The GREAT DIAMOND MOUNTAIN - Chapter One

 

I would like to see every PhD.. candidate in economics required to make at least one pilgrimage to the Unita Mountains in Utah. The humble range can be found about 100 miles due east of Salt Lake City. There, among the headwaters of the Green River, a wind swept conical peak looms over a 7,000 foot high green mesa called Diamond Mountain Plateau (above). 

There are no diamonds on the Diamond Plateau. Never have been. But amongst the scrub brush, gravel, and oppressive isolation there (above) the academic acolytes might find, if they looked hard enough,  a  a zircon of veracity, a small brilliant shinning baguette illuminating the fundamental and eternal truth behind capitalism – greed makes you stupid.

Our story begins in 1846, when 17 year old Philip Arnold (above, left) left his home in Elizabethtown,  with his cousin John Slack (above, right). They  joined 4,700 of their fellow Kentuckians volunteering to fight in the Mexican war.  

Both men were mustered out in 1848 in Texas, and rather than returning east, they joined the California gold rush. But, like the vast majority of prospectors, they found no gold. 

Eventually  Philip found employment in San Francisco at the new Bank of California - owned by William Chapman Ralston. Phillip became an appraiser of other prospector's gold claims. It was not the romantic adventure Philip had dreamed of.  But as the precipice of middle age yawned open before him, Philip Arnold found it less physically demanding and better paying than prospecting itself.

He eventually found even more sedentary employment, as an assistant bookkeeper for “General” George D. Roberts, at his Diamond Drill Company. 

And it was at the diamond drill company that Philip saw his first diamonds, in the diamond dust used in the rock drills. 

From this reasonably secure pedestal Philip also watched as the pattern established in California during the 1850's was repeated in the gold and silver strikes in Nevada of the 1860's. Out of the thousands of prospectors who rushed in, a mere handful of the early arrivals actually found any gold, and they were quickly bought out or squeezed out by the banker run mining conglomerates which followed. 

Then, in 1869, a mixed race sheepherder stumbled over an 83 1/2 carat diamond on the banks of the Orange River.  Named The Star Of South Africa, it quickly sold for the modern equivalent of  £1,363,334. And that set off The Great South Africa Diamond Rush.

Hundreds of aging desperate 49's, knowing nothing about diamonds, immediately sailed for South Africa. They all arrived in Capetown months too late to strike it rich. Meanwhile the smart ones, those who hadn't already drifted back to "the states",  stayed in California. But they all dreamed about the new fortunes, this time in Diamonds.  

And being reasonably smart,  in 1870,  forty year old Philip Arnold (above) gathered his life savings, quit his job at the Diamond Drill Company, and along with his cousin and old partner John Slack, went prospecting for diamonds in America.  They disappeared for two years. And over time, their fate became a mystery.

In early February of 1872, two dusty unshaven prospectors carrying a battered raw hide bag stumbled  into a crowded San Francisco saloon, ordered drinks and sat alone. 

Their furtive whispered arguments and their sheltering of the tattered bag immediately drew attention from the boozy crowd. A few of the denizens recognized them as  the long missing John Slack and Philip Arnold.  After several minutes, the pair paid their bill, gathered their bag and left.

But they repeated their argument at several saloons before finally presenting themselves, now reeking of whiskey, at the main office of the Bank of California - Phillip Arnold's old firm.  Without a word of explanation, they presented their bag for deposit. It was accepted and recorded by the bank manager as being filled with diamonds, rubies and other sapphires. It took about twenty minutes for the whole town to assemble the story and that story to be afire with rumors.

The bank manager immediately notified his boss, William Ralston. And after Ralston made inquires about the  two men, he then urged Major George Roberts to contact his old “friend” Philip Arnold. 

But Philip was reluctant to talk, and John Slack was virtually mute.  Only after being plied with whiskey for hours, did Philip finally admit that some where in the great desert wilderness of Utah territory, just before winter drove them back to civilization, he and John had found a mountain literally peppered with diamonds and sapphires. The bag deposited in Ralston's bank was just a sample of what they had picked up in a few hours. Right off the ground, just like that Hottentot in South Africa. Arnold explained they had filed on the claim and were now the legal owners of a diamond mountain.

It was an unbelievable story. But Ralston (above) and Roberts both knew, or thought they knew, Philip Arnold as a trustworthy and honest employee. And John Slack was also know around town as a dull but hard working man. And there was a logic to finding yet another massive, rich deposit of wealth in the American west, where everything was possible. The biggest problem at this point was getting information out of the two prospectors. 

Over the next few weeks banker Ralston and a small group of close investors managed, by befriending the two miners, to convince the pair to allow two local jewelers to examine the contents of the bag. The pair had never seen a diamond in the rough of course, or a ruby.  But they pronounced the contents as worth $125,000. 

This inspired Ralston to offer $50,000 for one half of one percent interest in the claim, if it were first examined by two experts of his choosing. One was to be David Colton (above), part owner of the successful Amador gold mine, and the other expert being "General" Roberts. Reluctantly, Philip Arnold and John Slack agreed to take these experts to their claim.

In early March, after Slack had gone ahead to secure travel connections, Arnold, Colton and Roberts traveled by railroad from San Francisco to Sacramento.  Because of missing bridges, that was as far west as the transcontinental railroad reached at the time.   There the trio boarded the Central Pacific Railroad line, climbing over the Donner Pass, down into the Nevada basin and thence across the Utah desert to Promontory Summit, in mountains north of The Great Salt Lake. Here the trio switched to a Union Pacific train to continue their journey eastward.

From now on,  Arnold insisted, Colton and Roberts must wear blindfolds at all times, and the pair meekly complied. Then, after 36 hours on the train, just before dawn, at a small seemingly abandoned station, the train pulled to a stop for water and coal.

Here they met John Slack. Philip and John helped the two men, still blindfolded, off the train and onto horseback. Immediately they continued their journey. For the next two days the experts, softened by life in San Francisco, suffered on horseback in the oppressive heat by day and endured freezing temperatures each night. 

They were allowed to remove their blindfolds only well after sunset. And before sunrise each morning, they were required to replace their blinders. And then, just as they had grown so frustrated they were on the verge of demanding to return to the train, the horses were brought to a stop and their blindfolds were removed.

What was revealed was a flat desert mesa, covered in scrub brush and gravel, with an odd thrust of a mountain at it's foot. Colton and Roberts wandered about, staring at and kicking the nondescript terrain until, suddenly, Colton reached into what appeared to be an ant mound and pulled out a small hard brilliant crystal. In an instant the two excited experts agreed. The Great Diamond Mountain was real!

They spent several hours collecting gems – diamonds and sapphires – before Philip Arnold and John Slack re-blindfolded the men and led their horses back off the mesa. It was a two day journey back across the horrible desert until they reached the railroad tracks again, Arnold flagged down the next west bound transcontinental passenger train.  Colton and Roberts were accompanied by Arnold and Slack as far west as Oakland. There the prospectors collected their $50,000 down payment and then returned to their "diggings". But the two experts  continued on to San Francisco with the two bags of jewels they had collected.

With those jewels in hand it seemed obvious to William Ralston (above) that the Diamond Mountain  was going to make him even richer than he was already.  It was the usual two step plan for this master of high finance, one he had already perfected in California and Nevada.  First he had to squeeze Philip Arnold and John Slack out of the deal as quickly and as inexpensively as possible. Then it would be just a matter of piling up the riches in his bank accounts. And you know, Mr. Ralston was half right.

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THE GREAT SILVER HUNT

  

I think billionaire Nelson Bunker Hunt (above) would prefer to be remembered as a man who did not smoke, drink or gamble, even though he was the son of a flagrant womanizer, who had openly produced two completely separate families, and a third in secret - fifteen children in total by three simultaneous wives, In response to his father's sins, Nelson was a major financial supporter of Fundamentalist Christian political groups.

Nelson was friends with and a financial supporter of white supremacists Senators Jesse Helms, of North Carolina and Strom Thurmond, of South Carolina. He was also a major financial supporter of the right wing John Birch Society.  And he was famous for searching his couch cushions looking to recover lost change, his own and visitors.

Said a family member; “Sometimes he’s brilliant. The rest of the time you wonder whether he’s really there with you or not.” Said a business partner; “He doesn’t just want some of it. He wants it all.”

Said his father, legendary oil man and bigamist Haroldson Lafayette Hunt Jr. (above); “I could find more oil with a road map, than Nelson could with a platoon of fancy geologists”. Said Nelson himself; “Worrying is for people with strong intellect or weak character.”

But maybe the key to his personality was that Nelson Baker Hunt, like Donald Trump, was born a second son. Nelson’s eldest brother - his father’s “run away favorite” - Hassie Hunt (above, left), was an oil wildcatter and “a millionaire in his own right by the age of 21.” And then this older, smarter brother developed schizophrenia and his desperate father decided to treat him with a lobotomy. Since that "Hail Mary Pass" of treatment failed, Hassie spent the rest of his life under 24 hour nursing care.

Thus Nelson (above) became the replacement son. But, again like Trump,  he was never his father’s favorite. And that may explain why one dark night in 1974 Nelson and a staff descended upon New York City in three charted 707 jets,. When the jets took off again, they flew 40 million ounces of silver to Nelson's leased vaults in Switzerland.

Now, silver is a commodity, like wheat or oil or steel. You can buy a commodity, and you can even sign a contract pledging to buy it at a set price some time in the future. These futures are a bet as to what the price of that commodity will be. The vast majority of futures traders never intend upon taking delivery of the actual commodity. They merely bet on the market, providing producers and buyers a hedge against price fluctuations of the actual commodity. People who buy gold on TV ought to remember that.

In most cases, these bets stabilize the market, which is good for everybody. And to encourage trading in futures, buyers have to put down only a small percentage of the total price they are betting on, called a “margin”. But Nelson was willing to suffer the expense of transportation, storage and insurance, by actually taking delivery on his silver, because he believed in a doomsday fundamentalist theology, that sooner or later the world’s financial markets were going to collapse. Paper money would become worthless. And if all that happened, a commodity like silver would still have intrinsic value.  Not like, food, you know. Just intrinsic, some how. 

In 1974 the world wide production of new silver was 245 million ounces, while annual consumption was 450 million ounces. The imbalance (67%) was made up through recovery of “scrap silver”, everything from recycling industrial applications to melting down family heirlooms.

But that imbalance also meant the control of a tiny percentage of the world’s silver could swing the price. This meant that every ounce of silver that Nelson bought and now stored in his Swiss vaults was another ounce removed from the market. And that drove the price of the remaining silver up. As the price went up, the silver in Nelson’s vaults increased in value.  Thus, on paper, he was getting richer by the day.

Nelson Bunker Hunt (above) cashed in on that increase by using it as collateral for loans, which he used to buy more silver and more silver futures. Which took even more silver off the market. Which made Hunt's silver even more valuable. He was gambling that the price would always go up, and he seemed to have enough control of the game, called leverage, to insure that it did.

The price rose from $6.22 per ounce in November of 1971 to $11.00 per ounce by the end of 1979. Nelson now controlled 1/3 of all the silver in the world not sitting in various government vaults, or being used to make electronics.

But Nelson’s manipulations had not gone unnoticed. Tiffany and Company made money selling silver art (above) to consumers. They took out a full page ad in the New York Times naming Nelson Hunt as the villain , and stating, “We think it is unconscionable for anyone to hoard several billion, yes billions, of dollars worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver.”  What the retailer meant, of course, was Tiffany was having to pay more, which meant they could sell less.

By the end of December 1979 the price of silver had risen to over $50 an ounce. Five years after that first late night silver flight, Nelson (above, right) and his younger brother (above, left) had earned between two and four billion dollars in paper profit from the (by then) 100 million ounces of silver they had in their Swiss vaults, And they had future contracts to buy much more at even higher prices.

But while Nelson had been buying silver futures “long”, betting that the price would go up, he was also squeezing the manufacturers - like Tiffany's - who needed silver today. They would have to pass their price increases to the millions of customers who used their products...

....such the silver used in the millions of catalytic converters required to reduce air pollution by the new Environmental Protection Agency .  Compared to the universal health benefits of cleaner air, the only  beneficiaries of Nelson Baker Hunt's silver hoarding scheme were the Hunt family and friends. In addition, unchecked, Nelson's speculations held the potential to bring about the very economic doomsday which was part of the evangelical prophecy.

On 7 January, 1980, the five year old United States Commodity Trading Commission, which had oversight of all futures markets, issued “Silver Rule Seven" which increased the margin required for silver futures.  Just four days later the price of silver had fallen back to $25 an ounce.

As the value of Nelson’s collateral began to plummet, the brokerage houses and banks which had made him loans to buy silver futures, now issued a $100 million "margin call" on those loans. In effect, Nelson would either have to cough up that $100 million, or fulfill the contracts, and take delivery on and pay for $1.7 billion in additional silver he did not already own.

Early on the morning of Thursday 26 March, 1980, before the commodity markets opened, Nelson’s younger brother and partner, Herbert Hunt (above), placed a telephone call to the chairman of the Futures Commodity Trading Commission and asked him not to open the silver market. The reason given for that extraordinary request was that the Hunt brothers would not be meeting their margin calls that morning – “would not”, Hunt had said, not “could not.”

As John Bloom noted in an article he wrote for the magazine “Texas Monthly” “Here was one of the leading spokesman for unbridled free enterprise in America, asking a federal regulator to close a market. If the federal government would not do that, then he simply wouldn’t pay up.”

That day, the silver markets did open. And they immediately collapsed. The price of silver futures fell from $25 an ounce to $10.20 an ounce. The day passed into history as “Silver Thursday”.

As the Federal government attempted a postmortem, they discovered that Nelson Hunt had assets of $1.5 billion, and debts of $2.43 billion. In short he was bankrupt. In addition he owned 6.5% of one of the brokerage houses which had loaned him money on the Silver Futures, a fact never revealed to the Security Exchanges Commission, which was supposed to regulate those houses. That cross control had been illegal since the Great Depression, which it helped cause.

The feds also discovered that Federal Reserve Chairman Paul Volcker (above) had met with Nelson several times in an attempt to find funding to save him from bankruptcy. all while allowing him to continue to unbalance the silver market.

As Time Magazine noted, Volcker’s “continual monitoring of the situation was interpreted by bankers to mean that the Federal Reserve…favored some kind of bailout to keep the Hunts from going under…(which) showed that when big speculators lose millions, “telephone calls come to Paul Volcker for a quick fix.” Those banks put together a one billion dollar line of credit to save, not the Hunt brothers, but the brokerage house he had defaulted. Yes, it has all happened before. Several times, in fact.

The aftermath to Bunker Hunt’s silver manipulation is also informative. The banks went after the Hunt’s fortune, seeking return of another billion dollars lost in their game. Like all good defendants, Nelson countersued, accusing the banks of lending him money which they knew he couldn’t possibly pay back. It was an absurd argument, but it allowed Hunt’s fifteen lawyers to negotiate a reduction of the repayment. Yes, the rich really do live in a different world than average people.

In 1998 a federal jury found Herbert Hunt (above, left), Lamar Hunt (above, center) and Nelson Baker Hunt (above, right) guilty of fraud and conspiracy to monopolize the world's silver market. Nelson was banned for life from ever trading in futures again. And finally Nelson Bunker Hunt was personally forced into Chapter 11 bankruptcy.

Nelson was certainly not reduced to poverty. The extended family remained wealthy and politically well connected. A reporter for the Dallas Morning News found in March of 2009 the 83 year old was  living “in relative modesty in a North Dallas house with his wife of 57 years”. The key word there is "relative".  Nelson insisted he had no regrets.

In better times, Nelson Baker Hunt said, “People who know how much they're worth, aren't usually worth that much.” Stephen Susman, one of Nelson’s lawyers, said, “These people are gamblers. If you’re a gambler, you take your shot.” Except, of course, when these rich folks win their gambles, it's their money. When they lose, it's ours. And that has always been true.

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