Railroads Transform the Stock Market

When Little entered the stock market in 1834, it was going through tremendous changes. Until the 1830s, most of the listed stocks were in insurance companies and banks. Most finance companies were small, had a limited number of shares outstanding, and their shares traded infrequently. Speculative activity was limited. In the 1820s and 1830s, shares in railroads began to dominate the stock market since they needed large amounts of capital to fund their operations. The first exchange-listed railroad, the Baltimore and Ohio Railroad, started trading in 1828. Whereas railroads weren’t even represented on the NYSE in 1825, by the 1840s, they represented around ninety percent of the volume of the exchange. With the growth in share size and volume, speculators like Little were able to jump into the market and seize opportunities that didn’t exist until the 1830s. Little had a fanatical obsession with the market. He would often work twelve hours at his office speculating on stocks, only to spend another six hours at night buying and selling banknotes issued by private banks. Little played both sides of the market, shorting stocks he felt were overpriced, trying to corner stocks the shorts were selling, or going long during a bull market. Little could remember every transaction he made, and attended to every detail of his transactions. He even delivered stock he sold personally to make sure there was no mistake in the transaction. Until Jacob Little arrived on the scene, most speculators used inside information to make their fortunes, but Little relied upon predicting the future direction of stocks and manipulating stocks to reap his fortune. Little was an inveterate gambler, but one who wanted the cards stacked in his favor. The spirit of Jacob Little was summed up when he said, “I don’t care what happens, so long as I am in it.” To understand Little’s involvement in the stock market, you have to understand how the stock market of the 1830s differed from the market today. Of course, there was no CNBC or ticker tape, telegraph or telephones, all trading was done on the floor of the exchange. Shares were not traded all day long as they are today. Instead there was a morning session and an afternoon session. During each session, a representative of the exchange would run through each of the listed stocks. Traders could only buy and sell when a stock was announced. When the representative of the Exchange arrived at Erie, for example, he would offer to buy or sell shares at set prices. Traders would respond by offering to buy and sell shares. Then the exchange moved on to the next stock. Continuous trading in stocks did not exist. You had two chances each day to trade a stock. That was it. Each and every transaction was written down, and published in The New York Times, The New York Herald or another newspaper the following day. If you go to a copy of The New York Times from the 1850s, you can see a record of every transaction that took place on the stock exchange. Shares were sold short either through borrowing shares directly from an owner, or more often through selling options on the stock. In the 1830s, options were not derivatives ruled by Black-Scholes mathematical formulae calculated on computers with a fixed premium. Instead, someone would offer a customer the opportunity to buy or sell the stock to them at a fixed price to be delivered at the request of the buyer at any point in the next six months. If you look at the record of transactions published in The New York Times, you can see the notation of the time period the buyer had the option to buy or sell the stock as well as the agreed upon price. Since this was how foreign exchange transactions and moving money between cities were carried out, this methodology seemed natural to people on the floor of the exchange.  

Little and Morris: The First Corner

Little’s first coup occurred in his corner of the Morris Canal and Banking Company in 1835. There had been an attempt to corner the stock of the First Bank of the United States in 1792 by William Duer and Alexander Macomb, but the attempt had failed, leading to the Panic of 1792. The Morris Canal was a 107-mile canal, established in 1822, that stretched across northern New Jersey from Phillipsburg on the Delaware River to Jersey City on the Hudson River. The canal lowered the cost of moving coal from Pennsylvania to New Jersey and iron ore from New Jersey back to Pennsylvania. It took only four days to move goods from one end of the canal to the other, but when railroads were able to move goods the same distance in five hours, the canal could no longer compete. Rather than make a tender offer for outstanding shares, as is done today, raiders had to buy up all existing shares of a company to own it. Little determined to do this for the Morris Canal and in the process, he cornered shares of the company. Little and his group of New Jersey traders ended up owning all of the outstanding shares, and shorts had to buy their stock from Little in order to cover their short positions. The price of Morris Canal stock went from $20 in February 1834 to $185 in January 1835. Little could have asked for more from the cornered shorts, but if he had, the shorts would have had to sell shares in other companies to raise the capital to cover their shorts which could have destabilized the market as a whole. The spike in price caused by the corner is visible in the graph below.   Jacob Little also participated in an attempt to corner the stock of the Norwich and Worcester Railroad in 1846. He organized a pool with several Boston operators to secure control of the railroad. Each member put up a $25,000 bond pledging not to sell stock below $90. The pool drove the stock price up, but Little thought the corner would fail. He sold his stock while it was in the 80s to cut his losses, and as promised, delivered a check for $25,000 to his co-conspirators. Little made a similar mistake in 1847 when he was given a chance to invest in the telegraph by Samuel Morse, but declined, a decision he later regretted.   There was one case where Little himself almost suffered the fate of being cornered. Little regularly shorted shares in the Erie Railroad Co., and in 1855, a syndicate of rival brokers which called themselves “the Happy Family” laid a trap for Little. They allowed Little to sell shares short, buying up the shares themselves. When they thought they had Little cornered, the family issued their one-day notice that they expected delivery of shares. Certain they had tripped up Little, the Happy Family estimated that Little had lost over $1 million on Erie, and now he would pay as they had done. The next day the Happy Family went to the floor of the NYSE and Nelson Robinson called out the list of stocks for trading. When he got to Erie, he offered 62 cash for Erie, then 63, 64, 65. There were no takers and Robinson and the others realized there was no float left. Although they knew they had him caught, Jacob Little sat placidly nearby, still offering to sell shares. In 1855, shares weren’t delivered by certificate and power of attorney, but had to be formally transferred at the office of the company. Knowing a showdown was at hand, Robinson and almost every operator on the Street went to the Erie office the next day to watch Jacob Little squeal when he failed to deliver the shares. Little showed up a few minutes before closing and Robinson said to him, “Well, we’ve got Erie locked up tight enough, every share of it. Now, stand to the rack like a man and acknowledge that the jig is up.” What Robinson and his clique didn’t know was that Little had purchased convertible bonds on Erie in London, and that morning had converted the bonds into shares of common stock. Little not only delivered all the shares that were demanded of him, but had shares left over which he offered for sale. Little cleared over $100,000 from this operation. From there, the price of the stock quickly fell into the teens as is seen in the graph below. In relation to the Erie story, one source said this occurred on November 12, 1855, but by then the stock had already fallen from the 60 range where the attempted corner occurred. Another source said this happened in 1838, but this was before the Erie railroad had even issued any shares. The data do confirm the stock corners in Morris Canal and Harlem Railroad, but leaves the stories about Erie in terms of amount and timing in question. According to one source, Jacob Little went bankrupt on December 5, 1856 after a reversal in Erie stock in which he was short 100,000 shares, and his position went from a profit of $2 million to a loss of $10 million. The problem is that a $12 million reversal on 100,000 shares could only occur if the stock had moved 120 points, but in 1856 the range on Erie stock was only 15 points. I found another article in The Economist from 1856 which said Jacob Little was short about $10 million in Erie, New York Central and Reading, and his total losses were estimated at $1 million. The contemporary account in The Economist makes more sense. The New York Times of December 6, 1856 reported that the failure of Jacob Little & Co. had been announced at the opening of the exchange on December 5. The article said Little had reportedly been a seller of “two-thirds the outstanding contracts registered at the Board for the past sixty days or ninety days.” In other words, Little had taken a bear stance against the entire New York Stock Exchange. The article mentioned not only Erie, but Reading and New York Central among the stocks he had been shorting. On December 5, 1856, Erie closed at 62. The stock remained above 60 until February when it began its descent to 8 in October 1856. Jacob Little was certainly correct to be bearish, but his timing was off and he gambled too much. Had he waited a few more months or gambled less, he could have made another fortune off the Panic of 1857. Although the suspension left Little free of any liability, he eventually distributed one million dollars to his creditors, paying every creditor in full with interest. When the Panic of 1857 hit on October 13, 1857, twenty brokerage firms failed or were suspended when the market crashed and banks suspended specie payments. Among the suspended firms was Jacob Little & Co. Although Jacob Little is central to the painting entitled “Wall Street, half past Two O’clock, October 13, 1857” which represented the scene when banks suspended specie payments, Jacob Little & Co. was allowed to resume its seat on the board three days later. As one newspaper put it, “It is said that the Stock Board cannot get along well without Jacob.” In the May 13, 1859 issue of The New York Times, the newspaper reported that Jacob Little was suspended from trading on the NYSE because once again he was unable to meet his engagements, though the amounts were smaller than the suspension of 1856. In this case, Little was bullish, hypothecating bonds and shares of the Delaware and Hudson Railroad, Illinois Central Railroad and Panama Railroad, as well as the Sixes of Missouri, Tennessee and Virginia. When these stocks and bonds declined in value, Little was unable to meet the margin calls. Again, Little promised to make good on the basis of the average market price of the day once he determined his overall financial condition. Little apparently paid his contracts in full, for as one source put it, “Jacob Little’s suspended paper was better than the checks of most merchants.”  

Jacob Little: Penniless Pauper or a Trader to the End?

Some sources say Jacob Little never recovered from the Panic of 1857 and died penniless, but did he? According to The Merchant’s Magazine, Little lost most of his fortune as a result of the Civil War rather than the Panic of 1857. Though his fortune was reduced, Little continued to trade in the 1860s. I personally own a stock transfer certificate, signed by Jacob Little on August 26, 1864 assigning 25 shares to H. J. Morgan and Co. If Jacob Little had been so penniless and forgotten, why would The Merchant’s Magazine devote the lead article in their June 1865 issue to the passing of Jacob Little, who died on May 28, 1865? According to the article in The Merchant’s Magazine, “The news of his death startled the great city. He had long been one of its most remarkable men. Merchants congregated to do him honor. Resolutions of enduring respect were adopted, and the Stock Board adjourned for his funeral.” The New York Stock Exchange didn’t adjourn to honor paupers. Although Jacob Little was the first stock market tycoon, the first to corner a stock, the first to make millions and lose millions over the course of a lifetime, he is barely known today. What little we do know of him are stories drawn from reminiscences of his fellow traders. Even if you assume that the stories about the Morris Canal, Harlem Railroad, Erie Railroad and others are true, it still makes you wonder what he did the rest of the time he spent 25 years on Wall Street. Little didn’t create the largest brokerage firm on Wall Street in the 1850s by shorting a few stocks. He had to be a consistent market trader who went bullish and bearish, who probably traded bonds more than he did stocks, and dealt with everyone on Wall Street successfully, despite his reputation. Perhaps it is the untold stories of Wall Street that are more interesting than the ones that are told.

This year started weak. So weak in fact that the first ten trading days of January were the worst in US history. The television is rife with talking heads exuberant over who they can point the finger at. “Oil,” one shouted. “Tech,” said another. A third bemoaned turbulence on the other side of the pond in European banks staring down a dry well of capital. Lastly, on February 10, 2016, Janet Yellen, the Chairman of the Board of Governors of the Federal Reserve Bank, faces tough questions from the White House on Capitol Hill, discussing the condition of the economy and interest rate hikes. Countries all over the world feel the crunch. Venezuela, with oil declines, is near bankruptcy. Brazil is buried under a staggering amount of debt. Japan has never recaptured the magic of their 1989 highs, suffering through a perpetual twenty plus year bear market. It looks like China, the so called Sleeping Giant, fell into a coma with the Shanghai Composite dropping 50% in the last 7 months. The first global crisis was in 1857. The market disastrously went into a free-fall, culminating in a 65% drop. Like today’s theories, economic historians still deliberate as to the cause of the crash. Was it the failure of the seemingly too big to fail Ohio Life Insurance and Trust Company from faulty loans? It could have been Europe’s declining reliance on American grain exports. The railroad industry nearly collapsed. Perhaps the panic was the result of the United States’ increasing demand of foreign imports with our own exportation severely lacking, culminating in a trade imbalance. Finally, banks raised interest rates in 1857 in an effort to keep gold reserves in check. The question should be, are we repeating the crash of 1857? Upon a cursory glance, one would say no. But look closer and you’ll find the requisite forces are all in place.

1. We have a commodity inflicting damage on the global economy. The oil of today was the grain of 1857.
2. An entire industry is caving in upon itself. The technology sector reminiscent of the railroads of the mid-1800s.
3. The banking industry, like the 1857 Ohio Life Insurance and Trust Company, both in Europe and the US, are tanking. Some are even talking about bankruptcy, mergers, buy-outs, and bailouts. After all, didn’t we learn that there is such a thing as too big to fail?
4. Like 1857, interest rates are the talk of the town. Why else has Janet Yellen been on the Hill for two days straight now?

American markets dropped a staggering 65% in 1857. Will we go down that far? I’m not sure anyone really knows. It’s called speculation for a reason. However, if history is any indication, if we hit a bear market (1707 from a May, 2015 high of 2134), chances are we’ll plummet further, down to a nightmarish 41%. Hold on to your butts, sports fans. We’re in for a bumpy ride.

Saunders was obsessed with the idea of efficiency, and thought that customers wasted a lot of time waiting on clerks. Saunders wanted to free customers from the tyranny of clerks by letting them do their own shopping. Saunders also developed a just-in-time delivery system to get food to his Piggly Wiggly stores. This system later inspired Toyota to apply the same concept to automobiles which helped Toyota to control costs and conquer the globe. Saunders opened up his first Piggly Wiggly store on September 6, 1916 at 79 Jefferson Ave. in downtown Memphis, Tennessee. Each store had a turnstile at the entrance. Every item in the store had a price on it, another innovation, and Saunders provided shopping baskets so customers could take their items to a check-out stand in front. Saunders patented the idea of self-service stores in 1917. Saunders incorporated the Piggly Wiggly Stores Corp. in 1918. The stores were an immediate success. By 1922, there were over 1,200 Piggly Wiggly Stores of which about 650 were owned by Saunders, and by 1932, there were 2,660 Piggly Wiggly stores with sales of $180 million. Unfortunately, in 1923, Saunders had lost control over his Piggly Wiggly stores.  

Saunders vs. the Shorts

Clarence Saunders also became part of the last stock corner on the New York Stock Exchange in 1923. The corner became so prominent, that the whole affair became known as the Piggly Crisis. Clarence Saunders was generous, determined, stubborn, and well-known in Memphis. Saunders became known as the home boy who faced off the financiers of Wall Street who were using a bear raid to try and profit from a decline in Piggly Wiggly stock. The goal of shorting a stock is to borrow shares from someone who owns them and sell them. When the stock declines in price, the shorts buy the shares back at a lower price, make a profit, and then return the stock to the person they borrowed it from. In a bear raid, several shorts make a concerted effort to drive the price of a stock down so they can profit from the decline. The bulls, on the other hand, can try and beat the shorts by forcing the price of the stock up, squeezing the shorts and forcing them to sell at a loss. If the bulls can buy up the existing float, the stock is cornered. The shorts have no choice but to buy the stock from the bulls at whatever price they demand. Of course, creating a corner is risky for the bulls as well because it takes a lot of resources to buy up the float in the stock. Once the corner is completed and the shorts have covered their positions at the inflated price, little demand is left for the stock. The price of the stock can collapse, leaving the bulls with a burdensome load of debt. The whole process can end up bankrupting both the shorts and the bulls. Piggly Wiggly shares started trading over-the-counter in July 1920 and listed on the New York Stock Exchange (NYSE) in June 1922. In November, 1922, several of the independently-owned Piggly Wiggly stores in New York, New Jersey and Connecticut failed and went into receivership. Although Saunders’ corporation operated independently of these stores and was profitable, some Wall Street operators saw this as a reason to begin a bear raid on Piggly Wiggly stock. The bear raiders began selling PIggly Wiggly short and spread rumors that the company was in poor shape. Saunders took this challenge personally. He had created Piggly Wiggly stores, created the concept of self-shopping, was spreading his stores across the country, and some bears were trying to create profits by spreading lies about his stores. Saunders decided to “beat the Wall Street professionals at their own game.” Saunders not only used his own money to battle the shorts, but he borrowed ten million dollars from a group of bankers in Memphis, Nashville, New Orleans, Chattanooga and St. Louis to buy up the existing float. In the Wall Street of the 1920s, bear raids came and went. Companies didn’t go bankrupt because of bear raids, and if the fundamentals of the company were sound, the stock would bounce back after the bear raid was over. Nevertheless, Saunders refused to give in to the Wall Street city slickers. Saunders hired Jesse L. Livermore, the most famous bear on Wall Street, to help him break the back of the bear raiders. Within a week, Livermore had bought 105,000 shares of Piggly Wiggly, over half the float of 200,000 shares. The bears had shorted Piggly Wiggly stock in the 40 range, but by January, Saunders’ bull campaign had pushed the price of shares past 60. The shorts were losing money.  

The Shorts Are Cornered

Piggly shares were traded on both the Chicago and New York Stock Exchanges. In January, the Chicago Exchange announced that the stock had been cornered, though the NYSE denied that a corner existed. So Saunders decided to try a new tack. He announced that he would issue 50,000 shares of Piggly Wiggly shares at $55 each. Saunders regularly advertised his stores in the newspapers, and he used some of these ads to offer shares to small investors. Saunders pointed out that Piggly Wiggly stock paid a $1 per quarter dividend, yielding 7% to investors. Since this occurred before the S.E.C. came into existence, Saunders could promise that this was a “once in a lifetime opportunity,” and get away with it. Since Piggly stock was then trading at $70, why would Saunders offer shares at $55, leaving $15 on the table for each of the 50,000 shares? The reason is that Saunders knew that once the shorts had been cornered, the demand for Piggly stock would dry up. Saunders’ stock distribution created a market where he could distribute his shares to new investors. Saunders even allowed investors to buy new shares on the payment plan, put $25 down and pay $10 a month for three months. Since the new shareholders couldn’t sell their shares until they were paid for, this would keep the shorts from obtaining these newly minted shares to cover their positions. On March 19, Saunders let it be known that he controlled all but 1,128 shares of Piggly Wiggly’s outstanding shares. He had cornered the shorts. On Tuesday, March 20, Saunders called on the shorts to deliver their shares to him. By the rules of the exchange, the shorts were required to produce the shares by 2:15 on March 21. The stock opened on the March 20 at 75½, moved up to 124 by noon, but then dropped to 82 on the rumor that the Exchange planned to suspend trading in Piggly and postpone the delivery deadline for the shorts. It was no rumor. The NYSE did suspend trading in the stock. Saunders responded by saying that he expected settlement on Thursday the 22nd by 3 p.m. at $150 per share. Thereafter, his price would be $250 per share. The exchange permanently halted trading in Piggly and gave the shorts until 5 p.m. on Monday the 26th to settle with Saunders. With this ruling, the NYSE saved the shorts. This postponement tipped the scales in favor of the shorts because it gave them several extra days to find some of the 1,128 outstanding shares to settle their accounts without having to come begging to Saunders. Was it right for the Exchange to change the rules in the middle of the game to prevent a corner similar to the one that had occurred in Northern Pacific in 1901? Or should the Exchange have left the shorts to their fate? The NYSE justified their actions on the grounds that the demoralizing effect of the corner could have spread to the rest of the market.  

Saunders Wins a Pyrrhic Victory

On Friday, the 23rd, Saunders offered to settle at $100 per share. In the meantime, the shorts were able to find enough shares floating around in Iowa or New Mexico to cover their positions. Shareholders in Sioux City who knew nothing of the Piggly Crisis were happy to double their money by selling to the shorts while the shorts were happy to get the shares at a mere $100. Saunders now had complete control of Piggly stock, but he was also deeply in debt. It is estimated that Saunders made half-a-million dollars out of his corner, but that proved insufficient to cover his costs. After Saunders paid off the banks with his proceeds, he found that he was five million dollars short, half of which was due on September 1, 1923 and the balance on January 1, 1924. Since Piggly shares could no longer trade on the NYSE, Saunders was forced to sell shares directly to the public and advertised in the newspapers once again, offering Piggly Wiggly shares at $55. Although the public was sympathetic toward Saunders and his battle against the Wall Street bears, the public was unwilling to put their money where their sympathies lay. Saunders took out another newspaper advertisement saying that if Piggly Wiggly were ruined, it would “shame the whole South.” Memphis’s newspaper, The Commercial Appeal, lined themselves behind Saunders and helped lead a campaign to convince Memphians to buy Piggly Wiggly shares and save their local boy. The newspaper planned a three-day campaign to sell 50,000 shares to Memphians at $55 a share. This was to be an all or nothing proposition. If they were unable to sell all 50,000 shares, none would be sold. The campaign began on May 8, and soon 23,698 shares had been subscribed. Despite this, skeptics began to raise questions about who was the true beneficiary of this campaign, Saunders or the public. They asked for a spot audit of Piggly Wiggly to reassure potential investors that the company was a good investment. Saunders refused the audit, but offered to step down and let a committee run the company. Skeptics also asked why Saunders was still building his million-dollar Pink Palace when Piggly Wiggly was possibly in its last throes. The Pink Palace was a huge house built using pink Georgia marble. The Palace was to include a pipe organ, Roman atrium, indoor swimming pool, ballroom, bowling alley, its own golf course, and other luxuries. Saunders promised to board up the Pink Palace and stop construction. Unfortunately, the campaign was unable to sell even 25,000 shares, and the campaign soon fizzled. Saunders responded by selling Piggly Wiggly stores, rather than stock, to raise money. Despite selling stores in Chicago, Denver, Kansas City and elsewhere, Saunders failed to raise enough money to meet the September 1 payment of $2.5 million. Saunders turned over his Piggly Wiggly Stock, the Pink Palace (which was sold to the city of Memphis for $150,000 and opened as a museum in 1930. Today, it includes a replica of the first Piggly Wiggly store, a planetarium, a natural history museum and a museum of twentieth-century Memphis) and other property to his creditors and defaulted on the loan. By Spring, Saunders was in formal bankruptcy proceedings. If Saunders had never launched his campaign against the shorts, he would not have had to borrow the money that drove him into bankruptcy. Pride went before the fall.   Initially, the stores, known as Sole Owner Stores, were hugely successful. A millionaire once again, Saunders was able to buy a million-dollar estate just outside Memphis. Saunders also organized a professional football team called the Sole Owner Tigers which beat the NFL champion Green Bay Packers in 1929 by the score of 20-6. In 1930, the Tigers were invited to join the National Football League, but Saunders declined because he didn’t want to go to away games. When the depression hit, the Sole Owner Stores went bankrupt in 1930. Still, Saunders was able to find backers for his next venture, Keedoozle (“Key Does All”) stores, which were completely automated. Goods were placed behind glass as in an Automat. Customers would turn a key in front of the item they wanted to buy. Their purchases were placed on a conveyor belt, delivered to the front, assembled and boxed. The system eliminated shopping carts, stocking by employees and queuing at the checkout stand. The stores embodied Saunders’ obsession with increasing efficiency. Two Keedoozle stores were opened up in Memphis and in Chicago, but the machinery was too complex and expensive to compete with the quaint fashion of having people push shopping carts around the store. The stores failed. When Saunders died in October 1953, he was still trying to perfect his idea, this time with the Foodelectric system which did everything the Keedoozle did, including adding up the bill. Today, there are over 600 independently-owned PIggly Wiggly stores located in 17 states, mainly in the southern United States. It is easy to see why the S.E.C. banned stock manipulation, not only for corners, but for pools and other schemes that were used to profit from unsuspecting investors in the 1920s. The corner game ended up destroying both the bulls and the bears and benefitted no one. Had Saunders never borrowed $10 million to challenge the shorts, he never would have lost control over his stores. Since the Piggly Crisis, there has been only one stock corner in the United States, in E. L. Bruce stock in 1958. That is another story.