The circle itself was a curious thing. His most important project that autumn was a loose confederation of traders he called the Six Percent Club. Its principal object, as all its members knew, was to establish control over those government issues yielding six percent interest. There was value in monopoly for its own sake, of course, but Duer’s scheme was more far-reaching. When the Bank of the United States launched, investors could only buy scrip, the ownership of which allowed them to make the four subsequent payments necessary to own actual bank shares. Not until those four payments were complete would the scrip holder actually be a shareholder. Two of those payments were to be made in specie, but two were to be made in six percent issues.
Hamilton ’s intention in doing this was actually quite clever. Create a demand for government securities in order to increase the trade and, consequently, the value. Duer’s plan was equally clever but far more diabolical. Control the flow of the six percents, make them impossible to obtain, and the original bank investors cannot hope to turn their scrip into actual shares. Their scrip becomes worthless, and they must sell it-to members of the Six Percent Club. It was his intention that by the end of the next year, his cartel would control both bank scrip and the six percent issues required to redeem it.
There was one added dimension, however. The Six Percent Club consisted of both agents whom Duer publicly acknowledged and those he did not. There were men who bought and sold with Duer’s money, and those who bought and sold with their own. Not all in the latter category, but certainly many of them, were nothing more than stooges, men Duer sacrificed to manipulate the market. If he wanted prices to go down, he would send the unwitting agents out to sell. If he wanted prices to go up, he would send them out to buy. That their investments would ruin them mattered nothing to him. He did not see himself as directing a skirmish but rather the final battle of a long war. When it was done, he might have ruined the markets, but he would own them. He might have ruined his reputation, but by then it would not matter.
Much of this I learned from our man in Duer’s employ in New York, and much I learned from my own observation. Duer liked to keep me on hand, as a kind of sign of his power, a charming woman with a considerable knowledge of finance. Never, not once, did he suggest he wished for a greater familiarity with me, though at times he might touch my arm when he spoke or place a hand upon my back. It was intimacy of a sort, certainly, and it took all my will not to recoil, but it was far less than I had feared he might demand.
Too, he discovered that my presence disarmed potential victims. I was a refined lady, and who would attempt chicanery in front of me? Only once did he ask me to participate in one of his ruses. Late in 1791, a man began to appear regularly at the City Tavern, a local landowner of some significance named Jacob Pearson.
Pearson would sit quietly during trading and then strike up conversations with other traders, explaining loudly that they had made terrible mistakes. He said he had observed the markets since their inception in this country and knew an error when he saw one-and a good trade as well. Yet he himself refrained from trading.
“Why do you think he behaves thus?” Duer asked me.
“Because he in fact knows nothing of the difference between a good trade and a bad one. He wishes to benefit from the markets but is too proud to admit knowing nothing.”
“Precisely,” Duer said. “He is quite perfect for our purposes.”
Duer sent the man a note, saying he wished to meet but that the meeting must be private, lest the world know of their business. Thus it was we arranged to meet in the back room of another tavern, where we could discuss these matters in private.
“Will he not be confused by my presence?” I asked Duer.
“That can only work to our advantage,” he said.
From a distance I’d found Mr. Pearson to be an unlikable person, loud and vain and pleased with himself to an unreasonable degree. In close conversation, I found him even more unpleasant, but because of, not despite, a kind of native charm. A man of a certain fading beauty, he displayed with Duer a self-confident expansiveness, but with me he used a predatory charm. It was the alluring gaze of a predator. I felt at once that Pearson was a dangerous creature-not to us, perhaps, but to those in his power. For myself, I did not fear him, but I did immediately despise him.
To this man, Duer explained that he needed someone to help him alter the market, someone who must buy and sell with his own money. When he profited, he would keep what he earned minus a small commission. When he lost, he would be reimbursed.
Some men, Duer had explained to me, reacted quite harshly to this suggestion, not liking the idea of behaving dishonorably to other traders, but that was what made Pearson so perfect. He was a stranger to the trading community and had no concerns about betraying his brothers. More to the point, he wished to learn the secrets of trade, yet he had nothing but contempt for those who had learned the secrets through the usual slow and persistent means. Duer offered him an opportunity to demonstrate his inherent superiority, wrapped in the protective cloak, so he would believe, of the undisputed master.
It began slowly. Duer had Pearson make a few trades he knew would prove sound, and these enticed Pearson’s appetite. While he profited, Duer also directed Pearson to lose a few thousand dollars on a single trade, and Duer did not hesitate to return the funds with all speed and cheer, demonstrating that he was as good as his word and Pearson had nothing to fear from his losses. Within six weeks, Pearson was making a name for himself on the Philadelphia floor as a canny investor. No one knew he was Duer’s puppet, and no one knew he was doomed.
P art of the difficulty of attempting to corner a market is that it does not take long for buyers to recognize that someone, even if they don’t know who it is, consistently snaps up an issue when it comes to market. Thus, the prices of six percent securities began to rise, which made them more expensive and harder to obtain. Men who already held them understood an attempt at a corner was under way and so were understandably reluctant to sell.
The best way to bring more issues to market was to convince holders that they did not know all and that someone else knew more. Thus it was that Duer and Pearson executed a simple but effective deception. At the City Tavern, Duer arrived and announced he wished to sell six percents and buy four percents, rated less valuable for the simple reason that they yielded less interest. Yet the price of six percents was high, and the other speculators drew the obvious conclusion that Duer anticipated that six percents had peaked and that four percents were undervalued and poised for a sudden increase.
Pearson, per prior arrangement, accepted Duer’s offer to sell. It was a perfect deal, since Pearson would simply return the six percents back to Duer later in the day. Pearson, who had begun to attract some notice, then announced that he would buy four percents from anyone who would sell them, and that he no longer wished to purchase six percents. Within a few days, the price of four percents soared while six percents declined. Duer’s other agents, those acting with his money, snapped up the six percent issues now on the market. Pearson continued to buy four percents at a newly inflated rate, a rate they would likely never see again, but this rate kept the four percents high and the six percents low. It was for this reason, and no other, that Duer continued to drive Pearson, and anyone who would follow him, to keep buying. When it was all done, Pearson had committed himself to more than sixty thousand dollars of four percents, issues whose value was wildly overinflated and would crash without warning.