Banks, businesses cashed in by 'mining the miners'

It was Black Friday in Gold Rush country.

A financial panic back East had spread to Northern California, plunging the region's fledgling banking system into chaos. A week of bedlam -- one San Francisco banker recalled a lobby full of "women shrieking and crying, men swearing" -- culminated Friday, Feb. 23, 1855. Miners, merchants and others stampeded the banking houses to withdraw their deposits. Fortunes disappeared; two of the leading San Francisco banks collapsed.

	"A visit to the doctor was one ounce; a visit to a lawyer was an ounce. Dentist was generally half an ounce, depending on how many teeth you wanted out." -- Malcom Rohrbough, a University of Iowa historian

The panic of '55 jolted Northern California. But the difficulties were relatively short-lived, a tribute to the remarkable strength of an economic system that didn't exist before 1848, said noted Gold Rush historian J.S. Holliday.

The discovery of gold spawned the stunningly swift development of a sophisticated market-driven economy run by bankers, venture capitalists, importers, experts and merchants of all kind, including many who once had tried their hands at mining. It was an economy that made tycoons out of people like Levi Strauss, a dry-goods merchant from Bavaria, and the slick real estate speculators who bought and sold parcels of land in Sacramento on an almost daily basis.

There were corporations established to move people and provisions from San Francisco to Sacramento. There were companies that bought gold dust and companies that minted coins and companies that did both.

"You basically had this economy spring up overnight," said State Librarian Kevin Starr.

It was an economy noteworthy for its lack of government regulation, Starr said. Merchants accepted gold dust as payment; private firms minted their own coins. Banks were formed without state charters.

But for all its frontier flavor, it was also an economy tamed by market forces. When eggs were scarce, they sold for $1 apiece; by the early '50s, when supply lines were established, they were down to $1.50 a dozen, said James Henley, a city of Sacramento historian.

Before 1848, California's industry consisted mainly of hide and tallow exports. California was noteworthy for its "astonishing primitiveness, backwardness," said Holliday, author of the authoritative Gold Rush history "The World Rushed In."

Gold changed all that. It eventually lured 300,000 people from around the world. True, a mass migration was hardly unprecedented, but what made the Gold Rush different was the speed with which a fully functioning economy grew, said Malcolm Rohrbough, a University of Iowa historian.

In the land rushes of the Midwest, it took years for economies to develop because agriculture produced wealth relatively slowly. In California, "you had people achieving degrees of wealth within days of arriving," said Rohrbough, who published a book last year called "Days of Gold, The California Gold Rush and the American Nation."

Although some miners worked on their own, most quickly formed small bands or companies, pooling their resources and talents, Henley said.

Much of the cooperative effort went into managing water. Companies were formed to divert water to create pressure for placer and sluice mining, Henley said. Before long, hydraulic miners were re-routing lengthy river stretches in order to mine the river beds. One of the earliest water companies evolved into the Natomas Co., the great development and industrial conglomerate that once had vast land holdings in the Sacramento area, Henley said.

As mining techniques became more sophisticated, so did these corporations. Early on, the miners used their own funds to start companies; they were the owners. By the mid-'50s there were companies with 50 to 100 miners -- many working as employees, for a day's wage -- backed by $200,000 or so in capital, much of it from New York or London.

"The independent entrepreneur is a very romantic, short-lived thing," Henley said. "The rugged individual miner was a myth."

But the miner surely was a risk-taker. Mining companies that reaped thousands of dollars a day one year would come up empty the following season, he said.

"It was boom or bust, it was a very erratic economy," said historian Robert Chandler of Wells Fargo & Co., the San Francisco banking giant that grew out of the Gold Rush.

Still, most miners made money. Early on, they found an average of an ounce of gold a day, worth about $16, Rohrbough said. By the mid '50s, as the gold region was becoming crowded, daily earnings were down to about $6, he said. But that still compared favorably to the $1 a day many laborers earned on the East Coast, he said.

By the end of the decade, at least $595 million worth of gold was found in California, Henley said. In today's dollars, that's something approaching $12 billion, he said.

Yet it was also true that for many, the real money was in "mining the miners," as the saying went. From the minute the legendary renegade Mormon leader Sam Brannan bought every pick and shovel in sight so he could sell them to miners, companies sprang up to provide every kind of good and service imaginable, said Gary Kurutz, curator with the State Library.

Some of the entrepreneurs started businesses that endured into the 20th century. Domenico Ghirardelli sold general merchandise to miners before devoting his full attention to chocolates. Korbel Champagne Cellars started as a maker of cigar boxes. John Studebaker made wheelbarrows for miners in Placerville, launching the company that eventually would make automobiles in Indiana. William Tecumseh Sherman co-owned a provisions shop in Coloma and was a banker in San Francisco before he became a legend of the Civil War.

In Sacramento, the Rivett carpet company and Fuller-O'Brien paint company started out as one company, peddling glass and wall coverings. The four major titans of early California business -- Stanford, Crocker, Hopkins and Huntington -- made their money selling hardware in Sacramento before they moved to San Francisco and became railroad barons. There was tremendous land speculation; Front Street lots would change hands a dozen times a month, Henley said.

In a state where almost everything had to be imported, price gouging was inevitable. Some say the most obvious example was in money-lending; banks routinely charged 2 percent or more a month.

But the forces of supply and demand worked pretty efficiently: If something was scarce and prices were high, some entrepreneur would come out of nowhere to increase supplies, thereby moderating the prices.

"A lot of miners saw themselves gouged," Rohrbough said. "But it was also a system that was enormously competitive. If you didn't like what this person was charging, you could go across the street."

Early on, many transactions were paid for in gold dust, particularly in the remote areas of the Mother Lode. The commonly agreed exchange price was $16 an ounce, although the official price of gold in the United States was $20.67 an ounce, said Wells Fargo's Chandler.

"A visit to a doctor was one ounce; a visit to a lawyer was an ounce," Rohrbough said. "Dentist was generally half an ounce, depending on how many teeth you wanted out."

Some merchants sold goods priced at a pinch of dust, leading to the phrase, "How much can you raise in a pinch?" according to Chandler.

After a while, the dust business became too unwieldy and unreliable; merchants demanded gold coins, even foreign coins. (Nobody trusted paper currency.) Private mints sprang up, although their business withered when the U.S. Mint opened a branch in San Francisco in 1854.

The early banks actually were express companies affiliated with Eastern and European banks. Although they took deposits and made loans, their main function was to exchange gold dust for bills of exchange -- instruments similar to cashier's checks that miners could use to ship their earnings home.

At first the banks paid $16 an ounce, the same as the merchants. But it quickly became apparent that not all gold dust was created equally. Dust varied widely in purity, depending on where it was found.

"Gold will often vary $2 an ounce in value ... not one hundred feet apart," wrote Charles T. Blake, a Wells Fargo agent in Folsom. Soon many buyers started using assaying equipment to measure purity.

The banking system was clunky in some ways; for instance, the San Francisco banks had affiliations with the "up country" banks but wouldn't honor their checks. Bank failures were fairly common. But no one was prepared for the bank panic of '55.

The St. Louis bank Page, Bacon & Co. suspended operations in February; when news reached San Francisco, it caused a panic. Page Bacon didn't survive; nor did the other San Francisco giant, Adams & Co.

The turmoil was felt all over Northern California as miners and others scrambled to retrieve their funds. "You had miners losing whatever money they had," Chandler said. "Wiped 'em out."

One company in particular withstood the run. Wells Fargo, founded by two of the three men who previously had started American Express, was doing a tidy little business as an express company and bank. With the failure of its two big rivals, Wells Fargo emerged as the premier Northern California bank.

But it wasn't easy. Wells Fargo suffered tremendous losses, and when the dust settled it discovered that, in an unrelated matter, it had been defrauded by two of its agents in Sacramento. The two had apparently invested Wells Fargo funds in the Sacramento gas company, according to Chandler.

To settle its claims, the bank seized the company. Until it relinquished control 20 years later, the great banking and express company was in charge of installing pipes, putting up street lamps and illuminating Sacramento.