Short sellers have long—and wrongly—been blamed for market woes.

On May 9, 1901, a special train was dispatched from Chicago, a crucial cargo in its strongbox, its race to New York accompanied by the hopes of men eager to make their fortunes and the desperation of others who were seeing their savings disappear in a matter of days. More than 1,000 miles away, the SS Oceanic, flagship of the White Star line and one of the fastest ships on the water, had already left Liverpool, England, for New York, a similar treasure onboard.

What was this fabulous cargo? Stock certificates. The reason for the mad rush to get the certificates to New York was that shares in the Northern Pacific railroad company had gone up to $200, $400, and then, unbelievably, to $1,000-in turn-of-the-century money. This was the greatest of the stock manipulations that were then called "a corner" and would now be called "a short squeeze."

When the market turns down, the short sellers make for convenient scapegoats, as they have in recent days. But underneath the hue and cry about the evils of "betting against the market," the reality has been that it is not the short sellers who manipulate the market. On the contrary, it is far more often the respected names of finance and industry who are doing the manipulating by driving up the price of shares and the short sellers who are-as they were at the turn of the century-the victims.

The Northern Pacific Corner had started out as a competition between railroad tycoon Edward H. Harriman and the éminence grise of American finance, JP Morgan, for control of the railroad, set off by a particularly audacious effort by Harriman to buy Northern Pacific. (In the '80s, Harriman's machinations would have been called a leveraged buyout.) But Harriman and Morgan fought each other to a standstill and, between each of them and their allies, had bought up every share that was to be had in New York without either one having certain control.

The folks who didn't know this were the unfortunate short sellers. Certain (and rightly so) that there was no rational basis for the jump in Northern Pacific's stock, the shorts ordered their brokers to find shares to borrow and sell short. The brokers went to the Harriman and Morgan syndicates-and especially to JP Morgan's henchman, the stockbroker James R. Street.

The syndicates were happy to lend out the shares. At the turn of the century, short sellers had to cover their positions and deliver the shares they'd sold in two days-not so different from the three-day rule now adopted by the Securities and Exchange Commission. The mad rush to get shares to New York happened because the stock trades had to be settled with actual paper documents. And the syndicates and people like Street knew that there were no more shares to be bought. The very same short sellers who'd borrowed shares from Street's brokerage, Street and Norton, would have no choice but to go right back to Street to get the shares to pay him back-at any price that Street cared to name.