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 Introduction | 1792 | 1837 | 1857 | 1874 | 1930 | 2011




In February 1791, at Treasury Secretary Alexander Hamilton’s urging, Congress authorized creation of a Bank of the United States (B.U.S.), to be capitalized at ten million dollars, with the government putting up one fifth, and the remainder to be raised by a sale of stock beginning in July. B.U.S. subscription shares sold out instantly, and were as quickly resold, with eager buyers, visions of future profits dancing in their heads, bidding up the value of a still nonexistent bank from $25 to $60 almost overnight, from $60 to $100 in two days, from $100 to $150 in a single day. By the end of October shares were at $170 and a number of Hamilton’s associates had acquired big stakes in the B.U.S. as well as seats on its board.

At the center of the frenzy was William Duer, the Darth Vader of early American finance. An English immigrant, socially distinguished, financially well fixed and wired – he had many European connections – Duer had had a honorable war. With independence won, he became one of the most active New Yorkers (leagued with Dutch, French and English backers) engaged in buying up the Revolutionary debt. These were paper promises of future payment the Continental Congress had given soldiers, but not made good on. They were being snapped up by wealthy speculators, at a fraction of their face value, gambling that they'd soon be paid off in full. Their hopes were fulfilled when Hamilton won Congressional approval for funding the debt, handing the speculators a colossal windfall profit, which he hoped they would put to productive use.

Hamilton made his friend Duer Assistant Secretary of the Treasury, and while Hamilton was incorruptible, he was pretty lax about Duer's doings. The latter used inside information about impending Treasury moves to continue, indeed accelerate his speculations, notably in the new federal securities (of which by the end of 1790 there were 62 million dollars worth in circulation). Trading on informal markets, notably in lower Manhattan coffee houses, he became one of the richest men in the country, living like a potentate in the former Philipse mansion.

After six months in office, Duer had abruptly resigned from the Treasury—“I have left to do better,” he explained—and promptly threw himself into daring and complex speculations, drawing on capital pools in eastern seaboard cities and Europe. These went into hyperdrive when the B.U.S stock went on sale in July 91. Borrowing (and embezzling) vast sums to finance their manipulations, Duer and his associates now inflated a speculative bubble that sucked in many ordinary citizens.

New Yorkers began jumping on this rapidly growing beanstalk and riding it up to the clouds, Their thought processes were described by one disapproving commentator: “Shall I continue, says an industrious Tradesman, in the drudgery of daily & laborious attention to an employment which gains me but a few dollars, while my neighbor in one Evening, or with a dash of his pen acquires thousands?! Such ideas, being disseminated amongst the various Classes of people could be subversive of private industry, happiness, & economy.”

Hamilton, who had been stoking the fever – delighted that European capital was flooding in to buy his fledgling government's shiny new securities – now grew alarmed. “These extravagant sallies of speculation,” he wrote in January 1792, “do injury to the government and to the whole system of public credit, by disgusting all sober citizens, and giving a wild air to every thing.” Far from making sober long term investments, as he'd hoped the speculator-beneficiaries of government largesse would do, they seemed gripped by an irrational exuberance. Robert R. Livingston noted that in New York City “hundreds have made fortunes by speculating in the funds ... and have no idea of a more perfect government than that which enriches them in six months.”

Duer plunged ahead. He put together a secret syndicate of speculators – what later players would call a "pool" – that quietly bought up yet more extant securities. Then they set out to game the market, bulling it artificially by announcing creation of a "Million Bank" (from its putative initial capitalization of $1 million), and hinting it would merge with both the Bank of New York and the Bank of the United States, driving up the stocks of all three institutions. When they had gone up far enough, the group planned to unload its holdings at a tremendous profit.

Sure enough, this touched off a "bancomania." Values and volume soared (prompting discussion of the need for a central securities market). As one witness marveled, “The merchant, the lawyer, the physician and the mechanic, appear to be equally striving to accumulate large fortunes” through speculation.

Though Duer's paper profits were immense, he deemed them insufficient. He began making "deferred" purchases, borrowing money from others to buy at market prices, agreeing to pay in two weeks, by when he was certain the price would have gone up, allowing him to repay the debt and come out ahead.

Early in March, however, stock prices leveled off, then declined slightly. Coincidentally, the government notified Duer of a $250,000 discrepancy in his accounts as Assistant Treasury Secretary. No longer able to raise cash, Duer began to sell. On March 10, as panic engulfed New York, he stopped payment on all his debts; two weeks later he was arrested and thrown in debtor’s prison, one step ahead of a crowd seeking to disembowel him.

Now full scale panic set in, failures spread throughout town, bowling down leading figures, some of whom fled town. Shopkeepers failed, business was disrupted, and Duer was lucky to be behind bars: “I expect to hear daily that they have broken open the jail and taken out Duer and Walter Livingston, and hanged them,” wrote one resident. One creditor did get into the prison, where he confronted Duer with a brace of dueling pistols, and demanded he pay up immediately or defend his honor; he left only after Duer forked over what he owed.

The panic touched off a wider economic crisis. Many leading merchants were ruined; many ordinary citizens lost their life savings; business languished; unemployment spread.

On the night of April 18th a stone-throwing crowd of between three and five hundred persons, working people as well as merchants, converged on the jail shouting “We will have Mr. Duer, he has gotten our money.” These demonstrations were repeated for the next several evenings and the mayor prudently increased the guard at the jail. Duer survived, though he would die in prison in 1799.

Thomas Jefferson was dismayed. “The credit and fate of the nation seem to hang on the desperate throws and plunges of gambling scoundrels,” he wrote. Jefferson was not surprised that “at last our paper bubble has burst” – he calculated that losses exceeded the combined value of all Manhattan’s real estate – and was thankful he'd snatched the capital out of New York City in time.

But Hamilton, too, was appalled. He had created a class of proto-capitalists to lend the government stability and facilitate the production of tangible wealth—not reel off on speculative binges that paralyzed the economy. As his biographer Ron Chernow notes, “the financial turmoil on Wall Street and the William Duer debacle pointed up a glaring defect in Hamilton’s political theory: the rich could put their own interests above the national interest.” Worried “about abuses committed against the rich,” Hamilton had minimized “the skulduggery that might be committed by the rich.”

Hamilton acknowledged to a worried President Washington that speculation “may be attended with pernicious effects,” that it “fosters a spirit of gambling, and diverts a certain number of individuals from other pursuits.”

Still, he was not prepared to accept Jefferson’s judgement that it constituted a “canker at the heart of the Hamilton enterprise.” Loathing idle capital, he insisted it should be possible to draw “a line of separation between honest men and knaves” – “between respectable stockholders and mere unprincipled gamblers” -- by relying on the power of “public infamy.”

Where, and how, to draw the line between “respectable stockholders” and “gamblers” – between the Force and its Dark Side (if indeed such a distinction is possible) – has remained a central dilemma of American capitalism from that day to this.

[For a fuller account, see Burrows & Wallace, Gotham, Chapter 20]


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