Panic of 1792
The Panic of 1792 was a financial credit crisis that occurred during March and April of 1792. William Duer and Alexander Macomb speculated against stock held by the Bank of New York. In the background, the first Bank of the United States engaged in a large credit expansion and so fueled the wave of speculation. But at the time of the Panic in 1792 the Bank of the United States was not functional and so Hamilton had to rely on the Bank of New York.
Prelude to the bubble
Hamilton became the first Secretary of the Treasury in September 1789. Because he inherited an empty national treasury, he reduced the rate of interest paid on the restructured domestic national debt from 6 to 4 percent. In modern lingo, he gave debt holders a "haircut." But the U.S. debts to foreign nations (chiefly to France for funds borrowed during the War of Independence) were to be discharged according to the terms of the original debt contracts.
Old evidences of debt began voluntarily to be exchanged for new Treasury debt in the form of 6% bonds (the "U.S. Sixes"), 6% "deferred" bonds (interest at 6% would commence in 1801, so for ten years these were "zeros"), and for 3% bonds, all payable at the pleasure of the government, i.e., with no fixed maturities. It took some time for all of the conversions to be made: About 50 percent of the eventual total of $64.5 million of domestic debt had been converted by September 30, 1791, 90 percent by the end of 1793, and 98 percent by the end of 1794.3 Nonetheless, active trading markets for the new issues emerged when they first appeared in Fall 1790.
In December 1790, Hamilton delivered to Congress a Report on a National Bank. It called for Congress to incorporate a Bank of the United States (BUS) capitalized at $10 million with 25 thousand shares of $400 par value each, with provisions for the U.S. government to take a 20 percent ownership stake and for the remaining $8 million of capital to be subscribed for by private investors. One quarter of the subscription price was to be in tendered in specie, and three quarters were payable in the new U.S. debt securities.
Both houses of Congress passed the Bank bill early in 1791. After a high-level debate involving the president and cabinet members on the constitutionality of the proposed action, and further backroom political dealing in Congress, Washington in late February signed the bill into law.
The Bank would have its headquarters in Philadelphia, then the seat of the federal government, and it could open branches throughout the United States. Four such branches, at Boston, New York, Baltimore, and Charleston, opened in 1792, and four more opened in and after 1800 in Norfolk, Washington DC, Savannah, and New Orleans.
The Bank of United States IPO took place on July 4, 1791, and was heavily oversubscribed. At that time were issued subscription rights, or scrips, to buy a full share of stock, at a price of $25 payable in specie. The possessor of a scrip then had to make additional payments of $100, one quarter in specie and three quarters in U.S. debt on January 1 and July 1, 1792, and January 1, 1793, with a final payment of $75 in U.S. debt due on July 1, 1793. The BUS was organized in the autumn of 1791, and its Philadelphia headquarters opened for business in December. Three of the first four branches opened in late March and early April of 1792, in the midst of the panic, followed by the Baltimore branch in June. Creation of the BUS induced the states to incorporate more banks of their own for a variety of reasons. State governments also began to charter more and more other types of business corporations. During the 1790s the states chartered more than ten times the number of businesses they had incorporated in the 1780s.
The IPO of the BUS on July 4, 1791, gave rise to six weeks of heated financial speculation the likes of which had never been witnessed in America. Scrips purchased at 25 during the IPO quickly doubled in price and remained at that level for most of July. "Scrippomania" swept the nation. Newspapers began printing daily stock quotations. In Philadelphia an angry Thomas Jefferson wrote to a friend: "Stock and scrip are the sole domestic subjects of conversation. . . . Ships are lying idle at the wharfs, buildings are stopped, capital withdrawn from commerce, manufacturers, arts and agriculture to be employed in gambling."
Public debt securities also rallied after the BUS IPO. The 6s rose from 90 at the time of the IPO to 112.50 in Philadelphia on August 13. Then they fell to 100 by August 17. That prompted Hamilton to swing into action. He had convened a meeting of the Commissioners of the Sinking Fund and gotten them to authorize open market purchases of U.S. debt in amounts of $300-400 thousand at Philadelphia and New York.
Hamilton authorized the Bank of New York to purchase up to $200 thousand of public debt in New York; and about $150 thousand was purchased by the U.S Treasurer in Philadelphia. He wanted it to be known that the Treasury was acting to alleviate financial distress by supporting the bond market, but, perhaps recognizing the moral hazard of a "Hamilton put," he wanted the announcement to be muted rather than trumpeted. Purchases of 6s were at or near par, but because 3s and deferreds were well below par, the total face value of the securities purchased in approximately one month came to more than $560 thousand. That was about 2 percent of the 6s, 3s, and deferreds outstanding at the time, a very large amount indeed.
The mini-panic of August-September 1791 had come to an end.
The rise of speculation
Hamilton planned to buy at par value the millions of dollars in promissory notes that the bankrupt Continental Congress and state governments had issued to soldiers, farmers, and others who had supported the Revolution. Most of the original holders of government paper had long since given up any hope of being paid its full value. According to a source, Hamilton permitted— and perhaps collaborated in—leaking his plan to numerous wealthy Americans, chief among the leakers was William Duer, the assistant secretary of the treasury, who combined government service with a passion for quick profits.
Duer’s financial scheming and operations with other members of his speculative "company" rapidly drove up securities prices to new highs early in the year 1792, and then in March, when Duer could not repay the large amounts of money he had borrowed to implement his plans, the market crashed and panic ensued. The scheming involved an attempt in January to launch a large new bank in New York City in order to drive down the price of BONY stock and get control of it, and then to corner the market for U.S. 6s, which subscribers to the BUS would need to meet their future payments for BUS shares.
Because of their reputations, Duer and his fellow speculators could raise credit locally in New York by issuing their own notes and mutually endorsing them. They did. But at the very end of 1791 a great new source of credit appeared on the scene, the first Bank of the United States, which was, and would be for the two decades it operated, by far the largest bank in the United States. The expansion of credit of the BUS in Philadelphia was taken advantage of by the speculators in New York.
While Duer attempted to drive the price of stocks up, the Livingston family, one of the richest families in the New York area, attempted to drive the price of stocks down. To ensure this, they began to withdraw gold and silver from their bank deposits, contracting the local money supply and forcing banks to call in loans, thus instituting a credit squeeze. Interest rates soared to as much as one percent a day.
In February, Hamilton recommended that all banks ought to gradually begin tightening credit, to reduce the speculative rise in the securities market. By the time the BUS was suffering the consequences of that credit over-expansion as its liabilities were being returned for conversion to specie. Its cash reserves had declined from $706 thousand on December 29, to $510 thousand on January 31, and then to $244 thousand on March 9. In response to the drain, the BUS sharply (not gradually) contracted its discounts, which declined from $2.68 million on January 31 to 2.05 million on March 9. The BUS was saved from even further distress with props from Hamilton, who transferred public funds from the BONY to the BUS.
Still, the contraction of BUS discounts by $0.62 million from January 31 to March 9 did severe damage to speculators such as Duer and "company," who were longs in the public debt market, attempting to corner US 6s. The BUS credit expansion had fueled their speculations in January, but then the tables were turned. The BUS was saved, but the speculators and others went down in flames. U.S. 6s in New York fell from 125.83 on March 5 to 116.25 on March 8, the day before Duer stopped paying his debts. That caused a contagion of defaults, and panic selling of securities. US 6s fell further to 95 on March 20, a drop of 25 percent in two weeks.
Rumors of his debts reached as high as $3,000,000. William Duer, "the king of the alley,", was insolvent. Driving another nail into his credit, the federal government sued Duer to force him to account for $240,000 in Treasury funds that were missing either because of his sloppy bookkeeping or his embezzlement when he was secretary of the Board of Treasury, charges that his wiliness and close association with Alexander Hamilton had forestalled for three years.
On March 23 Duer took refuge in the city jail—a place to which most debtors went reluctantly, but which he now saw as far safer than his mansion on Broadway. (He died in the prison in 1799.) In a letter a New York businessman ticked off the names of a veritable gallery of top merchants to whom Duer owed large sums— $80,000 to one man alone. He also owed "shopkeepers, widows, orphans—butchers, carmen, gardners, market women." Soon one of Duer’s partners, Walter Livingston of the powerful Hudson River Valley clan, joined him in debtors— prison. He had cosigned 28 of Duer’s notes for a total of $203,875.80. In April Alexander McComb defaulted on half a million dollars in stock purchased from the bears and joined his partners in the city prison. Public unrest grew and mobs gathered around the prison.
Even the bears were swallowed in the general collapse. One of their chiefs, Brockholst Livingston, was reported as "nearly ruined," and his fellows were not in much better shape. The commerce of New York all but stopped functioning. An upriver merchant with several tons of wheat on ships refused to unload them because no one could pay him in specie, and he did not trust the notes of the people who offered to store it. Philadelphia also felt the shock. Land prices throughout Pennsylvania dropped by two-thirds.
Hamilton's actions and recovery
On March 19, Hamilton begun a series of lender-of-last resort operations that would last for several weeks as the panic went on. The collector of customs duties in the district of the BUS had been authorized to receive post-notes of the BUS with a maximum maturity of 30 days "upon equal terms with cash."
Hamilton also initiated open market purchases once again. A day after, he wrote both Adams and Jefferson, fellow Sinking Fund commissioners, that they “may have heard that the Treasurer was in the Market last night and may be at a loss concerning his authority,” which, Hamilton explained, was the amount left unexpended from the previous summer’s authorization, which was a little over $50 thousand. In a crisis, act first, explain later. He also requested further authorizations.
Hamilton asked the Bank of New York to act as the lender of last resort in New York, because the New York branch of the BUS had not yet opened. It should buy public stock up to $1 million dollars, which was quite a large sum in 1792. To alleviate any concerns the BONY might have about risking its own solvency by lending freely in the crisis, he added a repo-like feature (should the BONY for whatever reason get stuck with the collateral, the Secretary of the Treasury would take at least half of it off the BONY’s hands). It is reported that the large bond agreed to collateralize U.S. bonds at the prices Hamilton had set, and that they would cooperate in the crisis by not acting to drain specie from banks
A new bank was the New York branch of the BUS, which was set to open on April 2nd. Shortly after it did, one businessman wrote another on April 5th that it too was discounting "pretty liberally," which likely reduced the liquidity squeeze.
Total injections from purchases authorized by the Sinking Fund came to $243 thousand in roughly a month. The 1792-panic purchases turned out to be roughly $100 thousand less than had been expended during the Bank-scrip crisis of 1791. The reason that smaller purchases could alleviate a larger panic in 1792 is that they were only one component of crisis containment. Hamilton had more tools at his disposal in 1792. He had more banks, including the BUS, to cajole into granting discounts to those who needed credit in various cities to pay, for example, customs duties falling due. He also had and used news of a new Dutch loan to the United States of $3 million guilders at 4% to reassure the markets of the strength of the government’s finances and the more attractive yields available in domestic U.S. markets. And finally, he coordinated a sort of clearing-house arrangement among New York securities dealers and bankers that made lender-of-last-resort loans while economizing on the specie reserves needed to support a given amount of credit. By employing all of these tools, more or less simultaneously, Hamilton was able to end the crisis in roughly one month.
After the panic
Hamilton’s crisis management in 1791 and 1792 may illustrate the moral hazard problem that is ever present in financial crisis management. By coming to the aid of the markets in 1791, Hamilton may have encouraged the speculative bubble of 1792 by making market participants believe that there was something like a "Hamilton put" on the table. Two centuries later, it was said that Alan Greenspan’s similar actions in dealing with the Asian, Russian, and LTCM crises of the 1990s created the notion of a "Greenspan put" that fueled the so-called dot com bubble of the late 1990s. Effective management of a financial crisis may sow the seeds of another one. Hamilton invented here what in time would be termed Bagehot’s rules for how a central bank should act in a crisis some nine decades before Bagehot rediscovered them.
A consequence from the panic of 1792 occurred May 17th of that year when twenty-four broker-dealers of New York met under a buttonwood tree on Wall Street and signed an agreement to trade with each other on preferential terms. This is often regarded by many, including the NYSE itself, as the origin or founding of the New York Stock Exchange. All of the securities regularly listed and quoted in the New York market in the early to mid 1790s—the U.S. 6s, 3s, and deferreds, and the stocks of the BONY and the BUS—were Hamilton’s creations. Hence, the panic of 1792 resulted in institutional changes with long-run benefits for securities markets. As another consequence, the panic strengthened the Democratic-Republican opposition to the Federalists and Hamilton.
For the rest of the decade, speculative fever abated on Wall Street. But the appetite for a fast buck continued. Robert Morris and other wealthy men continued to speculate in land. Vast stretches of wilderness in the West and North became a new bubble that collapsed at the end of the decade, bankrupting Morris and many others. For a year a small army of creditors and sheriffs— deputies camped on the lawn of Morris’s mansion. He sold off furniture, silver, and rugs to satisfy those who shouted loudest. But in February 1798, without wood or coal to keep warm, the once richest American surrendered and was escorted to Philadelphia’s debtors’ prison.
- Thomas Fleming. "Wall Street's First Collapse", American Heritage, Winter 2009.
- David J. Cowen, Richard Sylla, Robert E. Wright. The U.S. Panic of 1792: Financial Crisis Management and the Lender of Last Resort (pdf), referenced 2011-01-09.
- Brian Trumbore. William Duer and the Crash of 1792.
- Bruce H. Mann. "Republic of debtors: bankruptcy in the age of American independence", Google books preview, p.114. Referenced 2011-01-11.