The Great Crash (of 1792)

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The year 1929, like 1066, 1492, and 1776, is one of those dates that summon up an instant picture in our collective imagination. For not only did that year see a stock market crash, it was the crash. The defenestrated bodies of ruined investors and brokers are popularly supposed to have rained down on lower Manhattan like hailstones that terrible day (they didn’t); it is widely believed to have caused the Great Depression (it didn’t); and for all I know, some people think it was the crash that forced the Joads to move to California (it was a drought—not to mention John Steinbeck’s imagination).

Certainly ever since, the crash of ’29 has been perfect for scaring people. Let the slightest hint of “irrational exuberance”—to use Federal Reserve Chairman Alan Greenspan’s candidate for Bartlett’s —appear on Wall Street and the sages on TV talk shows, op-ed pages, and elsewhere start talking ominously about 1929.

But it was only one of a long series of stock market crashes in American economic history. There were others in 1837, 1857, 1873, 1893, and 1907 that were just as grim, and each also marked the beginning of a protracted period of economic depression. It is therefore instructive to take a look at Wall Street’s very first crash, in 1792, a crash so early that many of the buildings on Wall Street were still private houses. What makes this crash really interesting, however, is how the federal government handled the crisis.

In one of those neat coincidences of history that help keep people like me off the unemployment rolls, one of its chief victims was a man named Walter Livingston. His great-great-great-great-grandson, late last year, was briefly scheduled to be Speaker of the House.

The cause of Walter Livingston’s distress was a man named William Duer. Born in England in 1743, Duer was the son of a very successful West Indian planter. He spent some time managing his father’s estates in the West Indies and then settled in upstate New York.

When the Revolution began, he sided with the rebels and was elected to the Continental Congress. After he left the Congress, he made a fortune supplying the Continental Army, and he married Catherine Alexander, often known as Lady Kitty, the daughter of the immensely rich American general William Alexander.

After the Revolution Duer and his wife lived in almost royal style in their New York mansion, with liveried servants pouring as many as fifteen different wines at a single dinner. He was able to afford this lifestyle owing to a number of financial coups during the 1780s, involving land and the Revolutionary debt. In 1786 he was appointed Secretary of the Treasury Board under the Articles of Confederation, a position tailor-made for obtaining inside information. In 1789 Alexander Hamilton (whose wife was a cousin of Duer’s wife) made him Assistant Secretary of the Treasury under the new federal government.

Hamilton was personally hon- est and never tried to profit from his government position. Duer was not so fastidious. When Virginia’s Henry Lee asked his friend Hamilton for information on the Treasury’s refunding plans, Hamilton refused to tell him anything. But William Bingham, a wealthy Philadelphian and an intimate of Duer, was so sure of the future that he borrowed £60,000—a very considerable fortune at that time—in Amsterdam in order to speculate in the federal debt.

Federal law forbade Treasury officials from speculating in federal securities, and Duer himself resigned rather than obey it. But he had always been more interested in Treasury connections, and especially a reputation for having them, than in the job itself.

At the end of 1791 he entered into a partnership with Alexander Macomb, one of New York’s richest and most prominent citizens. The agreement called for combining Macomb’s money and Duer’s speculative talents and insider connections with the Treasury Department. They were to operate together for one year, speculating in stocks and bonds, and then divide the profits equally.

Duer began buying Bank of New York stock when there were rumors that it was to be bought by the Bank of the United States and converted into a branch. If that was true, the stock was certain to rise, and Duer and Macomb would make a handsome profit. But Duer was also playing a deeper game. While long in the market with Macomb, he was short Bank of New York in his own account. Thus he was betting in public that the Bank of New York would be taken over and in private that it would not be. If the merger failed, Duer and Macomb would lose, but Duer, on his own, would make a fortune. Since his agreement with Macomb called for using Macomb’s money, not his own, all Duer had to lose by double-crossing his partner was honor, a sacrifice he seemed perfectly willing to make.

Hamilton, unaware of Duer’s duplicity, was appalled nonetheless at his speculative activities. “Tis time,” he wrote on March 2, 1792, “there must be a line of separation between honest Men & knaves, between respectable Stockholders and dealers in the funds, and mere unprincipled Gamblers.” Finding that line of separation, of course, has occupied the finest minds of Wall Street and the government ever since, with, at best, very mixed results.