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Wall Street’s First Collapse
Speculators caused a stock market crash in 1792, forcing the federal government to bail out New York bankers— and the nation
Winter 2009 | Volume 58, Issue 6
Hamilton made most of his payments in government bonds with a par value of $400, paying 6 percent interest. These notes were soon being traded on America’s first stock exchange, under a buttonwood tree at the foot of Wall Street. Alas for Secretary Hamilton’s vision of an orderly prosperous future, too many newly rich titans declined to devote their magically multiplied wealth to launching new businesses. Instead they started looking for ways to double and quadruple their paper profits.
On July 4, 1791, the Treasury began selling stock in the new Bank of the United States. Noting that speculation was already brisk in government 6 percents, Hamilton attempted to check a similar fever in the bank’s stock by making it expensive to buy. A $400 share required $100 down, the rest to be paid in four semi-annual installments. (In modern money, this was roughly $6,000 a share and $1,500 down.) Laborers earned about $200 a year in 1792. Even skilled craftsmen, who earned ten times that much, would hesitate to part with $400. Hamilton’s goal was still to concentrate stock ownership among “the better sort.”
Congress, already demonstrating an eagerness to please as many people as possible, reduced the opening payment to $25. For this amount, the purchaser received a certificate, soon nicknamed a “scrip,” which entitled him to buy the full share at par. Hamilton had intended to offer the stock only in the nation’s capital, Philadelphia, but Congress ordered him to give speculators in New York, Boston, Baltimore, and Charleston a chance to buy as well.
In less than an hour, the $8 million first issue was oversubscribed by $1.6 million. In five weeks, the value of the scrip soared from $25 to $325. The low opening price enabled almost everyone to get into the game. “Scrippomania” swept the nation. Newspapers began printing daily stock quotations. Six-percent government bonds also levitated in the bubble, soaring from 75 cents on the dollar to 130. Other bonds, called deferred sixes, because they would not come due for 10 years, went from 40 cents to par.
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." Hamilton was almost as dismayed at the speculation. He knew the rise could not last. On August 11, 1791, the market broke, and a wave of frantic selling swept the major cities, leaving a great many people poorer than they had been on Independence Day.
Anticipating Henry Paulson, Hamilton struggled to calm the situation. Utilizing a $1,000,000 sinking fund he had created for this purpose, he bought some of the plummeting stock on the government’s account and publicly declared that scrip should be selling at 195 and 6 percents at 110. The market stabilized around these figures, averting a crash.
The wildest speculation boiled up in New York, led by Duer, who had resigned his post in government to devote full time to his investments. Hamilton warned him stiffly to exercise more public responsibility: “I have serious fears for you—for your purse and for your reputation.” For unknown reasons, however, Hamilton still trusted Duer enough to involve him in the next phase of his plan to turn the United States into an economic powerhouse. The secretary called for the creation of a Society for the Establishment of Useful Manufactures (S.U.M.); he asked Duer to become its governor and chief salesman, even though Duer had mishandled his government accounts, occasionally using Treasury warrants to cover his private speculations and generally leaving his books a mess. Already regarded as a man with a golden touch, Duer easily raised $600,000 in a stock offering to capitalize the S.U.M.
The mania for paper profits had only been checked, not eliminated. Across the country, state banks were being founded, primarily to loan money for speculation in stock and land. "Bank mania" joined "scrippomania" as part of the national vocabulary. The market in government securities soon resumed its rise. By October 1791, 6 percents were selling at $500, or $100 over par, and scrip had risen similarly.
Duer had learned nothing from the summer’s close call. He now decided to plunge on a grand scale. Forming a partnership with Alexander McComb, a New York businessman and land speculator, he set out to corner the market in government 6 percents. Duer soon drew in many of the leading S.U.M. investors forming what later would be called the “6 percent club.” They hoped to achieve a corner by July 1792, when the next installment on stock in the Bank of the United States was due.
They also bought “on time” as many shares in the bank as they could find. If they brought off the corner, Duer and McComb planned to sell the 6 percents at huge markups to European investors eager to buy American securities. With revolutionary France on the brink of exploding, United States looked far more stable than any country on their continent. With this wealth, Duer and McComb hoped to buy enough shares to take control of the Bank of the United States.