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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
Another part of the Duer-McComb strategy called for winning early control of the Bank of New York, a private institution Hamilton had helped to found. The partners spread a rumor that the Bank of New York would soon combine with the local branch of the Bank of the United States. To depress the price of the Bank of New York’s shares, they launched a bogus entity, the Million Bank, which they capitalized at $1.8 million. Duer and McComb soon had contracts to buy 400 of the Bank of New York’s outstanding shares.
As news of Duer’s schemes circulated through New York, people rushed to entrust their savings to him; he cheerfully promised to double their money in six months. Even the madam of one of the city’s premier brothels pulled dollars from beneath her much-used mattresses to pour into the bonanza. Duer also dipped into the funds of the S.U.M. and persuaded numerous merchant friends to cosign notes to expand his credit.
As with so many other attempted corners, Duer’s ploy looked better on paper than in reality. Bringing off such a coup required not only nerve but also the ability to keep track of a plethora of details, which was not Duer’s strong suit. He also had a manic tendency to get involved in more speculations than even the most gifted financier could handle. While impossibly leveraged by buying government stock with McComb, he was also the absentee contractor for the U.S. Army as they fought the western Indians. Simultaneously, he was heavily involved in the Scioto Company, an immense land speculation entity that had agents in Europe trying to unload 1 million acres of the Ohio wilderness.
Nor did Duer and McComb expect to run into difficulties in their 6 percent project. A group of speculators more or less aligned with New York Governor George Clinton, Hamilton’s political rival and Jefferson’s ally, got into the game on the bear side, selling all the stock they could find to Duer and his partners at a future date. Their goal was to depress stock prices, so that they could make a killing on the day of delivery.
Their timing was good. In the spring, much of the specie in New York went into the country to buy produce for export. This put a squeeze on the banks, which began calling in their loans. With the price of their stocks remaining flat, Duer and other members of the 6 percent club scurried around New York in search of money, paying interest as high as 1 percent per day-365 percent per year.
These desperate measures staved off disaster—temporarily. Watching from Philadelphia, Hamilton, became increasingly dismayed. Duer and his friends were making a mockery of the system Hamilton had created to give America financial stability. He was keenly aware that Jefferson and his colleague James Madison were looking for an opportunity to strike him down. “The enemies to banks and credit are in a fair way to having their utmost malignity gratified,” the secretary lamented.
Oliver Wolcott Jr. of Connecticut, the meticulous comptroller of the treasury, had been toiling over the books Duer left behind. He had found a shortfall of $239,000 from that resourceful fellow’s tenure on the old Treasury Board. Duer had long acknowledged the deficiency but ignored Wolcott’s demands that he make it good. Rumors of his financial overextension reached Wolcott, who called upon the U.S. attorney in New York, Richard Harison, to sue Duer.
The frantic Duer begged Hamilton to block a suit that would cripple his power to borrow. For the secretary of the treasury, it was a painful clash between private friendship and public duty. Hamilton met the test, grimly consigning Duer to his fate: “Tis time there should be a line of separation between honest men and knaves.”
On March 9, 1792, Duer failed to meet a number of payments on loans, and his paper pyramid began to crumble. He claimed that the notes had been issued by his agent in his absence and required “investigation.” No one believed a word of this, but it bought Duer a little more time.
By March 15, 6 percents were in precipitous decline and deferreds were also showing signs of galloping anemia. The bears were throwing all the stock they could find into the market to accelerate the downward plunge. Duer faced a crescendo of demands for payments of stocks that would soon be delivered, and the falling market combined with the government’s lawsuit made it impossible for him to raise another cent. He was soon in serious danger of physical harm from what one speculator called “the lower class of his creditors,” who were threatening that if they did not get their money they would “rise to extremities.”
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. 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.” Another writer reported: “The town has rec’d a shock which it will not get over for many years. Men look as if some general calamity had taken place.”