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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
Wall Street’s first bubble swelled burst in the spring of 1792, exerting a profound effect on American politics and society. Nine years after the Treaty of Paris and the acknowledgement of the former colonies— independence, both Europe and America lay in turmoil. The French Revolution was showing its first symptoms of radical violence. In March an assassin’s bullet felled Sweden’s King Gustav III, who had called for a crusade against France. In the United States, President Washington struggled to fight a war against British-backed Indians in the Midwest. Closer to home, a savage feud had exploded between his secretary of state, Thomas Jefferson, and his secretary of the treasury, Alexander Hamilton.
In spite of strenuous opposition by the supporters of Jefferson, Hamilton had persuaded Congress to set up a financial system designed to rescue the Republic from the humiliating bankruptcy that had almost destroyed the nation after the Revolution. In 1791 Congress chartered the Bank of the United States with the intention that it would buy up the millions of dollars in promissory notes issued by the Continental Congress when its paper money became worthless in the final years of the Revolution. “A public debt,” Hamilton said, “was a public blessing.” It could be used to pump new life into the all-but-dormant American economy. The Jeffersonians accused the secretary of trying to turn the new nation into a mirror image of Great Britain, which was not far from the truth.
Hamilton did not inspire confidence in average Americans. Born illegitimate in the West Indies, he had served as General Washington’s chief aide-de-camp during the Revolution. The public neither saw nor appreciated his contributions. As the war ended, he married a daughter of Gen. Philip Schuyler, one of the nation’s richest men. In the struggle to create a new constitution and federal government, he had displayed a no-holds-barred political style and a disdain, even contempt, for popular government. Hamilton regarded democracy as a “disease,” dangerous to the nation’s stability.
After winning the brawl over the bank, Hamilton and his followers clashed further with the Jeffersonians over how to deal with the debt. Haunted by the memory of the financial collapse of the 1780s, Hamilton decided to concentrate the wealth of the new republic in the hands of a relatively few men so that the nation would have capital when and if it was needed. He decided 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.
Hamilton knew that much of this federal debt was already in the hands of speculators. Most of the original holders of government paper had long since given up any hope of being paid its full value. They had either stuffed their certificates in drawers and forgotten them or sold them at heavy discounts. Hamilton permitted— and perhaps collaborated in—leaking his plan to numerous wealthy Americans. Chief among the leakers was almost certainly William Duer, the assistant secretary of the treasury, who combined government service with a passion for quick profits.
The son of a rich West Indies planter, Duer had come to New York on business in 1768 and stayed. He had joined the American side in the Revolution and served ably in the Continental Congress, where he had won Hamilton’s friendship by defending General Wash¬ington against his critics. Later Duer became secretary of the Confederation government’s Treasury Board. In 1779 he married Catherine Alexander, daughter of Maj. Gen. William Alexander of New Jersey, also known as Lord Stirling, thanks to his somewhat dubious claim to a Scottish title. “Lady Kitty,” as she was called, liked a splendid lifestyle as much as did Duer. They rode around New York in a coach and four with a coat of arms emblazoned on the doors, and they often served 15 different wines at their dinner parties.
Duer and his friends saw Hamilton’s plan as a way to make a killing. There were still certificates from the speculative cites of New York and Philadelphia waiting for aggressive buyers—especially in state debts, which had seemed even worse bets than the federal notes. Duer leaked word that Hamilton intended to consolidate these debts with the federal debt to strengthen the people’s attachment to the new government. Pennsylvania Senator Robert Morris, former superintendent of finance during the Revolution and considered the nation’s wealthiest man, sent agents galloping into the western reaches of New York, Pennsylvania, and other states to buy up state paper at a few cents on the dollar. Former army contractor James Wadsworth, now a congressman from Connecticut, dispatched two vessels to South Carolina, loaded with cash to do likewise. Duer, ignoring a law that forbade Treasury employees from speculating in government securities, was another major player in this greedy game.
Some 78 New Yorkers, many of them friends or partners of the assistant secretary, bought $2,717,754 of southern state certificates, with eight accounting for more than $1,500,000 of this potential bonanza. Add to this the $4,949,253 in the federal debt held by New Yorkers, and it is clear why New York’s well-to-do had a feverish interest in Congress’s approval of Hamilton’s funding system.
These numbers also reveal why Jefferson and his followers wanted to get Congress out of New York City. In return for backing the funding bill, the Jeffersonians demanded Hamiltonians— support for the transfer of the capital to yet unbuilt Washington, DC, in 1800. Meanwhile, Philadelphia became the temporary capital.
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.
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.”
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. Stock prices continued to fall in spite of Hamilton’s attempts to stabilize the market with government money. Public unrest grew. On April 15 Alexander McComb defaulted on half a million dollars in stock purchased from the bears. The following day he joined Duer and Livingston in the city prison.
On the night of April 17 a large mob gathered around the jail but was dispersed by a sudden rain shower. A few days later another angry crowd gathered, determined to do someone harm, but they lacked leadership. One jittery Connecticut visitor wrote that all the city needed was a “small riot” to burst into a “general flame” that would "consume the prison & D-r and McComb with it.” The city fathers equipped the jailers with small arms and cannon, which may have chilled the impulse to violence.
Hamilton’s attempts to quell the cascading stock market with infusions from his sinking fund were repeatedly overwhelmed by the escalating panic. 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.
On April 17 a gloating Jefferson reported that in New York “bankruptcy is become general, every man concerned in paper being broke.” He estimated that the total loss was $5 million, roughly the value of all the buildings in the city. It was the equivalent, Jefferson said, “of the whole town [being] burnt to the ground.”
His unconcealed satisfaction was the signal for a ferocious onslaught upon Hamilton by the secretary of state’s followers in Congress and elsewhere. Writing in the National Gazette, Philip Freneau, Jefferson’s favorite mouthpiece, assailed the funding system as evil. He blamed it for “the scenes of speculation calculated to aggrandize the few and the wealthy, while oppressing the great body of the people.” Never hesitant about replying to critics, Hamilton blasted back under numerous pseudonyms, accusing Jefferson of being, among other things, a secret enemy of the Constitution.
Another series of letters in Freneau’s newspaper assailed the S.U.M. Alas for the immediate future of American industry, the society was an easy target. Its treasury had been depleted by Duer’s illegal transfers into the speculative whirlwind. Many of its board of governors were either in jail or in hiding, and the few who showed up for meetings nursed grievous financial wounds inflicted by the 6 percent club.
The congressional elections in the fall of 1792 reflected the success of the newspaper and congressional clamors, giving the Jeffersonians a clear majority in the House of Representatives. It was the death knell of the S.U.M., although the wake and interment took three more years. A corporate ghost remained alive for another century, leasing land it owned on the Passaic River to entrepreneurs, but it no longer resembled Hamilton’s enterprise.
New York City, however, rode out Jefferson’s apocalyptic predictions. By June 1792, thanks in large part to new infusions from the sinking fund, stability had returned to the stock market and city.
For the rest of the decade, speculative fever abated on Wall Street. William Duer, still in prison, remained a kind of living reminder of what could go wrong. But the appetite for a fast buck was not purged from the American psyche. 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.
The failures of America’s first group of financiers had not a little to do with the election of Thomas Jefferson in 1800, beginning decades of a federal government that was ideologically hostile to banks, industrial development, and the accumulation of capital. Only when a new generation of businessmen and financiers demonstrated that they could combine profit seeking with self-restraint and concern for the general welfare did American voters and politicians begin to unlearn the harsh conclusions that had been drawn as Wall Street’s first bubble burst in fear and misery in the spring of 1792.