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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.