May/June 1999 | Volume 50, Issue 3
The federal government handled it far better than it would later ones
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.
In the increasing frenzy of speculation, Duer was the center of all attention, and it seemed he could do no wrong. Many were only too anxious to lend him money in hopes of getting on the bandwagon, among them Walter Livingston, who lent him $203,000. To get some idea of how much money that was in 1792, consider this. In 1828, thirty-six years later, a roster of New York’s richest citizens was drawn up, and although the city’s population had nearly tripled by then, there were only fifty-six New Yorkers thought to be worth at least $100,000.
Duer began to buy other bank stocks for future delivery, betting that rising prices would enable him to pay for them when the time came. But among the people from whom he had acquired bank stock were several other members of the Livingston clan, who were operating quite independently of their kinsman Walter. And they had an interest in seeing that prices fell. To ensure this, they began to withdraw gold and silver from their bank deposits, contracting the local money supply and forcing banks to call in loans. In other words, they instituted a credit squeeze. Interest rates soared to as much as one percent a day.
This was ruinous for Duer and others who had borrowed to speculate. Duer desperately tried to borrow more to cover his obligations, but now there was none to be had. Despite his troubles, he maintained a bold front, as the desperate on Wall Street usually do. On March 22 he wrote Walter Livingston, “I am now secure from my enemies, and feeling the purity of my heart I defy the world.” A day later he was in debtors’ prison.
With Duer’s fall, panic ensued and prices plunged. The next day twentyfive failures were reported in New York’s still-tiny financial community. Walter Livingston, who had gone from door to door assuring anyone who would listen that he was still solvent, announced that he was not. Alexander Macomb failed in early April and was also incarcerated for debt.
Thomas Jefferson, hardly able to contain his glee at the discomfiture of the speculators he hated so passionately, calculated their total losses at five million dollars. He also calculated that this was the total value of New York real estate at the time and equated the losses to those that would have occurred had the city been leveled by some natural catastrophe.
For some of those caught in the debacle, it must have seemed they had indeed been hit by an earthquake. Many never returned to Wall Street. William Duer would never get out of debtors’ prison alive, and Walter Livingston retired to his family’s vast upstate property to lick his wounds.
But for the country as a whole, it was not nearly that bad, thanks to fast action on the part of the federal government. Hamilton moved to make sure that the panic did not bring down basically sound institutions. He ordered the Treasury to purchase several hundred thousand dollars’ worth of federal securities to support the market, and he urged banks not to call in loans. Furthermore, to ease the money shortage, he allowed merchants to pay import duties at the customhouse—which usually required either gold or Bank of the United States bank notes—with notes payable in forty-five days. Speaking of the Treasury and the banks, Hamilton wrote, “No calamity truly public can happen, while these institutions remain sound.”
He was right. Calm quickly returned to the Street, the precursor to the New York Stock Exchange came into being a few months later, and the American economy continued to expand rapidly in the prosperous 179Os. The reason is simple: Hamilton acted exactly as public monetary and fiscal authorities should in the midst of a financial panic. He prevented the contagion of fear from getting out of hand and assured that the panic would not have long-term adverse consequences to the American economy as a whole.
Alas, the lesson went unlearned amid the developing tide of Jeffersonian politics, which held Wall Street and all its works to be a necessary evil. It would be 195 years, until the great crash of 1987, before the federal government once again moved decisively to prevent a panic on Wall Street from turning into a financial disaster.
That is why the panic of 1987 is today, only twelve years later, nearly as forgotten as the first one in 1792. If the federal government has truly learned its lesson, perhaps 1987, not 1929, should be the new image for our collective imagination.