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Economic History ssociation

The First Bank of the United States and the Securities Market Crash of 1792Author(s): David J. CowenSource: The Journal of Economic History, Vol. 60, No. 4 (Dec., 2000), pp. 1041-1060Published by: on behalf of theCambridge University Press Economic History AssociationStable URL: http://www.jstor.org/stable/2698086

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2/21

The First Bank

of

the United States and

the Securities Market Crash of 1 792

DAVID J. COWEN

In 1791 the $10 million capitalizationof the First Bank of the United States was

vastly greater han

the

combinedcapitalof all otherbanks.The Bank had an enor-

mous impacton the economy within two monthsof opening ts doors

for

business

by flooding the

marketwith

its discounts

and

banknotes

and then

sharplyreversing

course and

curtailing iquidity.Although

he added

iquidity nitially helped push

a

nsing securitiesmarkethigher, he subsequentdraincaused he firstU.S. securities-

market rashby forcingspeculators o sell theirstocks. Severalreasons

are

analyzed

for the Bank's creditrestriction.

The tendencyof a national bank s to increasepublic and

private credit. The ormer gives power to the

state

for

the

protection of its rights and interests,and the latter acili-

tates and extends

he

operationsof

commerce

among

indi-

viduals.Industry s increased,commodities

re

multiplied,

agriculture

and

manufacturesflourish,

nd

hereinconsists

the true wealth

andprosperityof

a state.

1

en years afterAlexanderHamiltonpenned hese words,his vision was

reality.

In

February1791 the

Bank

of the United States

received a

unique

nationalcharter or 20

years.2

Hamilton's

brainchild,

a

semipublic

nationalbank, was a crucial component n the building of the early U.S.

economy.

The Bank

prospered

or 20

years

and

performed

raditional ank-

ing

functions

n

exemplary

ashion.

With

a main

office

in

Philadelphia

nd

eight

branches nationwide to serve its

customers,

the

Bank's

influence

stretched

long

the entireAtlanticseaboard rom Boston to Charleston

nd

Savannahandwestwardacrossthe GulfCoastto New Orleans.Historian

James

Wettereau

ikened

the Bank

to

the mainspring

nd

regulator

of

the

whole Americanbusiness world. 3

The Journal of Economic History, Vol. 60, No. 4 (Dec. 2000).

?

The

Economic History

Association. All rights reserved. ISSN

0022-0507.

David J. Cowen is a director at Deutsche

Bank where he is employed as a foreign

currency trader.

Home address: Anthony Wayne Road,

Morristown, NJ 07960. E-mail: [email protected].

This article highlights a chapter of

my recent dissertation (see Cowen, Origins ). I thank my disser-

tation committee,

led

by Richard Sylla and

Irwin

Unger of New

York University, and also Howard

Bodenhorn of

Lafayette College,

Robert Wright of the University of Virginia

and two anonymous

referees, for their valuable insights, inspiration, and comments.

'

Alexander Hamilton to Robert Morris (30 April 1781), in Syrett, Papers, (hereafter PAH) vol. 2,

p. 618.

2

In this article I refer to the First Bank of the United States interchangeably

as the national Bank,

BUS,

or

simply

the Bank.

3

Wettereau, New Light, p. 263.

1041

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3/21

1042

Cowen

In the 1790s the Bank's

$10 million in capital ($8

million private,

$2 mil-

lion

U.S. government)

was a colossal sum

for the United

States.4It was larger

than

the

approximately

$3 million combined

capital of the

five state-chartered

banks

that

existed, the $3

million

aggregate

capital of the eight U.S. insurance

companies present in 1796,

and the $3

million combined capital

of all 32

canal and

turnpikecompaniesformed by 1800.5

It was also

substantially arger

than the original

capital

of 1.2 million pounds sterling

(about $6 million) of

the

Bank

of England, when

it

was founded

a century

earlier.6

A discussion

of

early

U.S. credit marketshas to consider

the role

played

by

the most formidable

financial

institution

of the day, the Bank of the

United States (BUS).

Unfortunately,

most of the Bank's internal

records

were

destroyed

in a

fire at the

Treasury Department

in

1833.

In the 1930s

James

Wettereau found

the

BUS's

balance sheets

for 1791

through

1800

in

the Oliver Wolcott Papers (Wolcott

succeeded Hamilton

as

Treasury

Secre-

tary

in

1795)

at the Connecticut

Historical

Society.

In

1985

Stuart

Bruchey

published

the records

under Wettereau' name.7

These

data,

when

combined

with

published

and archival

materials

relating

to

Treasury

Secretaries

and

BUS

officials

(including

minutes of board

meetings

in which

policy

deci-

sions were

made),

offer

fresh

perspectives

on

U.S.

financial

and economic

development duringa period that has been referredto as the DarkAge of

American economic

history.8

I

discuss

one such

perspective

in this article.

I show that

when the BUS

opened

its doors for the

first time in December

1791,

it flooded

the

economy

with

credit.

Two months later,however,

the Bank

reversed course by sharp-

ly

curtailing

its discounts (loans).

The

Bank's

erratic behavior

precipitated

the

first

U.S.

securities-market

crash

in

1792.

The Bank's connection

to

the

crash has remained obscure,

even buried

in

history,

for

more than two

centu-

ries. The episode was neither the first nor the last in which overexpansion,

followed

by contraction,

of credit on the

part

of a

major

financial

institution

had wider financial

and

economic

consequences.

It is

-one, however,

that has

heretofore

escaped

the

attention

of historians.

4TheBank ssued25,000

shares taparvalue

of $400,with$100

paid n specie,and$300 in U.S.

debt

securities.

The subscriptionrocesscommenced

n4 July 1791, when an initial$25 specie

down pay-

mentwas madefor a scrip,or receipt,of one shareof stock.Therewere four subsequentnstallments

between

1791 and 1793.

By early 1792the BUS had

$2.5 million

n private apitalcollected $3.125

million

ncluding he govemment's ortion).

By

1

July

1793 all $10millionof capital

was paid-in.

The

five state-charteredankswere

heBankof

NorthAmerica,Bankof New

York,Massachusetts

Bank, Bank

of Maryland,

nd ProvidenceBank. Other

measures einforce he

relative mpact

of the

Bank.For instance,

n 1792 the total ncomeof the

federalgovemmentwas $3.67

millionand

outlays

were

$5.08

million.Thetotal ndebtedness

f the

UnitedStatesas of 1 January

790 amountedo

over

$75

million (Bayley,Report).

6Clapham, Bankof

England,vol.

1, p. 18.

7Wettereau, Statistical

Records.

8

Bjork,

Stagnation,

p. vi.



4/21

First Bank of

the United

States

1043

BACKGROUND:THE

BUBBLE

AND CRASH

In December

1791 a speculative

machination

was hatched

that

would

have serious mplications

or theBankas well

as thecountry.

William

Duer,

in

secret

partnership

with

Alexander

Macomband

others,borrowed

arge

sums of money

in an

attempt o corner

he

markets n U.S. debtsecurities

as

well as

the stocks of the BUS

and the Bank

of

New

York.9 n the ensuing

speculation,

ecurities

pricesreached

heirpeaks n

lateJanuary

792.Prices

trendedower

in

February,

ell off

sharply

n

March,bottomed

n

Apriland

recovered

omewhat

n May.From

peak otrough

prices

dropped

more

than

20 percent.

The dramatic rice

movement

s displayed

n Figure

1.

The Marchsell-off has been dubbed he Panicof 1792. Duer's plan

ended

n

personal

disaster;

his

creditexhausted,

he was unable o

meet con-

tracts

or

securitypurchases.

Duer

suspended

ayments

of his

obligations

on

9 March.Making

matters

even worse for Duer

at this time was

a

pending

lawsuit

nstitutedby

the federal

government

or

improprieties

while

he was

Secretary

of the

Confederation-period

reasury

Board

during

the

1780s.

Duer's

spectacular

ailure was shocking

to contemporaries,

ne

calling

it

beyond

all

description-the

sums

he owes

upon

notes

is

unknown

he least

suppositions halfa Milliondollars.Lastnighthe wentto [jail]. '1Duer's

confederate

Macomb oined

him

in

jail

soon thereafter,

amenting

hat:

...

I

plainly

write

you

the truth. curse myself

for

my

credulity

n

believing

in

Duer.

You can

scarcely magine

the

present

distress

n the town, &

all confidence

ost,

no

credit,

ailureseveryday,

and when we burst,

t will

be

as

bad

as Law's

Mississippi

Scheme,comparatively

aken.

At

present

everycountenance

s gloomy,

all confi-

dence between

individuals s

lost,

credit

at a

stand,

and distress

and

general

bank-

ruptcy

o be daily

expected-for

everyone gambled

more or

less on these

cursed

speculations.11

How

was the Bank

of

the

UnitedStatesInvolved?

America's

newly

formed

ecuritiesmarkets

were

facing

theirmost

severe

test.

Historians

placed

the

blame

for

the

financial

crisis

on William

Duer,

and

his bandof confederates.

But

was

the

unwinding

of Duer's

speculative

scheme

the

sole

cause of the Panic

in March?

Evidence

suggests

that the

BUS inPhiladelphianadvertentlynstigatedhe crashby sharply estricting

9

Forageneral

discussion

of Duer'splan,see eitherDavis,

Essays;McDonald,A

exanderHamilton;

Matson,

PublicVices ;or

Wright,Banking.

0Daniel

McCormick

o WilliamConstable

24

March1792). Constable

Papers.

Alexander

Macomb oWilliamConstable

7

April 1792).Constable

Papers.

12

The

firstdetailed nvestigation

f events is

found

in Davis, Essays.His definitive

work in 1917

has beenaccepted

as thebasic interpretation

f

the Panic of 1792.



5/21

1044

Cowen

130

*

New YorkCt

-C

-

Phidelphia

125-

120

-

9115

110

105

100

95

I

December1791

January

1792

February

1792

March 1792

April

1792

May

1792

FIGURE

MONTH-END SECURITIES

PRICES,

1792:

U.S.

6

PERCENT BONDS

Note: Securities

prices are from

Sylla, Wilson,

and

Wright, America'sFirst

SecuritiesMarkets.

I

thankRichard

Sylla

for

bringing his material o

my attention.Month-end

prices

to not

fully expose

the dramatic

move,

for

6

percent

securitiesbottomed

n

Philadelphia

at

100 on 7

April,

or 6.25

points

lower

than the end March

figure.

See Table 3 for

additional nformationon

prices

in

the

Boston

securitiesmarket.

credit a full

monthbefore Duer's credit

dried

up,

sending

him into bank-

ruptcy.13 revious discussions

of the

Panic

assumed

that when

the

crisis

began

in

March

1792,

the

BUS

along

with

the statebanksrestricted

redit

to

protect themselves

from

financial loss. 4The

new

evidence,

however,

indicates

hat he BUS

was

restricting

redit n

February,

full

month

before

the crisis

began.

In

most financial

ystems,

such an action

by

a

major

source

of creditcould be expectedto leaddirectly o lowersecurityprices.15That

13

The

mainoffice opened

on 12 December1791.The first ourbranchesdid

not openuntil after he

Panic started,with Boston

commencing perations n 26 March1792, New York

and Charleston

n

2

April, and Baltimore n 22 June.

14Davis, Essays, p. 309.

'5Even at this timeindividuals

were awareof the connectionbetweenbank

credit

and securities

prices.

In

1789SethJohnson

wrotebrokerAndrew

Craigiewith respect o

the loan

curtailment y the

Bank

of

New

York, he sole

bank n

operation t that

ime in

New YorkCity: therehas

been

for

a

few

Days past

a

good many securities

offered

or

sale

... indeed he reason s obvious-not a brokerhas

anymoney & they areobligdto sell out their undsatwhat hey cost or at lessto makepaymentsat the

Bank [of New York] [as]

the Bank [is] not

discounting reely. SethJohnsonto Andrew Craigie

(20

December1789). CraigiePapers, American

Antiquarian ociety (copied

fromWright,Banking,

p.

204).

In

another xample

romsix monthsbefore he BUS opened or

business,SenatorRufusKing

of

New York

noted

somewhat lliptically hecause-and-effect elationship

etweenbankcreditof the

Bank

of New

Yorkandsecuritiesprices: I

understandhat t has beenreported,hat he late checkhas

beenproduced y thebank's

havingrefused

dealers]

heirusualdiscounts.

This hasby no meansbeen

the case. The

Bank

[of

New

York]

has

continued,

&

will

continue,o discount

as

faras their

safety

will

authorize.

The

presentagitation

will

render hem

cautious,

but

they

will not underthe

nfluence

of

that

temperwithhold hose

accommodations,

hich

maybe madewith safety o the

Bank,and which may

likewisebe essential n

preventing violentdepression f the funds. Rufus

Kingto AlexanderHamil-



6/21

First Bank of the UnitedStates 1045

is exactly what happened in 1792. The remainder of this article

presents the

evidence supporting this interpretationof the Panic of 1792.

The

BUS

in

Philadelphia inadvertently

lit

the match to the Duer powder

keg through

its

abrupt ending-policy reversal

that

led directly to

the securi-

ties-market slide in February.If securities prices had continued to increase

in

February, Duer (and other securities holders) would have been getting

richer, not poorer. Duer was wounded that month by the Bank's

credit re-

striction and securities-market sell-off, and then his subsequent failure

in

March

triggered

a snowball effect on other

securities holders. 6

Daniel McCormickBlames theBUSfor theSecurities-MarketFall

Archival

sources corroborate

the

BUS's

responsibility

for the Panic.

A

Bank of New

York

(BONY)

board

member,

Daniel

McCormick,

claimed

in

early March 1792

that the

BUS was to blame for

the fall

in

securities

prices thatbegan in February.McCormick wrote that

in

its early operations

the national Bank in

Philadelphia

had:

discountedwithoutboundsat first

setting

out

thinking

heirnotes would circulateas

cash over all the States, [and]findingtheirerror, heyhavecheckedwithoutmercy

on

Application

or renewal

and

been the meansof

bringing

a

quantity

of paper

nto

the market

uddenly

and

of

course oweredthe

prices.'7

McCormick,

of

course, might

have

been

wrong

in his

interpretation.

McCormick's

contention is that after the

Bank

commenced operations

in

December 1791, it aggressively discounted (loaned money)

that month and

in

January 1792, leading

to a

large

infusion

of its

notes

into

U.S.

markets.

Then, McCormick indicates, the Bank abruptly reversed course.

His

contention would have to be treated as conjecture unless it was to be

supported by convincing

evidence.

I

find that the

Bank's balance sheets

provide

such

support.

The Bank's

actions

are summarized

in Table

1

and are

explicated

in

the

discussion

that follows.

To test McConmick's

allegation

of a

BUS-induced

panic,

we must

investigate

his two

main

assertions:

hat the

BUS flooded

the marketwith

bank

notes

in

January:

discountedwithout

bounds at first

thinking

heirnotes

would circulate

as cash

over

all the

States ;

and that

in

February

he

BUS

reversedcourse, and

ton (15 August 1791), PAH, vol. 9,

pp.

60-61. Boston merchant Stephen Higginson also

commented

on the relationship of money to security

prices some years hence: our merchants are generally pressed

so much for money, as to sell their

stocks, after borrowing all they can from the

banks...

. Stephen

Higginson to Oliver Wolcott (25

June 1799). Gibbs, Memoirs, vol. 2, pp.

243-44.

16

According

to the editors of the

PAH, after reaching a high point in January, 1792, security prices

declined for the

next five

weeks,

and Duer was ruined. Vol.

11, p.

127. This

investigation explains

why the securities prices were declining.

1

Daniel

McCormick to William Constable (7 March 1792). Constable

Papers.



7/21

1046

Cowen

TABLE 1

SELECTED

BALANCE-SHEET

ITEMS: BUS, PHILADELPHIA

29

December 1791

31 January

1792 9 March

1792

Outstanding

Notes

134,268

886,684

891,873

Bills Discounted

964,260

2,675,441

2,051,564

Cash

on Hand

706,048

510,345

244,371

Deposits:

Individual

898,125

811,863

569,550

Government 133,000

467,178

599,869

Total

1,031,125

1,279,041

1,169,419

Note:

The balance sheets

do not break out aggregate deposits

to individual

and government

deposits

for two dates,

29

December

and

31

January.

I estimated the breakdown

of

deposits

on

both

those dates

based

on

the

following: government deposits

in

the bank were stated by

Hamilton to be $133,000

at

year end (Cochran, NewAmerican State Papers, p. 182.). Therefore, forthe 29 Decemberbalance sheet

lused

this figure and adjusted

individual deposits

accordingly. On the31

Januarybalance sheet

several

numbers

were lumped

together

into

a

catch-all label of deposits,

including those

of the government,

individuals,

and the

second of four specie payments

due from

stockholders for a total

of $1,776,265.78

(stockholders

paid

for

their shares

in

a proportion

of 25 percent specie

and 75 percent

U.S. 6 percent

securities, paid

in four installments-see

footnote 4).

However,

individual

deposits

can

be

closely

estimated by backing

out the second

specie payment ($497,225)

and government

deposits,

which were

$467,177.68

as of 28 January. (Hamilton

to the Board (28 January

1792). PAH,

vol.

1O,p. 572).

Source:

All

balance-sheet figures

are from Wettereau,

Statistical

Records.

nowrapidlyurtailedhe oans, allinghem n ratherhan enewinghem: find-

ing

their

rror,

heyhave

checkedwithout

mercyuponapplication

orrenewal.

TheFirst Claim:

TheBankFlooded

the

MarketwithBank

Notes

The Bank's balancesheets corroborate

DanielMcCormick's

claim

that

a

large

sum of notes

was issuedduring he

month

of

January.

he

notes were

issued

in

the course of

the Bank'slending

activity

(or discounting),

as the

mainmethodof makingabank oan atthattime was to providea borrower

with bank notes.

During

the

first two weeks after

opening

its

doors

in De-

cember, he

BUS

made loans

of

$964,260.

Most

of

these

loans were

for 30

days

and would mature

n

January. peculators,

ccording

o

John

Pintard,

a

securities

brokeremployed

by

WilliamDuer and others,

had

no problem

borrowing

at the new BUS and were quitepleased

at

the

prospect

of easy

money:

I

address

myself

to

you

on behalf of Mess.

Duer,

Verplanck

and

Alden whose

business

I

transact

in

my capacity

as

Broker,

and

who have furnished

me

with [their personal]

notes to

be

offered

at the National Bank

on

Tuesday next

for discount ...

this is a

new

business

I

trust

the

Direction

from this

city

will excuse

any

want

of

regular

fo......

I

cannot close without expressing

the general satisfaction

given

in

the market by

the

liberality

of

the Discounts

hitherto

made-from

which

we

draw

a

happy

passage

of the

utility

of the institution

to

this

country

in

general

&

to

this

stockholder

in

particular. 8

18

John

Pintard

o Nicholas Low (24

December1791).Low Papers, Library

f

Congress. Copied

fromJames

0. Wettereau apers).



8/21

First

Bank

of

the

United

States

1047

TABLE

PHILADELPHIA'S

OTE

ISSUANCE N

JANUARY

1792

Date

Post

Notes

Bank

Notes

Total

Notes

2

January

54,866

100,850

155,716

10

January

248,537

162,340

410,877

13

January

365,434

260,040

625,474

17 January

488,563

295,355

783,918

20

January

655,355

308,925

964,280

23

January

524,818

336,895

861,713

31

January

530,324

356,360

886,684

Note: The

notes

of

the

Bank

circulated

s cash

and

took the

fonnof either

Banknotes or

Post

notes.

Bank

noteswere

payable o

thebearer n

demand,while

Postnotes

were

payable

o specific

individuals ftera specifieddate,butcouldbe endorsed o effectpayments oothers.

Source:See

Table

1.

The

Bank's

explosive

ssuance

of

its

notes

continued

unabated

uring he

monthof

January

nd s

summarizedn

Table2.

By the end of

the

month he

main

branch

had issued a

total

of

$886,684

in

notes,

an

increase

of

$752,416, which

was more

than6.5

times the

amount

outstanding

rom

29

December.The

intramonth

igh

of

notes

outstandingwas

$964,280.

Several

additional

pieces

of

evidence

indicate

that

others

besides

McCormick ndPintard erceived herapidexpansionof theBank'scredit

andnote

circulation.

First,

he

Boston

port

collector

advanced he

view

that

BUS

paper

was

abundantn

mid-January:

there

is

not

the

least

prospect

that

the

[balance]

in

my

hands

will

be

augmented

in

any

other

way

than

by

the

receipt

of

the

Bank

notes

of

the

United

States.

There are

such a

flood of them

now here

that

they

are

bought up

at a

depreciated

value

by

the

Gentlemen

indebted to us for

the

payment

of their

bonds. 9

Second,although he Boston branchhadnot yet openedfor business,its

newly

appointed irectors

adbeen

chosenandwere

alarmed

nough

about

the influx of

BUS

paper

o

Boston in late

January

o write the

parent

Bank

in

Philadelphia.

The

Bostoniansmentioned

hat

huge

quantities

of

BUS

paper

were

not

being

locally

accepted,

and

they

wondered

f

they

had

not

madea

mistake

n

aligning

hemselveswith an

institution

eadquartered

n

Philadelphia.20

hird,

n

New

York,

he

Bank

of

New

York

provided

a

quan-

titative

assessment

o

the

amount

of

BUS

paper

looding

the

local

streets.

Like Boston,New Yorkwas becominginundatedwith BUS notes. The

BONY's cashier

reported

o

Treasury

Secretary

Hamilton

n

Philadelphia

19

Benjamin

Lincoln to

Alexander

Hamilton

(17

January

1792), PAH,

vol. 10,

pp.

518-19.

20

[T]he

national

paper in

great

quantities is

offering,

but

cannot be

exchanged even

at a

discount

of

from

two to five

per

cent-This

delicate and

unpleasant situation

of the

paper at so

early a

period

of

existence of

the

Bank, . . . have all

united in

alanning and

rendering

the

Eastern

Stockholders to a

man

uneasy and we

think

it

our

duty to add

that

many of them

have

entertained

serious

thoughts

of

selling their

national

interestsand

establishing

another

State

Bank.

Joseph

Barrell,

Christopher

Gore,

and

Jonathan

Mason, Jr.

to

the President

and Directors of

the Bank of

the

United States

(28

January

1792).

Gratz

Collection.



9/21


10/21

First

Bank of the

United

States

1049

speculation,

as

many merchants

were taking

out new loans

from the Bank

to buy stocks.26

BUS lending

practices, therefore, and perhaps

unwittingly,

helped push the securities market to its dizzying

heights in January.

Daniel

McCormick's claim that

the

BUS

issued paper with

abandon

during

January

s well substantiatedby

both its balance

sheets and the obser-

vations of numerous

contemporary

observers.

The

Second Claim:

The Bank Checked

Without

Mercy

McCormick's

second assertion was

that the

Bank

radically

curtailed

new

loans

during

February. Comparing

the 31 January

balance sheet with

the

next balance sheet dated

9 March,

the events of

the interim period

become

clear (see

Table

1),

and McCormick's

claim

appears

warranted.

The

Bank

did

not renew almost 25

percent

of its 30-day

loans.27

Bills discounted

shrank

from

$2,675,441

in late

January

to $2,051,564

in early

March.

There

is evidence that

the credit restriction

occurred

in

early

February.

On

2

February

Clement

Biddle,

an informedPhiladelphiabroker,

hinted that the

Bank

would

soon

be

limiting

loans.28

By 15 February

Biddle confirmed

the

curtailment

he had predicted

two weeks

earlier by stating

that cash grows

very

scarce from both

the

[Philadelphia]

Banks

[BUS

and

the Bank of North

America]

withholding

discounts

and then forecasted

(correctly)

that

every

kind of stock [will] fall. 29

Several

other contemporary

letter writers men-

tioned

the issue,

including

an agent of Dutch

investors

in a letter

of 17 Feb-

ruary.30

William Duer's

main confederate,

Alexander

Macomb,

mentioned

the

restriction

on 21 February while commenting

about

a new bank being

debated

in

the

New York state legislature:

The Bankprayed or [ MillionBank ] .. makesa seriousstiramongus. Brockholst,

and

all the

Livingstons

except

English Phil,

are its

promoters

& forwarders

oined

26

Jefferson

protested that:

The [BUS]

gives money

in exchange only

for merchant

notes: and

on

application

to

merchants I find

that nothing will

induce

them to lend either their money

or their

credit

to an individual.

In fact they

strain both to their

utmost

limits for their

own purposes.

The rage

of

gambling

in

the stocks,

of various

descriptions

is such, and the profits

sometimes made,

and

therefore

always

hoped

in that line are

so far beyond any

interest

which an individual

can

give, that all their

money

and

credit is centered

in their

own views. Thomas

Jefferson to

J. P. P.

Derieux (6 January

1792). Boyd, Papers of Thomas Jefferson, vol. 23, p. 27.

27

Commenting

on the course

of events two months later,

Macomb alluded

to the great

discount

made

by the

Bank of the U.S.

& immediately refusing

to

renew the notes,

which gave the

stocks a

fall

by obliging

the Holders to bring great

sums into market

to take up

their notes.

Macomb to Constable

(11

April 1792). American

Antiquarian

Society.

Macomb as quoted

in

Matson, Public Vices,

p.

106.

28

Clement

Biddle to George Lewis,

2 February

1792, ClemnentBiddleLetterbook.

Biddle suspected

the upcoming

curtailment:

The Bank

US I believe will

check the

discounts of those

concerned

with

the

new Bank with

you.

I

thank

Robert Wright

for bringing this archival

source to

my

attention.

29

Clement

Biddle to

George

Lewis,

16

February

1792,

Clement Biddle

Letterbook.

30

Cazenove

to

Stadnitski,

17

February

1792

(Cazenove's

Copybooks),

announces

the

beginning

of the credit restriction.

Van

Winter,American

Finance,

p. 475,

fn. 72.



11/21

1050 Cowen

by Platt, Fowler & Co. and others.The NationalBank have

take[n]the conductof

things in such a

light,

thatthey refusethe paperof all those

persons.The New York

Bank does

the

same

in

a

greatdegree.31

By 23 February n theNew YorkDaily Advertiser,

one writer,under he

assumedname of Curtius,

attacked he Bank for calling

in its loans:

Whyhas theNationalBank ceased its discountsbut because

of its limited specie

capital,

..

If

one or two

daring

ndividuals,by attemptingo monopolize he debtand

Bank stock of the United

States,have given it a temporary

nd artificialvalue, far

beyond every

fair

calculationand

to

which some

must

yet

fall and

sacrifice,

what

may not so powerfula bankingcompanyperform.32

These were amongthe responses

to the almost

$625,000

in

loans

that

were called in,

or notrenewed,duringFebruary nd early

Marchof

1792,

all duringa

period

when bank notes

outstanding

had remained

relatively

constant, increasing

only $5,000

to

$892,000. Clearly

the borrowers

did

not pay off their called-in

loans with the outstanding bank notes,

otherwise

the BUS notes outstanding

would have decreased. The

notes remained

in

circulation.

How, then, did the borrowersrepaythe loans? One way would be to draw

off their

deposit accounts,

and

it

appears that

this accounted

for some

of the

difference,

as

deposits

on account of individuals

on 31

January

were

approx-

imately $811,863 and on 9 March

were

$569,550,

a substantial decrease

of

$242,313.

Yet even if all the

change

in

deposits

were

credited

against

the

$625,000

in

loans

called

in,

that still leaves

approximately

a

$382,000

short-

fall. The second method of

paying

off loans

has important implications

for

securities markets:

selling

the

securities that were

purchased

with

the

loans

and using the proceeds to repay the loans. Inparticular,many accommoda-

tion borrowers

might

have chosen this course of action.33

Therefore,

securi-

ties

prices

should have

fallen,

due to

the

sudden sell-off

of securities

by

those denied loan renewals.

The

BUS balance

sheets and contemporary observers

confirm that

the

institution was reducing

credit

sharply

in

February.

Contemporary

securities

prices lend support to the hypothesis that

securities were liquidated

to

repay

31

AlexanderMacomb

o WilliamConstable 21 February 792). Constable

Papers, The Million

Bank was one of severalnew banking chemes

being debatedby the state egislature.Macomband

Duer had planned o

control he Million Bank,but withdrew upportwhen

the largenumberof sub-

scriptionsprevented hem

fromaccomplishing

his goal, as shareswere to be distributed ro rata.

32Emphasis

added.

New YorkDaily Advertiser, 3 February 792.

33

By

the end of February,rokerBiddlementioned

hatonly $1 in rollovers

were granted or every

$4 applied or: Our

BankU.S. discountedmore reelyyesterday than] hey

havefor someweekspast

but not aboveone fourth

of whatwas asked

or,

t is

expected hey

will be more iberalafter

next week

as

they

have

largepayments

o receivebut plead

for thenecessity

of

providing

or

the establishment

of Branches. ClementBiddle

to

WilliamRogers,

25 February 792, Clement

BiddleLetterbook.



12/21

First Bank

of the UnitedStates

1051

TABLE

MONTH-END

SECURITY PRICES, 1792

U.S.

6 Percent Bonds U.S. 3 Percent

Bonds

New York

Philadelphia Boston

New York

Philadelphia Boston

January

121.25 127.50

118.75 70.00

75.83 70.00

February

119.58

122.50 120.00

68.75

71.67 70.00

March

103.96 106.25

108.33

60.94 60.00

62.50

Source:

See Figure

1

bank oans.

If

theBUS

was

curtailing

redit

abruptly

n

Philadelphia,

ecur-

ities prices

n thatcitywouldprobably

move

lowermorequickly han

prices

in

othercities, given

theslow communications

f thatera.

A recent

working

paper

by

Richard

Sylla,

Jack

Wilson,

and Robert

Wright

ends to confirm

this intermarket

ricingsequence

(see Table3).34

Prices

in

Philadelphia,

home of the BUS,

fell more sharply

han

in the

other two cities between

the end of January

and

the

end

of

February.

New York's

price

flow

was

similar o

Philadelphia's.

nformation

moved

between New York andPhiladelphia

with

a one-day

lag.

But the

lag

be-

tween New

York

and

Boston was severaldays

to a week.

The Boston mar-

ket,therefore,would have adjusted ricesroughlywith a one-weekdelayin

responseto price

movements

in Philadelphiaand New

York. Curiously,

someBoston pricesactually

ncreased.However,

t is known that an agent

of

Duerwas

in

Boston

with the

specific intentionof supporting

rices;and

it was

reported hat

as of 15 February:

The wild

speculations

of N

York have

reachd

the Bostonians

beneficially--they

have

in

few,

if

any

instances

been

purchasers-many

&

to

large

amounts have

sold-the

only purchasers

in

our markets

have

been

the

agents

from New York.3s

Daniel McCormick's second

claim, like his first, appears

warranted

from

the record. The Bank

sharply reversed course

in February,moving

from a

liberal

discount policy

to a restrictive one.

And as a result, securities

prices

in

Philadelphia-home

of the BUS-fell

most

sharply

that month,

with the

declines

continuing

and

spreading

to

other

city

markets

in March.

WHY DID

THE BANK

RESTRICT

CREDITIN FEBRUARY

1792?

If it is clear that the BUS sharplyreduced discounts in February,then we

may

ask

why

the

board

felt the need to take such

a radical step?

One reason

is

that McCormick's

first

charge,

that

the bank had

overissued,

was

true.

34With a common

currencyand

instantaneousommunications,

rbitragewould tend

to equalize

pricesof

the samesecuritiesn different

markets.

The data n Table3 do not show such equalization.

But in1792 communications

ere

not nstantaneous,herewerestillcurrency ifferences ndexchange

ratesbetween

the cities,

and the dates of the prices

in Table3 vary,as

dictatedby the

publication

scheduleof the newspapers

romwhich prices

aretaken.

35

ChristopherGore

o RufusKing (15 February

792),RufusKingPapers.



13/21

1052

Cowen

Given that the Bank was

concernedwith

creatinga

safe circulatingpaper

medium, the board must

have began to

recognize thatthe opposite was

occurring.The BONY, as

noted above,had started o refuse

BUS notes

in

January.

The BUS shortly

hereafterearned hat ts notes

were trading

at a

sharpdiscount

n

Boston.

To the chagrinof the directors,

he Bank's liabili-

ties were

not being readily

acceptedat parnationwide.

The specter oomed

that

BUS paper

would come

rapidlybackto the Bank

ndreaded ashcalls,

in otherwords,

in calls for

conversionof BUS notes to

specie.

To

an

extent,

that

happened

n

February.

Cash on handbeganto

decline

in January nd furtherdeteriorated

etween31 January

and 9 March

(see

Table

1).

The BUS

on

9 Marchreported

ash on hand

as

$244,371, against

an

end-of-Januaryigure

of $5 10,345.36

Certainlyhe

boardmust

have been

concerned

hat specie

reserves

were

being depleted

too quickly,

with

the

threat

of a run on its

specie

reserves mminent.

In addition,

he Bank'sbranches

n

cities

other hanPhiladelphia

were to

commenceoperationswithin

two months.

Total nitialcapital o

be assigned

to

the

branches

was slated

at $500,000. BUS President

ThomasWilling

found it necessary,however, to curtail

he

branch

capital,

probably

n

re-

sponse to the

Bank's weakeningcash position

and

the uncertain

imes.37

SecretaryHamiltonbolstered he argumenthat branchconcernswere in-

volved

in

the decision-making

processwith respect o

the Bank's

reversal

of

loan policy.38Finally,

it is quite possible that

one of the board's

self-

imposed early

warningsystems,namely

the appearance

f a discountsto

capital

ratio above five to one, would

have causedalarm

bells to ring.39

The

BUS

board's

response

o these developments

was dictated

by

com-

mon sense:they reversed

earlierpoliciesby curtailing

he

outstanding

oans

and cutting

he amountof capitalslatedfor

the branches.

Was he BankActing Independently,

n Conjunction

with OtherBanks,

or

at

the Behest of theSecretaryof

the Treasury?

The

credit

reduction, lthoughperhaps

not

its

abrupt ature,

ertainly

had

the blessings of,

and,

may

have even

been initiated

by,

TreasurySecretary

Hamilton.

By

mid-January

he

Secretary

was concernedabout

the state

of

the

financialsystem

and the rabid

speculations,

specially

the

plans

for the

36

There

s also some anecdotal

evidencethatthe Bank was trying

to protect ts

cash position

in

February.One

note discounter went o the cashier,

who desired o know in what he

chose to receive

the amountof

his note-he replied

n gold-was told they could not

gratifyhim, butwould supply

a

thirdpart

n

gold. Christopher

Gore o Rufus

King (15 February 792). RufusKing

Papers.

3

By25

MarchWilling was

withholdingpartofthe New York

branch'scapital.

ThomasWilling

to

President,

Directorsof the New YorkOffice

of Discount and

Deposit (25 March 1792), Gratz

Collection.

38Alexander

Hamilton o WilliamShort 16 April 1792), PAH,

vol.

11, p.

289-91.

39

Cowen,Origins,pp.

100-01.



14/21


15/21


16/21

First

Bank

of

the United

States

1055

from the end of February

to mid-March

was from $53,301 to

$26,71 1,

or

$26,590.

By the end of March,

Dr.

Benjamin

Rush was

attributingDuer's

failure to all the banks ceasing to discount and calling in their credits. 49

The

Bank

of North

America, however, had instituted a

policy

of

curtailing

new loans in November

1791 to prepare

for the loss of business to

the BUS

when it

opened

in

December:

You could not have

made

an

Application or

discount

at

the Bank

of NorthAmerica

at

a worse time thanthe

present

or for 2 or 3

monthsto come

for we

are

advancing

all we

can

to

prepare

or the

veryheavy

demand

hat

will

be

made

on

it

by

the United

States

Bank,

the Public and those individuals

hat may transfer

heir

business

from

the

former o the latterBank.5

Were

other state banks

outside of

Philadelphia

and New York

possibly

restricting credit during

February?

In

Boston there exists evidence that the

Massachusetts

Bank

was curtailing

discounts during

February,commencing

on

the sixth

of that month, so it is

possible that

Secretary

Hamilton had sent

that

institution

a letter like that to

the BONY 5

According

to

the

general

ledger

of the

Massachusetts Bank, the amount

of

the restriction

appears

to

be

about 35

percent

of

discounts.52

While

the

percentage change paralleled

the Bank of United Statescurtailment,in aggregate termsthe Massachusetts

Bank

was

reducing

loans

by only $2,000 as compared

with

almost

$625,000

by

the Bank of the

United

States.

Philadelphia broker Biddle's claim

that

all the

Banks

on

the

Continent were

involved

in

the restrictive

process

seems plausible.53The restriction

was not

exclusive

to

Philadelphia

or

the

BUS,

although

the

BUS was

far

larger than

all

the other banks

as

a

group

and

clearly

the

dominant

player

in

the banking system of 1792.

Were

the three

other state banks

curtailing

credit

in

response

to

a similar

prompt from Secretary Hamilton such as the one the Bank of New York

received? Hamilton

was the one official

who could have coordinated a

pol-

49Davis, Essays, vol. 1, p. 309. Joseph

Davis stated that it

was an exaggerated rumor that Benjamin

Rush set down March 30, ascribing

Duer's failure to the Bank credit curtailment.

But Rush's claim

was not an

exaggeration

at

all;

in

fact, Rush

was

correct. One reason Davis

missed

the

restriction is

that

the balance sheets of the

national bank

were

unavailable to

him

5

Mordecai

Brown to Nicholas

Low,

25

November

1791,LowPapers, LibraryofCongress. (Copied

from James

0. WettereauPapers).

51N. S. B. Gras, Massachusetts First National Bank of Boston, p. 48, p. 349. From the 6 February

board

meeting: Agreed

that renewals be

admitted this Week, deducting 10 percent

and that no money

go out thereon According to Gras, this

situation lasted from

early

in

February until late in July, 1792,

[when] there were few if

any discounts. The directors ordered

that no money go out of

the Bank. Gore

informed others soon

thereafter of the

decision: The Massachusetts Bank have

been and are still

lessening their discounts.

Christopher Gore to Rufus King,15

February 1792,

Rufus King Papers.

52

General

Ledger, 1792, Massachusetts

Bank,

Fleet

BankArchives.

This

number

was

calculated

by

comparing the end-of-January number for total

amount

of

discounts received

($6,890)

versus the

end-

of-February number

($4,494).

The

discount contraction continued in March

($3,352), April ($2,895),

May ($2,888), and June ($3,137).

53

Clement

Biddle to William

Campbell,

11

March

1792, Clement Biddle Letterbook.



17/21

1056

Cowen

icy amongthe

existingbanks,

the Treasury

eing the

only institution

hat

had

relations

with allof them

as depositories

or U.S.

govenment

funds.A

possiblescenario

s

that

he

Secretary

aw a speculative

bubble

eveloping

and

tried to take preemptive

action, similar

to what modem-day

central

bankersmight

do.54

The Bank of the

United States,

however,

did not follow

the gradual

prescription

mentionedby

Hamilton.Rather

he Bank

checked he

markets

abruptly n

February.State

banks followed

suit either

simultaneously

or

shortly

hereafter.Therefore,

when

money

became

tightduring

he course

of February

andearlyMarch,the

tripwire

of

credit contraction

was acti-

vated.

The firstto

feel thepainwere

accommodation

orrowers, specially

those

who had

borrowed

o pay for stock,

as their oans werecalledin and

not

renewed.55Their

easiest

recoursewas

to sell

securities.Speculators

likewise

werecaught

n theliquidity

squeeze

in

February,

nd commenced

selling

securities.

By

March he selling

turned

nto a rout for

Duer and

the other

security

holders.

The short

sellers,

or

bears,

were

triumphing

ver

this unfortunate

Mans

[Duer's,

sic]

distress

and

they

are

preying

upon

the vitals

of

public

credit

by

every artifice &

combination

that

can be

devised

to

depress

stocks. 56On 24 MarchNew YorkbankerDaniel McCormickpennedan-

other

ettersuccinctly

summingup

the course

of events:

My

last to you was by the packett

n

which

I

mention hat

stocks

were

low

and

attrib-

uted their fall to the Directors

of

the

NationalBank discounting

o largely

at their

first

setting

out and curtailing

o much

when the notes

went

in for renewal.57

CONCLUSIONS

WhenthePanicof 1792is discussed,blameusuallyendsup squarelyon

the shoulders

of

William

Duer.The

role of banks

n it

has

not

been

analyzed

because

information uch as

that n the

BUS

balance

sheets

was

not

previ-

ouslyaccessible.

Yet contemporaries

uch as

Daniel McCormick,

Clement

Biddle,

and

Benjamin

Rush

knew what

the balance

sheets

now

appear

o

document:

he

Bank

of

the

United

States

was a

major

actor

n

precipitating

54

Anotherpossibilityexists,thatthestatebankswerecurtailingbecausethe government eposits

were

being transferred

o the national

bank.However,

Hamilton

hadwritten

hathe

was well awareof

the implications

f transferring

hesedeposits

oo

quickly,

andhe

had,

aswe

saw,

called

ora

gradual

curtailment

f bankcredit n

his 10February

792 letter

o the BONY.

5

According

o historian

RobertWright,

with

respectto all banksthe accommodation aper

was

called

in

first:

Troubleame

duringpanicsand

other tringencies

whenbanks

were forced o

'curtail

their discounts.'

This sometimesreferred

o new discounts

on

'real paper'but

most often

was an

allusion o the

stoppingor 'calling

n' of accommodation

aperrenewals.

Wright,

Banking,p. 725.

In

particular,

he speculators

n 1792

reliedonbankcredit.Wright,

Banking, p.

208.

56RobertTroup o

AlexanderHamilton

24

March1792).

PAH,vol. 26,

pp. 655-56.

DanielMcCormick

o William

Constable24

March

1792).Constable

Papers.



18/21

First Bank of the UnitedStates

1057

the

first securities-marketrash

n

our nation'sfinancialhistoryby sharply

contracting reditandcausingspeculators ndothers o sell theirsecurities.

The

largestspeculator aught

n

the web was WilliamDuer, whose sensa-

tional

failure

n

March emporarily aralyzed he credit

markets.

Several

considerations rompted

he

Bank's credit

restriction, ncluding

a

deterioratingashposition,

a

recognition hat he BUS hadadded oo much

of

its

own

paper o

the

market,a concern hat

new

branches

n

April would

be

undercapitalized,

nd a

discount-to-capital

atio

higher

than

the

board's

prescribed imits.

Yet the

BUS

was not alone

in

restricting

oans.

Compel-

ling

evidence demonstrates

hat

at

least

two,

if not

three,

of

the

five state

banks

hen

existing

were

also

restricting

redit.

AlthoughSecretary

Hamil-

ton warned one of these state banks to restrict creditgradually, he BUS

reversed

ts

loose-money policy abruptly; nd

the credit

squeeze

that fol-

lowed

lit

the match o

the

Duer

powderkeg.

While

no letterexists fromthe

TreasurySecretaryasking

the

Bank of the

United

Statesto curtail

oans,

it

seems

likely

that the national

Bank,

close

by

the

Treasury

n

Philadelphia,

would have been in

discussions

with

Hamiltonbefore

initiating

he

curtail-

ment.

It

is

also

likely

that

the Secretarywas

the

only

official

in the

country

who could

have coordinated

multiple

banks

n

a consistent

policy

of credit

reduction.The possibilityof Treasury-coordinatedankingpolicy in the

newly organizedU.S. financial ystem n 1792 is, however,partof

a

larger

story

that

merits discussion

n

a subsequent aper.58

The

events of

1792

bring

to mind other

occasions

in

American

history

when

the

primarymonetary

uthoritieswere

accused

of first

pumping

xcess

liquidity

ntothe

economy,andsubsequentlywithdrawingt,with a resultant

marketcrash.For

example,

in

1819 the Second Bank of theUnited States

curtailed redit

by abruptly educing utstandingoans.TheBankwas trying

to cool speculativeactivity and restore specie convertibilityafter it was

suspended

n

1814, but

their

heavy-handed ctionsdirectly ed to thePanic

of

1819 and

subsequentdepression.A second example s thegreatcrashof

1929,

which

economistand laterFed ChairmanAlan

Greenspan xplained

as follows:

The

excess

creditwhichthe Fed

pumped

nto the

economyspilled

over

nto

the stock

market,

riggering

fantastic

peculative

boom.

Belatedly

Federal

Reserve

officials

attempted

o

sop up

the

excess reserves

and

finally

succeeded

n

breaking

he

boom.

But

it

was too late:

By

1929 the

speculative

mbalanceshad become so overwhelm-

ing

that he

attempt recipitated sharp

etrenchmentnda

consequentdemoralizing

of

business

confidence. 9

58

Cowen, Origins,pp. 137-79.

59

Alan Greenspan, s quoted n Barrons,

4

May

1998,

MW18.



19/21

1058

Cowen

The

1792 panic

was

not followed

by a recession

or depression,

and

therefore

had less lasting

effects

than those

of 1819

and 1929.60

A better

analogy

might

be to the

eventspreceding

1987,wherein

credit

expansion

fueled a

largerun-up

n

stock

prices. TheFed instituteda creditrestriction

in August,which

some

claim

led to the crash

of stockprices

on 19

Octo-

ber.61

Although prices

declined by

more than

22 percent

on that day,

no

marked

slowdown,

much

less a depression,

ollowed.

Themarket

recov-

ered

fairly quickly

to pre-crash

evels,

as it did

in

1792. Inboth

cases

the

market'srevival

in

some

measuremay

be attributed

o the

reactionof

the

central monetary

authorities

n

their

capacity

as lender

of last resort.

In

1987

FederalReserve

Chairman

Alan

Greenspanmoved quickly

to insert

liquidityinto the moneymarkets.In 1792 TreasurySecretaryAlexander

Hamilton

njected

funds

bybuying

securities

directly

andon behalf

of the

sinking

fund,announced

a

newly secured

Dutch

loan

thatwould

augment

thegovernment's

resources,

andencouraged

atleast

one

bankto extend

its

discountsbecause

torelieve

the distress

andsupport

he fundsareprimary

objects. 62

While initiallyadopting

a restrictivepolicy

during

he

earlypart

of

the

Panic,

the Bank

of the United

States

also

recognizedby

April

that

adding

liquidity

was

the antidote:

In

these

stonny times

it

requires

reatattention

ndprudent

autiousmeasures

em-

pered

at the sametime

with as liberalan

extension

of creditas

the funds

of the

insti-

tution

& othercircumstances

will

admit of-Credit

which

was a

short

time ago

pampered

and overfed s now

sick verysick

indeed & requires

endernursing

and

renovating

ordials

o keep her from

totally

expiring.63

The financial

markets

esponded

o the

measuresof

the

monetary uthori-

ties and

the

1792 crisis

abated.

By early

May

the Gazetteof

the

United

States

reported

that business

conditions

were

returning

to

normal.64

n both

1792 and 1987

the

panics

were

indeed

short-lived. History in 1987 was in

some

form,

therefore,

repeating

events

from 195 years

earlier

at

the

begin-

ning of our financial

markets.

60

By thesummer

f 1792,6

percent

bondsweretrading

n Philadelphia

t 110.00, a

level compara-

ble to

the

late fall of 1791.

61

John

Phelan,

chairman

f

the

New YorkStockExchange,

blamed

he crashon

the fear

of

higher

interest ates,

aswell as

computerized

rading,

nd he

naturalendency

orprices o correct

fteralong

bull market.

Washington

ost,

20 October

1987, p. 1.

62

AlexanderHamilton o WilliamSeton,25 Marchand4 April 1792,PAH,vol. 11,pp. 190-92.

225-26. Hamilton's

useof the

sinking

undcamedespite

Secretary f StateJefferson'sdissenting

vote

on

26 March

Meeting

of

the

Commissioners

f the

SinkingFund,

26 March

1792, PAH,

vol.

11,

pp. 193-94).

Hamilton's

nitial

purchaseof

securities

occurred

on 19 March

1792

and continued

thereafter

nto the

spring.Cowen,

Origins,

pp. 110-13.

63

John

Kean

to

JonathanBurrall,

16

April 1792,

Manuscript

Collection,

NYHS, (Copied

from

James 0.

Wettereau apers).

Kean

was thecashier

of the main

branch

n

Philadelphia,

Burrall

he

cashierof the

New Yorkbranch

which had ust opened

ts doors

for business

on

2

April

1792.

The paper

nformedhat

ourprospects

began o

brighten p ...

there

canbeno doubt

of a

speedy

return

o

confidence

and credit,and

that business

will reassume

ts natural

course.

Gazette

of the

UnitedStates,

2

May

1792.



20/21

First Bank of the UnitedStates 1059

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