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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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8/11/2019 Artigo 3_ History Bank United States
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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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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.
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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.
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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-
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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.
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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).
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8/11/2019 Artigo 3_ History Bank United States
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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.
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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.
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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.
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8/11/2019 Artigo 3_ History Bank United States
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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.
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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.
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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.
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8/11/2019 Artigo 3_ History Bank United States
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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.
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8/11/2019 Artigo 3_ History Bank United States
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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.
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8/11/2019 Artigo 3_ History Bank United States
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.
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