"The First Bank of the United States and the Securities Market Crash of 1792" by David J. Cowen, in The Journal of Economic History (Dec. 2000), Social Science History Institute, Bldg. 200, Rm. 3, Stanford Univ., Stanford, Calif. 94305–2024.
The Panic of 1792 was America’s first market crash, and historians usually have blamed it on a speculator named William Duer and his confederates. Evidence freshly assembled, however, suggests a different culprit: the First Bank of the United States. The brainchild of Secretary of the Treasury Alexander Hamilton, the semipublic national bank received a charter for 20 years in February 1791 and, with a colossal $10 million in capital, opened its doors in Philadelphia the following December. Its mission was to facilitate commerce by lending money, and, not incidentally, to strengthen the federal government. Duer, working in secret with others, borrowed heavily in an effort to corner the markets in U.S. debt securities as well as the stocks of the national bank and the Bank of New York. "In the ensuing speculation," writes Cowen, a foreign currency trader and director of Deutsche Bank, "securities prices reached their peaks in late January 1792. Prices trended lower in February, [and] fell off sharply in March"—prompting the "Panic of 1792." The speculator Duer, his credit exhausted, could not meet contracts he had made to buy securities and suspended payments on his obligations on March 9. His failure, a contemporary said that month, was "beyond all description—the sums he owes upon notes is unknown—the least supposition is half a Million dollars. Last night he went to [jail]." Historians blamed him for bringing the market down. An 1833 fire at the Treasury Department destroyed most of the First Bank’s records. But its balance sheets for the 1790s were found by historian James Wettereau in the 1930s in the papers of Hamilton’s successor, and published in 1985. Together with other historical materials, Cowen says, they make it clear that the national bank, headed by Thomas Willing, was responsible for the March crash. When it opened in December 1791, the bank "flooded the economy with credit." Some loans were for legitimate businesses, but others were made to speculators (apparently including Duer) who used them to buy securities. In February—a full month before Duer ran into trouble—the bank, realizing it had loaned so heavily that its bank notes were not being readily accepted everywhere, reversed course by sharply curtailing credit and calling in outstanding loans. Hamilton, worried about speculation and the state of the financial system, gave the reversal his blessing, Cowen says, and may even have initiated it. Suddenly, Duer and other speculators were called upon to repay their loans. Many dumped stocks to do so, and the market sank. It was a classic "credit crunch." But no recession or depression followed. Like Federal Reserve Chairman Alan Greenspan after the 1987 market crash, Hamilton moved rapidly to have the central monetary authority act as lender of last resort, helping to avert a meltdown."The First Bank of the United States and the Securities Market Crash of 1792" by David J. Cowen, in The Journal of Economic History (Dec. 2000), Social Science History Institute, Bldg. 200, Rm. 3, Stanford Univ., Stanford, Calif. 94305–2024.