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Alexander Hamilton, Central Banker: Crisis Management during the U.S. Financial Panic of 1792

  • Richard Sylla, Robert E Wright and David J Cowen
Extract

Most scholars know little about the panic of 1792, America's first financial market crash, during which securities prices dropped nearly 25 percent in two weeks. Treasury Secretary Alexander Hamilton adroitly intervened to stem the crisis, minimizing its effect on the nascent nation's fragile economic and political systems. U.S. policymakers soon forgot the crisis-management techniques Hamilton invented but failed to codify. Many of them were later rediscovered and became theoretical and practical standards of modern central-bank crisis management. Hamilton, for example, formulated and implemented “Bagehot's rules” for central-bank crisis management eight decades before Walter Bagehot wrote about them in Lombard Street.

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1 Davis, Joseph Stancliffe, Essays on the Earlier History of American Corporations (Cambridge, Mass., 1917), 1: 278–345. More recent discussions of the panic include Cowen, David J., The Origins and Economic Impact of the First Bank of the United States, 1791–1797 (New York, 2000), 89136; Cowen, David J., “The First Bank of the United States and the Securities Markets Crash of 1792,Journal of Economic History 60 (Dec. 2000): 1041–60; Matson, Cathy, “Public Vices, Private Benefit: William Duer and His Circle, 1776–1792,” in New York and the Rise of American Capitalism: Economic Development and the Social and Political History of an American State, 1780–1870, ed. Pencak, William and Wright, Conrad E. (New York, 1989), 72123; Sobel, Robert, Panic on Wall Street: A History of America's Financial Disasters (New York, 1968), 831; Sterling, David, “William Duer, John Pintard, and the Panic of 1792,” in Business Enterprise in Early New York, ed. Frese, Joseph and Judd, Jacob (Tarrytown, N.Y., 1979), 99132.

2 Kindleberger, Charles P., Manias, Panics and Crashes: A History of Financial Crises (New York, 2000), 225; Perkins, Edwin, American Public Finance and Financial Services, 1700–1815 (Columbus, Oh., 1994).

3 Since the publication of Perkins's American Public Finance, a number of scholars, including Peter Austin, Howard Bodenhorn, David Cowen, Farley Grubb, Eric Hilt, James Karmel, Richard Kilbourne, Christopher Kingston, Naomi Lamoreaux, Paul Lockard, Sharon Murphy, Ronald Michener, Peter Rousseau, Richard Sylla, Daniel Wadhwani, Ta-Chen Wang, Jack Wilson, and Robert E. Wright have published a slew of papers, articles, books, and dissertations describing America's financial revolution in considerable detail, largely supplanting earlier financial histories by Davis Dewey, Paul Studenski and Herman Krooss, Margaret Myers, and others.

4 Numerous studies attest to America's early diversity. Good starting places for readers interested in such issues are Fischer, David H., Albion's Seed: Four British Folkways in America (New York, 1989), and Ireland, Owen, Religion, Ethnicity, and Politics: Ratifying the Constitution in Pennsylvania (University Park, Penn., 1995).

5 In addition to Kindleberger's Manias, readers interested in those episodes can also consult Banner, Stuart, Anglo-American Securities Regulation: Cultural and Political Roots, 1690–1860 (New York, 1998); Chancellor, Edward, Devil Take the Hindmost: A History of Financial Speculation (New York, 2000); Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds (New York, 2003).

6 Discussions of the early U.S. political system are too numerous to list here. The best overview of the emergence of the first party system is still probably Elkins, Stanley and McKitrick, Eric, The Age of Federalism (New York, 1993). Many important studies, including Ellis, Joseph J., Founding Brothers: The Revolutionary Generation (New York, 2001), neglect the panic. For specific discussions of the political implications of the panic, see Rock, Howard, Artisans of the New Republic: The Tradesmen of New York City in the Age of Jefferson (New York, 1984), 24, and Wright, Robert E. and Cowen, David J., Financial Founding Fathers: The Men Who Made America Rich (Chicago, 2006), 8386.

7 Sylla, Richard, “Comparing the U.K. and U.S. Financial Systems, 1790–1830,” in Atack, Jeremy and Neal, Larry, eds., The Origin and Development of Financial Markets and Institutions, from the Seventeenth Century to the Present (Cambridge, 2009), ch. 7, 209–40.

8 The Greenspan Fed was not always reactive, however. Among other things, Greenspan warned of “irrational exuberance” in December 1996, in advance of the late 1990s bubble, and the Fed added liquidity to the markets in 1999 in anticipation of a potential Y2K problem. See Mark Carlson, “A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response,” FEDS working paper no. 2007–13, SSRN_ID982615_code358088.pdf; Jeffrey Frankel, “Responding to Financial Crises,” KSG working paper no. RWP07–010, SSRN_ID963133_c0de385205.pdf; Kuttner, Robert, “The Bubble Economy,American Prospect 18 (1 Oct. 2007). An excellent nontechnical overview of current monetary policies worldwide is Mishkin, Frederic, Monetary Policy Strategy (Cambridge, Mass., 2007).

9 The precariousness of U.S. finances was most likely the reason for issuing bonds without fixed maturities. Leading European states tended to favor debt in the form of perpetuities that paid only interest and not principal. American opinion frowned on perpetual debt and strongly favored paying down and even eventually extinguishing public debt. That opinion increased the concern of investors that their bonds might be called by the government for payment at any time, a concern Hamilton and Congress met by stipulating that only a small percentage (2 percent) of the outstanding 6 percent bonds, the main issue, could be called in for repayment in any one year.

10 Bayley, Rafael A., History of the National Loans of the United States from July 4,1776 to June 30,1880 (Washington, D.C., 1882), 403.

11 For a full discussion of sinking funds in U.S. debt management, including Hamilton's initial provision for them, see Sylla, Richard and Wilson, Jack W., “Sinking Funds as Credible Commitments: Two Centuries of U.S. National-debt Experience,Japan and the World Economy 11 (Apr. 1999): 199222.

12 Cowen, Origins and Economic Impact, 37.

13 Irwin, Douglas, “The Aftermath of Hamilton's Report on Manufactures,Journal of Economic History 64 (Sept. 2004): 800–21.

14 Wright, Robert E., The First Wall Street: Chestnut Street, Philadelphia and the Birth of American Finance (Chicago, 2005), 4465.

15 Davis, Essays; Evans, George, Business Incorporations in the United States, 1800–1943 (New York, 1948).

16 Davis, Joseph H., “An Annual Index of U.S. Industrial Production, 1790–1915,Quarterly Journal of Economics 119 (Nov. 2004): 1177–215; Johnston, Louis D. and Williamson, Samuel H., “What Was the U.S. GDP Then?” MeasuringWorth.Com, 2007.

17 Wright, Robert E., One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (New York, 2008), 162, 308.

18 Blodget, Samuel, Economica: A Statistical Manual for the United States of America (Washington, 1806), 199.

19 Wright, Robert E., The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780–1850 (New York, 2002), 137–48.

20 Davis, Essays, l: 203–11.

21 Syrett, Harold C. and Cooke, Jacob E., eds., Papers of Alexander Hamilton (New York, 19611987), 9: 71–72 (hereafter, PAH).

22 A “put” is an option to sell an asset at a price set earlier. If purchasers of assets believe that public authorities, such as finance ministers or central bankers, will not allow prices of assets to fall below some particular level, they might think they have such a put option and hence speculate more recklessly.

23 PAH, 9: 122,176.

24 PAH, 9:82,184–85.

25 PAH, 9: 202–3.

26 In terms of the national debt of 2008, that would correspond to an open-market purchase in one month of some $100 billion, a very large amount indeed.

27 Elliott, Jonathan, The Funding System of the United States & Great Britain (Washington, D.C., 1845), 197.

28 Davis, Essays; Jones, Robert F., “King of the Alley,” William Duer: Politician, Entrepreneur, and Speculator (Philadelphia, 1992).

29 Davis, Essays; Matson, “Public Vices”; Cowen, Origins and Economic Impact; Cowen, “The First Bank.”

30 Cowen, Origins and Economic Impact, 93.

31 Discounts could exceed monetary liabilities because the BUS lent some of its capital as well as lent by creating monetary liabilities.

32 PAH, 10: 525.

33 Ibid., 528–29.

34 Ibid., 562–63.

35 Ibid., 580.

36 PAH, 11:18.

37 Ibid., 28.

38 Cowen, Origins and Economic Impact, 93.

39 Ibid.; PAH, n : 112–13.

40 PAH, 11: 126,131.

41 Ibid., 157.

42 Ibid., 155.

43 PAH, 26: 651–52, a letter that surfaced after publication of PAH 11 in 1966.

44 PAH, 11: 214–16.

45 Ibid., 172–73.

46 Ibid., 193.

47 Ibid., 224–25, n2.

48 Ibid., 158–61, 172–75,193–94; McDonald, Forrest, Alexander Hamilton: A Biography (New York, 1979), 244–49.

49 PAH, 11:163–64.

50 Bagehot, Walter, Lombard Street: A Description of the Money Market (London, 1873), 9697.

51 Ned Downing, a collector of scripophily and former stockbroker, owns Hamilton's original letter, which is missing in PAH. Downing several years ago graciously shared the letter with the authors before publishing it (with a typo–“? per Centum” instead of “7 per Centum”) in an appendix to the chapter he contributed to Goetzmann, William N. and Rauenhorst, K. Geert, eds., The Origins of Value (New York, 2005), 271–98.

52 PAH, 11:194–95.

53 PAH, 26: 663, another letter that surfaced after PAH 11 was published. Emphasis added.

54 Davis, Essays, 309–10.

55 PAH, 11:190–92.

56 PAH, 26:665.

57 PAH, 11: 263; 26: 665–68.

58 PAH, 11: 225, 257–58, 263–64.

59 Ibid., 266, 272–73.

60 Ibid., 288–91.

61 Elliott, Funding System, 197.

62 Davis, “A Quantity-Based Annual Index”; Johnston and Williamson, “What Was the U.S. GDP Then?”

63 See Cowen, Origins and Economic Impact, 153–59.

64 Mann, Bruce, Republic of Debtors: Bankruptcy in the Age of American Independence (Cambridge, Mass., 2003).

65 Wood, John H., A History of Central Banking in Great Britain and the United States (New York, 2005), 27, 44.

66 The Bank of England in the eighteenth century never reported that it had made any attempts to alleviate financial crises with lender-of-last resort interventions. But in the latter part of the century it may have intervened in that way without admitting it. Lovell, Michael C., “The Role of the Bank of England as a Lender of Last Resort in t he Crises of the Eighteenth Century,Explorations in Entrepreneurial History 10 (Oct. 1957): 821.

67 We compared Seton's list with the Buttonwood-agreement signers as given in Werner, Walter and Smith, Steven T., Wall Street (New York, 1991), 212. Richard Sylla, “Origins of the New York Stock Exchange,” in Origins of Value, ed. Goetzmann and Rauenhorst, 299–312.

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