The first panic, 1792

"So vast is the territory of North America that it will require many ages to settle it fully; and till it is settled, labor will never be cheap here, where no man continues long a laborer for others, but gets a plantation of his own, no man continues long a journeyman to a trade, but goes among those new settlers and sets up for himself."
Benjamin Franklin, circa 1754. Once again, this chapter primarily serves as a further brief guide to US history in the lead up to what has become regular US economic boom and bust cycles. With this in mind, the chapter offers a little history as the background and prelude to the events and panic of 1792.

The American Revolution was fought between England and thirteen of her North American colonies. The war officially began on April 19, 1775, with the battles of Lexington and Concord in Massachusetts, although the colonies did not actually declare their independence until the Declaration of Independence on July 4, 1776.

There is no shortage of historical material about these events in both books and on the web. The Ohio history central site says this: "The Americans rebelled for two principal reasons. First were taxes that England implemented to help it pay off its debt from the French and Indian War. The second reason involved England's refusal to allow its colonists to settle the Ohio Country. England, hoping to prevent further conflicts with Native Americans like Pontiac's Rebellion, had issued the Proclamation of 1763, which prohibited white settlement of the Ohio Country. The American Revolution lasted until 1783, although the final major battle between the English Army and the Continental Army took place at Yorktown, Virginia, in October 1781. The Treaty of Paris (1783) formally ended the war. Under this treaty, England recognised America's independence. The British relinquished all land north of Florida, south of Canada, and east of the Mississippi River to the Americans and promised to remove all soldiers from this territory."

Independence type thinking had been building in America for years prior to the 1770's, culminating in the Boston tea party riot of Dec 16th 1773, Britain in response then passing what became known to the American settlers as the Intolerable Acts, and the Settler colonies, in their response, holding the first Continental Congress, a meeting of all the 13 colonies, (states), to decide what to do. The Federal Government of the United States, complete with Declaration of Independence, federal laws, constitution, and later its Bill of Rights, was born. And so too, a rather large public debt for the cost of the war. Of course there was far more to it than this, however the purpose here is not to report fully on history, but to review the property cycles, so we will keep to the script as much as possible. A few points might be noted however:

  • The English speaking world underwent a marked economic downturn in the very early 1770's and there were poor crops in England throughout the years 1765 to 1773. Reduced English purchasing power hit the colonies quite hard. Revolutions, if they are going to happen, are more likely in times of economic distress. When the economy is booming, citizens are usually too busy making money and/or speculating, to worry about anything else. The move out of the 1770's UK downturn kicked off the Industrial Revolution.

  • Once the American Revolution had begun, all the States took for themselves all the land within their borders at that time belonging to the British. "By 1780, the Continental Congress adopted resolutions asking those seaboard states claiming land west of their present western boundaries to cede them to the national government." (Chandler page 474.) With a bit of horse trading and carrying on, this is eventually what happened. It was a lot of land, much of it still unexplored. The new Federal Government found itself with a public domain, the nations largest landholder. The eventual shape of the Union was determined as much by the forces of vested interested - land speculators in the main - as by any other force. This was not necessarily what might have been in the best interests of all the citizens of the new republic. Historian and writer Ray Allen Billington, (The Westward Movement in the United States, page 29) put it this way: "Before Congress could legislate for the West, control of that hinterland must be secured. At the beginning of the Revolution, all the trans-Appalachian country was claimed by seven of the states on the basis on their original charters which had contained sea-to-sea rights. A demand that these landed states cede their western holdings to the national government had been raised at once by the other six states without large western holdings, with Maryland serving as their principal spokesman. The public utterances of Maryland's statesmen stressed the benefits that all the nation would enjoy through the surrender of this territory to the nation, but their stirring phrases concealed an actual conflict between two groups of land speculators, one convinced that they could secure grants most easily from the states already in possession, and the other believing that the national Congress would be more generous. In the end the latter group triumphed by convincing Maryland to refuse to ratify the Articles of Confederation, the nations first constitution, until the landed states ceded."

  • Even George Washington himself, the first US President, was an active participant in the land speculation of the time. Noted historian Paul Johnson of his activities (A History of the American People, page 123): "Washington discovered, aged sixteen, that for a young man of his background and modest education the next best thing to owning a lot of land was to become a land surveyor. A neat hand and the ability to draw maps, take measurements, and make calculations were all that was required. The fascination all Americans had in land, the constant speculation in it, the vast amount there was still to be occupied further west, ensured there would be no lack of occupation. His first job was to survey part of the Fairfax estate west of the Blue Ridge. This took him into the frontier district for the first time and he found he liked the life, the opportunities, even the danger." Johnson noted further (page 130): "One American who was particularly upset by the (1763 English) proclamation was Washington…access to land on the frontier was his particular future, as well as America's. The idea of consigning America's interior to the Indians for ever struck him as ridiculous, flying in the face of all the evidence and ordinary common sense." Nor was getting elected cheap in those days either. Washington's first election victory cost him 40 pounds for the 47 gallons of beer, 35 gallons of wine, 2 gallons of cider, half a pint of brandy, and three barrels of rum-punch. (Johnson, page 196.)

Revolutionary war financing - the vested interests.

As with all government debt in the years to follow, the first national debt was born in the War of Independence. "Within a week of the Battle of Bunker Hill in 1775, the Continental Congress, following colonial precedents, authorised an issue of $2 million of bills of credit called Continentals to finance the war. By the end of 1779, $241.6 million of Continentals had been authorised. US loan certificates, foreign loans, state-issued bills of credit, and other evidences of public debt completed the stock of borrowing for the Revolution. The worst inflation in U.S. history resulted from the over issue of Continentals, and the bills became nearly valueless by 1780. The other evidences of revolutionary debt also depreciated greatly in value. After the war, starting in 1782, Congress authorised commissioners to travel around the country to examine claims against Congress and the Continental army and revalue them in terms of hard money. The revalued debt amounted to some $27 million." So goes the official historical version that can be read in most textbooks. The above came from:

For the inside story however, always identify the vested interests. Learning how the vested interests behaved in history is where the real ability to forecast comes from. Future vested interest groups will behave the same way.

To win the revolution, soldiers had to be paid, goods and munitions supplied, indeed, a whole army and navy was virtually built from scratch. Under authority of the continental congress, notes (continentals) were issued to pay for it all. On each note was printed:

This bill entitles the BEARER to receive three Spanish milled dollars, or the value thereof in gold or silver, according to a resolution of CONGRESS, passed at Philadelphia February 17, 1776.

To procure war supplies, the congress chose to rely upon the known experience of its colony's merchants. This is well explained at the site start quote:

"The merchant alone had the knowledge, the trade connections, and the necessary credit to handle procurement. For the most part, his business was a personal venture in which he utilized his personal connections and took advantage of the mutual patronage they afforded him. Though the corporate form of business organization was known, it was seldom used in the American colonies on the eve of the Revolution. Customarily, a merchant directed his own business or entered into a partnership. The firm of Otis and Andrews, which was active in providing clothing for the Continental troops, and that of Willing and Morris, which was deeply involved in filling powder and other supply contracts for the Secret Committee, are illustrative of partnership organization during the Revolution. Whether working in partnership or singly, the merchant was quite likely to be engaged in more than one business. It was also not unusual for several persons to join their capital and goods in a single project without formal partnership, the expenses and profits being divided in proportion to investment… Long before the Revolution, the payment of commissions to purchasing commissaries and quartermasters had become an established business procedure. Though contracts for providing supplies to British troops during the French and Indian War were placed with English merchants, the latter had agents in the colonies to act for them. Provincial troops participating in that war also had to be supplied. For the attack on Crown Point, for example, Rhode Island appointed a New York merchant as its agent to supply its troops with food and clothing, negotiate money bills for the province, and sell all produce sent to him as payment for the colony's account. For this service he received commissions of 5 percent for purchases, 2½ percent for money, and 7½ percent for storage and sale. During the Revolutionary War, the merchants who acted as agents for the Continental Congress and for the states in the procurement of supplies were paid a commission on the value of their purchases. They utilized their own credit to obtain supplies and incurred debts for which they were personally liable. That the payment of commissions opened the way to abuses was a fact initially ignored and subsequently roundly condemned but never wholly eliminated until Robert Morris, late in the war, introduced the system of contracts into Continental Army procurement operations.” End quote.

Supplying the revolutionary army would have been quite some feat; involving huge personal risks no doubt for the various merchants concerned. A lucrative business nevertheless. But back to the money side: again from start quote: "The Continental Congress began by issuing 2 million dollars in June 1775, and it increased the amount to 6 million before the end of the year. Wartime requirements soon demanded additional paper money. Before the end of 1776 a total of 25 million dollars was in circulation, and further issues followed rapidly…Congress also resorted to requisitions on the states. Until 1777 the delegates made no effort to encourage the states to raise funds through taxation. In theory the states had the power to levy taxes, but in reality they were in no position to do so. They already were issuing paper money to finance their own wartime expenditures, including equipping their militia. But with Continental paper money beginning to depreciate, Congress on 22 November 1777 recommended to the states that they raise 5 million dollars in taxes. This was the first of many requisitions, none of which would yield much in the way of funds for the Treasury." End quote.

As the war dragged on, the continentals depreciated so badly that it is probable they cost more to print than what you could buy with them, hence the expression 'not worth a continental'. They also made supplies that much harder to procure. Who would want to be paid in near worthless paper ? Alarmed, Congress in 1779 took steps to limit its note issue. Under congress authority, 'certificates of indebtedness' were also issued to pay for the war; i.e. you loan the government your money, the government promises to pay you back, giving you the certificate as proof of its promise.

As history tells us, America won its revolution. And here is where it starts to get interesting. First though, we need some further official history, once again from:

start quote: "Under the Articles of Confederation, Congress had no independent power to raise revenue. At the same time, the states, with debts of their own, were reluctant to respond to Congress's requisitions for revenue. As a result, interest payments in the 1780s were met by issuing certificates of interest indebtedness. The Constitution of 1787 solved the revenue problem by giving the new federal government the power to tax, but by the beginning of 1790 the indebtedness of the United States, including arrears of interest, had increased to $13.2 million of foreign debt and $40.7 million of domestic debt, while state governments had outstanding debts of $18.3 million. In 1789, as the new government under the Constitution was being organized, the market priced the existing evidences of debt at only fifteen to thirty cents on the dollar because of uncertainties about if, how, and when they would be repaid. The new nation had a poor credit rating.

In January 1790, Alexander Hamilton, installed as the first secretary of the treasury, submitted his Report on the Public Credit to Congress. He called for funding nearly all the government's obligations, including the state debts, into long-term federal securities payable in specie—that is, hard money. After considerable debate Hamilton's proposals were adopted in August 1790. The foreign debt was fully funded, as was most of the domestic debt, although interest payments were deferred on part of the latter and another portion carried interest rates below the market rate. Only the depreciated Continental bills, nearly valueless, were funded at less than face value; one hundred dollars of Continentals were accepted as payment for one dollar of the new bonds. The most controversial part of Hamilton's plan, because some states had paid off the bulk of their debts while others had not, was the assumption of remaining state debts by the federal government. (To gain the support of Thomas Jefferson and his followers for the plan, Hamilton and the Federalists agreed to a compromise that located the future capital of the nation on the banks of the Potomac.)

Hamilton's refunding plan was generous to the government's creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789 with new federal bonds that soon rose toward par. How was such generosity justified? Hamilton argued in his report that his plan would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy. Subsequent experience proved him correct. The U.S. government was nearly bankrupt in the 1780s; in 1803 it had no trouble borrowing $11.25 million on short notice, mostly from foreign subscribers, to finance the Louisiana Purchase, which doubled the size of the nation. By that time nearly 60 percent of the national debt had been purchased by foreigners, who in effect lent money to Americans in return for the government's promises to repay them in the future. Within the United States, debt owners could sell their federal securities for money or use them as collateral for bank loans. In retrospect, Hamilton's plan was a political and economic masterstroke for the new Republic." End quote

Masterstroke ? Depends who for. Consider this:

The land.

British impediment to westward US expansion was no longer a problem. Get the states to hand the land over, or at least any claim to this land, and it could be sold to farmers eager to settle there. The revolutionary peace treaty signed between Britain and America in Paris doubled the size of the US, and those trying to establish the new government were quick to spot that authority over this land would strengthen its power base. As was pointed out earlier, after some cajoling and a bit more horse-trading, the transfers were effected. The lands so transferred came to be called the public domain. Needless to say, Congress was soon inundated with petitions for grants of land. How that land was privatised and then sold off we will look at in the chapter dealing with the 1819 cycle, as it is related.

The debt.

Remember those things the Continental Congress issued to pay for the war ? The bills of credit, the loan certificates, the certificates of indebtedness to pay the soldiers etc ? During the war, and as things dragged on, many times it would have seemed such credit instruments would never be honoured. It is known that many original suppliers and lenders of money to the revolutionary army, the farmers, the ordinary folk and soldiers, sold them at often a fraction of their face value, to get some ready cash in order to live through the war, and afterwards. Much of the certificates of debt ended up in the hands of those who could more afford to hold them, even if only as a speculative holding. As a large holder of such certificates, and being within this new government, wouldn't you want these debts honoured at full value ?

Such was the plan of Robert Morris, merchant and Philadelphia financier, and the nations largest creditor. Morris backed Hamilton, and Hamilton, with his report on the public credit submitted to congress in 1790, received support for the war debts to be re-scheduled as long-term securities, payable in gold. It was decided too, that the new government would take over the debts of the 13 States as well, also to be re-scheduled the same way. A massive transfer of wealth from the landed interest, farmers and artisans, to the financiers, if and when the debt could actually ever be paid. This action also guaranteed support from the 'investor classes' who now had a vested interest in ensuring the success of the new federal government. The currency debt however was funded only to the amount of 100 continentals to one dollar backed by specie. Essentially repudiated in other words.

So, how to repay the investor classes ? The way it has always been done; tax the people, and found a bank. As it happens, Hamilton's further reports to Congress were his Report on the Excise, then his Report on the National Bank, and then finally his Report on Manufactures, revealing the plans of repayment.

The law and taxes.

Once the state debt had been taken over by the federal government, a method for its repayment must inevitably come next. Hamilton and his followers, Federalists as they became known, were representative of the emerging power of American industrialists and merchants. And as is so often the case after a peace induced economic slowdown, there is clamour for 'protection' for local industry hurt by the drop in sales, or having a tougher time competing with cheaper imports. So it was now. In this instance, the war had stepped up demand for goods and army supplies, which could be filled only by local suppliers. At the peace, there was a flood of newly available imported goods. (Britain may also have been deliberately dumping some of its goods to undercut US producers, yet another way England found to keep its colonies dependent upon the mother country.) Hence the demand for protection.

The 13 states all had varying import duties as a way of raising revenue, rarely effective however; state competition rendered them mostly useless – and they were often avoided by smugglers anyway, in which some writers claim 90% of American merchants were actively engaging. What better way to keep out foreign competitors, than with a federal government having the ability to levy uniform tariffs across the nation ? And this they did, whilst at the same time ensuring unrestricted trade within and across the states; sheer delight for the Federalist northern state industrialists. The first bill that was introduced into Congress was for import tariffs, set on 30 commodities.

To further raise revenue to help pay off the debt, Hamilton undertook another move, a tax on whisky. Does this not immediately strike one as odd ? Here it was, the country just having been through a bloody revolution, fought ostensibly over the British levying unjust 'internal' taxes - no taxes without representation - and now Congress was set to do the same. It could not have been more provoking to the frontiersmen than say had the Indians themselves combined all their tribes together and waged all out war for the return of their lands. (Something they were never able to do). The tax on whisky led to frontier rebellion in 1794.

Importantly, some historians and writers including Algie Martin Simons (Social Forces in American History, page 117) noted of this rebellion: "Corn was the principal crop on the frontier. The range within which it can be marketed in its original form and with crude methods of transportation is extremely limited. It can, however, be changed into two forms that admit of extensive and economical transportation, - pork and whisky. The second of these affords by far the greater profits. It is therefore an invariable rule of historical interpretation that a settlement within the corn belt with imperfect transportation facilities will always have moonshine stills. This rule has held good for more than a century, and clear across the continent, without regard to the morality or general law-abiding character of the population. The frontiersmen of Pennsylvania could see no reason why they should not be permitted to market their corn as a beverage unhindered by a revenue tax. Perhaps some of them had heard of the patriotic smugglers of pre-Revolutionary days, or thought that 'taxation without representation' was still a crime, and, since they were nearly all disfranchised by property qualifications, they attempted to resist the law. This gave Hamilton the opportunity for which he had been waiting. Although the 'Whisky Rebellion,' as the few isolated attacks upon the revenue officers were called, was of insignificant proportions, Hamilton succeeded in inducing Washington to call upon the troops from the neighbouring states, until an army of 15,000 was assembled and marched through the riotous localities. This overwhelming show of force established a precedent for direct interference by the national government with the internal affairs of a state, and gave evidence of the possession of sufficient power to enforce the decrees of the central government."

To read a little more about life at the frontier at this time, click here.

For more on the Whisky Rebellion, click here.

The classes.

Within the new government, two major parties developed: The Federalists, led by Hamilton, and the other, based on states rights, led by Jefferson. The Federalists wanted central government to back industrialisation, modelled upon England. Jefferson wanted to see America as a land of small farmers, strongly backing states rights and individualism, selling the surplus production to the world. Jefferson went some way towards denouncing the constitution so formed for the new government as centralising power, something that would eradicate the newly found American liberty, and go against everything the revolution was actually fought for. Jefferson lost.

For more on Thomas Jefferson, click here. Simons tells the story of class interests best, so we might quote a few further passages to best illustrate this, the first from page 88: start quote "The paramount interest of the time was commercial, and it was fitting that commerce should play the largest part in the formation of the new government. Commerce demanded a powerful central government. No other could afford protection in foreign ports, provide for uniform regulations throughout the country, make and enforce commercial treaties, and maintain the general conditions essential to profitable trading. As Fisher Ames said in the first Congress:

'I conceive, sir, that the present constitution was dictated by commercial necessity, more than any other cause. The want of an efficient government to secure the manufacturing interests, and to advance our commerce, was long seen by men of judgment, and pointed out by patriots solicitous to promote the general welfare.' (Annals of Congress, Vol I, p 230)

All of these interests were confined to the New England and Middle states. Unless a class could be found in the South that was also interested in a centralized government, there could be little hope of forming a union. In the North the farmers were opposed to a central government and the merchants were its friends. In the South the reverse was true. There the great planters, who were the social rulers, favored the formation of the union. The explanation of this is found in the fact that the planters of the South did their own exporting, but did it through English merchants. The latter were driving a profitable trade through their control of importations and the channels of export. The merchants were growing rich and the planters poor. The latter saw a possibility of relief in an internal commerce and in the development of domestic shipping with the opening of the West Indian trade through commercial treaties. To collect debts, public and private, to levy a tariff for the benefit of "infant industries," to protect the fisheries and pay bounties to the fishers, to assist the Southern planter in marketing his crops, and to secure commercial treaties and guard commercial interests in all parts of the world a centralized government was needed. Those who desired such a government were, numerically speaking, an insignificant minority of the population, but, once more, they were the class whose interests were bound up with progress toward a higher social stage. In advancing their interests this wealthy class of planters, merchants, and manufacturers was really building for future progress.

The wage working, farming, and debtor class naturally had no desire for a strong central government. These desired above all relief from the crushing burden of debt. They sought this relief in new issues of paper money, in 'stay laws' postponing the collection of debts, and in restrictions on the powers of the courts. In regard to government they cried out for economy and low taxes. The ever recurring populistic feud between frontier debtors and coast creditors made its appearance. The former were in an overwhelming majority, but they lacked cohesion, collective energy, and intelligence, - in short, class consciousness." End quote.

And from page 96 of Simons:

"It has been pointed out that with the return of peace the wealthy classes, including those who had remained Loyalists during the actual fight, returned to power. The merchants of Boston, frightened at Shays' Rebellion, the manufacturers of Pennsylvania, anxious for protection, and wishing to restrict the growing power of the western districts, the commercial classes of the South, desiring a central government for the settlement of disputes concerning navigable rivers, - all of these were opposed to democracy. All were anxious to secure their privileges against attack by the discontented debtors, frontiersmen, farmers, and wageworkers."

Page 108 of Simons:

"Three divisions of the ruling class united to form the constitution and establish the new government. These were the merchants, the manufacturers, and the planters. The first two at once formed an alliance against the latter to secure control of government. In this alliance the first dominated, since the carrying trade was by far the most highly developed."

Page 109 of Simons:

"The man who best incarnated the interests and ideas of the merchants and manufacturers of this time was Alexander Hamilton of New York. So true is this that the history of the first twelve years after the adoption of the constitution has been very rightfully designated as the Hamiltonian period."

As for the divisive issue of slavery - a lot of blacks had been brought in by now to farm tobacco or pick cotton - representative Ellsworth of Connecticut, in opposing any action restricting slavery said: "Let us not intermeddle. As population increases poor laborers will be so plenty as to render slaves useless." (Simons page 96) The invention of the cotton gin did not see this perceptive comment come to pass.

The corruption.

It always pays to have the inside running. On the process of refunding the debt of the nation, Jefferson made the comment: "After the expedient of paper money had exhausted itself, certificates of debt were given to the individual creditors, with assurance of payment as soon as the United States should be able. But the distresses of these people often obliged them to part with these for the half, the fifth, and even a tenth of their value; and speculators had made a trade of cozening them from their holders, by the most fraudulent practices, and persuasion that they would never be paid. In the bill for funding and paying these Hamilton made no difference between the original holders and the fraudulent purchasers of this paper. Great and just repugnance arose at putting these two classes of creditors on the same footing, and great exertions were used to pay the former the full value, and to the latter the price only which he had paid with interest. But this would have prevented the game which was to be played, and for which the minds of greedy members were already tutored and prepared. When the trial of strength on these several efforts had indicated the form in which the bill would finally pass, this being known within doors sooner than without and especially than to those who were in distant parts of the Union, the base scramble began.

Couriers and relay horses by land, and swift sailing pilot boats by sea, were flying in all directions, . . . and this paper was bought up at 5/ and even as low as 2/ in the pound, before the holder knew that Congress had already provided for its redemption at par. Immense sums were thus filched from the poor and ignorant, and fortunes accumulated by those who had been poor enough before. Men thus enriched by the dexterity of a leader would follow of course the chief who was leading them to fortune, and become the zealous instruments of all his enterprises." (Simons page 113).

It appears that Hamilton did not benefit in any material way personally from the events he ably carried out. Indeed history seems to show Hamilton to have been (mostly) of impeccable honesty, and in genuine belief of the honest rule of the elite, for the benefit of all. The same cannot be said however, of some of the men around him, to which he seems to have turned a blind eye, until things got slightly out of hand around 1691.

The banks.

Enter Robert Morris (again). About Morris, the encyclopaedia at reads, in part: "Morris, Robert: 1734–1806, American merchant, known as the 'financier of the American Revolution,' and signer of the Declaration of Independence, b. Liverpool, England. Morris emigrated to America in 1747 and was soon apprenticed to the merchant Charles Willing in Philadelphia. He showed an unusual aptitude for business and by 1754 became a partner in the firm with the son, Thomas Willing, after the elder Willing's death. He opposed British restrictions prior to the Revolution and served (1775–78) as a member of the Continental Congress. Morris voted against the original motion for independence in July 1776, as premature, but signed the declaration in August. A member of various committees in Congress, Morris was particularly important in obtaining munitions and other supplies and in borrowing money to finance George Washington's army. Although Morris's vast mercantile interests profited greatly from his congressional activities, both he and his firm were acquitted by Congress of charges of fraud. After leaving Congress, Morris expanded his mercantile and investment operations independently of Willing and by 1781 was almost universally acknowledged as the most prominent merchant in America. The collapse of public credit led to his being appointed superintendent of finance (1781–84) by Congress. Morris labored hard and well in this office; he pressed the states for contributions, retrenched expenditures, took steps toward the establishment of a national mint, guided the organization of a national bank, and extensively used his personal credit to raise funds for the government. He framed, but failed to get Congress to approve, a fiscal program including funding at par of the national debt and the assumption of state debts; it paralleled Alexander Hamilton's program of 1790."

As always, there is more to the history than meets the eye. Economist and prolific writer Murray Rothbard, in his A history of Money and Banking in the United States, points out the following, (page 62): "Robert Morris's nationalist vision was not confined to a strong central government, the power of the federal government to tax, and a massive public debt fastened permanently upon the taxpayers. Shortly after he assumed total economic power in Congress in the spring of 1781, Morris introduced a bill to create the first commercial bank, as well as the first central bank, in the history of the new republic. This bank, headed by Morris himself, the Bank of North America, was not only the first fractional reserve commercial bank in the US; it was to be a privately owned central bank, modelled after the bank of England. The money system was to be grounded upon specie, but with a controlled monetary inflation pyramiding an expansion of money and credit upon a reserve of specie. The Bank of North America, which quickly received a federal charter and opened its doors at the beginning of 1782, received the privilege from the government of its notes being receivable in all duties and taxes to all governments, at par with specie. In addition, no other banks were to be permitted to operate in the country. In return for its monopoly licence to issue paper money, the bank would graciously lend most of its newly created money to the federal government to purchase public debt and be reimbursed by the hapless taxpayer. The Bank of North America was made the depository for all congressional funds. The first central bank in America loaned $1.2 million to the congress, headed also by Robert Morris." Rothbard notes further, "When Morris failed to raise the legally required specie capital to launch the Bank of North America, Morris, in an act tantamount to embezzlement, simply appropriated specie loaned to the US by France, and invested it for the government in his own bank. In this way, the bulk of specie capital for his bank was appropriated by Morris out of government funds. A multiple of these funds was then borrowed back from Morris's bank by Morris as government financier for the pecuniary benefit of Morris as banker; and finally, Morris channelled most of the money into war contracts for his friends and business associates."

By wars end however, with his political power slipping, Morris moved to end the banks role as central bank, and changed it to the status of a private commercial bank, chartered in Pennsylvania, where he was resident. Hamilton as good as copied what went before, in his quest to establish his central bank as the bank for the federal government, and fiscal agent. However, for our purposes, it is what happened next that all of the foregoing was explained…

William Duer, the panic of 1792, and the Bank of the United States: a case study about the power of credit.

"There is scarcely anything but noise and racket last night, and the night before we had a mob raised, and nothing would satisfy them but (to get at) the father of speculation, the great William Duer, who is confined in gaol at present…"
Contemporary New York Observer to the actions of 1792.

The bank Hamilton wanted was to be a private concern, the shares privately owned but for one fifth held by the government. The notes of the bank were made redeemable in specie, on demand, and acceptable as payment of taxes. Congress gave it a charter for twenty years, in February 1791.

With great skill, Hamilton had the bank have a capital of $10 million, of which the government took up $2 million, receiving in return a loan from the bank for the same amount, and those good old certificates of debt could be accepted for up to 75% of the value of any number of shares in the bank stock. Hamilton's master plan for the embryonic US clearly displayed an understanding of the banking process. David Cowen, in his book The origins and Economic Impact of the First Bank of the United States, points out (page 12) that Hamilton was for "economic growth first and foremost, and viewed funding and banking as complementary pieces to the same financial puzzle. The strategy that the Secretary employed was therefore to utilise the synergy of funding and banking. A prime example of the synergy was in the upcoming Bank proposal. Shares in the Bank were paid for mostly in government bonds and not specie. Thus, the bond prices would be supported as individuals bought securities to turn into the bank. Next, the bank would issues paper notes, all backed 100% by specie. These notes, in turn, became the nation's principal money supply. In this fashion, the banking and funding system were working together to produce growth. Hamilton, therefor, viewed these two components as integral and co-working parts of a financial system that would create a solid base for economic stimulus."

Economic stimulus: exactly what happens when a bank creates credit. But before continuing with the story of the bank, we need to talk about William Duer. The events of 1792 start with Duer: English-born and Eton educated, eventual Continental Congress member and New York Judge, Duer made a good deal of money out of contracts to supply the English royal navy with masts, beginning 1768 in New York, and again in 1773, moving to New York at this time after having managed the family estates in the West Indies. Perhaps he switched sides, if indeed he took sides as after the move he became one of the largest contractors supplying the continental army. It was to be a lucrative venture, occasionally even at the expense of the soldiers. In 1791 for example, Maj. Gen. Arthur St. Clair was commissioned to establish a military outpost down Miami way against those troublesome Miami Indian tribes. Secretary of War Henry Knox, appointed Duer to supply the troops. The soldiers noted later a serious deficit in the number of horses for the task at hand, and that the gunpowder supplied had been reprocessed or was damaged, with one soldier having reported seeing his musket balls 'bouncing off the Indians' during battle. (See for more.)

Duer was not only busy supplying the army, but decently speculating in Western lands as well. In the late 1780's Congressman Duer and his associates were granted 3.5 million acres of the Northwest Territory (southern Ohio), for settlement. One of the company's first acts was to begin selling land to French families wishing to emigrate, whereupon Duer's instructions in 1789, a salesman was sent to Europe to sell the lands, through the Campagnie du Scioto. There was no shortage of French royalists it seems, in fear of the French revolution then underway, willing to move after reading the company's (false as it turned out) advertising. 500 persons set sail the following year. The company had appointed two officials, William Playfair and his assistant Joel Barlow to attend to the sales. Not living up to his name however, Playfair promptly stole the money so paid over by the French. This meant that the company was then unable to pay Congress for the land, which the company was selling before it had made payment to Congress anyway. (The practice was called 'dodging' - selling United States public domain land in Europe before it had been paid for in the US.) Moreover, Barlow had misrepresented the company's claim to the land, and the land sold actually belonged to the Ohio Company, of which we see a bit more next chapter. Upon arrival the French families found out they had been cheated. The US government did eventually grant the families some land, but the episode contributed somewhat to Duer's future problems.

Nor was Duer above a bribe either. The new United States needed coins minted for distribution, and had struck, amongst others, the Immunis Columbia copper coin of 1786 / 87. The Rahway Mills Mint believed it could supply the patterns and meet the coinage demands, but unbeknownst to the mills, Duer, as Secretary of the Treasury Board, had already awarded the contract for minting to a James Jarvis, in consideration of a $10,000 'inducement' paid over to Duer. Jarvis could not meet the contract demands, having no source of copper, and promptly fled the country to avoid a court judgement against him. (

In 1789, Hamilton appointed Duer Assistant Secretary of the Treasury. Hamilton's wife was a cousin of Duer's wife. Duer now had a position that would give him access to all government goings on, in advance of it being public information. Duer quit however, when he learned that federal law did not permit Treasury officials to speculate in federal securities. Upon quitting, Duer promptly began using his inside knowledge and connections to conduct the sorts of speculations he previously could not, borrowing heavily from banks and even close friends, to do so.

    William Duer

And as circumstances would have it, Hamilton's developing federal program gave him plenty in which to speculate; in particular, the shares of the new bank, chartered by Congress in 1791.

The government's 1791 charter for the Bank (the BUS as it was termed), authorised the issue of 25000 shares at $400 each, to raise $10 million in capital, the government to retain 5000 of the shares, the remainder to be offered to the public - an IPO - payable in 4 further instalments over the next two years. On July 4, 1791: "credit hungry citizens gobbled up $8 million in Bank of United States stock with unprecedented alacrity. Many notable members of the Congress were purchasers." (Cowen page 35.) The IPO was well oversubscribed, selling out within hours in all the largest US cities of the time where the shares were on offer. Duer and other speculators were able to add to their original holdings - limited to thirty shares per individual at the IPO - by buying BUS scrip in the after market.

By early August, BUS scrip had gone from $25 to $250; (i.e. a full $400 share was therefor now worth $625) a 50% profit for the month. The percentage did not go unnoticed by New York locals, as merchants began deserting their shops, "shopkeepers sending their goods to auction, and not a few of our merchants neglecting their regular and profitable commerce of the city." (Cowen page 38.)

Prices for the scrip topped out (in Philadelphia) at between $312 and $325 on August 11. "When the Bank of New York and other lenders curtailed loans to some extent to the speculators on August 11th, a panic set in, for the direct relationship between loan curtailment and security price decreases was logical. Securities, therefor, fell in New York first and then spilled over to Philadelphia. Prices plummeted and bottomed out between $110 - $125 over the course of the next week before rebounding." (Cowen page 40). The US's first liquidity crisis, to which the Treasury Secretary knew the appropriate response: add cash to the system. Acting like a central bank might today, Hamilton soothed markets by buying government securities. (It would not have been good times for Hamilton in these and following months; he was also dealing with the husband of his mistress who was blackmailing him.) Bank scrip prices went sideways for the remainder of the year at between $130 - $170. Duer and his agents were still buying though, and by September 1791 had acquired 1200 of the shares.

On October 7, (90 degrees from issue date) stockholders met in Philadelphia to propose a board of directors. Voting took place October 21. It was the board of directors who determined the salaries of all the officers and clerks, and supervised the printing and supply of bank notes. The board seats were eagerly sought out because these members approved private loan applications. "Certainly one's loan application prospects improved when fellow board members were passing judgement." (Cowen page 45.)

The board also set the guidelines and procedures for making loans. Bank deposits were voted to be accepted without charge, and payable upon request. Noted Cowen (page 58): "The deposits could take the form of specie, meaning gold and silver, or even state bank notes of their respective cities. Each branch had a set of scales that measured coin to determine their value. But were the banks scales true ? The answer is no. Ever cautious against impure metal, cashier Kean (Philadelphia branch) believed in a small edge for the house; 'it always ought to be remembered that the Bank ought to have some trifling and hardly perceptible difference in its favour to guard against base money' ".

By late December 1791, Duer and Co were putting into effect their plan to corner the US securities market, in particular the fixed income segment. Why this area ? "Duer's logic was in part connected with the six percent securities due to the bank, for $6 million in outstanding government six percent bonds were due in four instalments, the first one in January, 1792, and the following three over six month intervals concluding July, 1793. Therefor the BUS subscription process created a natural demand for U.S. securities. Once prices had appreciated, the plotters dreamt of selling their holdings to foreign investors, as well as other speculators, who had sold the stock 'short' in anticipation of lower prices. Duer may have also dreamed of controlling the Bank of the United States. Alexander Macomb described his partner as possessing a 'fertile head…genius at recourse…it astonished me. He thinks very little of raising in a few days some hundred thousand dollars.' " (Cowen page 90.) Buying bank shares also makes sense from another angle; obtaining a loan. Speculating on the scale Duer had in mind requires money. What better institution to control than a bank, whose deposits (read credit creation) "could be used to finance other things." (Sobel, Panic on Wall Street, page 21.)

Duer was not the only market operator scheming. A flood of new IPO's - in 1792 terms - had been coming to market and between Sept 1791 and March 1792 they numbered 17, the same number as in the previous 7 years. And other asset prices were also seen to be rising: "The rise in the value of land is astonishing," wrote Macomb to William Constable, February 5, 1792. (Cowen page 121, note 33.)

The high point in securities prices appears to have been January 1792, with prices declining for 5 weeks thereafter. With securities prices going lower, Duer, heavily long, announced March 9 (210 degrees from Aug 11) that he could no longer meet his contracts for securities purchases. He was also at this time, as it came to light, fighting a pending law suit against the government for 'indiscretions' as secretary of the Treasury Board the previous decade. An audit had discovered $238 000 missing. Duer's failure created panic: the panic of 1792.

For our purposes, the most important piece of the jigsaw has only recently come to light. Cowen, page 92 explains: "In all previous discussions of the panic, it was logically assumed that when the crisis began, the national and state banks restricted credit to protect themselves from financial loss. New evidence demonstrates that the BUS-Philadelphia was restricting credit in February, well before the panic started. The banks liquidity drain was the cause for the stock market's slide in February, which led Duer and other 'longs' to feel the pinch despite their attempts to keep the market up…Duer was the biggest long…his failure in March triggered a snowball effect on other security holders."

Remember, the first instalment of the BUS initial public offering fell due Jan 1st of that year (1792). The BUS was lending for a variety of purposes, particularly to merchants in the course of their normal trading, however a good many loans were also made to finance the purchase of the banks very own IPO shares, 'accommodation loans' as they were called. "Therefor it is logical to say that some of these borrowers bought debt securities with their loans in order to pay for the debt portion of their subscriptions to stock of the Bank, helping to push market prices higher in January." (Cowen page 96.) Today one might call this a margin loan - bank credit to buy shares. Why the credit tightening in February ? The BUS was worried about its note issue, having observed that their notes were, in some areas, no longer being accepted at par. This raised the distinct possibility that some of the bank notes might come back to the bank for redemption - a cash call - or a request for the equivalent to the notes in specie. Acting out of self-interest therefor, loans were curtailed.

Ron Insana gives a quick and notable summation of this whole episode in his book, Trendwatching, page 134: "The very first stock-market mania (in the US) was set off when the first Bank of the United States within months of opening its doors . . . flooded the market with notes and credit. David Cowen, (The Origins and Economic Impact of the First Bank of the United States), who analysed the balance sheet of the first bank, demonstrated that the largesse of the bank's policies helped to finance a major run-up in bond prices, which was exploited by speculators like William Duer. Additionally, Duer employed a great deal of leverage himself, borrowing funds from anyone who would lend in an effort to corner the market in U.S. government bonds. From late 1791 to early 1792, securities prices soared until a more restrictive bank curtailed credit and brought the market to a crashing halt. As Cowen points out, the bank, and possibly Treasury Secretary Hamilton, were so worried about the speculative excesses in the market that they choked off credit and turned a bubble into a panic."

The creation of bank credit is a necessary and important feature of a modern economy. Even more important however, in any economy that permits the capitalisation of government granted licences into a tradable commodity, is what the banks take as security to cover the credit so created; land value.

Duer was the first, of a long line of speculators to follow, doing what they all do; overextending themselves at the peak. Detractors had much to say of Duer's extravagance, and that of his wife Lady Kitty, (given away at the wedding by George Washington, and daughter of the exceedingly wealthy American general, William Alexander) who were often in the habit of serving up to fifteen different wines with dinner. Duer died whilst still in prison, May 7 1799, though it is doubtful if the prison sojourn itself killed him. Duer might have been in jail, but he was able to still conduct his business affairs from there, entertain friends, write to all manner of acquantances, and take lunch at the local tavern. (Sobel, Panic on Wall Street, page 31.) Jail may well have been the safest place for him to be. Duer spent the rest of his life attempting to put his financial affairs in order, but never successfully paid off his debts.

A few further things we might note about this episode:

Panic is never without a cause; a tightening of credit. Note the order; expansive bank policy (easy credit), insiders load up, speculators pile in, momentum starts, boom, crescendo as the public gets a sniff, credit is tightened, loans called in, bank policy goes into reverse, panic. This panic was not followed by any severe economic slowdown, though no doubt the lenders to Duer faced their own personal troubles and embarrassment.

The notes of the BUS very quickly became a ready target for counterfeiters, and the bank's branches were soon being warned to watch for unsound notes.

The New York Stock Exchange was born in the remains of this panic, on May 2nd, 1792, as the few surviving brokers wanted business only from the more reputable businessmen. (Transactions still took place on the outside curbs though, for those thought not good enough for the 'club'.) The fact that the New York legislature was in the process of considering an all out ban on the brokering of shares and financial instruments may have hastened the arrangement. No need for government involvement the brokers argued, we shall regulate ourselves to ensure law and order. An argument the legislature must have accepted. (A degree count in years off 1792 gives some interesting numbers, 2002 being 210 degrees.)

After the fall of Duer in New York, only two banks remained in operation, not that there were many in existence beforehand anyway, and of the many which were proposing to be floated over the previous year, none got to open their doors.

Just out of interest, monthly wages at this time for an average labourer were approximately $22, with estimated expenses for his family of just four, being food $14, rent $3.50, firewood $2.50, clothing $2. At the local market, to which a daily visit would have been required, a gallon of milk cost 24 cents, 6 cents per pound for meat, $1 per gallon of rum. (Plus taxes ?) (Coxe, A View of the United States, and Smith, Life in Early Philadelphia.) By contrast, a cashier's wage at the BUS, the most senior position underneath the Board, was about $220 per month, tellers were paid about $100 per month.

Finally, back to the land. (It's always back to the land.)

We have spoken much about land speculation. It is worth noting at this stage, coincidentally perhaps, that 'speculation' is the term used in Chandler's history of settlement until he uses the term 'wildest speculation' to describe settlement around Pittsburgh after the coal mines were opened up and substantial improvements projected, around 1785 and later, (page 429), and then the term 'wild land speculation' to describe events in Vermont, 1792 (page 161). So perhaps the speculative fever in land, financed mostly on credit, had been building for some time into 1792. Interesting timing considering the real estate events to follow.

And why would the government sell off the land in this fashion anyway ? Why not just sell off the land to small holders and willing farmers as quickly as possible, to get as many people settled, and farming on the land, as was humanly possible. By now you should have worked it out already. Simons says it well and I will quote him again, page 70: "The rapid growth of manufactures was hindered by the unwillingness of men to work for wages, when a whole great continent of untrodden fertile land lay at the western doors of society ready to yield up its bounty to whomever could get upon it and use his labour. Benjamin Franklin had seen this fact and had expressed an opinion that while free land existed, manufacturing would be impossible because no one would work for wages. This land was now in the hands of the national government, and we find this taking steps to limit settlement and thereby create a body of wageworkers."

The value worth claiming first, the land, and then have someone settle on it, was not insubstantial. The land of Maryland being just one example, tripled in price between 1730 and 1760; a good part of it owned by just one family, the Carrolls.

This psychology takes us into the very heart of the business cycle.

Further reading:

Billington, Ray Allen. The Westward Movement in the United States, D Van Nostrand Co. Inc. 1959.

Cowen, David Jack. The Origins and Economic Impact of the First Bank of the United States 1791-1797, Garland Publishing Inc, 2000.

Gordon, John Steele. The Great Game, Simon and Schuster, 2000.

Rothbard, Murray N. A History of Money and Banking in the United States; the Colonial Era to World War II, Ludwig von Mises Institute, 2002.

Sakolski, A. M. The Great American Land Bubble. The Amazing Story of Land-grabbing, Speculations, and Booms from Colonial Days to the Present Time, Harper and Brothers, 1932.

Sheldon, Garrett Ward. The Political Philosophy of Thomas Jefferson, Johns Hopkins University Press, 1991.

Simons, Algie Martin. Social Forces in American History, 1911, available on line at carrie/texts/carrie_books/simons/index.html

Slaughter, Thomas P. The Whiskey Rebellion. Frontier Epilogue to the American Revolution, Oxford University Press, 1986.

Smith, Billy G. Life in Early Philadelphia, 1995.

Sobel, Robert. Panic on Wall Street, A history of America's Financial Disasters, Macmillan, 1968.

Tench Coxe, A View of the United States, 1794. - Wall Street History.

Copyright: Phil Anderson 2004

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