
  • Features - Other

Wall Street's First Panic

  • Order Reprints
  • Print Article
Text size

W ere it not for a disastrous stumble on Wall Street, William Duer might occupy an honored place as one of the founders of the Republic, and perhaps the most important tycoon of his time. His was one of the earliest examples of how an astute individual might utilize political connections to further a business career. To do so successfully requires prudence and an awareness of limitations. Duer didn't recognize this, and came to grief.

Eager to advance, the Englishman, 21 years old, arrived in New York in 1768 and caught the eye of Philip Schuyler, one of the colony's most important businessmen. With his guidance, Duer started speculating in land. He also became active in politics, supporting separation from Britain. From the start, he participated in politics and business, and was learning how to use the former to benefit the latter.

Duer was a member of the Continental Congress and a signer of the Articles of Confederation. He resigned from the Congress in 1779 to follow his business interests, but then obtained a government post supplying the army with provisions. He promptly lined his pockets, taking some plum contracts, and emerged from the war a wealthy and influential man. Seeking new opportunities, in 1786 he became secretary to the Board of the Treasury, while continuing his land speculations in partnership with Andrew Craigie and Brissot de Warville, who represented several European banks interested in investing in the new nation. When Alexander Hamilton became Treasury Secretary in 1789, he chose his good friend William Duer as his undersecretary. Duer resigned after a half-year, but maintained close friendships at the Treasury. He used them to obtain inside information.

Friends in High Places

In this period, Hamilton restructured the national debt, and the newly issued bonds, or "script," were traded in the small merchants' shops that lined Wall Street. Duer learned that Hamilton intended, when necessary, to enter the market to support the bond prices. With this information, Duer would know when to buy and sell, using funds provided by Craigie and Brissot. "The public debt affords the best field in the world for speculation," wrote Craigie to his European clients, "But it is a field in which strangers may easily be lost. I know of no way of making safe speculations but by being associated with people who from their official situation know all present and can aid future arrangements, either for or against the funds." He was referring to Duer, of course. Soon, they were on their way. The partners reaped gains through wheeling and dealing in bonds, in what the newspapers called "scriptomania."

Duer saw even larger opportunities in the stock of the new Bank of the United States, organized by Hamilton as the nation's first central bank. Capitalized at $10 million, it was an enormous undertaking for the time. The "when issued" stock attracted much interest in early 1791, and the public distribution of the shares in July sparked the first American bull market. Hamilton performed the same service for the bank's stock that he did for those bonds. Whenever the price seemed about to decline, he would make purchases. The Secretary believed an ebullient market for the shares would encourage others to form banks and other commercial enterprises the new nation needed. So it did. Inspired by the runup in Bank of the United States, businessmen organized other banks and sold stock to a willing public. The Bank of New York appeared, capitalized at $1 million, with 2,000 shares issued; Duer took 290 shares at the opening and then another 110, ran up the price and then sold. Without attracting much attention, he was one of the major winners during the 1791 bull market. Scriptomania had been succeeded by "bankomania," as the nation's first bull market roared on.

Duer's successes attracted the attention of Alexander Macomb, and they soon formed a winning partnership. Duer supplied information on Treasury purchases and sales, and Macomb provided funds to act on it. All purchases and sales would be made in Macomb's name, assuring Duer of anonymity.

Not satisfied, Duer approached Walter Livingston, scion of one of the state's wealthiest families, and formed a financial relationship with him as well. He told Macomb to buy shares of the Bank of the United States, which he said would merge with the Bank of New York, and simultaneously arranged for Livingston to sell the stock short. Thus, Livingston was selling shares to Macomb, without whom the market would have been too thin for sizable transactions. When the merger didn't occur, Bank of the United States stock plunged. Macomb lost heavily, and when Livingston covered the short position, Duer reaped a large profit.

On his own, Duer maintained his interests in land speculation and helped organize the Society for Useful Manufactures, which hoped to enter that field. He formed at least four brokerage partnerships. Amazingly, he was able to keep all of these balls in the air at the same time. But he had to in order to realize his dream. By then, Duer planned to use the large profits made in securities to organize commercial and manufacturing businesses that would make him the most powerful American businessman.

Duer plunged in with passionate intensity, borrowing from friends and associates. According to one Wall Street observer, he paid 3%-4% interest per month to "persons of all descriptions." How could they lose, given Duer's reputation and those high interest rates? They didn't realize that, constantly cash-poor, Duer was skating close to the edge of disaster. He even sold his father-in-law's home to obtain more capital.

By March 1792, Duer made a common mistake of plungers: He came to believe his own lies. Duer started purchasing large blocks of stock, some on a deferred basis, meaning that he made purchases with contracts to pay for them in a short period, usually two weeks. It was a quite common practice at the time. Duer didn't have the money, but he expected the shares to rise, whereupon he would sell, pocket the profits and pay for the stock. How much he invested is unknown, but it is known that he borrowed more than $200,000 from Livingston in early March.

Had prices risen, Duer might have emerged with the power he sought, but they declined. While still wealthy, Duer faced a liquidity crisis. Had he attempted to cash out his holdings, his sales would have depressed the markets even more than they were.

At around this time, irregularities were discovered in Duer's books while he had been in government; he was informed he owed the government almost a quarter-million dollars from his days on the Treasury Board. Duer tried to stall, while scurrying around trying to borrow money to meet his market obligations. In desperation, he attempted to contact Hamilton for aid, but the Secretary had moved to Philadelphia and couldn't be reached.

Panic Attack

On March 22, Duer met with Livingston and assured him all was well. It was another lie. The following day, Duer was taken to debtors' prison. The news sent ripples of fear through the small New York investment community. Stock prices collapsed as speculators rushed to become liquid. From his cell, Duer tried to calm his creditors, promising that, if released, he would make a full settlement -- in 90 days. There were no takers. Livingston confessed that he couldn't honor the notes he had co-signed with Duer, and more panic followed.

Hamilton returned to New York, and was saddened to learn of Duer's activities and incarceration, but was more concerned by the financial panic. He ordered his agents to start purchasing government bonds to support their prices, and announced that, if necessary, the government would float a large loan in Amsterdam and use the proceeds to support the market. He instructed the Customs House to accept 60-day notes in lieu of cash for merchants in financial binds. It was the first time a leading member of the federal establishment had intervened to halt a Wall Street panic. (It didn't set a precedent. The next time forceful direct action would be taken by such a person was when Federal Reserve Chairman Arthur Burns provided liquidity to prevent a panic when Penn Central went under in 1970.)

In time, Macomb and Livingston recovered. Brissot and Craigie prospered in land speculation. Duer remained in prison, trying to salvage his holdings. He died there in 1799, ending the career of the young nation's first major securities speculator, who had almost single-handedly caused Wall Street's initial financial panic.

ROBERT SOBEL , a professor of business history at Hofstra University, is author of Panic on Wall Street .