Alexander Hamilton (74 page)

When the craving for bank scrip had created a speculative bubble in the summer of 1791, Hamilton had cooled off the contagion before it got out of hand. The relief had proved short-lived. The very prosperity that his ebullient leadership engendered—reflected in rising exports, a booming demand for American bonds in Europe, and a rush of newly chartered companies—generated effervescent optimism that fed yet another mad scramble for government securities and bank scrip, pushing their prices to new highs during the winter of 1791–1792.

Once again, the main protagonist was Hamilton’s old chum William Duer, always a restless soul beneath his bonhomie. Duer’s wife, Lady Kitty, had long been chagrined by her husband’s compulsive gambling. She once admonished him, “I fear...your mind will be too much harassed with the variety of business and speculations you undertake to allow you...inward quiet.”
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In a similar vein, Duer’s friend, Samuel Chase of Maryland, pleaded with him to control his acquisitive impulses: “I know the activity of your soul and fear your views... and schemes are boundless....I sincerely wish that you would set limits to your desires.”
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Unfortunately, nobody could cure William Duer’s speculative bent. He was now the colossus of New York financial markets and derisively crowned “King of the Alley” by Jefferson.
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In late 1791, determined to corner the market in government bonds and bank shares, he formed a secret partnership with Alexander Macomb, a wealthy land speculator. Hamilton had just chosen Duer as governor of the Society for Establishing Useful Manufactures, where Macomb also served as a director. Now, to finance stock manipulation, the reckless Duer borrowed vast sums on his personal notes and drew other SEUM backers into an investing cabal nicknamed the Six Per Cent Club because of its plan to monopolize 6 percent government bonds.

In January 1792, Hamilton was monitoring financial markets in New York with foreboding when hectic trading in bank scrip received a sudden fillip from the announcement of three new banks being formed. Aside from the Bank of New York and a projected branch of the Bank of the United States, New York at this time had no other banks. The Million Bank was to be organized by Macomb and Hamilton’s old adversary from the New York Ratifying Convention, Melancton Smith. At a time when banks had political colorings, the Million Bank was seen as a vehicle to boost the fortunes of Governor George Clinton. “The bank mania rages violently in this city,” James Tillary told Hamilton, “and it is made an engine to help the governor’s re-election.”
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When the bank’s shares were floated on January 16, they were ten times oversubscribed within hours, as “bancomania” gripped the city. In rapid succession, proposals emerged for a State Bank and Merchants’ Bank, culminating in a grand proposal to amalgamate the three new banks into one gigantic institution.

As treasury secretary, Hamilton had hoped to spur banking, but he rejected these new banks as so many brazen speculative vehicles. The instant he heard about the Million Bank, he wrote a vehement letter to William Seton of the Bank of New York, who had helped him to quell the panic the previous summer. Testifying to “infinite pain” at the news of this “dangerous tumour” in New York’s economy, Hamilton warned, “These extravagant sallies of speculation do injury to the government and to the whole system of public credit by disgusting all sober citizens and giving a wild air to everything....I sincerely hope that the Bank of New York will listen to no coalition with this newly engendered monster.”
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Seton replied that the “madmen” behind the Million Bank were trying to coerce the Bank of New York into an unwanted merger by unscrupulous means: withdrawing enough money from the bank to topple it. “The folly and madness that rages at present is a disgrace to us,” he reported.
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Hamilton wasn’t blind to the speculative hazards of creating credit. “The superstructure of credit is now too vast for the foundation,” he warned Seton. “It must be gradually brought within more reasonable dimensions or it will tumble.”
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Hamilton later conceded that share trading “fosters a spirit of gambling and diverts a certain number of individuals from other pursuits.”
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Yet this had to be weighed against the larger social benefits conferred by ready access to capital.

For Thomas Jefferson, bancomania wasn’t an unavoidable flaw in an otherwise sound system but a canker at the heart of the Hamiltonian enterprise. He warned Washington that paper money was “withdrawing our citizens from...useful industry to occupy themselves and their capitals in a species of gambling, destructive of morality, and which had introduced its poison into the government itself.”
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Jefferson’s fears were understandable, if often misplaced. He suspected Duer of trading on inside information and wrongly assumed that Hamilton was his constant, willing accomplice. When Jefferson wrote to Washington, accusing Hamilton of “the dealing out of Treasury-securities among his friends in what time and measure he pleases,” he made a baseless charge that he and his political followers were to repeat ad nauseam.
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Buoyed by credit, the prices of government and bank securities soared to a peak in late January 1792, exceeding any sane levels of valuation. As Hamilton recalled, “The rapid and extraordinary rise... was in fact artificial and violent such as no discreet calculation of probabilities could have presupposed.”
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Then euphoria turned to doubt and doubt to despair as shares began a precipitate five-week slide. Duer desperately put up more money to cover his obligations and borrowed sizable sums from all quarters. He pried loose loans from wealthy New Yorkers and petty cash from butchers and shopkeepers and even took money from a “noted bawd, Mrs. McCarty,” said one merchant.
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He raised a half-million dollars on his personal notes. “Widows, orphans, merchants, mechanics, etc. are all concerned in the notes,” Robert Troup informed Hamilton.
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Scenting blood, Duer’s creditors squeezed him with usurious interest rates that climbed as high as 6 percent per month. Duer had led a band of bulls betting on higher stock prices; three members of the Livingston family headed a counterclique of bears, who drove down share prices by yanking bank deposits and instigating a severe credit shortage that pushed interest rates to speculators to as high as 1 percent per day. This struck a fatal blow at the deeply indebted Duer. He began to jettison shares to repay loans, and this only worsened the downward spiral of bond prices.

On March 9, his resources exhausted, the embattled Duer stopped payment to some creditors. He owed so much money to so many people that his failure provoked financial mayhem. Twenty-five New York financiers went bust the next day as panic spread. Duer’s undoing was money he owed the government. From his days as secretary to the old Board of Treasury, Duer had carried a huge outstanding debt of $236,000. On March 12, with Hamilton’s blessing, Oliver Wolcott, Jr., comptroller of the treasury, wrote to New York’s district attorney and ordered him to recover the money from Duer or file suit against him. As soon as Duer heard of this letter, he knew he was doomed unless he got it revoked. Distraught, he sent a hurried message to Hamilton: “For heaven’s sake, use for once your influence to defer this [letter] till my arrival, when it will not be necessary....Every farthing will be immediately accounted for. Of this I pledge my honor. If a suit should be brought on the part of the public...my ruin is complete.”
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Hamilton waited to reply until March 14. In all likelihood he wanted to be able to inform Duer that Wolcott’s instructions had been sent before he could recall them. In his note to Duer, Hamilton did nothing to impede the threatened lawsuit and refused to compromise his official integrity. In a spirit of friendship, he told Duer that he was “affected beyond measure” by his plight and had “experienced all the bitterness of soul on your account which a warm attachment can inspire.” At the same time, he delivered this stern judgment: “Act with
fortitude
and
honor.
If you cannot reasonably hope for a favorable extrication, do not plunge deeper. Have the courage to make a full stop. Take all the care you can in the first place of institutions of public utility and in the next of all fair creditors.”
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The letter again refutes the caricature of Hamilton as a stooge for the monied interests. Meanwhile, Jefferson grumbled to his son-in-law that “the credit and fate of the nation seem to hang on the desperate throws and plunges of gambling scoundrels.”
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Instead of bailing out Duer, Hamilton had the Treasury purchase large amounts of government securities in the marketplace. By doing so, he steadied the market and also bought back public debt at bargain prices. The money came from the sinking fund he had set up to redeem public debt. Sensitive to perceptions, Hamilton told William Seton to purchase the bonds piecemeal at the securities auctions held twice daily at the Merchant’s Coffee House and “to keep up men’s spirits by
appearing often,
though not much at one time.”
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He also wanted Seton to conceal the buyer’s identity, allowing rumors to magnify the effect: “It will be very probably conjectured that you appear for the public. And the conjecture may be left to have its course but without confession.”
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Instinctively, Hamilton understood the creative ambiguity necessary for a central banker coping with a crisis. As was the case the previous summer, Hamilton had no training or tutors, yet he reacted with the sangfroid of an experienced central banker. He restored temporary calm to the marketplace, though milder gyrations continued through the fall.

The travail of William Duer was a public drama that transfixed New Yorkers for days. There were constant meetings at Duer’s mansion to try to rescue him from creditors. “This poor man is in a state of almost complete insanity,” Troup told Hamilton, “and his situation is a source of inexpressible grief to all his friends.”
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Duer portrayed himself as an innocent lamb, gored by his pitiless creditors. In an agitated, sometimes incoherent mood, he took refuge at Baron von Steuben’s, where he vainly awaited a reprieve from Hamilton. With an invincible capacity for self-delusion, Duer assured one friend, “I am now secure from my enemies and feeling the purity of my heart I defy the world.”
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The day after he made this brave declaration, he was packed off to debtors’ prison. Before long, Alexander Macomb failed and was also imprisoned.

By this point, Duer may have welcomed prison as a refuge from vengeful mobs howling that they wanted to disembowel him. Their animosity was so great that it was feared they might storm the jail and lynch him. On the night of April 18, hundreds of aggrieved creditors and investors ringed the jail and hurled stones at it. One newspaper wrote of the “frequent shouts and menaces” they uttered and said that many were “crying aloud,
We will have Mr. D[ue]r, he has gotten our money”—
words that “must have terrified the prisoner exceedingly and made him suppose that the vengeance of the injured citizens was immediately coming upon him.”
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Duer still expected to be freed by Hamilton’s miraculous intervention. In fact, the treasury secretary had already decided to make an example of Duer, informing a friend, “There should be a line of separation between honest men and knaves, between respectable stockholders and dealers in the funds and mere unprincipled gamblers. Public infamy must restrain what the laws cannot.”
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Hamilton’s letters to William Seton during these weeks mingle sadness and horror as he contemplated the plight of those destroyed by the panic.

Hamilton’s critics gloated over these events as vindicating their critique of his system. For the slaveholding south, this was irrefutable proof of northern depravity. Jefferson inveighed against the “criminality of this paper system” and said people would now return to “plain unsophisticated common sense.”
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With a touch of schadenfreude, he computed that the five million dollars squandered by speculators equaled the combined value of all New York real estate. Madison observed with satisfaction, “The gambling system...is beginning to exhibit its explosions. D[uer]... the prince of the tribe of speculators has just become a victim of his enterprises.”
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Hamilton was appalled to learn of Madison’s allegation that his purchases of government securities to steady the market had been made at high prices to benefit speculators. This complete misconception of his virtuoso performance was hard for Hamilton to stomach, and he told a Virginia friend it “left no doubt in anyone’s mind that Mr. Madison was actuated by
personal
and political animosity.”
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That Hamilton did not exaggerate the vindictive mood of Madison and the southern congressmen is confirmed in a letter Abigail Adams wrote about the panic to her sister: “The southern members are determined if possible to ruin the Secretary of the Treasury, destroy all his well-built systems, [and] if possible give a fatal stab to the funding system.” Her husband, the vice president, had managed to “harmonize” the Senate, but this did not stem the regional rancor. “I firmly believe, if I live ten years longer, I shall see a division of the southern and northern states unless more candour and less intrigue, of which I have no hopes, should prevail,” she wrote.
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William Duer’s downfall exposed the magnitude of the securities market that Hamilton had opened up. It also showed how easily the market for government bonds could be rigged by swindlers planting false rumors and exploiting the auction system for stock trades. To provide more orderly markets, two dozen brokers gathered on May 17 under the shade of a buttonwood tree at 68 Wall Street and drew up rules to govern securities trading. This historic Buttonwood Agreement set a minimum for brokers’ commissions and laid the foundations for what became the New York Stock Exchange. It attested to the extraordinary, if sometimes combustible, vigor of the capital markets that Hamilton had singlehandedly brought into being.