As we observed in our last post on the Continental Currency Crisis, the finances of the United States remained chaotic through the 1780s as the young government moved to establish its credit. U.S. Congress was finally given the power of taxation in 1787 and, in 1789, Alexander Hamilton was appointed as the first Secretary of the Treasury. Hamilton moved quickly to begin paying off war debts and to establish a national bank—the Bank of the United States. But in 1791, a burst of financial speculation in subscription rights to shares in the new bank caused a tangential rally and fall in public debt securities prices. In this edition of Crisis Chronicles, we describe how Hamilton invented central bank crisis management techniques eight decades before Walter Bagehot described them in Lombard Street.Also at Liberty Street:
From Political to Financial Revolution
Although the American political revolution ended in 1783, it was soon followed by a financial revolution as the United States implemented a number of key reforms common to modern financial systems. The first American mint was established in Philadelphia in 1786 in a move to create a more stable currency. In 1787, Congress was given the power of taxation to pay off the debt, which helped the United States make significant progress toward more stable public finances. And after Hamilton was appointed Treasury Secretary, he worked to pay off war debts, in the process creating an active securities market in what were called U.S. Sixes—the U.S. 6 percent bond that the Treasury issued in 1790. But it was Hamilton’s second Report on Public Credit, delivered to Congress in December 1790, in which he called for a national bank, headquartered in Philadelphia.
The Bank Scrip Bubble of 1791
Congress approved the Bank of the United States in early 1791, and the subscription rights—called “scrips”—to the July 1791 public offering were heavily oversubscribed. The $25 scrips were a down payment on the $400 per share bank stock, with the balance due over the course of the next two years. But only a quarter of the $400 due was in gold or silver specie; the remaining 75 percent was to be paid in Treasury securities.
From the oversubscription, it was clear that demand for shares in the Bank was strong and the price of bank scrips in the secondary market initially doubled, before going even higher. And because investors needed U.S. Treasury securities for a substantial portion of the future payments, the price of securities rose as well. But just as rapidly as the prices had run up in July, they fell just a month later in August. Fortunately, the Treasury had previously set aside a cash surplus, in what was called a sinking fund, to buy securities in the open market in the hopes of retiring some of the national debt early. So as the securities market fell and credit became constrained, Hamilton used the sinking fund to purchase securities in the open market, and the mini-panic came to an end by September. Hamilton’s early use of “open market operations” had effectively stabilized interest rates.
Panic of 1792—Wall Street’s First Crash
In late 1791, a former Treasury Department assistant and later speculator and businessman William Duer conspired to corner U.S. securities. Duer and his co-conspirators borrowed heavily to do so. At the same time, the Bank of the United States opened in December 1791 and began making loans and issuing banknotes. So as Duer borrowed heavily to finance his securities purchases, and as the Bank expanded credit, the price of U.S. Sixes rose from 110 to 125 from early December 1791 to mid-January 1792. But by February 1792, depositors began returning liabilities for gold and silver specie and the Bank slowed its credit expansion, as did other banks, creating another credit crunch....MORE
Treasury Term Premia: 1961-Present
