Poor William Duer. I don’t mean “poor” in the sympathetic way, where we feel sorry for him. I mean “poor” as in flat broke. He didn’t start out that way, but that’s how he ended up. He was a member of the Continental Congress and signer of the Articles of Confederation. He served as Alexander Hamilton’s Assistant Secretary at Treasury. And a year later, he was languishing in debtor’s prison, lucky to have remained alive long enough to get there. And in prison he would remain until death released him in 1799, seven years later.
So what happened?
The simple answer is that Duer was a gambler…he liked to speculate. His compulsive behavior was unbounded. We have already seen, through a glass darkly, the role he played in the first “stock market crash” back in 1791. Fortunately, that crash had been contained by quick action. But even before that, the economic system built by Hamilton was gaining momentum. Exports were rising, companies were starting up, money was changing hands, and European countries were buying up American bonds. And now with a disaster averted, confidence soared.
And William Duer could not be contained. He was warned by numerous people that his rampant speculation would land him in trouble. His wife Lady Kitty chided him, saying, “…your mind will be too much harassed with the variety of business and speculations you undertake to allow you…inward quiet.”
But her husband was on a roll. Already the biggest fish in the New York financial pool, he hooked up with a land speculator (Alexander Macomb) on a scheme to corner the market in government bonds and bank shares. He borrowed massive amounts of money to finance his deals, drawing other players into his “Six Per Cent Club”, named for the 6% government securities he was attempting to control.
New banks were started to help finance these schemes, with their bank shares selling at unsustainable values. Where 1791 had seen “Scrippomania”, January of 1792 had “Bancomania”. Hamilton and other rational thinkers were aghast at what was happening, and vehemently warned these men that they were treading on extremely dangerous ground.
For a bit, it was euphoria for investors. People made tons of money on outrageously inflated bank and government securities. And then guess what? Just like 1791, the sudden realization that prices might be over-extended took hold, and the slide began. Duer borrowed more money to cover himself, getting it from local townspeople and shopkeepers.
By March 9th, Duer’s credit was exhausted…his covering for himself was done. But the damage wasn’t limited to him alone. His fingers were all over the financial system, and he wiped out gobs of people. As in the previous year, the Treasury stepped in again, purchasing securities off the market to steady the system, but for many, Duer had ruined them just as he had ruined himself.
The mobs of financially devastated people descended on the jail where he was (and Macomb was soon to join him), hurling stones and looking to lynch the man who had taken everything from them. The Panic of 1792 (as it came to be known) had deep repercussions. Anti-Federalists like Jefferson blamed Hamilton for creating a financial monstrosity. Hamilton was left to defend a basically sound system that was ruined by carelessness, subtle manipulation, wild speculation, and unchecked greed.
I recount this episode, not just for the sake of the story, but for what came from it. Once again, I’m forced to submit to the incredible writing of Ron Chernow. “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 expoiting the auction system for stock trades.”
From this came the Buttonwood Agreement. A group of two dozen brokers gathered on May 17, 1792 at 68 Wall Street (under a buttonwood tree) and set the boundaries for securities trading. And friends, this agreement is the foundation of the modern New York Stock Exchange. Chernow continues, “It attested to the extraordinary, if sometimes combustible, vigor of the capital markets that Hamilton had singlehandedly brought into being. … Henceforth, Wall Street would signal much more that a short, narrow lane in lower Manhattan. It would symbolize an industry, a sector of the economy, a state of mind, and it became synonymous with American finance itself.”
The safeguards put in place nearly 220 years ago can still be misused to do damage, small and great. It might be an Ivan Boesky dabbling too heavily in junk bonds. It could be a CEO like Ken Lay, fudging balance sheets to maintain stock prices. Or maybe its Bernie Madoff, bilking people of billions. These people we will always have with us.
But those safeguards have kept the U.S. financial markets one of the very best places to “play the lottery” with your money, despite the presence of a William Duer or two.
Recommended Reading: Alexander Hamilton