Stock & Money Market Speculation Today and in the 1790s

STOCK & MONEY MARKET SPECULATION TODAY

AND IN THE 1790s

Question: What do Bernie Madoff and William Duer have in common?

Answer: Both were once respected investors forced into insolvency resulting in stock market (money) deterioration and the collapse of dozens of their investors.

Question: What does Timothy Geithner have in common with Alexander Hamilton?

Answer: Geithner is the current Secretary of the Treasury of the United States. Hamilton was the first Treasury secretary.

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Before continuing I must make a disclaimer: I’m not an economist nor do understand the fine points—or even the non-fine points—of the issue under discussion. I’m writing this post to increase my understanding of William Duer’s role in the first Wall Street crash. This issue is core to the writing of my historic romance novel, in which I must present the issues in a basic manor that can be understood by my future readers. If any of you can add clarification to these issues, feel free to comment in the comment box at the end of this post.

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History doesn’t always repeat itself, but it is often said to rhyme.

Or does it echo?

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Duer and Madoff reflect the root problems of two sudden and dramatic declines in the value of bank stocks: excessive greed.

While Madoff’s name has been sufficiently newsworthy that most Americans recognize his name, Duer is relatively unknown to many of today’s citizens.

I came in contact with him because of his land speculation in Ohio and Maine. The Ohio speculation was done under the guise of the Scioto Associates, a group of military and political personages hoping to make money off the post-Revolution land in Ohio. Duer managed to help a “secret” group purchase a huge tract of land along the Ohio River. Ultimately, Duer, along with Gen. Henry Knox, were responsible for the original French settlement at Gallipolis by a group of French émigrés.

When the Scioto land speculation went foul (another story) Duer and Knox managed to purchase two million acres of land in Downeast Maine. In the midst of all this Duer was involved in manufacturing and banking speculations. All the speculations went far beyond his means and resources.

The multiple speculations he was involved with brought his downfall and, had it not been for Alexander Hamilton’s intervention, it could have destroyed the new country that had yet to reach its toddler age.

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William Duer was a prominent patriot who served as a member of the Continental Congress, a New York judge, and a signer to the Articles of Confederation. After the Revolution, Alexander Hamilton appointed Duer as assistant secretary of the treasury.

In December 1790 Hamilton proposed the establishment of the Bank of the United States, a federally chartered but essentially private corporation. The charter was passed by Congress in February 1791, and on February 25th was signed into law by President George Washington.

In July of 1791 the bank’s stock subscriptions (scrips) went on sale. They sold out within hours, so quickly that many would-be investors could only try to bid them away from those persons who were fortunate enough to have obtained them. The demand was so high for scrips that a frenzied borrowing and buying  occurred. Soon the scrips’ selling price doubled, then went even higher, and people borrowed money to purchase them.

In October 1791, the stock holders of the Bank of the United States held an organizational meeting, which Duer attended. He was elected to a committee to prepare the bank’s by-laws.

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When Duer learned that federal law prohibited Treasury officials from speculating in federal securities he quit the position as assistant secretary  of the treasury—he did this because he sensed an opportunity to gain wealth from the new bank’s sale of stock subscriptions.

Once Duer was free of being bound by the federal law, he began an aggressive buying spree in both bank and government securities based on his inside knowledge of the Treasury Department.

At the October 31, 1791, meeting the stock holders were to decide whether bank branches would be opened in other cities. Duer was prepared for whichever way the decision would go: he had arranged to sell scrips on November 1st through an agent who was contracted to sell 600 scrips sixty days hence at the highest price possible. To ensure the highest price the agent was to place five or six persons indifferent quarters of the room to bid them up. The agent was directed to stay out of sight.

In late 1791, Duer formed a partnership with a wealthy land speculator , Alexander Macomb. They planned to corner the market on U.S. government securities. They hoped to sell the appreciated assets to other investors at a significant profit.

To pay for the securities Duer borrowed funds from banks and influential/prominent New Yorkers who believed he was privy to the bank’s “inside information” due to of his post in Hamilton’s Treasury Department.

Meanwhile, an audit of Duer’s books at the Treasury Department found $238,000 missing. When Hamilton ordered the Treasury to sue Duer for the money, Duer’s financial empire began to collapse. Duer, found wanting,  attempted to secure additional loans from both the wealthy and the average New Yorker as a way to meet his financial obligations.

The fallout of Duer’s financial fall bankrupted many of his creditors, bankers and brokers, which in turn caused a financial panic o­n Wall Street.

As his financial troubles became known, a powerful group of short-sellers began withdrawing money from one of the primary banks he had both borrowed from and invested in. The bank’s deposit base shrank as its future prospects diminished.

Then two things happened.

  • traders began unloading shares resulting in a further decline to Duer’s holdings.
  • the bank raised the interest rates charged to speculators to 1% a day to compensate for a shrinking deposit base and to avoid a credit crunch.

These two actions forced Duer to liquidate his massive holdings. Selling begot more selling, what today’s market refers to as a death spiral. William Duer’s actions not only caused a collapse in bank stock but his forced liquidations also caused a sharp reduction in the price of government bonds.

These bonds were held largely by ordinary citizens and veterans of the revolutionary war.

Early in March 1792 the market prices started to fall. At a March 24th meeting which Duer was expected to reveal how he was to meet his obligations. By this time he had stopped paying on all his notes.

During the final days before the meeting Duer was a virtual prisoner in his house. Potential callers entered through the back alley.

For his own physical safety, as well for any debt guaranty, several of his creditors had him committed to city prison on March 23. From the sanctuary of his prison cell, he addressed his creditors with a public notice:

  • he promised to pay the principal and legal interest of all debts within nine months
  • he promised to remain in prison until a complete settlement was made—thus offering his body as surety, instead of his word.

By March 9th Duer was insolvent. The next day twenty-five New York financiers were wiped out and forced to close their shops—due to their exposure to him.

While Duer was in debtors’ prison, 24 Wall Street brokers met under a buttonwood tree in 1792 to draw up the first rules to regulate trading.

” ‘Tis time,” Hamilton wrote, “there should be a separation between honest Men & knaves, between respectable Stockbrokers . . . and mere unprincipled gamblers.”

In the early days of our history, stock market skulduggery was a perfectly respectable way to achieve wealth, although not quite as respectable as slave trading or stealing land from the Indians.

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Duer was also involved in subterfuge land speculation in Maine with Gen. Henry Knox, whereby both men purchased one million acre tracts under the name of their land agents. This plot is integral to the historic romance novel I’m continuing to write.

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The events described above emanate from over-leverage and excessive greed, which were as prevalent 200 years ago as they are today.

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ADDITIONAL READING:

What is a Mantua Maker?

AMERICA’S
FIRST MANNED HOT AIR BALLOON

SOURCES

http://fa.smithbarney.com/facilityfiles/sb050124170330_4943b04a-423d-e4e0-49ea25dfe0dc6f93.pdf

http://www.thinkfn.com/wikibolsa/High_and_mighty_crooked

Book: The King of the Alley William Duer by Todd Jones

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