Stéphan Laouadi American Economic History 4/15/2009

The First Bank of the United States

and the Securities Market Crash of 1792

Published in December 2000, in the Journal of Economic History, (Vol. 60, No.4), the article “The First
Bank of the United States and the Securities Market Crash of 1792” was wrote by David J. Cowen,
director at Deutsche Bank and trader in foreign currency. In his paper Dr. Cowen tries to explain why the
security market crash of 1792 happened.
The view generally accepted is to incriminate the investor William Duer for the market crash. Using data
from the balance sheets of the First Bank of the United States (BUS), letters from different major players
and some contemporary press releases, Cowen demonstrates that the security market crash of 1792 was
not the fault of Duer but a miss-management of credit from the BUS and other major banks of this time.
In order to understand perfectly what happened, it’s important to reestablish the situation, the role of
each major player, as well as some basic economic principles.

Some background of the situation 1792

Back in February 1791, the First Bank of the United States was created and charted for 20 years. The
vision of Alexander Hamilton (Secretary of the Treasury) was becoming reality. “The tendency of a
national bank is to increase public and private credit. […] Industry is increased, commodities are
multiplied, agriculture and manufactures flourish, and herein consists the true wealth and prosperity of a
state.1” The BUS was the major player of the financial system at this time, with a fully diluted
capitalization of $10 million (In early 1792, the BUS had collected a capital of $3.125 million. The other
$6.875 million were collected gradually until July 1, 1793. “The Bank issued 25,000 shares at a par value
of$400, with $100 paid in specie, and $300 in U.S. debt securities2”.) Thus, any of its actions got
enormous repercussions on the financial market.

Historians had considered for a long time that the security market crash of 1792 was William Duer fault.
In December 1791, W. Duer with other investors had borrowed an enormous amount of money in order
to speculate on the U.S. debt security and stock market. Although the amount of money Duer had
borrowed is unknown, it appears that contemporaries considered it has being "beyond all description-the
sums he owes upon notes is unknown the least supposition is half a Million dollars. Last night he went to
[jail] “3 (recall that at this time, $500,000 was an extraordinary large sum of money, The BUS collected
capitalization was just more than 6 times Duer’ debt).

1
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1041
2
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1042
3
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1043
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Stéphan Laouadi American Economic History 4/15/2009

Because of the security market crash Duer was ruined, and in the impossibility to pay back his debts, he
ended his life in prison. Nevertheless, new evidence brought forward by Cowen tends to exonerate Duer
from responsibility for the crash.
As noted in Cowen’s paper, “Even at this time individuals were aware of the connection between bank
credit and securities prices4”. During a period of credit expansion, investors are more likely to take loans
and invest in security market, but if credits contract rapidly, investors, without cash in hands to pay back
their loans are obliged to sell their securities. As lots of securities are sold in the same time on the
market, prices fall (Supply and Demand), and if they fall sharply, it’s consider as a “security market
crash”. It’s exactly what happened in the first two quarters of 1792. Security prices had reached a peak in
the late January; start to fall slowly during February, dropped by more than 20% in March. During April
security prices bottomed before recovering slowly in May 1792.

Already in March 1792, Daniel McCormick who was a board member of the Bank of New-York (BONY),
blamed the First Bank of the United States for their credit policy. According to McCormick analysis of the
situation, the BUS had lent too many credits using bank notes during January 17925. Realizing their
errors, the BUS curtailed loans by calling them back and not renewing them6.

In order to assess McCormick’ theory, Cowen first analyzed if the BUS had really flooded the market with
too many bank notes (1st claim of the McCormick’ theory) and if the bank curtailed its loans too rapidly
and too sharply (2nd claim of the McCormick’ theory). In a second part, Cowen tried to understand why
the BUS has changed its credit policy so rapidly .Then in a last part, the author tried to establish if the
BUS was the only responsible, if it has acted in relation with other major banks and who was the one to
blame, if someone has to be blamed.

4
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1044
5
At this time, the lending process involved the creation of Bank notes.
6
At this time, bank loans were issued for 30 days.
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Stéphan Laouadi American Economic History 4/15/2009

Credit Expansion & Credit Contraction

Below are the selected balance sheets of the First Bank of the United States for this period. It gives an
overview of the increase of loans and bank notes between December 1791 and March 1792.

Table 1: Selected balance-sheet items: BUS, Philadelphia7

The 1st claim of McCormick

As we can see in Table 1, at the beginning of its opening, the First Bank of the United States made loans
for a total amount of $964,260. Most of those loans were running over a 30 days period and will have to
be repaid at the end of January.
Also referring to Table 1, it appears that the BUS issued for $886,684 in notes at the end of January. The
amount of bank notes outstanding in late January 1792 was more than 6.5 times greater than what it
was one month earlier.
As the amount of notes was increasing, the amount of loans should have increased too. As we can
notice, the total amount of loans increased from $964,260 in late December to $2,675,441 in late
January. This increased is much larger than the just renewal of the loans ending in January. The total
amount of old and new loans had been multiplied by more than 2.5 times.

Already in January 1792, some contemporaries, other than McCormick reported to the First Bank of the
United States that the amount of notes outstanding was too important. In mid-January 1792, the Boston
Port Collector in a letter from Benjamin Lincoln, informed Alexander Hamilton of the current situation in
Boston. “There are such a flood of them [BUS notes] now here that they are bought up at a depreciated
value by the Gentlemen indebted to us for the payment of their bonds.8”
In late January, it is the director of the Boston branch of the BUS (Not yet opened but in process) who
wrote to the parent bank in Philadelphia, that due to the amount of BUS notes, some Bostonians don’t
accept them anymore.
The same situation was taking place in New-York; the cashier of the Bank of New-York reported to
Hamilton that the BONY was “engulfed” with approximately $100,000 of BUS notes and that, because
speculators were coming to exchange them for specie, the BONY decided to no longer accept BUS notes.

7
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1046
8
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1047
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Stéphan Laouadi American Economic History 4/15/2009

As noted at this time by the broker John Pintard, the BUS loans were for “legitimate business” but were
also accommodating speculators. As explained by Cowen “It is therefore probable that some Bank
borrowers bought debt securities with their loans in order to pay for the debt portion of their
subscriptions to the stock of the Bank, thereby pushing securities market prices higher in January9”

The 2nd Claim of McCormick

Having proved that the First Bank of the United States extended its credit way too far in the early months
of 1792, Cowen tried to find evidence of McCormick second claim, “the BUS rapidly curtailed new loans
during February”. As noted in Table 1, the BUS reduced new loans by 25% moving from $2,675,441 in
end January to $2,051,564 in early March.
Evidence exist that the bank started cutting loans in early February. Clement Biddle (broker in
Philadelphia) wrote on February 2, 1792 that the BUS will soon reduce the amount of loans. In February
15, Biddle already anticipated the reaction on security prices and forecast that “every kind of stock [will]
fall.10”
One other evidence is found on the New-York Daily Advertiser of February 23, 1792 when a writer
explained that the BUS is cutting its loans because of the limited amount of specie available and that
stock prices have artificially gained in volume because of the action of some investors to “monopolize
the debt” but that stock prices will soon collapse.

Cowen analysis of the BUS balance sheets let us understand that loans were not paid back with bank
notes; in fact between February and March 1792, bank notes increased by $5,000. Cowen analysis states
that a small portion of the loans were reimbursed thru deposit account (Individual deposit account fall
from $811,863 in end January to $569,550 in early March). Nevertheless, money in deposit accounts was
not enough to cover the amount of loan called in or not renewed.
In order to pay back their loans, investors had no other choices to sell their securities. Because of the
large amount of stocks sold in the same time, security prices fall, leading to what is known as the security
Market Crash of 1792.
As Cowen shows on his paper, prices fall more rapidly in Philadelphia then spread out to other cities11.
Between January and February, the U.S. 3% bonds fall from by $4.16 in Philadelphia, $1.25 in New-York
and did not moved in Boston. In March nevertheless, this same bonds were trading for more or less the
same prices in all 3 cities.

By this analysis Cowen proved McCormick assumption that the important credit expansion followed by
the rapid credit contraction from the First Bank of the United States had led to the Security Market Crash
of 1792.

9
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1048
10
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1049
11
At this time, communication between Philadelphia, New-York and Boston was not instantaneous, but could have
taken 1 week.
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Stéphan Laouadi American Economic History 4/15/2009

Why the BUS did changed its loan policy so rapidly?

In the second part of his paper, Cowen tried to understand why the BUS has cut its loan policy so sharply
(Recall that loans had decreased by 25% within a month). Several explanations are advanced.
First, as noted by McCormick at this time, the First Bank of the United States had over-issued notes
which had led investors and citizens to trade them at a discount rate, and some banks to no longer
accept BUS notes. It is important to keep in mind that the BUS vision was to create reliable currency.
Because of this lack of trust on BUS notes, the risk was to see them flowing back in Philadelphia in
exchange of specie which were not available in a sufficient volume.
A second factor that led the BUS to cut its credit policy was the coming opening of BUS’ branches in
other cities like Boston. Each branch was assigned with an initial capital of $500,000. If cash on hand and
specie went to decrease significantly, it would have been impossible to operate those new opening.
The last explanation is purely financial. The BUS security system probably alarmed the board of directors.
The ratio loans to capital had most likely exceeded the limit and the BUS did not have other choices than
reducing its loans outstanding and changing its credit policy.

Did Hamilton was the puppeteer?

In the last part of his paper, Cowen asked himself if the Treasury Secretary, Alexander Hamilton was the
one who had coordinated everything.
In a letter wrote to the Bank of New-York ‘cashier on February 10, Hamilton recommended to the bank
to reduce their credit step by step. It is more than probable, that other banks had received the same
recommendation from Hamilton. In mid-February, Clement Biddle (the broker of Philadelphia) noticed
that lot’s of banks (BUS, BONY, Bank of North America), are all restricted their credits in the same time,
which had the effect to increase the demand for money. In March, McCormick wrote that BONY had
stopped since March 7 to lend money to any investors and had asked debtors to pay back a part of their
loans. Balance sheets of the Bank of North America also show that the bank had reduced its loans
creation by half between February and March 10.

All these information create evidence that the credit contraction was not just happening in Philadelphia
but in the entire banking system. The only person who would have been in power to coordinate all banks
was Alexander Hamilton, the Treasury Secretary. Nevertheless, evidences exists that state that the BUS
did not contracted its loans gradually, as required by Hamilton, but sharply as we have seen before. Due
to its dominant position, the action took by the BUS had been followed by all the other banks creating a
shortage of money. Borrowers like Duer who have taken loans in order to buy stocks were not able to
contract other loans, and were asked to pay back their debt (recall that loans were running for 30 days).
The only solution was to sell their stocks leading to an excess in supply and creating the Security Market
Crash of 1792. Investors like Duer were ruined.

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Stéphan Laouadi American Economic History 4/15/2009

Did we learn from our previous mistakes?

In his conclusion, Cowen re-estates the main points of his article:
- The First Bank of the United States had created too many loans.
- The lack of confidence in BUS notes forced it to reverse its position rapidly.
- Alexander Hamilton was the only one able to coordinate all the banks.

The article ends with some comparisons of the security market crash of 1792 with some other important
market crashes.
The one from 1792 differs from 1819 and 1929 by the fact that in 1792 no recession neither depression
had followed the crash. But the market crash of 1792 was similar to the one of October 1987 because of
their rapid declined, and rapid recovery. In both cases, authorities reacted by injected liquidities in the
market.
The last sentence of Cowen’s article states that “History in 1987 was in some form, therefore, repeating
events from 195 years earlier at the beginning of our financial markets.12”

12
Cowen, D. J. (2000). The First Bank of the United States and the Securities Market Crash of 1792. The Journal of Economic
History , 1058
6