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Alexander Hamilton, Central Banker: Crisis Management during the U.S. Financial Panic of 1792

Published online by Cambridge University Press:  14 April 2011

Extract

Most scholars know little about the panic of 1792, America's first financial market crash, during which securities prices dropped nearly 25 percent in two weeks. Treasury Secretary Alexander Hamilton adroitly intervened to stem the crisis, minimizing its effect on the nascent nation's fragile economic and political systems. U.S. policymakers soon forgot the crisis-management techniques Hamilton invented but failed to codify. Many of them were later rediscovered and became theoretical and practical standards of modern central-bank crisis management. Hamilton, for example, formulated and implemented “Bagehot's rules” for central-bank crisis management eight decades before Walter Bagehot wrote about them in Lombard Street.

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Copyright © Harvard Business School 2009

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References

1 Davis, Joseph Stancliffe, Essays on the Earlier History of American Corporations (Cambridge, Mass., 1917), 1: 278–345.Google Scholar More recent discussions of the panic include Cowen, David J., The Origins and Economic Impact of the First Bank of the United States, 1791–1797 (New York, 2000), 89136Google Scholar; Cowen, David J., “The First Bank of the United States and the Securities Markets Crash of 1792,Journal of Economic History 60 (Dec. 2000): 1041–60CrossRefGoogle Scholar; Matson, Cathy, “Public Vices, Private Benefit: William Duer and His Circle, 1776–1792,” in New York and the Rise of American Capitalism: Economic Development and the Social and Political History of an American State, 1780–1870, ed. Pencak, William and Wright, Conrad E. (New York, 1989), 72123Google Scholar; Sobel, Robert, Panic on Wall Street: A History of America's Financial Disasters (New York, 1968), 831Google Scholar; Sterling, David, “William Duer, John Pintard, and the Panic of 1792,” in Business Enterprise in Early New York, ed. Frese, Joseph and Judd, Jacob (Tarrytown, N.Y., 1979), 99132.Google Scholar

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4 Numerous studies attest to America's early diversity. Good starting places for readers interested in such issues are Fischer, David H., Albion's Seed: Four British Folkways in America (New York, 1989)Google Scholar, and Ireland, Owen, Religion, Ethnicity, and Politics: Ratifying the Constitution in Pennsylvania (University Park, Penn., 1995).Google Scholar

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22 A “put” is an option to sell an asset at a price set earlier. If purchasers of assets believe that public authorities, such as finance ministers or central bankers, will not allow prices of assets to fall below some particular level, they might think they have such a put option and hence speculate more recklessly.

23 PAH, 9: 122,176.

24 PAH, 9:82,184–85.

25 PAH, 9: 202–3.

26 In terms of the national debt of 2008, that would correspond to an open-market purchase in one month of some $100 billion, a very large amount indeed.

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30 Cowen, Origins and Economic Impact, 93.

31 Discounts could exceed monetary liabilities because the BUS lent some of its capital as well as lent by creating monetary liabilities.

32 PAH, 10: 525.

33 Ibid., 528–29.

34 Ibid., 562–63.

35 Ibid., 580.

36 PAH, 11:18.

37 Ibid., 28.

38 Cowen, Origins and Economic Impact, 93.

39 Ibid.; PAH, n : 112–13.

40 PAH, 11: 126,131.

41 Ibid., 157.

42 Ibid., 155.

43 PAH, 26: 651–52, a letter that surfaced after publication of PAH 11 in 1966.

44 PAH, 11: 214–16.

45 Ibid., 172–73.

46 Ibid., 193.

47 Ibid., 224–25, n2.

48 Ibid., 158–61, 172–75,193–94; McDonald, Forrest, Alexander Hamilton: A Biography (New York, 1979), 244–49.Google Scholar

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50 Bagehot, Walter, Lombard Street: A Description of the Money Market (London, 1873), 9697.Google Scholar

51 Ned Downing, a collector of scripophily and former stockbroker, owns Hamilton's original letter, which is missing in PAH. Downing several years ago graciously shared the letter with the authors before publishing it (with a typo–“? per Centum” instead of “7 per Centum”) in an appendix to the chapter he contributed to Goetzmann, William N. and Rauenhorst, K. Geert, eds., The Origins of Value (New York, 2005), 271–98.Google Scholar

52 PAH, 11:194–95.

53 PAH, 26: 663, another letter that surfaced after PAH 11 was published. Emphasis added.

54 Davis, Essays, 309–10.

55 PAH, 11:190–92.

56 PAH, 26:665.

57 PAH, 11: 263; 26: 665–68.

58 PAH, 11: 225, 257–58, 263–64.

59 Ibid., 266, 272–73.

60 Ibid., 288–91.

61 Elliott, Funding System, 197.

62 Davis, “A Quantity-Based Annual Index”; Johnston and Williamson, “What Was the U.S. GDP Then?”

63 See Cowen, Origins and Economic Impact, 153–59.

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