Wall Street’s First Collapse (Winter 2009 | Volume: 58, Issue: 6)

Wall Street’s First Collapse

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Authors: Thomas Fleming

Historic Era: Era 3: Revolution and the New Nation (1754-1820s)

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Winter 2009 | Volume 58, Issue 6

Wall Street’s first bubble swelled burst in the spring of 1792, exerting a profound effect on American politics and society. Nine years after the Treaty of Paris and the acknowledgement of the former colonies— independence, both Europe and America lay in turmoil. The French Revolution was showing its first symptoms of radical violence. In March an assassin’s bullet felled Sweden’s King Gustav III, who had called for a crusade against France. In the United States, President Washington struggled to fight a war against British-backed Indians in the Midwest. Closer to home, a savage feud had exploded between his secretary of state, Thomas Jefferson, and his secretary of the treasury, Alexander Hamilton.

In spite of strenuous opposition by the supporters of Jefferson, Hamilton had persuaded Congress to set up a financial system designed to rescue the Republic from the humiliating bankruptcy that had almost destroyed the nation after the Revolution. In 1791 Congress chartered the Bank of the United States with the intention that it would buy up the millions of dollars in promissory notes issued by the Continental Congress when its paper money became worthless in the final years of the Revolution. “A public debt,” Hamilton said, “was a public blessing.” It could be used to pump new life into the all-but-dormant American economy. The Jeffersonians accused the secretary of trying to turn the new nation into a mirror image of Great Britain, which was not far from the truth.

Hamilton did not inspire confidence in average Americans. Born illegitimate in the West Indies, he had served as General Washington’s chief aide-de-camp during the Revolution. The public neither saw nor appreciated his contributions. As the war ended, he married a daughter of Gen. Philip Schuyler, one of the nation’s richest men. In the struggle to create a new constitution and federal government, he had displayed a no-holds-barred political style and a disdain, even contempt, for popular government. Hamilton regarded democracy as a “disease,” dangerous to the nation’s stability.

After winning the brawl over the bank, Hamilton and his followers clashed further with the Jeffersonians over how to deal with the debt. Haunted by the memory of the financial collapse of the 1780s, Hamilton decided to concentrate the wealth of the new republic in the hands of a relatively few men so that the nation would have capital when and if it was needed. He decided to buy at par value the millions of dollars in promissory notes that the bankrupt Continental Congress and state governments had issued to soldiers, farmers, and others who had supported the revolution.

Hamilton knew that much of this federal debt was already in the hands of speculators. Most of the original holders of government paper had long since given up any hope of being paid its full value. They had either stuffed their certificates in drawers and forgotten them or sold them at heavy discounts. Hamilton permitted— and perhaps collaborated in—leaking his plan to numerous wealthy Americans. Chief among the leakers was