The First Bank Bailout

BANK OF THE US

Quite awhile ago, and I apologize for the delay, I was asked by one of our readers (FT) to do a post about the history of bank bailouts.  I was quite surprised to find that they go back virtually to day one.  I had originally intended to simply create a list, but was astonished by the vast number of panics and bailouts, in banking, commerce, and industry.  It seems we have been corporatist for a very long time.  Below is the first, and probably the most interesting story, given the fact that this one was a virtual economic dual between the Secretary of the Treasury and his assistant. 

In 1791 Secretary of the Treasury, Alexander Hamilton began the conversion of existing US debt to what became known as the “Sixes”, 6% 10 year deferred bonds (Interest would commence in 1801).

On July 4^th 1791 the Initial Public Offering (IPO) for the Bank of the United States took place. The price of sixes rose from 90 at the IPO to 112 by August amid a flurry of speculation.  The price of Sixes then began to fall and by August 17^th had fallen to $100.  Hamilton obtained authorization to purchase $400,000 in US public debt in order to to support the bond market.  He authorized the Bank of New York (of which he was founder) to purchase $200,000 and the US Treasurer in Philadelphia to purchase $150,000 stabilizing the bond market.

Concurrent with the events of 1791 William Duer, Assistant Secretary of the Treasury began a speculative move against stocks held by the Bank of New York and attempted to corner the market on Sixes.  As Duer attempted to drive the price of stocks up, the Livingston family (one of the wealthiest NY families) attempted to drive the price down by withdrawing gold and silver from the banks.  This created a credit squeeze with interest rates soaring to as high as 1% a day.

Meanwhile the Bank of the US (BUS) was suffering from the credit over expansion and its cash reserves declined to $244,000.  In response to the drain on reserves the BUS contracted its discounts by some $620,000. Hamilton transferred public funds from the Bank of New York to the Bank of the United States to keep it solvent.  The price of Sixes dropped from $125 on March 5^th to $95 on March 20^th, a drop of 25% in two weeks.

William Duer imploded, three million in debt, and took refuge in the city jail from the mobs in the streets on March 23rd.  Walter Livingston who had cosigned $200,000 of Duer’s notes soon joined him.  In April Alexander McComb, another Duer associate, defaulted on half a million in stock and joined them in prison. Commerce in New York virtually ceased and land values in Pennsylvania dropped by half.

Hamilton spent the remaining $50,000 authorized in 1791 and requested more authorizations.  He also directed the Bank of New York (he was founder, remember) to purchase up to $1 million in public stock, using the US Treasury to guarantee half the amount.  Total injection by the Treasury into the market came to $243,000.

On May 17^th twenty-four broker-dealers of New York met under a buttonwood tree on Wall Street and signed an agreement to trade with each other on preferential terms… the origin of the New York Stock Exchange.

  

Cheers!

~FINNTANN~