Tuesday, November 6, 2012

The First Bank Bailout


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 4th 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 17th 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 5th to $95 on March 20th, 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 17th 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.



FreeThinke said...

Fascinating, indeed, -- especially to those who are tempted to imagine the late-eighteenth and early nineteenth centuries to have been halcyon days where honest men, united by A Great and Noble Sense of Purpose, reigned lightly and elegantly free from the taint of manipulation and corruption.


As always, "Plus ca change plus ca la meme chose."

All I can say is that at least they put the perpetrators in JAIL in those not-so-good old days. Today, complain though we may of their misdeeds, we tend more to make folk heroes of miscreants -- or worse yet -- place them in high office.


That said, I'd make another request of you, sir.

Why don't you give us all a lesson -- or better yet a SERIES of lessons -- revealing your methods of doing research? It's impossible to believe you simply KNOW all this stuff, and retrieve from the extensive file cabinets that fill all corners of your mind.

Seriously, you are probably more adept at fact-finding than anyone I've ever run across in cyberspace. If you'd care to reveal your methodology, I'm sure I would not be the only one happy to try to benefit from your expertise.



Ducky's here said...

"When I die, I want to come back as the bond market. You can scare anybody."

--- some politician

Bunkerville said...

Fascinating piece..thanks.

Anonymous said...

The money changers and speculators have always been with us, haven't they?

Silverfiddle said...

In case anyone is wondering why I posted Finn's piece today, it is because I have no idea how the election will turn out, so I figured I would at least post something informative.

Ducky's here said...

The money changers and speculators have always been with us, haven't they?

One of them is running for prez with your blessing.

Silverfiddle said...

One of them is running?

You can't be that naive, Ducky. President Obama has never met a Wall Street fat cat he didn't like (and squeeze some campaign cash out of).

Ducky's here said...

Not naive, Silver. He can be bought but Mittens, now there's a money changer and speculator.

Jersey McJones said...

The first bank bailout? There were plenty of them long, long, long before America was even a word.

I think sometimes we isolate ourselves from our ancestral cultures and insulate against their contemporary stories.

Government manipulation of general economies is as old as there have been "general economies" and older. After all, you can't have a "general economy" without some kind of government that has some kind of power over it.

When you study history, even just a little, one of the first things that stand out is the significance of governments relationships with economies. It is a pillar of understanding of all late human history.

The first bailout?

I'd guess the best example would be the metal changes in the coins of the ancient world.


Finntann said...

@The first bank bailout?

Right you are Jersey, but, and perhaps I didn't make it clear, the context was within the history of the United States.

FT: I'll see what I can do, but I do an awful lot of regulatory and standards research in my job, so I have quite a bit of practice at it. I've never actually sat down and documented the process. I'll see what I can do.


Divine Theatre said...

Which came first? The chicken or the egg?


FreeThinke said...


It might pay you to write a "friendly" textbook on the subject.

I'm quite serious.

Lots of people have little or no idea ho to find the kind of information you routinely supply, because we don't know precisely what to ask for, I suspect.



Jersey McJones said...

Oh, and those metal changes, were often democratically and even republically approved by the people and often for their own good.

It goes to show, there can be ups and downs to everything in history. Whatever the case, what's done is done and it's best to deal with it rather than just tip the cart over.


Ducky's here said...

They're calling it for Obama.

Dems looking good in the Senate.

Ducky's here said...

I love the smell of napalm in the morning.

Baggers got the shit beat out of them. It's over.

Finntann said...

Ducky, might be a technical, but I'd hardly call it an ass whoopin.

Not that it matters, but Romney is still up in the popular vote... hardly a ringing endorsement and mandate to govern.

Face it, nothings changed, we're screwed.

Beamish... and how many votes did your candidate get?

Ducky's here said...

Fintann, he was ripe and should have been taken easily.

You probably lost two Senate seats because of those knuckle dragging "Rape is God's will" goons.

The Baggers cost conservatives the presidency (and by extension the court) and the Senate.

The purge starts tomorrow. People have had enough of this fundamentalist Bagger crap.

(((Thought Criminal))) said...

Beamish... and how many votes did your candidate get?

Enough to defog your hindsight goggles and make you doubt the efficacy of running the founding father of gay marriage as a "conservative."

Z said...

it's astonishing how close this election was, considering how the media was so in the bag.
Imagine they didn't even tell on Obama for warning companies not to issue pink slips till after the election and then offering to pay their fines when they had to fire people in untimely manners?

I'd take a "money changer and speculator" over someone who'd SCREW AMERICANS like THIS ANY time...
if only America'd heard so much about Obama. Take a good hard look at the counties which went Blue...very telling.

We got Congress, thank GOD.....another four years of gridlock (if you don't count Obama's sneaking things behind Congress' back and never consulting with them...oh, and not counting his appointing Eric Holder to the SCOTUS in about 2 months; I'm guessing at least 2 justices waited till after the election to finally step down from old age.)

Good job, America...sorry you won't know what hit you for a while; but YOU WILL.

Ducky's here said...

Yeah z, the press was the reason Mourdock and Akin were kicked to the curb.

The press is the reason Tammy Duckworth punched bagger favorite Joe Walsh's face in.

The press is the reason Elizabeth Warren and Tammy Baldwin won.

The press is the reason Ayn Ryan couldn't deliver his home state.

The electorate just didn't have your vision.
You got your butt kicked because the Baggers were repudiated. America is sick of the crap.

I feel blessed in New England. We have virtually purged the Bagger crap. Kelly Ayotte will probably be kicked to the curb in New Hampshire next election and that will be that.

Now when do you start whining about voter fraud. Start it all again to remind us you haven't learned a damn think.


Screw Breitfart. It's over.

Ducky's here said...

After blowing hundreds of millions of Koch dollars on an election and getting annihilated I'm guessing Karl Rove got fired tonight.

Silverfiddle said...

Fintann, he was ripe and should have been taken easily.

Ducky is right, all the way down the line.

Especially this line:

The purge starts tomorrow. People have had enough of this fundamentalist Bagger crap.

Obama's going to be punishing a lot of enemies this next four years.