Echoes Dispatches From Economic History
Sex, Insider Trading and the First U.S. Financial Panic: Echoes
One of the strangest pamphlets ever authored by an American public official appeared in 1797. Written by Alexander Hamilton -- a founding father and the first U.S. Secretary of the Treasury -- its title constituted a mini-essay in its own right.
It was called: "Observations on Certain Documents Contained in #s 5&6 of 'The History of the United States for the Year 1796,' in which Charges of Speculation Against Alexander Hamilton, Late Secretary of the Treasury, Is Fully Refuted by Himself."
The pamphlet had two purposes. First, Hamilton did something virtually inconceivable today. In an act of public humiliation, he apologized to his wife for carrying on an affair some years earlier when he was Treasury Secretary. He admitted that he bribed the woman's husband, James Reynolds, not only to hush up the assignation but to allow it to continue; in effect, Reynolds became his wife's pimp. Hamilton begged his own wife's forgiveness. This was a shabby business, to understate the situation.
But Hamilton's second purpose was to engage matters of state and questions about the future of the U.S. economy and the fate of the Revolution.
James Reynolds was a low-life, an obscure, frustrated place-seeker, who in the early 1790s befriended a New York aristocrat named William Duer. The son of mid-level British gentry, Duer had both supported the American Revolution and made a lot of money off it, sometimes by selling the Continental Army shoddy supplies, sometimes by holding foodstuffs and other essentials off the market to inflate prices.
He was, in other words, a distinctly American type: an aristocrat with his eye on the "main chance." When the new nation was born, Duer, along with other wealthy merchants and landowners, thought he spied "the next big thing."
When Hamilton assumed his post at the Treasury, he laid out a plan for the nation's economic future roughly modeled on the state-directed merchant capitalism then thriving in Britain. The first and most important step, he argued, was for the new federal government to issue bonds that would assume at face value all the accumulated debt of the revolutionary and post-revolutionary years issued by the Continental Congress and the states.
Hamilton thought this would boost the economy by attracting capital -- especially from abroad, where investors might otherwise have been too fearful to bet on what was, after all, an underdeveloped country.
Duer and his confederates had a narrower vision. For them the newly issued national debt could become an arena of speculation in which they thought they had an edge. These men became the perpetrators of what might be called the nation's first insider-trading scheme and in the process precipitated its first financial panic in 1792.
Duer had served as a financial official under the Articles of Confederation, which preceded the U.S. Constitution. He was also distantly related to Hamilton through marriage. Although Hamilton didn't entirely trust Duer, he appointed him to a post in the Treasury Department. Duer tried to use this access to gain information on how the Treasury was going to price various bond issues before it became public.
During his brief tenure as an assistant Treasury secretary, Duer also hired Reynolds, hoping perhaps to make use of his access to Hamilton. Whatever information he did glean didn't come from Hamilton, who in many respects (if obviously not in all) was a man of great integrity, and who had earlier warned Duer against engaging in reckless speculation.
In the end, Duer and his clique heavily leveraged their investment in these government securities. To finance his attempt at cornering the market in the government's new issue of 6 percent bonds -- Duer and his group came to be known as "the 6 percent club" -- he borrowed heavily at usurious rates from his associates, sold his family's estate in New Jersey and even dipped into the funds of a public lottery for which he functioned as a trustee.
When the scheme unraveled, he went bust. The whole New York City economy went down with him as real-estate prices collapsed, credit dried up and house-building stopped. The general distress spread from businessmen to "shopkeepers, Widows, orphans, Butchers, Cartmen, Gardeners, market women, and even the noted Bawd, Mrs. McCarty."
Duer was chased through the streets by an enraged mob and probably would have been disemboweled or hung had the police not arrived to haul him off to debtor's prison, where he died a few years later.
For men like Thomas Jefferson and James Madison, all of this -- the adultery, the blackmail, the financial conspiracy and panic -- offered a pretext for waging a more fundamental war against Hamilton's vision of the nation's future. Encouraging stories about Hamilton's sexual and financial transgressions would, they hoped, alert Americans about the moral and political dangers awaiting any society grounded on money-making.
They had known about Hamilton's sexual transgression for years, probably didn't care that much, and were hardly immune to such behavior themselves. And it's unlikely that they thought Hamilton had passed on inside information to Duer. What they did care about was Hamilton's desire to see the U.S. become like Britain -- that is, a powerful urban, mercantile and even industrial society, one prey to all the ills of class stratification, corruption, poverty and inequality they associated with the Old World. Such an order, they believed, would inevitably undermine the democratic accomplishments of the Revolution by leaving impoverished masses under the influence of their economic and social superiors.
They denounced Hamilton's followers as "monied aristocrats," "licentious speculators" and closet monarchists. And they decried Hamilton's hardly secret elitist political inclinations (he was disposed toward a lifetime presidency, for example) .
For his part, Hamilton grew to think of his opponents as Jacobin terrorists and revolutionaries. His "Reynolds" pamphlet warned of "mobocracy," of levelers whose vision of an egalitarian small-holder agrarian republic was a mask for the resentments of debtors and destined to keep the U.S. in a state of permanent dependency on the great powers of Europe.
Duer's panic and the ferocious name-calling between Hamiltonian federalists and Jeffersonian democrats signaled an underlying ambivalence about the import of an incipient commercial civilization. Was it pimping for monarchy or incubating the glorious birth of a rich and powerful republic? Was it a cockpit of counter-revolution or a modern engine of economic and political progress?
Americans would again and again engage this debate in the generations to come.
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