Panic of 1792

The Panic of 1792 was the first major financial crisis in the United States, a dramatic boom-and-bust cycle centered on the newly formed American financial markets. Think of it as the original Wall Street scandal, complete with rampant speculation, shady dealings, and a government bailout. The crisis was orchestrated by a high-flying financier named William Duer, a former Treasury official who used inside knowledge and massive loans to try and corner the market on new government securities and bank stocks. When the credit spigot was turned off, Duer’s scheme imploded, dragging down banks, merchants, and investors with him. The panic threatened to derail the young nation’s economy until Alexander Hamilton, the nation's first Treasury Secretary, stepped in. In a move that would set a precedent for centuries to come, Hamilton intervened to inject liquidity back into the system, effectively acting as a one-man central bank to calm the markets and contain the damage. The Panic of 1792 is a foundational story in American finance, offering timeless lessons on the dangers of leverage, greed, and the herd mentality.

After the Revolutionary War, the United States was a fledgling nation with a messy financial system. Alexander Hamilton's brilliant and controversial plan was to create a modern economy. He consolidated the states' debts into a single federal debt and established the nation's first central bank, the Bank of the United States (BUS). Suddenly, there was a whole new world of assets to buy and sell: US government bonds and shares of the BUS. This created the first American stock market, centered on Chestnut Street in Philadelphia and a certain buttonwood tree in New York. Investors, both domestic and foreign, were excited. The promise of a stable, growing US economy made these new securities incredibly attractive.

Enter William Duer, a charismatic speculator and Hamilton's former number two at the Treasury. Duer saw an opportunity for a spectacular profit. After leaving his government post, he formed a syndicate of wealthy investors with a simple, audacious goal: to use borrowed money to buy up as much government debt and BUS stock as possible, drive the prices to the moon, and then sell to a new wave of eager buyers. This is a classic cornering-the-market scheme, fueled by extreme leverage. Duer and his cronies borrowed aggressively from anyone who would lend, creating a whirlwind of speculation. Stock prices for the Bank of the United States, for example, soared from their initial offering price of $25 to over $300 in a matter of months. Confidence was high, credit was easy, and it seemed like the party would never end. Everyone wanted in, from seasoned merchants to everyday artisans, all chasing quick riches.

In March 1792, the music stopped. The Bank of the United States, seeking to curb the speculative frenzy, began to tighten credit. This was a disaster for Duer, whose entire empire was built on a mountain of short-term loans. Unable to borrow new money to pay off his old debts, he defaulted. His failure triggered a catastrophic chain reaction.

• Stock Crash: As news of Duer’s collapse spread, the prices of the securities he had propped up plummeted by over 25%.
• Bank Failures: Banks that had lent heavily to Duer and his syndicate found themselves with massive losses and faced a full-blown bank run as terrified depositors rushed to withdraw their cash.
• Economic Contagion: The panic spread from Wall Street to Main Street. Commercial activity ground to a halt, businesses failed, and Duer, along with many of his associates, ended up in debtors' prison.

Watching the chaos unfold from the nation's capital in Philadelphia, Alexander Hamilton knew he had to act fast to prevent the crisis from destroying his entire financial system. His response was decisive and ingenious, establishing the playbook for future financial crisis management.

1. Open-Market Operations: Hamilton authorized the Treasury to buy government securities on the open market. This had a dual effect: it supported falling bond prices and, more importantly, injected much-needed cash (liquidity) into the panicked banking system. This was an early form of what we now call quantitative easing.
2. Lender of Last Resort: He coordinated with other banks, encouraging them to continue lending to solvent firms against good collateral (like US bonds) while cutting off the reckless speculators. This helped separate the “good” borrowers from the “bad” ones, restoring a measure of confidence.

Hamilton’s intervention worked. By mid-April, the panic had subsided, and the markets began to stabilize. He had successfully saved the financial system from its first great test.

The Panic of 1792 might be ancient history, but the human behaviors that caused it are timeless. For the modern value investing practitioner, it offers several powerful reminders.

• Speculation is Not Investing: Duer wasn't investing in the future of the United States; he was gambling on short-term price movements with borrowed money. True investing, as Warren Buffett preaches, is about understanding a business's intrinsic value and buying it at a sensible price, not betting on market psychology.
• Fear and Greed Never Change: The speculative mania that gripped New York in 1791 looks a lot like the dot-com bubble of 1999 or the crypto craze of recent years. Human nature is the one constant in financial markets. Understanding this helps an investor remain disciplined when others are losing their heads.
• Beware of Leverage: Borrowing money to invest amplifies both gains and losses. As Duer's story shows, leverage can turn a bad situation into a catastrophic one with breathtaking speed. A prudent investor uses debt sparingly, if at all.
• Crises Create Opportunities: While others were panicking, Hamilton was calmly buying. For investors with cash and courage, market panics can be the best time to buy great assets at bargain prices. When the world is selling, the value investor starts looking for things to buy.