Panic of 1792 facts for kids
The Panic of 1792 was a big financial problem that happened in the United States in March and April 1792. It was caused by too much credit (money lent out) from the new Bank of the United States. It was also caused by a lot of risky investing, called speculation, by bankers like William Duer and Alexander Macomb.
These bankers tried to make the prices of US government debt securities (like special government IOUs) and bank stocks go up. But they couldn't pay back their loans, which made prices crash. This caused a "bank run," where many people rushed to take their money out of banks. At the same time, the Bank of the United States made it harder to get loans, which made the panic even worse.
Secretary of the Treasury Alexander Hamilton stepped in to help. He gave banks in the Northeast a lot of money. They used this money to buy securities, which helped the market calm down by May 1792.
How the Bank of the United States Started
In December 1790, Alexander Hamilton suggested creating the Bank of the United States. In February 1791, President George Washington agreed, and the bank was allowed to open.
To buy a share (called a "scrip") in the bank, investors first paid $25. They then had to make three more payments of $375 each over 18 months. These payments had to be 25% in gold or silver coins and 75% in US government debt securities.
Many people wanted to buy shares in this new bank. The price of these shares quickly went up. In New York, a $25 share reached $280. In Philadelphia, it was even higher, over $300 by mid-August.
However, these high prices couldn't last. Within days, prices started to fall fast. Hamilton acted quickly to fix this. He worked with William Seton, who managed the Bank of New York. Hamilton allowed the government to buy $150,000 worth of public debt in New York. This money came from government income.
By September 12, prices had recovered. Hamilton's actions not only made the market stable again but also built a strong working relationship with the Bank of New York. This partnership would be very important in stopping the Panic of 1792.
Why the Panic of 1792 Happened
In late December 1791, the prices of securities started to rise again. But then, in March 1792, the market crashed. This made many investors panic and pull their money out of the Bank of the United States.
One main reason for this sudden rush was a failed plan by William Duer, Alexander Macomb, and other bankers. Their plan was to use huge loans to control the market for US government debt securities. They knew other investors needed these securities to pay for their shares in the Bank of the United States.
Duer and Macomb also created their own credit by agreeing to pay each other's debts. They hoped to start a new bank in New York that would be bigger than the existing Bank of New York.
But on March 9, 1792, Duer stopped paying his lenders. He also faced legal problems from his time as Secretary of the Treasury Board in the 1780s. As Duer and Macomb couldn't pay their debts and faced serious trouble, the price of securities dropped by more than 20% in just a few weeks.
The Panic of 1792 got worse because the Bank of the United States suddenly limited its loans. When the Bank of the United States first opened in December 1791, it lent out a lot of money. By January 31, 1792, it had lent out about $2.68 million, which was a huge amount back then.
Risky investors used this new source of loans. They used it to take money out of the Bank of New York, which put a lot of pressure on that bank's money reserves. From December 29 to March 9, the Bank of the United States' cash reserves dropped by 34%. This made the bank decide not to renew almost 25% of its 30-day loans.
This forced many people who had borrowed from the Bank of the United States to sell other investments they owned to pay back their loans. This caused the prices of these other investments to fall sharply, making the financial panic even worse.
How the Crisis Was Handled
In mid-March 1792, Treasury Secretary Alexander Hamilton started working to control the financial crisis. This crisis was affecting markets all over the country.
The law that created the Bank of the United States also set up the Sinking Fund Commission. This group was in charge of solving financial problems. Its members were Vice President John Adams, Secretary of State Thomas Jefferson, Attorney General Edmund Randolph, Chief Justice John Jay, and Secretary of the Treasury Alexander Hamilton.
On March 21, 1792, with Jay not present, the commission was split on whether to allow the government to buy securities in the open market. Hamilton had heard from William Seton that the Bank of New York was in trouble. He wanted the government to buy securities, just like it had in 1791. But Jefferson and Randolph were against it.
While waiting for Jay's vote, Randolph started to agree with Hamilton on March 26. With only Jefferson still disagreeing, the commission allowed $100,000 to be spent on buying securities.
Hamilton sent several letters to Seton at the Bank of New York. In these letters, he suggested ways to make the securities market normal again. Hamilton encouraged the bank to keep offering loans, using US government debt securities as collateral (something of value given to secure a loan). He suggested a slightly higher interest rate of seven percent instead of six.
To convince the Bank of New York to lend money during the panic, Hamilton also promised that the US Treasury would buy up to $500,000 of securities from the bank if it ended up with too much collateral. Hamilton also supported the Bank of Maryland's lending by offering to have the US Treasury cover loans made to merchants who were paying duties (taxes).
By April 16, Hamilton allowed the Bank of New York to buy an additional $150,000 of securities. Seton then reported that the market was returning to normal.
In less than a month, Hamilton was able to make the securities market stable again. He stopped the panic from causing a major economic downturn. By using his power as Secretary of the Treasury and convincing several banks to keep lending money during the crisis, Hamilton limited the government's debt purchases to $243,000. This was about $100,000 less than what was spent during the smaller panic in 1791.
