the richest man in america goes bust -- 10/1/18

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Today's selection -- from A Nation of Deadbeats by Scott Reynolds Nelson. In the early years of the United States, William Duer was the richest man in the country and had been tapped to be Alexander Hamilton's assistant at the new Department of the Treasury. But he resigned in order to try a massive bond gambit to further increase his wealth, and instead brought about the young nation's first financial crisis and landed in debtor's prison:

"In less than a year [after being founded, the First Bank of the United States] faced its first crisis. It began in 1792 after Hamilton's former assistant William Duer resigned from the Treasury to concoct a scheme to corner the market on U.S. 6 percent bonds. The response to Duer's actions among Democrats and some of his financial competitors almost destroyed American banking.

"[Due to a series of international events, Duer concluded] ... that bond prices would have to rise. ... He bought thousands of bond futures; indeed he hoped to corner the entire market on U.S. bonds available in New York, a market of more than $2 million [using borrowed funds. It was an enormous sum at the time]. If the bond price went up, then he would make the difference between the January and the April price, having put no money down; if the price went down, he would owe mil­lions more than he had. In the language of the market he was a 'bull. '

"But by February 1792, Duer was in hot water. The previous fall he had received a lucrative military contract to supply General Arthur St. Clair's expedition against the Indians of the Western Confederacy led by Little Turtle. Duer's agents failed, and failed so spectacularly as to endanger the future of the Republic. They had provided broken packsaddles, insufficient forage, and wet gunpowder; the only provi­sions that were serviceable, apparently, were the drams of whiskey that Duer's contractors secretly sold directly to the troops.

"When St. Clair's army was overwhelmed in November 1791 in what is now western Ohio, Little Turtle's army killed more than six hundred men. Some of them were burned alive, according to retreating soldiers. It was the worst defeat in the history of the U.S. Army and an enor­mous setback for those who imagined that the United States could confidently blaze a trail over western Indians. By early February, word of Duer's role in the catastrophe had drifted back to North Carolina, New York, and New England. It was also a personal embarrassment to Duer that would undermine the bankers' trust in a man who had bor­rowed more than $2 million on bull market operations.

"On February 2, the North Carolina congressman John Steele asked that a congressional committee be formed to investigate whether 'scar­city of provisions and forage' and 'the quality of the powder' had been responsible for the defeat. It was a direct attack on Duer, and it set off the first congressional investigation in U.S. history. In addition, Presi­dent Washington, alarmed by the defeat and the clamor in Congress, summoned his secretaries of state, war, and treasury to determine how to respond to Duer's mismanagement. This became the first cabinet meeting in U.S. history. By mid-February, his reputation in tatters, Duer could not get credit with his regular lenders for his scheme to buy up the 6 percent bonds. He resorted to borrowing sums as little as $500 from those small lenders, like Mrs. Macarty, who would soon be surrounding his jail.

"Duer's reputation was not his only problem. Democrats connected with Chancellor Robert Livingston countered Duer's scheme by try­ing to withdraw large quantities of gold and silver from the Bank of New York in late January. The move was simultaneously financial and political, the first 'bear raid' in American history. When Democrats withdrew gold and silver, the banks lacked specie, and they called in their notes [from Duer]. 'I cannot describe to you,' wrote one of Duer's associates to another, 'the serious effect this great & unexpected depreciation of the moment occasioned.' Duer's purchases of U.S. bond futures depended on his pristine public reputation and his preferential access to bank credit. Little Turtle destroyed his reputation; New York Dem­ocrats destroyed his credit. His notes were due, his credit had been impeached by the by the St Clair disaster, and he had no cash. On March 9 he suspended payment to his creditors.

"Duer's mostly Democratic competitors understood that a run on the New York banks could destroy his heavily leveraged fortune. They did not see that a bank panic [would lead to a national economic crisis, and damage all the individuals that lent to him]."

author:	Scott Reynolds Nelson
title:	A Nation of Deadbeats: An Uncommon History of America's Financial Disasters
publisher:	First Vintage Books Edition, June 2013
date:	Copyright 2012 by Scott Reynolds Nelson
pages:	26-28