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U.S. History/IPO of the Bank of the US - Pt. 3


QUESTION: Sorry that I haven't rated your last answer yet. For whatever reason, I never received an e-mail notification for it - which is much of why I'm getting back to you so late - and I'm not sure of any way to rate answers without going through e-mail. If you know of a way to sort this out, then I'd be happy to give you a perfect rating.

I have been a little confused though, about your statement that Hamilton stopped the 1791 financial crisis by buying scrip, as I thought that he did this by buying government securities - did he buy both?

ANSWER: Sorry, you are correct.  I misspoke.  Hamilton bought up US securities, i.e. depreciated government debt in order to restore credit and end the panic.  He did not purchase Bank script.

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QUESTION: Ah, okay.

I guess I'm still a tad confused about how buying US securities restored credit though.

The cause of the 1791 panic, you've said, was essentially that speculators couldn't pay back loans that they had taken out to buy scrip. And so lenders became a lot tighter about extending credit.

Did Hamilton stop the panic by getting money back into the hands of the creditors (which would suggest that he either focused on buying securities directly from the creditors or that he focused on buying securities from speculators, so that said speculators could pay back the creditors)? That seems like the most *direct* way that the negative effects could have been reversed, but perhaps such a solution would be oversimplifying the problem.

ANSWER: When credit tightens and prices fall, investors stop buying.  No one wants to buy securities in a market that is falling since the purchase will be worth less the next day.  As a result, the market continues to collapse even further.

When the government started purchasing the securities on the public market, investors quickly realized that the prices would not continue to fall because the government was willing to buy all securities at the current price.  That gave investors the confidence to get back into the market themselves since there was little risk of further falling prices and the expectation that prices would begin to rise again.

So it was not a matter of getting money in the hands of speculators.  It was a matter of restoring confidence in the market that prices would not continue to drop.  There were speculators with money.  They just needed to be encouraged to invest again.

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QUESTION: I feel kind of silly asking a follow up question about this so long after the fact, but the summer has been incredibly busy for me, and I haven't had the chance to further my history learning until now.

It sounds to me like you're saying that the primary cause of the 1791 financial crisis was a drying up of credit, which was caused by speculators being unable to pay back loans (that had been taken out to buy scrip). When credit became less available, prices began to fall - this makes sense to me. I can see a clear correlation between less available credit and falling prices. There may be nuances that I'm unaware of, but on a basic level, if people can't take out loans, they won't have as much spending money, which means that demand will decrease - so of course prices will have to decrease as well.

But then, you're saying that Hamilton reversed these falling prices by buying securities. I can see how buying up securities would protect the value of *securities*, but am struggling to see how this had broader ramifications. In basic terms of cause and effect, how does buying up securities impact prices across the economy as a whole? I could venture a guess or two, but it would probably be simplest to just let you explain it, haha.

Thank you for all the help that you've been! Hope that you've been having a great summer!

P.S. - Do you know of any books that discuss the Bank of the US in detail? All of these questions originally stemmed from a George Washington biography, which although quite long, only touches on the topic briefly. I assume that a Hamilton bio might go into a little more depth about it, or perhaps there are some good books written specifically about the BUS. I feel like you've helped me gain a pretty solid framework for this, but would love to know if you have any recommendations for further reading.

One thing you have to remember was how small the US economy was in 1791.  There were not many publicly traded companies at the time.  The NY Stock Exchange would not exit for another quarter of a century.  The Bank of the US was one of the very few publicly traded equities available in the US. Most of the others were banks as well.

So by saving the Bank of the US investors, Hamilton was protecting the primary investment available to all investors in the US.

But what would have been the ramifications of a full blown crash if Hamilton had not acted?  Most people were not invested in the market and would not have lost money as a result of the crash.  The US had been in a financial mess for decades and people had for the most part learned to live with the existing system.  Had the Bank crashed and gone away entirely, people would still survive.  That was not Hamilton's concern.

Hamilton saw the benefits of foreign investment and foreign trade to make life better for Americans.  A financial crash would not only wipe out the investments of current speculators, but might discourage future investment in the US, particularly from foreign investors who could send their money anywhere in the world in search of minimum risk and maximum return.  Hamilton wanted to make sure these investors did not see the US as a dangerous and fiscally unsound market in which to invest.  

Stemming the panic and ensuring that the Bank would continue to have the backing of investors also ensured that more investment would come into the US and cause the economy to grow.  This would also help ensure that the federal government would continue to maintain the public confidence and ensure that it would not fail.  

You also have to remember that the Constitution was only a few years old at this time, and a large portion of the country would have been just as happy to see it fail and go back to a system where the States pretty much ran things on their own.  One of the justifications for the federal government was to bring some financial sanity to the economy.  If the new government was unable to do that, it might have been unable to justify its existence in the long run.

I have not found a good book devoted solely the first Bank of the US.  But there are a few books that go into the issues in some detail.  You might want to take a look at:

A Financial History of the United States by Jerry Markham (2001)

A History of Money and Banking in the United States: The Colonial Era to World War II by Murray Rothbard (2002)

There is also an older book, now in the public domain called: The First and Second Banks, of the United States by John Holdsworth (1910), which you can download here:

By the way, I recently started a History blog where I post miscellaneous articles about various events in history.  Nothing there on the Bank yet, but if you are interested in other topics, the link is:  

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Michael Troy


I can answer just about any question on early American History. My specialties are the American Revolution through the Civil War/Reconstruction. I also have greater expertise in matters relating to military, political or legal history.


I have lectured at George Washington University regarding the Civil War, as well as several elementary school Civil War demonstrations. I was also a member of a Civil War reenactment group for about 10 years.


J.D. University of Michigan B.A. George Washington University

Awards and Honors
Truman Scholar

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