You are here:

U.S. History/IPO of the Bank of the US

Advertisement


Question
QUESTION: Well I thought I had reached the end of my questions on this topic, haha. I definitely feel like I've gotten to a good place regarding the basics of how the bank functioned, which is a huge step for me. I can't thank you enough for sticking with me for so long on that.

But now I'm getting confused about the aftermath of the bank's IPO (Initial Public Offering). I know as little about stock as I do about banking. What I've read is that all the bank's "scrips" sold out within a matter of hours. Over what I believe was the following month (although I'm not entirely sure what length of time it was) the selling price of these scrips fluctuated wildly, as did the price of US securities. First, the value of these two shot up, then they crashed.

What I'm struggling to fully understand is what caused these fluctuations. If I were to venture a guess, I would say that since there was a finite number of scrips available, and since all of those scrips sold out so quickly, people who had bought the scrips could turn around and sell them for a profit. If that's the case, then it sounds like the increase in value of the scrips wouldn't have actually benefited the Bank of the US; just speculators.

As for the increase in the price of US securities, I suppose that since the Bank of the US demanded securities as partial payment for the scrips, then that would have increased the public's demand for securities. And when demand goes up, cost goes up.

Is that right or am I off? And what caused the subsequent drop in value of these?

(Also, was the requirement that scrips be partially paid for with securities a means of bringing in extra revenue for the government or was it simply because the Bank of the US valued securities for its own purposes?)

ANSWER: The public sale of scrips (which were subscriptions, essentially the right to buy stock once it was available) led to a price bubble which eventually burst.  Your understanding is essentially correct.  There were far more interested buyers than there were scrips available.  So the price shot up until it reached a point where scrip holders were willing to sell them.  Because that price ended up being far higher than was justified based on the bank's value, it fell again.  But spikes like that often happen with IPOs as speculation becomes more than calculation of actual value.  Incidentally, the initial price was $25.  It shot up to about $300 then settled back to around $150.  So those who held from the beginning still profited big time, even after the "crash."  Today we would just call that a correction.

The value of scrip affected those who owned it, which included the Bank's leading officers.  But scrip price really did not benefit the bank itself.  Today, most public companies could sell more stock if they thought their stock price was too high.  But the Bank did not have authority to sell additional stock.  So price fluctuations did not benefit or harm the bank itself at all.

The requirement that 1/4 of payment had to be made in specie (gold or silver) ensured that the bank would have sufficient specie to fund itself from the beginning.  The remainder of payment could be made with securities or other items of value.  As negotiable instruments, the Bank could use these investments similar to other items of value.

Incidentally, the government didn't actually put up $2 million at the start.  The government did not have $2 million. It's initial "investment" came in the form of a $2 million bank loan from the Bank itself, which it paid back over ten years.



---------- FOLLOW-UP ----------

QUESTION: I've read that the availability of credit also had an impact on the price of these scrips. Again, I'm not entirely confident that I understand what was going on, but it sounds like in order to pay for the scrips at their peak price of around $300, people had to take out bank loans. After a while, the banks stopped making so many loans, which caused demand for the scrips to decrease, which in turn decreased the selling price of the scrips (and I suppose the price of securities as well).

Is that right? If so, then does that mean that there were essentially two reasons for the drop in prices (the more limited availability of bank loans and the realization that the scrips were being sold at a higher value than they were actually worth)?

Also, if my interpretation is correct, then do you know why the availability of bank loans decreased?

Answer

Many people borrowed money in order to buy scrip, thinking the price would go up fast enough to pay back the loan and make a profit on the price gain. The drying up of credit and the high price of scrip were not entirely separate issues.  When the prices became unreasonably high, lenders would not want to lend for such purchases because the risk of a price collapse and default on the loan became higher.  Even back then, lenders were smart enough to see a price bubble forming and knew at some point it would burst.

U.S. History

All Answers


Answers by Expert:


Ask Experts

Volunteer


Michael Troy

Expertise

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.

Experience

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.

Publications
http://unlearnedhistory.blogspot.com

Education/Credentials
J.D. University of Michigan B.A. George Washington University

Awards and Honors
Truman Scholar

©2016 About.com. All rights reserved.