Photograph by Hulton Fine Art Collection/Getty ImagesChalk up another first for Alexander Hamilton, the good-looking man on the 10-dollar bill. We already knew he was America’s first Treasury secretary, started the First Bank of the United States, and founded America’s first political party, the Federalists. Today, a blog post from the Federal Reserve Bank of New York credits Hamilton with being the inventor of a bank crisis-management technique that’s usually attributed to a Brit who came 80 years later.
Hamilton’s innovative bank rescue came in the Panic of 1792, which authors James Narron and David Skeie call “Wall Street’s first crash.” A speculator named William Duer tried to corner the market in U.S. Treasury bonds, borrowing heavily to finance his purchases. When the bonds’ prices fell and Duer defaulted, panic ensued. To stabilize the market, Hamilton, in coordination with the Bank of New York, stepped in as a buyer of last resort of Treasury bonds. He bought from whoever wanted to sell, but acquired only fundamentally sound assets, and he paid less than the full price, so only parties in desperate straits would resort to raising money that way.
What Hamilton did is close to what Walter Bagehot, a British journalist who was editor-in-chief of the Economist, advocated in his 1873 book, Lombard Street, which contains the concept of lending freely in a crisis at a penalty rate against good collateral. In an e-mail, Skeie writes, “Hamilton was more specifically a buyer of last resort, which we think of as in the broad category of lender of last resort.”
“Key features of Hamilton’s market intervention predate Walter Bagehot’s famous rules for central bank crisis management by nearly a century,” Narron, a senior vice president and cash product manager at the Federal Reserve Bank of San Francisco, and Skeie, a senior economist with the New York Fed’s Research and Statistics Group, write in the Liberty Street blog post.
Oh, and one more thing: The coordination that ended the Panic of 1792 led to a meeting of 24 broker-dealers under a buttonwood tree on Wall Street. There, write Narron and Skeie, they “signed an agreement of cooperation, an act many historians view as the origin of the New York Stock Exchange.”