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The new nation’s first financial panic was not long in coming, threatening to reach its climax on the night of April 18, 1792. The shouting started outside William Duer’s cell in the “New Gaol,” a debtors’ prison near the New York City commons at the northeast corner of what is now City Hall Park. A diverse crowd of three to five hundred “disorderly persons” had gathered there to confront him that evening, including cart men, artisans, and slaves. What began with shouts, catcalls, and a few stones tossed at the prison’s windows soon escalated into an old-fashioned New York riot.
Colonel William Duer was nearly fifty, a small and delicate man born into a wealthy English family with plantations in the Anglo-Caribbean colonies of Antigua and Dominica. Educated at Eton, Duer had come to New York in 1768 searching for timber for his family’s Dominican plantation. Seeing greater opportunities in New York, he had borrowed £1,400 from his sister and established himself the next year on a large plot of land along the Hudson River. With his charming wife, “Lady Kitty,” he had defied convention by dressing his servants in livery, creating a family crest of arms, and entertaining aristocrats in a fashionable town house one block north of Wall Street. As the Revolution began, he used his growing social network in New York to become a furnishing merchant, supplying timber, planks, and provisions to the Continental army. By 1780 he was worth more than £400,000, or nearly 2 million. After the Revolution, he had become a member of the powerful Board of Treasury under the Continental Congress, a government bond dealer, and a stock market trader.
But on March 23, 1792, less than a month before the fracas outside, Duer had voluntarily entered the New Gaol to hide from his creditors. By ancient rules of bankruptcy that still applied in New York, debtors’ prisons were designed to shake money out of debtors, their friends, and their families. Duer’s neighbors in the New Gaol included many who had overleveraged, but no one who had leveraged so much.
At the height of the mayhem outside the prison, some in the crowd reportedly shouted, “We will have Mr. Duer, he has gotten our money.” Threatening to remove Duer bodily from his cell, the crowd began to throw paving stones, breaking windows and streetlamps. Well after dusk, “friends of legal restraint and good order” helped the city magistrates to arrest some of the most troublesome members of the crowd, including several artisans, the merchant John Hazard, and Tom, a slave owned by Joseph Towers. For the next few nights, crowds returned to the jail to threaten vengeance. The magistrate assigned Duer his own personal guard, though by the middle of April civil authorities and brick prison walls seemed little protection against a mob bent on repossessing the colonel’s assets in this world and sending him to the next one.
At the time he entered prison, it was estimated that Duer, America’s first famous deadbeat, had defaulted on promises worth more than $2 million. By some estimates this was more than half the nation’s supply of readily available money. For though the American colonies had revolted against the English crown more than ten years earlier, capital, education, and power in America were still concentrated among a small group of insiders. Duer was at the center of this financial network, the man who hired the auctioneers who sold bonds in coffeehouses and shouted current prices from tree stumps on New York’s Wall Street. When he placed a bid, every head turned to see which way his money was moving. In today’s parlance, Duer was a market maker.
In the beginning of March, Duer and his associates borrowed more than $800,000 to corner the market on U.S. bonds. Few understood that he had bet most of his fortune. When his credit got tight later that month, he had his assistants privately borrow gold and silver at high interest from many of New York’s most unlikely lenders. “Besides shopkeepers, Widows, [and] orphans,” wrote his associate Seth Johnson, Duer owed “Butchers, Car[t]men, Gardners, market women, & even the noted Bawd Mrs. Macarty—many of them if they are unpaid are ruined.”
In addition to the sufferers outside the New Gaol, the nation’s tiny financial elite—men who spent their hours and their fortunes in the coffeehouses of Philadelphia, Boston, and New York—faced financial ruin. Scores of Duer’s merchant friends along the Eastern Seaboard had signed now-overdue promissory notes on faith under Colonel Duer’s name. Most now rued the day they had ever met the man. Some disappeared into the western wilderness or crossed into Canada to escape Duer’s fate.
By April all five branches of the newly established Bank of the United States had restricted lending. Lenders demanded immediate settlement in gold and silver. Secretary of the Treasury Alexander Hamilton sought to buoy the nation’s tiny stock and securities market by buying back federal Treasuries, but few lenders were accepting anything but gold. In May interest rates on short-term loans approached 96 percent, or 8 percent per month. Soon there were rumors that creditors in Connecticut were demanding that Congress make good on Duer’s debts. Many doubted if the new nation could survive its first financial crisis. But that is getting a bit ahead of the story.
How To Fund A Revolution?
After Americans and British troops began to exchange gunfire at Lexington and Concord in 1775, merchants with capital had to make a decision: support the Revolution or support the crown? Duer and a small group of New York and New England merchant adventurers with names like Roosevelt, Bleecker, Melvill, and Morris threw their financial backing behind the American partisans. They took enormous risks in challenging the British crown, but many of Duer’s associates profited handsomely by providing high-interest loans to this newly formed government.
To be fair, Duer’s support for the Revolution put his family in some danger. Indeed he hesitated to take an officer’s commission because he feared it would lead the crown to seize the family’s plantation in Antigua. Yet as a man with capital, he was in a position to demand a great deal. As companies mustered in New York and Boston, Duer promised provisions but demanded that Revolutionary quartermasters, colonels, treasurers, and comptrollers provide him with negotiable loans and letters of credit, promises of future payment that he could sell to international capitalists in France and Amsterdam. These were the new nation’s first debts, and most of them passed through Duer’s hands. Of course Duer paid his fellow colonists in depreciated colonial currencies when he bought their timber, muskets, and provisions for the Continental armies.
As the man who profited from the nation’s debts, Duer had few friends and a host of enemies. Depending on where you stood, men like Duer were either the merchant financiers who had funded the American cause or the speculators who had nearly squeezed the Revolution dry. Those standing outside Duer’s jail cell in April 1792 were inclined to see him as the devil in human form. As the Boston Argus noted, Duer had long been a swindler who “laughs at the calamity he has brought upon his country; while the bloodsucking brokers in his employ are still hovering round us like Milton’s devils, pimping, soothing, and promising redress without any intention . . . of ever performing.”
Men like Duer were not unfamiliar, even in colonial America. Merchant capitalists like Duer had been secretly doing business with foreign powers for generations. Indeed their covert trading with Dutch, French, and Spanish sea captains had much to do with the crown’s imposition of financial regulations that helped cause the Revolution. After the colonies challenged Britain’s authority to tax their trade, the hastily created Continental Congress called on militia to assemble. It failed, however, to properly fund the operation. In the past, the colonies had parsimoniously issued small quantities of their own currency, but during the Revolutionary struggle they turned to the printing press, printing unbacked currency to fight the British.
Duer and his friends understood that the colonies in revolt had no currency and banking infrastructure compared with their English opponents. In Britain and much of Europe, printed currencies were strictly regulated by agents of kings and bore the seal of the monarch. For more than one hundred years before the Revolution, colonial currencies changed hands in America, but they were frequently declared illegal by Britain. The value of these colonial currencies rested on either export goods or land. Thus Virginia’s first printed banknote was a tobacco receipt issued by the colony’s inspection station in Richmond: the state’s pledge to pay gold or silver for tobacco deposited in its warehouse. Regular in form and difficult to reproduce, these receipts appealed to Virginians as replacements for scarce gold and silver. To keep up their value, Virginia’s treasurer promised to destroy them when Virginians turned them in for taxes (sometimes he didn’t). Within a generation Virginia’s fledgling private banks held these tobacco receipts in their vaults and issued their own banknotes on their security, a pledge on a pledge. Likewise, New England banks chartered by colonial assemblies took mortgages for land borrowed, bought, or stolen from Indians, giving out currency that was payable for taxes. Even before the colonies declared themselves separate nations, they covertly assumed the rights of European sovereigns to make the pledges that became printed money. Colonial currencies were America’s first symbolic promises, promises about future tobacco sales, future land values, and the future prospect of property taxes. Imprinting colonial currencies with engravings of painted Indians, tobacco leaves, sailing ships, and sturdy pioneers simply made the metaphor concrete.
Fighting a revolution allowed the colonies to gradually become sovereign in a process both military and monetary. As the battles moved along the Eastern Seaboard, the colonies and their Continental Congress claimed the sovereign power to issue state and national currency to pay for food, guns, and gunpowder. Americans with guns and gunpowder would in turn make their states sovereign by force of arms; sovereign states would then accept their own currency for taxes and unsettled land. As go-betweens in America’s first promises, Duer and his friends had their doubts about this circular process of using currency to buy arms to guarantee currency; they speculated in state currencies but refused to take them as payment for the goods they provided. They preferred handwritten promises of future payment: bonds, not currency.
As Duer and his friends predicted, the value of these state currencies fluctuated wildly depending on how the battle with England was progressing, how careful each state was in issuing its notes, and how large its population of currency holders was. In the final analysis, most Americans saw currency for what it was: a measure of the value of land the states claimed but that remained untilled in their Westerly reaches, land that states would sell once the shooting stopped. Big colonies had a vast blank check in their thousands of acres of unsurveyed western land. Little colonies had nothing. Rhode Island paper was worthless; Massachusetts notes were respectable; free-spending but well-endowed Virginia was somewhere in between.
When the colonies came together to create the Continental Congress to oversee the fighting of the war, the Congress issued its own currency as well. As a “congress” of independent states rather than a parliament, it had no sovereignty, no direct claim to western land or taxes. The Congress expected that the member states would tax their own lands and then pay the Congress a sum proportional to their population. As it became clear that some states would not pay the debts incurred in the fighting, the value of the Continental dollars plunged after the autumn of 1776. “It is true,” wrote the editor of the Pennsylvania Evening Post, “that those rags after having gone thro[ugh] a certain mysterious process of transubstantiation, under the sanction of Congress are said to be money . . . but since that Popish doctrine with a long name is exploded, and the funds for redeeming these nominal dollars are in the moon, no man but a lunatic will . . . believe that billets of brown paper can really be dollars.”
As General Washington’s troops suffered for provisions, the Congress tried to prop federal dollars up by authorizing the army to seize the assets of grocers and farmers who refused to take them. The expression “not worth a Continental dollar” became a catchphrase that traveled more widely than the notes did. To make matters worse, the British general Henry Clinton learned to take advantage of the rebels’ wartime dependence on paper promises. To simultaneously make money for himself and destabilize the colonial economy, he set up tavern agents to sell knockoffs of American currency for pennies a sheet to unscrupulous buyers.
Duer and many of his friends understood that banknotes issued by states or the Continental Congress were not nearly as reliable as the promises made to foreign states. Indeed, as the fighting continued in 1780, Congress passed the infamous Forty-for-One Act, declaring that it would pay only a dollar in silver for forty continentals. This was hyperinflation of the worst kind. As Revolutionaries like Thomas Paine pointed out, rapid currency inflation was a tax on the poor: the poorest Americans were paid in currency, bought goods with currency, and saved currency that was constantly dropping in value. Rather than hold cash, Duer hoarded assets that appreciated in wartime: gold, silver, timber, or wheat. He especially sought promises that came from across the ocean or promises that could be sold there.
Duer’s most spectacular gains came in supplying America’s French allies. By agreeing to split his proceeds with requisitioning officers, Duer won lucrative contracts in provisioning French armies and navies. Because he paid with bills of exchange that originated in Paris, he had marketable promises when few others did. He could buy English and Dutch goods with substantial Paris bills, trade those goods for provisions in New York, then charge French forces for the New York provisions, earning what he called “double profits.”
In the midst of the fighting between 1776 and 1783, many American promises were made, but few were paid. Courts and legislatures suspended the collection of public and private debts. A few states took strategic advantage of the chaos to favor debtors: North Carolina and New York seized the property of loyalists and forced English creditors to accept the states’ depreciated banknotes for it; South Carolina made English creditors accept land in the pine barrens for unpaid promissory notes.
After the Treaty of Paris in 1783, as courts reopened, states began collecting taxes. Creditors—from New York to Liverpool—began to demand repayment. Many private debtors resisted the reckoning. The planter George Mason recalled to Patrick Henry an “absurd question” that one of his constituents had asked: “If we are now to pay the Debts due to British merchants, what have we been fighting for all this while?” Mason was appalled, but there were no repo men or collection agencies in these United States. Between 1783 and 1786 the states were in a tumult over back taxes, unpaid personal debts, and land foreclosures. Armed insurrections against repossessions and property liquidations bubbled up in the western parts of Virginia, Massachusetts, and Pennsylvania. The turmoil made the national government seem all the more ineffective, while anger at creditors like William Duer grew all the more intense.