Panic of 1792 - Causes of The Panic of 1792

Causes of The Panic of 1792

In late December of 1791, the price of securities began to increase once again, and the eventual crash in March of 1792 caused many investors to panic and withdraw their money from the Bank of the United States. One of the primary causes of the sudden run on the bank was the failure of a scheme created by William Duer, Alexander Macomb and other bankers in the winter of 1791. Duer and Macomb’s plan was to use large loans to gain control of the US debt securities market because other investors needed those securities to make payments on stocks in the Bank of the United States. Additionally, Duer and Macomb were able to create their own credit by endorsing one another’s notes, and did so in hopes of creating a new bank in New York to overtake the existing Bank of New York. On March 9, 1792 Duer stopped making payments to his creditors and simultaneously faced a lawsuit for actions he had taken as Secretary of the Treasury Board in the 1780s. As Duer and Macomb defaulted on their contracts and found themselves in prison, the price of securities fell more than 20%, all in the matter of weeks.

The Panic of 1792 was further instigated by the sudden restriction of previously overextended credit by the Bank of the United States. When the Bank of the United States first began accepting deposits and making discounts in December of 1791, it expanded credit extensively. By January 31, 1792 monetary liabilities exceeded $2.17 million, and discounts reached $2.68 million – a very large sum at the time. Speculators took advantage of this new credit source, using it to make withdrawals from the Bank of New York, which placed undue stress on the bank’s reserves. From December 29 to March 9, cash reserves for the Bank of the United States decreased by 34%, prompting the bank to not renew nearly 25% of its outstanding 30-day loans. In order to pay off these loans, many borrowers were forced to sell securities that they had purchased, which caused prices to fall sharply.