Panic of 1792 - Crisis Management

Crisis Management

In mid-March of 1792, Alexander Hamilton began the political and economic maneuvering necessary to contain the credit crisis affecting markets across the country. The charter creating the Bank of the United States had also set up the Sinking Fund Commission composed of Vice President John Adams, Secretary of State Thomas Jefferson, Attorney General Edmund Randolph, Chief Justice John Jay, and Secretary of the Treasury Alexander Hamilton, charged with resolving financial crises. On March 21, 1792, with Jay absent from voting, the commission split on the decision to allow open-market purchases. Having received notice from William Seton that the Bank of New York was in trouble, Hamilton wished to have the government make purchases as it had in 1791, but was unable to do so while Jefferson and Randolph stood opposed. While still waiting for Jay’s formal and deciding vote, Randolph began to side with Hamilton on March 26, and with only Jefferson dissenting, the commission authorized $100,000 in open-market purchases of securities.

In a series of letters to Seton at the Bank of New York, Hamilton introduced several measures to restore normalcy to the securities market. Hamilton encouraged the bank to continue offering loans collateralized by US debt securities, but at a slightly increased rate of interest – seven percent instead of six. In order to persuade the Bank of New York to lend during the panic, Hamilton also promised that the US Treasury would buy from the bank up to $500,000 of securities should the Bank of New York be stuck with excessive collateral. Similarly, Hamilton supported the Bank of Maryland’s lending by offering to have the US Treasury cover loans made to merchants paying duties. By April 16, after Hamilton authorized an additional $150,000 of open-market purchases by the Bank of New York, Seton reported that market demand was returning to normal.

In just under a month, Hamilton was thus able to stabilize the securities market and prevent the panic from inducing a recession. By exerting his power as Secretary of Treasury and persuading a number of banks to continue offering credit throughout the crisis, Hamilton was able to limit the amount spent by the Sinking Fund Commission to $243,000 – roughly $100,000 less than what was spent during the smaller panic in 1791.