Financial historian: Look to 1792 for economic lessons





Alexander Hamilton’s handling of the panic of 1792 provides lessons for today’s economic turmoil, a financial historian said at the March 13 Romano Lecture.

“If you have a really good leader in a crisis, the leader acts boldly,” Richard Sylla told an audience at the Anderson Center Chamber Hall. “You don’t waver and you don’t change your mind. You want to keep the banks lending.”

Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets and professor of economics at New York University, was the featured speaker at the event. The Mario and Antoinette Romano Lecture Series was endowed in 1984 to sponsor lectures by speakers in history, economics, art history and medicine.

Other lessons Sylla emphasized were: promoting cooperation within the financial community; supporting the functioning of financial markets; resisting whining and blaming; and not being afraid of bankruptcy.

The 1792 crisis is often overlooked because it was handled so efficiently by Hamilton, who was then Treasury secretary.

“Usually when I’m lecturing to students, they’ve never heard of the (1792 panic),” Sylla said. “That’s what happens when a financial crisis is handled well.”

Hamilton’s work actually started with his plan for a U.S. financial system in 1789, which Sylla called the “quickest, neatest and slickest” financial revolution in history. Hamilton’s plan featured the assumption of state debts, creation of the Bank of America and the establishment of the dollar as a monetary base. The stable money expanded the financial system, leading to foreign investment and the growth of banks and corporations. The country that had three banks in 1790 would have 584 in 1835.

“Americans took to banks like ducks take to water,” Sylla said.

In March 1792, Wall Street suffered its first crash, as the U.S. national debt lost a quarter of its value.

“Financial crises begin when there’s some kind of cheap credit available,” Sylla said. “There were a lot of increases in bank credit leading up to the crash with speculators borrowing money right and left.”

Hamilton immediately intervened. He directed open-market purchases of securities; induced banks to lend and also cooperate with each other; arranged cooperative agreements among banks and securities dealers; and released reassuring news, such as publicizing a loan from Dutch bankers that the United States had been trying to negotiate since late 1791.

“Hamilton said, ‘Everyone go out there and tell these panicked people: Why are you panicking? The Dutch just lent us $1.2 million at 4 percent,’” Sylla said.

The intervention ended the panic. By May, the markets recovered and the U.S. economy returned to growth. Later that spring, the New York Stock Exchange was formed.

The success of the U.S. financial system gave the country a built-in advantage for growth, as it laid the foundation for westward expansion and transportation upgrades, Sylla said.

“We often take the U.S. financial system for granted,” said Sylla, who also serves as vice-chairman of the board of trustees of the Museum of American Finance. “Since we’ve always had a banking system and stock markets, the main things for historians to do is complain about how much banks fail and stock markets crash. We should think about how much our country has benefited from a financial system.”

Nevertheless, Sylla admitted that it is an interesting time to be a financial historian in New York City.

“I go out now and talk to people at financial firms and hedge funds and they’re very gloomy,” he said. “I put a smile on my face and say, ‘Hey guys, don’t be gloomy. I’m a financial historian and it doesn’t get any better than this!’”


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