America Declares Its Dependence on the Financial Markets

America Declares Its Dependence on the Financial Markets

On this day in economic and business history...

The United States celebrates its independence on July 4, but the worlds of business and finance don't shut down simply because much of the nation would rather watch fireworks and grill hamburgers. Several key events in American business history took place on the same day that its Founding Fathers signed their names to a set of self-evident truths. The first of these would have a lasting impact on the financial markets of the young nation...

Central banking goes public
The First Bank of the United States held an initial public offering on July 4, 1791, several months after it was chartered by federal legislation. It was not the country's first IPO -- that honor belongs to the Bank of North America -- but it dwarfed all other public debuts in the young nation's history and, indeed, may be the largest IPO of all time. Many prominent citizens swarmed Wall Street to buy shares in the $8 million offering, which in our time corresponds to an amount equal to $615 billion in present-day economic power. The final $2 million of the bank's $10 million total market cap remained in government hands. The new central bank was worth almost 5% of America's GDP in 1791, a truly staggering scale for a largely privately owned bank, that is unlikely to ever be matched again -- at least in market cap.

Rather than offer shares at their full face value, the Bank IPO took a different approach to capital raising that has rarely been repeated since. A report prepared for the National Bureau of Economic Research (NBER ) by Richard Sylla and Robert E. Wright of New York University, in collaboration with David J. Cowen, offers greater detail:

At that time were issued subscription rights, or scrips, to buy a full share of stock, at a price of $25 payable in specie. The possessor of a scrip then had to make additional payments of $100, one quarter in specie and three quarters in U.S. debt on January 1 and July 1, 1792, and January 1, 1793, with a final payment of $75 in U.S. debt due on July 1, 1793.

The Bank's incorporation, and the later heavy interest in its IPO, encouraged a flurry of state banking incorporations in response, either to defend against total federalization of banking, or to attract Bank of the United States branches to that state. Other businesses were also chartered in increasing numbers following the Bank's incorporation, and the NBER paper records a tenfold increase in business charters granted in the 1790s over the 1780s, establishing incorporation practices in the United States before many other imperial powers had begun adopting the practice.

However, the Bank's IPO would also lead to instability in America's developing financial markets, which eventually erupted in all-out panic during the spring of 1792. The scrips requirement to pay much of the Bank's share value in federal debt issues ensured that those debt issues also received a great level of investor interest, and prices fluctuated rather wildly in the periods that bookended the four additional scrip payments as bonds were bought or traded in. The NBER report has more detail on the Bank's initial IPO bubble:

[The IPO] gave rise to six weeks of heated financial speculation the likes of which had never been witnessed in America. Scrips purchased at $25 during the IPO quickly doubled in price and remained at that level for most of July. In early August they went through the roof, reaching $264 bid, $280 ask in New York on August 11, and more than $300 in Philadelphia the same evening. Then they tumbled, in Boston from $230 on August 12 to $112 on August 14, to $154-$159 in New York on August 16, and to $125-$137 in Philadelphia the same day, before rallying later that month.

Public debt securities also rallied after the IPO. The 6s [6% bonds] rose from $90 at the time of the IPO to $112.50 in Philadelphia on August 13. Then they fell to $100 by August 17. That prompted Hamilton to swing into action. On August 17, he wrote Rufus King, U.S. Senator and a director of the Bank of New York, who had written Hamilton on August 15 about the market collapse in New York, "a bubble connected with my operations is of all the enemies I have to fear, in my judgment the most formidable."

Alexander Hamilton, the first Secretary of the Treasury, and mastermind of the Bank's formation, implemented an innovative public-private financial partnership that had never before been attempted. Through his connections at the Bank of New York, which he'd also helped establish, Hamilton began directing the open-market purchase of hundreds of thousands of dollars of the panic-stricken bonds, setting up what the NBER paper refers to as the "Hamilton put," a phrase familiar to any present-day Fed-watcher.

The Panic of 1792 involved a more complex financial scheme, as is often the case with major panics. New York businessman William Duer had been attempting to gain control of the Bank of New York, and corner the market on the debt 6s for some time. His efforts had been buoyed by the Bank's loose credit policies during its first few months of operation. Hamilton began to worry that loose credit would result in the loss of its gold and silver deposits (creditors had begun to demand repayment by this point), and tightened the spigot on credit issuance in March of 1792. Duer defaulted on his debts, creating a cascade of further defaults that caused a bond market massacre.

Within two weeks, the 6s had lost 25% of their value. The Hamilton put was once again put into action over the strident objections of small-government advocate Thomas Jefferson, who was "scarcely able to contain his glee over the catastrophe," according to one contemporary report. Hamilton pushed ahead to stem the panic with a lender-of-last-resort plan decades (if not centuries) ahead of its time. Bond buying at Hamilton's direction stemmed the tide of the panic, with less total money expended than had been used in the first Hamilton put of 1791. Greater public-private coordination (similar to the Fed's operations today), and a more complete fiscal toolset helped Hamilton end the crisis in roughly a month -- just in time to calm America's gestating financial markets before the creation of the New York Stock Exchange a month later.

Hamilton's innovations, through the First Bank of the United States, and the new policies he developed to strengthen its power, would go a long way toward creating a firm financial foundation for the young nation in advance of the Industrial Revolution. The U.S. economy continued to grow until 1796 before entering a recession, and the first American banking failure did not occur until 1809. The Bank's 20-year term as America's first central bank occurred during a period in which the nation's GDP grew by over 250%. The remnants of the First Bank of the United States are now part of BNY Mellon , which originally began as the Bank of New York -- both of Hamilton's greatest banking legacies now exist under the same roof.

The hottest of mails
"HoTMaiL" -- capitalized to represent HTML -- launched to the Internet-browsing public on July 4, 1996. It was one of the earliest free webmail clients, and its launch date was symbolically chosen to celebrate its users' "freedom" from service provider email. In these early Internet days, the service only offered two megabytes of mail storage, but that was enough for the nearly 9 million users who signed up in Hotmail's first year-and-a-half online.

Microsoft bought Hotmail at the end of 1997 for approximately $400 million, and began integrating it with the MSN network of services. Today, Hotmail has been replaced by, which boasts over 400 million active accounts, many of which still direct to an @hotmail address. That makes Hotmail (or, as it's now called) the second most-popular webmail client in the world.

You can have any color (including black)
The era of monochromatic cars ended on July 4, 1920, when a DuPont researcher accidentally discovered a nitrocellulose lacquer that it would soon call Duco. Until that point, cars had been almost exclusively painted black, because the finish was the fastest to dry -- and "fast" is a bit of a stretch, when automobile paint took up to a month to dry. DuPont partnered with General Motors , in which it owned a substantial minority stake, to promote the new lacquer as a finish for new cars. It first appeared on GM's Oakland badge in 1924 and, within a year, even the Model T began to take on a more varied set of hues.

DuPont joined the Dow Jones Industrial Average in the same year that Duco first began adding color to the nation's roads. Four years later, when the index expanded to 30 components, it had added three other automakers as well: Chrysler, Mack Trucks, and Nash Motors. That period also saw GM rise from a distant second on the automaker production rankings to claim the global sales lead by 1931, which it held for nearly eight decades before finally losing the crown in 2008.

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