The first stock market panic of the United States of America, in common parlance a ‘pump and dump’ scandal- occurred this week in 1791, courtesy of speculative actions by former Assistant Secretary of the Treasury, William Duer.

After the Revolution, corporations and notably American banks, were free of the capital raising restrictions imposed by the English government. New stock subscriptions were ‘hot’ issues and shares were sold to an exuberant public. Often along for the ride was William Duer, a former member of the Continental Congress and Treasury official under Alexander Hamilton, who supported his lavish lifestyle with insider knowledge about government securities.

Resignation from his government post did not stop Duer from attempted financial shenanigans. He began to manipulate the widely traded and respected Bank of New York stock using partner Alexander Macomb’s money to buy the entity’s shares. As prices rose thanks to the speculator’s well placed rumor that the Bank of New York would be bought by the federally chartered Bank of The United States, Duer then simultaneously bet that the former Bank’s stock price would fall, using Macomb’s money to set up the market for a fall. Duer also lured the wealthy Walter Livingston to bet likewise.

However, the whole plan blew up as the Bank of New York stock price just kept going up. Duer defaulted on his commitments and was thrown in prison for the scandal, as was Livingston. Ironically, the jail walls protected both from hordes of seething, financially ruined investors.

This Week in Wall Street History

3/24/08