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Fallout: The Financial Crisis

A cautionary tale from the 1790s

Marketplace Staff Oct 21, 2008
Fallout: The Financial Crisis

A cautionary tale from the 1790s

Marketplace Staff Oct 21, 2008


Kai Ryssdal:
When things are bad it’s always tempting to try to find the silver lining, some clue that things aren’t as bad as they seem, or that at least they’ve been worse before. By most accounts this is no Great Depression we’re looking at. But commentator and novelist David Liss says while historical context offers perspective, rarely does it provide anything like comfort.

David Liss:

Irrational greed is nothing new.

In fact, Wall Street emerged from America’s first encounter with the sort of disastrous exuberance that has produced the current financial crisis.

And like today, the market of the eighteenth century had to learn the hard way, the consequences of a system that offered no restraints.

In the early 1790s, the first Treasury secretary, Alexander Hamilton, took innovative measures to strengthen the nation’s new economy.
His efforts were undermined by his former assistant–a speculator named William Duer.

Duer decided to use his inside information to build a massive personal fortune.
He borrowed from banks he wanted to seize.
He borrowed from his partners after lying about his worth.
He borrowed from citizens by promising an impossible rate of interest.
Not surprisingly, he failed.

His lenders thought Duer was too big to fail.
So, his bankruptcy set off a panic that nearly destroyed Hamilton’s fledgling banking system.

The government swooped in and snapped up securities to stabilize the markets.
The same speculators who earlier wanted government out of the way,
now realized they had to be saved from their own greed.

In response, a group of stockbrokers gathered under a buttonwood tree on Wall Street to form the now-famous Buttonwood Agreement. It established what was to become the New York Stock Exchange.

These founders of Wall Street believed they could establish rules to prevent speculators from ever again risking the nation’s economy.

They took it as an article of faith that rational actors engaged in rational trade could–as a group–keep each other in check.

They learned the wrong lesson. Investment strategies may be rational, but speculators engaged in wild trades, with huge profits in the balance, cannot be.

They are like gamblers at the craps table–high on a good roll.

A system cannot police itself when success makes its participants oblivious to the consequences.

Looking over the wreckage of the past few weeks, you have to wonder when we’re finally going to learn this lesson.

Ryssdal: David Liss is the author of the historical novel “The Whiskey Rebels.”

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