Hamilton, in a series of letters to…
April 1792 CE
Hamilton encourages 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 promises that the US Treasury will buy from the bank up to five hundred thousand dollars of securities should the Bank of New York be stuck with excessive collateral.
Similarly, Hamilton supports 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 authorizes an additional one hundred and fifty thousand dollars of open-market purchases by the Bank of New York, Seton reports that market demand is returning to normal.
In just under a month, Hamilton has thus been 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 has been able to limit the amount spent by the Sinking Fund Commission to two hundred and forty-three thousand dollars—roughly one hundred thousand dollars less than what had been spent during the smaller panic in 1791.
Economists and economic historians will note that Hamilton's management of the Panic of 1792 appears to have anticipated "Bagehot's Dictum" by approximately eighty years.
This prescription, that in a crisis central banks should "lend freely, against good collateral, at a penalty rate" is still considered the gold standard for managing a financial panic as the "lender of last resort."
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