What Was America’s First Economic Bubble—and How Did It Burst?

Americans have long pursued prosperity. That pursuit led the United States into a series of early financial panics. The nation's young economy was untested and full of speculative mania, a financial enthusiasm that bets on the rapid increase in the value of assets.

When asset prices rise beyond their real value, a “bubble” is created.

The first Bank of the United States (BUS) was chartered in February 1791 to help manage the nation’s money—overseeing tax revenues, loans and debts. To raise funds, the bank began selling stock to the public. Because a full share was expensive, investors could first buy a cheaper certificate called a “scrip,” which guaranteed the right to purchase a full share in installments: part in gold or silver and the rest in government bonds.

Excitement over this new investment opportunity spread quickly. Scrips were traded on the open market, and people began speculating wildly, hoping to flip scrips for a profit as share prices increased. The price of scrips—and that of Treasury securities (government bonds sold to raise federal funds)—quickly spiked in the summer of 1791. By late August, confidence collapsed, prices crashed, and the frenzy ensued. Known as the Bank Scrip Bubble, many consider this the first financial bubble in U.S. history.

To steady the market, Treasury Secretary Alexander Hamilton used a cash reserve called a “sinking fund” to buy up securities and avoid a total collapse. His intervention helped prevent full financial meltdown. Although the 1791 bubble was short-lived, another financial crisis soon followed.

William Duer, a well-connected speculator and former assistant secretary of the treasury, used his insider knowledge to develop a moneymaking scheme.

Partnering with wealthy land speculator Alexander Macomb, Duer bought up all the government debt and bank shares he could. He looped in other wealthy investors and borrowed heavily from many sources to finance his purchases, planning to later sell them to European investors at huge markups.

Prices soared, but by spring 1792, the banks’ rapid credit expansions turned into a credit crunch. Banks curtailed credit just as farmers needed cash for crop season and Duer’s debts also came due. In March 1792, he was unable to repay his debts or borrow more. He took refuge from furious investors in debtor’s prison, where he spent the rest of his life.

The crash that followed froze credit and sent markets plunging. The Panic of 1792 rippled through New York’s business community, prompting Hamilton to step in once again to stabilize the market.

Another speculative market didn’t tank the economy until 1819.

Following the War of 1812, Americans rushed to buy western land—prime cotton-growing areas—available after the forced relocation of Native Americans. State banks lent freely, often recklessly, feeding the frenzy. When the nation’s Second BUS tightened credit in 1818 and European demand for American cotton collapsed, the entire system unraveled.

The ensuing Panic of 1819 was far more devastating than the brief turmoil of 1792. Land prices crashed, banks failed, and many Americans lost their farms and livelihoods. The resulting depression lasted for years, becoming the nation’s first widespread economic catastrophe.