The Great Divide

by Thomas Fleming

  The President excused himself and rushed to a nearby parlor to glance at a dispatch from the commander of the western army, Major General Arthur St. Clair. The previous day, a newspaper had reported a rumor that the army had been mauled in a clash with hostile Indians. Within minutes Washington returned to the table, where he chatted agreeably with his guests until they departed.

  Lear followed Washington into the parlor to see if he were needed for any further duties. The slight, affable secretary found a man he had never seen before. The President’s face was red, his eyes wild. His long arms flailed the air. “IT’S ALL OVER!” he roared. “St. Clair’s defeated—ROUTED! The officers nearly all KILLED! I told him when I took leave of him—Beware of SURPRISE! He went off with that as MY LAST SOLEMN WARNING! Yet he let his army be cut to pieces—HACKED—BUTCHERED—TOMAHAWKED—by SURPRISE—the very thing I warned him against! The blood of the slain is upon him—the curse of widows and orphans—THE CURSE OF HEAVEN!”

  For another five minutes, Washington damned General St. Clair using adjectives and adverbs that Lear had never heard before in his genteel life. He had spent the Revolutionary War years at Harvard. The horrified secretary feared the fifty-nine-year-old president would topple to the floor in a fatal fit of apoplexy.

  Breathing in rasps, Washington flung himself onto a nearby sofa. When he spoke again, it was in a calm, measured voice. “This must not go beyond this room. General St. Clair shall have justice. I will hear him without prejudice.”1

  Even before Washington became president in 1789, the fledging United States had been fighting an undeclared war in the western territory the Americans had unexpectedly acquired from the British in the treaty of peace that ended the War for Independence. President Washington had sent envoys who attempted to negotiate a peaceful cession of some of the Indians’ lands. As we have seen, in the South the Creeks responded, but in the Northwest, the Miamis, Shawnees, and other more warlike tribes evaded or violated agreements.

  To the President’s frustration, the United States still did not have an army to add some muscle to his diplomacy. If anything, the opposition to paying a regular army had become a permanent prejudice in Congress. Not even President Washington’s military prestige could persuade the politicians to recruit more than the single regiment created in 1784. A year before General St. Clair marched to disaster, this regiment, reinforced by over one thousand militia, had launched an attack on a cluster of Miami villages from which many war parties emanated. About one hundred Miami warriors led by a gifted war chief, Little Turtle, had ambushed the advance guard. The panicked militia abandoned the regulars in headlong flight. The army stumbled back to its base at Fort Washington, near present-day Cincinnati, demoralized and humiliated.2

  A grim President and his Secretary of War, Henry Knox, persuaded Congress to authorize a second regular regiment. They also negotiated permission to raise two thousand “levies” for six months service. These soldiers would be considered regulars even though they were closer to militia. To command this second army, the President chose Arthur St. Clair, who had been a major general during the Revolution, and was currently governor of the Indiana territory.

  Simultaneously, anti-army ideologues in Congress undermined St. Clair and the President. Late in 1790 they reduced the regulars’ pay, and for an entire year did not bother to send them a penny. Less than 10 percent of the men whose enlistments expired that year signed up again. When St. Clair reached Fort Washington, he found the First Regiment had dwindled to 299 men. Recruiting for the new second regiment faltered disastrously, leaving the regulars 50 percent below their authorized strength. St. Clair’s six-month levies were barely trained and he was forced to call out 1,160 militia.3

  Meanwhile, the Indians gathered a fifteen hundred warrior army under the leadership of Little Turtle. At dawn on November 4, 1791, the war chief attacked. The militia and the six-month levies fled and the American campground became a scene of indescribable slaughter. An appalling 64 officers and 807 enlisted men were killed or wounded, and the casualties among the packhorse drivers and other civilians were even more horrendous. General St. Clair had joined the fugitives on one of the few surviving horses.4

  The President informed Congress and the newspapers that the country was now embroiled in a full scale war, with the future of the United States at stake. Were we going to let the British and their Indian allies confine America to a strip of states along the Atlantic seaboard? The chastened politicians abandoned their regular army paranoia and gave the President the soldiers he wanted. There would be four regular regiments, with men enlisted for three years service, plus a squadron of cavalry. As a sop to a still vocal minority of regular-haters in Congress, Secretary of War Knox decided the new force would be called “The Legion of the United States” rather than the United States Army.

  The President chose Anthony Wayne of Pennsylvania to command this new entity. As a brigadier general in the Revolution, he had acquired a reputation for fierce attacks. Someone who did not relish his headlong battlefield style had called him “Mad Anthony,” and the name stuck. Wayne was far from a reckless hothead. In 1782, with only a few hundred regulars, he had wrested control of Georgia from a much larger British army.

  Wasting no time, General Wayne headed for Pittsburgh, where he was told his army would await him. He discovered a grand total of forty morose recruits. It took another ten months for the Legion of the United States to reach twelve hundred men. Low pay and the prospect of confronting the tomahawk wielders who had slaughtered St. Clair’s army did not attract the best and brightest. A grim Wayne went to work on turning this collection of illiterate farm boys and urban drifters into serious soldiers.

  Back in Philadelphia, the man whom President Washington had begun to consider his most important cabinet member was revealing an all too human flaw. On December 15, 1791, ten days after Secretary of the Treasury Alexander Hamilton had submitted his groundbreaking Report on Manufactures to Congress, he received a letter from James Reynolds, informing him in outraged terms that he had just discovered the Secretary was conducting a torrid affair with his wife, Maria. By seeming coincidence, Mrs. Reynolds had also written Hamilton an alarmed letter, warning him that her husband had discovered their liaison.

  The affair had begun in the summer of 1791, when Hamilton sent his wife and children to spend several weeks with their maternal grandparents in Albany, New York. Philadelphia was notoriously unhealthy when the temperature soared. One humid night not long after their departure, Maria had appeared at Hamilton’s door pleading for help from her abusive husband, who had supposedly abandoned her. When Hamilton went to her house with some money that evening, he learned Maria was prepared to express her gratitude in a way that left no doubt about her passion for him.

  We now know that Reynolds had been renting his stylish twenty-three-year-old wife to various gentlemen for several years, and quite possibly blackmailing them. It was an early version of what police officers began calling “the badger game.” The term came from an eighteenth century English sport that pitted a badger against a dog, which the badger often demolished with his powerful jaws and formidable claws. James Reynolds, the badger in Hamilton’s version, was soon regularly demanding money from Hamilton to assuage his wounded “honor.”

  A sensible public official would have ended the affair the moment he received Reynolds’ first letter. But Hamilton was not sensible about the women in his life. Along with the sophisticated man who could analyze and argue economics and politics with an overwhelming cascade of rhetoric and logic, and think brilliantly about the future of his country, there was a primitive Hamilton who remained trapped in his West Indies boyhood watching his beautiful, headstrong mother conduct blazing affairs with wealthy merchants.

  Somehow, while enjoying Maria Reynolds and fending off her greedy husband, Hamilton managed to perform his complex duties as Secretary of the Treasury. He exchanged letters with customs officers all over the country, he supervised repaying the nation�
��s international debt and the more intricate task of equalizing payments to states that had paid most of their war debts, and adjusted sums to those that had paid little or nothing. Simultaneously, he produced his Report on Manufactures and conducted a growing newspaper war with Thomas Jefferson and James Madison. But Maria Reynolds and her husband may have been one complication too many.

  The Secretary of the Treasury should have paid more attention to the activities of his former assistant secretary of the Treasury, William Duer. The son of a rich West Indies planter, Duer came to New York on business in 1768 and joined the American side in the Revolution. He served ably in the Continental Congress, where he won Hamilton’s friendship by defending General Washington against his critics.

  Duer later became Secretary of the Congressional government’s Treasury Board. He also made a good deal of money as a contractor, supplying the Continental Army with food. In 1779, he married Catherine Alexander, daughter of Major General William Alexander of New Jersey, who was also known as Lord Stirling thanks to his somewhat dubious claim to a Scottish title. “Lady Kitty,” as she was called, liked a splendid lifestyle as much as Duer. They rode around postwar New York in a coach and four with a coat of arms emblazoned on the doors, and often served fifteen different wines at their dinner parties. They were undoubtedly among the New Yorkers who convinced newly arrived Secretary of State Thomas Jefferson of the city’s addiction to luxury.

  Duer spent only seven months as an assistant treasury secretary. But he learned enough about Hamilton’s financial plans to take advantage of them. When the Bank of the United States sold its first shares and Congress added “scrip” as a way for the less wealthy to acquire a piece of the action, the wildest “scrippomania” boiled up in New York, led by Duer. After Hamilton deflated the bubble, he sent Duer a stiff letter, urging him to exercise more public responsibility. “I have serious fears for you—for your purse and for your reputation,” he wrote.

  Alas, Hamilton remained fond of Duer personally, and managed to convince himself that his friend had learned a lesson. He also needed Duer’s talent for raising large amounts of money. The Secretary asked him to become governor and chief salesman for the S.U.M. Already regarded as a man with a golden touch, Duer helped raise the $500,000 necessary to capitalize the new government entity.

  The mania for paper profits had only been checked, not eliminated. Across the country, state banks were being founded, primarily to loan money for speculation in stock and land. “Bankmania” joined “scrippomania” as part of the national vocabulary. The market in government securities soon resumed its rise. By October 1791, “six-percents” (shares in the Bank of the United States, paying six percent interest) were selling at $500, or $100 over par, and scrip had risen similarly.

  William Duer decided to plunge on a grand scale. Forming a partnership with Alexander McComb, a New York businessman and land speculator, he set out to corner the market in six-percents. Duer soon drew in many of the leading investors in the S.U.M., forming what would soon be called “The Six Percent Club.” They hoped to achieve a corner by July 1792, when the next installment on stock in the Bank of the United States would be due.

  Duer and his allies bought on time as many shares in the bank as they could find. If they pulled off the corner, they planned to sell the six-percents at huge markups to foreign investors eager to buy American securities. With revolutionary France on the brink of exploding, America looked far more stable than any country in Europe. Ultimately, Duer and McComb hoped to buy enough shares to seize control of the Bank of the United States.

  As news of Duer’s scheme circulated through New York, people rushed to entrust their savings to him. He cheerfully promised to double their money in six months. Even the madam of one of the city’s brothels pulled dollars from beneath her much-used mattresses to throw into the promised bonanza. Duer also dipped into the funds of the S.U.M. and persuaded numerous merchant friends to cosign notes to expand his credit.

  As with so many other attempted corners, Duer’s ploy read better on paper than in reality. Bringing off such a coup required not only nerve, but the ability to keep track of a plethora of details, which was not Duer’s strong suit. He had a manic tendency to get involved in more speculations than even the most gifted financier could handle. While impossibly leveraged by buying government stock with McComb, he was also the absentee contractor for the U.S. Army that was preparing to fight the western Indians. Simultaneously, he was heavily involved in the Scioto Company, an immense land speculation that had agents in Europe trying to unload 1,000,0000 acres of the Ohio wilderness.

  Duer and his fellow plungers never imagined that another group of investors would try to sabotage their corner. These foes were aligned with Secretary Hamilton’s political rival (and Thomas Jefferson’s ally), Governor George Clinton of New York. They got into the game on the bear side, selling all the stock they could find to Duer and his partners for payment at a future date. They also withdrew large amounts of money from the city’s banks to create a credit shortage. Their goal was to depress stock prices, so they could make a killing on the day of delivery—and force the Duer group to pay ruinous interest rates.

  The bears’ timing was good. In the spring, much of the cash in New York went into the country to buy produce for export. This put a squeeze on the banks, which began calling in their loans. With the price of their Bank of United States shares remaining flat, Duer and the other members of The Six Percent Club scurried around New York in search of money. They were soon paying interest as high as 1 percent per day—365 percent per year.

  Watching from Philadelphia, Alexander Hamilton became increasingly dismayed. Duer and his friends were making a mockery of the system Hamilton had created to give America financial stability. The Secretary knew that Jefferson and his colleague, James Madison, were looking for an opportunity to strike him down. “The enemies to banks and credit are in a fair way to having their utmost malignity gratified,” the Secretary of the Treasury lamented.5

  Meanwhile, Oliver Wolcott, the meticulous comptroller of the Treasury, had been toiling over the books Duer had left behind from his tour of duty on the old Treasury Board of the Confederation Congress. Wolcott found a shortfall of $239,000—money Duer had apparently used for personal investments and expenses. Duer had long acknowledged the deficiency, but ignored Wolcott’s demands that he make it good. Rumors of Duer’s financial woes reached Wolcott, who called upon the U.S. attorney in New York, Richard Harrison, to sue Duer for the long overdue debt. Wolcott did not want to be responsible for the money, if Duer went bankrupt.

  The frantic Duer begged Hamilton to block the suit, which would cripple his ability to borrow. For the Secretary of the Treasury, it was a painful clash between private friendship and public duty. Hamilton told Duer that he was experiencing “all the bitterness of soul on your account which a warm attachment can inspire.” But he met this test of his integrity head-on, grimly consigning Duer to his fate: “Tis time there should be a line of separation between honest men and knaves,” he told a friend.6

  On March 9, 1792, Duer failed to meet a number of payments on loans, and his paper pyramid began to crumble. He claimed that the notes had been issued by his agent in his absence, and required “investigation.” No one believed a word of this. By March 15, six-percents were in precipitous decline. The bears were throwing all the stock they could find into the market to accelerate the downward plunge. Duer faced a rising volcano of demands for payments of stocks that would soon be delivered, and the falling market combined with the government’s lawsuit made it impossible for him to raise another cent.

  Duer was soon in danger of physical harm from what one speculator called “the lower class of his creditors.” On March 23, he took refuge in the city jail—a place to which most debtors went reluctantly. He saw it as far safer than his mansion on the Broadway. A New York businessman ticked off the names of a veritable gallery of top merchants to whom Duer owed large sums—$80,000 to one man
alone. He also owed “shopkeepers, widows, orphans—butchers, carmen, gardeners, market women.” Another writer reported: “The town has rec’d a shock which it will not get over for many years. Men look as if some general calamity had taken place.”

  Soon one of Duer’s partners, Walter Livingston, of the powerful Hudson River Valley clan, joined him in debtors’ prison. He had cosigned twenty-eight of Duer’s notes for a total of $203,875.80. Stock prices continued to fall. Public unrest grew. On April 15, Alexander McComb defaulted on half a million dollars in stock he had purchased from the bears. The following day, he joined Duer and Livingston in the city prison.

  On the night of April 17, a mob gathered around the jail, but was dispersed by a sudden rain shower. A few days later, another angry crowd gathered, determined to do someone harm, but they lacked leadership. One jittery Connecticut visitor wrote that all the city needed was a “small riot” to burst into a “general flame” that would “consume the prison & D-r and McComb with it.” The city fathers equipped the jailers with small arms and cannon, which helped abort the impulse to violence.

  Hamilton’s attempts to stabilize the collapsing stock market with infusions from his sinking fund were repeatedly overwhelmed by the growing panic. Even the bears were swallowed in the general collapse. One of their chiefs, Brockholst Livingston, was reported as “nearly ruined,” and his fellow speculators were not in much better shape. The commerce of New York all but stopped functioning. An upriver merchant with several tons of wheat on ships refused to unload his cargo because no one could pay him in cash and he did not trust the notes of the people who offered to store it. Philadelphia also felt the shock. Land prices throughout Pennsylvania dropped by two-thirds.