Trading Places: Understanding the Impact ...

The Year 1792

Ironically, insider trading was considered an essential competitive advantage centuries ago.  History points to William Duer as the first person to make an insider trader transaction. Duer, a former assistant treasury secretary, was largely responsible for the economic crash of 1792.  Duer used his government connections to speculate on the debt of the newly created American government. 

When Alexander Hamilton became the first secretary of the treasury, he argued that the government should issue bonds to help attract foreign investments and help pay down the government’s increasing debt.  Duer used his inside information to learn how these government bonds would be priced before they were released.  After some initial success, he began attracting the attention of other investors.  He was only too happy to take their money in hopes of increasing his own profits.  With this borrowed money, he attempted to corner the market on the newly issued 6% bonds. This collective of investors became known as the “6 Percent Club.”  Duer was so sure of his own success that he liquidated most of his assets, including his family estate in New Jersey and defrauded funds from a public lottery where he served as trustee. 

Alexander Hamilton was furious at Duer’s behavior and wrote on March 2, 1792: “'Tis time, there must be a line of separation between honest men and knaves, between respectable stockholders and dealers in the funds, and mere unprincipled gamblers."  He convinced the Bank of the United States to curtail lending, especially to the “knaves and gamblers”.  Hamilton’s efforts caused Duer’s plan to go belly up. Duer was left penniless and unable to pay back his debts, causing him to be chased through the streets of New York by a mob of people trying to lynch him. Eventually, he got reprieve while in debtor’s prison, where he died a few years later.  Duer’s double-dealing increased controls on the trading of securities and was responsible for the establishment of the Buttonwood Group, the predecessor of the New York Stock Exchange.