SVB’s parallel in early American history
The Long View
The news cycle moves so fast, these days, that unless you have a personal interest in the collapse of the Silicon Valley Bank (SVB), which led the news a few weeks ago, you have already moved on to other ‘breaking news’ such as the indictment of former president Donald J. Trump.
My interest in the SVB is, as Yogi Berra would say, “Déjà vu all over again.”
One of the perks/drawbacks of being a student of American history is finding in it parallels to many current events. For instance, a vice-president of the United States was once indicted for serious crimes. His name was Aaron Burr and his crimes were murder and insurrection. A story for another day.
Right now, the SVB disaster reminds me of what happened to the U. S.’s first quasi-national bank, the Bank of North America, chartered by Congress on January 2, 1782, and run by several Founders of the country including the financier of the Revolution, Robert Morris, and his longtime business partner, Thomas Willing.
The 1782 date is important because it is during the period that I call the American interregnum, the years between the Battle of Yorktown in 1781 (the end of major combat operations of the Revolutionary War) and the inauguration of George Washington as first president in 1789. The country was not lawless, and had a Congress, but it and the entire national governmental structure was unworkable, imperfections that led to the Constitutional Convention and our democratic form of national governance. In fact, the BoNA’s charterers had tried and failed to set it up in 1781 in a subscription that fell short because likely investors were still worried about the war’s outcome.
One of Morris’s arguments for the BoNA was that it would act as a clearinghouse for the national government’s income and outgo, and also as the prime lender to the national government. He installed Willing, known as “Old Square Toes” for his conservative approach to money and life, as its president. They immediately ran into trouble as the share price dropped below par. To save it, the board engaged in deliberate deception. Would-be “subscribers” — depositors — were shown piles of silver coins brought up from the bank’s vault to the main floor by a conveyor belt; what the subscribers didn’t know was that when the belt returned the silver down below, workers would hastily rearrange the coins and send them back up again. Also, the bank sent out messengers with loan notes to be bought, and they were publicly bought but then surreptitiously returned to the bank.
The shenanigans worked.
Shortly the BoNA was solvent, able to loan the government $400,000 while paying its shareholders an 8 percent dividend. No wonder that Jeremiah Wadsworth of Hartford became the biggest stockholder, owning even more shares than Morris or Willing.
Then the favored loans began, mostly to directors and their circles of family and friends. The most flagrant director-borrower was James Wilson, a Scottish-born signer of the Declaration of Independence. He took $100,000 to invest in the Illinois-Wabash Company, for which he was acting as legal counsel. Several other directors did similar things, because the end of the Revolutionary War unleashed a rush for land in the west that could be bought wholesale, developed, and re-sold to investors who would retail it at a profit to individuals and groups seeking homesteads.
The land-speculation virus that enveloped America in the 1780s was not that much different from the tech frenzy of Silicon Valley two hundred years later.
In the 1780s, the land speculators soon learned that it took time — and additional money — to develop their new properties to the point of re-sale, and many got into serious trouble while waiting, Wilson and Morris included. When Washington asked Morris, a close friend, to be the first secretary of the treasury, Morris had to decline because his finances were in such bad shape. Shortly, he had to default on his debts and went to prison. Wilson, once quite wealthy, died in debt.
The BoNA was eventually righted and continued on until its governmental-support functions were transferred to an actual national bank. But the considerable damage done during its heyday has never been fully assessed.
Salisbury resident Tom Shachtman has written more than two dozen books and many television documentaries.