Founding Financial Father

Between 1776 and 1890, an awkward collection of agricultural and trading states on North America’s Eastern seaboard was transformed into the world’s largest capital-driven economy. There is no mono-causal explanation for this extraordinary change. But if one person has a claim to being the architect of the financial engine that propelled America’s astonishing economic development, it is surely Alexander Hamilton.

Even Hamilton’s many critics, past and present, will generally affirm that he was (with the possible exception of Charles Carroll of Carrollton) the Founder most knowledgeable about what was the still-nascent realm of economics. Hamilton was also, however, a classic “big picture” thinker. His voluminous writings reflect a remarkable capacity to relate economic writings—ranging from the apostle of free markets, Adam Smith, to Smith’s fellow Scot and the 18th century’s champion of mercantilism, Sir James Steuart—to ancient and modern political debates. From Hamilton’s perspective, those charged with the responsibility of government couldn’t pursue economic policy as if it could be determined in isolation from a nation’s political wellbeing or core beliefs. Nor, however, did Hamilton believe that governments should act as if the hard fiscal and financial truths of the moment could somehow be ignored.

It is from this standpoint that Richard Sylla and David J. Cowen seek to frame what they describe as Hamilton’s engineering of “the neatest, quickest financial revolution in history.” In Alexander Hamilton on Finance, Credit, and Debt they have brought together those central Hamilton writings which show how he identified and accomplished the economic objectives that would prove decisive for the American Republic’s political development. Sylla and Cowen also offer helpful and accessible commentaries to contextualize the different texts and illustrate how they fit together.

The period covered by this volume begins during Hamilton’s service as General Washington’s indispensable aide-de-camp in 1780. It finishes just before Hamilton’s tragic death in 1804 as a private citizen embroiled in une affaire d’honneur. Its contents will remind readers of Hamilton’s ability to write clearly, lengthily, and often at a moment’s notice. This afforded Hamilton an immeasurable advantage over his political adversaries inasmuch as he was able to overwhelm them through a sheer command of theory, history, and practical details that they often lacked.

Creating—but Also Stimulating—a Financial System

The downside of Hamilton’s incredible productivity as a writer is that anyone wanting to understand his thought can become lost in the thousands of pages he churned out throughout his life. But Sylla and Cohen’s judicious selection and abbreviation of key Hamiltonian texts will greatly assist those who want a grasp of the financial foundations of America’s economic success story.

Among the essential public papers here are Hamilton’s reports on public credit. These are supplemented by texts, not all of them penned for public consumption, in which Hamilton elaborated upon the political and philosophical ideas underpinning his approach to public finance. The picture that emerges is of a remarkably consistent set of views about the goals that Hamilton thought could be achieved through creating a financial system virtually from the ground up.

Some of these aims are well-known. Sylla and Cowen, however, provide an excellent summary of the main components of Hamilton’s endeavor. They describe these as:

  • Establishing effective institutions of public finance which led to the founding, practically ex nihilo, of the public credit of the United States;
  • Instituting a central bank modelled on the Bank of England to serve as the hub of an emergent banking and financial system;
  • Establishing the U.S. dollar as the country’s unit of account and medium of exchange;
  • Fostering the growth of a banking system that led to the establishment of private credit and bank money;
  • Nurturing the growth of securities markets; and
  • Encouraging the multiplication of business corporations, both financial (such as insurance companies) and non-financial (such as utilities).

In retrospect, that’s quite a list. The significance of Hamilton’s contributions also becomes clearer once we take into account two contextual factors.

The first is that Hamilton pioneered these measures in a climate of widespread antagonism throughout America and among some of the leading Founders toward the business of credit and finance. This antipathy often served as a proxy for a deeper hostility concerning the direction in which Hamilton and others wanted to take America. Not everyone wanted post-Revolutionary America to become a commercial republic.

Hamilton’s decidedly capitalist ambitions for America clashed with the view—held since time immemorial as well as by key actors in the Founding—that more virtuous lifestyles were to be found in agriculture. “Those who labor in the earth,” proclaimed Thomas Jefferson in his Notes on the State of Virginia, (1784) “are the chosen people of God.”

It was widely believed that urban settings, by contrast, tempted people to become what Jefferson derisively called “stock-jobbers”: those who focused single-mindedly upon acquiring wealth through investment and speculation. The alleged subsequent materialism and gradual loss of particular work-habits acquired through laboring on the land were, according to many 18th century Americans and Europeans, regressive trends that were exacerbated by the creation of new banking and financial markets.

Hamilton himself didn’t lack a romantic side. Consider his dreams of military glory and near-obsessive attachment to the 18th century gentlemen’s code of honor—adherence to which would bring him to an early grave. About questions of political economy, though, Hamilton remained deeply unromantic. It was folly, he insisted, to deny the workings of self-interest in human affairs. He also thought that a dynamic, capital-intensive economy was indispensable if the United States was to have the strength to maintain its independence in a world of nation-states bent on pursuing their perceived national self-interests.

The second contextual consideration to bear in mind (and one emphasized by Sylla and Cowen) is that Hamilton only exercised direct authority as Treasury Secretary over the first three items on the above list. Private actors and state-level officials, the editors specify, were directly responsible for items 4, 5, and 6. But they make an important point: Hamilton anticipated that items 1, 2, and 3 would incentivize other actors to pursue 4, 5, and 6.

This bolsters the growing argument on the part of some Hamilton scholars that he was more of a small “f” federalist than hitherto assumed. In any case, it speaks to considerable foresight on Hamilton’s part insofar as he sensed how people were likely to respond to the new set of economic conditions he was trying to create. It also testifies to Hamilton’s acumen as a constitutional strategist, politician, and financial policymaker as well as his realistic appreciation of how human nature impacts political and economic affairs. That particular combination of skills was rare in Hamilton’s age and arguably even harder to find in our own time.

Achievements and Ironies

In his lifetime, Hamilton witnessed much of the impact of his financial reforms. Most significantly, he saw the resolution of the debt problems that had burdened the old Confederation and a number of states. Another accomplishment was that all the states had essentially joined a national currency union by 1795. Business corporations in America had expanded from seven in 1780 to approximately 330 by 1800, and this was a trend of which Hamilton was likely aware. More generally, living in New York meant that Hamilton could not help but observe the beginnings of the commercial republic which he regarded as the political, cultural, and economic entity most likely to preserve America’s experiment in ordered liberty in an imperfect world.

There is, to be sure, much that Hamilton did not see, thanks to his premature death in 1804 in a duel with the sitting Vice President of the United States. This “Moses seeing but not entering the Promised Land” situation points to a curious lacunae in some of the contemporary literature about Hamilton: namely, that scant attention has been given to the ways in which his program contributed to America’s long-term development.

To their credit, Sylla and Cowen do try to gauge the longer-term effects of Hamilton’s financial reforms. Perhaps the single most important abiding political benefit, they argue, was that Hamilton’s system made it possible for the United States to acquire enormous amounts of territory in a generally peaceful manner.

Apart from Britain, few 19th century nations could have written the checks needed to double their size, as happened via the Louisiana Purchase in 1803, or, 50 years later, to buy the southern parts of Arizona and New Mexico, or, in 1867, to purchase Alaska’s 586,412 square miles of territory. Obviously particular developments in the sphere of foreign affairs helped facilitate these transactions. But so too did the United States’ enviable public credit—which was indisputably Hamilton’s creation.

Sylla and Cowen omit one notable irony. It is that, paradoxically enough, it was Jefferson—the man with such grave misgivings about Hamilton’s financial system that he tried to dismantle parts of it—who used the United States’ public credit to expand what Jefferson called the “empire of liberty” into the West when he accepted Napoleon’s offer of 828,000 square miles in return for $15 million (approximately $1.2 trillion in today’s money).

Hamilton’s financial innovations, it turns out, contributed to one of the most notable political successes of someone who despised him. They also helped realize a nation-state’s territorial goals in that rarest of ways, which is to say, relatively peacefully. For that all Americans, past, present, and future, owe Alexander Hamilton a great non-monetary debt.