The Founders’ Finance, and Ours

My recent blogging hiatus was caused by a splendid family vacation in Key West, rendered yet more enjoyable by a chance encounter with our dear friends, Nick and Mary Eberstadt. Our temporary abodes were separated by a single block of Duval Street, occupied by a liquor store, a wonderful French bakery, and a raucous transvestite bar. (Mrs. Eberstadt professed to “resent these people. Their nail polish is so much better than mine.”) A good time was had by all.

In an approximation of work, I zipped through Thomas K. McCraw’s The Founders and Finance, a magnificent, just-published book on “How Hamilton, Gallatin, and Other Immigrants Forged a New Economy.” Familiar ground to be sure, but McCraw—arguably the country’s finest business historian—covers it elegantly, judiciously, and with a keen eye for the telling detail. His big detail is the amazing extent to which the nation’s young economy and institutions were shaped by immigrants—Hamilton and Gallatin, but also many others (Robert Morris). The recent arrivals lacked a connection to any particular state; thus, they were predisposed to think on a national, continental scale. And they lacked any deep connection to land and the peculiar institution that in many states went along with it; thus, they were anti-slavery, and they understood the ism in capitalism and its lifeblood, credit. As McCraw acknowledges, you can find non-immigrant Founders with those sensibilities (Gouverneur Morris is a fine example). But the basic point stands, and it’s worth pondering.

McCraw’s Hamilton comes across as the genius that he was. His Jefferson, by contrast, looks like the Joe Biden of his day: a blowhard and false friend of the people who managed to get it wrong on every single question of moment. (McCraw tries to soften the blow: finance, he says, was Hamilton’s strongest suit and Jefferson’s weakest. Well, yes. But then, Jefferson the statesman  fought the Barbary pirates with Hamilton’s Navy, and he bought Louisiana on Hamilton’s constitutional theory and on the credit Hamilton had established.) Beyond that, McCraw’s masterful account reminds one of a few points of current salience:

  • To build a financial system meant building institutions (foremost, the Bank), and that in turn meant constitutional construction. Everyone on all sides eagerly mobilized the “original public meaning” of the Constitution, only to discover that it would carry only so far. Those arguments, moreover, were part of a vituperative, sharply polarized and, over long stretches, closely divided debate. (McCraw records the often razor-thin margins on votes on the Bank, the debt, and internal improvements.) The stuff that we now take for granted and cite, reverently and/or precedentially, as constitutional wisdom easily could have come out the other way. In our current confused debate, it’s good to hold on to all of that at the same time: the Constitution as a lode star; the limits of mere interpretation and the impossibility of a Constitution beyond all politics; and the recognition that the Constitution can survive and, in a real sense, rests on political strife.
  • Hamilton’s Bank of the United States was in a sense the forerunner of the Federal Reserve, but McCraw’s account illustrates how far we’ve come, or rather fallen. For starters, the Bank was mostly a private institution. While it operated under a federal charter, Congress supplied a mere twenty percent of its initial capital. Better yet, Hamilton’s initial plan provided that the Bank could lend no more than $50,000 to the federal government. That did not quite hold: in an ingenious swap, the Bank eventually started with $2 million of the bonds with which Hamilton restructured the desolate debt markets. Still, the basic impulse is unmistakable: the Founders wanted the Bank (and by extension the economy) to be run by creditors—including, remarkably, foreign creditors who for long stretches sat on the Bank’s Board. Put differently, they wanted the Bank to perform its useful functions—allow money transfers across the continent, supply liquidity, check state banks through what we now call open market transactions—without having it doing what politically controlled institutions will do: wreck the currency, and finance Congress’s profligate consumption with cheap money. All things considered, that sounds like a good plan.
  • McCraw supplies much-needed context and notes several little-known features of Hamilton’s famous—and famously successful—plan to assume the states’ debts on top of the feds’ and to restructure both. First, Hamilton did an inventory of all the outstanding state and federal debts—no small undertaking, since no one had any idea what junk had been floated here, there, and yonder in the course of the war. (Hamilton came up with about $29 million in debt and $11.4 million in unpaid interest for the feds, and something like $79 for all state and federal debts at par. The actual number may have been closer to $74 million, against less than $2 million in federal revenue at the time.) Hamilton then segregated the foreign debt (about $12 million) and managed to restructure it promptly. And over time, his scheme allowed the country not only to service the debt but to reduce its burden on the economy and the budget. In 1790, Hamilton was staring at a debt-to-revenue ratio of 46:1. By 1794, he had cut it to 15:1; by 1800, the end of the Federalist era, it was something like 8.6. How come? Enhanced federal tax capacity (revenues more than tripled from 1790 to 1794); monstrous chunks of the federal budget (over 80 percent) devoted to debt payments; and above all stupendous economic growth, unleashed by a set of institutions that allowed the country to get to work. Hamilton bet on that, as did the foreign investors. Their huge gamble proved right.

It’s a different world now, in many ways. Still, just as a thought experiment, do the Hamiltonian thing. First, add up all the public debts—not just the “headline” debt of $16.4 trillion but also intergovernmental debts, agency debts (like Fannie and Freddie), unfunded obligations (which we can always renege on but then, no one forced the great Hamilton to redeem the bad debts at par), and state debts of various kinds: you end up north of $90 trillion, as against less than $3 trillion in federal revenues. (The exact numbers don’t matter; the order of magnitude does.) Not quite Hamilton land yet, but we’re getting there.

Federal receipts are now a much bigger piece of the economy than they were back when, and enhanced federal tax capacity—beyond nickeling and diming “billionaires”—isn’t on the agenda. Little of the cash is available for servicing the debt (forget reducing it): some 40 million Americans insist on their inalienable right to play bingo and visit doctors on someone else’s nickel from age 65 to eternity, and keeping them in shoes consumes more than 40 percent of the budget. That leaves growth as the only means of debt management. Where, pray tell, is it going to come from? And who is going to bet on it?

Maybe we should hand the country over to immigrants, or the IMF.