Alexander Hamilton The Men Who Made America Rich

The Wall Street-Washington revolving door is as American as apple pie

https://www.lexology.com/library/detail.aspx?g=655c4531-39c6-41bc-9e2f-e7487727306b

Arnold & Porter  USA March 14 2013

The most oft-heard criticism of Mary Jo White’s nomination to become chair of the Securities and Exchange Commission is that she has made repeated trips through the “revolving door” between government service as a prosecutor and private practice representing, among other clients, the kinds of business executives and companies she used to prosecute. As John Cassidy of The New Yorker put it, “it seems a bit peculiar for a President who has repeatedly pledged to crack down on Wall Streetwrongdoing to pick as one of his top financial cops a figure who has spent much of the last decade defending senior bankers.”

The announcement of her nomination coincided with a report last month by the Project on Government Oversight, a nonprofit group, that found a pattern of revolving door SEC alumni helping companies “influence SEC rule-making, soften the blow of SEC enforcement actions, block shareholder proposals and win exemptions from federal law.” White’s confirmation is all but certain after her impressive performance at Tuesday’s confirmation hearing, but the revolving door issue will not go away—even though, especially with high-stature nominees, it misapprehends history, what lawyers, especially senior litigators, are about, and the real-world impact of money on revolving door public servants.

The revolving door has been a fixture of American governance ever since Alexander Hamilton went from a post-Revolutionary War law practice to become the first secretary of the treasury and then back to a very lucrative law practice, and it has produced exemplary public servants. In the 1930s and ’40s, for example, Dean Acheson went from aWashington law firm where he often dealt with international legal issues to undersecretary of the treasury, then back to his law practice after a falling out with President Roosevelt, and then back to government after mending his fences with FDR, this time as an assistant secretary of state. He eventually became one of America’s greatest secretaries of state—and then returned to his Washington law practice. No one ever suggested that his public service was ever influenced by his private practice.

To be sure, the revolving door isn’t always the stuff of American legends.Louisiana Senator John Breaux, a Democrat who served in Congress from 1972 to 2005, is perhaps best remembered for his 1981 success in getting huge sugar subsidies enacted as part of Republican-sponsored tax cut legislation. “My vote can’t be bought, but it can be rented,” he told reporters afterward. After leaving the Senate, Breaux joined a lobbying firm that in 2010 had billings of more than $11 million from blue chip companies.

“The revolving door has been a fixture of American governance ever since Alexander Hamilton went from a post-Revolutionary War law practice to become the first secretary of the treasury.”

But Mary Jo White, like many nominees to law enforcement and regulatory positions, is a career litigator. Here’s the DNA of litigators: Between the bounds of ethics and the duty to adequately, if not zealously, represent their clients, they want the best possible result. It doesn’t matter whether they represent the butcher, the baker, or the candlestick maker—or a big bank or the SEC. When a Major League baseball team trades one of its longtime players to another team, everyone expects—indeed, would be astonished if it didn’t happen—that player to try as hard as he can to wreck his former teammates’ chances of winning the pennant. Litigation, a competitive endeavor, is no different. Trials are zero-sum games in which there are almost always a clear winner and loser. Even in settlements, especially involving the government, someone is perceived to come out best. Any high-level nominee’s residual ties to an industry will just evaporate in the face of the competitive challenge of pursuing and achieving the goals and objectives of his or her regulatory agency, especially when litigation is so often the tip of the regulatory agency spear.

Finally, at this level money isn’t an issue, which is why the PGO study is irrelevant to Mary Jo White’s nomination. When midlevel employees at regulatory agencies—that is, those with no policymaking authority—leave the government, they have to find a job that pays well. Perhaps they were single when, in their mid-20s or early 30s, they started their public service careers, but now many are married, supporting families, and paying off mortgages. The risks that financial pressures will lead them to cut potential future employers a break and/or barter their agency connections and insider knowledge to obtain or succeed in the private sector—and sometimes in so doing breach their obligations to avoid conflicts of interest—are not insignificant.

“Here’s the DNA of litigators: Between the bounds of ethics and the duty to adequately, if not zealously, represent their clients, they want the best possible result.”

But in the case of a successful senior lawyer like Mary Jo White, this concern is nonexistent. The much repeated emphasis on her lucrative law practice should serve only to underscore that her chairwomanship of the SEC, whether a success or failure, will not be a platform for burnishing her marketability among New York City law firms. She doesn’t need that.

So in considering the revolving door phenomenon of American public life, let’s not throw the baby out with the bathwater. The revolving door has often served this country quite well, and there is no reason that it will do otherwise in the case of Mary Jo White.

This article originally appeared in Forbes on March 14, 2013.

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An excerpt from

Financial Founding Fathers

The Men Who Made America Rich

https://press.uchicago.edu/Misc/Chicago/910687.html 

By Robert E. Wright and David J. Cowen

Alexander Hamilton (1755–1804)

February 22, 1791, was an ordinary day for the 42,000 or so citizens of Philadelphia, the largest city in the new nation and, for the time being, its capital. But for one unusual man, Secretary of the Treasury Alexander Hamilton, it was an extraordinary day, and a more extraordinary night. Hamilton was at work on a document that would make or break America's nascent financial system. The stakes were enormous. What lay at risk was the centerpiece of Hamilton's financial system, a bank. Not just any bank, but a Bank of the United States, with the right to open branches anywhere in a nation then serviced by only four relatively small and localized banks. Hamilton's proposed Bank was to be managed by private businessmen but to include a strong government investment of $2 million, or 20 percent, of the slated $10 million in capital. Though a seeming pittance today, $10 million was a colossal sum for the day, dwarfing as it did the combined capital of all joint-stock companies then in operation in the country. In other words, if the Dow Jones Index then existed, the Bank alone would have comprised over half of it.

Several years earlier, in 1789, Hamilton had been appointed the first ever Secretary of the Treasury. In that post, he directed a monumental undertaking to straighten out the nation's tangled finances. He funded the national debt and even engineered the "assumption" by the new federal government of all the various state debts accrued during the Revolutionary War and its aftermath. That was no mean feat, given that the taxpayers of the fiscally responsible states did not want to pay the debts of their profligate neighbor states. With a little luck and a big dose of political acumen, Hamilton had made federal "assumption" of state debts a reality. With that base in place, the time had come to continue work on the financial system by establishing a national bank, an institution where savers and users of capital could come together, where a paper currency could be created and made acceptable for commerce by its easy convertibility into specie (gold or silver coins), where both entrepreneurs and governments could safeguard their cash and receive loans.

Banks were then highly controversial, but Hamilton was at the apex of his brilliance, guiding his Bank bill through Congress, ably aided by Congressman Fisher Ames of Massachusetts, a nationalist of the most fervent type. Although the Bank bill passed the Senate on January 20, 1791, congressman and Federalist Papers co-author James Madison tried to defeat it in the House. On February 8, the diminutive Madison and his allies lost a roll call that counted 39 in favor of the Bank and only 20 opposed. The political fighting had been particularly nasty, causing one senator to state in his diary that "some gentlemen would have been ashamed to have their speeches of this day reflected in the newspapers of tomorrow." The attack by the mostly southern opponents to the Bank was a landmark in American history, marking as it did the birth of the agrarian or Jeffersonian wing of the Republican Party. While this stand was the agrarian Republicans' first, it was certainly not their last; they would not rest in their attempt to destroy the creative work of Hamilton and his funding system.

Although it had passed both houses of Congress, the Bank bill was anything but a done deal. To become law, President George Washington would have to sign it, and do so before February 26, the time limit imposed by the Constitution. While Hamilton's ties to the president were many and deep, forged as they were during the crises and dangers of the Revolutionary War, Virginia's agrarian Republicans, led by Secretary of State Thomas Jefferson, Attorney General Edmund Randolph, and Madison, also had strong ties with Washington. All four gentlemen shared Virginian roots and bore the stain of slaveholding, though some more thoroughly than others. The agrarians were formidable adversaries because they were well-educated men with brilliant minds. Most importantly, their opposition was not so much political as ideological; they vehemently opposed the Bank as unconstitutional and potentially dangerous to republican government. Jefferson and Randolph pressed the president to veto the Bank bill, and Madison's vain attempt to galvanize opposition to the Bank in Congress made it obvious where he stood.

Washington had a decision to make. Dare he veto a bill of such importance passed by both houses of Congress and eagerly submitted by his closest economic advisor? Dare he sign the measure and face the accusation that he had passed a law that was, according to many prominent Virginians, impolitic, poor policy, and, perhaps most damning, clearly unconstitutional? Washington showed Hamilton the arguments against the Bank set forth by Randolph and Jefferson and gave him a week to respond. In essence, he placed in Hamilton's hands the power to save his creation.

It was the sixth day, February 22, and Washington's deadline loomed. As the sun set, thirty-two Philadelphia watchmen who shouted out the hour started their work as each of the 662 lamps that brought light to the seaport's dark thoroughfares were lit. By suppertime that evening, the printing presses of the local newspapers stopped. The door of the Treasury Department at 100 Chestnut Street was locked. City Tavern, the central meeting place for politicians and merchants, served its last meal for the evening at 8 p.m. A few hours after that most of the other hundred or so taverns shut their doors for the night. Perhaps Bishop William White, the revered pastor of Christ Church, reviewed his Sunday Sermon at his residence, 309 Walnut Street, before turning in. By midnight most residents were fast asleep, and one would expect that the home of Robert Morris on Sixth and Market, where President George Washington resided, was quiet, as were the residences of Thomas Jefferson at 274 High Street, Tench Coxe at 126 South Third Street, and his neighbor Oliver Wolcott at 121 South Third Street.

But if anyone that night ventured a little farther down Third Street from the Wolcott house they would have observed the lights on at number 79, the home of Alexander Hamilton. The hour of the walk would not have mattered as Hamilton, with wife Elizabeth assisting, worked all night long to finish the rebuttal. Many years later, Elizabeth Hamilton recalled that night: "I sat up all night with him. ... He made your government. ... He made your bank. ... My husband said, 'We must have a Bank.'"

Many observers, however, demurred or remained unconvinced of the necessity of a national bank. Hamilton believed that the long-term viability of his new funding system depended on passage of the law. The pressure to produce a flawless retort weighed heavily on him, and he rose to the challenge. In the first clear articulation of the broad or loose interpretation of the Constitution, Hamilton argued that the Bank, though not explicitly mentioned in the Constitution, was clearly constitutional because "every power vested in a Government is in its nature sovereign, and includes by force of the term, a right to employ all means requisite and fairly applicable to the attainment of the ends of such power."

Hamilton had turned the tables on his opposition. Where Jefferson, Madison, and Randolph argued that the federal government had no power to incorporate a bank because it was not explicitly allowed to do so in the Constitution, Hamilton retorted that the government enjoyed all powers necessary to its functioning that were not explicitly forbidden. Hamilton's logic was unanswerable. From that day forth the doctrine of "implied powers" increasingly dominated legal interpretation of the Constitution. Hamilton had gained not one but two victories, the establishment of the Bank and the widespread acceptance of the doctrine of implied powers.

Washington signed the bill on February 25. The centerpiece of Hamilton's creation was in place. The creator had once again triumphed. However, the "triumvirate" of Madison, Randolph, and Jefferson was horrified that their fellow Virginian had signed the bill. As one pamphleteer noted, "the great Washington burst from the trammels which had been prepared for him, shook off the bias on which the triumvirate had placed their main dependence, and to the great mortification of their party, fixed his signature on the bill." The agrarian trio would not soon forget.

Quite likely, Washington signed the Bank into law because he knew that the financial system was as yet incomplete and that the country needed a national bank, both to aid the government's fiscal operations and to help unify the nation's credit and capital markets. Moreover, Washington, like Hamilton, wished to expand the role of the federal government. Finally, Washington realized that Madison and Jefferson were being hypocritical. When it suited their purposes, they had implicitly upheld the doctrine of implied powers now explicitly advanced by Hamilton. Reflecting some fifteen months later on the titanic Constitutional struggle, the secretary succinctly explained: "A mighty stand was made on the affair of the Bank. There was much commitment in that case. I prevailed."

 

Prevail is a word that describes Hamilton perfectly. The ultimate self-made American was most likely born in 1755, not on the mainland but rather in the sticky heat of Nevis, a tiny island in the West Indies. Young Alex learned early to prevail because he had to. He was, as John Adams later claimed, "the bastard brat of a Scottish peddler." Hamilton's father, James Hamilton, was the fourth son of a Scottish aristocrat. With no chance of inheriting his father's property, he traveled the Caribbean seeking his fortune. He did not find it, but he did discover the warm embrace of Rachael Lavien nee Faucitt. That half-French, half-English island beauty had fled from her French husband, who had imprisoned her for what he considered indecent and suspicious behavior.

Rachael and James lived together but could not marry because of Rachael's marriage. Religious and public policy considerations rendered divorce well-nigh impossible for British subjects. Couples often separated, but, because a divorce could only be granted by an act of Parliament, usually only those with political connections or large sums of cash could procure a divorce that would allow legal remarriage. Undaunted, Rachael bore two sons, James and Alexander. The four lived in St. Croix until the feckless James declared bankruptcy and abandoned his family. To supplement the family's income, young Hamilton apprenticed as a clerk in the New York trading firm of Nicholas Cruger, Cornelius Kortright, and David Beekman. The precocious youth even managed the business when Cruger, the principal based locally, was away.

Hamilton, at the age of 13, had to prevail again when his mother, who had pieced together a livelihood as a retailer, died. He prevailed again when his guardian, a distant relative named Peter Lytton, committed suicide the following year. He prevailed yet again in 1772 when a deadly hurricane struck the West Indies while he was in charge of Cruger's operation. That storm was so severe that Pennsylvania sent provisions to help supply "the unhappy Sufferers." Though one of its victims, the young Hamilton, now just 17, was able to create something positive out of the storm both literally and figuratively: he wrote a letter describing its horrible aftermath and showed it to Dr. Hugh Knox, a local clergymen. Knox was so impressed with the piece that he had it published in a local newspaper. The newspaper story earned Hamilton the respect and admiration of his community and brought forth benefactors—most likely Knox, his employers, and cousin Ann Lytton Venton—who sent him to the mainland for a proper education. Hamilton would never return to his native land.

As a nominal Presbyterian, Hamilton had his heart set on Princeton, then the College of New Jersey. He sailed to the mainland armed with a letter of recommendation from Knox, an alumnus of that college. Princeton, however, would not allow the impoverished orphan to move through the curriculum at his own pace. Columbia, then King's College, was more accommodating. So instead of twiddling away the hours in the wilderness of New Jersey, Hamilton, after living with Elias Boudinot in northern New Jersey as he raced through some preparatory work at a grammar school, settled in the bustling metropolis of Manhattan.

There, Hamilton was quickly drawn to the radical cause bent upon overthrowing British rule. Hamilton, after all, was a college student, and the 1770s were a tumultuous time. He was not a typical radical, though, for he disdained mobs and disorder. So rather than burn effigies or set up Liberty Poles, he penned several widely read polemics. Yet when the real shooting began in 1775, Hamilton zealously enlisted in the patriotic cause. In March 1776 the undergraduate was appointed a captain of the New York artillery, but that at first meant only title without command, as Hamilton, in accordance with the custom of the day, had to provide his own troops and supplies. Eventually, however, he scraped a unit together.

Hamilton and his men fought bravely in several early battles, including the unsuccessful attempt to hold Manhattan from the British. Hamilton and his unit covered Washington's retreat across New Jersey. In the sharpest exchanges, Hamilton's artillery kept the British at bay while the bulk of the American forces crossed first the Raritan River and later the Delaware. Hamilton also took part in the successful, and famous, counterattacks at Trenton and Princeton in the winter of 1776–77. One wonders if Hamilton took special joy in pouring grapeshot into a Redcoat position in Princeton's Nassau Hall.

Observers marveled at the apparent contradiction of Hamilton's youth and skill, but the early break in Hamilton's military career was due to his administrative skills, which were nothing short of masterful, not his battlefield heroics. General Washington invited the brilliant young Patriot to become one of his several aides-de-camp, positions usually reserved for the "well-bred," not orphaned bastards. But Hamilton could and would prevail on talent alone. Washington recognized that talent, giving ever-increasing responsibility to the young officer, now a lieutenant colonel. During the next few years of fighting, when desertion was all too common, Hamilton stayed loyally by his commander's side. He was there for the frozen winters at Valley Forge and Morristown; the military disasters like the abandonment of New York City in 1776 and the subsequent retreat across New Jersey; the real treacheries of Benedict Arnold, and the perceived treacheries of an impotent Continental Congress; and the failed opportunities like Monmouth, when he was at Washington's side when the Virginia gentleman lambasted General Charles Lee in mid-battle for gross misconduct. And Hamilton was with Washington during the good times, the infrequent victories, and the secret march to trap Cornwallis at Yorktown. There, Hamilton capped his military career with battlefield heroics by charging and capturing an important British redoubt.

"Little Hammy" or the "Little Lion," as he was affectionately known, was, along with other favorites like Generals Nathanael Greene, William Alexander ("Lord Stirling"), and Henry Knox, clearly ensconced in Washington's inner circle. Some believe that Washington was the father figure that Hamilton never had, and perhaps Hamilton was the son that Washington never had. Their special bond, though occasionally strained, lasted a lifetime. Though much younger than Washington, Hamilton would not long outlive the general.

Despite the turbulence of the war years, battle plans were not the only subjects flourishing in Hamilton's fertile mind. Hamilton understood that the rebels' finances were in shambles. In an attempt to improve the situation, he commenced communication with Robert Morris, another self-made man of deep importance to the Patriot cause. It is here we first glimpse Hamilton's creative genius, as he became the architect and chief advocate of a powerful national bank. In 1779, and again in 1781, as the war raged, Hamilton drew up proposals for a national bank. Those recommendations planted seeds for an idea that would take a decade to come to fruition. Central to Hamilton's early plans were several key provisions of what would later be the hallmarks of his financial program: foreign loans, partial government ownership of a national bank, and use of that bank to provide the national government with short-term loans.

A national bank, Hamilton realized as early as 1781, would both stimulate the economy and enhance the government's shaky credit. "In a National Bank alone," he wrote, "we can find the ingredients to constitute a wholesome, solid and beneficial paper credit." He was correct. Acting as Superintendent of Finance, Morris teamed up with private entrepreneurs to establish the rebellious nation's first national bank, the Bank of North America. We will learn more of this episode in "Angels Risen and Fallen." For now, suffice it to say that the Bank of North America, after struggling to its feet, aided both the war effort and the recovery before politics interceded and temporarily stripped the institution of the corporate status granted it by Congress. It continued to function, however, as an important, Philadelphia-based commercial bank.

Hamilton also married during the war, in December 1780. His bride, his little "nut brown maid," was the sweet and petite Elizabeth Schuyler, daughter of New York patroon (manorial baron) General Philip Schuyler. Hamilton clearly loved his "Betsey." Although Hamilton flirted with Betsey's vivacious sister Angelica, we know of nothing more passing between the in-laws than playful letters and the occasional polite kiss. Hamilton did have at least one extramarital affair, with the lovely Maria Reynolds, who was in league with her husband and attempted to blackmail the nation's highest financial officer. Luckily for Hamilton, news of the adultery and failed blackmail attempt did not leak to the public until years later. Hamilton, to his credit, owned up to the whole thing. He remained wedded to Betsey, who bore him eight children.

 

After the war, Hamilton, young bride in hand, sought training in the law. The young nation had no formal law schools, but obtaining entry into the lucrative field of law was as expensive then as now. A would-be attorney had to pass rigorous examinations in order to begin practice, but only after apprenticing to a practicing lawyer for three years, the apprentice paying for the privilege of doing the lawyer's menial work. Hamilton, as usual, found the requirements too rigid. For the average mind, three years was probably just enough time to learn the rudiments of the law and pass the examinations. But for Hamilton three years was an eternity, a waste of his considerable talents and energy. He therefore jumped at the opportunity presented by a law waiving the three-year apprenticeship rule for young men who had been called away from their legal studies to the war effort.

Hamilton had certainly gone off to war but he had not really been studying law at the time: though later showered with honorary degrees, he never officially graduated from college. The state legislature, however, had passed the law because it wished to give its officers some hope for the future. So the state allowed Hamilton through the loophole, and even widened it by providing him a study extension from the April deadline until October. Still, Hamilton's accomplishment was truly stunning. Between January and October 1782, he qualified himself to practice both office and courtroom law. He did it, interestingly enough, by writing a forty-thousand-word textbook for himself. That textbook, about half the length of this book, was copied, by hand of course, by other attorneys-in-training until it was finally in wide enough demand to be published. That was roughly the equivalent of a Ph.D. student today writing and publishing a scholarly monograph in order to prepare himself for his qualifying exams. Clearly, this was no ordinary man!

Hamilton soon became the greatest of the nation's early lawyers, at least in the estimation of famed New York jurist James Kent. He did it by penetrating to the very root of each issue, concentrating always on first principles. Those qualities we have already seen in his telling opinion on the constitutionality of the Bank of the United States. They showed up in everything that he did.

Because of his constant attention to first principles instead of the meaningless detritus that usually occupies lesser minds, Hamilton's thought was often far in advance of that of most of his contemporaries. This is not to say that he could see the future but rather that he took positions that remained unpopular or misunderstood until well into the nineteenth century. Two episodes in 1784 demonstrate his prescience. First, Hamilton established a private commercial bank. The innovation came not so much from the bank itself, which closely followed the procedures established by its predecessor, the Bank of North America. Rather, the innovation came from the way in which the bank, the very same Bank of New York that still graces Wall Street, found legal life.

The Bank of New York was a joint-stock company, not a partnership, which was a much too cumbersome form of organization for a large firm. In a partnership, the business had to be liquidated and re-formed each time a partner died or sold out his equity in the company. Moreover, when partnerships sued, or were sued, each partner had to be named in the suit. Worse still, each partner was responsible for all of the firm's debts, even those contracted by other partners. Partners therefore had to watch each other like hawks.

Partnerships with more than a handful of principals were simply too unwieldy. In a joint-stock company, by contrast, owners could buy or sell their equity or shares in the firm without affecting the operation of the business. Moreover, joint-stock companies could sue and be sued as a single "body politic" instead of as the individuals composing it. And those individuals could not be sued in their individual capacities for the company's debts. For big companies requiring large amounts of capital and hence many owners, like an urban commercial bank, the joint-stock form was well-nigh essential.

In the Anglo-American tradition, however, it was customary for a company that wished to take the joint-stock form to obtain a legal charter. That meant that the politicians got involved in order to pass a law granting the company explicit corporate privileges. The great British joint-stock companies, like the East India Company and the Bank of England, had each obtained a parliamentary charter. Many of New York's legislators, however, were in no mood to grant a charter to the Bank of New York. Upstate politicians did not see how a bank in New York City would help them, but they could imagine any number of scenarios where the bank could hurt them, particularly at the polls in the next election. The New York State legislature, therefore, refused to answer the bank's "prayer," its formal request to incorporate.

After such a rebuff, most would-be incorporators would have given up. But not the Little Lion. He understood that incorporation merely granted a joint-stock company the imprimatur of the state. The most essential advantages of the joint-stock form, negotiable shares, status as a legal entity, and limited liability, could be secured without formal legislative approval. So the Bank of New York formed and began business anyway, under private "articles of association" instead of a special legislative act. Hamilton used the same technique again with the Merchants' Bank in the early nineteenth century.

The importance of articles of association has largely been lost to history because most joint-stock companies, including the Bank of New York, the Merchants' Bank, and the Bank of North America, sought and eventually received formal incorporation. What has been missed is that many joint-stock companies used Hamilton-style articles of association to begin business before receiving formal sanction to do so. Even when faced with a recalcitrant legislature, any new company that so desired could enjoy most of the benefits of the corporate form. The mere option of forming without a charter gave companies great leverage to force the legislature to come to terms. If a particular legislature would not deal, the company could simply begin business and wait until favorable election results made formal incorporation possible. Hamilton, in short, had greatly reduced the barriers to entry into large-scale enterprises. Because of the loophole Hamilton found and exploited, state legislatures eventually gave up trying to limit the number of corporations and established administrative procedures for incorporation. Not surprisingly, one of the first states to do so, in both manufacturing and banking, was New York.

The other 1784 episode that demonstrated Hamilton's prescience sprang from the case of Rutgers v. Waddington, which underscored the importance of the concept of judicial review. New Yorker Elizabeth Rutgers, a well-to-do elderly widow who fled the British army in 1776, sued Joshua Waddington for £8,000 in damages caused by Waddington's use of her brewery during the British occupation. Rutgers brought her action under the terms of the Trespass Act, a radical piece of legislation that flouted established principles of common and international law. Serving as counsel to the defense, Hamilton shredded the law as essentially illegal and won a ten-fold reduction in the damage claim.

Rutgers v. Waddington did not establish the principle that courts could strike down a law as unconstitutional. But it planted the seeds that later grew into that check or block against abuse of legislative power. For Hamilton, as for most Americans, government was bound to act according to the rules set down in the federal or state constitutions. Yet the constitution would be meaningless if any legislature could pass a law inimical to it and force the courts to execute that law. Judicial review has grown into one of the most important ways by which the government is prevented from growing too venal, too set upon satiating its own ends instead of those of the people.

The Rutgers case applied to New York's 1777 state constitution. Though created and passed in the early days of the war, as the state legislature fled the approaching British, New York's first constitution was a successful one. New York attorney John Jay was responsible for it. Jay clearly understood the "agency problem" inherent in government—the tendency, that is, for government officials (the "agents") to act in their own interests rather than in the interest of the people who elected them. Jay made provisions, including a special council of revision to review the constitutionality of laws, to counter it. In that relatively stable constitutional and legal environment, Hamilton thrived. Soon, therefore, he could turn his attention to the establishment of a new federal constitution.

As far as anyone has been able to ascertain, Hamilton's role in the Constitutional Convention proper was relatively minor. His efforts before and after the Convention, by contrast, were crucial. Hamilton was the most ardent of the nationalists, that group of men who sought the creation of a more powerful national government, because he had no ties to any particular state. He had lived in New Jersey and Pennsylvania as well as New York. As an opponent of slavery, he was not comfortable in the southern states with their heavy concentrations of slaves. Commercial New England was more to his liking. But as a native of the West Indies, he thought in terms of "America" rather than any one of the several states.

Accordingly, Hamilton set out to replace the Articles of Confederation, a weak national frame of government established during the Revolution. He first came to despise the impotent Articles during the conflict because they proved unequal to the task of properly provisioning the Continental Army. His hatred solidified during his stints as a Continental congressman and a confederation tax collector as he saw the futility of the instrument firsthand, and even in peacetime. So in 1786 Hamilton jumped at the chance to represent New York at an interstate trade convention in Annapolis, Maryland. Hamilton steered the convention to release a report that solemnly declared that the nation faced a grave crisis that transcended mere trade disputes. That same report urged the states to send delegates to a general convention in Philadelphia in May of the following year.

That meeting, of course, was the one of lore that led to the Constitution. But the mere creation of that document did not make it the law of the land. Before it could take effect, nine states would have to ratify it. Its ultimate adoption, therefore, was by no means assured. Little states with no real future on their own, like Delaware, quickly signed on. (Rhode Island, with its strong streak of independence, was the exception to this rule.) But sentiment in larger states like Massachusetts, New York, Pennsylvania, and Virginia was mixed. Urban and commercial men typically supported adoption because they realized that the new government would be good for trade. Moreover, such men understood that the document contained numerous checks and balances against government venality that would prevent government officials from usurping their liberties and properties. Many inland farmers, on the other hand, did not see much in the proposed Constitution to benefit them. Moreover, they saw much to fear. Had they not just suffered gravely to establish their independence? Would their sacrifices—farmers had won the war, of course, or so they believed—simply go to create a new tyrant that would aid everyone but themselves?

In fact, were it not for the efforts of Hamilton, James Madison, and, to a lesser extent, John Jay, the Constitutional Convention might have become a mere footnote in world history. Those three men penned the famous Federalist Papers, hundreds of pages of closely reasoned exposition on the merits of the proposed frame of government. Those essays, which appeared in key newspapers throughout the country, persuaded many fence sitters that the Constitution was sound. The Constitution was not submitted to a plebiscite. Rather, the decision for adoption was delegated to special constitutional conventions in each state. We shall never know what percentage of the American electorate wished to see adoption, but we do know what happened in each state convention, and that Hamilton was the leader of the victorious pro-Constitutional forces in New York's ratifying convention. In the late eighteenth and early nineteenth centuries, legislative gatherings tended to be boisterous, all-out affairs filled with bribery, violence, intrigue, and dastardly parliamentary tricks. Indeed, Pennsylvania and Massachusetts both ratified thanks to deft maneuvering and outright chicanery on the part of nationalist forces.

When New Hampshire became the ninth state to ratify, the Constitution went into effect. When Virginia followed suit on June 25, 1788, the remaining holdouts—Rhode Island, North Carolina, and New York—took on the appearance of rogue states. Nevertheless, the prospect of New York joining the new union at first looked dim. Most of the delegates to the ratifying convention were chosen by upstate farmers and hence were opposed to adoption. To win, Hamilton and Jay spread rumors that New York City was prepared to secede from the state and join the new nation on its own. That outcome would have landlocked upstate New York. (The St. Lawrence River was not a reliable international thoroughfare until the construction of the St. Lawrence Seaway in the twentieth century, and of course the Great Lakes and Mississippi basin were not yet open to American commerce.) The upstate forces capitulated, as did the other holdout states.

 

On April 30, 1789, the new government commenced in earnest; President Washington was sworn in on the steps of Federal Hall on Wall Street in Manhattan, the temporary national capital. Soon after Congress created the Treasury Department in September 1789, Washington offered Hamilton the post of Treasury secretary, and the Senate concurred. Hamilton accepted the position, not for the pay, which was far inferior to what he was earning in private practice, but rather because it provided him a platform from which he could remake the American economy and the financial system.

Today, the Departments of State, Treasury, Commerce, and Defense are all massive. There was no such parity in 1789; the Treasury was the focal point of the entire executive branch of government. From the outset, the department's influence was marked by its sheer size and scope of affairs. Its initial headcount, thirty-nine, ballooned to fifty-three within a year. Compare that with the staff of five at State under Jefferson, and three at Henry Knox's War Department. Total salaries for each department also demonstrate Treasury's dominance: Treasury, $43,000; State, $6,250; War, $6,500. Hamilton alone among all the cabinet officers had an assistant. Most impressively, or ominously depending on one's perspective, Treasury maintained a comprehensive network of agents throughout the country.

The other cabinet members had additional reasons for jealousy. Congress continually asked Hamilton, and Hamilton alone, for strategic guidance. More alarming still, Hamilton responded to such requests with alacrity. The secretary presented several monumental state papers that, when combined with the entrepreneurial talents and self-interested desires of thousands of Americans, forged a national financial system: The Report on Public Credit (January 9, 1790), The Report on the Bank (December 13, 1790), The Establishment of a Mint (January 28, 1791), and The Report on Manufactures (December 5, 1791). Taken together, Hamilton's reports were nothing short of a strategic outline for the establishment of a thriving economy rooted solidly in the bedrock of sound fiscal management, a stable monetary system, extensive short-term commercial credit, and long-term development capital. On the grandest scale, the secretary's policies helped to solidify the new government by creating incentives for wealthy individuals to invest in it, directly through ownership of its bonds and indirectly through ownership of shares in the Bank of the United States. He surmised, correctly as it turned out, that the financial system would be "the powerful cement of our Union."

In the Report on Public Credit, his first and arguably most famous report, Hamilton proposed that the new national government take responsibility for all state and national debts left over from the war. This was a truly revolutionary concept. Those $75-odd millions of obligations, which took literally scores of different forms, traded at just fractions of their face value. Few expected payments on those decade-old obligations. So why did Hamilton argue that the national government should "service" this debt? Would it not be better simply to default on it, as so many countries had done before (and since)? The fledgling United States certainly did not appear to be in a position to pay its debts. But herein lies the genius of Hamilton. Where others saw a problem, he saw opportunity. While others viewed the national debt as a threat to republican government, Hamilton believed it was "a national blessing." In addition to aligning the interests of the wealthy with those of the government, his funding plan would increase the nation's credit overseas, making it cheaper and easier for both the government and private enterprises to obtain foreign financing. Finally, funding would create a form of liquid capital that would help the economy to allocate resources more efficiently.

Making a proposal was one thing. Getting it through Congress was quite another. Americans were generally agreed that the portion of the national debt owed to foreigners, the foreign national debt, should be paid in full. They differed, however, on the best way to service or pay off those debts. The question of the national debt owed to citizens, the domestic national debt, was even stickier. Some, including Madison, wanted to discriminate against most public creditors by compensating the original holders of the debt in lieu of the current owners. Much of the national debt was composed of promissory notes given by field officers to soldiers and by commissary officers to farmers. The soldiers and farmers had often immediately sold the notes at steep discounts for cash or goods. Madison wanted to make the soldiers and farmers whole, at the expense of those who subsequently purchased the notes.

Hamilton eventually crushed the discrimination argument with his usual barrage of logic and first principles. The debt instruments were simply a species of property, the value of which fluctuated with the government's fortunes and interest rates. They were, moreover, fully negotiable instruments. In other words, exchanging them was perfectly legal. The original holders had not been coerced into selling and had received a valuable consideration for the ownership of the obligations. Only the current owners of the bonds, Hamilton concluded, could be compensated. For those who could not follow his reasoning, Hamilton offered the Continental Congressional resolution of April 26, 1783, authored ironically enough by Madison, that solemnly pledged that there would be no discrimination against those who obtained government debt in the secondary market.

Assumption of state debts, turning debts owed by the state governments into an obligation of the new federal government, proved a tougher nut to crack. Several states, notably Virginia, had demonstrated fiscal responsibility with respect to their war debts and were therefore reluctant to assume the debts of more profligate states like South Carolina and Massachusetts. More vexing still, Thomas Jefferson and James Madison led Virginia's contingent in Congress. The two men were remarkably similar but yet nothing alike. Both had been born and raised in central Virginia, just a few miles from each other in fact, within sight of the magnificent Blue Ridge. Both were uneasy slaveholders but too wrapped up in politics and theorizing to gain the wealth that would have enabled them to afford to free their slaves. Jefferson and Madison worked as a team. Alone, each would have been a formidable adversary. Together, they were almost unstoppable, as their later iron grip on the presidency proved. But the pair had one great weakness, their blind love of the Old Dominion. They fervently desired the national capital to be permanently located in their native state. Hamilton realized this, and used it to his advantage.

Herein lies one of the great deals in American political history, cut between Hamilton and the two Virginians at a dinner party. The Virginians horse-traded votes for assumption of state debts in return for removal of the capital to the shores of the Potomac in ten years time. This was a truly stunning trade made possible only by the fact that the Virginians did not know that Hamilton too sought a southern capital. (He believed that it would assist in keeping southern states in the Union.) The southerners, for their part, vowed never to trade with Hamilton again because they felt that the Treasury secretary had gotten the better of them. But they too gained from the deal. In addition to the nation enjoying a stronger economy due to assumption, three Virginia presidents, who served a total of twenty-four years, enjoyed a relatively short trip from their central Virginia plantations to the Potomac capital.

Hamilton also secured the votes of Pennsylvania's representatives by having the capital moved to Philadelphia from New York for an interim period of ten years. (The Philadelphians wistfully believed that the government would never leave their beautiful city.) According to one contemporary, the opposition to assumption was so "slight and feeble" that it would have easily passed had not southerners decided to hold it up to give them a bargaining chip for a southern national capital. The Residence Bill, therefore, was "the offspring of a political cohabitation (for it cannot be called a marriage) between Pennsylvania and Virginia." "Begotten in darkness," the bill "forced its way through the Senate ... where it underwent the solemn farce of a discussion—a phalanx of well-disciplined troops were placed to guard it."

The positive effects of funding and assumption of the debt upon not only the country's credit standing but also its commerce were felt almost immediately. Writing from Hartford in 1791, Noah Webster, the "schoolmaster of America," boasted about the era of prosperity brought on by assumption. "The establishment of funds to maintain public credit," he noted, "has an amazing effect upon the face of business and the country." "Commerce," he continued, "revives and the country is full of provision. Manufactures are increasing to a great degree, and in the large towns vast improvements are making in pavements and buildings."

Moreover, Europe's capital markets magically opened to the United States. As early as March 1791, United States securities were selling from 1 to 40 percent above par in Europe. In November 1791, European-based broker John Fry assured Hamilton that American credit overseas was secure and that European funds would stabilize securities prices. "The American Funds," Fry claimed, "had inspired no Confidence in this market 'til they had acquired a high price at home & three months ago a sale of them must have been effected here with the greatest difficulty." "The Case is now so materially alter'd," he wrote, "that one friend of mine has bought & sold near a Million of Dollars." Fry noted that Europeans at that time had more money than local investment opportunities and were looking to employ their capital in the United States. In short, Americans were able to borrow money in Europe at between 3 and 6 percent and use it to fund projects that returned 10, 15, even 20 percent per year. The strong economy made Hamilton's fame. According to one contemporary observer, "his reputation traversed the ocean and in distant climes his Name was mentioned among the great ministers of the age."

 

But even that rousing success was not enough for Hamilton, who possessed a truly comprehensive understanding of the entire economic process. He realized that funding and assumption, which created both national and international markets for U.S. government bonds, was only a start. The government, not to mention entrepreneurs, still did not have ample access to short-term credit, the very life-blood of commerce and manufacturing. And, Hamilton further realized, the combination of active securities markets and adequate banking facilities would prove truly awesome. The secretary therefore set out to exploit the synergy of funding and banking. The Report on the Bank contained one of the most fundamental elements of that synergy. Shares in the Bank were paid for mostly in government bonds, not gold and silver. Thus, bond prices would be supported as individuals bought securities to use them to purchase Bank shares. Next, the Bank would issue notes and deposits, all backed by gold and silver. Those Bank liabilities, in turn, became the nation's principal media of exchange, and could be used to purchase government bonds, other financial securities, or any asset for that matter, without the hassle of counting out payment in the potpourri of foreign coins and local banknotes that Americans had to contend with before the Bank's establishment. (Imagine trying to purchase an automobile or a refrigerator with a mix of yen, euros, and Mexican pesos.) In that fashion, the banking and funding systems worked together to enable economic growth.

Hamilton's vision for the American economy coalesced in his Report on the Bank, making it a masterpiece that cogently explained the importance of banks in a capitalist economy. Hamilton started by stating his "conviction"—one based on copious study of European financial theorists like Jacques Necker—that a national bank would prove "an Institution of primary importance to the prosperous administration of the Finances, and would be of the greatest utility in the operations connected with the support of the Public Credit." Next, he stressed that all the great powers of Europe possessed public banks and were indebted to them for successful trade and commerce. The implications of the comparison were clear: if young America wanted to join the ranks of the elite powers, it too would have to create a banking infrastructure. The national bank would confer many benefits. It would provide government with a ready source of loans, a safe depository for federal monies, a low-cost mechanism for transferring funds from point of collection to point of disbursement, and an inexpensive agent for meeting payments on the national debt and government salaries. After all, in 1790 technology was still quite primitive. In the absence of electronic wire transfers, how did the federal government receive a tariff duty paid in Charleston, South Carolina? How did it pay a federal judge in Boston? How did it pay interest on a U.S. government bond held by an investor in London? How did it finance the construction of warships like the fabled USS Constitution? The Bank provided all those services and more.

To ensure the safety of the government's deposits, the Secretary of the Treasury was empowered to inspect the state of the Bank as frequently as once a week. To ensure that the government would have access to funds when it needed loans, restrictions were placed on the Bank's ability to lend to individual states and foreigners. To make certain that the Bank made mostly safe loans, interest rates were capped at 6 percent. (Unable to charge more than 6 percent, the Bank naturally sought out the best, i.e. safest, borrowers.) The government, as the largest stockholder in the institution, would share in its profits but have no direct participation in its management. In Hamilton's view, independent managers would prevent abuse by the government and provide a necessary check against its possible perfidy, much like judicial review did for courts and legislatures. The private status of the Bank would ensure that the government could never use it as a tool of oppression. As Hamilton noted, governments were never "blessed with a constant succession of upright and wise Administrators." But the Bank, as a private institution, would have a "magnetic sense" of its "own interest ... the prosperity of the institution" and thereby prevent the government from succumbing to "the temptations of momentary exigencies."

The model for Hamilton's plan was the greatest banking force of the day, the Bank of England. In 1790, Tench Coxe, Hamilton's assistant secretary, sent him a note with a pamphlet he wrote in 1786 that highlighted the English institution: "The Bank of England is better worth our attention, than any which has ever existed." Hamilton also drew on Adam Smith's seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, where financial matters, including the advantages of banks and bank money, were amply and ably discussed. Hamilton must have brimmed with excitement as he read Smith declare that "the trade of Scotland has more than quadrupled since the first erection of the two publick banks at Edinburgh." Hamilton also read Malachy Postlethwayt's Universal Dictionary, which suggested that commercial banks ought not to invest heavily in real estate, sound advice generally heeded until the 1980s. The secretary also relied on his knowledge of the domestic operations of the Bank of New York and the Bank of North America. Moreover, two directors of the latter institution, Philadelphia merchant William Bingham and Postmaster General Samuel Osgood, probably helped to shape the secretary's ideas.

The moment Washington finished signing the Bank bill, Hamilton's financial system was nearly complete. The national Bank, an enormous institution whose notes would circulate countrywide and whose loans would grease the wheels of commerce, agriculture, and manufacturing, was to become a reality. Investors were delighted. On July 4, 1791, fittingly enough, they eagerly snapped up "scripts" or rights to purchase shares in the new Bank. It was the most intense initial stock offering the country had yet witnessed. The offering was oversubscribed by 20 percent and sold out within hours in most locations. Subscriptions had to be scaled down pro rata. Subscribers included a broad-based group of wealthy individuals who included thirty members of Congress, Secretary of War Henry Knox, many merchants and speculators, as well as several states, the Bank of New York, the Massachusetts Bank, and Harvard University. Even Hamilton had not foreseen the tremendous demand for the Bank scripts, the price of which soared within a month from the initial $25 to over $300. Speculators, including wealthy brokers Jeremiah Wadsworth, Andrew Craigie, Joseph Barrell, and William Constable, were actively involved in buying shares in the after-market. William Duer and Robert Morris also took large positions, sometimes bullish and sometimes bearish. We will learn later that Morris loved to gamble. We will also discover that Duer made Morris seem tame, plunging his hands into every speculation imaginable and often crossing the line between speculation and fraud.

Bulls lined up on one side of the market—championed now by Duer—and bears on the other—led by Brockholst Livingston. Lawyer Robert Troup mentioned to his friend Hamilton that "the truth is that the fluctuations [in stock prices] are principally owing to the arts & contrivances of mere jobbers" and that Duer was purchasing and "is mounting fast above [Livingston]." As during the 1990s Internet craze, when individuals left good jobs to become day traders, some local businessmen got caught up in the excitement of fast and easy money. According to U.S. Senator Rufus King, the scene was one of "mechanicks deserting their shops, shopkeepers sending their goods to auction, and not a few of our merchants neglecting their regular and profitable commerce of the city" to join the trading frenzy. As always, Madison and Jefferson were incensed. Six days after the offering, Madison wrote Jefferson that the entire "business" was "shameful" because "members of the Legislature ... were most active" in the market, "openly grasping its emoluments."

By early August, the price of Bank stock in New York produced a one-month profit in excess of 50 percent! Little wonder that shopkeepers found the temptation for quick profits too great to bear. Express carriages sped through little Jersey towns carrying "stockjobbers" in transit between the stock markets of New York and Philadelphia. Such behaviors were unprecedented in America. Many, particularly those "short," predicted that the speculative bubble was certain to burst, just like the infamous "South Sea Bubble" in 1720 had and the stock market crash of 1929 would. Hamilton soon found the wild run-up of securities prices a cause for alarm. "I thought it advisable to speak out," Hamilton told confidant Rufus King, "for a bubble connected with any operations is of all the enemies I have to fear, in my judgment the most formidable. ... I thought it therefore expedient to risk something in contributing to dissolve the charm."

Hamilton's fears were justified. Loan curtailment would mean that money would become scarce, interest rates would rise, and securities prices would suffer. Speculators who had borrowed money to buy stock would especially feel the pinch because they would have to sell securities in order to repay their loans. The same phenomenon occurs today when calls are made on highly leveraged (indebted to the hilt) traders who buy on "margin." Using other people's money at 6 percent per year is a great game if prices move your way 10 percent in a few weeks. But if prices move contrary to expectations, speculators may end up in serious financial and legal trouble. So at the first sign of trouble, a stampede for the door ensues. If the doorkeeper, a central banker like Hamilton or Alan Greenspan, is not paying attention, more than a few end up trampled underfoot.

When the Bank of New York and other private lenders curtailed loans to the speculators on August 11, panic set in and prices of scripts soon dropped from a peak of about $325 to around $125. This type of rapid wealth destruction had not been seen before on our shores. On August 15, Hamilton, whose main concern was for the entire financial system, calmed the markets with direct open market purchases of government securities. The brokers immediately felt the relief, as one commented four days later that "stocks rather look up, and we are told the Treasury has not had much offered to him." The mere knowledge that Treasury stood ready to make purchases helped to temper the market and the mini-crisis abated. Hamilton showed that he knew how to combat crises by adding money to the system. In effect, he had opened the door, allowing speculators to exit in a somewhat orderly fashion.

By autumn, the markets had calmed and the Bank geared up to commence operations. Stockholders flocked to Philadelphia's City Hall on October 21 to choose directors in the new institution. The first board, composed of twenty-five men, was nevertheless quite distinguished, including as it did three U.S. senators and four U.S. congressmen, as well as lawyers, merchants, brokers, and even a physician. Most were members of the Federalist Party, northerners, and wealthier than average. (Representatives of Philadelphia, New York, and Boston accounted for 80 percent of the Bank board. Not surprisingly, only one board member hailed from Virginia.) Board seats were eagerly sought because directors decided who did and did not receive loans. Directors also determined salaries of all the Bank's officers and clerks and supervised the printing and supply of banknotes. The main board in Philadelphia passed judgment on loans to the government. Hamilton certainly needed to have allies on the board, as the government was soon to be the Bank's largest borrower.

The biggest question was, who would be president of the Bank? Oliver Wolcott, then working for Hamilton in the Treasury Department as comptroller, might have been the stockholders' first choice because he supported the establishment of branch offices. But Wolcott made it clear that he preferred public service. The presidency therefore devolved on Philadelphia merchant Thomas Willing, who was elected unanimously at the October 25 meeting. Willing had a strong resume and good credentials and will be featured later in "Angels Risen and Fallen." Suffice to say he was a resolute Federalist, a former judge of Pennsylvania's Supreme Court, and perhaps the wealthiest man in Philadelphia, in some part owing to a partnership with Robert Morris in the successful mercantile firm Willing & Morris. At least one board member, speaking on behalf of a "faction," argued that Willing would become Morris's puppet. The president of the Bank, he argued, "ought to be free from all suspicion of management." Willing received the nod anyway because he had served as president of the Bank of North America for about a decade and therefore was the preeminent commercial banker in the country.

The main branch opened to receive deposits on December 12, 1791 at Carpenter's Hall in Philadelphia. Soon thereafter, the Bank began making loans. Loan recipients could take their proceeds as notes, deposits, or a combination thereof. Whatever their choice, the liabilities could be turned into gold or silver coins upon demand, or tendered in payment of federal taxes. Borrowers included merchants, politicians, manufacturers, landowners, and most importantly, the government of the United States. In the spring of 1792, the Bank opened branch offices in Baltimore, Boston, Charleston, and New York, making it the first nationwide enterprise in American history.

In addition to making loans to government, Hamilton's creation performed other central banking functions. It regulated state banks by returning their notes for redemption in specie. That practice forced the state banks to hold specie reserves and effectively prevented them from over-issuing their notes. The Bank also shared macroeconomic information with the Treasury Department, and discussed with it economic conditions and policies designed to safeguard the credit system. The Treasury Department often took a paternal attitude toward the institution, particularly when the Bank stressed its independence or seemed to be overextended. Importantly, the Treasury, with the Bank's aid, acted as a lender of last resort, acting to stabilize the financial system on numerous occasions. The Treasury used various methods to achieve financial stability, including the purchase of debt securities, the manipulation of specie payments to banks, the regulation of Treasury drafts, and, when necessary, the addition of funds to ailing banks. The Treasury and the Bank, in other words, worked closely together to ensure the economy's health. As Hamilton noted a year after the Bank's inception, even "the most incorrigible theorist among its opponents would in one month's experience as head of the Department of the Treasury be compelled to acknowledge that [the Bank] is an absolutely indispensable engine in the management of the Finances."

 

Every week several of the directors of the Bank walked downstairs to the vault to take inventory. A perusal of the vault inventory statement from March 14, 1795 provides us with a glimpse into the national bank's activities. The vaults contained banknotes, both those of the Bank and of local banks, totaling $536,000, a variety of French, Spanish, and Portuguese gold coins worth $150,000, and several chests filled with silver coins worth in sum about $13,500. The Bank's vault did not contain any U.S. coins, yet all of the sums are stated in dollars. That curious situation can be explained only by delving into the early history of the U.S. Mint.

On April 2, 1792, George Washington signed into law a bill establishing a mint, a factory for the production of coins for the federal government, under article 1, section 8 of the U.S. Constitution. (That same clause empowered Congress to "regulate the Value ... of foreign Coin," a power that it also exercised.) The bill drew upon the earlier work on coins and mintage proffered during the Confederation period by Thomas Jefferson, Gouverneur Morris, Robert Morris, and others, and the more recent recommendations of Hamilton, whose Report on the Establishment of a Mint Congress had received on January 28, 1791.

The early U.S. Mint was a failure. High copper prices plagued the minting of pennies and half pennies from the start. Moreover, the 1792 law made no provision for the Mint to purchase gold and silver bullion on behalf of the public, so the institution relied entirely upon private flows of specie to provide the silver and gold for the coinage of higher denomination coins. Not until July 1794, almost two years after commencing operations, did the Mint receive a private deposit of silver, some $80,000 of French coins owned by the Bank of Maryland. The first private gold flow into the Mint occurred in February 1795, when New England merchant Moses Brown deposited $2,276 worth of gold bullion.

But private flows remained pitifully small. The Mint, which required a fairly sizeable scale of operations to run efficiently, languished, coming under repeated Congressional inquiries. Its early directors, which including famed scientist David Rittenhouse and Elias Boudinot, one of Hamilton's first benefactors, remained frustrated in their efforts to turn the Mint into an important economic force. In hindsight, the reason for their failure is readily apparent: the Mint was largely unnecessary. Bank liabilities (notes and deposits) and foreign coins admirably served as the nation's media of exchange.

Yet, Hamilton's report and the subsequent Mint Act of 1792 were important parts in the early credit system, for the act defined the U.S. dollar as a unit of account. The unit of account is a measure of value; it answers the question "what is the value of that?" just as inches answer "what is the length of that?" or grams answer "what is the weight of that?" In other words, the Mint Act defined the size of the goose's golden eggs.

Today, Americans are accustomed to conflate the unit of account with the medium of exchange because the two have been identical for decades. In other words, we measure money in the same units, the U.S. dollar, that we use to trade or exchange. If a store clerk says "the value of that item is $5," we know that, to obtain the item, we can present a $5 Federal Reserve note, write a check, or pull out a credit card. This coincidence of measuring rod and means of payment is extremely convenient. It is also a relatively new phenomenon.

In the colonial period, if a store clerk said that the price of an item was $5, the customer might tender 5 Spanish milled dollars. However, he could also hand over 37 shillings and 6 pence of Pennsylvania bills of credit, for each dollar was worth 7 shillings and 6 pence in Pennsylvania. Or, he might offer 38 chickens, each worth a shilling, and demand 6 pence in change. (There were 12 pence in a shilling, 20 shillings in a pound.) If this sounds confusing, that is because it is. Imagine the impediment to trade.

The unit of account (the measuring rod of value) and the medium of exchange are distinct things. The medium of exchange, it turns out, is relatively unimportant. What people agree to exchange, be it silver, paper, or chickens, is up to them. The key to economic growth is finding a reliable, stable method for defining or measuring value. That allows people to compare, and hence exchange, unlike things. How many chickens is a cow worth? A horse? A farm? A bond? Without a common measure, without a unit of account, answering such questions is nearly impossible.

Without a unit of account, all trade is barter. And barter, everyone knew, was extremely inefficient. "Bartering of Commodities for Commodities," one Englishman noted, "would soon be found Chargable and Inconvenient, and a hindrance to Trade." "Bartering one species of property for another," colonists too realized, "would be endless labour." "For some years after the settling of this colony," "A Pennsylvanian" wrote in 1768, "we had but little specie, and trade was carried on chiefly by truck or barter." "Under such inconveniences," the "man in years" correctly noted, "it was found impossible for a colony to flourish, or the inhabitants make any considerable progress in their improvements."

Accordingly, the colonies had each developed their own unit of account, their own method for measuring value. Converting from one colony's unit to another was often an arduous, mind-boggling task. Think of the trouble that would ensue if an "inch" or an "ounce" in New York were different from an "inch" or an "ounce" in Pennsylvania! Luckily for colonists, most trade was conducted between each colony and the Mother Country, so the problem was not a serious one. After independence, and especially after the passage of the Constitution, however, trade flows between the states increased significantly. The nation clearly needed a single unit of account, an identical way of measuring value. Hamilton gave it to them, in the form of the U.S. dollar. Not the physical dollars that the Mint found so difficult to produce, but rather the U.S. dollar as an abstraction, as the value represented by 371.25 grains of pure silver (416 grains of "standard silver") or 24.75 grains of pure gold (27 grains of "standard gold"). The Mint Act also defined the "standard"—but in terms too arcane to discuss here—and fixed the ratio of silver to gold at 15 to 1.

With those definitions, there emerged a distinctively American unit of account that served as the legal basis upon which all business contracts could be fairly adjudicated. A contract that called for the payment of, say, $100 could be satisfied by the payment of gold and silver as defined in the act, or by the payment of other goods and services acceptable to the creditor and valued as defined in the act. In terms of this book's larger themes, the Mint Act ensured that Americans played the game of life on a level playing field, that their inputs were commensurate to the outputs, thereby enabling a fair and consistent measurement.

 

But Hamilton's funding system, the Bank, and his creation of a stable unit of account would come to little if the United States did not produce anything. The Dutch had showed that there were profits to be made from acting as mere middlemen, buying from one to sell to another. But the Dutch experience had also showed the limitations of such a livelihood. Clearly, America would produce ever more prodigious surpluses of agricultural goods for market. However, demand for foodstuffs waxed and waned. Moreover, rampant competition meant that the profit margins on agricultural products would always remain thin. Significant wealth lay not in extracting the rude products of the earth but rather in working those raw materials—trees, grains, and ores—into useful goods like houses, bread, and metalware. To really get the goose to pump out its golden eggs, Americans would have to learn to add value to raw materials. In other words, they needed to invest in manufacturing.

Hamilton knew this and, in his usual style, set out to put his adopted countrymen on the correct path, whether all of them liked it or not. Before the Revolution, Hamilton made it clear that he thought America could become a major manufacturer. "Neither is there any great difficulty, in acquiring a competent knowledge of the manufacturing arts," he wrote in Farmer Refuted, one of the productions of his radical college days. "In a couple of years many of our own people might become proficient enough, to make the coarser kinds of stuffs and linens." During the Revolution, Hamilton continued to learn, copying much information about manufacturing into his artillery pay book. He also took copious notes on glass, asbestos, and other manufactured goods.

In the New York Ratifying Convention held in Poughkeepsie in 1788, Hamilton showed at least a general knowledge of the current development of indigenous manufactures. "Our manufactures are in their infancy," he opined, "but are they always to be so? In some of the states, they already begin to make considerable progress. In Connecticut such encouragement is given, as will soon distinguish that state." In response to his profound understanding of the importance of manufacturing, the artisans and mechanics of New York and indeed the English-speaking world generally adored him and penned him glowing letters of admiration.

As part of his comprehensive economic program, Hamilton authored a brilliant Report on Manufacturing where he made the case for expanding U.S. manufactures. The report was submitted to Congress on December 5, 1791, and was the fourth of his monumental state papers devoted to the development of the new nation's economy. Tench Coxe made important contributions to the manufacturing report, as we will discuss in detail in "The Judas." Importantly, Hamilton understood that aside from protective tariffs and bounties, government could do relatively little to encourage manufacturing. A national manufactory, unlike a national bank, simply did not make economic sense. Private enterprise would have to do the heavy lifting. But that did not mean that Hamilton could not again lead the way.

Hamilton, with help from Coxe, William Duer, and others, founded the Society for the Establishment of Useful Manufactures (SEUM) to demonstrate that America could create its own indigenous manufacturing base. On the banks of the mighty falls of the Passaic River in New Jersey, the SEUM attempted to build an eighteenth-century industrial park supported by the money of private equity investors. While the venture did not develop according to plan, and Duer, as he was wont to do, raided the till, Hamilton again showed that his ideas ran well ahead of those of most of his contemporaries. It would be several more decades before large-scale manufacturing would catch hold in America.

 

If Hamilton's financial program was as important to the development of the U.S. economy, the nation's political development, and its national sovereignty, as claimed here, why did it arouse such heated opposition? Some opposition was clearly ideological; many Republicans had a fundamentally different vision for the nation. Some opposition, however, appears to have been personal; sometimes people took a stand on an issue simply because Hamilton supported the other side. "Fame," one contemporary observer noted, "begets Envy, and envy begets hatred."

But the root of the problem appears to have been one of perceived economic interest. Southerners wanted states rights and an agricultural economy, while northerners sought a relatively strong national government and an economy rooted in commerce and manufacturing. Indeed, Hamilton's funding system brought to the surface the recurring issue of states' rights, the rights of the colonies or states versus the rights of the imperial or federal government. Most observers thought of the question as if it were a "zero sum" game. In other words, what one government gained the other necessarily lost. Although Congress ultimately held the purse strings, many viewed Hamilton with suspicion because he headed the powerful Treasury Department. The agrarian Republican forces feared a Treasury-dominated central government, noting that in Britain prime ministers bent on uncontested power first co-opted the Exchequer, the British treasury. Agrarian Republicans also believed that Hamilton's cronies, speculators and merchants congregated in the northern cities, favored English interests. Parts of the agrarian Republican critique contained language that suggested that the real struggle pitted merchant capitalism against agrarianism.

Other parts suggested that sectional differences, North vs. South, were the key. In the case of the Bank, sectional differences were clearly visible in the House ballot; only one northern vote was cast against the Bank while only three southern votes favored it. Representative William Branch Giles of Virginia described the sectional vote in February 1792 as indicative of a "radical difference of opinion" between North and South "upon the great governmental questions." That difference of opinion would eventually lead to the Civil War. The funding issue also contained a sectional tinge. Agrarian Republicans saw all indebtedness as pernicious. One particularly vituperative polemicist chided Hamilton for calling the public debt "a blessing" and called his reputation "bloated." His ad hominem attack also claimed that Hamilton's reports were effective only because they were so long and "fatiguing" that they "confound the judgment" and force readers into "a labyrinth of error."

The national bank merited specific antagonism because of its large size. One of James Madison's correspondents, Joseph Jones, suggested that "if the whole swarm of insects which the sunshine of the funding and banking system hath produced should be dissipated by one severe blast, I should not weep over their disaster." Detractors believed the Bank was so colossal that it was capable of many evils. They labeled the Bank a monopolistic monster that would corrupt the entire society. Why did the Bank set off opposition? In the twenty-first century, when over ten thousand banks of various sorts exist in America, it may be difficult to comprehend the hostility to it. But in the 1790s, banks, and in particular a bank with a unique national charter (charters were usually granted by states), were looked upon with profound suspicion. The anti-bank advocates were terrified that the Bank could usurp the very reins of power. After all, was the Bank not going to be guardian of the public money? And if that was the case, was that not too great a temptation for mere mortals? The entire Constitution was based on checks and balances, but was private ownership enough of a check on the Bank? Detractors also labeled the Bank as an enemy of farmers—at a time when some 90 percent of the population toiled in the fields and barns.

Southerners especially feared the institution. Many thought it would drain the economy of gold and silver. Others, who did not understand that banks had to redeem their notes and deposits for specie on demand, feared the onset of rampant inflation once its presses commenced printing. Southern delegates also opposed the Bank's two-decade lifespan. (Unlike today, all early U.S. corporate charters were of finite duration.) Commenting on the proposed length of the charter, Madison was purported to have said that "twenty years was to this country as a period of a century is to the history of other countries—there was no calculating for the events which might take place." Southerners also feared that the Bank, which was headquartered in Philadelphia, would be used as an excuse to renege on the deal struck to move the seat of government to the Potomac in 1800.

At one level, Hamilton had difficulty comprehending the agrarian critique. Unlike many of his contemporaries, Hamilton did not see the issue of state vs. federal power as a zero sum game. He was, after all, one of the leading proponents of federalism (note the small f), the notion that the states and the national government could share power. The creation of the Bank of the United States, for instance, did not preclude the formation of state banks and in fact ultimately made life for state banks easier. The assumption of state debts did not preclude borrowing by state governments in the future and in fact made it easier for states to borrow again. Perhaps most importantly, the different levels of government served to check and balance each other. Again, Hamilton's thought, which did not conceive of power as a finite sum, was decades ahead of its time.

But the antagonism went much deeper than the issues. Agrarians thought Hamilton a tyrant who had designs on the reins of power. In their opinion, he had duped Washington. But ironically, while many Republicans distrusted Hamilton, they not only did not destroy the financial system but in many cases strengthened it.

 

When Hamilton left his homeland in Nevis in 1772, never to return, agriculture was king in America. (Even ironworks, the largest manufacturing enterprises, were called "plantations" because much of their value stemmed from their forest-clearing activities.) The mainland colonies had no joint-stock banks, only a few small corporations (and their stock did not trade), and only tiny amounts of publicly traded debt. Massachusetts enjoyed the most advanced capital market, but even there government obligations were not actively traded. Governments borrowed by issuing bills of credit—fiat paper money—that often lost value. Each colony had its own unit of account and its own legal system. Colonists worked wonders with what they had. Ground rents, perpetual mortgages popular in Pennsylvania, Delaware, and Maryland, served as a form of negotiable long-term capital; foreign exchange markets provided entrepreneurs with some access to short-term loans. Overall, however, little financial intermediation existed until late in the colonial period, when a few brokers, like Hendrick Oudenaarde, began operations. In addition to chartering vessels, collecting debts, and wholesaling teas, sugars, coffee, indigo, and pepper, Oudenaarde let "money upon interest ... upon personal Security, or Mortgages upon Houses or Lands." That was in late 1767 and early 1768, a year after Oudenaarde managed to extricate himself from debtors' prison! Suffice it to say, the scale of his money-lending operations was not large. As much recent scholarship shows, economic growth during the colonial period was torpid.

By the time our creator forever left his adopted land in 1804 to meet his Creator, the financial system was awash in intermediation. Though Hamilton fell mortally wounded on the dueling grounds at Weehawken, the financial system was thriving. Joint-stock banks were rapidly multiplying, as were other types of joint-stock companies, not all of which, thanks to Hamilton's insight, needed formal incorporation to begin operations. The credit of the U.S. was among the best in the world; U.S. bonds and stock in the Bank of the United States regularly traded in London as well as in the active securities markets of Boston, New York, Philadelphia, Baltimore, and Charleston. The nation's credit was so good that it easily borrowed to purchase Louisiana and to fight wars. The first Bank helped to keep the macroeconomy on an even keel by checking the note issue of state banks. The entire nation had a single unit of account, the U.S. dollar, that was firmly defined in terms of gold and silver. Fire and marine insurance was almost fully formed; life insurance lay just over the horizon, as did trust companies, savings banks, and building-and-loans. Great leaps in manufacturing—ultimately funded by banks and capital markets—began just a few years after Hamilton's death. Most importantly, economic growth, increases in real per capita output, was picking up steam, soon literally as well as figuratively.

Hamilton was the creator of the U.S. financial system, the engine of America's remarkable nineteenth-century economic and political transformations. Unlike the Almighty, however, Hamilton was not immortal. Nor did he work alone.

 

Robert E. Wright and David J. Cowen
Financial Founding Fathers: The Men Who Made America Rich
©2006, 216 pages
Cloth $25.00 ISBN: 0-226-91068-7

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See also:

• The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance by Robert E. Wright • Read an excerpt
• The Founders' Constitution online edition
• A catalog of books in history
• A catalog of economics titles
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