Alexander Hamilton on Finance, Credit, and Debt

Richard Sylla, David J. Cowen

• Publisher: Columbia University Press
• Year: 2018
• ISBN:
  9780231545556
• Topic: Économie
• Subtopic: Histoire économique

"A treasure trove for financial and public policy geeks... will also help lay readers go beyond the hit musical in understanding Hamilton's lasting significance." — Publishers Weekly While serving as the first treasury secretary from 1789 to 1795, Alexander Hamilton engineered a financial revolution. He established the treasury debt market, the dollar, and a central bank, while strategically prompting private entrepreneurs to establish securities markets and stock exchanges and encouraging state governments to charter a number of commercial banks and other business corporations. Yet despite a recent surge of interest in Hamilton, US financial modernization has not been fully recognized as one of his greatest achievements. This book traces the development of Hamilton's financial thinking, policies, and actions through a selection of his writings. Financial historians and Hamilton experts Richard Sylla and David J.Cowen provide commentary that demonstrates the impact Hamilton had on the modern economic system, guiding readers through Hamilton's distinguished career. It showcases Hamilton's thoughts on the nation's founding, the need for a strong central government, problems such as a depreciating paper currency and weak public credit, and the architecture of the financial system. His great state papers on public credit, the national bank, the mint, and manufactures instructed reform of the nation's finances and jumpstarted economic growth. Hamilton practiced what he preached: he played a key role in the founding of three banks and a manufacturing corporation—and his deft political maneuvering and economic savvy saved the fledgling republic's economy during the country's first full-blown financial crisis in 1792. "A fascinating examination of Hamiltonian economics." — The Washington Times

CHAPTER ONE

To— (December 1779–March 1780)

The necessity of a foreign loan is now greater than ever.

THIS LETTER REPRESENTS Hamilton’s first serious foray into the subject of finance. Neither the recipient nor the exact date is known. The editors of The Papers of Alexander Hamilton (PAH) give the date range above based on when Hamilton was known to have been in Morristown, NJ, from which the letter was sent, and on its contents. They consider suggestions of various scholars that it may have been sent to Robert Morris, John Sullivan, or Philip Schuyler, but find the evidence inconclusive.¹ The financial problem that motivated Hamilton’s letter was the inflation, bordering on hyperinflation, of prices during the War of Independence—or, in other words, the rapid depreciation of the Continental currency issued by Congress and of currencies issued by individual U.S. states. As the war had dragged on for five years, during most of which Hamilton was a soldier, both types of paper currency had been issued to excess. By early 1780, they had lost most of their value. That prompted Hamilton, as he says at the end of the letter, to engage in “some reading on the subjects of commerce and finance” and “occasional reflections on our particular situation.” From Hamilton’s references in the letter to the 1720 Mississippi scheme and John Law in France, it seems apparent that one of his sources was Sir James Steuart’s An Inquiry into the Principles of Political Economy (1767), which has similar descriptions and phrasings.

After noting that even the richest of European states had to resort in wartime to foreign loans or subsidies, Hamilton said the United States could do no less. But how should such a loan, assuming it could be arranged, be best employed? One plan would be to use the proceeds of the foreign loan to buy up and retire most of the superfluous American currency issues and hope that would end the inflation. Hamilton doubted that would work because Americans had lost all confidence in their currencies. His discussion is couched in terms of what economists now call the quantity theory of money, and when he says that American currencies depreciated much more than might have been expected according to the simplest version of this theory, he implies that the public’s lack of confidence in those currencies led them to spend them as fast as they could, which modern quantity theorists would term an increase in the “velocity” of spending.

Hamilton discussed a second plan that he thought had a better chance of success—using the foreign loan to purchase imported commodities, especially ones militarily useful, which he thought would allow the Americans to carry on the war for two to three years—but he doubted it would restore confidence in the currency.

Hamilton then unveils his own plan, which is most interesting because it presages a key part of the program of financial reform he would execute a decade later when he became the first Secretary of the Treasury of the United States. His plan is to use the foreign loan proceeds to capitalize an American bank, which Hamilton already in 1780 calls the Bank of the United States, the name he and Congress would give the national bank in 1790–1791. The proposed bank was to be a modern bank based on European precedents, which Hamilton had studied in his crash course of reading about financial history in the period before this letter was written. There was no such modern bank in the United States in 1780. Indeed, there had never been one. Hamilton was ahead of his time.

This first version of Hamilton’s central bank has a number of similarities to the Bank of the United States he would recommend to Congress in 1790 and which Congress would approve in 1791 (see chapter 10). The confederation Congress would own half of the bank’s stock and be entitled to half of its profits. The government would have the right to inspect the bank’s books, an early form of financial regulation. The bank would lend to Congress and also to private commercial borrowers. It would issue a new and better currency, which Hamilton implies would be convertible into specie (gold and silver coins, presumably obtained in the foreign loan). The convertibility of bank money into specie is what would restore confidence in American currency.

To induce private investors, “the principal monied men,” to invest in the bank along with the government, Hamilton calls for giving them incentives to invest. But he is against giving the bank exclusive privileges, as were given to European trading companies, because such privileges would “fetter that spirit of enterprise and competition on which the prosperity of commerce depends.” Hamilton believed in free enterprise and free markets, but hardly in an extreme libertarian fashion. Enlightened government policies could be used to encourage and sustain free markets and free enterprise.

In this letter we see the beginnings of a far more comprehensive plan of financial reform and modernization that would be more fully formed when Hamilton hit the ground running as Secretary of the Treasury in September 1789. In his discussion of the national debt toward the end of the document, we also see the germ of his idea that a national debt could be a national blessing. This idea became explicit in his letter a year later to Robert Morris (see chapter 3).

We have condensed the 6,418 words of this document to 2,555 words.

[Morristown, New Jersey, December 1779–March 1780]

Sir,

The present conjuncture is by all allowed to be peculiarly critical. Every man of reflection employs his thoughts about the remedies proper to be applied to the national disorders; and everyone from a partiality to his own ideas wishes to convey them to those who are charged with the management of affairs….

The object of principal concern is the state of our currency. In my opinion all our speculations on this head have been founded in error. Most people think that the depreciation might have been avoided by provident arrangements in the beginning without any aid from abroad, and a great many of our sanguine politicians ’till very lately imagined the money might still be restored by expedients within ourselves. Hence the delay in attempting to procure a foreign loan….

The public expenditures from the dearness of everything necessarily became immense, greater in proportion than in other countries and much beyond any revenues which the best concerted scheme of finance could have extracted from the natural funds of the state. No taxes which the people were capable of bearing on that quantity of money which is deemed a proper medium for this country (had it been gold instead of paper) would have been sufficient for the current exigencies of government.

The most opulent states of Europe in a war of any duration are commonly obliged to have recourse to foreign loans or subsidies. How then could we expect to do without them and not augment the quantity of our artificial wealth beyond those bounds, which were proper to preserve its credit? The idea was chimerical….

The ordinary revenues of The United Provinces amount to about 25.000.000 of Guilders or 2.250.000 £ Sterling per annum. This is in proportion to its territory and numbers the richest country in the world, and the country where the people sustain the heaviest load of taxes. Its population is about equal to ours, 2000000 of souls. The burthens on the subject are so great that it is by some held almost impracticable even on extraordinary emergencies to enlarge the revenues by new impositions. It is maintained their dependence in these cases must be on the extraordinary contributions of wealthy individuals, with the aid of which in some of their wars they have raised 4000.000 Stg. a year. In a country possessed of so vast a stock of wealth, where taxes are carried to such a height and where the means of paying them so infinitely exceed those in our power, if the national revenues only amount to the sum I have stated, how inadequate must have been the product of any taxes we could have levied to the demands of the service? Loans for the reason before hinted would have been out of the question; at least they would have been so trifling as to be an object of little importance….

From these reasons it results that it was not in the power of Congress when their emissions had arrived at the 30,000,000 of dollars to put a stop to them. They were obliged, in order to keep up the supplies, to go on creating artificial revenues by new emissions; and as these multiplied their value declined. The progress of the depreciation might have been retarded but it could not have been prevented. It was in a great degree necessary.

There was but one remedy, a foreign loan. All other expedients should rather have been considered as auxiliary. Could a loan have been obtained and judiciously applied, assisted by a vigorous system of taxation, we might have avoided that excess of emissions which has ruined the paper. The credit of such a fund would have procured loans from the monied and trading men within ourselves, because it might have been so directed as to have been beneficial to them in their commercial transactions abroad.

The necessity of a foreign loan is now greater than ever. Nothing else will retrieve our affairs. The wheels of government without it cannot much longer be kept in motion. Including loan-office certificates and state emissions, we have about 400.000.000 of dollars in circulation. The real value of these is less than 7.000.000, which is the true circulating medium of these states….

The hope of appreciating the money by taxes and domestic loans is at an end. As fast as it could be received it must be issued in the daily expenditures. The momentary interval between its being drawn out of circulation and returning into it would prevent its receiving the least advantage.

These reasons may appear useless, as the necessity of a foreign loan is now acknowledged and measures are taking to procure it. But they are intended to establish good principles, the want of which has brought us to the desperate crisis we are arrived at and may still betray us into fatal mistakes.

How this loan is to be employed is now the question, and its difficulty equal to its importance. Two plans have been proposed: one to purchase up at once in specie or Sterling bills all the superfluous paper and to endeavor by taxes, loans and economy to hinder its returning into circulation. The remainder it is supposed would then recover its value. This it is said will reduce our public debt to the Sterling cost of the paper….

A great source of error in disquisitions of this nature is the judging of events by abstract calculations, which though geometrically true are false as they relate to the concerns of beings governed more by passion and prejudice than by an enlightened sense of their interests. A degree of illusion mixes itself in all the affairs of society. The opinion of objects has more influence than their real nature. The quantity of money in circulation is certainly a chief cause of its decline, but we find it is depreciated more than five times as much as it ought to be by this rule. The excess is derived from opinion, a want of confidence. In like manner we deceive ourselves when we suppose the value will increase in proportion as the quantity is lessened. Opinion will operate here also, and a thousand circumstances may promote or counteract the principle.

The other plan proposed is to convert the loan into merchandize and import it on public account. This plan is incomparably better than the former. Instead of losing on the sale of its specie or bills, the public would gain a considerable profit on the commodities imported. The loan would go much further this way towards supplying the expenses of the war, and a large stock of valuable commodities useful to the army and to the country would be introduced. This would affect the prices of things in general and assist the currency. But the arts of monopolizers would prevent its having so extensive and durable an influence as it ought to have….

This is a plan not altogether to be rejected. With prudent management it might enable us to carry on the war two or three years (which perhaps is as long as it may last) but if we should expect more from it, the restoration of the currency, we should be disappointed.

The only plan that can preserve the currency is one that will make it the immediate interest of the monied men to cooperate with government in its support. This country is in the same predicament in which France was previous to the famous Mississippi scheme projected by Mr. Law. Its paper money like ours had dwindled to nothing, and no efforts of the government could revive it because the people had lost all con...