An Ode to Hamilton

Richard Brookhiser published this op-ed at Opinion Journal yesterday regarding one of my favorite figures in American history, Alexander Hamilton. Hamilton's importance in building the country has received increasing recognition -- he stands on par (if not higher) than Jefferson, Adams and Franklin in import amonst the Founders. Brookheiser's piece discusses why...

When the Founders got the chance to run their own economic affairs, they stumbled. Throughout the Revolutionary War Congress lacked the power to tax the states. (It could make requisitions on them for money--i.e., beg. Robert Morris, superintendent of finance, said this was like "preaching to the dead.") Congress turned instead to fiat money and borrowing. American dollars quickly became worthless. In 1780 Congress called them in and printed new ones, worth 40 old ones; the new dollars inflated in turn. Congress got loans from France, America's ally, and from Dutch bankers who were willing to take a flier on the new nation. But once America stopped making interest payments, the loan market dried up. After the war the states, which had run up debts of their own, tried raising money in a variety of ways, from printing state paper money, to levying desperate and crushing taxes (Massachusetts' land tax provoked an armed taxpayer revolt in 1786-87, Shays's Rebellion). By the end of the decade American securities were trading at one-quarter to one-third of their face value on European money markets. The Founders, for all their personal and political daring, were on the way to founding a banana republic, though, if the U.S. had been the first one, the name would be maple republic.

... Hamilton was an autodidact. He apprenticed as a merchant's clerk in the Virgin Islands, never finished college, and sponged up economic theories and data in his spare time as a colonel on Washington's staff. When he was barely 20 he began writing letters of economic and political advice to his elders and betters. Washington had no deep understanding of economics, but he understood Hamilton's energy and gifts. When he became president under the new Constitution in 1789 he made Hamilton the first Treasury secretary.

Cleaning up the American mess had to start with political reform. The Constitution, which Washington, Hamilton and both Morrises signed, gave the United States a revenue stream by allowing Congress to tax imports and products, such as whiskey and salt. (Income taxes were unconstitutional.) This change alone began to boost the value of American securities even as Hamilton took office. Hamilton strengthened American credit further by taking over the states' debts and announcing that all creditors would be paid at a common rate. To make good on that pledge, he had to overcome congressional resistance to rewarding speculators who had bought up debt. But Hamilton knew that if the United States started picking and choosing among its creditors, its credit would go back into the outhouse.

By paying America's debts responsibly, Hamilton made American IOUs valuable. "It is a well known fact," he wrote, "that in countries in which the national debt is properly funded . . . it answers most of the purposes of money." He thus monetized a cash-strapped, backwater economy. To handle the government's funds, and to regulate the money supply, Hamilton asked Congress to charter the Bank of the United States. America would join Holland and Britain in the vanguard of the financial revolution. The Bank had to overcome the objections of Secretary of State Jefferson, and Virginia's Rep. James Madison, who thought chartering such a corporation was unconstitutional. Madison's opposition pained Hamilton, since he and Madison had worked together in the struggle to ratify the Constitution. Madison, he concluded, was a "clever man," but "very little acquainted with the world." The world recognized Hamilton's knowledge. When he stepped down as Treasury secretary in 1795, American securities were trading at 110% of face value.

Brookhiser knows his subject well, since he wrote one of the better bios on Hamilton. It's well worth reading, as is this article.