By Nancy Spannaus
Jan. 10, 2018—One test of an individual’s genius is the enduring quality and validity of his or her ideas, lasting from one generation to the next. A Leonardo, a Beethoven, an Einstein—to cite just a few examples—produced insights and beauty which have borne fruit, and inspired many generations after their deaths, and will continue to do so.
It is the same with Alexander Hamilton, whose 261st birthday is to be celebrated January 11, 2018. Hamilton’s genius lay in the area of political economy, which combines concepts of statecraft and economics. His work in that area shaped both our Constitution and our economic system, and remains totally relevant to solving the financial and physical-economic mess which the United States faces today. Yet today one can scarcely find economists who understand his basic principles, much less members of the Congress and Presidential administrations (not just the current one).
Thus, I have decided to once again tell the story of how Hamilton created our financial system on the basis of public credit. It was a feat that took us from utter bankruptcy into becoming a developing nation, and the principles upon which it was based endured to be applied by presidents in other periods of national crisis—including Lincoln in the Civil War, and FDR in the Great Depression. The following account comes from an article I wrote in December of 2010, which was published in Executive Intelligence Review; it has been very slightly edited for the present period.
For a discussion of applying Hamilton’s principles to today’s crisis, see my recent articles “We Need a Hamiltonian National Bank!” and “Want Real Economic Growth? Time to Study Alexander Hamilton’s Report on Manufactures.”
Bankruptcy Reorganization for a Credit System
President Washington appointed his former aide-de-camp as his Secretary of the Treasury in September 1789, and Hamilton went to work immediately. The bankruptcy of the nation was near total. Much of the agricultural land had been heavily damaged by the war, the British were interfering with the use of the fisheries, and commerce had been choked by the British as well. There was no national currency worthy of the name, just coins of various other nations circulating. The use of barter was escalating, even for such transactions as payment of taxes.
On top of the collapse of the physical economy, there was debt, an enormous amount of debt.
There were three categories of debt, plus arrears in interest on debts. The largest amount was money owed by the Confederation to individuals, including Army veterans, or states, amounting to approximately $40 million. This debt had explicitly been taken over by the Federal government, as prescribed in the Constitution. The second-largest category of debt was that owed by the states, incurred for their ability to function during the war, which amounted to approximately $25 million. The third category was foreign loans, which amounted to approximately $10 million—an amount also assumed by the incoming government. Interest on this debt—with rates between 4 and 6%—was several million dollars in arrears.
To service this debt, Hamilton figured, would cost over $1 million a year—more than the revenue projected to be available to the Federal government from the one major source, the tariff that had been passed two months before.
So, what did Hamilton propose? He proposed to add to the debt owed by the Federal government, by assuming the debts of the states—and then to turn that debt, in the form of bonds, into a pool of capital for a National Bank, which would provide the basis for beginning to build up the physical economy of the nation! That, he emphasized in his first Report on Public Credit, would be the means of securing the public credit of the bankrupt country. His second Report went into the particulars of the formation of the National Bank, and the benefits that it would accrue to the nation.
Hamilton’s first Report proceeds from the first principle, of course, that the debt from the war is a moral obligation of the nation (“the price of liberty”), and must be repaid. But to do that, there are certain urgent measures that had to be taken to support public credit. He summarized the objectives as follows:
To justify and preserve their confidence; to promote the encreasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources both to agriculture and commerce; to cement more closely the union of the states; to add to their security against foreign attack; to establish public order on the basis of an upright and liberal policy. These are the great and invaluable ends to be secured, by a proper and adequate provision, at the present period, for the support of public credit.
Yet this could obviously only be done by increasing the productivity of the nation! Thus the debt—most of which fortunately did not include any due date for the principal—had to be turned into annuities, or bonds, monetized, in such a way that it provide funds for real, physical-economic development. This funding of the debt would provide for regular interest payments, but turn the debt into capital.
Funding the Debt
To kick off the implementation of his plan, he needed (and got) another loan from France. He also opened subscriptions for a new loan to cover the domestic debt, but at 4% interest rather than the going rate of 6%, sweetening the deal with additional options, including a certain amount of public land. He also increased revenues by an increase in excise taxes on liquor, and created a sinking fund which would perform the functions of a national bank until that could be established.
Hamilton outlined in detail the benefits which would accrue upon his plan to fund the debt. It would extend trade, by making available greater capital. It would promote agriculture and manufactures. It would also reduce the interest on money, by putting more into circulation. It would also be a blow against speculators, who were counting on the depressed values of land and overall instability in the economy, to profit at the expense of the nation.
The response to Hamilton’s first proposal was an uproar. To a large degree, that uproar focused on his plan to assume the state debts. Some of the states had already paid off their debts, while others were in great arrears—a situation which led the richer states to resist assumption, on the alleged grounds of inequity. More seriously, the representatives of those states, especially New York and Virginia, saw clearly that increasing the size of the national debt, and funding it, would increase the power of the Federal government, and its ability to advance the aims of industrial and technological development—rather than the plantation system (Virginia) or largely commercial system (New York)—an outcome which Hamilton, Washington, and their collaborators were clearly driving for.
The tool for agitating against Hamilton’s plan was primarily the plight of the war veterans, who had been forced to sell the promissory notes (or “indents”) from the government for their pay, at a cut rate, over the recent period of near-financial anarchy, and now would not benefit, while the individuals who bought them out would receive full value from the Federal government. Hamilton was not unsympathetic to those who lost out, but insisted that there could not be created two categories of such paper. It would just be too chaotic and time-consuming.
The spokesmen for the opposition were primarily the Virginians, House of Representatives leader James Madison, and Secretary of State Thomas Jefferson. Both waged a propaganda campaign against Hamilton’s plan, and it was only through a private bargain, in which Hamilton agreed to support moving the nation’s capital from Philadelphia to the Maryland-Virginia border along the Potomac, creating the Federal District of Columbia, that they agreed to let the first Report on Public Credit be adopted, although its provisions had to be passed in four different pieces of legislation. The whole process took until August 1790, a full eight months after it had been submitted.
But, even though clearly the second Report was an integral implementation sequel to the first, Madison and Jefferson decided to oppose that report, known as the Report on the National Bank, as well.
The National Bank
Hamilton submitted his Report on the National Bank in December 1790. The Bank of the United States, as he dubbed it, was to be capitalized with $10 million, making it a monolith compared to the three other existing banks in the country—the Bank of North America, the Bank of Massachusetts, and (Hamilton’s) Bank of New York. Two million dollars of the initial capital was to come from the Federal government, and $8 million by public subscriptions, which were payable one-quarter in specie, and three-quarters in 6% securities of the Federal government. Thus, these government securities (debt) formed the basis for extending credit.
The bank’s income would come from interest on the Federal securities, and its loans to what we would call today the “private sector,” for development of the physical economy.
While Hamilton did not make a point of differentiating his plan for a National Bank from the Bank of England, not only its intent—as outlined above—but its entire functioning was different. First, the Bank was not to deal with public debt—i.e., buy government bonds—after the initial funding. It could provide short-term loans to facilitate collection of tax revenues and be a depository for government funds, but its major function was to provide a money supply for financing the physical economy: agriculture and industry.
From this standpoint, it is not hard to understand why Hamilton specified that the Bank of the United States was to be run by private individuals, although it was responsible to report to the Federal government on its functioning, and was subject to the government’s regulations. Hamilton insisted upon tying the public credit to the growth of the nation, not to serve as a piggy bank for the Federal government, which he feared would be a source of corruption, just as it clearly was in England.
The Bank bill came to the Congress in January 1791—and a major war began. The bill passed the Senate easily, and even after some extensive Constitutional arguments by Madison, it passed the House. But then, Madison, backed by Jefferson and Attorney General Edmund Randolph (also a Virginian), despite the fact that the previous deal on the location of the national capital had been struck, decided to try to block Hamilton’s plan. The tack Madison took was that which we still hear today: the claim that the Constitution did not permit the Federal government to create a corporation, namely the Bank of the United States. The three Virginians launched a full-scale assault to get President Washington to veto the Bank bill.
Washington was in danger of being railroaded. The pressure on him was so great, that he actually had Madison, who was considered a Constitutional authority, draft a veto message. But, in fairness, Washington also sent a note to Hamilton, requesting his response to the challenge on the constitutionality, which had been written by Randolph. With the deadline for the veto looming, Hamilton penned what has become the nearly definitive document on the meaning of sovereignty under the U.S. Constitution, in his “Opinion on the Constitutionality of the National Bank.” The paper was extensive, but we will quote it in summary. The core argument is this response to the argument that the U.S. government cannot erect a corporation:
Now it appears to the Secretary of the Treasury, that this general principle is inherent in the very definition of Government and essential to every step of the progress to be made by that of the United States: namely—that every power vested in a Government is in its nature sovereign, and includes by force of the term, a right to employ all the means requisite, and fairly applicable to the attainment of the ends of such power; and which are not precluded by restrictions & exceptions specified in the constitution; or not immoral, or not contrary to the essential ends of political society.
Hamilton proved beyond the shadow of a doubt that the establishment of the Bank was necessary and proper for meeting the basic objectives of the U.S. government: creating a prosperous nation, with an efficient tax system, and with the institutions that would support its credit and the expansion of its future productive power, through its investments in agriculture and industry, all for the General Welfare. Washington was convinced, and the Bank bill was signed into law on Feb. 25, 1791.
The Supreme Court affirmed Hamilton’s view in its 1819 opinion upholding the constitutionality of the National Bank, McCulloch vs. Maryland, written by Hamilton’s collaborator, Chief Justice John Marshall. That decision has never been overturned, and thus, is part of our Constitutional law.
The National Bank was to survive for its chartered 20 years, and make substantial progress on its mission, despite the subversion of its aims by President Jefferson and his Treasury Secretary Albert Gallatin, who did their best to use it to pay off debt, rather than use the debt for capital formation. The vote to prevent its re-chartering, on the eve of the War of 1812—just like the killing of the Second National Bank by Andrew Jackson in the 1830s—was a deliberate, effectively treasonous act to subvert the economy, and even the existence, of the United States.
So far, however, such traitors have not succeeded. In fact, leading members of Jefferson’s own party, centered on Mathew Carey, recognized that Hamilton’s economic principles were indeed the principles enshrined in the Constitution, and required for the survival of the nation, and kept them alive into the 19th Century, where they eventually bore fruit in the administrations of patriots. There is still a vestigial institutional impulse toward the Hamiltonian approach, but it is waning fast.
Time To Act on Principle!
Today it is the principle which Hamilton embedded in the Constitution, and carried out in his own economic measures, which we must bring to bear, at a moment of fearful crisis. Our adversaries are essentially the same as his were, but much more desperate. And they have played on the ignorance, and desperation, of many of our people, in order to get them to demand the very destruction of sovereign government, and its essential economic measures, which will destroy them, and the nation.
Like Hamilton, we must realize that the road out of crisis requires action to restore the productive powers of labor, and that the powers to embark on that road exist within the U.S. Constitution. Our government has the sovereign power to free itself of a money system, and use credit, based upon its own commitment to develop the industrial and agricultural capabilities of the country. That credit, which may represent the immediate incurring of a debt, must be used to create an explosion of capital formation, especially in large infrastructure projects of the sort that are being discussed today.
Hamilton’s bankruptcy reorganization, of course, had some fundamental differences with what we require today. While he was dealing with overwhelming debt from the war, we are dealing with trillions in speculation—which can and must be ruled invalid altogether. But like him, we are compelled to look beyond the question of “money” per se, and judge the financial conduct of the Federal government from the standpoint of the physical economy. Where “money” considerations conflict with the General Welfare, they must take a back seat—with full knowledge that the extension of credit for productive investment will ultimately put the nation’s fiscal, as well as physical, house in order.
It is in light of that principle, that we face the urgent necessity of re-instating FDR’s Glass-Steagall legislation, which separated the speculators from the commercial bankers who tied their pursuit of profits to improving the welfare of their communities. Hamilton may not have had such a law, but the Constitution itself, in Article 1, Section 8, mandates that Congress regulate the creation and value of currency—and that in line with the General Welfare—which should rule out imposing casino debts on our nation. Note also that Hamilton spent his every day as Treasury Secretary fighting the speculators—including Aaron Burr, their representative at the Bank of Manhattan, a bank founded on fraud, and expanding on it. Hamilton paid for that opposition with his life.
In principle, we must also apply the example of Hamilton’s National Bank. This is particularly apt in the case of the extreme indebtedness that we, as a nation, have incurred with nations such as China and Japan, all of which is verging on explosion, under the current hyper-inflationary policy of Federal Reserve chairman Ben Bernanke, the Bank of England, et al. That legitimate debt can be turned into credit, which will enhance the productivity of nations, and, under a renewed fixed-exchange-rate regime, create a stable environment in which technological progress can take off once again.
It’s time to put the monetarists in their place. Those who invoke “Constitutional principle” in support of dismantling the Federal government, are actually spitting on the principles of that founding document.
It is the concept of the General Welfare which Hamilton, Franklin, and their allies espoused, and put in the Constitution, that must rule our economic policy, and that means using government power to enhance the productive powers of labor. Now is the time for all patriots to rally to that cause.
Tags: Alexander Hamilton, bankruptcy, Constitution, credit, debt, Nancy Spannaus, National Bank