By Nancy Spannaus
… By contributing to enlarge the mass of industrious and commercial enterprise, banks become nurseries of national wealth: a consequence, as satisfactorily verified by experience, as it is clearly deducible in theory. – Report on the National Bank
Alexander Hamilton put forward his most controversial proposal — the Second Report on Public Credit, or Report on the National Bank – on December 13, 1790. The principles and intent which lay behind this proposal were crucial for forging a unified, prosperous federal republic, and were implemented by our greatest presidents to stunning success. Yet today, there are many Americans who have no idea that we had a National Bank, or, worse, confuse Hamilton’s idea with the bankers’ Federal Reserve.
In a way that’s not surprising. The issuance of Hamilton’s report touched off a vehement campaign against his economic policy by those who feared it. No slander was off limits. Hamilton was charged with being a British sympathizer, a monarchist, a font of corruption and speculative greed. I have read (but can’t find the source now) that Jefferson even proposed that Virginians who support the Bank of the United States be considered traitors. Officially, the Jefferson argument was that Hamilton’s bank was simply a tool of the wealthy urban class, would destroy state banks and discriminate against small enterprises, and was not explicitly permitted in the Constitution.
Jefferson was lying about Hamilton’s institution and its intent, but the experience that Americans had had with British banking made it sound credible to many. It took the experience of having a unified currency which greatly improved commercial activity for all sectors of the population during the 1790s to turn the tide. Americans today, of course, have not seen a national bank with a commitment to upgrading living standards, infrastructure, and agro-industrial production for more than 50 years. Prejudice against establishing a Hamiltonian National Bank, explicitly dedicated to building up the physical economy, is easy to excite.
It was in the face of this view that I wrote my book Hamilton Versus Wall Street: The Core Principles of the American System of Economics, which takes on the misunderstandings and lies about Hamilton’s economic program for the nation. Not only do we have to set the historical record straight, but we need those principles today, in order to reverse the degradation of the productive powers of the nation which is reflecting itself in the opioid epidemic, the rise in suicides, the homelessness crisis, the skills crisis, infrastructure collapse, and much more.
To encourage you to buy the book, I am reprinting here an excerpt from Chapter 8, which is entitled “Alexander Hamilton’s banking system was not British!”
Excerpt of Chapter 8: Hamilton’s Bank Was Not British
One of the most disorienting and vicious charges against Hamilton and his financial plan is the claim that he was adopting the British System.[1] This charge is often justified by Hamilton’s explicit citation of the usefulness of the Bank of England in building the industrial power of the mother country, and his copying of various organizational features of that British bank in his schema for the Bank of the United States. As a few Hamilton scholars such as Forrest McDonald[2] and Donald Swanson[3] point out, this claim is a lie.
A National Vision
The first fundamental difference between the two banks lies in the purpose for which they were created. Hamilton’s Bank of the United States was intended as one means of creating the “more perfect union” which the Preamble to the U.S. Constitution had called for, by establishing a central sovereign currency, banking system, and source of credit to build the nation. It was a cornerstone for nation-building. By contrast, the Bank of England was established in 1694 as a means of amassing funding for the Crown’s plans for war against France.
Hamilton’s writings, from as early as 1774, demonstrate that he had a vision for creating a large commercial republic, in which the widely differing regions of the nation would complement each other in producing a growing economy. This vision emphasized the development of increasing mechanization, creation of a manufacturing base, and urbanization. These economic characteristics were incompatible with the continuation of the slave-based economy that Great Britain had brought to the United States.
Hamilton’s personal actions in opposition to slavery, especially with the New York Manumission Society, and the establishment of the African Free School to educate the children of slaves,[4] are not the only evidence that he sought an end to that institution. Best known is his proposal, with John Laurens, to bring slaves into the Revolutionary Army (along with giving them their freedom). But most importantly, his financial system, with its orientation to building up the productive powers of labor and nation-unifying infrastructure, and undercutting the power of the landed oligarchy, represented a mortal threat to the slave system.
To accomplish his vision, Hamilton devised an ingenious plan that would turn what appeared to be a crushing debt burden (the foreign, continental, and state debts incurred during the Revolution, which amounted to $77 million, an enormous sum at the time), into a source of credit and capital which could be used to invest in developing the nation. When he took over the Treasury, the United States was hopelessly behind in interest payments, and the revenues which would be available from the tariff (passed in August of 1789) would not even cover the debt service, much less suffice for the government’s expenses. And without the development of the economy, there was no prospect these debts ever could be paid.
Hamilton’s solution was 1) to increase the Federal debt burden by assuming the state debts; 2) to turn that debt into government bonds; and 3) to utilize those bonds to capitalize a national bank. This would effectively turn debt into credit for the real economy. Unlike those who wanted to pay off or cancel the debt right away, he insisted on putting it to work to increase the productive powers of the nation. Bond- and stock-holders would be paid their annual rates of interest, but would have to be in it for the long haul, as any investment in the physical development of a nation has to be.
It boggled the minds of many Americans, and still does to this day, that Hamilton chose to increase the Federal debt, but his purposes were critical for the unity of the nation. He argued in the First Report on Public Credit (January 9, 1790) that the debts of the war were the responsibility of the entire country, as it was the entire country which benefited from their being incurred. By consolidating the debt, he aimed at further consolidating the 13 former colonies into one nation. As he wrote in 1781 to fellow New Yorker James Duane, who was then a delegate to the Continental Congress:
A national debt, if it is not too excessive, will be to us a national blessing. It will be a powerful cement of our union.[5]
As for those who wanted to cancel the debt, or cut it substantially, Hamilton considered them short-sighted, as well as immoral. Honoring the war debts of the past, he understood, could provide the basis for creating prosperity for the future.
Hamilton was out to establish public credit, for the sake of the nation as a whole. For this, he has often been accused of wanting to maintain the debt for the purpose of enriching the nation’s creditors, or the power of the Federal government per se. He wanted nothing of the kind. In that First Report, he asserted that
Persuaded as the Secretary is, that the proper funding of the present debt, will render it a national blessing: Yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality, and liable to dangerous abuse,—that he ardently wishes to see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal.
Unlike many others, however, Hamilton understood that providing the means of “extinguishment” meant more than guaranteeing a revenue stream for interest payments; it required increasing the productive powers of the nation as a whole. That is a long-term process, which requires investment in infrastructure, skills, and innovation. Thus, the need for credit to generate that productive activity.
What a contrast to the short-term profit-taking of today! …
[1] The charge originated with the Jeffersonians in 1792, when the Secretary of State, in a rage about the establishment of the National Bank, began a newspaper campaign charging that Hamilton’s bank was part of his desire to establish a British monarchy in America. He cited Hamilton’s speech at the Constitutional Convention and comments Hamilton allegedly made at the dinner where he, Jefferson, and James Madison made the deal to pass the Bank bill, in exchange for moving the U.S. Capital to the South. Hamilton rebutted the charges, among other places, in an Aug. 18, 1792 letter to George Washington, where he noted that the promoters of anarchy are the “true Artificers of Monarchy.” Given Hamilton’s lifelong fight to establish and defend the republican U.S. Constitution, the charges of his being a monarchist are worse than absurd.
[2] Forrest McDonald, Alexander Hamilton, A Biography, W.W. Norton & Company, New York, 1979, passim.
[3] Donald F. Swanson, “Origins of Hamilton’s Fiscal Policies,” University of Florida Monographs, Social Sciences, No. 17, Winter 1963, passim.
[4] See Introduction.
[5] Letter to James Duane, September 3, 1781.
Tags: Alexander Hamilton, debt, Hamilton Versus Wall Street, industry, Nancy Spannaus, Report on a National Bank, Thomas Jefferson