We Need a Hamiltonian National Bank!
By Nancy Spannaus
Dec. 12, 2017—Ask any professional economist, or Congressman for that matter, about why the United States is facing a hundreds of billions of dollars deficit in basic infrastructure, and he will tell you that we “don’t have the money.” But how could that be true? Trillions of dollars are available to be traded daily in stocks on Wall Street, and speculative banking operations, despite the tens of trillions of dollars in national debt. The Federal Reserve prints money in the trillions, and provides it to those banks. The problem is not lack of money; it’s a lack of credit for the kinds of productive activity which will actually bring prosperity (and reduced indebtedness) to our country both today, and in the long-range future.
The solution lies in turning our current banking system into a credit system, which means linking the private banking system once again to institutions of public credit which are devoted to lending for the general welfare of the country. In other words, we need a real National Bank, constructed on the principles that Founding Father Alexander Hamilton outlined some 227 years ago.
But what is a Hamiltonian National Bank?
Hamilton’s bank proposal, which established the Bank of the United States (BUS), cannot be separated from his broader aim—the creation of a national industrial economy (Union) dedicated to scientific and technological progress. The BUS was crafted in order to create a banking system that would support that. As premier Hamiltonian historian Forrest McDonald put it in his biography of Hamilton, “What was important was that there would be a banking system, and that the currency of the nation would be based upon it, not upon gold and silver. That meant the nation could be built on credit, for the crucial characteristic of banking currency is that it is money created in the present, not out of past savings but out of the expectation of future profits.”
As his Report on Manufactures makes crystal clear, Hamilton understood that the wealth of the nation was based on developing the productive powers of labor, not accumulating precious metals. “To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted,” he wrote. The bank was one part of this plan to increase the nation’s wealth.
Nor did Hamilton see the bank’s profits as merely those of the stockholders of the Bank. As he wrote in the Report:
Public utility is more truly the object of public Banks, than private profit. And it is the business of Government, to constitute them on such principles, that while the latter will result, to a significant degree, to afford competent motives to engage in them, the former be not made subservient to it.
To this end, Hamilton’s BUS followed the following principles:
1) It was a Federally-chartered institution created with the support of government credit, partial government ownership, and regular government supervision, but mostly owned, and totally operated, by private interests. In other words, the famous wedding of public and private interests through with a mandate to cooperate in economic growth.
2) It was dedicated to investing in physical economic growth through creation of what McDonald calls “a large, stable, but flexible national money supply” for ample commercial lending and economic development, capped at a moderate interest rate (in his time, 6 percent).
3) It was prohibited from trading in government debt (after the initial transactions that established the Bank), and thus could not be used, as the Federal Reserve is today, as a means of speculative profits at the expense of public finances.
Through these measures, as Hamilton asserts in his Report, the Bank was set up to build up the “quantity and quality” of productive activity in the country, to combat usury, and to stabilize the finances of what was otherwise an infant nation faced with bankruptcy.
We need these principles applied today on a much larger scale, as is envisioned in the Draft proposal for a Bank of the United States for Infrastructure and Manufacturing. A short video on this proposal can be viewed here. The written proposal is available elsewhere on this blog.
Now, let’s take a brief look at Hamilton’s Bank.
When Treasury Secretary Alexander Hamilton sent his Report on a National Bank to Congress on December 13, 1790, he began with the following assertion:
That a National Bank is 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 Public Credit.
But he was quick to amplify that statement, making clear that the National Bank he was proposing was not simply an aid to government finances, per se, but to the nation as a whole. The principal advantage of a Bank, he wrote, would be
the augmentation of the active or productive capital of a country. Gold and Silver, when they are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead Stock; but when deposited in Banks, to become the basis of a paper circulation, which takes their character and place, as the signs of representatives of value, they then acquire life, or, in other words, an active and productive quality. (emph. added)
In other words, the National Bank will turn money into credit for farmers, industrialists, and commercial enterprises. “And thus 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.”
There were two other major aims of a National Bank, Hamilton wrote. One is to provide aid to the government, “especially in sudden emergencies.” (floods and hurricanes, perhaps?) This is possible because such a bank will bring together a large mass of capital in one place which can be deployed in the interest of the public welfare. The second is to facilitate the payment of taxes, by creating a medium of circulation which can be conveniently utilized everywhere in the country.
To accomplish these aims, Hamilton devised a Bank of the United States which utilized the public debt of the United States (then in the order of 75 million dollars) to create a credit institution devoted to commercial lending. In order to buy stock in the BUS, potential stockholders had to pay in government debt instruments (government bonds) for three-quarters of the value of their stock, along with one quarter in specie (gold or silver). This turned those government bonds into the baseline capital for the BUS, and simultaneously gave the BUS a dedicated source of income through the government interest payments on those bonds. In addition, Hamilton called for a dedicated source of funds to pay that interest, in the form of certain tariffs and excise taxes. (He always insisted that a means of payment accompany the contracting of debt, although in this case it was only the interest payments which had a definite schedule of payment.)
This turning of national debt into credit is the realization of Hamilton’s often-quoted statement, from his 1781 letter to Robert Morris on the need for a National Bank, that “A national debt, if it is not excessive, will be to us a national blessing.” This brilliant move simultaneously increased the value of U.S. government bonds (which was sorely needed at the time), and provided a fund for lending to private enterprise, which would increase the productivity of the economy as a whole—including, obviously, future tax revenues. The bank was also open for other deposits, and its notes became, in effect, a national currency, which helped bind the nation together.
What’s Needed Today
If truth be told, the United States today is even more bankrupt than it was in 1790. Trillions of dollars of outstanding government, corporate, and personal debt have been created, while the physical basis for survival has been looted to the point of unliveability for increasing portions of the population.
In this situation, Hamilton’s principles represent the only way out. The massive debts of the U.S. government today (in the trillions held by China and Japan) can, as they were in Hamilton’s time, be used to capitalize a new National Bank, turning them from “dead stock” into interest-bearing stock in a lending institution that will begin to rebuild the country. This institution will be banned from speculation, and directed to lend for major infrastructure projects and productive enterprises, in collaboration with other banks and nations. It will serve as a depository for government funds (as did Hamilton’s BUS), and receive a dedicated stream of income (notably, from an increased Federal gas tax, among other potential sources) in order to help in servicing its debts.
Wall Street and its associated international banking cronies mightily object. This would cut off their subsidies from the Federal Reserve, and re-establish a banking system based on lending to the physical economy instead, where the payoff would be long-term and reaped primarily in the development of the economy as a whole. But it has been done before. Lincoln bucked Wall Street with the establishment of his national banking system and greenbacks; so did FDR with the Reconstruction Finance Corporation RFC).
It’s time for Hamiltonian banking to be restored once more.
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