Alexander Hamilton (67 page)

It did not take long for stirrings of revolt to crop up in western Pennsylvania. As soon as the tax took effect in July 1791, locals began to shun or even threaten inspectors. Hamilton imagined that he had been scrupulous in circumscribing the powers of inspectors—they “can’t search and inspect
indiscriminately
all the houses and buildings of people engaged in the business”—but many distillers found their methods bullying and intrusive.
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As discontent with the liquor tax increased, the protesters began to broaden their critique, taking aim at Hamilton’s funding scheme and his entire gamut of policies.

Hamilton was caught on the horns of a dilemma. To prop up the federal government, he had to restore public credit. To restore public credit, he had to institute unpopular taxes, and this “gave a handle to its enemies to attack” the federal government, he later conceded.
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Yet all of the alternatives to the liquor tax would have proved even more unpopular. As reports drifted back to Philadelphia of disturbances in western Pennsylvania, Hamilton did not lighten up on enforcement. He thought it his duty to implement unpopular but necessary policies, even if they detracted from his own popularity. Hamilton was not the sort to tolerate lawbreaking and was not finished with the lengthy list of controversial policies he planned to introduce.
EIGHTEEN

n December 14, 1790, one day after he jolted Congress with his call for an excise tax on liquor, Alexander Hamilton submitted another trailblazing report, this one a clarion call to charter America’s first central bank. The

country, still reeling from programs the treasury secretary had churned out in a mere fifteen months, was learning just how fertile Hamilton’s brain was. He was setting in place the building blocks for a powerful state: public credit, an efficient tax system, a customs service, and now a strong central bank. Of all his monumental programs, his proposal for the Bank of the United States raised the most searching constitutional questions.

The American Revolution and its aftermath coincided with two great transformations in the late eighteenth century. In the political sphere, there had been a repudiation of royal rule, fired by a new respect for individual freedom, majority rule, and limited government. If Hamilton made distinguished contributions in this sphere, so did Franklin, Adams, Jefferson, and Madison. In contrast, when it came to the parallel economic upheavals of the period—the industrial revolution, the expansion of global trade, the growth of banks and stock exchanges—Hamilton was an American prophet without peer. No other founding father straddled both of these revolutions—only Franklin even came close—and therein lay Hamilton’s novelty and greatness. He was the clear-eyed apostle of America’s economic future, setting forth a vision that many found enthralling, others unsettling, but that would ultimately prevail. He stood squarely on the modern side of a historical divide that seemed to separate him from other founders. Small wonder he aroused such fear and confusion.

Over the past two centuries, Hamilton’s reputation has waxed and waned as the country has glorified or debunked businessmen. Historian Gordon Wood has written, “Although late-nineteenth-century Americans honored Hamilton as the creator of American capitalism, that honor became a liability through much of the twentieth century.”
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All the conflicting emotions stirred up by capitalism—its bountiful efficiency, its crass inequities—have adhered to Hamilton’s image. As chief agent of a market economy, he had to spur acquisitive impulses, accepting self-interest as the mainspring of economic action. At the same time, he was never a mindless business booster and knew how the desire for lucre could shade over into noxious greed. In
Federalist
number 12, when discussing how prosperity abets the circulation of precious metals, he referred to gold and silver as “those darling objects of human avarice and enterprise”—a phrase that sums up neatly his ambivalence about the drive to amass personal wealth.

In a nation of self-made people, Hamilton became an emblematic figure because he believed that government ought to promote self-fulfillment, self-improvement, and self-reliance. His own life offered an extraordinary object lesson in social mobility, and his unstinting energy illustrated his devout belief in the salutary power of work to develop people’s minds and bodies. As treasury secretary, he wanted to make room for entrepreneurs, whom he regarded as the motive force of the economy. Like Franklin, he intuited America’s special genius for business: “As to whatever may depend on enterprise, we need not fear to be outdone by any people on earth. It may almost be said that enterprise is our element.”
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Hamilton did not create America’s market economy so much as foster the cultural and legal setting in which it flourished. A capitalist society requires certain preconditions. Among other things, it must establish a rule of law through enforceable contracts; respect private property; create a trustworthy bureaucracy to arbitrate legal disputes; and offer patents and other protections to promote invention. The abysmal failure of the Articles of Confederation to provide such an atmosphere was one of Hamilton’s principal motives for promoting the Constitution. “It is known,” he wrote, “that the relaxed conduct of the state governments in regard to property and credit was one of the most serious diseases under which the body politic laboured prior to the adoption of our present constitution and was a material cause of that state of public opinion which led to its adoption.”
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He converted the new Constitution into a flexible instrument for creating the legal framework necessary for economic growth. He did this by activating three still amorphous clauses—the necessary-and-proper clause, the general-welfare clause, and the commerce clause—making them the basis for government activism in economics.

Washington’s first term was devoted largely to the economic matters in which Hamilton excelled, and Woodrow Wilson justly observed that “we think of Mr. Hamilton rather than of President Washington when we look back to the policy of the first administration.”
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Hamilton had a storehouse of information that nobody else could match. Since the “science” of finance was new to America, Fisher Ames observed, “A gentleman may therefore propose the worst of measures with the best intentions.”
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Among the well-intentioned men who were woefully backward in finance, if forward-looking in politics, were Hamilton’s three most savage critics of the 1790s: Jefferson, Madison, and Adams. These founders adhered to a static, archaic worldview that scorned banks, credit, and stock markets. From this perspective, Hamilton was the progressive figure of the era, his critics the conservatives.

As members of the Virginia plantation world, Jefferson and Madison had a nearly visceral contempt for market values and tended to denigrate commerce as grubby, parasitic, and degrading. Like landed aristocrats throughout history, they betrayed a snobbish disdain for commerce and financial speculation. Jefferson perpetuated a fantasy of America as an agrarian paradise with limited household manufacturing. He favored the placid, unchanging rhythms of rural life, not the unruly urban dynamic articulated by Hamilton. He wrote, “I think our governments will remain virtuous for many centuries as long as they are chiefly agricultural.... When they get piled upon one another in large cities, as in Europe, they will become corrupt as in Europe.”
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For Jefferson, banks were devices to fleece the poor, oppress farmers, and induce a taste for luxury that would subvert republican simplicity. Strangely enough for a large slaveholder, he thought that agriculture was egalitarian while manufacturing would produce a class-conscious society.

As a representative of New England’s mercantile community, John Adams might have seemed a more likely candidate to sympathize with Hamilton’s economic system, yet his views, too, harked back to simpler times. In later years, Adams told Jefferson that “an aristocracy of bank paper is as bad as the nobility of France or England.” For Adams, a banking system was a confidence trick by which the rich exploited the poor. “Every bank in America is an enormous tax upon the people for the profit of individuals,” he remarked, dismissing bankers as “swindlers and thieves.”
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“Our whole banking system I ever abhorred,” he declared another time. “I continue to abhor and shall die abhorring...every bank by which interest is to be paid or profit of any kind made by the deponent.”
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Adams was too shrewd to think banks could be dispensed with altogether. Instead, he wanted a central bank with state branches but no private banks. Both Jefferson and Adams detested people who earned a living shuffling financial paper, and when Adams launched a bitter tirade in later years against the iniquitous banking system, Jefferson agreed that the business was “an infinity of successive felonious larcenies.”
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That banks could serve any economic purpose—that they could generate prosperity that might enrich the few but also lubricate the wheels of commerce—seemed alien to both men. So when they wrote about Hamilton in quasi-satanic terms, we must remember that they considered banking and other financial activities as so much infernal trickery.

Hamilton never doubted the urgent need for a central bank. Lacking a uniform currency acceptable in all states, still suffering from a hodgepodge of foreign coins, the country required an institution that could expand the money supply, extend credit to government and business, collect revenues, make debt payments, handle foreign exchange, and provide a depository for government funds. Hamilton stated flatly that anyone who served a single month as treasury secretary would develop a “full conviction that banks are essential to the pecuniary operations of the government.”
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Hamilton was acquainted with private banks in Philadelphia, New York, and Boston, but homegrown institutions offered limited guidance in founding a central bank. Fortunately, he was steeped in European banking precedents, for amid the alarums and excursions of the American Revolution he had managed to become educated in financial history. In his astonishingly precocious letter to James Duane of September 1780, the twenty-five-year-old colonel had hit upon an insight that now informed his theory of central banks—the fruitful commingling of public and private money: “The Bank of England unites public authority and faith with private credit.... [T]he bank of Amsterdam is on a similar foundation. And why cannot we have an American bank?”
¹¹
This hybrid character—an essentially private bank buttressed by public authority—was to define his central bank.

To tutor himself further about European central banks, Hamilton turned to Malachy Postlethwayt’s
Universal Dictionary of Trade and Commerce
and Adam Smith’s
Wealth of Nations,
the latter sent from London by Angelica Church. His main primer, however, was the charter of the Bank of England, established in 1694 under King William III. He kept a copy of it on his desk as a handy reference as he wrote his banking report, though he did not copy it uncritically and deviated in significant respects. Hamilton’s bank would serve the government
and
invigorate the economy, and he constantly stressed the broader public benefits, lest the bank be misperceived as the iniquitous tool of a small clique of speculators.

From the outset of his report, Hamilton stressed his desire to catch up with European experience: “It is a fact well understood that public banks have found admission and patronage among the principal and most enlightened commercial nations. They have successively obtained in Italy, Germany, Holland, England, and France as well as in the United States.”
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Aware of the widespread prejudice against banks, Hamilton knew he needed to set out their advantages. Echoing Adam Smith, he showed how gold and silver, if locked up in a merchant’s chest, were sterile. Deposit them in a bank, however, and these dead metals sprang to life as “nurseries of national wealth,” forming a credit supply several times larger than the coins heaped in the bank’s vaults.
¹³
In contemporary parlance, Hamilton wished to increase the money supply and the speed with which it circulated. Due to scarce money, many deals were being done as barter; in the south, warehouse receipts for tobacco often doubled as money. In contrast, a central bank would provide liquid capital that would promote the ease, freedom, and efficiency of commerce.

It speaks volumes about the prevalent detestation of banks that Hamilton dwelled so long on combating myths against them. For example, he had to contest that banks would invariably engender speculative binges in securities. The growing confidence in government, he asserted, would gradually reduce speculation in its bonds. At the same time, he admitted that speculative abuses are “an occasional ill, incident to a general good,” that did not outweigh the overall advantages of bank lending: “If the abuses of a beneficial thing are to determine its condemnation, there is scarcely a source of public prosperity which will not speedily be closed.”
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Given the speculative mania about to break out, Hamilton’s candor about it should be emphasized: “If banks, in spite of every precaution, are sometimes betrayed into giving a false credit to the persons described, they more frequently enable honest and industrious men of small or perhaps of no capital to undertake and prosecute business with advantage to themselves and to the community.”
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For political and legal reasons, Hamilton had to address the loaded subject of paper money. The Constitution outlawed the issue of paper money by states; everybody remembered the worthless Continentals printed by Congress during the Revolution. Should the federal government now issue paper money? Fearing an inflationary peril, Hamilton scotched the idea: “The stamping of paper is an operation so much easier than the laying of taxes that a government in the practice of paper emissions would rarely fail in any such emergency to indulge itself too far.”
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As an alternative, Hamilton touted a central bank that could issue paper currency in the form of banknotes redeemable for coins. This would set in motion a selfcorrecting system. If the bank issued too much paper, holders would question its value and exchange it for gold and silver; this would then force the bank to curtail its supply of paper, restoring its value.