Alexander Hamilton (71 page)

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?”
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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.
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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 self-correcting 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.

Hamilton wanted his central bank to be profitable enough to attract private investors while serving the public interest. He knew the composition of its board would be an inflammatory issue. Directors would consist of a “small and select class of men.” To prevent an abuse of trust, Hamilton suggested mandatory rotation. “The necessary secrecy” of directors’ transactions will give “unlimited scope to imagination to infer that something is or may be wrong. And this
inevitable
mystery is a solid reason for inserting in the constitution of a Bank the necessity of a change of men.”
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But who would direct this mysterious bastion of money? Its ten million dollars in capital would be several times larger than the combined capital of all existing banks, eclipsing anything ever seen in America. Hamilton, wanting the bank to remain predominantly in private hands, advanced a theory that became a truism of central banking—that monetary policy was so liable to abuse that it needed some insulation from interfering politicians: “To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure that it shall be under a
private
not a
public
direction, under the guidance of
individual interest,
not of
public policy.
”
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At the same time, Hamilton worried that the bank would be so well buffered from public control that abuses might occur. To safeguard the public interest, the government would become a minority stockholder in the bank and able to vote for directors. Of the ten million dollars in capital, the president would be authorized to buy up to two million in bank stock—a stake presumably large enough to give the government substantial leverage, while not
so
large that it could dictate self-serving policies. The treasury secretary could also receive weekly reports on bank activities and retained the option of inspecting its books.

It was in the nature of Hamilton’s achievement as treasury secretary that each of his programs was designed to mesh with the others to form a single interlocking whole. His central bank was no exception. Of the eight million of its capital that would be subscribed by private investors, three quarters would be paid in government securities. Thus Hamilton finely interwove his bank and public-debt plans, making it difficult to undo one and not the other. The byzantine, interrelated nature of his programs made him all the more the bane and terror of opponents.

On January 20, 1791, a bill to charter the Bank of the United States for twenty years virtually breezed through the Senate. At that point, nothing presaged the chasm about to yawn in American politics, one that was to create the first political parties. Only as the House mulled over the bank bill in early February did it become palpable that the amity between Hamilton and Madison, briefly restored by the excise tax, was about to shatter, this time irrevocably. Once again, Madison’s dissent was partly local in origin. Some central-bank critics thought the institution would aggrandize northern merchants at the expense of southern agrarians, and Madison came from the largest rural state. Hamilton denied any urban bias, telling Washington that where banks had been established “they have given a new spring to agriculture, manufactures, and commerce.”
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Even if this were true, Hamilton had to reckon with the fact that farmers were debtors by nature and hence contemptuous of bankers and other creditors. Southern planters especially hated bankers. “Holding banking to be no more than the prostitution of money for illicit gain,” historian John C. Miller has written, “one Virginia planter swore that he would no more be caught going into a bank than into a house of ill fame.”
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Hamilton wanted the new bank in Philadelphia. “It is manifest that a
large commercial city
with a great deal of
capital
and
business
must be the fittest seat of the Bank,” he told Washington.
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Madison fretted that placing the bank in Philadelphia might plant the national capital there permanently, reneging on the promised move to the Potomac. Congressman Benjamin Bourne of Rhode Island surmised that Madison might not have spoken against the bank had not “the gentlemen of the southward” viewed it as “adverse to the removal of Congress” to the Potomac.
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For this and other reasons, Patrick Henry denounced Hamilton’s economic program as a “constituent part of a system which I have ever dreaded—subserviency of southern to n[orther]n interests.”
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Overshadowing this geographic split was the fundamental question of whether the Constitution allowed a central bank. While writing
The Federalist,
Madison had subscribed to an elastic interpretation of the charter. Now, speaking on the House floor, he made a dramatic turnabout, denying that the Constitution granted the federal government powers not specifically enumerated there: “Reviewing the Constitution…it was not possible to discover in it the power to incorporate a bank.”
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Hamilton turned to article 1, section 8, the catchall clause giving Congress the right to pass any legislation deemed “necessary and proper” to exercise its listed powers. Madison accused him of exploiting that power and “levelling all the barriers which limit the powers of the general government and protect those of the state governments.”
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Afraid that the agile Hamilton would dream up limitless activities and then rationalize them as “necessary and proper,” Madison re-created himself as a strict constructionist of the Constitution.

For Madison, Hamilton was becoming the official voice of monied aristocrats who were grabbing the reins of federal power. He felt betrayed by his old friend. But it was Madison who had deviated from their former reading of the Constitution. To embarrass Madison, Elias Boudinot read aloud in Congress some passages about the “necessary and proper” clause from
Federalist
number 44, notably the following: “No axiom is more clearly established in law or in reason than wherever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power for doing it is included.”
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Hamilton probably tipped off his old friend that Madison had written these incriminating words.