Authors: Michael Lind
Morris argued for aligning the interests of the rich with those of the government, by means of institutions like the Bank of North America and a funded debt, because doing so would “give stability to government, by combining together the Interests of moneyed men for its support.”
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With respect to the creation of a new market in US public securities as a result of funding the debt, Morris wrote: “Even if it were possible to prevent Speculation, it is precisely the thing which ought not to be prevented; because he who wants money to commence, pursue, or extend his business, is more benefited by selling stock of any kind, than he could be by the rise of it at a future Period; Every man being able to judge better of his own business and situation, than the Government can for him.”
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Morris practiced what he preached: “I shall continue to discharge my duty faithfully to the Public, and pursue my Private Fortune by all such honorable and fair means as the times will admit of.”
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Morris invested in a fleet of privateers that harassed British shipping and provided him with prizes that he could add to his wealth. A French envoy in Philadelphia observed in his diary that Morris “is, in fact, so accustomed to the success of his privateers, that when he is observed on a Sunday to be more serious than usual, the conclusion is, that no prize has arrived in the preceding week.”
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Morris wanted the nation’s permanent capital to be located on the Delaware River at Trenton, New Jersey, where he owned land.
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In addition to the effect of the deeply rooted distrust of rich big-city bankers in American political culture, particularly those who are foreign-born, Morris’s unhappy later career may explain his absence from the American pantheon. Morris served as a Pennsylvania delegate to the Constitutional Convention and later as a US senator from Pennsylvania. In 1790, Morris bought two million acres in New York State and quickly sold it to a group of British investors, Pulteney Associates.
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In another transaction, in December 1792, he sold 1.5 million acres in upstate New York and his son in Amsterdam, acting as his agent, sold another 1.8 million to a group of Dutch investors who formed the Holland Land Company.
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Having invested in millions of acres of land in New York, Pennsylvania, Georgia, South Carolina, and Virginia, as well as the District of Columbia, Morris, unable to pay his debts, ended up in jail for three and a half years until the nation’s first bankruptcy law came into effect. He died in 1806. Morris’s longtime friend and business partner, Thomas Willing, outlived him and was nominated unsuccessfully to lead the second Bank of the United States.
BUILDING A NATIONAL ECONOMY
When Britain formally recognized the independence of the United States in 1783, the new country, under the Articles of Confederation, ratified by the states in 1781, was more of a loose alliance than a nation-state. The federal government lacked the power to raise revenue and depended on voluntary contributions from the state governments.
The War of Independence had left both the federal government and the state governments with large debts. There was no national currency and only a single bank, the small Bank of North America in Philadelphia, which began operations in 1782. Money took the form either of state-printed paper or specie, in the form of gold and silver, including foreign coins.
In addition to the debt of the US government, each state had debts from the war. Virginia and some other southern states paid down their debts. Rhode Island resorted to inflation. In 1786, when Massachusetts imposed taxes to pay for its debt, settlers in the western backcountry took up arms and rebelled. Several were killed and a thousand arrested by the time the so-called Regulators or Shaysites, who followed Daniel Shays and others, were defeated.
Shays’s Rebellion underlined the weakness of the federal government under the Articles of Confederation. Congress had to approve the use of weapons in the Springfield, Massachusetts, armory, but it had been out of session when the crisis arose. The incident convinced many Americans that the United States needed a stronger government. Among them was George Washington, then living in retirement at his estate in Virginia, Mount Vernon. He wrote, “Let us have a government by which our lives, liberty and properties will be secured, or let us know the worst at once.”
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In the summer of 1787, Washington presided over the Constitutional Convention at Philadelphia. After the new, stronger federal constitution was ratified by the states, Washington became the first president elected under the new system. To help in the consolidation of the nation’s finances, he turned to Alexander Hamilton.
THE MASTERMIND
“The bastard brat of a Scotch peddler” was the description of Hamilton by his rival John Adams, the second president of the United States. Hamilton was born in 1757 on the British West Indian island of Nevis to Rachel Faucett Lavien and the son of a Scots laird, James Hamilton, who deserted his family when Hamilton was a boy. He was orphaned a few years later when his mother died. A merchant who noticed his abilities arranged for him to study at King’s College (present-day Columbia University) in 1772. When the American Revolution began, he joined the New York militia and his abilities brought him to the notice of Washington, who made him one of his staff officers. Following the war, in which he distinguished himself not only by his logistical abilities but also by a raid on British forces at Yorktown, he married into the wealthy Schuyler family of New York and became a champion of a more centralized government, organizing and writing a majority of the
Federalist Papers
, which were used in the campaign for ratification of the new federal constitution.
In a 1780 letter to the New York revolutionary leader James Duane, the young Hamilton, then serving as an aide on General Washington’s staff, proposed a constitutional convention to remedy the weaknesses of the existing confederation. His proposals included “complete sovereignty” of the federal government over the states, the authority of the federal government to tax citizens directly, a permanent military, a national bank, and “great officers of state—a secretary for foreign affairs—a President of War—a President of Marine—a Financier.” Hamilton suggested that Morris would make an excellent “Financier.”
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Hamilton wrote to Morris, with his own plan for a bank. According to legend, when George Washington, on being elected president, asked Morris to serve as the first Treasury secretary of the United States, Morris declined and recommended Hamilton.
As the secretary of the Treasury, the largest and most important federal agency, Hamilton proved worthy of the responsibility. He submitted a series of great state papers, of which the most important were the Report on Public Credit (January 14, 1790), the report calling for the establishment of the Bank of the United States (December 14, 1790), the report calling for the establishment of a national mint and a bimetallic dollar standard (January 28, 1791), and the Report on Manufactures (December 5, 1791). Congress acted on most of his recommendations. In only a few years, he laid the solid foundation for America’s future prosperity.
FROM COLBERT TO HAMILTON
Hamilton’s self-education prepared him well for the task of building a nation out of a miscellany of former colonies. While serving during the Revolutionary War on Washington’s staff, Hamilton studied what was then known as political economy rather than economics, reading David Hume and Adam Smith, among others. Scattered through his army pay book are notes quoting or summarizing a two-volume book by the British author Malachy Postlethwayt, published in London between 1751 and 1755:
The universal dictionary of trade and commerce; translated, from the French of the celebrated Monsieur Savary, Inspector-General of the manufactures for the King, at the custom-house of Paris: with large improvements, incorporated throught the whole work; which more particularly accommodated the same to the trade and navigation of the kingdoms, and the laws, customs, and usages, to which all traders are subject.
Postlethwayt’s book was a translation and adaptation of the
Dictionnaire universel de commerce
, written by Jacques Savary des Bruslons, completed by his brother Philemon-Louis Savary and published in Paris in 1723 before being translated into other languages. Jacques Savary was the inspector general of the manufactures for the king at the Custom House in Paris. He was the sixth son of Jacques Savary, a member of an elite merchant family, who had been one of the architects of French economic policy under the great French statesman Jean-Baptiste Colbert.
Colbert served as France’s minister of finance from 1665 until his death in 1683. A brilliant, hardworking public servant, Colbert presided over a program to modernize the French economy and strengthen the state. He created the French merchant marine, imposed quality standards on French producers to make their products more attractive, and promoted infrastructure projects like roads and canals, including the important Canal du Midi. Colbert used protective tariffs and other methods to promote French infant industries. He fostered the French glass industry by banning Venetian glass imports. Another method was the use of state-owned enterprises, like the royal Gobelin tapestry factories. Similar techniques were employed by Britain before the 1840s, and would later be used by the Americans and Germans in the nineteenth century and even later by Japan and China.
At Colbert’s request, Jacques Savary codified French commercial practice in 1673, in what became known as the Code Savary. In addition, Savary wrote a book called
The Perfect Merchant
, which was published in 1675 and translated into German, Italian, Dutch, and English. The universal dictionary of commerce that his two sons published, and that Postlethwayt translated into English, built upon his work for Colbert. By way of the Savary family and Postlethwayt, the economic nation-building of Alexander Hamilton was influenced by the economic nation-building of Jean-Baptiste Colbert.
Britain as well as France provided Hamilton with a model for state-sponsored economic modernization. Such a system was established under British prime minister Robert Walpole in the early eighteenth century. In 1721, British commercial law was reformed to promote manufacturing by raising tariffs on foreign manufactured goods, eliminating export duties on most British manufactured goods, lowering or eliminating tariffs on raw materials used by British manufacturers, and providing subsidies to British export industries like silk and gunpowder.
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The same era witnessed the founding of the Bank of England (1694), a model for the first Bank of the United States. Only after Britain over several centuries had successfully used protectionism, subsidies, and mercantilist trade policies to develop competitive industries did it take the risk of liberalizing trade.
FUNDING THE DEBT
One of Hamilton’s first decisions as secretary of the Treasury was to ask Congress to establish America’s creditworthiness in the eyes of American and foreign creditors by taking over the debt of the states. Opposition to Hamilton’s funding plan was concentrated in the South. Virginia and several other southern states had paid their wartime debts and objected to being taxed to pay down the debts of other states. In addition, much of the debt had ended up in the hands of northeastern speculators, whose agents had traveled through rural areas buying debt instruments at a fraction of their face value.
James Madison’s proposal to divide the payment between the original holders of the debt and those who had purchased it was unworkable. Hamilton was right to insist that a fluid market in securities meant that the government had to treat all holders of debt equally.
In June 1790, Hamilton was leaving George Washington’s temporary home in New York when he encountered Thomas Jefferson, who had arrived for an appointment with the president. Jefferson later described the Treasury secretary as “somber, haggard and dejected beyond comparison.” Jefferson invited Hamilton to dine with him and Madison at Jefferson’s home on June 20. Legend has it that the Virginians promised Hamilton they would support his funding scheme if Hamilton delivered the support of northerners for a capital on the Potomac. The truth is more complicated. Such a deal had been in the works for some time, and Hamilton knew that Washington favored a site for the capital near his Mount Vernon plantation. In any event, a few days later Congress narrowly passed Hamilton’s assumption system by a single vote. Congress subsequently chose the Potomac site for the federal capital and Jefferson was the first president to serve his full term there.
As Hamilton carried out his plan, the miscellany of federal and state securities were replaced by three new bond issues with a par value of $64 million. By law the debt was funded, that is, federal revenues were dedicated first to paying interest on the debt. Dutch bankers cooperated with Hamilton in managing the debt held by Europeans. Hamilton also increased a sinking fund. Justified by the need to pay down debt in the future, in fact this permitted him to perform what would later be called “open market operations” to stabilize the economy.
The
New York Gazette
on April 2, 1792, used nautical terminology to describe federal bonds:
THE Six-per Cent, a first rate, belonging to the fleet commanded by Admiral
hamilton
, notwithstanding several hard contrary gales, and a strong lee current setting out of the Hudson and Delaware is still working to windward; and bids fair to gain her destined port.
The Three per Cent, a frigate belonging to the above mentioned fleet, in sailing through Speculation Straights, received a land flaw, which threw her on her beam ends—She has, however, since righted, and is pursuing her voyage.
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Hamilton was confident that economic growth would permit the United States to pay down the consolidated federal and state debts. He told his friend and mentor Robert Morris: “Speaking within moderate bounds, our population will be doubled in thirty years; there will be a confluence of emigration from all parts of the world, our commerce will have a proportionate progress and of course our wealth and capacity for revenue. It will be a matter of choice if we are not out of debt in twenty years, without at all encumbering the people.”
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