Alexander Hamilton, Taking America from Poverty to Prosperity

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Alexander Hamilton, oil portrait by Daniel Huntington (1865). Courtesy Wikipedia.org

 

Alexander Hamilton was the architect of the original American economic policy.  Under the sound policies he promoted with the full support of President Washington, Hamilton was the helmsman of America’s vibrant economic growth President Washington appointed him secretary of the treasury on September 11, 1789 and he served until January 31, 1795.

In 1791, Treasury Secretary Hamilton furnished the Congress with a Report of the Secretary of the Treasury on the Subject of a Mint. This paper, one of four extensive reports by Hamilton, addressed four pressing questions of policy, the first of which was: "What ought to be the nature of the money unit of the United States?"

Hamilton’s exposition on how reduction of money’s intrinsic value below its nominal value -- is definitive:

Upon the supposition that the expense of coinage out to be defrayed ought of the metals, there are two ways in which it may be effected; one by a reduction of the quantity of fine gold and silver in the coins; the other by establishing a difference between the value of those metals, in the coins, and the mint price of them in bullion.

The first method appears to the Secretary inadmissible. He is unable to distinguish an operation of this sort, from that of raising the denomination of the coin; a measure which has been disapproved of by the wisest men in the nations in which it has been practised, and condemned by the rest of the world. To declare that a less weight of gold or silver shall pass for the same sum which before represented a greater weight, or to ordain that the same weight shall pass for a greater sum, are things substantially of one nature. The consequence of either of them, if the change can be realised, is to degrade the money unit; obliging creditors to receive less than their just dues -- and depreciating property of every kind: for it is manifest, that every thing would in this case be represented by a less quantity of gold and silver, than before.

It is sometimes observed on this head, that though any article of property might in fact be represented by a less actual quantity of pure metal, it would nevertheless be represented by something of the same intrinsic value. Every fabric, it is remarked, is worth intrinsically, the price of the raw material and the expense of fabrication; a truth not less applicable to a piece of coin, than to a yard of cloth.

This position, well founded in itself, is here misapplied. It supposes that the coins now in circulation, are to be considered as bullion, or in other words, as a raw material. But the fact is, that the adoption of them, as money, has caused them to become the fabric. It has invested them with the character and office of coins, and has given them a sanction and efficacy equivalent to that of the stamp of the sovereign. The prices of all our commodities, at home and abroad, and of all foreign commodities, in our markets, have found their level, in conformity to this principle. The foreign coins may be divested of the privilege they have hitherto been permitted to enjoy, and may of course be left to find their value in the markets, as a raw material. But the quantity of gold and silver in the national coins, corresponding with a given sum, cannot be made less than heretofore, without disturbing the balance of intrinsic value; and making every acre of land, as well as every bushel of wheat, of less actual worth than in time past. If the United States were insulated, and cut off from all intercourse with the rest of mankind, this reasoning would not be equally conclusive. But it appears decisive, when considered with a view to the relations which commerce has created between us and other countries.

It is however not improbable, that the effect meditated would be defeated by a rise of prices, proportioned to the diminution of the intrinsic value of the coins. This might be looked for in every enlightened commercial country; but perhaps in none with greater certainty than this: because, in none, are men less liable to be the dupes of sounds -- in none has authority so little resource for substituting names to things.

A general revolution in prices, though only nominally, and in appearance, could not fail to distract the ideas of the community, and would be apt to breed discontents, as well among all those who live on the income of their money, as among the poorer class of people, to whom the necessaries of life would seem to have become dearer. In the confusion of such a state of things, ideas of value would not improbably adhere to the old coins, which from that circumstance, instead of feeling the effect of the loss of their privilege as money, would perhaps bear a price in the market relatively to the new ones, in exact proportion to weight. The frequency of the demand for the metals to pay foreign balances would contribute to this effect.

Among the evils, attendant on such an operation, are these -- creditors both of the public and of individuals would lose a part of their property -- public and private credit would receive a wound -- the effective revenues of the government would be diminished. There is scarcely any point, in the economy of national affairs of greater moment, than the uniform preservation of the intrinsic value of the money unit. On this the security and steady value of property essentially depend.

The other three comprehensive reports by Hamilton were the First and Second Report on the public credit, and the Report on Manufactures. All were influential.

In the First Report on the Public Credit, reported to Congress on January 14, 1790, Hamilton proposed to, among other things, refinance, at 4% — rather than repudiate — the accumulated debts of the American Revolution.  The debts, when federal assumption of state debts is included, represented the GDP equivalent of $4 trillion today. Honoring debt that had been purchased at a discount by speculators, and assumption of the State debts, was opposed by Jefferson and Madison and a source of intense controversy.  New York City "is all in a flame about funding, nothing else heard even among the women and children," wrote William Neilson to John Chaloner on February 17, 1790.  With some horsetrading — for instance, locating the national capital within territory ceded by Virginia and Maryland — Hamilton’s plan narrowly passed the House of Representatives. Secretary of State Thomas Jefferson hosted a dinner for Madison and Hamilton at which the compromise was arranged.

Hamilton’s Second Report on Public Credit, transmitted to Congress on December 14, 1790, recommended the creation of the precursor of the Federal Reserve System, nicely summed up by the Liberty Fund recommended the creation of a national bank:

"A semipublic institution, modeled on the Bank of England (one-fifth of its stock would be held by the federal government, which would appoint a minority of its directors), the Bank of the United States would hold an exclusive charter from Congress and act as an adjunct to the Treasury in several respects.  It would hold the government’s funds, shift them around the country on request, and serve as a ready source of short-term loans.  In exchange for these services, it would be authorized, as well, to make private loans in notes that were to be receivable for taxes and payable in specie on demand. With an initial fund of $10 million—four times the capital of America’s three existing banks, a sum exceeding all the country’s coin, and an amount sufficient to permit some regulation of the country’s other lenders—the bank would concentrate the capital required for major commercial ventures.  Circulating through the country, its notes would be a valuable resource for merchants, providing the nation, for the first time in its history, with an ample, stable substitute for cash. Starting with only $500,000 in specie, it would be capable quite safely of extending its commitments to the limits of its capitalization. The private holders of the bank stock were to pay in four installments: one-fourth in specie, three-fourths in government certificates of debt. They would be nearly guaranteed a good return on their investment, both from private loans and from the interest payments on the government’s bonds."

Congress, again over the opposition of Jefferson and Madison who were opposed on principal and further considered there to be no constitutional authority for such a bank, nevertheless chartered it for twenty years on February 25, 1791.  The First Bank of the United States proved to be an engine of prosperity for the young United States.  It is noteworthy that — unlike the Federal Reserve System — it was forbidden to buy government bonds.  It also was prohibited from issuing notes or incurring debts beyond its actual capitalization.

Hamilton’s Report on Manufactures reported to Congress on December 5, 1791, argued for tariffs and subsidies to help incubate manufacturing in the United States.

Among Hamilton’s most impressive and durable contributions both to American monetary integrity, rationality, and, thus, stability and prosperity, was the Coinage Act of 1792. According to economic (and monetary policy) scholar Prof. Lawrence H. Officer, of the University of Illinois at Chicago:

The Coinage Act of 1792 (P.L. 2–16, 1 Stat. 246) was Congress's first use of its constitutional power regarding coinage and money. Congress faced four major problems. First, there was no common system of monetary accounting in the new nation. Each state, as a colony, had created its own unit of account, based on the British system of pounds, shillings, and pence, that it continued to use—doubly unacceptable to the newly constituted nation.

Second, the medium of exchange (money used in transactions) was the Spanish dollar, a silver coin.  The difference between the unit of account and medium of exchange was tremendously inconvenient. Third, a variety of other coins—both gold and silver—circulated. So the monetary relationship of gold to silver needed to be established.  Fourth, these coins were all foreign: A domestically-produced coinage would be a hallmark of independence.

The provisions of the Coinage Act were based on a report prepared by Alexander Hamilton, secretary of the treasury. Hamilton suggested coinage that implicitly adopted a decimal system of account: the dollar, "tenth part" of the dollar, and "hundredth part" of the dollar. The Coinage Act provided that "the money of account of the United States shall be expressed in dollars or units, dismes or tenths, cents or hundredths, and milles or thousandths." … Thus a decimal monetary system was created—the first in history for any country! The private sector followed the official shift to a decimal system of accounting within a decade.

As a military officer, Alexander Hamilton had been a key figure in the War for Independence. He was a delegate to the Constitutional Convention, and played a key role in securing the Constitution’s ratification. As America’s first treasury secretary, under President Washington, Hamilton was the key agent that gave America sound money — a dollar defined in fixed weights of precious metals — coupled with a sound, as Lewis E. Lehrman aptly phrases it in The True Gold Standard, credit superstructure. 

Lehrman wrote that Hamilton’s

"antagonists conceded, and Jefferson lamented, that he had founded the lasting financial institutions of his country, thereby giving life to the fragile fabric of the Constitution and the Federal Union, mobilizing the requisite energy in the Executive to raise the Federal government from the lethargy of the Articles of Confederation. He originated the tax system, the banking system, even the detailed procedures of the tariff and customs measures which financed the new federal government. Over Jefferson's and Madison's resistance he oversaw the consolidation and refinancing of the enormous and debilitating public debt, all of which led, at the creation of the republic, to a vibrant organism of government — all but nullifying for a time, under the aegis of President Washington, the centrifugal forces of state autonomy. His were also the brilliant arguments for liberal construction of the implied powers of the constitution, relied upon by our greatest Chief Justice, John Marshall, who held out Alexander Hamilton to be, after Washington, the first man of his age."

Hamilton more than earned his place on the modern $10 bill — which deserves to be made convertible, one imagines, very roughly into somewhere between three and four grains of gold. As Lehrman’s essay concludes: “In the words of Senator Henry Cabot Lodge, the leading scholar-politician of a later era, Hamilton ‘was the embodiment of nationality’. This was a decisive idea at the crucial moment when ‘the principle of nationality meant nothing...’ And ‘there is no single man to whom’ the idea and the building of American nationality ‘owes more than to Hamilton’.”

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