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Alexander Hamilton on Finance, Credit, and Debt

Author(s):Sylla, Richard
Cowen, David J.
Reviewer(s):McNamara, Peter

Published by EH.Net (November 2018)

Richard Sylla and David J. Cowen, Alexander Hamilton on Finance, Credit, and Debt. New York: Columbia University Press, 2018. xii + 346 pp. $30 (hardcover), ISBN: 978-0-231-18456-4.

Reviewed for EH.Net by Peter McNamara, School of Civic and Economic Thought and Leadership, Arizona State University.

“The effect of energy and system is to vulgar and feeble minds a kind of magic which they do not comprehend and thus they make false interpretation of the most obvious facts. The people of several parts of the state relieved and happy by the effects of the assumption execrate the measure with its authors to which they owe the blessing” (p. 289). So wrote Alexander Hamilton in his “Defense of the Funding System,” soon after resigning his post as the nation’s first Secretary of the Treasury. “The Defense” is one of a number of Hamilton’s economic writings that have not received the scholarly attention they deserve. The piece contains not only polemics and technical discussions of Hamilton’s financial program, it also contains a number of important philosophical reflections, rare in Hamilton’s writings, on the nature, especially the moral costs and benefits, of commercial societies. Richard Sylla, professor emeritus at the Stern School of Business at New York University and David J. Cowen, president and CEO of the Museum of American Finance have included the “Defense” in their new collection of Hamilton’s writings, Alexander Hamilton on Finance, Credit, and Debt.

In addition to drawing attention to neglected documents, Sylla and Cowen’s broader goal with this volume is to create a kind of Hamiltonian primer on public finance, to explain its magic to “citizens, financiers, and policy makers” (p. 322). To this end, they have brought together writings from across Hamilton’s career beginning with the young soldier thinking through the political and financial woes of the would-be new republic. In an effort to make Hamilton’s ideas more accessible, Sylla and Cowen have engaged in a drastic pruning of Hamilton’s voluminous, sometimes prolix output and have modernized spelling and punctuation. By my rough count, they have trimmed over 100,000 words, almost 60 percent of the original documents. The result is a unique, highly readable, and very useful collection of Hamilton’s writings on political economy, broadly understood. By including documents that are usually overlooked, they also give us a fuller picture of Hamilton.

Hamilton displayed a remarkable consistency in his economic thinking over the years. As noted, he began to think through the American situation while on Washington’s staff and quickly identified the most important problems. For solutions, he looked to the Dutch and British examples for guidance and to writers such as David Hume, James Steuart, Malachy Postlethwayt, and later Jacques Necker and Adam Smith. The lessons he learned were many but the key lesson, according to Sylla and Cowen, was that what the United States needed was a “financial revolution” of the kind the Dutch and British had experienced. Sylla and Cowen acknowledge the contributions of their sometime collaborator Robert E. Wright of Augustana College in developing this particular interpretation of Hamilton and of America’s economic take-off. What specifically was needed? Based on his inquiries: a national bank, a sound currency, assumption of the states’ Revolutionary War debt, an efficient and equitable tax system, and most immediately a plan to restore the public credit of the United States, then a bankrupt nation. Hamilton and the United States benefited from being late arrivers because they were able to innovate on Dutch and British precedents. This is, for example, evident in Hamilton’s plan for a national bank. As the editors point out, the Bank of the United States differed from the Bank of England as regards its voting procedures, its partial government ownership, its species reserve requirements, and branch banking. Hamilton’s vision and recommendations went beyond matters of pure public finance. If it was to realize its potential, the American private sector economy needed modernization as well. Hamilton recommended the encouragement of manufactures through modest tariffs and a variety of other government incentives. According to Sylla and Cowen, however, the critical thing was to make capital readily available to entrepreneurs. The Bank of the United States was one way to do this. It could lend to entrepreneurs and it provided the states with an incentive to encourage the creation of banks and a model to emulate. The editors include documents relative to Hamilton’s drafting of charters for the Bank of New York and the Merchants Bank (also of New York).

Hamilton’s neglected final report on public credit of January 15, 1795 is included in the volume. A clearly irritated Madison characterized it as Hamilton’s “arrogant valedictory Report” (p. 231). Hamilton did remark that the nation’s finances were “prosperous beyond expectation” (p. 239), a judgement with which Madison took issue. This piece is most important because it clarifies Hamilton’s views on public debt which were misunderstood at the time and have often been since. In a 1781 letter to Robert Morris, Hamilton had written that “A national debt if it is not excessive will be to us a national blessing; it will be powerful cement of our union” (p. 45). Hamilton enemies believed that he saw maintaining a high level of public debt as a weapon for subverting republican government. They feared a class of permanent government pensioners living off the debt would support the government and in turn the government would be beholden to them. Hamilton’s final report made clear his views. He warned against high levels of public debt and given the inevitability of future government borrowing he advised that new debt should be incurred only if the means of extinguishing it were also created. With respect to the current debt he proposed a plan that would extinguish it in thirty years. As matters turned out, it was forty years until Andrew Jackson (much as he loathed the Hamiltonian system) could announce in 1835 that the debt had been paid off. This period, of course, included the War of 1812, which by itself more than doubled the national debt at the time.

Hamilton does not fit neatly into contemporary categories. Free market economists will have difficulties with some of Hamilton’s argument about trade and with his belief that funding the debt would add to the nation’s stock of “active capital.” Notwithstanding the success of Hamilton: An American Musical, contemporary progressives will find Hamilton’s enthusiastic embrace of business and modern finance off-putting to say the least. Nor, it must be emphasized, does Hamilton provide us with ready answers for today’s problems. During the 2008 financial crisis, would Hamilton have bailed out the banks or would he have provided relief to embattled home-owners? Or would he, given his remarkable inventiveness, have come up with some third option? We cannot know. That said, there is much to learn from this collection of writings by the man who more than any other of the time thought through the complex problems of securing American power and prosperity.

Peter McNamara is the author of Political Economy and Statesmanship: Smith, Hamilton and the Foundation of the Commercial Republic.

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):18th Century