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The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy

Author(s):McCraw, Thomas K.
Reviewer(s):Brownlee, W. Elliot

Published by EH.Net (April 2013)

Thomas K. McCraw, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy. Cambridge, MA: Harvard University Press, 2012.? ix + 485 pp. $35 (hardcover), ISBN: 978-0-674-00692-2.

Reviewed for EH.Net by W. Elliot Brownlee, Department of History, University of California, Santa Barbara.

Thomas McCraw, the Straus Professor of Business History Emeritus at the Harvard University Business School, passed away in November 2012, the year this book appeared. Over his career of more than four decades McCraw often used biography as a tool to reveal and explain important trends and developments in the history of American business and economic life. No historian working in the fields of business and economic history has done so as effectively. His last book, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy, also mobilizes biography as an interpretive tool. The result is a work that lives up to the high standards McCraw set in books like Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, and Alfred E. Kahn (Harvard University Press, 1984) and Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Harvard University Press, 2007).

?The United States government started out on a shoestring and almost immediately went bankrupt,? McCraw writes in the first sentence (p. 1) of The Founders and Finance. He goes on to suggest that the severe financial problems might have fragmented the new nation except for ?a handful of people who understood finance and also grasped the economic potential of the American national future,? and adds that ?a disproportionate number of them were recent arrivals from almost a dozen different places overseas.? The objective of the book is to show ?how they put the United States on a sound institutional footing to manage its finances, and how some of their ideas grew out of their experience as immigrants? (p. 2).? From among this ?handful? McCraw focuses on two: Alexander Hamilton (born in the West Indies, probably on the British island of Nevis, and an immigrant to New Jersey in 1772) and Albert Gallatin (born in Geneva, then an independent republic, and an immigrant to Massachusetts in 1780). They were two of the first four secretaries of the treasury, with Gallatin?s service of nearly 13 years the longest in American history.? ?What Hamilton?s policies achieved,? McCraw concludes, ?was the promotion of long-term business confidence, setting the stage for the release of immense economic energy? (p. 132). McCraw argues that as secretary of the treasury Gallatin ?dominated public financial affairs? and ?did more than any other federal official to oversee settlement and economic growth in the West and to turn America?s public lands into a force for the public good? (p. 179).

McCraw?s extended discussions of the institutional innovations of Hamilton and Gallatin add little information that will be new to scholars of the early republic, but no one has written about their careers in a more engaging and literate way, and with as much care regarding the vast scholarship that is available on both careers. McCraw?s attention to Gallatin?s monumental efforts on behalf of fiscal consolidation, financing of the Louisiana Purchase, reorganization of land sales, promotion of western economic development, and financing of the War of 1812 is particularly refreshing in a study that writes so admiringly of Hamilton. McCraw?s juxtaposition of the careers of Hamilton and Gallatin works superbly well.? In the realm of public finance, for example, McCraw correctly views Hamilton as the primary architect of what Joseph Schumpeter called the ?tax state? and Gallatin as complementing Hamilton?s work, crafting what I would describe as a kind of ?asset state? based on the nation?s great wealth in public lands. The juxtaposition also works well for McCraw in contrasting their national security strategies. While Hamilton, ?preoccupied with preserving independence against European threats, looked eastward, toward Europe,? Gallatin ?looked consistently not toward the Atlantic but toward the West.? But, McCraw nicely observes: ?Both believed that military effectiveness depended on economic strength? (pp. 359-60).? McCraw also appreciates the similarity of their views on the power of credit and the virtues of central banking. And, McCraw suggests looking at the ?American System? of Henry Clay and others as a kind of fusion of Hamilton?s and Gallatin?s policies. Except for its program of tariff protection, the system ?mirrored the policies of both Hamilton and Gallatin? (p. 363). More generally, it reflected their powerful nationalism and their shared belief in the potential of vigorous, coherent public-private cooperation to advance the national interest.

For a history of innovation in financial policy, the scope of the book?s attention to the personal lives of the innovators is admirably broad. Because of his ambitious biographical approach, McCraw is able to break new interpretive ground through his emphasis on the significance of their immigrant backgrounds. Hamilton dominates Part I of The Founders and Finance. In McCraw?s narrative, several elements of Hamilton?s formative experiences outside continental North America played crucial roles. First, in St. Croix (a Danish colony where British settlers became powerful) Hamilton?s immersion in the business of a New York trader provided an opportunity for him to learn about ?bookkeeping, inventory control, short-term finance, scheduling, and the pricing of merchandise? (p. 15), to become proficient in calculating exchange rates and coping with the arcane world of bills of credit, and even to acquire, when a teenager, a great deal of personal responsibility within the decentralized organization of international trade. During the Revolution he would follow up on his business experience with extensive reading of European authorities on finance. As early as 1780, McCraw suggests, Hamilton?s ideas foreshadowed the main elements of his programs as secretary of the treasury. Second, his life in the West Indian hot house of international commerce fostered cosmopolitan attitudes ? attitudes that ?the roiling mix? (p. 19) of New York would further encourage. During the political and financial crises after the Revolution Hamilton?s ?immigrant origins served him well, giving him a more national orientation ? a more single-minded devotion to the Union than that of perhaps any other founder? (p. 44). McCraw suggests that in the process of drafting, adopting, and ratifying the Constitution, Hamilton along with the ?other immigrant delegates? (most notably, Robert Morris, born in England) ?took a more national perspective than their native-born counterparts? (p. 83). Third, Hamilton?s experiences in the Caribbean, famously described by historian Eric Williams as ?the cockpit of Europe,? and Hamilton?s service in General George Washington?s headquarters, convinced him of the importance of ?national security in a world of warring empires? (p. 95).

Albert Gallatin takes over the flow of McCraw?s narrative in Part II. Gallatin arrived on the American scene in 1780, too late to play a major role in either the Revolution or the political consolidation of the new nation during the 1780s. Like Hamilton, McCraw argues, Gallatin?s cosmopolitan, immigrant background led him to take a national view of economic issues. But the assets and aspirations that Gallatin brought in immigrating to North America differed greatly from those of Hamilton. He grew up in an aristocratic circle in Geneva and had the benefit of an elite education and the certainty of a financial inheritance. His American goal was, McCraw suggests, becoming a rich landowner, realizing ?Rousseau?s notions about the moral virtues of nature? and ?doing well by doing good.? But his experiences in the financial center of Geneva had also given him a familiarity with the economic benefits of banking, and after more than ten years in the United States, he finally took advantage of this knowledge and realized that ?his gifts? were in finance (p. 183).

The structure of McCraw?s book weakens in the four very short, and perhaps hastily written, chapters of Part III (?The Legacies?). One of the four (?Immigrant Exceptionalism??) poses the important suggestion that Hamilton and Gallatin had an advantage as financial experts because ?much of the best American talent gravitated toward land development and away from trade, finance, and manufacturing? (p. 335). However, the chapter fails to provide the analysis required to sustain the point. Opportunities for land acquisition, trading, and development were certainly powerful economic magnets throughout the British colonies and new republic of the late eighteenth century. But farmers, merchants, and artisans on the mainland colonies often had diverse talents and diverse experiences in a wide range of activities, including international trade and finance (and proto-industrialization) as well as agriculture and land development or speculation. And American merchants did, in fact, contribute significantly to the young nation?s pool of financial talent. One example of such talent was the Philadelphia merchant Thomas Willing who became the first President of the Bank of North America (the first federally chartered bank, established in 1782) and later the first, and quite successful, President of Hamilton?s Bank of the United States.. Another example may have been Robert Morris, who played a central role in financing the Revolution and was George Washington?s first choice as secretary of the treasury. McCraw, however, counts him as an immigrant despite the fact that his father was a British tobacco factor living in Oxford, Maryland, which was then British territory, before young Robert joined him there at 13 years of age. Perhaps McCraw should have sharpened definition of an immigrant.

In this chapter McCraw also raises the interesting question of whether or not the United States was unique in calling on ?foreign-born financial talent.? He observes that ?From the seventeenth century down to the present, outsiders have been summoned to straighten out financial disarray in many countries,? explaining that ?their lack of ties to existing national interest groups has, almost by itself, made them more neutral judges of what must be done.? He cites numerous examples, including the ?money doctors? of the nineteenth and twentieth centuries and the IMF (p. 338). McCraw might have noted, however, that the quality of advice that Hamilton and Gallatin gave was far higher than that of many of the ?money doctors? (Joseph Dodge, for example, in the occupation of Japan) and certainly the cookie-cutter neo-liberalism of the IMF.? But McCraw does go on to emphasize a key point:? in pressing for a centralized and effective fiscal state during the 1780s Hamilton, despite his West Indian birth, was definitely not an outsider. In contrast with the later ?money doctors,? by the time he rendered financial advice he was a committed citizen of the nation he studied. McCraw might have taken the additional step of emphasizing that Hamilton?s financial advice was superb in large part because he was very much an insider:? an experienced leader of a national interest group that had formed to promote financial consolidation in the face of the commercial and financial challenges that the federal government experienced under the Articles of Confederation. With more time, McCraw might have explored in greater depth the composition, sources, objectives, methods, and results of this powerful entrepreneurial interest group, and thus even more effectively situated Hamilton within the political economy of the emerging republic.

At the end of his life McCraw apparently was pursuing further research on the important topic of immigrant entrepreneurship. This endeavor might well have provided him with an opportunity to develop the various intriguing issues that he was able to consider in only a tentative way in Part III. Even without such analysis, we are very much in McCraw?s debt for The Founders and Finance. McCraw?s brilliantly paired biographies of Hamilton and Gallatin add significantly to our understanding of the development of the financial underpinnings of the American republic.

W. Elliot Brownlee, Emeritus Professor of History at UC-Santa Barbara, is editor (with Eisaku Ide and Yasunori Fukagai) of The Political Economy of Transnational Tax Reform: The Shoup Mission to Japan in Historical Context to be published by Cambridge University Press in May 2013.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):18th Century
19th Century