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Published by EH.Net (January 2024).

Dianne L. Durante. The Financial Programs of Alexander Hamilton, by a Farmer’s Daughter. Self-published, 2021. 542 pp. $35 (paperback), ISBN 978-0974589992.

Reviewed for EH.Net by Arthur J. Wilson, George Washington University.

 

This is a neat book with a sharp focus and a disarming title. The focus is on Alexander Hamilton’s financial programs during his time as George Washington’s first Secretary of the Treasury. And while she may be a farmer’s daughter, Dianne L. Durante is also a longstanding and accomplished Hamilton scholar. Her deep erudition is on display throughout this book. As I read the book and wrote this review, I came to appreciate that the book is also a nice complement to Ron Chernow’s biography of Hamilton. If you liked Chernow, you should get Durante.

Concerning Hamilton’s financial programs, Durante documents how, within just a few short years, the early United States was transformed from an economically depressed, nearly bankrupt set of squabbling states under the Articles of the Confederation to an increasingly prosperous emerging nation under the Constitution. Of course, the Constitution itself was a big reason for this success, but it might not have been so successful without Hamilton’s efforts before, during and after its adoption. It is worth noting that the Constitution’s ratification was made more likely by Hamilton’s (and James Madison’s and John Jay’s) efforts as embodied in the Federalist papers.

Durante focuses on five interrelated problems confronting the young United States. She likens them to a Gordian knot – addressing any one problem in isolation is likely to be ineffective or make the other problems worse. She refers to these problems as “strands.”

The first strand concerned the economy. Most Americans were farmers, but trade barriers with Britain and the British colonies cut them off from their previous markets. With most international trade constrained by trade barriers, and little manufacturing due to longstanding British policy, one could imagine the early United States lapsing into subsistence agriculture, with corresponding economic misery

The second strand concerned forces pulling the states away from each other. Britain and Spain interfered in the nation’s affairs, such as by arming Native American groups and encouraging attacks on US nationals. But internal issues, such as who will bear the burden of the debt run up during and after the war for independence and which states will claim what parts of inland territories, gave occasion for conflict. With state militias but no funding for a national army, the prospects for disunion were bright.

The third strand concerned the lack of an adequate means of exchange. Conventional gold or silver coins were scarce, paper money was discredited, and few banks existed. Accumulating money for spending, saving or investment was difficult. With little money for spending, goods and services markets remained underdeveloped. With little ability to save or for investment, productivity would not be expected to improve.

The fourth strand concerned the weakness of the national government under the articles. It could not tax citizens directly nor tax the states. Instead it relied on voluntary donations from the states, which were completely inadequate. There was no money to field an army, no money to construct a court system, no money to execute most of the usual functions of government. With the national government so weak, the states undertook some functions – reinforcing the second strand – or did without. In either case, it would be difficult to see much good coming from the existence of the national government.

The fifth strand concerned the massive debt left over from the revolution. Of course, there were squabbles over whether it should be paid in full or in part, and who should pay it. And while the Dutch bankers must have had enormous patience, such patience would surely eventually end. Until those prior debts were dealt with, there were few prospects for any new funding for war or other essential activities.

For example, if the federal government were to impose tariffs, it would raise revenue, but tie up substantial amounts of specie in government coffers, reducing the money supply. Without such revenue, the money supply is intact, but the country could not defend itself without funds to raise an army. If it renounces the debt, it will free up possible future revenue, but foreclose access to credit in the future. Addressing strands in isolation risks making the other strands harder to address effectively.

After the introduction (ch. 1), the book begins by laying out the multiple problems faced by the United States in the 1780s, described above (ch. 2). A substantial chapter (ch. 3) reviews Hamilton’s early years, documenting his varied experiences first as a businessman, then a student, soldier, delegate, lawyer, and polemicist. The chapter makes clear that Hamilton was surprisingly well prepared for the role of George Washington’s Secretary of the Treasury.

The next three chapters (chs. 4-6) consider the context for Hamilton’s three major reports as Treasury Secretary: First Report on Public Credit, Report on a National Bank, and Report on Manufacturers. Surprisingly, Congress moved quickly to implement most of his suggestions. While both the first and the second reports would remain controversial for years even after enactment, within just a few years, the nation’s financial circumstances were completely transformed. The third report did not call for specific legislation and was less controversial.

Durante makes clear that the report on Public Credit was profoundly controversial as it confronted several vexatious issues. On the one hand, the debt was so massive that it could not have been paid off except over a long period. In essence, it would have to be refinanced. To get a sense of the scale, Hamilton concluded that the debt amounted to 79 million dollars. That might not sound like much to our ears, attuned as we are to talk of billions and trillions. To find context, at the same time, Hamilton estimated that the operating cost for the entire rest of the federal government would be on the order of 600,000 dollars. Refinancing the debt effectively addressed the fifth strand.

In the report, Hamilton proposed a host of new taxes and tariffs, including excise taxes on luxury items such as beer, wine, and distilled liquors. He knew they would be unpopular. In all, he estimated that these taxes would raise roughly 3 million dollars yearly. This would have to cover interest on the debt as well as gradually repaying the principal. Even so, by building a better credit relationship and finding revenue for the federal government, he laid the groundwork for future borrowing, such as might be necessary in the event of war. This addressed Durante’s fourth strand.

While the taxes might be expected to reduce the amount of money in circulation until spent, the new securities provided would offset that. By providing credible funding for refinancing all the debt, Hamilton argued that the resulting debt instruments will be stable enough in value to augment the money in circulation, partially addressing the third strand.

A second issue concerned whether to discriminate between original debt holders and speculators who bought up the assignable debt subsequently. The anti-speculator sentiment of the day would have found a way to reward the original holders at the expense of the speculators. Hamilton noted that such plans would be unworkable, but goes further to defend the speculators, shifting the “moral” high ground in the process. Indeed, if the federal government could defy contracts so readily in so high profile a context, one wonders if it might become a habit at the expense of future credibility. By defending contracts and speculation, Hamilton was also leaving room for the saving and investing that will gradually transform the economy and enrich Americans, addressing the first strand.

A third issue concerned assumption of the State debts. Roughly one-third of the total debt was State debt. Some commentators, like Jefferson and Madison, wanted to let the states deal with their problems. Hamilton argued that: a) it would be unfair, since some states bore more than their share of the debt, b) it would give states an incentive to raise taxes to pay remaining debts, potentially conflicting with federal taxing plans, including tariffs. This element of Hamilton’s plan was only included after Hamilton agreed to please Jefferson and Madison by calling to locate the seat of the federal government in the south – straddling Maryland and Virginia. By so doing, Hamilton gave debt holders a stronger incentive to support the federal government, addressing the second of Durante’s strands.

The report on a National Bank was no less controversial. At the time, there were three state-chartered banks, in Massachusetts, New York, and Pennsylvania. Hamilton argued for a huge, national bank, that could establish branches throughout the country. While the Bank of the United States was not expected to become a central bank – that term had not even been coined yet – Hamilton was well aware of the Bank of England and the Bank of Amsterdam as examples of banks that greatly enhanced the resources of England and the Netherlands. However, the Bank was seen as a threat to agrarian interests. Jefferson and his faction argued that such a federal corporation was not authorized by the Constitution and therefore was unconstitutional. The issue ultimately hinged on the interpretation of the “necessary and proper” language of the Constitution. Hamilton argued that such powers were implied by that language. Jefferson did not. In the end, Washington was persuaded by Hamilton.

A functioning bank with diverse branches would quicken commerce (first strand), help knit the country together (second strand), provide ample good-quality currency in the form of banknotes (third strand), and could act as the federal government’s bank concerning tax receipts and spending.

After two very controversial reports in less than a year, one might have expected the third report to be also. However, unlike the first two, it did not call for specific legislation. Instead it made the case for the need to encourage manufacturing, both for national security purposes, and to reduce US vulnerability to tariffs by foreign countries on US products. Hamilton noted that protective tariffs may have a role in encouraging domestic manufacturing. Tariffs were increased somewhat later, but apparently to raise revenue rather than to protect potential manufacturers.

In Chapter 7, Durante considers how well Hamilton’s innovations functioned in the crises of the early 1790s. These include a first financial crisis – deftly handled by Hamilton, problems with Native Americans – egged on by the British and Spanish, quarrels with Jefferson and Madison, problems with Barbary Pirates, and ending with Hamilton’s resignation in 1795.

The final two chapters considered how well the five strands had been addressed by 1801 when Jefferson took office. Certainly, the economy was thriving (strand 1), and the nation was increasingly united (strand 2). There were not yet many dollars issued by the mint, but as long as their value was stable, the newly issued government debt could function as a form of money, greatly relieving monetary troubles (strand 3). The federal government was now powered by increasing tariff revenue, which allowed it to pay interest on the debt, and gradually pay down the principal, finance the rest of government, and respond to emergencies if need be (strand 4). Most of the debt was still unpaid but had been transformed into highly regarded securities, the interest on which was now paid regularly. A sinking fund was set up to help retire principal (strand 5). The Bank of the United States was up and running and thriving. Hamilton’s reforms were a rousing success. Indeed, despite Jefferson’s earlier doubts, the financial system was so robust that in 1803 it could accommodate Jefferson’s issuance of $15 million of bonds to buy the Louisiana territory from France.

The book also boasts a series of appendices. The first three contain the full text of Hamilton’s three major reports. Another three appendices include a selection of primary sources related to the panic of 1792, a list of excerpts from other of Hamilton’s writings, and a select bibliography.

Is this book perfect? Not quite. For example, I wish it had an index. Additionally, the pages are so rich in footnotes that it is easy to lose sight of the main text. The layout struck me as odd, with the main text in a conventional, single column, but the footnotes in two parallel columns. These are quibbles.

Despite those quibbles, this book is a wonderful resource on Hamilton and the financial circumstances of the early United States. I expect to use parts of it in my financial history course next fall. I think it would also be useful for any and all Hamilton scholars, as well as folks who may have gotten interested to learn more about Hamilton by Chernow’s book or the Broadway musical.

 

Arthur J. Wilson is Associate Professor in the School of Business, George Washington University. His publications include “Put-Call Parity, the Triple Contract, and Approaches to Usury in Medieval Contracting,” with Geetae Kim (Financial History Review, 2015). He thanks his colleagues Denver Brunsman, Brian Henderson and Donald Parsons for helpful comments.

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