EIGHTEEN
On December 14, 1790, one day after he jolted Congress with his call for an excise tax on liquor, Alexander Hamilton submitted another trailblazing report, this one a clarion call to charter America’s first central bank. The country, still reeling from programs the treasury secretary had churned out in a mere fifteen months, was learning just how fertile Hamilton’s brain was. He was setting in place the building blocks for a powerful state: public credit, an efficient tax system, a customs service, and now a strong central bank. Of all his monumental programs, his proposal for the Bank of the United States raised the most searching constitutional questions.
The American Revolution and its aftermath coincided with two great transformations in the late eighteenth century. In the political sphere, there had been a repudiation of royal rule, fired by a new respect for individual freedom, majority rule, and limited government. If Hamilton made distinguished contributions in this sphere, so did Franklin, Adams, Jefferson, and Madison. In contrast, when it came to the parallel economic upheavals of the period—the industrial revolution, the expansion of global trade, the growth of banks and stock exchanges—Hamilton was an American prophet without peer. No other founding father straddled both of these revolutions—only Franklin even came close—and therein lay Hamilton’s novelty and greatness. He was the clear-eyed apostle of America’s economic future, setting forth a vision that many found enthralling, others unsettling, but that would ultimately prevail. He stood squarely on the modern side of a historical divide that seemed to separate him from other founders. Small wonder he aroused such fear and confusion.
Over the past two centuries, Hamilton’s reputation has waxed and waned as the country has glorified or debunked businessmen. Historian Gordon Wood has written, “Although late-nineteenth-century Americans honored Hamilton as the creator of American capitalism, that honor became a liability through much of the twentieth century.”1 All the conflicting emotions stirred up by capitalism—its bountiful efficiency, its crass inequities—have adhered to Hamilton’s image. As chief agent of a market economy, he had to spur acquisitive impulses, accepting self-interest as the mainspring of economic action. At the same time, he was never a mindless business booster and knew how the desire for lucre could shade over into noxious greed. In Federalist number 12, when discussing how prosperity abets the circulation of precious metals, he referred to gold and silver as “those darling objects of human avarice and enterprise”—a phrase that sums up neatly his ambivalence about the drive to amass personal wealth.
In a nation of self-made people, Hamilton became an emblematic figure because he believed that government ought to promote self-fulfillment, self-improvement, and self-reliance. His own life offered an extraordinary object lesson in social mobility, and his unstinting energy illustrated his devout belief in the salutary power of work to develop people’s minds and bodies. As treasury secretary, he wanted to make room for entrepreneurs, whom he regarded as the motive force of the economy. Like Franklin, he intuited America’s special genius for business: “As to whatever may depend on enterprise, we need not fear to be outdone by any people on earth. It may almost be said that enterprise is our element.”2
Hamilton did not create America’s market economy so much as foster the cultural and legal setting in which it flourished. A capitalist society requires certain preconditions. Among other things, it must establish a rule of law through enforceable contracts; respect private property; create a trustworthy bureaucracy to arbitrate legal disputes; and offer patents and other protections to promote invention. The abysmal failure of the Articles of Confederation to provide such an atmosphere was one of Hamilton’s principal motives for promoting the Constitution. “It is known,” he wrote, “that the relaxed conduct of the state governments in regard to property and credit was one of the most serious diseases under which the body politic laboured prior to the adoption of our present constitution and was a material cause of that state of public opinion which led to its adoption.”3 He converted the new Constitution into a flexible instrument for creating the legal framework necessary for economic growth. He did this by activating three still amorphous clauses—the necessary-and-proper clause, the general-welfare clause, and the commerce clause—making them the basis for government activism in economics.
Washington’s first term was devoted largely to the economic matters in which Hamilton excelled, and Woodrow Wilson justly observed that “we think of Mr. Hamilton rather than of President Washington when we look back to the policy of the first administration.”4 Hamilton had a storehouse of information that nobody else could match. Since the “science” of finance was new to America, Fisher Ames observed, “A gentleman may therefore propose the worst of measures with the best intentions.”5 Among the well-intentioned men who were woefully backward in finance, if forward-looking in politics, were Hamilton’s three most savage critics of the 1790s: Jefferson, Madison, and Adams. These founders adhered to a static, archaic worldview that scorned banks, credit, and stock markets. From this perspective, Hamilton was the progressive figure of the era, his critics the conservatives.
As members of the Virginia plantation world, Jefferson and Madison had a nearly visceral contempt for market values and tended to denigrate commerce as grubby, parasitic, and degrading. Like landed aristocrats throughout history, they betrayed a snobbish disdain for commerce and financial speculation. Jefferson perpetuated a fantasy of America as an agrarian paradise with limited household manufacturing. He favored the placid, unchanging rhythms of rural life, not the unruly urban dynamic articulated by Hamilton. He wrote, “I think our governments will remain virtuous for many centuries as long as they are chiefly agricultural…. When they get piled upon one another in large cities, as in Europe, they will become corrupt as in Europe.”6 For Jefferson, banks were devices to fleece the poor, oppress farmers, and induce a taste for luxury that would subvert republican simplicity. Strangely enough for a large slaveholder, he thought that agriculture was egalitarian while manufacturing would produce a class-conscious society.
As a representative of New England’s mercantile community, John Adams might have seemed a more likely candidate to sympathize with Hamilton’s economic system, yet his views, too, harked back to simpler times. In later years, Adams told Jefferson that “an aristocracy of bank paper is as bad as the nobility of France or England.” For Adams, a banking system was a confidence trick by which the rich exploited the poor. “Every bank in America is an enormous tax upon the people for the profit of individuals,” he remarked, dismissing bankers as “swindlers and thieves.”7 “Our whole banking system I ever abhorred,” he declared another time. “I continue to abhor and shall die abhorring…every bank by which interest is to be paid or profit of any kind made by the deponent.”8Adams was too shrewd to think banks could be dispensed with altogether. Instead, he wanted a central bank with state branches but no private banks. Both Jefferson and Adams detested people who earned a living shuffling financial paper, and when Adams launched a bitter tirade in later years against the iniquitous banking system, Jefferson agreed that the business was “an infinity of successive felonious larcenies.”9 That banks could serve any economic purpose—that they could generate prosperity that might enrich the few but also lubricate the wheels of commerce—seemed alien to both men. So when they wrote about Hamilton in quasi-satanic terms, we must remember that they considered banking and other financial activities as so much infernal trickery.
Hamilton never doubted the urgent need for a central bank. Lacking a uniform currency acceptable in all states, still suffering from a hodgepodge of foreign coins, the country required an institution that could expand the money supply, extend credit to government and business, collect revenues, make debt payments, handle foreign exchange, and provide a depository for government funds. Hamilton stated flatly that anyone who served a single month as treasury secretary would develop a “full conviction that banks are essential to the pecuniary operations of the government.”10
Hamilton was acquainted with private banks in Philadelphia, New York, and Boston, but homegrown institutions offered limited guidance in founding a central bank. Fortunately, he was steeped in European banking precedents, for amid the alarums and excursions of the American Revolution he had managed to become educated in financial history. In his astonishingly precocious letter to James Duane of September 1780, the twenty-five-year-old colonel had hit upon an insight that now informed his theory of central banks—the fruitful commingling of public and private money: “The Bank of England unites public authority and faith with private credit…. [T]he bank of Amsterdam is on a similar foundation. And why cannot we have an American bank?”11 This hybrid character—an essentially private bank buttressed by public authority—was to define his central bank.
To tutor himself further about European central banks, Hamilton turned to Malachy Postlethwayt’s Universal Dictionary of Trade and Commerce and Adam Smith’s Wealth of Nations, the latter sent from London by Angelica Church. His main primer, however, was the charter of the Bank of England, established in 1694 under King William III. He kept a copy of it on his desk as a handy reference as he wrote his banking report, though he did not copy it uncritically and deviated in significant respects. Hamilton’s bank would serve the government and invigorate the economy, and he constantly stressed the broader public benefits, lest the bank be misperceived as the iniquitous tool of a small clique of speculators.
From the outset of his report, Hamilton stressed his desire to catch up with European experience: “It is a fact well understood that public banks have found admission and patronage among the principal and most enlightened commercial nations. They have successively obtained in Italy, Germany, Holland, England, and France as well as in the United States.”12 Aware of the widespread prejudice against banks, Hamilton knew he needed to set out their advantages. Echoing Adam Smith, he showed how gold and silver, if locked up in a merchant’s chest, were sterile. Deposit them in a bank, however, and these dead metals sprang to life as “nurseries of national wealth,” forming a credit supply several times larger than the coins heaped in the bank’s vaults.13 In contemporary parlance, Hamilton wished to increase the money supply and the speed with which it circulated. Due to scarce money, many deals were being done as barter; in the south, warehouse receipts for tobacco often doubled as money. In contrast, a central bank would provide liquid capital that would promote the ease, freedom, and efficiency of commerce.
It speaks volumes about the prevalent detestation of banks that Hamilton dwelled so long on combating myths against them. For example, he had to contest that banks would invariably engender speculative binges in securities. The growing confidence in government, he asserted, would gradually reduce speculation in its bonds. At the same time, he admitted that speculative abuses are “an occasional ill, incident to a general good,” that did not outweigh the overall advantages of bank lending: “If the abuses of a beneficial thing are to determine its condemnation, there is scarcely a source of public prosperity which will not speedily be closed.”14 Given the speculative mania about to break out, Hamilton’s candor about it should be emphasized: “If banks, in spite of every precaution, are sometimes betrayed into giving a false credit to the persons described, they more frequently enable honest and industrious men of small or perhaps of no capital to undertake and prosecute business with advantage to themselves and to the community.”15
For political and legal reasons, Hamilton had to address the loaded subject of paper money. The Constitution outlawed the issue of paper money by states; everybody remembered the worthless Continentals printed by Congress during the Revolution. Should the federal government now issue paper money? Fearing an inflationary peril, Hamilton scotched the idea: “The stamping of paper is an operation so much easier than the laying of taxes that a government in the practice of paper emissions would rarely fail in any such emergency to indulge itself too far.”16 As an alternative, Hamilton touted a central bank that could issue paper currency in the form of banknotes redeemable for coins. This would set in motion a self-correcting system. If the bank issued too much paper, holders would question its value and exchange it for gold and silver; this would then force the bank to curtail its supply of paper, restoring its value.
Hamilton wanted his central bank to be profitable enough to attract private investors while serving the public interest. He knew the composition of its board would be an inflammatory issue. Directors would consist of a “small and select class of men.” To prevent an abuse of trust, Hamilton suggested mandatory rotation. “The necessary secrecy” of directors’ transactions will give “unlimited scope to imagination to infer that something is or may be wrong. And this inevitable mystery is a solid reason for inserting in the constitution of a Bank the necessity of a change of men.”17 But who would direct this mysterious bastion of money? Its ten million dollars in capital would be several times larger than the combined capital of all existing banks, eclipsing anything ever seen in America. Hamilton, wanting the bank to remain predominantly in private hands, advanced a theory that became a truism of central banking—that monetary policy was so liable to abuse that it needed some insulation from interfering politicians: “To attach full confidence to an institution of this nature, it appears to be an essential ingredient in its structure that it shall be under a private not a public direction, under the guidance of individual interest, not of public policy.”18
At the same time, Hamilton worried that the bank would be so well buffered from public control that abuses might occur. To safeguard the public interest, the government would become a minority stockholder in the bank and able to vote for directors. Of the ten million dollars in capital, the president would be authorized to buy up to two million in bank stock—a stake presumably large enough to give the government substantial leverage, while not so large that it could dictate self-serving policies. The treasury secretary could also receive weekly reports on bank activities and retained the option of inspecting its books.
It was in the nature of Hamilton’s achievement as treasury secretary that each of his programs was designed to mesh with the others to form a single interlocking whole. His central bank was no exception. Of the eight million of its capital that would be subscribed by private investors, three quarters would be paid in government securities. Thus Hamilton finely interwove his bank and public-debt plans, making it difficult to undo one and not the other. The byzantine, interrelated nature of his programs made him all the more the bane and terror of opponents.
On January 20, 1791, a bill to charter the Bank of the United States for twenty years virtually breezed through the Senate. At that point, nothing presaged the chasm about to yawn in American politics, one that was to create the first political parties. Only as the House mulled over the bank bill in early February did it become palpable that the amity between Hamilton and Madison, briefly restored by the excise tax, was about to shatter, this time irrevocably. Once again, Madison’s dissent was partly local in origin. Some central-bank critics thought the institution would aggrandize northern merchants at the expense of southern agrarians, and Madison came from the largest rural state. Hamilton denied any urban bias, telling Washington that where banks had been established “they have given a new spring to agriculture, manufactures, and commerce.”19 Even if this were true, Hamilton had to reckon with the fact that farmers were debtors by nature and hence contemptuous of bankers and other creditors. Southern planters especially hated bankers. “Holding banking to be no more than the prostitution of money for illicit gain,” historian John C. Miller has written, “one Virginia planter swore that he would no more be caught going into a bank than into a house of ill fame.”20
Hamilton wanted the new bank in Philadelphia. “It is manifest that a large commercial city with a great deal of capital and business must be the fittest seat of the Bank,” he told Washington.21 Madison fretted that placing the bank in Philadelphia might plant the national capital there permanently, reneging on the promised move to the Potomac. Congressman Benjamin Bourne of Rhode Island surmised that Madison might not have spoken against the bank had not “the gentlemen of the southward” viewed it as “adverse to the removal of Congress” to the Potomac.22 For this and other reasons, Patrick Henry denounced Hamilton’s economic program as a “constituent part of a system which I have ever dreaded—subserviency of southern to n[orther]n interests.”23
Overshadowing this geographic split was the fundamental question of whether the Constitution allowed a central bank. While writing The Federalist, Madison had subscribed to an elastic interpretation of the charter. Now, speaking on the House floor, he made a dramatic turnabout, denying that the Constitution granted the federal government powers not specifically enumerated there: “Reviewing the Constitution…it was not possible to discover in it the power to incorporate a bank.”24 Hamilton turned to article 1, section 8, the catchall clause giving Congress the right to pass any legislation deemed “necessary and proper” to exercise its listed powers. Madison accused him of exploiting that power and “levelling all the barriers which limit the powers of the general government and protect those of the state governments.”25 Afraid that the agile Hamilton would dream up limitless activities and then rationalize them as “necessary and proper,” Madison re-created himself as a strict constructionist of the Constitution.
For Madison, Hamilton was becoming the official voice of monied aristocrats who were grabbing the reins of federal power. He felt betrayed by his old friend. But it was Madison who had deviated from their former reading of the Constitution. To embarrass Madison, Elias Boudinot read aloud in Congress some passages about the “necessary and proper” clause from Federalist number 44, notably the following: “No axiom is more clearly established in law or in reason than wherever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power for doing it is included.”26 Hamilton probably tipped off his old friend that Madison had written these incriminating words.
On February 8, the House passed the bank bill by a one-sided thirty-nine to twenty, giving Hamilton a particularly sweet triumph. For a fleeting moment, his mastery of the government seemed complete, but the victory raised troublesome questions. Almost all congressmen from north of the Potomac had stood four-square behind him, while their southern counterparts had almost all opposed him. As philosophical views increasingly dovetailed with geographic interests, one could begin to glimpse the contours of two parties taking shape. Individual issues were coalescing into clusters, with the same people lining up each time on opposite sides. In his Life of Washington, Chief Justice John Marshall traced the genesis of American political parties to the rancorous dispute over the Bank of the United States. That debate, he said, led “to the complete organization of those distinct and visible parties which in their long and dubious conflict for power have…shaken the United States to their center.”27
Hamilton’s seeming omnipotence unnerved Madison because it further skewed what the latter deemed the proper balance between executive and legislative power.
For many delegates at Philadelphia in 1787, Congress was supposed to be the leading branch of government, the guardian of popular liberty that would prevent the restoration of British tyranny. That was why legislative duties were spelled out in article 1 of the Constitution. Consistent with this view, Madison thought the treasury secretary should serve as an adjunct to Congress, providing legislators with reports from which they would shape bills. Jefferson likewise balked at the way Hamilton both submitted reports and drafted bills based on them. Hamilton, in contrast, envisioned the executive branch as the main engine of government, the sole branch that could give force and direction to its policies, and time has abundantly vindicated his view.
Hamilton had not foreseen the looming constitutional crisis that his bank bill was to instigate. Jefferson and Madison grew fearful that Hamilton was not simply building a structure that dashed their principles but sculpting his creations in stone. His expansive vision of federal power filled them with foreboding. Precedents were being set that would be very hard to revoke later on. Hamilton admitted in retrospect that the new central bank represented his greatest stretch of federal power. The new government had reached a defining moment.
Madison wanted Washington to spike Hamilton’s bank bill and cast the first veto in American history. To figure out whether the bill squared with the Constitution, Washington canvassed the members of his compact cabinet. First, he solicited the opinion of Attorney General Edmund Randolph, who wrote a weakly reasoned piece contending that the bank was unconstitutional. Washington then turned to Jefferson, who had long detested monopolies and chartered companies as privileges conferred by British kings; he could not reconcile a central bank with true republicanism. Jefferson was also increasingly irked by his relative impotence in Washington’s cabinet and worried that the mercantile north, under Hamilton’s auspices, was gaining the upper hand over the rural south. He told George Mason: “The only corrective of what is corrupt in our present form of government will be the augmentation of the numbers in the lower house so as to get a more agricultural representation, which may put that interest above that of the stock-jobbers.”28
In a concise opinion, Jefferson blasted the Bank of the United States as unconstitutional on the grounds that Hamilton was perverting the necessary-and-proper clause. To pass the constitutional test, Jefferson said, a measure had to be more than just convenient in executing powers granted to the federal government: it had to be truly necessary—that is, indispensable. Taking literally the Constitution’s recitation of congressional powers, he prophesied that “to take a single step beyond the boundaries thus specifically drawn…is to take possession of a boundless field of power, no longer susceptible of any definition.”29
Just how vehemently Jefferson opposed the new bank can be inferred from a fire-breathing letter he sent to Madison the following year. Governor Henry Lee wished to open a local bank in Virginia that would act as a counterweight to a branch of Hamilton’s national bank. Jefferson worried about any measure that might confer legitimacy upon the central bank. From his letter, it is clear that he did not recognize the supremacy of federal over state law, a cardinal tenet of the Constitution:
The power of erecting banks and corporations was not given to the general government; it remains then with the state itself. For any person to recognize a foreign legislature [Jefferson was talking about the U.S. Congress] in a case belonging to the state itself is an act of treason against the state. And whosoever shall do any act under color of the authority of a foreign legislature—whether by signing notes, issuing or passing them, acting as director, cashier or in any other office relating to it, shall be adjudged guilty of high treason and suffer death accordingly by the judgment of the state courts. This is the only opposition worthy of our state and the only kind which can be effectual…. I really wish that this or nothing should be done.30 [Italics added.]
In other words, the principal author of the Declaration of Independence was recommending to the chief architect of the U.S. Constitution that any Virginia bank functionary who cooperated with Hamilton’s bank should be found guilty of treason and executed.
Though inclined to support the bank, Washington was shaken by the negative verdicts rendered by Jefferson and Randolph, and on February 16 he rushed them to Hamilton for comment. Washington had ten days to sign or veto the measure. The document that Hamilton wrote in response, says one of his editors, is “the most brilliant argument for a broad interpretation of the Constitution in American political literature.”31 As always, Hamilton wanted to bury his foes beneath an avalanche of arguments. After gathering his thoughts, he consulted William Lewis, one of Philadelphia’s foremost lawyers, and the two men spent an afternoon pacing Lewis’s garden and reviewing Hamilton’s arguments. In slightly more than a week, Hamilton, the human dynamo, elaborated a treatise of nearly fifteen thousand words that covers almost forty printed pages in his collected papers. On Monday the twenty-first, he reported back to Washington that he had “been ever since sedulously engaged” in preparing his defense and would send the results on Tuesday evening or Wednesday morning. With comical understatement, he said that he wanted to give the issue “a thorough examination.”32 He went right down to the deadline with his treatise. Upon delivering it to Washington on Wednesday morning, a frazzled Hamilton noted that the final draft had “occupied him the greatest part of last night.”33
Eliza Hamilton remembered the sleepless night when her husband gave immortal expression to a durable principle of constitutional law. As an ancient lady garbed in widow’s weeds, she told the story to a young man who recorded it this way in his journal:
Old Mrs. Hamilton…active in body, clear in mind…talks familiarly of Washington, Jefferson, and the fathers. I told her how greatly I was interested…on account of her husband’s connection with the government. “He made your government,” said she. “He made your bank. I sat up all night with him to help him do it. Jefferson thought we ought not to have a bank and President Washington thought so. But my husband said, ‘We must have a Bank.’ I sat up all night, copied out his writing, and the next morning, he carried it to President Washington and we had a bank.”34
Hamilton’s own allusion to staying up “the greatest part” of that night also attests to some electrifying finish, some final, brilliant burst of inspiration that completed his stupendous feat. As with many of his intellectual exploits, they were almost feats of athletic prowess as well.
Hamilton lent his opinion the erudition of a treatise and the warmth of a manifesto. The essence of it was that government must possess the means to attain ends for which it was established or the bonds of society would dissolve. To liberate the government from a restrictive reading of the Constitution, Hamilton refined the doctrine of “implied powers”—that is, that the government had the right to employ all means necessary to carry out powers mentioned in the Constitution.
In drafting his opinion, Hamilton claimed that minutes of the Constitutional Convention could provide “ample confirmation” of his liberal interpretation of the necessary-and-proper clause. Reluctant to break the convention’s confidentiality oath—or perhaps afraid that Madison might play the same game—he then expunged the passage and let the Constitution speak for itself. He told Washington that, if adopted, “principles of construction like those espoused by the Secretary of State and the Attorney General would be fatal to the just and indispensable authority of the United States.”35 Then, in blazing italics, Hamilton trumpeted his main theme: “Now it appears to the Secretary of the Treasury that this general principle is inherent in the very definition of government andessentialto every step of the progress to be made by that of the United States: namely that every power vested in a government is in its nature sovereign and includes by force of the term a right to employ all the means requisite and fairly applicable to the attainment of theends of such power.” If Jefferson’s and Randolph’s views were upheld, “the United States would furnish the singular spectacle of a political society without sovereignty or of a people governed without government.”36
Hamilton waved away complaints that the Constitution did not explicitly mention a bank: “It is not denied that there are implied as well as express powers and that the former are as effectually delegated as the latter.”37 To argue, as did Jefferson, that all government policies had to pass a strict test of being “absolutely necessary” to the performance of specified duties would paralyze government. How could one say with certainty what was absolutely necessary? Hamilton pointed out that, in setting up the Customs Service, he had overseen construction of lighthouses, beacons, and buoys, things not strictly necessary, but useful for society all the same. He was crafting a rationale for the future exercise of numerous forms of federal power.
The Bank of the United States would enable the government to make good on four powers cited explicitly in the Constitution: the rights to collect taxes, borrow money, regulate trade among states, and support fleets and armies. Jefferson wanted to deprive the federal government of the power to create any corporations, which Hamilton thought could cripple American business in the future. At the time, few corporations existed, and those mostly to build turnpikes. The farseeing Hamilton perceived the immense utility of this business form and patiently explained to Washington how corporations, with limited liability, were superior to private partnerships. In the end, his bank argument was predicated not only on his interpretation of the Constitution but on his reading of history: “In all questions of this nature, the practice of mankind ought to have great weight against the theories of individuals.”38
After writing this magisterial defense, Hamilton packed it off to Washington before noon on Wednesday, February 23. The next day, Washington studied the opinion and, despite lingering doubts, was sufficiently impressed that he did not bother to send it to Jefferson. The day after that, he signed the bank bill.
Hamilton’s plea for the bank had a continuing life in American history, partly from the influence it exerted upon Chief Justice John Marshall. When Daniel Webster made oral arguments for the Second Bank of the United States in the landmark case ofMcCulloch v. Maryland in 1819, he quoted Hamilton’s 1791 memo to Washington on the necessary-and-proper clause. In words that distinctly echoed Hamilton’s, Marshall said that necessary didn’t mean indispensable so much as appropriate. Repeatedly in American history, Hamilton’s flexible definition of the word necessary was to free government to handle unforeseen emergencies. Henry Cabot Lodge later referred to the doctrine of implied powers enunciated by Hamilton as “the most formidable weapon in the armory of the Constitution…capable of conferring on the federal government powers of almost any extent.”39 Hamilton was not the master builder of the Constitution: the laurels surely go to James Madison. He was, however, its foremost interpreter, starting with The Federalistand continuing with his Treasury tenure, when he had to expound constitutional doctrines to accomplish his goals. He lived, in theory and practice, every syllable of the Constitution. For that reason, historian Clinton Rossiter insisted that Hamilton’s “works and words have been more consequential than those of any other American in shaping the Constitution under which we live.”40
Among many arcane subjects that Hamilton had to master was the minting of coins. So laggard was America in this regard that after Washington took office, his daily expenses were still quoted in British pounds, shillings, and pence, even though the Confederation Congress had adopted the dollar as the currency unit. Businessmen in different states continued to assign differing values to the foreign coins that still circulated freely. So many gold and silver coins were adulterated with base metals that many merchants hesitated to do business for fear of being shortchanged. Counterfeiting was also widespread, and when Hamilton became treasury secretary it was still a crime punishable by death in New York State.
Somehow, even as he brought forth his bank report, Hamilton plowed through books about coinage in foreign nations, especially Principles of Political Economy by Sir James Steuart. He pored over tables that Isaac Newton, as master of the mint, had prepared for the British Treasury Board, specifying the pound’s exact value in precious metals, and he ordered special assays of foreign coins to gauge the gold, silver, and copper content in their alloys.
On January 28, 1791, a week after the Senate approved his bank bill, Hamilton handed beleaguered legislators yet another hefty document. His Report on the Mint was studded with clever suggestions. “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,” he intoned. “On this, the security and steady value of property essentially depend.”41 He endorsed the dollar as the basic currency, divided into smaller coins on a decimal basis. Because many Americans still bartered, Hamilton wanted to encourage the use of coins. As part of his campaign to foster a market economy, Hamilton suggested introducing a wide variety of coins, including gold and silver dollars, a ten-cent silver piece, and copper coins of a cent or half cent. He wasn’t just thinking of rich people; small coins would benefit the poor “by enabling them to purchase in small portions and at a more reasonable rate the necessaries of which they stand in need.”42 To spur patriotism, he proposed that coins feature presidential heads or other emblematic designs and display great beauty and workmanship: “It is a just observation that ‘The perfection of the coins is a great safeguard against counterfeits.’”43 With customary attention to detail, Hamilton recommended that coins should be small and thick instead of large and thin, making it more difficult to rub away the metal.
As to whether coins should be minted from gold or silver, Hamilton caused no end of mischief by opting for both, starting the vogue for “bimetallism” that was to become the curse of American financial history. He stumbled into this decision because he feared that if he chose either gold or silver as the sole monetary metal, it would “abridge the quantity of circulating medium” at a time when his primary aim was to expand the money supply and stoke economic activity.44 One major problem that he sought to remedy was that the dollar had no fixed value in various states. With typical exactitude, Hamilton tried to establish the quantity of precious metal in each coin so that the silver dollar, for instance, would contain “370 grains and 933 thousandth parts of a grain of pure silver.”45
At the time Hamilton drafted his Report on the Mint, he and Jefferson still talked civilly and exchanged ideas about money. Coinage was one of Jefferson’s hobbyhorses, and he had reported on it to Congress the previous summer. In fact, Hamilton drew on that report in preparing his paper. For once, they seemed in agreement. “I return your report on the mint, which I have read over with a great deal of satisfaction,” Jefferson told Hamilton before the latter sent it to Congress.46 While minister in Paris, Jefferson had visited the royal mint and marveled at a machine concocted by the Swiss inventor Jean Pierre Droz, which could simultaneously stamp images on both sides of a coin.
Hamilton long regretted that when the U.S. Mint was finally established by Congress in spring 1792 and began to produce the first federal coins, Washington lodged it under Jefferson’s jurisdiction at State. The mint was a pet interest of Jefferson, and Washington submitted to his prodding. The president also believed that the treasury secretary was bowed beneath enough work. Unfortunately, Jefferson ran the mint poorly. Hamilton later tried, in vain, to arrange a swap whereby the post office would go to State in exchange for the mint coming under Treasury control, where it belonged. Despite this wobbly start, the mint became a Philadelphia fixture, and when the government moved to Washington, D.C., in 1800 it stayed behind in the interim capital.
That the Bank of the United States had sparked heated controversy and polarized the country must have seemed like forgotten history on July 4, 1791. On that memorable day in Philadelphia, the subscription to the stock of Hamilton’s central bank was thrown open to an expectant public, and the public promptly went berserk. Speculaton was rife that the stock would pay rich dividends of 12 percent or more, and people had been flocking to the capital for a week in anticipation of this first offering. So lusty was the pent-up demand that mobs, dazzled by visions of riches, stormed the building, overwhelming the clerks. The heavily oversubscribed issue sold out within an hour, leaving many disgruntled investors empty-handed. Jefferson told James Monroe, “The bank filled and overflowed in the moment it was opened.”47
Hamilton had expected an ebullient market in these publicly traded shares but nothing nearly this clamorous. By late June, reports flooded his office of large quantities of money flowing into the forthcoming subscription. “In all appearances, the subscriptions to the Bank of the United States will proceed with astonishing rapidity,” Hamilton assured one congressman. “’Twill not be surprising if a week completes them.”48 Even Hamilton never dreamed that the response would be so giddy that it would take less than an hour to complete the offering.
When trading in shares commenced, prices promptly took off, buoyed by a money fever such as Americans had never witnessed. Investors did not purchase shares outright. To create a robust market and broaden share ownership, Hamilton agreed to sell the bank shares initially in the form of scrip. The system worked thus: investors made a twenty-five-dollar down payment and received a scrip that entitled them to buy a set number of shares at par and then pay off the balance over an eighteen-month period. So frenzied was the trading in scrip that many investors doubled their money within days, and the resulting madness was dubbed “scrippomania.”
The contagion spread rapidly to other cities. Special couriers galloped off to New York to report prices rocketing upward in Philadelphia and Boston, and newspapers recorded each fresh spurt in shares. Madison happened to be in New York and watched with consternation as the trading mania descended on Manhattan. For this Virginia planter, the bedlam of speculation wasn’t a pretty sight. On July 10, he informed Jefferson that “the Bank shares have risen as much in the market here as at Philadelphia” and castigated the booming market as “a mere scramble for so much public plunder.”49 Like Madison, Jefferson didn’t view this “delirium of speculation” as a tribute to Hamilton’s mystique so much as squandered money. He told Washington, “It remains to be seen whether in a country whose capital is too small to carry its own commerce, to establish manufactures, erect buildings, etc., such sums should have been withdrawn from these useful pursuits to be employed in gambling.”50
Hamilton had brought the modern financial world to America, with all its unsettling effects. He had wanted to spread bank ownership widely, but he made a critical blunder that only ratified southern suspicions that he was the ringleader of a northern plot. Philadelphia had hosted the initial offering, and many investors had traveled there, lugging gold and silver, to make purchases. Hamilton had also arranged for Bostonians to buy scrip through the Bank of Massachusetts and New Yorkers through the Bank of New York. Hence, a disproportionate number of scrip holders resided in Philadelphia, Boston, and New York, which looked like arrant favoritism rather than a consequence of the fact that Boston and New York had banks to act as intermediaries. Hamilton regretted this ownership pattern, and his correspondence confirms that he had written to southerners, trying to entice them to buy bank shares.
The troubling preponderance of northeast investors combined with other factors to feed the impression of a northern oligarchy assiduously at work. Most subscribers were merchants and lawyers—part of Hamilton’s political following—and some of the most visible speculators, especially William Duer, belonged to his entourage. With Jefferson and Madison poised to spot British-style corruption in the legislature, it did not help Hamilton’s cause that at least thirty members of Congress and Secretary of War Knox subscribed to bank scrip.
Hamilton knew that a speculative binge on securities could tarnish his system. He welcomed enthusiasm but not crazed investors. “These extravagant sallies of speculation do injury to the government and to the whole system of public credit,” Hamilton had warned earlier in the year.51 He was never a hireling of monied interests; rather, he wanted to attach them to the new country’s interests. Like many thinkers of his day, he thought that property conferred independent judgment on people and hoped that creditors would bring an enlightened, disinterested point of view to government. But what if they succumbed to speculation and disrupted the system they were supposed to stabilize? What if they engaged in destructive short-term behavior instead of being long-term custodians of the nation’s interests? If that happened, it might undermine his whole political program.
As with any speculative bubble, it is hard to pin down the elusive moment when reasonable confidence in bank scrip bloomed into euphoria. As late as July 31, Fisher Ames wrote to Hamilton from Boston, praising the bank subscription: “People here are full of exultation and gratitude.”52 Then, in early August, prices soared upward in a vertical line. On August 8, Madison expressed shock to Jefferson: “The stock-jobbers will become the praetorian head of the Government, at once its tool and its tyrant, bribed by its largesses and overawing it by clamours and combinations.”53 Jefferson brooded about the harm to America’s moral fiber: “The spirit of gaming, once it has seized a subject, is incurable. The tailor who has made thousands in one day, tho[ugh] he has lost them the next, can never again be content with the slow and moderate earnings of his needle.”54 Benjamin Rush reported the same money-mad bustle in Philadelphia. Everybody from merchants to clerks was forsaking everyday duties to wager on scrip: “The city of Philadelphia for several days has exhibited the marks of a great gaming house…. Never did I see so universal a frenzy. Nothing else was spoken of but scrip in all companies, even by those who were not interested in it.”55 Senator Rufus King later told Hamilton that New York City’s economy had ground to a halt as people rushed off to gamble in bank shares: “The business was going on in a most alarming manner, mechanics deserting their shops, shopkeepers sending their goods to auction, and not a few of our merchants neglecting the regular and profitable commerce of the City.”56
Finally, on August 11, 1791, came the first crash in government securities in American history. Bank scrip that had gone on sale for twenty-five dollars just over a month earlier had zoomed to more than three hundred dollars. The bubble was pricked when bankers refused to extend more credit to leading speculators. Then bears began to sell, and shares nose-dived. As the chief financial regulator, this market turbulence thrust Hamilton into a ticklish situation. He had no precedents to guide him. As a rule, he tried not to interfere with markets and thought it improper to register opinions on the value of government securities. But he also believed he had an obligation to protect the financial system, and so he improvised as he went along. On August 15, Rufus King informed Hamilton that speculators attempting to depress bank shares were quoting Hamilton’s opinion that scrip was grossly overvalued: “They go further and mention prices below the present market as the value sanctioned by your authority.”57
The rumors had some basis in truth. As Hamilton admitted to King, he did not ordinarily voice opinions about the suitable level of shares, but he had intimated that prices were too high: “I thought it advisable to speak out, for a bubble connected with my operations is, of all the enemies I have to fear, in my judgment the most formidable…. [T]o counteract delusions appears to me the only secure foundation on which to stand. I thought it therefore expedient to risk something in contributing to dissolve the charm.”58In modern lingo, Hamilton subtly tried to “talk down” the market to avert a worse tumble later on. At the same time, he stressed that the price he had quoted as the proper level for scrip was not as low as the one being bandied about by speculators.
On August 16, Hamilton wrote confidentially to William Seton, cashier of the Bank of New York, instructing him to buy up $150,000 in government securities (what we would today call “open market operations”). Hamilton hoped that as these security prices rose, the beneficial effect would spill over into the market for bank shares. His strategy worked. What concerned Hamilton was not so much the harm to speculators as the risk to the financial system. He particularly feared that securities dealers, caught in a cash squeeze, might liquidate shares and precipitate a self-sustaining drop in prices. As he put it, “A principal object with me is to keep the stock from falling too low in case the embarrassments of the dealers should lead to sacrifices.”59
Complicating matters was the uncomfortable fact that the most flamboyant New York speculator was Hamilton’s boon companion from King’s College days, William Duer. Duer had lasted seven months as assistant treasury secretary. After leaving office, he lost no time in capitalizing on his knowledge of Treasury operations and set about cornering state debt, sending teams of buying agents into the boondocks. Duer borrowed heavily to finance his enormous trading in bank scrip, and Hamilton knew this added extreme danger to the situation.
On August 17, Hamilton wrote a tough-minded letter to Duer, reproaching him for his maneuvers and invoking the South Sea Bubble of 1720. He told Duer that people were whispering that he and his associates were rigging the price of bank scrip through “fictitious purchases” to dupe a gullible public into buying more shares. While adding tactfully that he knew Duer would do no such duplicitous thing, Hamilton made clear that he took these reports seriously: “I will honestly own I had serious fears for you—for your purse and for your reputation and with an anxiety for both I wrote to you in earnest terms.”60 Hamilton’s letter showed his usual integrity, displaying concern both for Duer as a friend and for the health of the securities market. Then Hamilton compromised himself by tipping his hand and suggesting to Duer an appropriate price for bank stock: “I should rather call it about 190 to be within bounds with hopes of better things and I sincerely wish you may be able to support it at what you mention.”61 It was one thing for Hamilton to employ the Bank of New York to prop up share prices and quite another to enlist a longtime friend and grand-scale speculator as his intermediary. Duer, of course, denied all wrongdoing. “Those who impute to my artifices the rise of this species of stock in the market beyond its true point of value do me infinite injustice,” he pleaded.62 Hamilton’s letter could only have emboldened Duer to believe that he might profit from inside information, and he continued to flaunt his association with the treasury secretary, leading unsuspecting investors to believe he was privy to government plans.
For the moment, Hamilton’s actions halted the slide in financial markets and averted a catastrophic break in prices. Scrip fell back to a more reasonable 110 share price before rallying to 145 in September. For the first time in American history, Hamilton had demonstrated how a financial regulator could steady a panicky market through deft, behind-the-scenes operations. Unfortunately, he had erred in confiding in William Duer, who remained deaf to Hamilton’s admonition that he restrain his speculation.
For Hamilton’s growing legion of critics, the financial mayhem showed the corrosive effect of his financial wizardry. New York merchant Seth Johnson deplored the behavior induced by prodigal trading in bank shares: “Those who gain play in hope of more, those who lose continue in hope of better fortune.”63 For Jefferson, scrippomania brought to the surface all his disgust for the Hamiltonian system, making imperative the need to preserve a pure, agrarian America. “Ships are lying at the wharves,” he wrote that summer, “buildings are stopped, capitals are withdrawn from commerce, manufactures, arts, and agriculture to be employed in gambling, and the tide of public prosperity almost unparalleled in any country is arrested in its course and suppressed by the rage of getting rich in one day.”64 For Jefferson, Alexander Hamilton was more than just dead wrong in his prescriptions. He was becoming a menace to the American experiment, one who had to be stopped at all costs.