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The Founders and Finance

The Founders and Finance: how Hamilton, Gallatin, and other immigrants forged a new economy

Copyright Date: 2012
Published by: Harvard University Press
Pages: 390
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  • Book Info
    The Founders and Finance
    Book Description:

    In 1776 the U.S. owed huge sums to foreign creditors and its own citizens but, lacking the power to tax, had no means to repay them. This is the first book to tell the story of how foreign-born financial specialists—the immigrant founders Hamilton and Gallatin—solved the fiscal crisis and set the nation on a path to long-term economic prosperity.

    eISBN: 978-0-674-06766-0
    Subjects: History, Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Introduction
    (pp. 1-8)

    The United States government started out on a shoestring and almost immediately went bankrupt. To fight its War of Independence from Britain, it borrowed from banks in Holland and wheedled large sums from France, Britain’s great rival. The Continental Congress continually asked the new state governments for funds but never received more than a fraction of what it needed. Desperate for cash, Congress made extravagant use of the printing presses, churning out stacks of paper money. The quick depreciation of this currency gave rise to the phrase “not worth a Continental.”

    The War of Independence not only impoverished the country,...

  4. Part I ALEXANDER HAMILTON: 1757–1804

    • CHAPTER 1 St. Croix and Trauma
      (pp. 11-17)

      Of the six major “founders” of the United States, Alexander Hamilton was the only immigrant. He was also much the youngest of the six: fifty-one years younger than Benjamin Franklin, twenty-five younger than George Washington, twenty-two younger than John Adams, fourteen younger than Thomas Jefferson, six younger than James Madison. Hamilton alone died violently, in his famous duel with Aaron Burr. He also had the shortest life—only forty-seven years. Washington lived to be sixty-seven, Adams into his nineties, the other three into their middle eighties.

      All were true revolutionaries. As Benjamin Franklin remarked in 1776, “we must all hang...

    • CHAPTER 2 New York and Promise
      (pp. 18-24)

      In the eighteenth century, it was common practice in the west Indies to help talented white boys go abroad for further education. Hamilton had no family financial support other than that of his cousin Ann Lytton Venton, whom he later called “the person in the world to whom as a friend I am under the greatest Obligations.” But he made the journey to North America with the additional help of several St. Croix sponsors who had been impressed by his account of the great hurricane. Among them was Hugh Knox, a radical Presbyterian minister with connections in New York and...

    • CHAPTER 3 War and Heroism
      (pp. 25-31)

      After years of simmering, the War of Independence exploded in April 1775 on the fields of Lexington and Concord in Massachusetts. In New York City, Hamilton began drilling daily with other volunteers in the yard of St. George’s Church. Later in the year, during the evacuation of cannon from the Battery at the southern tip of Manhattan, he came under British fire for the first time. In January 1776, New York’s Provincial Congress ordered that an artillery company be organized for the defense of the city. Soon Hamilton, now nineteen years old, received his appointment as a captain. He made...

    • CHAPTER 4 Love and Social Status
      (pp. 34-44)

      Hamilton had arrived in North America in 1772 as a rootless fifteen-year-old. By 1780, despite his achievements, he remained acutely aware of his tenuous position in the new nation. He had worked closely with George Washington at the highest levels of the army, but once the war ended he would have no standing in American society, no logical destination. “I am a stranger in this country,” he wrote. “I have no property here, no connexions.” Nothing in his life was settled, as it was for all the other founders. He would have to reinvent himself again—choose a profession, find...

    • CHAPTER 5 The Roots of His Thinking
      (pp. 45-55)

      By the time Hamilton reached his middle twenties, his basic ideas had crystallized. There is not much in The Federalist Papers of 1787–1788 or in his great Reports to Congress as secretary of the treasury during the 1790s that his writings of a decade earlier did not foreshadow. Because these ideas so powerfully influenced the future of the United States, they are worth a close look. They ripened during the years 1779–1782, and concerned four interrelated subjects: finance, foreign relations, the optimal nature of the American union, and the strategy that would best promote national security and prosperity,...

    • CHAPTER 6 Robert Morris, Hamilton, and Finance
      (pp. 56-73)

      In Hamilton’s long letter of September 1780 to James Duane, he had recommended that Congress appoint executive officers to be in charge of trade, foreign policy, and other departments, including finance. For this last office, which he regarded as the most important, he recommended only one candidate: Robert Morris of Philadelphia. Morris, Hamilton wrote, “could by his own personal influence give great weight to the measures he should adopt.”¹

      When Hamilton sent his letter in 1780, the legislature had no clear authority to appoint executive officers. But in 1781, when the Articles of Confederation were at last retified, Congress did...

    • CHAPTER 7 The Constitution
      (pp. 74-86)

      The failure of Morris’s program gave even more force to Hamilton’s sense of urgency. It prompted him to push hard to get rid of the Articles of Confederation and create a new constitution. Under the Articles, each state had one vote, regardless of its population. Unanimous consent was required to amend the Articles, and the approval of nine of the thirteen states was necessary to pass any legislation at all. After Morris resigned as superintendent of finance, Congress chose to replace him with a three-person committee, which proved ineffective. The stalemate over financial policy continued.

      As Hamilton often pointed out,...

    • CHAPTER 8 New Government, Old Debt
      (pp. 87-96)

      By the time Hamilton took office in 1789, the War of Independence had been over for six years. The Constitution had been written and ratified, after almost two years of arduous bargaining among the states. The framework of a new federal government was being set up. What should that government now do? Not much, many Americans believed. In their eyes, the national crisis was over and the state governments would suffice for most public needs. Everyone should go home and savor the fruits of the Revolution and the Constitution. The time had come to enjoy the peace, raise crops, engage...

    • CHAPTER 9 The Fight over the Debt
      (pp. 97-109)

      To bring order out of this chaos, Hamilton proposed bold, almost breathtaking action. When Congress created the Treasury Department in 1789, it required that the secretary report to both the president and the House of Representatives. This provision gave the treasury secretary the opportunity to initiate legislation, a power even Washington believed he himself did not possess as president. In Hamilton’s long Report Relative to a Provision for the Support of Public Credit, submitted in January 1790, he presented the most forceful and persuasive case he could make, and ended by suggesting a complex package of legislation. He began his...

    • CHAPTER 10 The Bank of the United States
      (pp. 110-121)

      The move to Philadelphia late in 1790 facilitated better organization of federal offices and more efficient communication among them. The tight physical constraints of lower manhattan had forced the government into cramped quarters. The First Congress had met at Federal Hall on crowded Wall Street, which is barely half a mile long. Philadelphia, by contrast, was much more spacious. It had been the largest and most populous city in the thirteen colonies and remained so for three decades after independence. The city had hosted the Constitutional Convention of 1787 and remained the capital of Pennsylvania until 1798.

      Unlike New York,...

    • CHAPTER 11 Diversifying the Economy
      (pp. 122-136)

      Hamilton was determined to make the American economy broad and diverse. It should have vibrant manufacturing, financial, and trading sectors, as well as agricultural. In late 1791, he issued the third of his major treatises as secretary of the treasury: the Report on the Subject of Manufactures. Now almost thirty-five years old, he was the most powerful person in the country with the exception of Washington. In preparing his Report, he read still more economic treatises and deluged his subordinates with questions and requests for statistics. He worked on the document periodically for eleven months, writing at least five drafts....

    • CHAPTER 12 Tensions and Political Parties
      (pp. 137-155)

      The Constitution said nothing about organized political parties. Yet the subject was hardly absent from the minds of the delegates to the Philadelphia Convention of 1787 or to the state ratification conventions that followed. An enormous amount of discussion and argument centered on “factions” and “parties.” Few delegates to any of the conventions wished to replicate the recent English tradition of Tories versus Whigs, with alternating majorities in Parliament and attendant systems of patronage. Most delegates favored a representative republic that could somehow remain immune to these institutions, which, like the monarchy, would lead to corruption.

      On the other hand,...

    • CHAPTER 13 The Decline
      (pp. 156-170)

      The whistle-blower in the Reynolds affair was James Callender, a mercurial immigrant journalist given to inflammatory rhetoric. In his native Scotland, having published in 1792 a scathing pamphlet on corruption and war called “The Political Progress of Britain,” he escaped prosecution by going first to Ireland, then to the United States. There he settled at age thirty-four in Philadelphia, the nation’s capital. Callender was soon writing anonymous articles for Benjamin Franklin Bache’s Aurora and other newspapers. His denunciations of Federalist policies and his satires of Federalist leaders took a particularly vicious tone. He enjoyed naming names, and he spared nobody:...

    • CHAPTER 14 The Duel
      (pp. 171-176)

      As a way to settle affairs of honor, dueling was not rare during Hamilton’s time, but neither was it very common. Most duels did not end fatally, even though the distance between the combatants was usually ten or twenty paces. Duels occurred most often between military officers. Hamilton’s exaggerated sense of honor and his long service in the army seemed to predispose him to involvement in more duels than most men—occasionally as a principal, sometimes as a second, others as a peacemaker. But the only time he actually took the field of honor as a principal occurred in his...

  5. Part II ALBERT GALLATIN: 1761–1849

    • CHAPTER 15 Choosing the New World
      (pp. 179-185)

      Albert Gallatin, an immigrant from Geneva, filled the same role for presidents Thomas Jefferson and James Madison that Alexander Hamilton, an immigrant from St. Croix, had filled for George Washington. As secretary of the treasury from 1801 to 1813, Gallatin dominated public financial affairs. But he went far beyond that field and into foreign policy, military strategy, and the development of the American West.¹

      As a member of the House from 1795 to 1801, he was the first powerful congressman who lived on the western side of the Appalachian Mountains. When Jefferson made him secretary, Gallatin also became the first...

    • CHAPTER 16 Moving to the West
      (pp. 186-194)

      Gallatin disliked New England, both at this time and throughout his life. His dream, from the beginning, had been to set himself up as a gentleman farmer and land dealer in the trans-Appalachian West. As he wrote years later, for all of the early English colonists, “the most vast field of enterprise was opened which ever offered itself to civilized men. Their mission was to conquer the wilderness, to multiply indefinitely, to settle and inhabit a whole continent, and to carry their institutions and civilization from the Atlantic to the Pacific Ocean.” Not to belittle his own home city, but...

    • CHAPTER 17 Entering Politics
      (pp. 195-203)

      From the time of Sophie’s death in 1789 until 1829, a period of forty years, Gallatin devoted almost all of his time and energy to public service—and phenomenal energy it turned out to be. Late in life he reflected on “that great facility of labour with which I was blessed.” During the winter of 1789–1790, he represented Fayette County at the Pennsylvania convention called to revise the state constitution. His neighbors then elected him to the state House of Representatives. In that contest he won two-thirds of all votes cast. In 1791 and 1792 he was reelected without...

    • CHAPTER 18 Becoming Jeffersonian
      (pp. 204-214)

      After the resignation of Jefferson as secretary of state in 1793, he and his allies had begun to formulate a plan to gain control of the national government. More than any other event, the fight over the Jay Treaty with Britain gave them the ammunition they needed. Gallatin’s arrival in Congress in 1795 therefore came at a pivotal moment. The Jeffersonians were in open revolt against the Federalists, not only over Hamilton’s economic program but now over the Jay Treaty as well.

      The treaty did avert a possible war with Britain and open some Caribbean ports to American exports. But...

    • CHAPTER 19 The Climb to Power
      (pp. 215-226)

      In the election of 1796, the Federalists regained control of the House and kept their large majority in the Senate. In the presidential election, Jefferson lost a close race to John Adams, who had been vice president under Washington. Before the passage of the Twelfth Amendment in 1804, the winning candidate became president and the second-place finisher vice president. Once in office, Vice President Jefferson was almost never consulted by Adams. He did, however, participate actively in government. He presided over the Senate during a tumultuous four years, built an opposition party, and planned another run for the highest office.¹...

    • CHAPTER 20 Debt, Armaments, and Louisiana
      (pp. 227-243)

      When Jefferson took office on March 4, 1801, every informed person knew he was going to name Gallatin secretary of the treasury, even though the immigrant Genevan had been reelected to Congress. There were no other plausible candidates for the post. As Jefferson put it, Gallatin was “the only man in the United States who understands, through all the laberinths that Hamilton involv’d it, the precise state of the Treasury, and the resources of the Country.”¹

      Gallatin was originally intending to retire from politics and move to a large city after his term in Congress expired in 1803. He had...

    • CHAPTER 21 Developing the West
      (pp. 246-268)

      Gallatin’s preoccupation with Louisiana grew out of the same deep impulse about land that had motivated his emigration from Geneva in 1780. It also comported with his own purchase of public lands in Virginia and Pennsylvania and his efforts to develop the area around Friendship Hill. His dominant idea of how the United States should evolve centered around settlement of the West. This too would require financial innovation, and the frugal Gallatin was willing to spend ample federal funds for the surveying, clearing, and sales of western lands.

      Without the availability of cheap land, neither Gallatin himself nor millions of...

    • CHAPTER 22 Embargo and Frustration
      (pp. 271-283)

      In 1806, Lewis and Clark returned from their two-year exploration of the West, and their glowing reports on the Louisiana Territory captured the nation’s imagination. But few other things went well from 1805 to 1809. Jefferson was almost sixtysix when his second term ended—an old man for that time. Like Washington during his own second term, he had become sickly as he aged and had started to lose his earlier enthusiasm for government. Plagued with frequent headaches and numerous other ailments, Jefferson felt at home only at Monticello. There, he could control his daily routine without the incessant demands...

    • CHAPTER 23 Dispiriting Diplomacy
      (pp. 284-289)

      The commercial and political trap set for the United States by the Napoleonic Wars did not disappear with the end of Jefferson’s presidency. His successor, James Madison, proved to be a weak and indecisive executive until his final two years in office. The first six years of Madison’s presidency seemed to contrast with his earlier achievements: as a delegate at the Constitutional Convention, as author of many of The Federalist Papers, and as Republican leader in Congress. But the contrast may have been more apparent than real. Madison was one of the most perceptive and original political thinkers the United...

    • CHAPTER 24 The Fate of the Bank
      (pp. 290-297)

      Meanwhile, Gallatin found himself in the middle of a frustrating fight on still another front: an internal battle over renewal of the Bank of the United States. Its twenty-year charter, secured by Alexander Hamilton in 1791, would expire in 1811. Many Republicans, including Jefferson, opposed the existence of all banks and of this one in particular. Shortly after the Louisiana purchase of 1803, Jefferson had written Gallatin that the secretary’s proposed new branch of the bank at New Orleans was out of the question: “This institution is one of the most deadly hostility existing against the principles and form of...

    • CHAPTER 25 Financing the Wayward War
      (pp. 298-304)

      War had been a real possibility since 1807, when HMS Leopard attacked the USS Chesapeake. When it finally came in 1812, it marked the climax of many years of controversy: over sailors’ rights against impressment, British capture of U.S. merchant ships, conspiracies between British agents and Indian tribes to thwart settlement of the West, and general humiliation of the United States. Those Americans who wanted war exploited the long-held popular suspicion that Britain was determined to recolonize their country. The British had no such intention, and in May 1812 even repealed some of the Orders in Council pertaining to American...

    • CHAPTER 26 Winning the Peace
      (pp. 306-314)

      Gallatin’s role in ending the war turned out to be one of his greatest contributions to his adopted country. In all, the negotiations consumed twenty-one months. Throughout this long period, the British took a rude, dilatory, and intransigent stance toward the Americans. On the U.S. side, two members of the diplomatic team—John Quincy Adams and Henry Clay—quarreled almost constantly with each other. Without Gallatin’s limitless patience toward both the British and his own colleagues, the negotiations might well have collapsed.

      They began in March 1813, when Russia’s representative in Washington wrote President Madison of a proposal by Czar...

    • CHAPTER 27 His Long and Useful Life
      (pp. 315-326)

      When the War of 1812 ended, Gallatin was fifty-four, seven years older than Hamilton had been when Burr’s bullet killed him. But unlike Hamilton, Gallatin lived a very long life. He survived until the age of eighty-eight and continued to make major contributions to his adopted country. In 1815, President Madison asked him two different times to resume his duties at the Treasury, but Gallatin said no on both occasions. In 1816, he helped in the campaign to charter the Second Bank of the United States, replacing the bank Congress had terminated in 1811. Having learned its lesson, the legislature...


    • CHAPTER 28 Immigrant Exceptionalism?
      (pp. 329-340)

      Why were Robert Morris, Alexander Hamilton, and Albert Gallatin selected to oversee the nation’s finances for such a long and crucial period? The answer is simple: well-informed political leaders judged them superior to native-born candidates in their ability to manage liquid capital.

      During the crisis year of 1781, Robert Morris appeared to be the only logical choice for the newly created position, superintendent of finance. The national government was bankrupt and the Continental Army on the brink of disintegration. Morris had dealt with money and credit for decades, had developed invaluable mercantile contacts in the Caribbean and Europe, and had...

    • CHAPTER 29 Comparisons and Contingencies
      (pp. 341-349)

      In the popular consciousness, and even in much academic writing, many aspects of the historical era covered by this book have come down to a dualism: between Alexander Hamilton and Thomas Jefferson as personalities, and between Hamiltonian and Jeffersonian ways of thinking. For more than 200 years, these men have prevailed as two of the most potent personal symbols in American politics. Histories, biographies, and even novels have explored the economic and political differences between Hamiltonian and Jeffersonian patterns of thought and of government.

      Some of this literature, despite its merits, comes up short on several fronts. It dwells too...

    • CHAPTER 30 Capitalism and Credit
      (pp. 350-356)

      In the era of Hamilton and Gallatin, the American economy was moving toward a modern capitalist system, which matured during the nineteenth century. Their policies accelerated that transition. Yet in their time, even the most sophisticated analysts were only starting to imagine how a fully industrialized capitalist economy might work. The word “capitalism” had not yet been invented. It first appeared around 1850, as an antonym for socialism. The term “capital,” on the other hand, had made its debut in about 1630. The Oxford English Dictionary gives it this concise definition: “accumulated wealth reproductively employed.”

      Capital, of course, exists in...

    • CHAPTER 31 The Political Economy of Hamilton and Gallatin
      (pp. 357-366)

      For much of its history, the United States has been the quintessential capitalist nation, the one most open to entrepreneurial opportunity. It has been the country whose laws and circumstances most encouraged immigration from abroad and economic growth at home. These are the legacies of the American Revolution and of economic policies forged by Hamilton, Gallatin, and the other immigrants mentioned in this book.

      Taken together, their policies added up to a hothouse for the germination of business. The plants of private enterprise did the actual growing and made up the final harvest. But without the hothouse, and without close...

  7. Notes
    (pp. 367-440)
  8. Acknowledgments
    (pp. 441-443)
  9. Credits
    (pp. 444-445)
  10. Index
    (pp. 446-485)