by Ron Chernow
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 of McCulloch 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 Federalist and 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 shortterm 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.”58 In 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.