by Myron Magnet
The new Constitution, he argued as The Federalist progressed, fixes these defects by creating “a vigorous national government” with sufficient powers to protect citizens “as well against internal convulsions as external attacks,”58 to regulate international and interstate commerce, and to carry on foreign affairs. It provides for vital “energy in the executive.” It allows the federal government to raise armies and build a navy, as it must “if we mean to be a commercial people.”59 And it permits the government to tax, since “money is . . . the vital principle of the body politic,” government’s “essential engine.”60 But government should levy taxes with wisdom and restraint, Hamilton cautioned: “If duties are too high they lessen the consumption . . . ; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.”61 And of course, “if we are in earnest about giving the Union energy and duration, we must abandon the vain project of legislating upon the States in their collective capacities: We must extend the laws of the Fœderal Government to the individual citizens of America,” making the national government supreme at the expense of the state governments.62
Standing guard over the whole machinery, to keep the legislators “within the limits assigned to their authority,” will be “the rights of the courts to pronounce legislative acts void, because . . . [n]o legislative act . . . contrary to the Constitution, can be valid.” After all, this fundamental law, which embodies “the intention of the people,” must always be of “superior obligation and validity . . . to the intention of their agents” in the legislature. And since the “interpretation of the laws is the proper and peculiar province of the courts,” it “therefore belongs to them to ascertain [the Constitution’s] meaning.”63 This was fifteen years before Chief Justice John Marshall wrote Marbury v. Madison.
In June 1788, the Constitution took effect when the ninth state ratified it. In July, New York State decided to sign on, too, thanks primarily to a month of Hamilton’s heroic speechifying at the Poughkeepsie ratifying convention. Wildly pro-Constitution Gothamites celebrated their townsman’s magnificent achievement as author and orator with a rollicking parade, featuring a flag that depicted Hamilton beneath trumpet-blowing Fame, and climaxed by a twenty-seven-foot-long, frigate-shaped float pulled by ten horses and christened the Federal ship Hamilton. Marching down Broadway with the celebrants was Hamilton’s old Saint Croix boss, Nicholas Cruger.64
ONCE GEORGE WASHINGTON took office under the new Constitution on April 30, 1789, that “energy in the executive” that The Federalist had extolled turned out largely to be Hamilton himself, at least in the first term. Appointed Treasury secretary in September—the startled Washington had only recently learned that his ex-aide was a financial whiz—Hamilton, now thirty-four, turned to the financial crisis undermining the nation.65 He did more than solve it. He used it as an occasion to spread the contagion of liberty, accelerating the transformation of what historian Forrest McDonald calls a “hierarchical and deferential social order”—in which freely elected justices of the peace always turned out to be generation after generation of the same family, and Harvard listed students in its records in order of family prominence—into a free-market, opportunity society in the New York tradition.66
“The fabled birth of Minerva from the brain of Jove,” Daniel Webster exclaimed, “was hardly more sudden or more perfect than the financial system of the United States, as it burst forth from the conception of Alexander Hamilton.”67 Certainly all the complex pieces came into being almost simultaneously and meshed together with Swiss-watch precision. But the exquisite mechanism had a moral as well as an economic purpose, which Hamilton explained in his 1791 Report on Manufactures, and it’s worth understanding the why before quickly considering the how.
If Americans were going to pursue happiness, Hamilton aimed to give them powerful means to do it. Now that they had gained unprecedented “personal independence” and “perfect equality of religious privileges” from the “more equal government” that the Revolution and new Constitution had established, he wrote, Americans next needed a vibrant, diversified economy that would include manufacturing, to further both their material and their spiritual well-being. The object of such an economy would not be just the production of more goods and services but also the human fulfillment, the realization of human potential, that comes from thinking them up and creating them.
In this sense, Hamilton saw, economics is soulcraft. So while “a more ample and various field of enterprize” will certainly increase the wealth of the nation, he said, it will also allow all “the diversity of talents and dispositions which discriminate men from each other” to develop to their fullest excellence. In a society with limited opportunity, “minds of the strongest and most active powers for their proper objects . . . labour without effect, if confined to uncongenial pursuits.” But “when all the different kinds of industry obtain in a community, each individual can find his proper element, and can call into activity the whole vigour of his nature. . . . To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted.”68 In Hamilton’s hands, the dismal science became a humane and optimistic one.
Who knows how far the flow of opportunity and progress can spread? Machines that “facilitate and abridge labour” proliferate; the man who conceives and designs them is an “Artist.”69 As invention and enterprise flourish, the increase of supply creates its own demand, in turn sparking further enterprise. “Every new scene, which is opened to the busy nature of man to rouse and exert itself, is the addition of a new energy to the general stock of effort. . . . The bowels as well as the surface of the earth are ransacked for articles which were before neglected. Animals, Plants and Minerals acquire an utility and value, which were before unexplored.”70 Talent, ingenuity, and innovation blossom, prosperity increases, and dependence on (and vulnerability to) foreign powers shrinks.71
BUT TO REACH that point takes a money economy, and that’s what Hamilton created out of the $76 million that the nation and various states owed to soldiers, army suppliers, and foreign lenders. That debt, said Hamilton in his January 1790 Report on Public Credit, “was the price of our liberty,” and it would be shameful to repudiate it, as some politicians urged. It would be impolitic too: for if the federal government could convert all the various bonds and promissory notes representing those debts into federal government securities that people believed would actually be paid in full, those securities could serve as money. They could serve as a medium of exchange that would “give greater means for enterprize,” extending trade, manufacturing, and agriculture.72 But they could do so, to repeat, only if people believed they were really worth what they said they were worth, and government creates such belief by keeping its promises, not repudiating them.
Of course the nation had insufficient gold and silver to pay these debts in full, so Hamilton proposed instead to renegotiate and restructure them into several kinds of interest-bearing annuities. He would pay the interest by levying import duties and excise taxes sequestered in a special “sinking fund” that he’d also use to buy up bonds in the market whenever they fell below their face value, thus pushing the price back up to “par” (as he did spectacularly to calm the markets like a seasoned central banker when the bursting of a speculative bubble gave way to the panic of 1792). Thus stabilized in value, the securities could serve as money.73
But in the process, Hamilton had to untangle a jumble. Some original holders had sold their promissory notes at big discounts (as Washington had predicted they would have to); and in converting these to federal bonds, some legislators asked, shouldn’t the government in fairness discriminate among holders, paying a speculator who had bought an IOU from a hard-up ex-soldier only what the spectator had paid for it, plus interest, and giving the rest of the face value to the veteran whose wounds had earned it? Hamilton managed to talk Congress out of s
uch discrimination, arguing that it would be an administrative nightmare of dubious justice, and that it would subvert the whole enterprise, because unless people believed that government securities were worth their face value, they wouldn’t be negotiable and so wouldn’t serve as money.74
And what of the state debts? Hamilton thought that the federal government—meaning everybody—should assume responsibility for paying them, since they had been incurred in the national cause.75 But Virginians, who had already settled most of their debt for pennies on the dollar, and who had lots of House votes, disagreed. And so Hamilton made his famous deal with Jefferson and Madison over dinner on June 20, 1790. They would provide the votes for the federal assumption of state debts if Hamilton delivered the votes for moving the national capital from New York to Philadelphia for ten years and then to a permanent site on the Potomac, where the Virginia statesmen incidentally had bought up lots of land. By the end of July, the necessary legislation had passed. And by December, paper worth $15 million when Hamilton first went to work in his Broadway office just below Wall Street had tripled in value.76
THAT MONTH, now in the new capital of Philadelphia, Hamilton sent Congress his Report on a National Bank, laying out the last parts of his plan—a bank to issue currency and lend it, a mint to print and coin it, and a customs service to collect duties and catch smugglers. Paper money, Hamilton understood, has an almost magical aspect. Like a bond, a banknote is just a promise, resting on the credit of the issuer, and credit is mere belief. He had already noted in his Report on Public Credit that “in nothing are appearances of greater moment, than in whatever regards credit. Opinion is the soul of it, and this is affected by appearances, as well as realities.”77 Now he intended to use the prestidigitation of credit to levitate the nation into economic modernity.
“Gold and silver, when they are employed merely as the instruments of exchange and [transfer of ownership], have been not improperly denominated dead Stock,” he explained in the Report on a National Bank; “but when deposited in Banks, to become the basis of a paper circulation, which takes their character and place, as the signs or representatives of value, they then acquire life, or, in other words, an active and productive quality.”78 That’s because, first, the bank can issue paper currency way beyond the value of the precious metal in its vault, since individuals have so much faith that they can redeem their dollar bill for a dollar’s worth of gold or silver that they never do the experiment—at least not all at once.79 How far beyond the value of the gold and silver can the paper currency grow? In a breathtaking leap of daring, Hamilton arranged that, of the bank’s $10 million capitalization, only $2 million would be actual precious metal; the rest would be . . . federal government bonds—mere promises—so that the national debt would support an even larger superstructure of credit. The bank’s stockholders would pay for their shares in four installments over two years, one-fourth in specie and the rest in bonds.80 For the first six months, therefore, Hamilton balanced a $10 million elephant of currency on a $500,000 ball of specie.
So why was this not a pyramid scheme?
Hamilton made one of those leaps of faith that, once made, prove true. He believed that the country had a vast latent productive capacity—an “unequalled spirit of enterprise, which . . . is in itself an inexhaustible mine of national wealth”—and raw developable land that just needed to be unlocked with capital to start gushing riches.81 As things stood, he had written as far back as 1780, “the money in circulation is not a sufficient representative of the productions of the country.”82 The bank’s ability to put its capital to work, incessantly circulating it in notes or in loans at interest, so that it never lies idle, is to “all the purposes of trade and industry an absolute increase of capital,” he observed. “And thus by contributing to enlarge the mass of industrious and commercial enterprise, banks become nurseries of national wealth.” By giving loans to the creditworthy, banks “enable honest and industrious men, of small or perhaps no capital to undertake and prosecute business, with advantage to themselves and to the community,” he wrote, as one self-made man hoping to give others the same opportunity; and indeed he took care to issue currency in small denominations, so that even the humblest could reap the benefits of the new economy.83 “He smote the rock of the national resources,” Daniel Webster marveled, “and abundant streams of revenue gushed forth.”84
Hamilton insisted that the bank be run privately, not by government (which held a 20 percent stake, to give it some oversight power). A private bank would take care not to print more money than its capital could support or than the economy could productively employ, since otherwise people would try to cash in superfluous banknotes for specie, depleting the bank’s reserves. Underlying the magical belief, he repeatedly insisted, had to be a foundation of hard reality: some specie is really there; loans go to people whose character and business plans the bank finds, after careful inspection, solid enough to pay back the money. Politicians are less prudent. “The stamping of paper is an operation so much easier than the laying of taxes,” Hamilton noted, that in an emergency, government would too readily roll the presses, producing inflation and ruining the bank’s credit. Stupid, yes: “But what government ever uniformly consulted its true interest,” he asked, “in opposition to the temptations of momentary exigencies?”85 In this case, at least, government did the right thing, and Washington signed the bank bill in February 1791.
AS HAMILTON rolled out his new revolution, opponents rose up in outrage. Not only agriculturalists like Jefferson believed that the Hamiltonian system would turn the country over to corrupt “stock jobbers”; even Harvard-trained Adams lacked the economic acumen to know that bankers could be anything more than “swindlers and thieves,” who levy “an enormous tax on the people for the profit of individuals.”86 Jefferson, Madison, and their followers also believed that Hamilton’s energetic expansion of federal power threatened constitutional liberty. They pooh-poohed his contention that Congress’s power to make any law “necessary and proper” for carrying out its enumerated powers armed government with what Hamilton called “implied” powers, including the authority to charter a bank. They rejected his argument that a sovereign government has the “right to employ all the means requisite and fairly applicable to the attainment of the ends” for which it was established, an argument that is a Federalist leitmotif, even in the numbers written by a younger and wiser Madison. If government goes down the Hamiltonian road, Jefferson warned, it takes “possession of a boundless field of power, no longer susceptible of any definition”—exactly the arbitrary, monarchical power that Americans fought a revolution to overthrow.87
Patrick Henry had given just this warning about the doctrine of implied powers in the Virginia ratifying convention, and, like Jefferson and Madison’s fear that northern bankers would lord it over southern planters, his warning expressed a sectional as well as a constitutional fear. “Implication is dangerous because it is unbounded,” Henry argued; “if it be admitted at all, and no limits be prescribed, it admits of the utmost extension.”88 What would such power do? It would bring about, he said, what “I have ever dreaded—subserviency of southern to n[orther]n interests.”89 By which he meant, as he reportedly had phrased it in the ratifying convention, “They’ll free your niggers!”90
The Framers hoped they’d found a way of finessing the slavery issue: southerners agreed to end the importation of slaves after 1808 in exchange for being awarded seats in Congress proportional to their white populations plus three-fifths of their slaves, giving them extra political power.91 But northern abolitionists never heeded the Constitutional Convention’s promise to stop belaboring the issue, and the tension remained, becoming the mainspring of American history from the 1820 Missouri Compromise to the Civil War. Hamilton himself, who hated slavery from growing up amidst its barbarities in the West Indies, had become a founding member of the New York Manumission Society in 1785, and after the Revolution he had declared the idea of making Britain return or pa
y for slaves it had freed “odious and immoral.”92 It took decades, but Patrick Henry’s prediction proved correct.
HAMILTON’S RIVALS depicted his “federalist” program not as a completion of the Revolution but as a counterrevolution against liberty and limited government, and their opposition was bitter. For his own part, aside from his wry awareness that, in Doctor Johnson’s phrase, “we hear the loudest yelps for liberty among the drivers of negroes,” Hamilton abhorred the version of liberty that the “anti-federalists” increasingly embraced—the liberté of the French Revolution, which began two months after Washington took office and filled Hamilton with a “foreboding of ill.”93 In The Federalist, he had rejected, in favor of practical real-world experience and the lessons of history, all “Utopian speculations,” all “those idle theories which have amused us with promises of an exemption from the imperfections, the weaknesses, and the evils incident to society in every shape.”94 Now, he wrote Lafayette, “I dread the reveries of your Philosophic politicians . . . who being mere speculists may aim at more refinement than suits . . . with human nature.”95 They mistakenly saw men as reasonable rather than merely reasoning creatures, able to re-create society logically from first principles rather than modestly building on “ancient establishments and courses,” in the light of “that best oracle of wisdom, experience.” Human nature being the imperfectible thing it is, he thought that the French would more than likely fail “to keep within Proper bounds” and “run to anarchy.”96
As they did. And when pro–French Revolution Republicans (as the anti-Federalists renamed themselves) started calling each other “citizen,” and French atrocities worsened, Hamilton began to fear that the homegrown “spirit of Jacobinism” could lead in America to “calamities of which the dreadful incidents of the French revolution afford a very faint image.”