In 1776 the United States government started out on a shoestring and quickly went bankrupt fighting its War of Independence against Britain. At the war’s end, the national government owed tremendous sums to foreign creditors and its own citizens. But lacking the power to tax, it had no means to repay them. The Founders and Finance is the first book to tell the story of how foreign-born financial specialistsimmigrantssolved the fiscal crisis and set the United States on a path to long-term economic success.
Pulitzer Prize–winning author Thomas K. McCraw analyzes the skills and worldliness of Alexander Hamilton (from the Danish Virgin Islands), Albert Gallatin (from the Republic of Geneva), and other immigrant founders who guided the nation to prosperity. Their expertise with liquid capital far exceeded that of native-born plantation owners Washington, Jefferson, and Madison, who well understood the management of land and slaves but had only a vague knowledge of financial instrumentscurrencies, stocks, and bonds. The very rootlessness of America’s immigrant leaders gave them a better understanding of money, credit, and banks, and the way each could be made to serve the public good.
The remarkable financial innovations designed by Hamilton, Gallatin, and other immigrants enabled the United States to control its debts, to pay for the Louisiana Purchase of 1803, andbarelyto fight the War of 1812, which preserved the nation’s hard-won independence from Britain.
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From Part I, Chapter Ten: The Bank of the United States
The House passed Hamilton’s Bank bill by the one-sided vote of 39–20. After the Senate also passed the bill and sent it to Washington for his signature, the president asked Secretary of State Jefferson and Attorney General Edmund Randolph for their opinions. Jefferson, in addition to regarding Hamilton as an immigrant upstart, detested all banks, and opposed this one in particular on the additional grounds of unconstitutionality. Both he and Randolph returned a negative verdict. They argued that the Constitution said nothing about incorporating banks or any other kinds of business. In effect, they were recommending that Washington veto the Bank bill. Jefferson’s message was strongly phrased, and although he hedged a bit on the matter of a veto, there could be little question that this is what he wanted. Randolph and Jefferson were Virginians, and most politicians from their state opposed Hamilton’s Bank bill. Washington, also a Virginian but more of a nationalist than the other two, was genuinely undecided. As a contingency, he asked James Madison to draft a veto message.
The president then put the question to Hamilton, giving him the written objections from Randolph and Jefferson. After a week of feverish composition, the secretary produced a long and sophisticated response. He began by noting that the essence of both Jefferson’s and Randolph’s objections lay in their narrow interpretation of federal powers under the Constitution: “The objections of the Secretary of State and Attorney General are founded on a general denial of the authority of the United States to erect corporations.” From this beginning Hamilton constructed a step-by-step rebuttal of both the premises and specific arguments employed by Randolph and particularly by Jefferson.
“A strange fallacy seems to have crept into the matter of thinking & reasoning upon the subject,” Hamilton wrote. “An incorporation seems to have been regarded as some great, independent, substantive thing—as a political end of peculiar magnitude & moment; whereas it is truly to be considered as a quality, capacity, or mean to an end.” In other words, incorporation of the Bank of the United States was a type of measure clearly contemplated by the Constitution in its “necessary and proper” clause about what the federal government could or could not do.
If Jefferson’s reading of the Constitution were correct, Hamilton went on to say, it would be “as if the word absolutely or indispensibly had been prefixed” to the necessary and proper clause. “Such a construction would beget endless uncertainty and embarrassment. The cases must be palpable & extreme in which it could be pronounced with certainty that a measure was absolutely necessary, or one without which the exercise of a given power would be nugatory. There are few measures of any government, which would stand so severe a test.”
Furthermore, although Jefferson’s letter to Washington had referred to the adequacy of existing banks, his reasoning would prohibit not only the national government but also the states from incorporating a bank. “It is to be remembered, that there is no express power in any State constitution to erect corporations.” This was a telling detail that Hamilton knew from his research in drafting the charter of the Bank of New York in 1784, whereas Jefferson likely did not.
Table of Contents
Part I Alexander Hamilton 1757-1804
1 St. Croix and Trauma 11
2 New York and Promise 18
3 War and Heroism 25
4 Love and Social Status 34
5 The Roots of His Thinking 45
6 Robert Morris, Hamilton, and Finance 56
7 The Constitution 74
8 New Government, Old Debt 87
9 The Fight over the Debt 97
10 The Bank of the United States 110
11 Diversifying the Economy 122
12 Tensions and Political Parties 137
13 The Decline 156
14 The Duel 171
Part II Albert Gallatin 1761-1849
15 Choosing the New World 179
16 Moving to the West 186
17 Entering Politics 195
18 Becoming Jeffersonian 204
19 The Climb to Power 215
20 Debt, Armaments, and Louisiana 227
21 Developing the West 246
22 Embargo and Frustration 271
23 Dispiriting Diplomacy 284
24 The Fate of the Bank 290
25 Financing the Wayward War 298
26 Winning the Peace 306
27 His Long and Useful Life 315
Part III The Legacies
28 Immigrant Exceptionalism? 329
29 Comparisons and Contingencies 341
30 Capitalism and Credit 350
31 The Political Economy of Hamilton and Gallatin 357