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The Founding Wizard
Two hundred years ago the United States was a weakling republic prostrate beneath a ruinous national debt. Then Alexander Hamilton worked the miracle of fiscal imagination that made America a healthy young economic giant. How did he do it?
July/august 1990 | Volume 41, Issue 5
With the removal of royal control, these oligarchies inherited a near monopoly of political power in each colony. Although the population of the United States in 1787 and 1788 was almost 4,000,000, only 160,000—4 percent of the whole—voted for delegates to the state conventions to ratify the new Constitution, the most important political event of their lives. Even when only adult white males are considered, less than 25 percent voted. It was not for lack of interest. It was simply that the right to vote was limited to those who owned substantial property, in other words, the oligarchs.
The oligarchies often manipulated the legislatures to advance their own interests, such as suspending foreclosures for debt during the economically depressed 1780s. And taxes tended to be laid more heavily on those without the vote, such as small farmers and laborers. Oppressive taxes had led to Shays’ Rebellion in Massachusetts in 1786 and 1787, which in turn was a powerful stimulant to calling the Constitutional Convention. It is no accident that that convention placed into the document it wrote a clause forbidding the states to impair the obligation of contracts.
Although Hamilton married the daughter of Philip Schuyler, one of the richest members of New York’s Knickerbocker aristocracy, he never fully belonged to it himself. While he could be charming, especially with women, he was too driven, too ambitious for fame and glory, too unable to suffer fools gladly to be completely accepted by the men. They recognized his brilliance and utilized his skills, but they never forgot where Hamilton came from or the conditions of his birth.
He believed, unashamedly, that people were driven by self-interest. Control how they pursue their interests and you can make their efforts benefit society.
Hamilton has often been accused of seeking to establish an aristocratic form of government in this country. This is due partly to an inevitable contrast with Jefferson and his “democratic” political allies and partly to Hamilton’s often-stated fear of “the mob.” But it is not accurate. To be sure, he had envisioned a government wherein Washington would serve as a sort of uncrowned monarch and Hamilton would be his chief minister. (And Hamilton’s political opponents were keenly aware that Sir Robert Walpole, half a century earlier, had transformed his office in the British government, that of first lord of the treasury, into the entirely new office of prime minister.) But for all his personal ambition, Hamilton in fact was a man of the extreme center, to use Stewart Alsop’s marvelous phrase. He fully recognized how dangerous too much power in the hands of any one group could be. “Give all power to the many,” Hamilton thought, and “they will oppress the few. Give all power to the few, they will oppress the many. Both therefore ought to have power, that each may defend itself against the other.”
Here was the essence of Hamilton’s political and economic philosophy. He believed, unashamedly, that people were driven by self-interest. If Jefferson found the roots of his political philosophy in Rousseau and Voltaire, Hamilton found his in Adam Smith. Control the channels in which people may pursue their interests, thought Hamilton, and you can direct their efforts in ways that are positive for society. As Forrest McDonald, one of the best of Hamilton’s modern biographers, explains: “The rules determine the nature and outcome of the game. That was the heart of Hamiltonianism. It was a concept as essential to the art of free government as Ockham’s Razor was to the philosophy of logic.”
Hamilton planned to use this philosophy to accomplish his goals of putting the country on a sound financial footing and binding its citizens to it. He would succeed so well that Hamilton, and very nearly Hamilton alone, laid the foundations upon which arose in the next hundred years the rich and powerful national economy we today take so much for granted.
Over the next five years Hamilton would prepare and transmit to Congress a first and second “Report on the Public Credit,” a “Report on a National Bank,” and a “Report on Manufactures,” embodying in great detail his plans to establish a financial system for the United States that would rationalize the national debt, adequately fund the current expenses of the government, and provide a financial and regulatory framework in which the American economy could prosper and grow.
Hamilton’s first major proposal was to refund the debt incurred by the old national government, and indeed, there was not much choice, since the new Constitution commanded that the federal government assume the debts of the old Confederation. The argument was over who should benefit from this refunding. Much of the debt had been issued to pay for requisitions from farmers and merchants. In the inflation caused by the war and the fiscal weakness of the Confederation, the bonds had depreciated greatly in value. Much of the debt had fallen into the hands of wealthy merchants in Boston and elsewhere who had bought it up at far below par (some for as little as 10 percent of its face value).