Friday, October 2, 2020

Alexander Hamilton: How He Smote the Rock, Touched the Corpse, Birthed Minerva

Even at a time and place when florid public compliments were a hallmark of public oratory, Daniel Webster's comment about Alexander Hamilton at a "Public Dinner at New York" given in Webster's honor on March 10, 1831, stands out. (The text is from the 1903 collection, The Writings and Speeches of Daniel Webster, vol. 2, pp. 48-50, available via the magic of Hathitrust.) Webster said: 

He smote the rock of the national resources, and abundant streams of revenue gushed forth. He touched the dead corpse of the Public Credit, and it sprung upon its feet. The fabled birth of Minerva, from the brain of Jove, was hardly more sudden or more perfect than the financial system of the United States, as it burst forth from the conceptions of ALEXANDER HAMILTON.

But what did Hamilton do to deserve this tribute? Daniel Webster explains at greater length, and I've appended more of his discussion below. But for the those looking for a little more detail on how Hamilton smote the rock, touched the corpse, and birthed Minerva, Richard Sylla and David J. Cowen provide a crisp and readable overview in "Hamilton and the U.S. Financial Revolution" (Journal of Applied Corporate Finance, Fall 2019, 31:4, pp. 10-15), which in turn is based on their 2018 book.  

Sylla and Cowen argue that a US "financial revolution" occurred in a few years of the early 1790s, led by Hamilton. They argue that Hamilton was a student of financial history, and that he saw connections from earlier small countries that developed their financial markets and then became economically and politically powerful. They write: 
Roughly two centuries before the United States gained independence, the Dutch Republic (or “the United Provinces,” as they were then called), the modern-day Netherlands, had its own financial revolution. That revolution helped the small country to win its independence from Spain, a larger and seemingly more powerful country. Armed with modern finances and an entrepreneurial mercantile spirit, the Dutch Republic became the leading and richest economy of the 17th century—and many historians view it as it the world’s first truly modern economy. Amsterdam became the world’s leading financial center, and it was there that Hamilton succeeded in the 1790s in floating the foreign loans he foresaw would be required to restructure the massive U.S. war debts. And New Amsterdam was, of course, Dutch before it became New York.

Great Britain, the mother country of the United States, followed in the footsteps of the Dutch by handing its throne to a Dutch prince, Willem of Orange, in the Glorious Revolution of 1688. As William III of Britain, he brought over experienced Dutch financiers, who together with Britons launched an English financial revolution. Similar to the ways in which the Dutch exploited their access to capital—or “credit”—to defeat the Spanish, England used it to win all of its protracted wars with France, a larger country, between 1688 and 1815.3 

Hamilton was a student of all this financial history ...
What were the main components of the US financial revolution of the early 1790s. Sylla and Cowen sum it up this way: 
To our mind it had six key components:

1. Establishing effective institutions of public finance—revenues and spending—and public debt management to finance the government, restructure its unpaid debts, and establish public credit so that the U.S. government would always be able to borrow on good terms.

2. Founding a central bank to aid the government’s finances and serve as the central node of the country’s emergent banking and financial systems.

3. Creating the U.S. dollar as the country’s unit of account and medium of exchange, and basing it on gold and silver as the monetary base into which bank notes and deposits were convertible, thereby giving it the stability of value that would make it a safe basis for long-term contracts (such as bonds) and a safe asset in which to hold savings.

4. Fostering the growth of a banking system by encouraging state governments to create more banks to aid their own finances and lend to businesses and individual entrepreneurs— in other words, to establish private credit and bank money.

5. Fostering the growth of securities markets to make financial assets—government bonds, private-sector bonds, and company equities (stocks)— liquid and transferrable for the benefit of issuers and investors.

6. Fostering the growth of business corporations, financial (such as banks and insurance companies) and non-financial (such as utilities; road, bridge, and canal companies; and manufacturers), and so encouraging the pooling of capital of individuals that would allow large enterprises to be created and economies of scale to be achieved.

As Treasury Secretary from 1789 to 1795, Hamilton had direct authority concerning the first three items on the list—public credit, the central bank, and establishment of the dollar as the unit of currency. Hamilton had to rely on others—state authorities and private entrepreneurs—to flesh out his financial revolution by implementing the other components—state banks, corporations, and securities markets. But once put in place, the first three elements, as Hamilton foresaw they would, laid the groundwork and provided the inducements for the second three.
In modern times, we have a tendency to take the benefits and workings of the financial system for granted, at least in high-income countries. But what is obvious today was not obvious to many people circa 1790. And when a nation's financial system seems shaky--say, during the Great Depression, the US economy during the Great Recession, the struggles of the EU with debtor nations, China's current experience with high debt levels and a rigid and inflexible financial system--Hamilton's foresight becomes even more remarkable. As Sylla and Cowen describe Hamilton: "He was ahead of his time. Indeed, since we have come so lately to appreciate what he learned long ago about the connection of finance and credit to growth and power, he has remained ahead of his time right down to the present."


Here's the full three-paragraph passage of Webster discussing Hamilton in 1831: 

How can I stand here, to speak of the Constitution of the United States, of the wisdom of its provisions, of the difficulties attending its adoption, of the evils from which it rescued the country, and of the prosperity and power to which it has raised it, and yet pay no tribute to those who were highly instrumental in accomplishing the work? While we are here to rejoice that it yet stands firm and strong, while we congratulate one another that we live under its benign influence, and cherish hopes of its long duration, we cannot forget who they were that, in the day of our national infancy, in the times of despondency and despair, mainly assisted to work out our deliverance. I should feel that I was unfaithful to the strong recollections which the occasion presses upon us, that I was not true to gratitude, not true to patriotism, not true to the living or the dead, not true to your feelings or my own, if I should forbear to make mention of ALEXANDER HAMILTON.

Coming from the military service of the country yet a youth, but with knowledge and maturity, even in civil affairs, far beyond his years, he made this city the place of his adoption; and he gave the whole powers of his mind to the contemplation of the weak and distracted condition of the country. Daily increasing in acquaintance and confidence with the people of New York, he saw, what they also saw, the absolute necessity of some closer bond of union for the States. This was the great object of desire. He never appears to have lost sight of it, but was found in the lead whenever any thing was to be attempted for its accomplishment. One experiment after another, as is well known, was tried, and all failed. The States were urgently called on to confer such further powers on the old Congress as would enable it to redeem the public faith, or to adopt, themselves, some general and common principle of commercial regulation. But the States had not agreed, and were not likely to agree. In this posture of affairs, so full of public difliculty and public distress, commissioners from five or six of the States met, on the request of Virginia, at Annapolis, in September, 1786. The precise object of their appointment was to take into consideration the trade of the United States; to examine the relative situations and trade of the several States; and to consider how far a uniform system of commercial regulations was necessary to their common interest and permanent harmony. Mr. Hamilton was one of these commissioners; and I have understood, though I cannot assert the fact, that their report was drawn by him. His associate from this State was the venerable Judge Benson, who has lived long, and still lives, to see the happy results of the counsels which originated in this meeting. Of its members, he and Mr. Madison are, I believe, now the only survivors. These commissioners recommended, what took place the next year, a general Convention of all the States, to take into serious deliberation the condition of the country, and devise such provisions as should render the constitution of the federal government adequate to the exigencies of the Union. I need not remind you, that of this Convention Mr. Hamilton was an active and efficient member. The Constitution was framed, and submitted to the country. And then another great work was to be undertaken. The Constitution would naturally find, and did find, enemies and opposers. Objections to it were numerous, and powerful, and spirited. They were to be answered; and they were effectually answered. The writers of the numbers of the Federalist, Mr. Hamilton, Mr. Madison, and Mr. Jay, so greatly distinguished themselves in their discussions of the Constitution, that those numbers are generally received as important commentaries on the text, and accurate expositions, in general, of its objects and purposes. Those papers were all written and published in this city. Mr. Hamilton was elected one of the distinguished delegation from the city to the State Convention at Poughkeepsie, called to ratify the new Constitution. Its debates are published. Mr. Hamilton appears to have exerted, on this occasion, to the utmost, every power and faculty of his mind. 

The whole question was likely to depend on the decision of New York. He felt the full importance of the crisis; and the reports of his speeches, imperfect as they probably are, are yet lasting monuments to his genius and patriotism. He saw at last his hopes fulfilled; he saw the Constitution adopted, and the government under it established and organized. The discerning eye of Washington immediately called him to that post, which was far the most important in the administration of the new system. He was made Secretary of the Treasury; and how be fulfilled the duties of such a place, at such a time, the whole country perceived with delight and the whole world saw with admiration. He smote the rock of the national resources, and abundant streams of revenue gushed forth. He touched the dead corpse of the Public Credit, and it sprung upon its feet. The fabled birth of Minerva, from the brain of Jove, was hardly more sudden or more perfect than the financial system of the United States, as it burst forth from the conceptions of ALEXANDER HAMILTON.