Hamilton’s Legacy

As the rich get richer and the poor get poorer, pundits and philosophers theorize about the problems of income inequality, social stratification, and legal injustice.  Proposed solutions flow thick and fast, most advocating government intervention or denouncing government de-regulation since the Great Depression.

The American myth of freedom, democracy, and capitalism dies hard, but the United States has never been free, democratic, or even capitalistic, unless it was before the Europeans arrived.  Stratification of society was built into the system with the arrival of the English and their traditions of monarchs and minions, the French and Spanish, and their long histories of battle and inbreeding among themselves on the European continent.

The American experiment may have represented a break from the past, but it carried with it the same patriarchal patterns of its forebears.  The “Founding Fathers” ultimately adopted a government structure that varied only slightly from that of its British progenitors.

Many US citizens don’t know the difference between the Declaration of Independence, which we celebrate on July 4 every year, and the Constitution, which was drafted in secrecy and signed on September 17, 1787, over eleven years after the Declaration announced the United States’ independence from Britain.

In that eleven year gap, the Revolutionary War had been fought and won.  The now free colonies were struggling with debts to soldiers, domestic, and foreign investors.  The individual states had taxing power, but the loosely formed union did not.  Some states were paying off their debts, but others were lagging.  John Adams had been sent to London to negotiate credit for the fledgling country, and Thomas Jefferson had been sent to France for the same purpose, to replace Benjamin Franklin, who was aging and ill.

James Madison of Virginia and Alexander Hamilton of New York led the effort to revise the Articles of Confederation with a new Constitution that would create a strong central government, supersede state governments, and have the taxing power to pay war debts.  Once gathered at what became the Constitutional Convention in Philadelphia, though, each delegate learned the intent was to completely re-write the Articles and was sworn to strict secrecy. George Washington was unanimously elected president.  Madison sat by his side taking notes and was later acknowledged as having written the Constitution.  Alexander Hamilton was a strong advocate for a centralized government, brilliant and opinionated, an open admirer of the British model, including the monarchy, and wanted to reproduce the British system in the states.  He also extolled wealth and privilege, claiming the masses could not be trusted to manage their own affairs.  Madison was of the same general opinion.

While he initially opposed the Constitution, Hamilton later became its strongest advocate and promoter.  He induced Madison and John Jay to write with him what became the Federalist Papers, a series of anonymous essays distributed to newspapers to promote ratification by the states.  For ratification, the Philadelphia conventioneers chose to bypass state legislatures and rely on specifically convened  ratification conventions.

Hamilton played an early and profound role in shaping the early American government.  According to his biographer, Ron Chernow*, he was an illegitimate child of a dissolute couple, born in 1755 or 1757 on the British island of Nevis in the West Indies.  After his father abandoned the family and his mother died, he was employed at age 13 as a clerk and bookkeeper for wealthy British traders on St. Croix, also in the West Indies.  His employers traded in a variety of goods, but at least one shipment a year was of African slaves.  Those employers eventually financed Hamilton’s migration to the New York colony in 1773, where periodic shipments of slave-produced sugar covered his expenses.

Hamilton, who was dashing and gifted, quickly made his way into New York society, courting and marrying a daughter, Elizabeth, of the prominent Philip Schuyler.  He enlisted in George Washington’s Continental Army, gained Washington’s confidence and became his personal secretary during the Revolutionary War years.  Later, Washington granted him his one and only command, at the battle of Yorktown, where Continental and French forces defeated British General Cornwallis to win the Revolutionary War.

After the war ended, Hamilton practiced law in New York City and involved himself in politics.    He also involved himself in banking, writing the constitution for the Bank of New York in 1784, as agent for his brother-in-law, John B. Church, who was in Britain acting as a member of Parliament.  It was New York’s first bank and exists today as BNY-Mellon, billed as having the longest continually traded stock on the New York Stock Exchange.

After the Constitution was ratified, George Washington became the first US president, elected in 1788.  John Adams was elected vice president, and Hamilton became Washington’s first Treasury Secretary.  Thomas Jefferson, who was still in France, was appointed Secretary of State and confirmed by the Senate before he knew of his appointment.

Hamilton went to work immediately to take control of the nation’s finances.  The day after his confirmation as Secretary of the Treasury, he arranged for a $50,000 loan from the Bank of New York—of which he was a director–to pay salaries of Washington and Congress.  He then arranged for another $50,000 loan from the Bank of North America.  The Hamilton Tariff Act of 1789 was Congress’ second official move, after establishing rules for taking oaths of office.

By 1790, Hamilton was busy working on a plan for the federal government to assume state debts from the Revolutionary War.  In the Constitutional Convention the question of assumption had split—like the slavery issue—essentially along North-South lines, because Southern states had paid off much of their debt, while northern states, like New York, had not.  The issue dovetailed with questions about the ultimate location of the nation’s capital.  Madison, silently backed by George Washington, negotiated for a Potomac River location near Washington’s Mount Vernon plantation in exchange for agreeing that the federal government would assume the states’ debt.

Meanwhile, Hamilton was busy creating the First Bank of the United States, a central bank that could issue credit, capitalized at $10 million, 20% owned by the government and 80% owned by shareholders.  He was also looking for other sources of income and convinced Washington and Congress to support an excise tax on whiskey.  He introduced legislation for the whiskey tax on December 13, 1790 and for the central bank December 14, 1790.  At that point, Washington’s main source of income came from whiskey distillation.

Both James Madison and Thomas Jefferson vigorously opposed the central bank, calling it unconstitutional.  Madison and Hamilton had been allies before, but this difference in interpretation of the Constitution caused a rift that never healed.  Jefferson and Madison wrote letters back and forth condemning the mad stock speculation that greeted the public offering of central bank stock, and the fact that people in the Northeast could talk of nothing else.  Once again, critics claimed Hamilton demonstrated a preference for rich Northerners, as he only offered the stock through three banks, in Boston, New York, and Philadelphia.  Also, opponents pointed to the fact that three-fourths of investors were foreign.  Thirty of the approximately 85 Congressmen bought shares.

Hamilton’s assistant Treasury Secretary, William Duer, could be called one of the nation’s first inside traders.  Philip Schuyler, who would become Hamilton’s father-in-law, had previously done business with Duer and had encouraged him to move from Antigua to New York.  Duer became an early friend when Hamilton immigrated to the continent.  But Duer turned out to be an inveterate gambler and stock speculator who was blamed for causing the Panic of 1892 through debt-backed stock speculation in First Bank of the United States stock. His method was to borrow heavily to make trades, hoping to sell at peak prices, but he ran out of cash and couldn’t make payments on his debts.  People panicked and started selling stock.  Hamilton then used the Treasury’s sinking fund to buy government securities anonymously, to stem the panic.

As a result of the crisis, to restore confidence, and to encourage people to start investing again, 24 stock brokers and merchants formed the New York Stock Exchange in May, 1792, by signing the so-called “Buttonwood Agreement,” under a buttonwood tree on Wall Street.  The signers agreed to trade only with each other, and to charge one-quarter percent commission on trades.  Available stock was limited to insurance companies, the Bank of New York, the First Bank of the United States, and Hamilton Bonds that Hamilton had decided to issue to pay Revolutionary War debt.

The United States has operated as a triumvirate of government, banking, and the stock market ever since.  The “Framers” of the Constitution were wealthy businessmen, planters, bankers, lawyers, and merchants, who designed a structure for exerting control over the population through laws and taxation.  While the Declaration of Independence set the states free, the Constitution bound them in economic slavery to a new taxing authority.  The links to the banking system and the New York Stock Exchange initiated the “public-private partnerships” that define the United States today.

If, in the 21^st century the rich are getting richer and the poor getting poorer, it’s probably fair to say it was designed that way.  The Framers knew what they were doing.

 

*  The recent Broadway hit Hamilton is based on Chernow’s book, Alexander Hamilton, 2004.