American History’s Invisible Innovator

“There is an elegant memorial in Washington to Jefferson, but none to Hamilton. However, if you seek Hamilton’s monument, look around. You are living in it.”
-George Will

If asked what Alexander Hamilton looks like, Most people would likely profess to have no idea, even though his image has been on the $10 bill for their entire lives. George Will is not quite right in the above quote though. There is a moenument of some sort to Alexander Hamilton in D.C.: a small statute in a courtyard of the Department of the Treasury. It’s reportedly a very nice statue, though admittedly rather unimpressive when compared to the Washington Monument or Jefferson Memorial.

This is probably why the 260th anniversary of Hamilton’s birth on Sunday January 11, 2015 passed without much comment or notice.  New Englanders celebrated the Patriots’ spectacular playoff win (and the almost as satisfying Peyton Manning upset loss), movie and media enthusiasts toasted the Golden Globes and we all stood together in solidarity with the people in Paris as everyone everywhere stood up against terrorism and the tragedy that was Charlie Hebdo. Yet with all of that commemoration and celebration, Alexander Hamilton received nary a mention.

Payments, commerce and banking enthusiasts, however, should celebrate because it’s not much of an exaggeration to say that anyone who bought or sold anything using American currency today has him to thank for that.  Alexander Hamilton did not invent money, of course – or commerce or banking either, for that matter. However, his important, if occasionally overlooked, contribution to the American experience is pretty clear: he was the architect of the financial system that US residents live under today.

Think we’re exaggerating? Here are some of Hamilton’s more impressive accomplishments:

The United State Constitution

Alexander Hamilton did not write the Constitution – that honor more or less goes to James Madison (with some significant input from others).  Alexander Hamilton did something almost as important.  He sold it to the American people.

The Articles of Confederation, the original guiding document of American government, was almost an immediate failure. Among other other things, the articles lacked a central executive or any description of a court system.  They were also as difficult to change as they were insufficient, since they  required unanimous approval of the 13 Confederated States to be amended.

The biggest failing of the Articles of Confederation from the point of view of financial history is that it essentially left the nation that would become the United States without any kind of financial system or the means to develop one.

Though the Congress did have the ability to levy taxes under the Articles, they could not collect them. However at least taxes were mentioned –  currency, on the other hand, was not. Because the federal government was not granted the authority to mint money, individual states were responsible for making their own specie. The result was that as of 1789 (the year the U.S. Constitution went into effect), the most common form of currency in the American nation was the Spanish peso, since state-issued script was widely considered worthless.  The Articles also failed to give the newly created confederate government the power to negotiate trade treaties as an entity, instead leaving it up to individual state governments to negotiate their terms with foreign national governments.

The inability to mint currency or set a single trade policy was disastrous for the early American government, especially when combined with the fact that the Articles gave the power to assess, but not collect, taxes.

The Constitution rectified those problems – and required 9 of the original 13 colonies to ratify the document.

The Federalist Papers, a series of essays defending the proposed Constitution which were published nationwide, effectively made that case.  They were widely considered instrumental in getting the constitution ratified at the time and are cited more often than any other primary source by jurists, lawyers, historians, and political scientists as the major contemporary interpretation of the Constitution.

There are 80 essays in all.  Alexander Hamilton wrote 51 of them.

“Let the thirteen States, bound together in a strict and indisoluble Union, concur in erecting one great American system, superior to the control of all trans-Atlantic force or influence and able to dictate the terms of the connection between the old and the new world!” Hamilton wrote in Federalist No. 11.

While today there are spirited debates to be had about the proper relative size and reach of government, there are no normal people actively pursuing the total decentralization of currency, the abolition of the federal executive or the revocation of the federal government’s power to levy and collect taxes or sign treaties. We take for granted that these things are necessary to the American system, a belief for which we can thank Alexander Hamilton and the Federalist Papers.

The Federal Reserve

Again, it would not quite be accurate to credit Alexander Hamilton with the creation of the Federal Reserve, which was actually created on December 23, 1913, with the enactment of the Federal Reserve Act.  However, the ideological framework underlying the existence?  Thank Alexander Hamilton, who is mostly responsible for the creation of the first Central Bank of the United States in 1791.

Hamilton was the first Secretary of the Treasury, and his first priority was to create a central bank with the power to collect taxes, hold government funds, and make loans to the governments and borrowers.

This was not a universally popular idea in the late 1700’s and was widely derided in some segments as both unrepublican and unconstitutional.  It was one of handful of early political issues that triggered the formation of the United State’s first two-party political system, with Federalists like Hamilton and George Washington squaring off against Anti-Federalists like Thomas Jefferson and James Madison over whether a Central Bank should be allowed to exist at all.

In the short-run, Hamilton’s argument won out – as did the doctrine of “implied powers” that he more or less invented to justify the creation of the bank on constitutional grounds.  Hamilton argued that though the Constitution, as written, did not give Congress the power to charter a Central Bank, the powers granted to Congress by the Constitution required the creation of such a bank to properly exercise said powers.

In the longer run, The Bank of the United States was far from settled. America has had many different Central Banks through its history as well as many long stretches when there was no Central Bank. The current iteration, The Federal Reserve, has been in place for 102 years, which is the longest run for a Central Bank in U.S.history.

Disruptive Innovator

After he was done selling the Constitution to the American people and establishing the Bank of the United States, Hamilton delivered the first of a series of his Report on Manufactures to Congress.  His conclusion was that though agrarianism would always be an important part of the United States, the nation’s ultimate future was as an industrial and manufacturing nation.  He strongly emphasized that attempting to resist the tide of history and remain an agrarian nation would become a disadvantage in dealing with Europe over time.

Today, that hardly seems like a very controversial assertion.  In 1790, the audience to whom Hamilton delivered that message was comprised of the nation’s most successful agrarians.  Four of the first five U.S. presidents were plantation owners whose main source of income was agricultural revenue.

It was not a popular message at the time, and it remained divisive until the Civil War settled the question 70 years later.

Alexander Hamilton is not much thought of today. Most Jeopardy questions about him in the last decade have been more focused on his death in a duel with Aaron Burr than his role in shaping the financial system that we take for granted in the US today.

But without Alexander Hamilton and the financial infrastructure he put in place, the American experiment might never have gotten off the ground. While not one of the better known Founding Fathers, his influence is most clearly felt today.  Even if it is a little invisible.