APUSH
Mr. Tran
Chapter 5
Name: __________________________________ Group: ____________ Date: 9/23/2013
Did Alexander Hamilton’s Policies Lay the Foundation for America’s Economic Growth in the Early National
Period? 1
Alexander Hamilton remains the most enigmatic, elusive, and highly criticized of the group we call “the
founding fathers.” When contrasted with Jefferson, Hamilton comes off second best as arrogant, crude, and
manipulative, an embezzler who was worst of all a “crypto-monarchist.” Yet nationally syndicated
conservative columnist George Will astutely observes: “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.
We honor Jefferson but live in Hamilton’s country.”
Hamilton grew up in very humble circumstances. Born out of wedlock in the West Indies in 1755, Hamilton
was abandoned by his father at age 9, orphaned by the death of his mother at age 13, and left penniless. He
and his older brother were assigned by the courts to live with a cousin who committed suicide less than a year
after he had taken in the boys. In spite of such a volatile childhood that limited his formal schooling, Hamilton
was a voracious reader who taught himself French and became skilled in mathematics and economics. As a 16year-old, he was employed as a clerk in the firm of Beckman and Cruger where he performed important
accounting and administrative duties. Hugh Knox, a Presbyterian minister, recognized Hamilton’s talents and
changed the young man’s life forever when he collected funds to send him to the mainland for an education.
Hamilton was not only talented but also very ambitious. He arrived in the British North American colonies in
1773 as revolutionary fervor was boiling and worked his way up in the Continental Army. General Washington
appointed Hamilton his chief aide-de-camp and promoted him to the rank of lieutenant colonel. He served
with the general at key battles including the near disaster at Valley Forge.
Hamilton’s military experiences with the financially starved Continental Army, along with his service as a
delegate from New York in the Confederation Congress, turned him into a staunch nationalist. He attended
the Annapolis convention in 1786 to discuss the problems of interstate commerce under the Articles of
Confederation, but when so few delegates showed up, Hamilton introduced a resolution for a meeting at
Philadelphia the following year.
At the Constitutional Convention of 1787, Hamilton’s proposal to model the new government after the British
system, with lifetime appointments for the president, Supreme Court, and Senate met with strong hostility.
His two fellow New York delegates were even opposed to the government supported by the majority of the
delegates. “But Hamilton was instrumental in convincing a hostile New York Convention to support the
1
Madaras, Larry and SoRelle, James. "Did Alexander Hamilton’s Policies Lay the Foundation for America’s Economic Growth in the
Early National Period?" Taking Sides: Clashing Views in United States History, Volume 1: The Colonial Period to Reconstruction. 15th
ed. Vol. 1. McGraw-Hill Higher Education, pp. 173-85. Print
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Constitution.” The Federalist Papers were published in book form and became the bible of interpreting the
Constitution.
The highpoint of Hamilton’s career was his appointment as President George Washington’s secretary of the
treasury, where his proposals for funding the new government, assuming the debts of the states, and
establishing a Bank of the United States created a political furor that is still being debated by historians today…
After his resignation from Washington’s cabinet in 1795, Hamilton’s advice was sought by Washington, and he
penned the president’s famous farewell address. Though out of office, he dominated the cabinet of his
opponent, President John Adams, but lost influence after his Federalist Party was thrown out of office. In the
election of 1800, he supported Jefferson over Burr when a tie resulted in the electoral-college vote. Later,
when Hamilton labeled Burr “a dangerous man who ought not to be trusted with the reins of government”
and cost his adversary the gubernatorial election in New York in 1804, Burr challenged Hamilton to a duel.
Hamilton accepted and was mortally wounded on July 11, 1804. He died a day later, bidding farewell to his
wife and children.
Was Hamilton an economic genius or was he overrated in terms of his influence of the future American
economy? In the first essay, historian John Steele Gordon states that Hamilton’s policies for funding and
assuming the debts of the confederation and state governments, and for establishing a privately controlled
Bank of the United States, laid the foundation for the rich and powerful national economy the nation enjoys
today.
Not all of Hamilton’s contemporaries agreed with his vision of America. His biggest challenge came in the
1790s from Thomas Jefferson, Washington’s Secretary of State whose political values and economic views
were diametrically opposed to the Secretary of the Treasury. Jefferson was a true Renaissance man who knew
a little about everything. “Not a sprig of grass shoots uninteresting to me,” he once wrote to his daughter. As a
philosopher who spoke to posterity, he waxed eloquent in his letters about civil liberties, the rights of man,
states’ rights, strict construction of the Constitution, and the virtues of the agrarian way of life. A practical
man, he was an architect of the nation’s capital, the University of Virginia, and his own home. Visitors to his
Monticello plantation are amazed by the elaborate pulley and drainage systems that he devised.
A respected member of the Virginia aristocracy who owned about 10,000 acres and from 100 to 200 slaves,
Jefferson ran his farm in a self-sufficient manner and carefully studied the efficiency of employing slave labor.
When he traveled, he recorded everything he observed in detailed journals. The newest inventions—steam
engines, thermometers, elevators—fascinated him.
Jefferson was also a keen political animal—author of the Declaration of Independence, Governor of Virginia
during the Revolutionary War, and Ambassador to France during the Confederation government. Unlike
Hamilton, Jefferson did not attend the Constitutional Convention of 1787 though he supported the new
Constitution provided a bill of rights was added. As Secretary of State, Thomas Jefferson and his Virginia
colleague James Madison opposed Hamilton’s economic program. The Funding Act of 1790 allowed present
holders of national securities to convert them into federal bonds at face value. The measure passed, but
Jefferson was upset that the original holders were revolutionary war soldiers who sold them off at a fraction
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of their value and received no compensation. Jefferson agreed to allow the national government to assume
the debts of the states when a deal was struck to locate the permanent capital of the United States at its
present site along the Potomac River adjacent to his home state of Virginia. Jefferson and Madison also
opposed funding a debt to back an issue of “bank notes” which could be lent to manufacturers and merchants
in lieu of cash. The debt would be funded by imports and excise taxes. These notes were to be issued by a
privately chartered Bank of the United States, an institution opposed by Jefferson because it favored the
northern states over the southern ones and the merchant and manufacturing classes over the farmers, and
because he found no authority for the Bank’s creation within the constitution of the United States.
Considering the vitriolic fights over Hamilton’s economic policies, Washington’s foreign policy of neutrality, as
well as the fiasco in the 1800 election that resulted in an Electoral College tie, Jefferson’s presidency was
remarkable for the smooth transition in which the opposition party took power. As Professor Richard
Hofstadter points out in The Idea of Party System: The Rise of Legitimate Opposition in the United States,
1780–1840 (University of California Press, 1969), Jefferson’s pragmatic “disposition dictated an initial strategy
of conciliation toward the Federalists which led to a basic acceptance of the Hamiltonian fiscal system,
including even the bank, to a patronage policy which Jefferson considered to be fair and compromising and
hoped would appease moderate Federalists, and to an early attempt to pursue neutrality and to eschew
aggravating signs of that Francophilia and Anglophobia with which the Federalists so obsessively and
hyperbolically charged him.” His first term was more successful than his second. He waged a winning war
against the Barbary pirates in the Mediterranean and took advantage of Napoleon’s offer to purchase the
Louisiana territory, thereby nearly doubling the size of the United States. His second term, however, was
consumed with a failed embargo against Great Britain and France who were at war with one another.
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The Hamiltonian Creation 2
The importance that the Washington administration, which took office on April 30, 1789, placed on dealing
with the financial situation confronting the government under the new Constitution can be judged by the
numbers. While the newly created State Department had five employees, the Treasury had forty.
The tasks before the Treasury were monumental. A tax system had to be created out of whole cloth and put in
place. The debt left over from the Revolution had to be rationalized and funded. The customs had to be
organized to collect the duties that would be the government’s main source of revenue for more than a
century. The public credit had to be established so that the federal government could borrow when necessary.
A monetary system had to be implemented.
The last already existed, at least in theory, established by Congress under the Articles of Confederation.
…Hamilton was the only one of the Founding Fathers not to be born in what is now the United States. He was
born in Nevis, one of Britain’s less important Leeward Island possessions. He was also the only one—besides
Benjamin Franklin, who had made a large fortune on his own and an even larger reputation—not to be born
to affluence. Indeed, he grew up in poverty after his feckless father—who had never married his mother—
deserted the family when Hamilton was only a boy.
Living in St. Croix, now part of the U.S. Virgin Islands but then a possession of Denmark, Hamilton went to
work at a trading house owned by the New York merchants Nicholas Cruger and David Beekman, when he was
eleven years old. Extraordinarily competent and ferociously ambitious, Hamilton was managing the place by
the time he was in his mid-teens, quite literally growing up in a counting house. Thus, of all the Founding
Fathers, only Franklin had so urban and commercial a background. Even John Adams, a lawyer by profession,
considered his family farm in Braintree (now Quincy), Massachusetts, to be home, not Boston.
Cruger, recognizing Hamilton’s talents, helped him come to New York in 1772 and to attend King’s College,
now Columbia University. After the Revolution he studied law and began practicing in New York City, where he
married Elizabeth Schuyler, from one of New York’s most prominent families.
After the Revolution he wrote a series of newspaper articles and pamphlets outlining his ideas of what was
needed to create an effective federal government. In 1784 he founded the Bank of New York, the first bank in
that city and the second in the country…
Hamilton, a deep student of economics, understood public finance thoroughly, a fact that he would make
dazzlingly clear in the next few years. But like so many of the Founding Fathers, he was also a deep student of
human nature and knew that there was no more powerful motivator in the human universe than self-interest.
He sought to establish a system that would both channel the individual pursuit of self-interest into developing
the American economy and protect that economy from the follies that untrammeled self-interest always leads
to.
2
From An Empire of Wealth: The Epic History of American Economic Power by John Steele Gordon (HarperCollins, 2004). Copyright
© 2004 by John Steele Gordon. Reprinted by permission of HarperCollins Publishers.
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[Creating Government Revenue]
Even before the Treasury Department was created on September 2, 1789, and Hamilton was confirmed by the
Senate as its first secretary on September 11, Congress had passed a tax bill to give the new government the
funds it needed to pay its bills. There was no argument that the main source of income was to be the tariff,
but there was lengthy debate over what imports should be taxed and at what rate. Pennsylvania had had a
high tariff under the old Articles to protect its nascent iron industry and wanted it maintained. The southern
states, importers of iron products such as nails and hinges, wanted a low tariff on iron goods or none at all.
New England rum distillers wanted a low tariff on its imports of molasses. Whiskey manufacturers in
Pennsylvania and elsewhere wanted a high tariff on molasses, to stifle their main competition.
Congress finally passed the Tariff and Tonnage Acts (the latter imposed a duty of 6 cents a ton on American
ships entering U.S. ports and 50 cents a ton on foreign vessels) in the summer of 1789. But, second only to
slavery, the tariff would be the most contentious issue in Congress for the next hundred years. Pierce Butler of
South Carolina even issued the first secession threat before the Tariff Act of 1789 made it through Congress.
[Debt is a Good Thing if Used Strategically]
With funding in place, Hamilton’s most pressing problem was to deal with the federal debt. The Constitution
commanded that the new federal government should assume the debts of the old one, but how that should
be done was a fiercely debated question. Much of the debt had fallen into the hands of speculators who had
bought it for as little as 10 percent of its face value.
On January 14, 1790, Hamilton submitted to Congress his first “Report on the Public Credit.” It called for
redeeming the old debt on generous terms and issuing new bonds to pay for it, backed by the revenue from
the tariff. The report became public knowledge in New York City, the temporary capital, immediately, but
news of it spread only slowly to other parts of the country, and New York speculators were able to snap up
large quantities of the old debt at prices far below what Hamilton proposed redeeming it for.
Many were outraged that speculators should profit while those who had taken the debt at far higher prices
during the Revolution should not see their money again. James Madison argued that only the original holders
should have their paper redeemed at the full price and the speculators get only what
they had paid for it. But this was hopelessly impractical. For one thing, determining who was the original
holder would have often been impossible.
Even more important, such a move would have greatly impaired the credit of the government in the future. If
the government could decide to whom along the chain of holders it owed past debts, people would be more
reluctant to take future debt, and the price in terms of the interest rate demanded, therefore, would be
higher. And Hamilton was anxious to establish a secure and well-funded national debt, modeled on that of
Great Britain and for precisely the purposes that Great Britain had used its debt.
Many of those in the new government, unversed in public finance, did not grasp the power of a national debt,
properly funded and serviced, to add to a nation’s prosperity. But Hamilton grasped it fully. One of the
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greatest problems facing the American economy at the start of the 1790s was the lack of liquid capital, capital
available for investment. Hamilton wanted to use the national debt to create a larger and more flexible money
supply. Banks holding government bonds could issue banknotes backed by them. And government bonds
could serve as collateral for bank loans, multiplying the available capital. He also knew they would attract still
more capital from Europe.
Hamilton’s program eventually passed Congress, although not without a great deal of rhetoric…
[Federal Government to Assume State Debts]
Hamilton also wanted the federal government to assume the debts that had been incurred by the various
states in fighting the Revolution. His main reason for doing so was to help cement the Union. Most of the state
debt was held by wealthy citizens of those states. If they had a large part of their assets in federal bonds,
instead of state bonds, they would be that much more interested in seeing that the Union as a whole
prospered.
Those states, mostly northern, that still had substantial debt were, of course, all for Hamilton’s proposal.
Those that had paid off their debts were just as naturally against it. Jefferson and Madison—Virginia had paid
off its debts—were adamantly opposed and had enough votes to defeat the measure.
Hamilton offered a deal. If enough votes were switched to pass his assumption bill, he would see that the new
capital was located in the South. To assure Pennsylvania’s cooperation, the capital would be moved from New
York to Philadelphia for ten years while the new one was built. Jefferson and Madison agreed. Hamilton’s
program passed and was signed into law by President Washington, who was delighted at the prospect of the
new capital being located on his beloved Potomac River.
The program was an immediate success, and the new bonds sold out within a few weeks. When it was clear
that the revenue stream from the tariff was more than adequate to service the new debt, the bonds became
sought after in Europe. In 1789 the United States had been a financial basket case, its obligations unsalable, its
ability to borrow nil. By 1794 it had the highest credit rating in Europe, and some of its bonds were selling at
10 percent over par.
Talleyrand, the future French foreign minister, then in the United States to escape the Terror, explained why.
The bonds, he said, were “safe and free from reverses. They have been funded in such a sound manner and
the prosperity of this country is growing so rapidly that there can be no doubt of their solvency.”
Talleyrand might have added that the willingness of the new federal government to take on the debt of the
old, rather than repudiate it for short-term fiscal reasons or political advantage, also helped powerfully to gain
the trust of investors. The ability of the federal government to borrow huge sums at affordable rates in times
of emergency—such as during the Civil War and the Great Depression—has been an immense national asset.
In large measure, we owe that ability to Alexander Hamilton’s policies that were put in place at the dawn of
the Republic. It is no small legacy.
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[Creating a Central Bank]
The other major part of Hamilton’s fiscal policy was the establishment of a central bank, to be called the Bank
of the United States and modeled on the Bank of England.
Hamilton expected a central bank to carry out three functions. First, it would act as a depository for
government funds and facilitate the transfer of them from one part of the country to another. This was a
major consideration in the primitive conditions of the young United States. Second, it would be a source of
loans to the federal government and to other banks. And third, it would regulate the money supply by
disciplining state-chartered banks.
The money supply was a critical problem at the time. Specie—gold and silver coins—was in very short supply.
In 1790 there were only three state-chartered banks empowered to issue paper money, including Hamilton’s
Bank of New York, but these notes had only local circulation. Hamilton reasoned that if the Bank of the United
States accepted these local notes at par, other banks would too, greatly increasing the area in which they
would circulate.
And if the BUS refused the notes of a particular bank, because of irregularities or excess money creation, other
banks would refuse them as well, helping to keep the state banks on the straight and narrow. Hamilton had
learned not to like the idea of the government itself issuing paper money, knowing that in times of need the
government would be unable to resist the temptation to solve its money problems by simply printing it [such
as during the American Revolution]…The bill passed Congress with little trouble, both houses splitting along
sectional lines.
[Conflict of Visions: Jefferson v. Hamilton]
…But he had not counted on Thomas Jefferson, by now secretary of state, and James Madison, who then sat in
the House of Representatives. Although Jefferson had personally enjoyed to the hilt the manifold pleasures of
Paris while he had served as minister to Louis XVI under the old Articles of Confederation, nonetheless he had
a deep political aversion to cities and to the commerce that thrives in them.
Nothing symbolized the vulgar, urban moneygrubbing he so despised as banks. “I have ever been the enemy
of banks . . .” he wrote to John Adams in old age. “My zeal against those institutions was so warm and open at
the establishment of the Bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who
were seeking to filch from the public their swindling, and barren gains.”
Jefferson, born one of the richest men in the American colonies—on his father’s death he inherited more than
five thousand acres of land and three hundred slaves—spent money all his life with a lordly disdain for
whether he actually had any to spend. He died, as a result, deeply in debt, bankrupt in all but name. And
regardless of his own aristocratic lifestyle, his vision of the future of America was a land of self-sufficient
yeoman farmers, a rural utopia that had never really existed and would be utterly at odds with the American
economy as it actually developed in the industrial age then just coming into being.
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Jefferson and his allies Madison and Edmund Randolph, the attorney general, fought Hamilton’s bank tooth
and nail. They wrote opinions for President Washington saying that the bank was unconstitutional. Their
arguments revolved around the so-called necessary and proper clause of the Constitution, giving Congress the
power to pass laws “necessary and proper for carrying into Execution the foregoing Powers.”
As the Constitution nowhere explicitly grants Congress the power to establish a bank, they argued, only if one
were absolutely necessary could Congress do so. This “strict construction” of the Constitution has been part of
the warp and woof of American politics ever since, although even Jefferson admitted that it appealed mostly
to those out of power. ..
Hamilton countered with a doctrine of “implied powers.” He argued that if the federal government were to
deal successfully with its enumerated duties, it must be supreme in deciding how to do so. “Little less than a
prohibitory clause,” he wrote to Washington, “can destroy the strong presumptions which result from the
general aspect of the government. Nothing but demonstration should exclude the idea that the power exists.”
Further, he asserted that Congress had the right to decide what means were necessary and proper…
The sale of stock was a resounding success, as investors expected that the bank would prove very profitable,
which it was. It also functioned exactly as Hamilton thought it would. The three state banks in existence in
1790 became twenty-nine by the turn of the century, and the United States enjoyed a more reliable money
supply than most nations in Europe. With the success of the Bank of the United States stock offering, the
nascent securities markets in New York and Philadelphia had their first bull markets, in bank stocks.
…Thomas Jefferson was a better politician than Hamilton, and a far better hater. The success of the Bank of
the United States and its obvious institutional utility for both the economy and the smooth running of the
government did not cause him to change his mind at all about banks. He loathed them all. The party forming
around Thomas Jefferson would seize the reins of power in the election of 1800 and would not lose them for
more than a generation. In that time, they would destroy Hamilton’s financial regulatory system and would
replace it with nothing…
Thomas Jefferson, one of the most brilliant men who has ever lived, was psychologically unable to incorporate
the need for a mechanism to regulate the emerging banking system or, indeed, banks at all, into his political
philosophy. His legion of admirers, most of them far less intelligent than he, followed his philosophy for
generations as the country and the world changed beyond recognition. As a direct result, economic disaster
would be visited on the United States roughly every twenty years for more than a century.
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