The Magazine

The Money Men

How immigrants invented an American economy.

Oct 14, 2013, Vol. 19, No. 06 • By KEVIN R. KOSAR
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The past few years have brought a steady stream of awful news about America’s finances. 

Albert Gallatin at the Treasury Department

Albert Gallatin at the Treasury Department

michael reynolds/epa/newscom

The federal deficit topped a trillion dollars in 2009—a first. The nation’s debt is approaching $17 trillion. Tax revenue is less than it was five years ago. Government spending has been rising rapidly. Annual national defense spending jumped from $350 billion to $670 billion in the past 10 years, while nondefense spending also has spiked. The future, we are told, is an endless ocean of red ink. “Mandatory spending,” the grim term the Congressional Budget Office employs to refer to Medicare and all the must-pay entitlements, is projected to rise from $2 trillion to $3.6 trillion by 2023.

The fiscal gore is not limited to the federal government. State governments are billions of dollars in hock to employee pension funds, and municipalities have declared bankruptcy. Detroit has reduced police station hours, abandoned parks, and shuttered schools. 

Terms such as “debt ceiling,” “fiscal cliff,” and “sequestration” are part of our lingua franca. All this bad financial news has brought bizarre ideas out of the woodwork. Eggheads have advocated the minting of trillion-dollar coins; paranoiacs have advocated abolishing the Federal Reserve. Virginia has even considered issuing its own currency. It is enough to drive one to despair—and beyond strong drink, about the only thing that has leavened my mood is the knowledge that things have been worse in American history. Much worse. 

As Thomas K. McCraw relates here, America lurched from one financial crisis to another between 1780 and 1840. At many times, it was entirely plausible that the young nation’s financial troubles might disintegrate it: 

The War of Independence not only impoverished the country, but also left it burdened with the highest public debt it has ever experienced, measured against the income of the government. Unpaid interest on the debt grew larger and larger by the year, during the deep depression that persisted throughout the 1780s.

The war debt amounted to the total budget of the federal government 20 times over. Foreign creditors and merchants frequently demanded that Americans pay them in specie: They did not trust the paper money issued by states, cities, and private firms. Gold and silver flowed out, and more and more paper currency was printed. Hyperinflation ensued. While America had won independence, it remained closely linked to the Mother Country by trade. The young government received the vast bulk of its revenues from tariffs, meaning that Great Britain could choke it of funds by interrupting trade. 

As told by McCraw, America’s efforts to get out of this financial mess, and ultimately get the nation on sturdy footing, were incalculably aided by immigrants. No, he is not speaking of the unnamed many who braved the Atlantic crossing to come to America to work the land and engage in commerce. McCraw eschews bottom-up social history in favor of old-fashioned Great Man history, and the heroes in this story are the earliest stewards of the government’s money, particularly Robert Morris, Alexander Hamilton, and Albert Gallatin.

McCraw notes that “during the first fifty years under the Constitution, only six of the sixty persons appointed to presidential cabinets had been born abroad. Five of those six became secretaries of the treasury.” That number would be six of seven were Morris counted. (He served as America’s superintendent of finance prior to the ratification of the Constitution.) The author attributes this demographic peculiarity to the limited talent pool among earlier arrivals to North America: “That so few native-born Americans in the late eighteenth century understood finance reflected both the agrarian nature of the society and a broad aversion to indebtedness.” 

Trained in law, history, and the classics, many of the Founders were forward-thinking in politics and retrograde in economic theory. They clung to a simple mercantilist zero-sum notion about wealth creation or dreamt of an America comprised of virtuous yeomen. Thomas Jefferson was particularly thick on this count. In his Notes on the State of Virginia, he declared, “Those who labour in the earth are the chosen people of God.” He likened the factory workers in cities to “sores” on the body politic. Being former colonists did not help; British administrators had staffed America’s major public finance positions, depriving locals of positions that would have trained them in finance.