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. 

Capitalism’s “distinctive traits” include a market system, rule of law, the easy purchase and sale of property, labor mobility, stable currency, and credit. “And therein,” McCraw underscores, “lies a key difference between the way Robert Morris, Alexander Hamilton, and Albert Gallatin thought about the American economy and the way John Adams, Thomas Jefferson, and James Madison did. Credit, if managed well, holds the key to almost unlimited economic growth.”

Morris, Hamilton, and Gallatin came to America from England, the West Indies, and Switzerland, respectively, and made their fortunes here. As arrivistes who toiled in commerce, real estate, and manufacturing, they understood finance and avidly promoted the creation of good banks. Morris used his own money to start the Bank of North America in 1782. Two years later, Hamilton chartered the Bank of New York, of which Gallatin later became president. Banks create credit by lending funds in excess of their deposits; this increases the supply of money and fuels both consumption and investment. 

Morris, Hamilton, and Gallatin further recognized that credit was key to forging and strengthening the young nation. If a government is “to provide for the common defense,” as the Constitution instructs, then it needs the power to borrow money on good terms. The Revolutionary War had been made much tougher to fight because the government could not access funds to buy the weapons and material required. Indeed, borrowing money is part and parcel of daily government operations, be they road-building, harbor-dredging, or war-making.

Taxation provides a means to repay these debts—and repayment is critical, for a government’s access to credit depends on its trustworthiness. Morris, who spent inordinate amounts of time jawboning states to contribute their fair share to retire the Revolutionary War debts, wrote:

No treason has operated, or can operate, so great an injury to America, as must follow from a loss of reputation. The payment of debts may indeed be expensive, but it is infinitely more expensive to withhold payment. The former is an expense of money, when money may be commanded to defray it; but the latter involves the destruction of that source from which money can be derived when all other sources fail. That source, abundant, nay almost inexhaustible, is public credit.

The achievements of Morris, Hamilton, and Gallatin cannot be overstated. They erected America’s “basic capitalist framework” by establishing a steady national currency and loosed gushing wells of both private and public credit. These immigrants also fashioned a system of taxation and collection, tamed the nation’s debt, and fostered the development of a manufacturing economy. And these astonishing achievements came despite ardent political opposition: All three men were nastily denounced throughout their 23 years of collective Treasury service. Morris was called a crook; Hamilton was tarred as a royalist and a shill for bankers; poor Gallatin was accused of being a French foreign agent and endured Presidents Jefferson and Madison, both of whom hated banks and little understood macroeconomics.

So the lessons of The Founders and Finance are that America’s finances have been far worse than they are today, and that good policies can triumph over political stupidity. Pity that Thomas McCraw died late last year. One wonders if he believed America would ever see the equal of a Morris, Hamilton, or Gallatin again.

Kevin R. Kosar is the author, most recently, of Ronald Reagan and Education Policy.