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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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.