01 Dec 2012

Rival Visions

Hamilton, Gallatin, and the Financing of America


After its war of liberation from England, America was bankrupt, disjointed, and devoid of experience in governance. "The new country could have broken apart because of its financial problems," HBS professor emeritus Thomas McCraw writes in his new book, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy (Harvard University Press).

To the rescue, McCraw recounts, came two unheralded immigrants, Alexander Hamilton and Albert Gallatin, later regarded by most experts as the two greatest US treasury secretaries of all time. Writes McCraw: "Hamilton exemplifies energetic government and vigorous federal programs for economic growth. Gallatin symbolizes low taxes and less intrusion by government." Not surprisingly, the two men (after whom two HBS buildings are named) were political enemies whose "competitive visions of the nation's future and of the best ways to fulfill it" still inform today's politics. Excerpts from the book follow.

After the death of his mother when he was a young child, and with no father in his life, Alexander Hamilton (1757–1804), who would become America's first treasury secretary, supported himself by clerking at an import-export firm in his native St. Croix. Sent to America for college in 1772 by local leaders who saw his potential, he soon joined the revolutionary army and was tapped for service on General George Washington's staff.

Among Washington's aides, it was always Hamilton who received (or sought out) the hardest assignments. He drafted plans to institute new military regulations, to reform the inspector general's office, and—most remarkably—to reorganize the entire army…. Despite his emotional insecurities, he had total confidence in his own abilities and seemed able to do anything. In an age unfamiliar with complex management, he proved a superlative administrator, with a sure sense of managerial hierarchies….

Most of all, Hamilton wrote—hundreds, ultimately thousands of pages: orders, letters, reorganization plans, essays on strategy, ideas for financing the war, the occasional political tract. Seated at his camp desk day after day, the weeks turning into years, he recorded in his smooth, plain script a huge body of work. His surviving papers, almost by themselves, constitute a military history of the Revolutionary War. During his first four years of service, he never took a furlough. The army had become his household, Washington's "family" his own. He had no other home.

The one missing ingredient remained the very thing that had led him to join the army in the first place: glory in battle. He wanted more than a desk job, even if that desk stood at the epicenter of the Revolution. Thus continued the protracted struggle with his chief, who dreaded losing his unmatched talents.…To understand how strongly Hamilton felt about this is to grasp the essence of his character. He had a passionate drive to achieve what in his time was called "Fame" and what today we would call immortality...

After Hamilton left Washington's headquarters, his moment of true glory came in the fall of 1781, during the decisive Battle of Yorktown in Virginia. There he was put in command of three light infantry battalions— but only after still another tiff with Washington, who wanted to place a French officer in charge because it was a joint operation. Hamilton's orders were to seize a fortified British position, a redoubt that blocked a full advance by the Continental Army. It was the kind of opportunity he had been dreaming of for years.

Washington decided on a daring nighttime assault on the redoubt, so as to gain the advantage of surprise over the British. In another bold stroke, he instructed Hamilton to have his men unload their pistols and muskets and attack only with swords and bayonets. Hamilton's troops silently crept up on the British, then surged into the trenches and began screaming like madmen.

After ten or fifteen minutes of vicious hand-to-hand fighting, the Americans overwhelmed the startled enemy soldiers and captured the redoubt. Hamilton, sword in hand and the first person to leap into the fray, could not have written a better script or carried it off with more élan. It was the perfect culmination of his time in the army, and it made him a legitimate national hero....

Hamilton remained in office until early 1795, implementing the legislation he had sponsored from 1790 to 1793—and in most cases had written himself. He oversaw the conversion of an economy that had long been in depression to one of booming prosperity, and he knew that he himself had been the major contributor to the change. As the historian Richard Sylla has pointed out, when Hamilton became secretary of the treasury in 1789, the United States had no plan for funding its huge debts. It had no stable currency, no sound credit system, no central bank, no reliable securities markets, and almost no corporations. By 1795, Hamilton's policies had corrected all of these deficiencies. The United States enjoyed the highest credit rating in European financial markets of any country in the world. Hamilton endured enormous personal abuse during these years, but he also had the satisfaction of seeing most of "my commercial system" put into place.… What Hamilton's policies had achieved, in combination with events, was the promotion of long-term business confidence, setting the stage for the release of immense economic energy. His programs had helped to shape the distinctive American balance between political stability on the one hand and capacity for economic growth on the other. They had made it plausible for entrepreneurs to think big thoughts and entertain risky new ventures. They had made it easier for energetic individuals, whatever their social or national origins, to rise in American society, just as Hamilton himself, a poor boy from abroad, had done....He had filled many roles: as a teenaged pamphleteer justifying strong action against Britain; as a captain of artillery and as Washington's aide-de-camp during the War of Independence; as a moving spirit behind the Constitutional Convention of 1787; and as the principal author of The Federalist Papers, whose purpose was to get the Constitution ratified.

Once he became secretary of the treasury, he had devised a comprehensive and audacious economic program for the new nation and had persuaded Congress to enact it.…Theodore Roosevelt judged that Hamilton was "the most brilliant American statesman who ever lived, possessing the loftiest and keenest intellect of his time."

During the first 28 years under the Constitution, four treasury secretaries were foreign-born. Among them was the longest-serving secretary of the treasury in US history, Albert Gallatin (1761–1849), who, like Hamilton and in contrast to other founders, was "personally rootless," McCraw writes. Gallatin, who also served in the Senate and the House of Representatives, saw "capital as rootless too…and how its mobility could serve the public good." Gallatin successfully arranged financing for the Louisiana Purchase and for the War of 1812, despite President Thomas Jefferson's push to reduce spending and eliminate the country's debt.

Albert Gallatin, an immigrant from Geneva, filled the same role for presidents Thomas Jefferson and James Madison that Alexander Hamilton, an immigrant from St. Croix, had filled for George Washington. As secretary of the treasury from 1801 to 1813, Gallatin dominated public financial affairs. But he went far beyond that field and into foreign policy, military strategy, and the development of the American West.

As a member of the House from 1795 to 1801, he was the first powerful congressman who lived on the western side of the Appalachian Mountains. When Jefferson made him secretary, Gallatin also became the first cabinet member from the West among the twenty appointed up to that time in any department. He did more than any other federal official to oversee settlement and economic growth in the West, and to turn America's public lands into a force for the public good. This was his signature contribution, as financial modernization had been Hamilton's....

With two classmates from the academy, Gallatin had resolved to leave Geneva and cross the Atlantic, where vast tracts of land in the United States awaited development…. In deciding to come to America, Gallatin and his two young friends were acting on a psychological impulse rooted in a romantic dream.... They were three young men in a state of rebellion moving to a place that was itself rebelling. They seemed to believe that Rousseau's notions about the moral virtues of nature might be realized in the United States—a new country where they could become rich landowners, doing well by doing good. That they had no experience as farmers and might well fail does not seem to have occurred to them. Their dreams of becoming landlords were misdirected illusions of ways to become rich.

It would take Gallatin well over a decade to realize that his gifts lay not in dealing with land and agriculture, but rather in managing money and other financial instruments—liquid capital, not illiquid land. His talents resembled those of Hamilton more than those of Jefferson and Madison, and that is what later made him so useful, so nearly indispensable, to the Virginians and the Republican Party. There had been banks in Geneva for more than a century before Gallatin emigrated, and he took their existence for granted in a way Jefferson and Madison did not…. Hamilton and Gallatin had helped to lay the intellectual and policy framework for the rise of the United States as a powerful engine of economic innovation. In the administrations they served, they differed from their native-born, planter-led colleagues. The two of them together had deep personal experience of rootlessness—experience with the Atlantic world and the Caribbean, experience with the national and international mobility of money. It was this kind of background, together with their own brilliance, that enabled them to envision and then to execute the responsible deployment of rootless capital in the forging of a new economy.

Mr. Hamilton's Growth Strategy (Op-Ed, New York Times, November 11, 2012)


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