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THE FOUNDERS AND FINANCE*

How Hamilton, Gallatin, and Other Immigrants Forged a New Economy

(Book Excerpt)

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By Thomas K. McCraw

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The Montréal Review, October 2012

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"The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy" by Thomas K. McCraw (The Belknap Press of Harvard University Press, 2012)

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"Only two men are honored with statues outside the U.S. Treasury building: Alexander Hamilton and Albert Gallatin. McCraw explores their qualities, foibles, achievements, and failures in order to show why both deserve credit for laying the foundations of American governmental finance. McCraw is a talented storyteller. His highly readable and fascinating work portrays the brilliance of Hamilton and Gallatin against the difficulty of their time and is strongly recommended to all readers interested in American and financial history. "

-Lawrence Maxted, Library Journal (starred review)

"Consistently interesting and beautifully written, McCraw's narratives of the careers of Hamilton and Gallatin are simply splendid. We are in the hands of a master storyteller, as well as a master analyst of historical materials. "

-Robin Einhorn, University of California, Berkeley

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The United States government started out on a shoestring and almost immediately went bankrupt. To fight its war of Independence from Britain, it borrowed from banks in Holland and wheedled large sums from France, Britain’s great rival. The Continental Congress continually asked the new state governments for funds but never received more than a fraction of what it needed. Desperate for cash, Congress made extravagant use of the printing presses, churning out stacks of paper money. The quick depreciation of this currency gave rise to the phrase “not worth a Continental.”

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 its government. Unpaid interest on the debt grew larger year by year, during the deep depression that persisted throughout the 1780s. There seemed to be no way out—the more so because “these United Colonies,” as the Declaration of Independence called them, were now “Free and Independent States.” From Massachusetts, New York, and Pennsylvania in the North to Virginia, the Carolinas, and Georgia in the South, the thirteen states differed in many of their basic economic interests and some of their core ideas. Not until the late 1860s, after the Civil War, did people speak of the nation in the singular: “the United States is” rather than “the United States are.”

During the first forty years after 1776, the new country could have broken apart because of its financial problems, which were related to sectional disputes and even more to foreign affairs. It happened to be blessed, however, with a handful of people who understood finance and also grasped the economic potential of the American national future. A disproportionate number of them were recent arrivals from almost a dozen different places overseas. This book shows how they put the United States on a sound institutional footing to manage its finances, and how some of their ideas grew out of their experience as immigrants. It highlights what they did more than what they wrote and said.

The achievements of one of them, Alexander Hamilton—who came from St. Croix in the Danish West Indies—are well known. But a great deal of fresh research on Hamilton and a more thorough look at how he went about his work underscore the influence of his overseas origins. In addition, a closer analysis of the parts other immigrants played in the financial affairs of the early Republic reveals a much larger role than they have usually been accorded. It also illuminates the strengths and weaknesses of the major founders who had been born in North America—and why they depended on financial policies designed by recent arrivals.

Did other aspects of governing rely on immigrants to the same extent that finance did? No. 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.

When George Washington was inaugurated as president in 1789, one of the first tasks he faced under the new Constitution was to establish a national executive administration. Because of the immense debt left over from the War of Independence, financial affairs would be among the most critical concerns. The candidates Washington considered for secretary of the treasury were Robert Morris, who had come from the English port of Liverpool, and Alexander Hamilton, who had emigrated from the Caribbean.

Twelve years later, when Thomas Jefferson took office in 1801 as the first Republican president (no relation to the present-day party of that name), he, too, appointed a foreign-born secretary: Albert Gallatin, who had come from Geneva; and he reappointed him in 1805. Jefferson’s successor, James Madison, also appointed Gallatin—in 1809 and again in 1813. Later, when Gallatin left office to negotiate the end of the war with Britain that had begun in 1812, Madison appointed, in sequence, two more immigrants: George W. Campbell (from Scotland) and Alexander James Dallas (from Jamaica).

Thus, four of the first six secretaries of the treasury were born overseas. They served for twenty-one of the first twenty-seven years under the Constitution—78 percent of that period. Was this a remarkable circumstance? Compared to later patterns of appointment, exceedingly so. Of the next sixty-seven secretaries, serving into the twenty-first century, only two were born abroad, and their combined service lasted less than two years out of almost two hundred.

Why would immigrants occupy such a sensitive office 78 percent of the time from 1789 through 1816, versus 1 percent of the time since? Did the foreign-born constitute a greater proportion of the U.S. population during the early years? No. The rate of immigration had been sluggish before the Revolutionary War, and a very high percentage of the population was native-born. The U.S. Census did not begin to record foreign births until 1850. But other data suggest that in 1775 the number of persons born abroad, including those from Africa, was no more than about 8 percent of the population, and likely less. Immigration then dropped during the fighting of 1775–1783, and during most years of the Napoleonic Wars and the War of 1812. In 1816 the proportion of foreign-born was probably no more than about 4 percent, among the lowest in U.S. history.

When the Revolutionary War began in 1775, many of the colonies had experienced at least 125 years of settlement. Almost all of the major founders came from families long resident in North America. John Adams’s first American ancestor arrived in 1620 aboard the Mayflower; Benjamin Franklin’s, in 1635; James Madison’s, in 1653; George Washington’s, in 1659; and Thomas Jefferson’s, in 1672. By contrast, Alexander Hamilton came in 1772 and Albert Gallatin in 1780.

Much of this book is about Hamilton and Gallatin, whom most experts regard as the two greatest secretaries of the treasury. But they were only two of about ten newcomers who shaped the early financial contours of the country. The names of some other members of this group may be recognizable, if only vaguely: Robert Morris, Haym Solomon, John Jacob Astor, Stephen Girard. But even Gallatin, who served as secretary longer than anyone else ever has, is unfamiliar to most people.

Did it make a difference that the most important architects of the American economy were immigrants? This is like asking whether it made a difference that four of the first five presidents, who served for thirty-two of the first thirty-six years under the Constitution, were slaveholding Virginia planters. Certainly they were iconic figures: George Washington, Thomas Jefferson, James Madison, and James Monroe. Yet they, like most people everywhere, tended to look at the world through the lens of their native milieu—in their case, the landed class of colonial Virginia. As adults, each these four presidents came to own very large plantations. Their holdings in Virginia totaled about 23,000 acres—the equivalent of almost thirty-six square miles.

As Emerson wrote in 1860, “If a man owns land, the land owns him.” The extent to which land (as opposed to liquid capital) dominated Virginia’s culture is reflected in the number of banks chartered during the nation’s first decades. In 1781, when Virginia was the largest and most populous state, not a single bank existed anywhere in the country. By 1837, there were 627. Of these, Massachusetts had 123 banks, New York 98, Pennsylvania 49, but Virginia only 6. Each bank increased the money supply in the state where it was chartered—promoting commerce, manufacturing, and faster economic growth.

Robert Morris played the major role in securing a charter for the nation’s first bank, which opened in Philadelphia in 1782. Alexander Hamilton drafted the charter for its second, founded in New York in 1784. They and other financial innovators from overseas took a more commercial and cosmopolitan perspective than the landowners in Virginia and most other states, especially in the South. The stories told here suggest that their being immigrants broadened their insights and shaped their behavior. They did not fit the image of immigrants popularized in the famous poem written by Emma Lazarus in 1883 and etched on the Statue of Liberty. They were not tired, or wretched refuse, or members of huddled masses. Nearly all of them came alone and full of vigor. The economic foundations they laid were a vital part of the promise that drew the millions of immigrants who followed them.

Even in the eighteenth century, abundant land attracted more newcomers than any other endowment of North America. But it did not attract most of the protagonists of this book. Rather, these agents of financial change arrived with a mentality about cash and credit different from that of most people born in the thirteen colonies, and from that of other immigrants as well. The innovators analyzed here were nonfarming, urban people comfortable with the tools of public finance—with money, taxation, government spending, and other means of making the United States first solvent and then prosperous. As the nation’s chief financial officers, they moved money across oceans and across national, state, county, and city borders. Dealing both domestically and with European bankers and governments, they thrust their country into a new economic relationship with the Atlantic world.

In this sense, their wanderlust and readiness for bold action never died. Compared to other founders such as the four Virginia presidents, they remained personally rootless. They saw capital as rootless, too—movable, portable, migratory in the same sense that they themselves were. Theirs was an agrarian age, and most people throughout the world were farmers tied to the land—as slaves, serfs, renters, or owners. But the immigrants in this book were not. They had no plantations to inherit or other businesses built up by their parents and grandparents. Their ties to any state or community ran less deep than those of native-born settlers. They had no North American genealogy, no ancestral farms or manors. But neither did they intend to return to the homelands they had left.

Being rootless themselves, they were better able to appreciate the intrinsic rootlessness of money—and how its mobility could serve the public good. As a character in one of William Faulkner’s novels expresses it, “We were foreigners, strangers, that thought differently from the people whose country we had come into without being asked or wanted.” Yet this same character of Faulkner’s recognizes an obligation not to demean local customs but instead “to respect anybody’s love for the land where he and his people were born and to understand that a man would have to act as the land where he was born had trained him to act.” The immigrant financiers were engaged in a constant task of reconciling what they knew about money and credit with what the executives who appointed them believed.

Morris, Hamilton, and Gallatin had experiences and habits of thought different from those of the native-born planters Washington, Jefferson, and Madison. Even as teenagers, Morris and Hamilton had worked long hours in merchant houses. Gallatin had been the best student in his mathematics classes at elite academies in Geneva. All three had grown up in cities rather than on farms or plantations. They dealt more with movable capital than with immovable land, and they trusted their
own ability to manage both public and private finance. For the first two generations of U.S. history, these three immigrants and others like them influenced national financial policies more powerfully than did citizens born in the thirteen colonies. And over the next two hundred years, their ideas formed much of the framework for American economic development.

Today, the U.S. Treasury Building in Washington, D.C., stands right next to the White House. Its five acres of space occupy three city blocks. On the opposite sides of its 466-foot length are two pillared façades, each overlooking a spacious plaza. A large bronze statue of Alexander Hamilton dominates one plaza. On the other side is a similar statue of Albert Gallatin. There are no other statues. Nor do monuments to only foreign-born statesmen adorn the British, French, German, Brazilian, Chinese, Indian, or Japanese equivalents of the U.S. Treasury. That idea seems ludicrous on its face.

Hamilton and Gallatin were political enemies with partly competitive visions of the nation’s future and of the best ways to fulfill it. During the two centuries since they left office, many of their differing ideas have survived, vying for dominance. Hamilton exemplifies energetic government and vigorous federal programs for economic growth. Gallatin symbolizes low taxes and less intrusion by government. Their views still underlie debates over the proper roles of the public and private sectors, the appropriate level of taxation, and the character of the national debt.

Of course, the United States has changed drastically since their time—having fought a Civil War, ended slavery, spread the Republic across the North American continent and beyond, multiplied its population more than a hundred times over, and become the world’s largest economy. But the contest over their ideas has endured. The frequent compromises and recurrent fusions of Hamilton’s and Gallatin’s ideas have sometimes produced bizarre and even harmful results. In the long run, however, they have yielded outcomes of immeasurable benefit to the country. This book shows how those ideas evolved and were first put into practice.

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Thomas K. McCraw is Straus Professor of Business History Emeritus at Harvard Business School and winner of the Pulitzer Prize for History.

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* Reprinted by permission of the publisher from "The founders and finance: how Hamilton, Gallatin, and other immigrants forged a new economy" by Thomas K. McCraw, pp. 1-8, Cambridge, Mass.: Harvard University Press, Copyright © 2012 by the President and Fellows of Harvard College.

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MORE FROM THOMAS McCRAW:

THE CURRENT CRISIS AND THE ESSENCE OF CAPITALISM

The worldwide economic downturn is no short-term blip but a full-fledged crisis of capitalism. Amid the din of commentary and political posturing, it is appropriate to return to first principles for a better understanding of the crisis. What are these principles? The answer requires a foray into history...

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