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Declan Ganley and Brendan Simms
ALEXANDER Hamilton never got to lead his country, but he did get
to serve George Washington in a positon that was to become
absolutely pivotal to the survival of the United States of America – as its
frst secretary of the Treasury. He trained frst in the commerce of the
West Indies and later served as a remarkably heroic young ofcer of the
American Revoluton. Hamilton was a lawyer and leading author of The
Federalist Papers and did much to weld America’s politcal union, founded
on frm democratc practce, before his untmely and tragic death before
he had reached ffy.
On taking ofce in 1789, shortly afer the conclusion of America’s War of
Independence, Hamilton found himself facing the challenge of shaping
the economic framework upon which the nascent and very bankrupt
United States would either perish or prevail. Hamilton’s country had been
ravaged by war and saddled by debt. On top of that, he had to fnd a way
of paying of an army that, in many cases, was awaitng years of back-
pay. In additon to domestc concerns, there were major foreign lenders,
including some of the very largest and most powerful players in global
fnance at the tme – French and Dutch bankers. With redcoats on the
Canadian border stll holding western forts and the Royal Navy ruling the
Atlantc, Hamilton quickly understood that the union’s credit ratng would
play a large part in deciding whether or not America really had a future.
As secretary of the Treasury, and under Washington’s protecton, Hamilton
was given the scope to establish the economic structural basis of America.
That simply would not have been possible had Washington and the other
Founding Fathers not already put in place the inital mechanisms for
government by consent. Without Hamilton – or his patron, Washington
– the superstructure facilitatng the fantastc nineteenth-century burst of
American economic growth would simply not have been built.
Benjamin Franklin’s argument to the Britsh in the 1760s was that a unifed
America would be an economic powerhouse and that they would be foolish
in the extreme to risk losing it for the few seats the colonists wanted in the
Britsh Parliament. That hard-headed denial by the Britsh elite, to bow to
grantng their colonies government by consent of the governed, was to
have major consequences.
On dealing with the most pressing mater of government debt, Hamilton
was faced with the fact that the thirteen founding states of the United
States all had separate and disparate debts, built up during their tmes as
separate colonies during the course of the War of Independence. As the war
had been waged in some states more than others and as the contributons
of the states to the war efort and cost had varied greatly, even that porton
of debt that was directly atributable to a form of ‘joint enterprise and
expenditure’, was not evenly or proportonately disbursed across all of the
states. On top of the states’ debts, there was already a federal debt, which
had been used to fnance some of the cost of Washington’s triumphant
Contnental Army, as well as some other federal borrowings.
Hamilton knew that he possessed limited short-term fnancial resources
and that these many debts would have to be re-structured, while
enhancing America’s reputaton as a borrower. One dilemma was that
many securites had changed hands at signifcant discount, raising potental
moral dilemmas. Weighing his optons, Hamilton decided that security of
transfer, and its repercussions for private property, were paramount to
establishing credibility, thus assistng a favourable credit ratng.
He then made the bold decision to federalise all of the state debts in
distress, doing so to ensure the survival of the whole, rather than the
sacrifce of any member state. Interest on the (already incurred) federal
debt was then between 4 and 5 per cent and Hamilton understood that
for the sake of American credibility, this debt, all owed to foreign lenders
and primarily made to fnance America’s war efort, must be paid in full.
Nevertheless, the various interest rates on the debts of the thirteen
states were higher, at 6 per cent or more. Hamilton knew that his ability
to raise revenue was simply not sufcient to allow the servicing of the
combined states’ debts. He also knew that bondholders sitng on state
debts were exposed to a broad range of growing risks, of which they
were well aware.
The Federalist Choice for a Continent in Crisis
Hamilton also saw the opportunity to shif the loyalty of those creditors
by giving them a stake in preserving a federal government by having it
federalise the state debts and thus make those creditors commit risk onto
the new United Sates.
However, given the fact that combined state debts and interest were
just too high to sustain, Hamilton decided to deliver a federal ‘haircut’
on assumpton of the states’ debts. Hamilton took the path of ofering
‘voluntary’ haircuts in a variety of optons that largely boiled down to a
partal payment at 6 per cent interest, a partal ‘equity swap’ (in Hamilton’s
case, for Western land that at the tme was relatvely valueless but had
prospects), or payment at a lower interest rate, over a longer term but
sweetened by quarterly, rather than yearly payments and paid from taxes
specifcally earmarked for the purpose of paying those bonds.
The creditors did the pragmatc thing and accepted Hamilton’s ofers.
Hamilton drew those creditors into supportng his new country, while at
the same tme rescuing many of his thirteen member states. Through his
federalisaton and re-structuring of unsustainable state debts, Hamilton
helped cement the disparate states together to form their ‘more perfect
Hamilton’s hands-on experience with a potentally catastrophic sovereign
debt crisis caused him to leave some wise advice for posterity that growing
debt ‘is perhaps the natural disease of all governments. And it is not easy
to conceive anything more likely than this to lead to great and convulsive
revolutons of empire’. He also wisely advised that he ‘ardently wishes to
see it incorporated as a fundamental maxim in the system of public credit of
the United States that the creaton of debt should always be accompanied
with the means of extnguishment’.
As a means to fnance debt, Hamilton set up ‘sinking funds’, revenue that
was stored up to service debts and which he prudently and quietly used to
buy back large amounts of government debt at bargain prices (Hamilton
understood the Central Banker’s art of ‘creatve ambiguity’).
Bailouts were not Hamilton’s modus operandi. At King’s College (later
to become Columbia University) one of Hamilton’s friends and an early
companion in the Treasury Department was William Duer. But Duer had
quickly departed his assistant secretary role at the Treasury to engage
in private banking and speculaton, becoming a major New York ‘market
maker’ in the process. In 1791 and 1792, Hamilton was faced with America’s
frst banking and government securites crisis. Amid the fnancial fallout,
his powerful fnancial industry friend, Duer, had ended up in the positon
of needing a government bailout for his banking and fnancing interests or
he would ultmately face debtors’ prison.
Hamilton, though empathising with Duer, would not provide the bailout.
The end result was that Duer ended his days in a debtors’ prison, sometmes
visited by Hamilton but paying the ultmate price for Hamilton’s allowing
‘the freedom to fail’, which in the eighteenth century had steeper personal
consequences than in the world of today.
Hamilton’s most recent (and excellent) biographer, Ron Chernow, summed-
up the completon of Hamilton’s tme in ofce:
It is popular today for Europeans to look back at the early formaton of
the United States of America and to say that it was inevitable, unique
and took place in an already cohesive homogenous society. The facts
of the mater are more complex. The thirteen colonies that made up
the frst states were disparate in their compositon and had seen their
existence in relaton to tes with London, more greatly than they did
to each other. American cites were flled with immigrants from all of
Europe’s cultures, speaking a multtude of languages, with English and
German being the most dominant. Great cultural diferences existed
between the states, perhaps the most acute being in their attudes to
The early insttutonal success of America’s union was more due to the
willingness and courage of a principled minority of gifed leaders (formed
in a more meritocratc environment that, for its tme, was somewhat less
constrained by the sclerosis that ofen aficts old establishments) who
were motvated by a common bond of morals and a pioneering willingness
to make sacrifces and take risks for the greater good.
Declan Ganley is founder of Libertas.
Brendan Simms is Professor in the History of Internatonal Relatons at
Adapted from Declan Ganley and Brendan Simms, ‘A Europe for the People
by the People’, Sunday Business Post, 10 January 2012.
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