As you celebrate Independence Day, be thankful for Alexander Hamilton. The economic strength of our nation is largely due to actions he took two centuries ago. While many know him only as the face on a $10 bill, he was the greatest founder of our nation who never became president.
A driven, energetic man, Hamilton made his reputation in the Revolutionary War as an artillery officer and aide to George Washington. He was only 32 when New York delegated him to the U.S. constitutional convention. He was highly influential in that debate, writing most of the essays in “The Federalist Papers.”
After ratification of the Constitution and George Washington’s election as president, Hamilton was the first secretary of the Treasury. He structured the government finance system we know.
His most important act was consolidating government debts incurred during the fight for independence and establishing the credit-worthiness of the new nation, which continues unbroken to the present.
Responsible government finance was the exception rather than the rule in the late 1700s. The “Anglo-Dutch” model of honoring government obligations that Hamilton emulated contrasted with the French model of frequent defaults on payments, political persecution of creditors and arbitrary changes in tax regimes. Most European countries of the day followed the French example, as do nations like Argentina in our own age.
Thus, most countries paid high rates of interest, and experienced near-perpetual fiscal crises. To pay off their high-interest debt, such deadbeat nations resorted to costly, inefficient tax systems. Indeed, France’s ongoing fiscal problems from the time of the U.S. constitutional convention were a root cause of the French Revolution.
Our financial situation was complicated. Individual colonies — Massachusetts, Virginia, Pennsylvania and others — had borrowed large amounts to fund their forces during the Revolutionary War. Some had paid down these debts by 1790, others had not.
Moreover, the Continental Congress — the closest thing we had to a national government during the Revolution itself — had borrowed large sums domestically and abroad, mostly from Dutch financiers and the French government.
Hamilton proposed the new government assume all such debt, consolidate it at lower interest rates and then service it scrupulously. It was an uphill fight. States that had already paid down their debts objected to paying for other states that had not. But Hamilton’s proposal succeeded.
Memories of the reputation for bad credit earned by the Continental Congress faded quickly. The new nation soon could borrow what it needed at low interest rates. It has been able to do so ever since.
Yes, low-income people on the frontier objected to taxes used to pay off the rich city folk who had speculated in promissory notes issued to finance the war. But all generations of Americans since 1790 have benefited from Hamilton’s prudent actions.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.