Alexander Hamilton: Architect of US Financial Structure and Debt Program, Lecture notes of Finance

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Hamilton’s Debt Program

Jes´us Fern´andez-Villaverde^1 February 4, 2022 (^1) University of Pennsylvania

An introduction to Alexander

Hamilton

Who was Alexander Hamilton?, I

• Alexander Hamilton (1755 or 1757-1804) was the architect of the U.S. financial structure.
• Born out of wedlock in the West Indies, lives his childhood in difficult economic conditions.
• Comes to New York to study after locals create a fund for his education.
• Key role in the Revolution as a key person in George Washington’s staff.
• He ends the war fighting in Yorktown, a bit reckless on the battlefield.
• Huge impact on the maintenance of the common law in the new republic.
• He was one of the main forces behind the Constitutional Convention (with Madison and Washington).
• He spearheaded the editorial project behind the Federalists Papers and wrote (estimated) 51 of the 85 essays (vs. 29 for Madison and 5 for Jay), including those related to the executive, judiciary, senate, military powers, and taxation.
• Key for ratification in Virginia and New York. (^3)

Hamilton’s view

• His view of a powerful, dynamic, and diversified U.S. economy was years ahead from the views of most of his contemporaries.
• In some sense, he was the only “modern” founding father (including in his scandals!).
• He articulated this view during the Revolution, while in his early twenties:
  1. Twelve-point program submitted to Congress in 1779-1780. https://founders.archives.gov/documents/Hamilton/01-02-02-0559-
  2. A letter to James Duane on September 3, 1780. https://founders.archives.gov/documents/Hamilton/01-02-02-
  3. A 31-pages letter to Robert Morris on April 30, 1781. https://founders.archives.gov/documents/Hamilton/01-02-02-
• Also, he was a staunch abolitionist and tried to end slavery in New York.

What drove Hamilton’s view?

• Hamilton envisions that the U.S. will need to live in a world of competing empires, where war is a constant feature that requires professional armies, not militias.
• Thus, the U.S. needs to build a powerful fiscal-military state and have a prosperous economy to ensure the survival of freedom and the republic.
• Economic and military strength go hand in hand.
• Foreign affairs are driven by interest, not altruism. Highly suspicious of the French Revolution.
• Ancestor of the modern “realist” school of international relations (recognized as such by Hans Morgenthau, 1904-1980).

Four reports

• Hamilton, as the first Secretary of the Treasury (September 11, 1789 - January 31, 1795) personally writes four key reports to implement his view: 1. The First Report on the Public Credit, presented to the U.S. Congress on January 9, 1790. https://founders.archives.gov/documents/Hamilton/01-06-02-0076-0002- 2. The Second Report on the Public Credit (aka the Report on a National Bank), presented to the U.S. Congress on December 14, 1790. https://founders.archives.gov/documents/Hamilton/01-07-02-0229- 3. Report on the Subject of A Mint, presented to the U.S. Congress on January 28, 1790. https://founders.archives.gov/documents/Hamilton/01-07-02-0334- 4. Report on the Subject of Manufactures, presented to the U.S. Congress on December 5, 1791. https://founders.archives.gov/documents/Hamilton/01-10-02-0001-

Debunking a few myths

• Jefferson resigned fairly early in Washington’s first term, Hamilton followed soon after.
• Hamilton does not ask Burr to help with The Federalist.
• The duel with Burr was in 1804, not right after the election.
• Hamilton admitted his affair with Maria Reynolds to James Monroe, Fredrick Muhlengerg, and Abraham Venenabe, but not to Madison, Jefferson, and Burr.

Some additional references

• The Cash Nexus by Niall Ferguson.
• Fiscal Discrimination in Three Wars by Hall and Sargent, Journal of Monetary Economics 2014 148-166.
• Alexander Hamilton, Conversion, and Debt Reduction by Swanson and Trout, Explorations in Economic History 1992, 417-429.
• Alexander Hamilton’s Market-Based Debt Reduction Plan by Garber in Carnegie Rochester Conference Series on Public Policy (1991) 79-104.

Why public debt?