Hamilton's Blessing, His Long-delayed Central Bank Victory

And the taxing-and-spending battle that the nation’s first Treasury Secretary is losing, so far.

Economic Principals was founded as a newspaper column, in 1983, on the premise that most of the important action in economic policy took place in universities – not just departments of economics and history, but in other social sciences departments as well, and in schools of law, business, and government.

Quacks thrived in the days immediately after Ronald Reagan’s 1980 presidential victory, though his administration before long began to exhibit great good sense, as if to illustrate EP’s contention. And while nothing EP has learned since has changed his mind, the column’s predicate has occasionally caused him to overlook some exceptional journalists along the way.,

One such is John Steele Gordon, author of Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt (Walker, 1997) A revised edition appeared in 2010. The book is of special interest in current circumstances – the crisis over an attempt to impose a limit on the government’s borrowing capacity in exchange for promises of future cuts in spending on social welfare programs. 

Alexander Hamilton has become a celebrity since then, thanks to Lin-Manuel Miranda and  another exceptional journalist, Ron Chernow, on whose biography of  Miranda’s smash-hit musical was based, and for good reason. The Caribbean-born Hamilton was the only Founding Father except Benjamin Franklin not endowed by birth with privilege (“the bastard brat of a Scotch peddler,” John Adams called him).  Moreover, having grown up abroad, he possessed no fundamental loyalty to any one of the thirteen colonies; he was, instead, a nationalist. Above all, Hamilton was a prodigy.

After serving as George Washington’s aide-de-camp during the War of Independence, he helped lead the battle to dismantle the Articles of Confederation. Once the new Constitution was adopted, Washington named him Treasury Secretary, and, in short order, Hamilton assembled much of the fiscal and monetary machinery of the new Republic.  His program had three main struts.

He nationalized the obligations of the thirteen states, incurred during the seven years of war. “A national debt” he wrote to a friend, “if it is not excessive, will be to us a national blessing.”  He established taxes to reliably pay those debts: at first, tariffs on imported goods; when those revenues were insufficient, sales taxes on consumption goods, including whiskey. Finally, he successfully lobbied for the creation of a Bank of the United States, modeled on the Bank of England, owned by private banks in partnership with the Federal government, to  issue currency and  to assure its reliability; and to oversee the banking industry in general.

In 1804, Hamilton was killed by Aaron Burr in a duel. A dozen years later, the charter of First Bank of the United States was allowed to expire. The Second Bank of the United States replaced it, but its charter, too, was allowed to lapse, in 1836, after a battle with President Andrew Jackson.

The National Banking Act of 1863 established the Office of the Comptroller of the Currency and preserved the North’s ability to borrow against “the full faith and credit of the United States, during the Civil War (as described in Ways and Means: Lincoln and his Cabinet and the Financing of the Civil War (Penguin, 2022), by Roger Lowenstein, another exceptional journalist.)

Only after the Panic of 1907, in which the American banking system required rescue by a syndicate organize by J.P. Morgan, was Hamilton’s original proposal smuggled back into law, in the form of the Federal Reserve System. Had the twentieth century version been properly named, as Hamilton intended, the Fed’s partnership with the Treasury Department might be better understood today.

The Treasury borrows money from willing lenders all over the world – that is, it accepts deposit and issues bonds and bills in return, on behalf of the United States Government.  The Fed is among its customers, buying or selling those government securities, , raising and lowering interest rates (“conducting monetary policy”) through open market operations as need be. Exchanges rates fluctuate accordingly, based on those policy measures, keeping the US dollar the preferred currency of global markets, at least for now.

By threatening the Treasury Department’s ability to borrow – to accept on deposit in the American system of banking, cash from well-to-d individuals and institution, wiling to accept very low interest rates in return for taking the least possible riskof default  – Congress is tampering with the trustworthiness of the system itself.  The root of the domestic argument has to do with the purposes for which the government borrows and spends the money – to defend the nation and make war, to finance its system of social welfare, or simply to keep the bank of the Fed running smoothly.  The journalist Gordon writes:

In the 1860s we used the national debt to save the Union. In the 1930s we used it to save the American economy. In the 1940s we used it to save the world.  So surely Hamilton was right, and the American national debt has been an immense national, indeed global, blessing.  But is it still? Or is it now a crippling curse?

In short, it is the second strut of Hamilton’s program that is contested – the Treasury Department and its system of taxation. Income and expenditures are out of line and the imbalances have been growing for decades.  Republicans generally favor cutting benefits – the Social Security and health care systems.  Democrats generally favor raising taxes.

While you are waiting this summer for these issues to be addressed in next year’s elections, Hamilton’s Blessing is a beguiling introduction to the fundamental problem. 

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   Speaking of which, a recent biography of Treasury Secretary Janet Yellen, Yellen: The Trailblazing Economist Who Navigated an Era of Upheaval (Harper, 2022), by Jon Hilsenrath, yet another exceptional journalist, has received less attention than it deserves.

   Hilsenrath notes that Fed chair Ben Bernanke relied on an inner circle of advisers during the financial crisis of 2007-08, all in Washington or New York.   As President of the Federal Reserve Bank of San Francisco, Yellen was not among them. 

   As Treasury Secretary, Yellen is at the center of the drama of the debt ceiling negotiation, perhaps more central to the matter, as his principal advisor, than President Biden himself. The story of the formation of the character of this remarkable woman will make interesting reading long after she has left office.