By Anant Gupta
When America was founded on 4 July 1776, most of its states were saddled with heavy economic debt. The country had borrowed or promised a lot of money during the Revolutionary War. Chosen as the first treasury secretary of the United States, Alexander Hamilton was aware of the crippling effect debt would have on future economic expansion of America. In answer to the seemingly unsurmountable problem, Hamilton brought in bold and modern reforms – the most effective of which was the creation of a national bank for the United States, much on the lines of the national bank of Europe – the Bank of England.
Inheritance of loss
As the first treasury secretary, Hamilton inherited a country with $80 million in debt, largely due to excessive military spending during the Revolutionary War, and a pitiable $4 million in cash, barely enough to scrape through the operating expenses of the government for an entire year. Sensing impending financial doom, Hamilton broke away from the traditional mold and infused modern reforms to lead America as the world’s largest economy.
Innovation #1 – Imposing tariffs to raise federal revenue
Recently, Trump was in the news for raising tariffs on Chinese imports and inciting a trade war. Well, that wasn’t the first time USA played the protectionism card and imposed tariffs to reduce trade imbalance and boost sales of homemade products. Hamilton had the same view when in 1789, seeing an urgent need of around $3 million a year to meet the government’s operating expenses, he proposed raising tariffs on imports to reduce the trade deficit America had with other countries. The Tariffs Act of 1790, which levied 5% tariff on imported goods, was changed to 7-10%, depending on the good sold and rechristened as the Act Laying Duties on Imports.
Since USA at that time was a developing nation, other countries could not afford to ignore the rising demand of Americans for imported goods, just because they were being charged a commission for selling there. America was successful in implementing the Act through James Madison, who ironically became a vocal critic of Hamilton on one of his subsequent policies.
Innovation #2: – A national bank to fund government debt
Hamilton’s unrelenting desire to bring America on equal footing with Europe (then the wealthiest nation in the world) forced him to question the absence of a national bank to fund the government. Taking cue from the Bank of England, Hamilton proposed the creation of a national bank which would provide credit to the government to carry out its activities. Reeling under financial pressure after the Revolutionary War, the bank would also extend credit to traders and manufacturers wanting to sustain their businesses. On December 15, 1790, Hamilton submitted a report to Congress making the case. He proposed a Bank of the United States with a $10 million capital (then five times more than all other American banks combined) and the authority to issue paper money.
Hamilton was of the view that a national bank with a national currency would infuse uniformity in the monetary system. To support his solution, he even prepared a 40,000 word report, highlighting the feasibility of his solution.
Innovation #3 – Consolidation of state debt into national debt
Hamilton proposed clubbing all the state debts into national debt – to be paid directly by the national bank. He arranged for funds from investors, selling government bonds in return which promised a stake in the bank and an interest for the tenure of loan. It was no surprise when the bank went public, it was the most subscribed IPO (Initial Public Offering) of any organization in the country to date.
Stiff resistance and the big debate
Every big idea has its share of detractors. The national bank was no different, and it faced severe resistance from James Madison, Hamilton’s acquaintance from Purdue. Madison envisioned America as an agrarian society run by farmers and socialists. The idea of a national bank brought images of crony capitalism, commercialism and exploitation of farmers, especially down South, which was more rural compared to North America.
The most vocal critic of Hamilton was however Secretary-of-State Thomas Jefferson. He felt the United States Bank would hinder the development of state banks, and concentrate economic power into the hands of the mighty few. Already fully aware of Hamilton’s over ambitious personality, he was skeptical to support such a law. Apart from being morally incorrect, Jefferson considered the bank as being above the law and sought the Constitution to support his claim.
When his refusal to support the bank was sent to then US President George Washington, he asked Hamilton to submit a report on where the US constitution gave the parliament the legal right to create such an institute. Hamilton responded with a 15,000 word report and based his response on the Constitution’s Preamble, which gave the Congress the authority to pass laws which were “necessary and proper”.
Focusing his argument based on the above clause, Hamilton argued that to promote national prosperity, the institutionalization of the national bank was a necessary exercise, and was the power was granted to the Congress through these words. Though Jefferson’s response was based on the Congress overreaching its power and centralizing it in the hands of a single entity, Washington was more convinced with Hamilton’s argument, and officially signed the bill on Feb 25 to convert it into law.
Impact of Hamilton’s reforms
The impact of Hamilton’s reforms are far-reaching. The debt-security program, which involved selling government land and imposing tariffs, fetched the government $30 million, three times the capital infused in America’s national bank. America’s manufacturing capabilities soared, with states such as Pennsylvania emerging as the steel city of the country. With the advancement in technology and transport, America catapulted itself to the summit of economic advancement, becoming a superpower in the process and the world’s richest economy. All this was possible on the back of few critical, courageous decisions taken by Alexander Hamilton – the father of modern banking.
Anant Gupta is a Business Intelligence Analyst at KPMG.
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