Alexander Hamilton, Banking Mercantilist

Alexander Hamilton, antebellum banking, First Bank of the United States, mercantilism, ten dollar bill
Classic cover image of Thomas Hobbes "Leviathan," scanned from 2012 Penguin Classic Edition.

LeviathanIn this past summer’s controversy over whether Alexander Hamilton’s image should be replaced on the $10 bill, outraged commentators made many extravagant claims on behalf of Hamilton’s wisdom in matters of money and banking policy.  For example, Ben Bernanke blogged that “Hamilton was without doubt the best and most foresighted economic policymaker in U.S. history,” citing among other evidence that “over the objections of Thomas Jefferson and James Madison, Hamilton also oversaw the chartering in 1791 of the First Bank of the United States, which was to serve as a central bank and would be a precursor of the Federal Reserve System.”

Now that the controversy has cooled we can take a more informed perspective.  There is no denying Hamilton’s importance and influence, or that his life story is compelling, as evidenced by the sold-out hip-hop musical Hamilton currently running on Broadway.  But the wisdom of his policy advice, and the merits of the First Bank of the United States (BUS), are another matter.

To describe Hamilton’s Bank accurately, one should note that Congress owned one fifth of its shares, and chartered it exclusively, that is, made it the only bank allowed by law to branch nationwide.  (State governments chartered banks, but each state denied entry to banks with charters from other states.)  The BUS monopoly franchise was among the chief of the objections of Jefferson and Madison, and deservedly so.  One nationwide bank is better than none, but many is better than one. Creating a legal monopoly where open competition could and should prevail is hardly a mark of good or foresighted economic policy.

Many modern-day historians miss this point, and laud Hamilton as a man of unerring financial genius.  Robert E. Wright and David J. Cowen, in their 2006 book Financial Founding Fathers: The Men Who Made America Rich, write of Hamilton’s “creative genius, as he became the architect and chief advocate of a powerful national bank.”  They claim that “Hamilton's thought was often far in advance of that of most of his contemporaries,” as when he was early to advocate a national bank.  They quote Hamilton’s 1781 statement that “in a National Bank alone we can find the ingredients to constitute a wholesome, solid and beneficial paper credit,” and add: “He was correct.”  They call Hamilton’s 1790 Report on the Bank “a masterpiece that cogently explained the importance of banks in a capitalist economy.”  They credit Hamilton with the following argument, as though it made good sense:  “Next, he stressed that all the great powers of Europe possessed public banks and were indebted to them for successful trade and commerce.  The implications of the comparison were clear: if young America wanted to join the ranks of the elite powers, it too would have to create a banking infrastructure.”  In much the same way, Hamilton would elsewhere argue that if the leading European nations have protective tariffs, we should have them too.  The error should be plain.

Hamilton modeled the Bank of the United States after the Bank of England.  But in truth, the monopoly privileges of the BOE and other national banks of Europe were badges of mercantilism, and drags on financial and economic activity by comparison with free competition in banking services.  A more wholesome, solid, and beneficial credit system could be observed in Scotland at the time, with free entry into nationwide branch banking.  Hamilton’s “masterpiece” was oblivious to the benefits of competition in banking, much less the separation of banking and state.  In his banking policy views, as in his tariff policy views, Hamilton was a retrograde mercantilist.

Wright and Cowen note that in drafting his plan for the Bank, “Hamilton also drew on Adam Smith's seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, where financial matters, including the advantages of banks and bank money, were amply and ably discussed.  Hamilton must have brimmed with excitement as he read Smith declare that ‘the trade of Scotland has more than quadrupled since the first erection of the two publick banks at Edinburgh.’”  They should also have noted that in his able discussion Smith — the penetrating Scottish critic of mercantilism — did not defend monopoly privileges in banking, but argued for free competition (see below).  The “publick” banks of Edinburgh were chartered non-exclusively (note that Smith refers to the two earliest; later there would be a third plus dozens of non-chartered joint-stock banks that were similarly sized and equally branched nationwide), and were completely privately owned.  Nor were they great engines of the state, as the Bank of England was according to Smith.  Unlike the BOE or the BUS, which were created in large part to lend the national government money, the Bank of Scotland was actually prohibited by its 1695 charter from lending to the government.

The policy conclusion of Smith’s chapter on banking (Book II, chapter II of the Wealth of Nations) bears quoting here:

The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public.  …  By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public.  This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away.  In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.

In light of Smith’s clarity and correctness here, it is actually a telling criticism of Hamilton to note that he read Smith on banking, because it means that he ought to have known better when he promoted monopoly privileges.  Although Hamilton’s Report on the Bank alludes to Smith’s understanding of how banking promotes the wealth of a nation, Hamilton either didn’t understand Smith’s policy message — the more banks competing the better — or rejected it as not helpful to his own mission of empowering the federal government, for which his chosen means was to forge an alliance between the government and a new privileged financial elite.[1]  Smith’s policy here was wise, and Hamilton’s not.

In brief, contrary to what is nearly the conventional wisdom, Alexander Hamilton was not “far in advance” of contemporary thinking on banking.  He was decidedly retrograde in pushing for an exclusive nationwide bank with a sweetheart government deal.  He was not a creative policy genius so much as a persuasive second-hand dealer in discredited mercantilist ideas.

Here I draw upon a dissertation chapter, unfortunately not available online, by Nicholas Curott.

  • As always on the mark. Thanks to all at Alt-M for your work and efforts. Free market banking is by far the biggest threat to big government and the parasite lobbyists and crony capitalists that inhabit the nations capital.

  • W. Ferrell

    Thanks for an excellent and timely discussion of Hamilton. It might be added that in 1791 Hamilton urged direct subsidies to private businesses.

  • Walker Todd

    Larry is right in his critique of Hamilton here. I know a lot about the subject and verify what Larry says here. Walker

  • MichaelM

    Calling Hamilton's Bank of the US a central bank is also clap trap. It wasn't and it wasn't designed as such. Although, in testament to Hamilton's genius, he did make use of something resembling open market operations in the early 1790's in response to a panic surrounding shares in the Bank (which hadn't begun operations yet — he used a friendly bank in New York to conduct the purchases), nothing like modern notions of central bank fostered macroeconomic stability existed. The 'wholesome, solid and beneficial credit' referenced in Hamilton's quote is the credit [i]of the Federal government[/i], because that is what the BUSA was supposed to help foster.

    That is also what the national banks in Europe were all about: Facilitating their respective governments in borrowing money as cheaply as possible in order to fund a large military establishment. That's what Hamilton wanted to build. That's what modern admirers of Hamilton on the Left just don't get about the man: He was a national power conservative. An imperialist capitalist of the first rank, the very thing they're supposed to hate the most. But, because he's useful rhetorically, they entirely revise what he thought. Modern, technocratic ideals of macroeconomic management owe a lot more to late 19th century socialists than they do to late 18th century nationalists.

    But, of course, general discourse on the subject will remain dominated by the ignorant. When well listened-to talking heads deign to even notice the history of banking and banking politics they'll keep up with their parroting of a bad summary of a misunderstanding of the actual economic and political history here. It's just as annoying to hear about the vital role of the Second Bank of the United States, which essentially amounted to doing what a healthy free banking system is more than capable of and running an efficient clearing mechanism for bank notes. Or how the veto of its re-charter bill is responsible for the 1837 Panic (it's exceedingly difficult to imagine exactly [i]what it is the Second Bank could have realistically done[/i] to prevent or productively react to the crash). Economic history, and especially the economic history of the banking industry, is an incredibly niche topic where even people who are supposed to have done their research usually have no idea about the actual history.

    It's a shame such vital institutional decisions are made based on that ignorance.

    • All we know is that the current central bank does indeed fix prices. And Jackson hated a foreign bank board at the 2nd National Bank. He was a nationalist. We would do well to follow his lead and take back our nation from the international bankers. Will Rogers didn't have much use for them in the last century either. While I would have worded it differently, Rogers said: "I guess there is no two races of people in worse repute with everybody than the international bankers, and the folks that put all those pins in new shirts." Aug. 26, 1932

  • I wonder if central banks back then mispriced risk as BAC accused our Fed of doing. Since they were mercantile banks, they probably just made credit easy for the companies they favored and didn't need to go to the lengths our central bank goes to to help its cronies.

  • Jeffrey Rogers Hummel

    I heartily applaud Larry’s much-needed corrective to the widespread celebration of Alexander Hamilton’s alleged economic acumen. I would add one interesting but little known detail. Despite
    the fact that the charter of the First Bank of the United States included the authority to branch interstate, Hamilton as Secretary of the Treasury initially opposed creation of branches beyond the Bank’s main office in Philadelphia. His expressed reservation was the lack of managerial expertise necessary to keep the branches under effective control. But as financial historian Edwin J. Perkins has suggested, Hamilton also feared that a branch network would divert the Bank toward greater commercial lending and away from its primary task: providing financial support to help the fledgling U.S. government become a powerful fiscal-military State, emulating those of Europe. In this he was drawing on the example of the Bank of England, which had no branch offices. After the U.S. Bank’s board of directors ignored Hamilton’s objections and quickly established branches in New York, Boston, Baltimore, and Charleston, Hamilton briefly entertained the idea of having the Bank and its branches absorb any state-chartered banks existing in those cities and in Philadelphia. Fortunately this scheme to suppress competition and create a nationwide bank monopoly never went anywhere as Hamilton, within a few months, abandoned the idea.

    • MichaelM

      I just want to make clear that Hamilton's economic acumen was anything but alleged. He was a financial genius of the first rank. The idea that a single human being could conceive of and execute a plan where a colonial backwater could establish institutions capable of competing with the most advanced of fiscal-military states of its day would be absolutely bonkers if we didn't have an example thereof right in front of us. Unfortunately, genius is never a guarantee of virtue and Hamilton's absolute dedication to the interests of the state rather than the interests of the public is his real flaw. Never question the man's ability or knowledge (within the context of his time): he could have been a leading bureaucrat in a Europe where inter-state competition for bureaucrats was THE running factor of individual prosperity.

      The real problem he had is that he didn't understand how a republic with representative institutions was supposed to be different from a monarchy, at least according to the leading leftyish political theorists of the day. He thought just building the institutions that made a monarchy successful on to a republic was all that needed to be done, never quite getting that the real revolution wasn't about a change in deciding WHO was in charge (and thus what specific policy level decisions were made) but instead in what being in charge meant (and, thus, instead WHERE policy level decisions were made and implemented).

      Something like modern free banking theory would have made no sense to Hamilton's opponents(who, despite the objections I have to modern characterizations, really didn't understand money), and modern central banking theory (for the most part: read, "macroeconomics") wouldn't have been something Hamilton would have had an immediate grasp on (although I thoroughly believe he would have been able to pick it up shockingly quickly: The most important skill is to be able to differentiate genius from goodness). Nevertheless, both sides were full of the most intelligent of men. Hamilton himself was probably one of the most naturally intelligent.

      Doesn't mean he's worth an ounce of worship, though.

  • GaryL

    This is an often overlooked and critically important element of history; it's the initial set of conditions that insidiously dismantled federalism and led us to the dysfunction we presently experience. This was followed by Henry Clay's concept of "The American System," of subsidies and monopoly, which Lincoln finally put solidified by force of arms. It's been all downhill since.