The Founding Father of Finance: How Alexander Hamilton Saved America

The story of America’s formation is a precarious one. At times, it seemed that the young nation would never survive the stumbling-blocks associated with full independence. Amid other established world powers, America would need innovative and daring leaders to step forward and take charge of the nation’s fate. Upon declaring independence from Britain, America experienced a cascade of political and economic pitfalls. Particularly, America was once afforded certain privileges as a colony of Britain; declaring independence, however, squashed all of these benefits. In severing ties with Britain, America isolated itself economically. Whereas it had previously utilized lucrative British ports for trade, America was immediately disallowed from British and British West Indies ports, effectively hindering all trade. This was a damaging blow to the new American economy, and without the protection of the powerful British Navy, ships were at the mercy of pirates that sought to seize the defenseless Americans.
Additionally, merchants in America once had access to British products such as sugar and rum; however, along with the American Revolution came the severance of all colonial resources. Likewise, the newly freed America was left with a tremendous war debt, primarily to powers such as France and Holland. Domestically, speculation and profiteering in wartime resulted in inflation, which subsequently weakened the economy and sparked dissension among American citizens. Overall, while America was now freed from British control, it faced a cornucopia of financial setbacks in the wake of the Revolution.
Furthermore, the new American government also gave way to more economic problems. Utilizing the first paper currency, “the Continental,” America sought to purchase supplies for the army. However, the money had no true backing; it was only promised that tax revenues after the war’s end would be sufficient enough to replace the currency’s value. The Continental was met with discontent, and eventually became worthless in its final years in circulation., hence the phrase “not worth a continental.” America’s basic form of government, the Articles of Confederation, was fraught with shortcomings. It was nothing more than a powerless interstate league with little to no control over individual states. Here, the states had almost all the power, while the federal government was essentially ineffectual.
The lack of power given to the Continental Congress proved utterly crippling. The Articles gave Congress the power to pass laws but no means of actually enforcing them. If a state was not in support of a particular ruling, there was nothing stopping the state from simply disregarding it. Congress was powerless to lay taxes/duties or regulate trade, and given the economic turmoil of the time, this only further contributed to America’s weak standing as a global force. Additionally, there was no national court system and thus no way of enforcing any laws. Amending the Articles of Confederation would also require a unanimous decision, which was next to impossible. The Articles of Confederation, America’s earliest form of government, shed light on the numerous shortcomings of a weak central government.
As is typical in times of poor economic standing, America experienced great social unrest. Particularly, many farmers were crippled by debt as a result of high taxes and worthless paper money. Most notoriously, farmers in Massachusetts led by Daniel Shays protested government policies, eventually storming courthouses and engaging in conflict with armed forces. This was another major catalyst that sparked the formation of the Constitution, as there was no way of solving disputes between states. With worthless paper money, a flimsy government, tremendous public debt, and widespread social unrest, there existed a need for a markedly stronger central government.
The plethora of shortcomings in early American freedom prompted some influential leaders to propose a stronger central government. In his 2007 account of America’s financial history, The Money Men, author H.W. Brands notes that Alexander Hamilton was very much in favor of a strong government. “’Such events as the Shays’s rebellion demonstrated that the nation must pull together lest it be pulled apart. A nation without a national government is, in my view, an awful spectacle.’” It became clear that replacing the Articles of Confederation, which proved to be ineffective, was the next logical step. The writers of the Constitution took many of the state’s rights and gave them directly to the federal government. Congress was able to levy taxes, create a uniform currency, and regulate interstate/foreign commerce. Additionally, many structural issues were ameliorated, as a simple majority was now needed to pass laws, and three-fourths of states are required to ratify an amendment. Thus, the overwhelming economic and political obstacles highlighted the need for a strong central government, which ultimately spurred the writing of the Constitution.
One of the major tenets of the Articles of Confederation was that the true power lied in the hands of the states. Post-Revolution, the states were cautious of a strong central government, as the memories of British rule were still strikingly vivid. Many Americans feared that a strong central government would simply replace King George III with another equally despotic tyrant. If all the power in a nation is concentrated into one person, they can make, enforce, and amend laws with no effective recourse from the states. British rule was harsh, and Americans feared the idea of reentering a structure that they so valiantly fought to escape. Given the fact that America had just exited a grueling war that crippled the economy and shattered its political foundation, a strong central government was precisely the opposite of what the states wanted. Therefore, many of these fears were justified, and the writers of the Constitution recognized that the American people were afraid of a tyrannical government. To quell their fears, the Constitution included federalism, which blended regional governments with the federal government. Likewise, a separation of powers, checks and balances, and ways to balance powers between large and small states ensured that no one entity would exhibit absolute rule over the nation
Today, much of this fear from centuries ago is still present among American citizens, and there exists an inherent distaste for overarching government power in state affairs. For example, marijuana legalization continues to spread throughout the United States; nonetheless, it is still technically a federal crime. The revenue from marijuana sales cannot be transported to a bank, as it can subsequently be seized by the federal government. Therefore, most dispensaries have all their earnings in locked safes. Despite its legalization, recreational marijuana remains a federal crime.
In the wake of the economic and political crisis, President George Washington sought someone who could help the new nation rise from the ashes. After his first choice, Robert Morris, declined the offer, Washington was in a dire situation. America was crumbling financially, and someone was needed who could create a financial plan to kickstart the economy. Enter Alexander Hamilton: Hamilton’s financial plan had four major provisions that would ultimately lead to financial prosperity. First, Hamilton sought to assume all state debts into the federal government. This was a controversial idea at the time, as some states, such as Virginia, were debt-free, while others were not. In linking the state debts to the federal government, the attachment of wealthy creditors from the states to the federal government all but ensured government success. Essentially, the more creditors the government owed money to, the more these people would work to maintain a functioning federal government so they could be repaid in the future. By issuing bonds, the federal government was able to collect money while promising future repayment with interest. Now, it was in the public’s best interest for the federal government to thrive.
Second, Hamilton proposed the creation of a national bank. This institution would be the fiscal cornerstone of the nation and provide a legitimate paper money circulation. The bank could also be the main source of loans for the federal government, act as a depository for government funds, and regulate the money supply. Next, Hamilton introduced a protective tariff, which was a tax on imported goods. In raising the prices of foreign goods, consumers were more incentivized to purchase domestic products, and Hamilton viewed this as a way to awaken the manufacturing and business industries in America. Finally, Hamilton imposed an excise tax on whiskey, which was the alcoholic beverage of choice in the 18th-century. By taxing a massively popular beverage, Hamilton aimed to raise revenue to subsequently minimize the national debt. Although not George Washington’s initial choice, Alexander Hamilton implemented a concise, effective, and sound plan to revitalize the American economy.
Hamilton’s financial plan was an overwhelming success. His steadfast commitment to the manufacturing industry, a national bank, and federal credit became important components of the American economy for centuries to come. Although influential Americans of the time were opposed to a national bank (most notably, Thomas Jefferson), the bank helped stabilize the economy, and the dollar became a legitimate form of currency. The issuing of bonds allowed debt from the Revolution to be paid, and peoples’ trust in the government grew as their bonds were redeemed. His protective tariff sparked American manufacturing and helped the economy kick into high gear. A subsequent war between France and England increased America’s presence as a global power, as trade in the West Indies was reinstated. Industry would continue to grow in the coming decades, further transforming America into an economic powerhouse.
Unequivocally, Hamilton’s financial plan placed more power in the hands of the federal government, thereby mitigating the power of the individual state governments. By assuming state debts and borrowing from wealthy creditors, it was in the public’s best interests to cooperate with the federal government and hope for its flourishing. The bond system enabled the federal government to repay past debts and quickly establish good public credit. The creation of a national bank gave the federal government a secure place to keep money and to collect taxes from the public and issue loans to businesses across states. Hamilton, a longtime supporter of placing the power in the hands of the national government, finally had the opportunity. “Central control of the nation’s money supply would contribute to unity and coherence, for money was ‘the vital principle of the body politic’…central management of the public debt would eliminate a ’cause of collision’ among the states.”
Further, federal taxes and protective tariffs created a strong source of revenue for the federal government. In fact, the excise tax on whiskey resulted in a particularly strong display of federal government power. In 1791, protesters in Pennsylvania violently halted federal officials from collecting the whiskey tax. In response, Washington led militia troops into Pennsylvania, summarily thwarting what came to be known as the “Whiskey Rebellion.” Washington’s actions displayed the true power of the federal government, as it took initiative to squash a state-level revolt. The effects of Hamilton’s financial plan still reverberate today, as the major tenets of his proposal provided a strong economic foundation for the federal government to assume power.
At one point, the newly independent America was in financial ruins. Without the privileges that came with being a British colony, America had to fend for itself among numerous world powers. With the situation seemingly impossible to reverse, President George Washington placed the fate of the nation in a former lawyer, Alexander Hamilton. With his keen economic vision, Hamilton was able to stimulate the American economy and strengthen the federal government. Today, the people of the United States are forever indebted to Alexander Hamilton for being the founding father of the American economy.
