On the grounds of lower Manhattan’s Trinity Church stands the gravestone of Alexander Hamilton, whose distinctions include being the nation’s first Secretary of the Treasury. The monument reads:
“The patriot of incorruptible integrity, the soldier of approved valor, the statesman of consummate wisdom, whose talents and virtues will be admired by grateful posterity long after this marble shall have mouldered into dust.”
Quite appropriately, Wall Street and the New York Stock Exchange are just a stone’s throw away. Hamilton rests alongside a financial world whose basic elements were, in large part, created by him. As Treasury Secretary to President George Washington in the early 1790s, Hamilton consolidated the national debt, set up a central bank, made the dollar into a respected currency, and handled a spate of financial turmoil that could have derailed America’s emerging securities markets.
Hamilton epitomized both financial sophistication and upward mobility, two qualities he sought to promote in the American economy. Born into poverty and illegitimacy on the Caribbean island of Nevis in either 1755 or 1757, he showed business acumen as a young clerk in a trading company. Arriving in the Colonies to pursue an education, he became a pamphleteer for American independence and then an officer in the Continental Army.
A Busy ExecutiveSome key events in the life of Alexander Hamilton and his time:Sept. 11, 1789 Hamilton is nominated to be Treasury Secretary and promptly confirmed by the Senate.Jan. 14, 1790 Submits to Congress his “Report on Public Credit,” which forms the basis for consolidating and managing the national debt.June 20, 1790 Negotiates, over dinner with Thomas Jefferson, deal to move nation’s capital to the Potomac in exchange for support for Hamilton’s debt policies.August 1790 Receives authorization from Congress to create a service to enforce customs laws, which would become the Coast GuardDecember 14, 1790 Submits report arguing for establishment of a central bank, leading to formation of the Bank of the United States.January 28, 1791 Delivers report calling for creation of a national mint and defining the U.S. dollar in quantities of gold and silver.July 4, 1791 Oversees public offering of shares of the Bank of the United States.August 1791 Directs purchases of government securities to stabilize markets.December 5, 1791 Submits “Report on Manufactures,” setting tone for future government industrial policies.January-April 1792 Manages new spate of turbulence in Treasuries and bank scrip.July 1792 Consults with officers of the Society for Establishing Useful Manufactures to organize industrial activities along the Passaic River in New Jersey.January-March 1793 Provides detailed information to Congress refuting politically charged claims of improper financial management in his department.Aug. 1, 1793 Successfully argues for administration to take firmer line toward revolutionary government of France.September-October 1794 Leads militia of 13,000 troops to Pennsylvania to suppress Whiskey Rebellion against federal liquor tax.Jan. 31, 1795 Resigns as Treasury Secretary.
Serving as a top aide to General Washington during the Revolution, Hamilton found time to read the economic works of Adam Smith, David Hume and others. After the war, he became a lawyer and legislator, founder of the Bank of New York, drafter of the Constitution and principal author of the pro-Constitution Federalist Papers. When newly elected President Washington asked Philadelphia merchant Robert Morris what to do about the nation’s finances, Morris suggested he let Hamilton figure it out.
Hamilton became Treasury Secretary on September 11, 1789, and quickly arranged some bank loans so the federal government could continue operating. He then set to work on his “Report on Public Credit,” which proposed combining Revolution-era state debts into a national debt, among other measures to get the United States out of the 18th-century equivalent of junk-bond status. Hamilton’s proposals were mostly adopted by Congress, and a market soon arose for a new type of instrument — U.S. Treasuries, which were available in versions paying 6 percent, 3 percent, or the equivalent of a zero coupon.
In late 1790, Hamilton submitted a report calling for a central bank, and Congress in turn approved a 20-year charter for a Bank of the United States. Capitalized at $10 million, this entity would be one-fifth owned by government and the rest by private investors. On July 4, 1791, a public offering was held of subscription rights, or scrip, that cost $25 and enabled investors to become full shareholders by making further payments over 18 months.
The offering was heavily oversubscribed, with scrip selling out within an hour and then trading briskly among investors. Soon there would be further charters of banks at the state level and more offerings of bank scrip. Spurred by Hamilton’s central bank plan, something new was taking shape in America — an active and liquid stock market.
And it was in this early stage of existence that America’s securities markets first underwent the turbulence of speculative bubbles popping. Bank of the United States scrip doubled from its initial $25 price by late July — and then shot up to around $300 in the first half of August. Just as suddenly, scrip prices plunged, falling to around $150 by mid-August. Treasury prices also underwent sharp swings.
Moving quickly to calm the markets, Hamilton spearheaded a push by the government to purchase portions of its own debt, and coordinated further purchases with the Bank of New York. Before long, things had settled down. The Bank of the United States, which was still being organized in the months after its financing, opened its doors for business at its Philadelphia headquarters in December.
However, a second, and worse, financial crisis erupted in early 1792. Markets started growing volatile again in January, amid a rapid expansion of credit by the Bank of the United States and a flurry of actual or proposed bank formations and mergers. A new institution called the Million Bank launched an oversubscribed share offering and made plans for swift growth; part of this strategy was to force the Bank of New York to merge by orchestrating a rush of withdrawals from accounts at the older bank.
Hamilton watched such developments with growing alarm. In a letter to William Seton, a sympathetic Bank of New York executive, the Treasury Secretary vented: “These extravagant sallies of speculation do injury to the government and to the whole system of public credit by disgusting all sober citizens and giving a wild air to everything.”
It so happened, though, that one of the wildest speculators was an old friend and colleague of Hamilton’s. This was William Duer, who had been an Assistant Treasury Secretary in the early months of Hamilton’s tenure and more recently had become governor of the Society for Establishing Useful Manufactures, a New Jersey enterprise that Hamilton had set up in order to jump-start industrial development in America.
Duer and collaborators had elaborate plans to corner the country’s new financial markets, attempting for instance to monopolize 6 percent Treasuries that would be needed by holders of bank scrip to complete share purchases. All this required borrowing a lot of money. Hamilton, meanwhile, was trying to put some brakes on the lending boom.
The expansion of credit pushed securities prices to a peak in late January, but Treasuries and bank scrip then began dropping as lenders tightened the reins. Duer, who had bet heavily on markets going up, was now in serious trouble. On March 9, he stopped paying some of his debts, causing a chain reaction of defaults and further drops in securities prices.
Among Duer’s obligations was a massive $236,000 debt to the government. He now wrote to the Treasury Secretary, hoping his old friend would take a laid back approach to collection. Hamilton declined in his reply letter, expressing sympathy but giving Duer this advice: “Act with fortitude and honor. If you cannot reasonably hope for a favorable extrication, do not plunge deeper. Have the courage to make a full stop.” Duer would soon go to debtors’ prison.
In short order, Hamilton was moving to stabilize financial markets, as he had the previous year. He organized new purchases of Treasuries, trading at distress prices. He coordinated operations with the Bank of New York, so investors would be impressed that both public and private money were entering the markets, and he gave government backing to enable that bank to serve as lender of last resort in New York, where the crisis was worst, until the Bank of the United States had set up a branch there.
By mid-April, markets were calm. With little to guide him in theory or history, Hamilton had improvised an adept response to the financial turmoil, and in so doing pioneered such key techniques of central banking as open-market operations and lending of last resort.
The Emergence of Wall StreetYet the boom and bust had left some investors bankrupt, and sparked a heightened level of public and political suspicion toward financial markets. Legislators showed growing interest in placing restrictions on securities trading — and one effect of this was to encourage dealers to form their own organizations to make and enforce trading rules.
On May 17, a group of 24 dealers gathered on Wall Street to draw up some rules, reportedly while taking shade under a buttonwood tree. Their concise document stated that they would trade securities on a commission basis, with a minimum fee of a quarter percent, and do business with each other on preferential terms. This pact among brokers, known to history as the Buttonwood Agreement, began what would become the New York Stock Exchange.
Many of the agreement’s signers had some involvement in Hamilton’s crisis management operations of previous weeks, as has been pointed out by New York University financial historian Richard Sylla. Perhaps the dealers were inspired by the Treasury Secretary’s demonstration of what could be accomplished through innovative finance and appropriate cooperation among market players. In any event, their pact suggested confidence that America’s nascent financial markets were here to stay.
Among the nation’s founding fathers, Hamilton was unusual in his affinity for modern finance. Thomas Jefferson, who wanted America to stay agrarian like his own Virginia plantation, derided the “new created paper fortunes” of stock-trading urbanites. He and political ally James Madison deeply distrusted banks and securities markets, seeing them as distractions from useful work and centers of corruption.
Such differences helped fuel a split in America’s politics between Hamilton’s Federalists and Jefferson’s Republicans. (The Republicans would later evolve into today’s Democrats, while the Federalists are often seen as precursors of today’s Republicans.) However, even among the Federalists, not everyone was as pro-finance as Hamilton. John Adams, nominally of the same party as Hamilton, wrote to Jefferson late in life that “an aristocracy of bank paper is as bad as the nobility of France or England.”
Thus, the next three presidents after Washington — Adams, Jefferson and Madison — were not very well-disposed toward the markets Hamilton had fostered. Nonetheless, those markets survived. The key reason was that they worked.
After stepping down as Treasury Secretary in 1795, Hamilton returned to the practice of law. He remained active in politics, but with limited success. He was killed, infamously, by political rival Aaron Burr in a duel in Weehawken, N.J., in 1804. Hamilton’s death was announced at Wall Street’s Tontine Coffee House, now the main site of the Buttonwood group’s stock trading, and hundreds of brokers and merchants assembled there to endorse a call by city officials for businesses to close in mourning.
Kenneth Silber, a New Jersey-based editor and writer, has published on various subjects, and his articles have appeared in the New York Post, Wall Street Journal, Reason and other publications.