Occupy This! Alexander Hamilton, the Bank, and banks

If you can find a ten dollar bill you’ll see his image. On the back of the bill you’ll see the institution he is most noted for building, the Department of the Treasury. Hamilton’s story is one of a self-made man; he came up from poverty into the highest ranks of government.  Alexander Hamilton goes with Thomas Jefferson the way Jerry the Mouse goes with Tom the Cat. The two men representdivergent paths in the American story.

Hamilton was born a poor commoner. Jefferson was born into the wealthy Virginia aristocracy. Hamilton lived in New York City. Jefferson was a “farmer” at his rural Monticello estate. Hamilton was a soldier and advocate of strong central government. Jefferson preferred to do his fighting with a pen and as a slave owner, wanted a weak and distant central government.

After playing a decisive role in the writing and ratification of the Constitution, Hamilton, at the age of 34, became the new country’s first Secretary of the Treasury. He immediately set out to analyze the best way to move the country out of debt and into solvency after the lengthy revolutionary war. His first proposal was controversial, a federal bail-out of states behind on their debt accrued during the revolutionary war. Jefferson opposed this because he saw it as a power grab for the central government. If the state’s owed the Federal government money, he believed, it would mean less power for the states.

But Hamilton argued that to have vast sums of debt would damage the United States’ credit rating, increasing its costs to borrow money. In Hamilton’s view

In a country, which, like this, is possessed of little active wealth, or in other words, little monied capital, the necessity for that resource, must, in such emergencies, be proportionably urgent. And as on the one hand, the necessity for borrowing in particular emergencies cannot be doubted, so on the other, it is equally evident, that to be able to borrow upon good terms, it is essential that the credit of a nation should be well established.1

Hamilton saw the United States as one country, not just a series of loosely organized states. And if the country’s economy was to thrive it needed to be able to borrow. Good credit would be essential for that purpose. Bad credit would mean the new government would be unable to provide the services and stability that would

Justify and preserve [the supporters of the new government] confidence; to promote the increasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources both to agriculture and commerce; to cement more closely the union of the states; to add to their security against foreign attack; to establish public order on the basis of an upright and liberal policy. These are the great and invaluable ends to be secured, by a proper and adequate provision, at the present period, for the support of public credit.2

Hamilton’s vision for government using borrowed money mostly won out. He supported the development of the First Bank of the United States, which could issue debt and other financial instruments in the name of the United States. Northern city dwellers tended to like this scheme, while southerners, suspicious of a powerful central government, hated it.

In the decades subsequent to the development of the Bank, strong populist opposition arose against it. The opposition was so strong that Andrew Jackson would run for and win the presidency on the idea of destroying the bank. While he was largely successful, the bank and the financial system would mostly reconstitute itself. The fight between Hamilton’s Federalists on the one side and Jefferson’s Republicans on the other would morph into a battle between Jackson’s Democrats and Henry Clay’s Whigs. The names and faces changed but the battle lines didn’t: Southern rural farmers were suspicious of big city speculators betting with the public’s money and putting their economic well-being at risk.

Sound familiar? Nothing has changed except, as then, the names and the faces. Today the vast majority of the middle class, represented by Tea Baggers and Occupiers, are deeply suspicious of the sharp suited bankers and stock brokers that they see as having wrecked the economy. Then as now, banks were a target of suspicion. When the Occupiers talk about “The Banks” a country famer from America in the 1820s or 1830s would know exactly what they were talking about.

But the truth is banks are essential and good, providing a place to keep cash and other assets and loaning money. The way banks work is simple: they take the money of depositors and loan it out to other people who need it with an interest charge. Depositors win because their money is safe and earns some interest; borrowers win because they can get needed capital to make improvements in their lives or businesses. The banks make a profit doing this. There is nothing inherently evil about it.

The principle of banking is to expand access to money. When people have more money the economy grows, more people work, more people make more money, and prosperity follows. Government banks can issue debt to pay for government services which provide a safe source of interest income for purchasers of the debt and a steady flow of cash for government services and infrastructure.

The banking system can and will fail, especially when the loans that the banks give are risky. Those risky loans are tempting because they generate more profit, but when they fail they put depositors at risk. That’s what happened with the housing bubble. It has happened before and, yes, it will happen again. It’s called greed, and it is a feature inherent to human nature but not necessary for functioning of the banking system itself. On the contrary, reasonable risk with good returns is the essence of good banking.

The alternative to banks is to keep money in a jar in a hole in the back yard, bartering for goods and services, or paying for everything with gold. I’m game to try that. Are you? The thing is, I may need to borrow some gold to get started.

1,2  Both quotes are from “Report on the Public Credit,” Alexander Hamilton, 1790

Photo credit: Alvimann from morguefile.com

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3 Responses to Occupy This! Alexander Hamilton, the Bank, and banks

  1. Pingback: First summing up: A change is gonna come | The theory and practice of folkenomics

  2. Nathanael says:

    “The way banks work is simple: they take the money of depositors and loan it out to other people who need it with an interest charge.”

    Bullshit. Learn something about banking, please. I don’t think I need to elaborate. You seem to know very, very, very little about banking. The operations of banks are much less simple than this. For starters, banks engage in maturity transformation (borrowing short-term and lending long-term), which has far-reaching consequences, and is equivalent to printing money (though it’s not necessarily a bad thing) — this is the only reason banks are subject to bank runs and the main reason they need to be kept under very strict control.

    More significantly, today, most large banks actually make their money off fees, and have arranged a system of forced late payments and debt slavery to maintain that income stream.

    Basically, get a clue before you mouth off platitudes; your concept of how banks operate is not only hundreds of years out of date, but shallow even for the period.

  3. . says:

    Nathanael,

    I’m guessing you’re a fine person who wouldn’t speak to me in person with the tone you’ve used here with the benefit of the anonymity of the internets. But your tone notwithstanding, I would suggest that what you have suggested is conceived of in what I have written about banks. You haven’t said anything to refute the quote you pull, in fact you accept it.

    “banks engage in maturity transformation (borrowing short-term and lending long-term), which has far-reaching consequences, and is equivalent to printing money”

    What does that mean, Nathanael? Why is the jargony term you use different that what you say in the between the parentheses or how I define banking? Sure, the actual loaning of money and the securititization of those loans for resale is very complicated. And yes, there are opportunities for mistakes and greed to wreck that system.

    But you’ve obviously mistaken my attempt to explain banking simply as an effort to comprehensively describe our current system. My explanation was an effort to reduce the idea down to its basics, not give a tutorial on the modern banking system. I was writing here, after all, about Alexander Hamilton, who was–as you put it–hundreds of years ago.

    If you’d like to write a post explaining the banking system in your own terms I’d gladly post it, but you’d have to say who you are. Just let me know, I’d love to read it.

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