This is an excerpt of the prologue to the book that I’m writing, which chronicles financial panics and crises in America that stretches from the modern era back to the nation’s founding…..
It was a fateful dinner. The young American Republic is no more than a decade old but already staring at its first crisis. Thomas Jefferson, the U.S. Secretary of State, brokered a dinner meeting between US Treasury Secretary Alexander Hamilton and Virginian leader James Madison. The trio were in a heated battle over the proper role of national government in resolving fundamental issues in the fledgling economy. Congressional lawmakers formed coalitions based on their view of what would be the optimal structure for America’s economic foundation.
Even at its founding, America is characterized by compromise, conflict, and crisis. The Republic was in a chaotic state coming out of the Revolutionary War. It was more like a loose collection of sovereign states, much less a perfect union. States were divided geographically and economically. The country had a $80 million debt, with a mix of foreign, domestic and state debts. Absent a credible repayment plan, the United States runs the risk of destroying its ability to borrow from creditors and undermining its obligation to pay the Continental Army. Yet, the national government was ill equipped to deal with the crisis.
The predecessor to the Constitution was The Articles of Confederation, an agreement among the 13 states, written against the backdrop of wartime urgency. There was a valid fear against a central government coming out of the War for Independence. The post-war document outlined America’s first government, but the temporary framework was missing a president and a court system. The only branch was the Continental Congress which wielded little power. Absent a federal government and a coherent national economic strategy, the thirteen states organized themselves around their own economic interests. They freely imposed tariffs on imports and exports to and from other states.
Making matters worse, economic security was inextricably linked with national security. During the War for Independence, Union troops starved and faced backlogs of unpaid compensation for their services. In December 1777, 11,000 Continental Army Troops made camp at Valley Forge. Washington’s troops were in a desolate situation, cold and starving. Washington petitioned the Congress for food, clothes and fresh supplies. Congress failed to act. Compounded by diseases like influenza and typhoid, 2,000 troops died.
Hamilton served as a Captain of the New York Independent Artillery Company during the first two years of the War. Washington enlisted Hamilton to his staff as a lieutenant-colonel thanks to his fine writing skills. This skill was tested in Valley Forge, as Hamilton joined other aides-de-camp to pen letters to governors and members of Congress, seeking help. On February 13th, 1778, Hamilton wrote to New York Governor George Clinton: “…exert yourself upon this occasion, our distress in infinite…Desertions have been immense and strong features of mutiny begin to show themselves…” (Chernow 2004)
To fund supplies for the Continental Army and national operations, the country scraped money from the states. With good reason, states were skeptical of sending funds to a dubious central authority. In an ill-attempt to fix financial woes, Congress printed money which rendered currency in the colonies near worthless and undermined public confidence in the currency and the government’s ability to respond.
Congress didn’t have the authority to raise revenue through taxation to fund a federal government. It was actually the preference of influential players such as Thomas Jefferson who believed in the vision of a pastoral America with individual liberty, land ownership, unfettered by government. Alexander Hamilton, then a New York delegate to the Continental Congress, held the opposite view. He saw the dangers of states pursuing their disparate interests that counteract national goals. He even warned George Washington and his superiors about this lack of unity but failed several times. At one point he asked to resign from his state public office to retreat into private life but Washington talked him out of it.
Valley Forge was a pivotal moment that solidified Alexander Hamilton’s view that without real political reform, the country would not have the institutions to foster economic stability. Without necessary reforms, the country could disintegrate into factioning states.
Hamilton’s fear would escalate a few years later. States were cash strapped from Revolutionary war debt. On June 17, 1783, while meeting at the Pennsylvania State House, Congress received a message from soldiers of the Continental Army stationed in Philadelphia that they are demanding backlog pay for their service during the War. Congress balked. In the next several days, soldiers from Lancaster, Pennsylvania, abandoned their posts to join with brothers in arm from the city barracks. United with 400 strong, they surrounded the State House and refused to let the Delegates leave without getting addressing their demands. Soldiers forged an insurgency to trap Congressional delegates in the halls of Philadelphia, including Hamilton. This became known as the Philadelphia Mutiny.
Hamilton would draw the hard lessons learned from the Philadelphia Mutiny to his duties as Treasury Secretary. He did not want the new country to start off on shaky foundations. He would formalized this proposal into a grand plan that everyone now knows as the Hamiltonian economics program. Approving this package is not an easy feat. A different post will cover the fateful dinner that drove the grand bargain of 1789.
Chernow, Ron. Alexander Hamilton. New York: Penguin, 2004. Print.