The war of 1812 was a remarkable act of chutzpah for the infant United States. Britain was ceaselessly bullying American global commercial enterprises, markets and shipping. In addition to this economic strife, British mariners had pressed into service many British-born naturalized American citizens. Our nascent nation, being deeply angered by the British bullying, finally declared war in 1812 under the presidency of James Madison.

James Madison was, to put it mildly, a political protégée of Thomas Jefferson. In many cases Madison was the person who turned Jefferson’s ideas, dispositions and philosophies into action. During a persistent row between the philosophies of the agrarian, utopian Jefferson and the capitalistic and pragmatic Alexander Hamilton, Madison took the lead in writing and publishing the most vitriolic attacks on Hamilton – while Jefferson maintained an aristocratic aloofness and plausible deniability. Madison was possessed of an amazing, detail-oriented mind. His mind, more than any other, was the creator of the U.S. Constitution. Yet his formidable intellect could be, and often was, ensnared by the high rhetoric and charisma of Mr. Jefferson.

One of the most contentious disagreements between Jefferson and Hamilton concerned federal support for a national bank. Hamilton took a pragmatic stance that section 8, article 18 of the Constitution, called the necessary clause, not only granted but demanded the federal government take necessary and proper steps to ensure the various states could engage in equitable interstate commerce. To Hamilton, the best way to ensure the various states could develop an integrated economy was to have a states-independent (e.g. national) bank to ensure consistent credit rates, currency and capital access. Jefferson, who believed farming was a far more proper profession than manufacturing or banking, pointed out that the Constitution made no specific provision for a national bank. This lack of explicit mandate was for him grounds for an explicit rejection of the national bank. Jefferson believed that all banks were corrupt institutions which strove always to find ways to bilk honest working people out of their capital (to wit, pesky bankers wanting Jefferson to make good on loans supporting his own farm: Monticello). Jefferson was one of the most brilliant and innovative political thinkers in the history of humanity, but he was no economist. At a time when the nation’s finances were in a shambles, the country sought out and well-considered the wisdom of its most gifted economic pragmatist. Hamilton won the first round: As Treasury Secretary to President Washington, he became the second most powerful person in the federal government, and used his tremendous clout and persuasive arguments to convince first Washington and then congress to charter the Bank of the United States.

Hamilton’s reforms included: The Assumption Act which saw the federal government assuming in their entirety the state’s debts from the Revolution (and incidentally, created the city and capital of Washington D.C.); the honoring at 100% face-value of the old Continental Congress issued debt (which had then recently been trading at 10% of face-value); the creation of a well-funded national debt and the establishment of the federal Bank. In 1789 the United States had an economy in shambles: Its bonds were essentially worthless, foreign investment was trivial, and government revenue was anemic. By 1794 after Hamilton’s reforms were instituted, the United States had a better bond rating than any of the European nations- meaning the financiers and governments of the world recognized the U.S. as having the most stable, sustainable economy and the best record of financial responsibility. Hamilton’s ideas worked fantastically well.

By 1812 Hamilton had been murdered by the self-serving and corrupt Aaron Burr, the U.S. had experienced a decade of financial stability and growth, and James Madison – Jefferson’s protégée was now President. Madison, to his considerable credit, had come to recognize the value of the national bank in fostering national prosperity. Madison, though a legislator par-excellence, was a weak President; which may not be surprising from a personality accustomed to lingering willingly in the shadow of greatness. He did not make much of an effort to convince Congress to renew the charter of the Bank of the United States when it came up for renewal in 1811. To add to the insult, his own vice-president, George Clinton (who was a friend and political ally of Aaron Burr), cast a tie-breaking vote against the renewal (surprised?), and the bank was liquidated – literally.

An enterprising French immigrant, Stephen Girard who had made a handsome fortune as a shipping magnate, purchased the assets (building, chairs, fixtures) of the Bank, and promptly used them to open his own private bank. As luck (and Stephen’s management skills) would have it, his bank was phenomenally successful.

Mr. Madison in the mean time had decided to prosecute a war with Great Britain. The war was mostly a disaster for the U.S. armed forces, government and economy. Britain, being rather busy helping to thwart one Corporeal Bonaparte, agreed to a negotiated peace, even though they had soundly defeated the Americans except for a handful of naval battles and a pitched battle for New Orleans. The U.S. also got from the misbegotten war the “Star Spangled Banner” and the caricature of Uncle Sam. Sam Wilson was a real New York merchant, who was by all accounts friendly and kind and know locally as “Uncle Sam”. Sam did a lot to supply the army during the conflict. Several soldiers were aware of the provenance of their supplies and jokingly started referring to the “U.S.” rations as “Uncle Sams”. Soon, nearly everything marked “U.S.” became the supposed property of Uncle Sam.

President Madison had some severe crises to which he needed to attend, thanks to the war. The smouldering White House not least among them. In general, the war caused so much destruction, and required such an outlay of resources for soldier’s pay, provisions and “Uncle Sams” that the Treasury had not nearly enough funds to cover the expenses. The prudent course of action would have been to obtain a long-term loan from the well-respected and profoundly stable Bank of the United States. Except, of course, there was now no Bank of the United States. In 1813 the Secretary of the Treasury, Albert Gallaton, did the only thing he could – he issued government bonds. The problem with bonds is, they do no good whatsoever unless somebody turns in cash to get one. Unsold bonds are worthless. Another problem is that buyers of said bonds must have profound trust in the future return on the bond (e.g. the interest guaranteed by the government at time of sale), or they won’t see it as a worth-while investment. Without the Bank of the United States to back the bonds, trust was exceptionally low and the nice freshly minted pile of bonds remained unsold. About 75% of the bonds remained unsold right up to the very day when the government would have to produce more capital or (essentially) declare bankruptcy, stop the war for lack of funds, and face a disastrous economic crash.

As a very last resort, Gallaton approached the owner of Girard’s Bank, the former Bank of the U.S.. Girard was a shrewd businessman and a patriot. He agreed to finance 50% of the bond with his own bank’s assets. This was a tremendous sum of money for the day and a sum he did not in fact possess. He was not a fool, though, and everybody who was anybody in business knew it. As soon as people got news that the impeccably honest and successful Girard had purchased such a huge number of bonds, hordes of other investors clamored to get their share of what must have been a fantastic investment (or else, they though why would Girard have risked so much on it?). Girard asked only that the government deposit the excess capital from the loan (they didn’t need all the money at once) into his own bank until it was drawn down, and that he receive a .25% commission on the loan to cover his own bond re-sale costs. As a matter of course, Girard was able to re-sell the bonds to which he had committed, and thus made good on his own commitment to the government, which deposited the bulk of the quickly-raised cash into his bank. One wise, honest, prudent and patriotic banker had saved the United States from financial, military and possibly social collapse.
In 1816 President Madison and a humbled congress signed into law a 20 year charter for the Second Bank of the United States. The second bank was not given as much power, and was neither as influential nor as helpful as the first one, but it was better than none.

Fifteen years later, Andrew Jackson championed Jeffersonian anti-business ideals, wherein banks were seen as counter-progressive at best and poisonous at worst. Jackson, the self-made, relatively uneducated but fiercely patriot and reformist, led a campaign that shuttered the Bank. He also implemented many other fiscal policies which were disastrous to the country’s economic health (such as eliminating the debt – no debt, no bonds to buy. No bonds to buy means woefully insufficient capital (proceeds) for national infrastructure investment). The consequence was the longest-lasting depression in the nation’s history, from 1837 until 1843. In 1843, Charles Dickens disparaged American bonds in his play, “A Christmas Carol” by having Ebenezer Scrooge say, “…[worthless as] a mere United States Security.” This regarding a nation which fifty years earlier Alexander Hamilton had catapulted to the pinnacle of prosperity and financial security†.

Trust in a stable financial basis for the Federal government is just as important in 2006 as it was in 1794, 1812 and 1843. Trust is an essential human capability, leveraging our ability to predict, or at least imagine, a future. Our confidence in a better future leads us to take risks in the present. Without the trust that the risky action will yield a net benefit, or trust that a risked possession or idea will be respected and managed fairly, little new (and risky) would be ventured. Trust in Hamilton’s selfless and supremely functional Bank of the United States gave foreign governments confidence that America was a good long-term investment. Singular trust in Stephan Girard’s competency, assets and honor bolstered American in a time of grave peril. The whole realm of investment, from banks to stocks, bonds, mortgages, options and even money itself is based in absolute and real terms on institutionalized trust. In the case of economics, the trust of the participants is guaranteed and secured by the rule of law. As a specific case, a Federal bank is part of that rule, we are all better off. I could just as easily have made an interesting and compelling story about the trust (and necessity) surrounding any of the other economic tools mentioned just above. However, I have a particular fondness for Alexander Hamilton’s selflessness and genius, and a current fascination with macro-economics.

† I am indebted for much of factual information in Part 1 to the fine (though somewhat biased) book “An Empire of Wealth

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Wednesday, September 6th, 2006 @ 12:07 am Disposition and Relationships, The American Experiment, Towards a New Liberalism
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