Born on the Caribbean island of Nevis in 1755, Alexander Hamilton served as the first US secretary of the Treasury (1789-95) and played a leading role in establishing the nation’s early financial infrastructure, including the First Bank of the United States. He died of gunshot wounds on July 12, 1804, following a duel with his political rival Aaron Burr.
No founder had more influence over the nation’s early economic and financial architecture than Hamilton. Drawing on readings on political economy, credit markets, and central banking, he applied his knowledge to make several core contributions to stabilize the precarious postcolonial economy. As Treasury secretary, his innovations included consolidating the states’ debt into US Treasury debt; establishing the US Mint; and introducing the nation’s first tax on a domestic product (the infamous Whiskey Tax) so that the United States could finance its military without going further into debt.
Hamilton’s most ambitious project – the First Bank of the United States – was also among the most controversial, attracting vehement opposition from other framers such as Thomas Jefferson and James Madison. Hamilton learned about central banking at an early age, when he read about how the Bank of England provided liquid capital as a way to expand commerce – which in turn helped Britain become a global trading power. A US central bank, he believed, was similarly necessary to transform his nation from a largely rural and agrarian country into a commercial powerhouse.
When Hamilton made his case to President George Washington in the winter of 1790-91 to establish the Bank, much of this debate turned on the question of constitutionality. Hamilton invoked a flexible reading of the US Constitution that has informed American constitutional law to this day. He acknowledged that although the Constitution didn’t explicitly mention any kind of “national” bank, its “necessary and proper” clause implied that Congress had the power to create one if needed. In Hamilton’s view, the Bank was indeed “necessary” because the cash-strapped new republic lacked a central institution that could expand the money supply, extend credit, collect taxes, pay the nation’s debts, handle foreign exchange, and store government money – in short, the key fiscal and monetary authorities of the Treasury and the Federal Reserve today. (The Constitution explicitly referred to some of these functions but did not say how they were to be executed.) This concept of “implied powers” allowed Hamilton and his fellow Federalists to lay the groundwork for a robust expansion of the executive branch in the decades to come. In 1819, the Supreme Court formalized this doctrine in McCulloch v. Maryland.
On the other side of the debate stood Madison, Jefferson, and other leading framers who saw the First Bank proposal as an executive-branch overreach and a power play by the more commercially developed Northern states against the more agrarian South. But Hamilton convinced Washington and a majority in Congress, and the Bank began operations in Philadelphia in late 1791, expanding to other cities in 1792. Chartered for twenty years, it soon stabilized the postwar economy, and many scholars today view it as one of the factors behind the robust growth of the period.
After his term as Treasury secretary, Hamilton continued to play a leading role in national affairs, advising Washington as well as his successor at Treasury, Oliver Wolcott, and later helping build up the US Army. He didn’t live long enough to witness the fate of the First Bank and Second Bank of the United States, which both expired at the end of their charters. But his insights about central banking, money supply, and credit endured well beyond those years, and they eventually provided a foundation for the establishment of the Federal Reserve in 1913.
Chernow, Ron. Alexander Hamilton. New York: Penguin Press, 2004.
Cowen, David J. “The First Bank of the United States and the Securities Market Crash of 1792.” Journal of Economic History vol. 60, no. 4 (December 2000): pp. 1041-60.
Sylla, Richard, Robert E. Wright, and David J. Cowen. “Alexander Hamilton, Central Banker: Crisis Management during the U.S. Financial Panic of 1792.” Business History Review vol. 83, no. 1 (Spring 2009): pp. 61-86.
Shankman, Andrew. “‘A New Thing on Earth’: Alexander Hamilton, Pro-Manufacturing Republicans, and the Democratization of American Political Economy.” Journal of the Early Republic vol. 23, no. 3 (Autumn 2003): pp. 323-52.
Wright, Robert E., and David J. Cowen. Financial Founding Fathers: The Men Who Made America Rich. Chicago: University of Chicago Press, 2006.
Written by the Federal Reserve Bank of Richmond. See disclaimer.