So in this section, we’ll learn how
Alexander Hamilton, the first US Secretary of the Treasury, shaped the
future path of American capitalism by creating a new set of rules
for the financial relationships inside the country. What these rules did ultimately
was make the wealthiest Americans dependent on the national state’s
ability to pay them back for money which they had lent to
the federal government. This ensured their commitment
to the larger project of keeping the United States unified. But the rules and the
links that he created would also help to shape the future
development of American capitalism in even bigger ways. So one of the biggest problems that
the United States faced in the 1780s was the huge accumulation of debt. And this debt was caused by spending
during the American Revolution. Both the national government
and the individual states had sold bonds in order to
finance war against Britain, which was the world’s
biggest military power. They’d won the war. But now they were left with
a huge accumulation of debt and an economy in tatters. They had very little ability to pay
this money back through tax revenues. When Hamilton becomes Secretary
of the Treasury in 1789, the United States federal government
and the individual states combined owed about $79 million collectively
in bonds and in accumulated interest. Now, a bond is a promise to pay money at
a specific time and sometimes over time through a stream of interest payments. If you don’t pay back
your debts on bonds, whether you’re a state, a
corporation or an individual, you’re going to find it much harder
to borrow money in the future should you need to do so. Some policymakers, like
Virginia’s James Madison, said it would be unethical to
pay back the bonds at face value, because many of the current
holders are speculators, who had bought the bonds
for pennies on the dollar. Others pointed out that it was probably
impossible to actually pay back the bonds. In 1789, the government was going
to raise about $2.8 million, mostly from taxing imports. That meant that the federal
government would owe, if it assumed all the debts, $26 for
every single dollar they brought in in revenue. Just to give you a little
context, in 2012 and ’13, the European Union nearly collapsed
because of Greece’s inability to pay back its debts. Greece’s debt to income ratio was 3.5:1. Now, while many of Hamilton’s
political opponents, like James Madison or Thomas Jefferson,
had a narrow focus on shaving down the total amount of debt by repudiating
or paying back only part of the bonds, Hamilton understood that
if the bonds were a crisis, they were also an opportunity to show
the power of the federal government to establish a coherent and stable
economic environment in which entrepreneurs and investors
could make profit. Now, one reason, perhaps
why he understood this was that he came from a
different sort of background. In contrast to many of the
Virginia-based leaders who dominated much of the early years
of the American federal government, Hamilton wasn’t a tobacco planter. He wasn’t somebody who borrowed money
and sold primary products in the world market. He instead had grown up in
the British West Indies. Now, sugar colonies, tobacco
colonies, there’s some similarity. But Hamilton got his
education in business right in the middle of mercantile
activity, in the office of a local merchant, who
lent money to planters and borrowed money himself
from overseas investors. So he had a different set of ideas. And these ideas, which drew upon
innovative British and Dutch banking practices, would be tremendously
influential in shaping the financial architecture
of the United States. Hamilton’s plan was that he
would convert all of the debt from the Revolutionary era,
including the state-issued bonds into one new set of federal bonds. Now, instead of 6% interest, like the
old ones, these would pay 4% interest. But they’d be perpetual. In other words, the
federal government would keep paying 4% interest
year after year, unless it decided to buy the
bonds back completely. Hamilton convinced
Congress to adopt his plan and even to set aside a fixed
portion of the tariff revenue every year to pay off the
interest on the bonds. Now, his plan worked so
well that within 10 years, the debt to income ratio of the federal
government had dropped from 26 to one to eight to one. And it was able to issue
new debt and borrow money much more cheaply than it
had been able to do before. And in a broader sense, this was so
because he had convinced investors around the world to buy into, to
sink their money into the startup that the United States represented. They were now confident,
because of his plan, that the United States would
be able to pay them back. But at the same time, as they
invested in the United States, their fortunes were literally invested
in the broader fortune and the broader success of the United States. They would not be inclined to break up
the United States into smaller nations or see it be re-acquired by Britain
or some other colonial power.