The men who helped establish the United States as a democratic republic are lionized everywhere today, from history textbooks to political rallies that draw audiences from across the ideological spectrum. Even though Founding Fathers like Thomas Jefferson and James Madison successfully built firm political foundations for the United States, they were notably less successful in the realm of public finance. By the end of Revolutionary War the United States was drowning in debt, yet it was unable to levy the taxes needed to fill up its empty coffers.
America’s post-revolutionary path to financial solvency is often overshadowed by more dramatic tales about the political wrangling involved in writing the Declaration of Independence and, later, the Constitution. However, Harvard Business School Professor Thomas McCraw reminds us in his book The Founders and Finance that the creation of America’s financial infrastructure was no less important.
McCraw focuses specifically on the role of two men. The first, Alexander Hamilton, is well-known today for his infamous duel with Aaron Burr and for gracing the ten-dollar bill. The second, Albert Gallatin, the scion of an aristocratic Swiss family, remains more obscure but no less important. Though the two men spent much of their careers on opposite sides of the political aisle, they shared a strong understanding of finance. Because most other Founding Fathers knew little about that topic, Hamilton and Gallatin were left to tackle the country’s looming financial troubles.
McCraw is a masterful storyteller who manages to inject drama into a staid topic. However, he needs no dramatic amplification to convey the disastrous nature of America’s finances when Hamilton became the country’s first treasury secretary. At that time, the US was crippled by a $54 million debt (equivalent on a per-capita basis to about $4.1 trillion in today’s dollars). Hamilton, determined to establish the creditworthiness of the young republic, took a number of bold steps, including assuming the debt of individual states and issuing bonds partially financed by a controversial whiskey tax.
Meanwhile, Gallatin, who served in Congress from 1795 to 1801, worked to create powerful tools that allowed legislators to oversee federal finances and check the power of Hamilton. During his time on Capitol Hill he helped create the House Ways and Means Committee, which still has jurisdiction over all taxes and tariffs.
Although Gallatin initially opposed many of Hamilton’s policies, during his own time as Treasury Secretary from 1801 to 1814 Gallatin used Hamiltonian powers to trim the national debt while financing the Louisiana Purchase and the War of 1812.
The problems tackled by Gallatin and Hamilton are eerily reminiscent of contemporary issues. Then, as now, the country faces a large debt, mounting expenses, and strong ideological divisions. More than two centuries ago, Hamilton and Gallatin were able to craft a pragmatic solution to the issues facing the nascent US republic. Today, the country’s citizens are right to wonder whether the politicians with nothing but praise for the Founding Fathers will be able to craft their own pragmatic compromise.
Photo: Phil Dokas – Flickr