The basics of Hamiltonian finance: “Hamilton: An American Musical”

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Question: 

I’m currently doing a research on the subject of American founding father Alexander Hamilton as a character in the musical “Hamilton: An American Musical” vs the portrayal of Hamilton by professional historians. To be able to understand the importance of the historical Hamilton as a founder of the US in order to write about him, I need to be able to explain (and first of all understand) what “Hamiltonian finance” is. Could you in a simple way explain the basics of Hamiltonian finance? It is something I have had a difficult time finding an pedagogical and reliable source on. It would be of immense help for me.

Answer: 

Alexander Hamilton was, as the musical portrays him, an influential figure in the early history of the United States.  A full description of his views about and impact on financial arrangements in the newly formed United States would be well beyond the scope of this forum, and I will leave the issue of comparing historical and dramatic interpretations in your hands.  

Hamilton's chief accomplishment as the first Secretary of the Treasury of the newly established country was to establish the creditworthiness of the country.  During the Revolution the federal government and the several states had all incurred substantial debts to finance the war and lacked credible means of repaying them.  As a result these obligations were trading at significant discounts.  Hamilton understood that establishing the ability to borrow would be crucial in the country's growth, and that a subsidiary effect of doing so would be to create a secondary market in these debt obligations that would expand the private sector's access to credit.  

To achieve these goals, he undertook several actions.  These included: (1) having the federal government assume responsibility for the debt of the states (since these had been incurred to achieve independence), (2) restructuring the debt to lower the interest costs, making payment more credible, and (3) establishing a source of revenue (mainly tariffs) that would enable repayment.  The first of these faced considerable opposition from southern states which had repaid their debts and viewed this as a subsidy to northern states that had not.  Hamilton was able to secure their support by agreeing to locate the nation's capital in Washington, D.C.

In addition to establishing the credibility of U.S. debt obligations, Hamilton established the monetary system, and was instrumental in creating the First Bank of the United States, a public-private partnership, which in turn stimulated the expansion of state-chartered banks and helped to expand private access to credit.  

Many economic historians believe that these steps were an important contributor the subsequent acceleration of economic growth in the United States. See in particular the work of Richard Sylla http://www.stern.nyu.edu/faculty/bio/richard-sylla . 

Answered by:
Dr. Joshua Rosenbloom
Professor
Department Chair
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Last updated on February 25, 2019