Founding Choices: American Economic Policy in the 1790s
This PDF is a selection from a published volume from the
National Bureau of Economic Research
Volume Title: Founding Choices: American Economic Policy in
the 1790s
Volume Autho
Editor: Douglas Irwin and Richard Sylla, editors
Volume Publisher: University of Chicago Press
Volume ISBN: XXXXXXXXXXcloth); XXXXXXXXXXpaper)
ISBN13: XXXXXXXXXXcloth); XXXXXXXXXXpaper)
Volume URL: http:
www.nber.org
ooks/irwi09-1
Conference Date: May 8-9, 2009
Publication Date: December 2010
Chapter Title: Financial Foundations: Public Credit, the National
Bank, and Securities Markets
Chapter Authors: Richard Sylla
Chapter URL: http:
www.nber.org/chapters/c11737
Chapter pages in book: XXXXXXXXXX)
59
2
Financial Foundations
Public Credit, the National Bank,
and Securities Markets
Richard Sylla
The fi nancial foundations of the United States and its federal government
were created in three years, 1790 to 1792. Before 1790, the government was
effectively bankrupt. Without tax revenues until late in 1789—after the newly
created Treasury Department opened in September of that year, it managed
to collect by year end a grand total of $162,200 in custom duties—the U.S.
government was in default on almost all of its large domestic debts left over
from the Revolution, as well as on most of its foreign debts incu
ed in the
struggle. The new nation lacked a national cu
ency, a national bank, a bank-
ing system, and regularly functioning securities markets. It had only a couple
of dozen business corporations the states had chartered during the 1780s.
The fi nancial revolution of 1790 to 1792 changed all that. In 1793, the
government collected almost $4.7 million in tax revenue, more than enough
to fund government operations and meet interest payments on the national
debt. By 1793, a federally chartered Bank of the United States had opened in
Philadelphia with
anches in several cities, as had the U.S. Mint, to produce
silver and gold coins in the newly defi ned dollar unit of account. Several
states had chartered ten more banks to join the fi rst three bank start- ups of
the 1780s, one of which operated without a corporate charter until 1791.
Richard Sylla is the Henry Kaufman Professor of the History of Financial Institutions and
Markets and Professor of Economics at New York University, and a research associate of the
National Bureau of Economic Research.
The author thanks Eric Hilt, Farley Gru
, Douglas Irwin, Naomi Lamoreaux, Hugh
Rockoff, Jon Wallis, Thomas Weiss, Robert Wright, other participants in the Founding Choices
conference, and two anonymous reviewers for comments and suggestions that he hopes have
improved this essay. Some material in the chapter is based upon work supported by the National
Science Foundation under Grant no XXXXXXXXXX, “U.S. Corporate Development, 1801– 1860.”
Any opinions, fi ndings, and conclusions expressed in this chapter are those of the author and
do not necessarily refl ect the views of the National Science Foundation.
60 Richard Sylla
Along with the national bank and its
anches, these banks were interacting
with one another as a banking system.
Forty- four new business corporations, including the banks, received char-
ters in 1790 to 1792: more in three years than the total of seven in the entire
colonial era and the total of twenty- four in the 1780s. Securities markets in
Philadelphia, New York, and Boston priced every business day the $63 mil-
lion of restructured domestic U.S. debt that began to appear in late 1790,
as well as the $10 million in stock of the Bank of the United States and the
stock of state banks and nonbanking corporations.1 These markets had
even survived their fi rst bu
les, panics, and crashes in 1791 and 1792 (Sylla,
Wright, and Cowen XXXXXXXXXXFinancially, by 1793 the United States looked
surprisingly modern. In 1789 it was decidedly premodern.
Because of the events of 1790 to 1792, from that time forward Americans
and most of their historians could assume, co
ectly, that a modern fi nancial
system always existed in their country. But, too often inco
ectly, they also
assumed there was nothing special, unique, or even good about it. Since
modern economies by defi nition have modern fi nancial systems, much of
U.S. fi nancial historiography has focused on the unseemly, negative features
of these systems. Taxes and public spending are too high. The national debt
is too big and ought to be reduced. Large banks are a threat to economic
stability and perhaps even the people’s liberties. Banks take too many risks
and too often fail. Stock markets are the dens of speculators and thieves, and
too often they crash. Business corporations have too many privileges and too
much infl uence in American life.
These widely trumpeted opinions of our time are nothing new. They have
een voiced throughout U.S. history since 1790. But they were not voiced
in America before 1790, or in most other countries until long after 1790.
The United States was one of the fi rst nations to modernize its fi nances.
Only two nations did so earlier—the Dutch Republic (the modern Neth-
erlands) about two centuries before the United States, and Great Britain
starting perhaps a century earlier. Neither modernized as completely as the
United States did by 1800, and neither did it within three years, or even three
decades (Rousseau and Sylla 2003, 2005; Sylla 2009).
This chapter attempts to answer several questions. How did so much mod-
ernizing economic and fi nancial change happen so quickly at the start of
U.S. history? What were the specifi c choices made and actions taken during
1790 to 1792 that made it happen? How were they challenged? How were
they defended? Did the fi nancial revolution happen as easily as is sometimes
assumed from its sheer rapidity? And fi nally, what difference did the fi nancial
evolution make for what happened after it occu
ed? In particular, what
was its impact on the growth of the U.S. economy?
1. An additional $12 million of foreign debt raised the total national debt to approximately
$75 million as of 1790. Most of the foreign debt was owed to France, for French loans during
the War of Independence and a
ears of interest on those loans.
Financial Foundations 61
2.1 Hatching and Shaping the Plan
The origins of the fi nancial revolution of the early 1790s can be traced
to the seemingly insurmountable fi nancial difficulties of the last years of
the War of Independence. Then, the Confederation Congress saw its paper
money become worthless and, having no tax powers, it struggled to fi nd
ways to pay its army and its debts (Ferguson XXXXXXXXXXCongress appointed
Robert Mo
is, a wealthy merchant and fi nancier, to be superintendent of
fi nance in 1781. Mo
is managed to fund the decisive Yorktown campaign
and victory in October of that year, and to persuade Congress to charter the
fi rst American bank, the Bank of North America, shortly thereafter. But
Congress failed to enact most other fi nancial reforms Mo
is recommended,
and he resigned in frustration in 1784.
Financial difficulties in countries are common, particularly during times
of war, and there were lots of such times during the eighteenth century.
Financial revolutions, however, are rare. How, then, did the fi nancial
difficulties experienced by Americans during the War of Independence lead
to a fi nancial revolution a decade later?
Subsequent events would reveal that the initial plans for a U.S. fi nancial
evolution were hatched in several letters—more accurately essays—on
political economy that Alexander Hamilton wrote between late 1779 and
early 1781. Hamilton at the time was a lieutenant colonel in the Continental
Army and the principal aide de camp to General Washington, the American
commander. In his long letters to U.S. leaders, Hamilton demonstrated an
unusual understanding of fi nancial history, gained from his recent study of
the works of Malachy Postlethwaite, David Hume, Richard Price, Adam
Smith, and others (McDonald 1979, 35). The letters indicate that Hamilton
knew quite a lot about the successful fi nancial revolutions of the Dutch
and the British, and the aborted efforts of John Law in France. From those
histories he drew the conclusion that fi nance was the key both to state power
and economic growth. Applying his historical understanding to the situation
of the United States, he began to formulate plans for what would become
the U.S. fi nancial revolution a decade later. In 1789, as the fi rst secretary of
the treasury of the new federal government, Hamilton would execute a more
efi ned version of a plan he had hatched a decade earlier and then developed
during the 1780s.
The setting for Hamilton’s letter- essays was the dire situation of the Amer-
ican revolutionaries in 1779 to 1781. The war had dragged on for fi ve years.
Paper “Continental Cu
ency,” fi rst authorized and issued by Congress in
1775, and then issued to excess by 1778 to 1779, was well on its way to becom-
ing worthless by 1780. Taxation, then, was in the hands of the states. To meet
the requisitions of Congress, states were supposed to levy wartime taxes
payable in Continentals as well as in their own state paper cu
encies. That
would support the values of the paper cu
encies by making them acceptable
as a means of paying taxes and by reducing the amounts outstanding. But
62 Richard Sylla
taxes levied and collected by the states were woefully inadequate to the task,
so Continental paper dollars depreciated to the point where it took about
forty paper dollars to purchase a dollar in hard- money coins by the start of
1780, and about one hundred paper dollars to buy a dollar in specie by the
eginning of 1781 (Perkins 1994, 97). Bo
owing, an alternative to taxation
and money printing as a method of public fi nance, also proved difficult
oth at home and a
oad, in part because ineffective taxation and excessive
money printing undermined whatever confi dence lenders might otherwise
have had in the revolutionary cause.
In his fi rst letter on the dire U.S. fi nancial situation (undated, but thought
to have been written between December 1779 and March 1780), Hamil-
ton argued that the main solution to the wartime fi