Continued . . . King’s CollegeThe letter caused Hamilton’s employer, who experienced the same catastrophic storm but lacked Hamilton’s expressive ability, to fund his study at King’s College (now Columbia University), where Alexander arrived in 1774. This was after Princeton declined Hamilton’s required terms of enrollment. At age 19, being supported by third parties, but being of adamantine will, he demanded to be allowed to enroll in any class for which he was qualified and to graduate as soon as he’d completed the minimum requirements. 

Given Hamilton’s implacable attitude, it is not inconceivable that Hamilton’s employer contributed to his moving expenses just to be rid of him. Princeton, as noted, seemed to ratify his employer’s position when it declined Hamilton’s terms as presumptuous. King’s College, the next approached, agreed to the arrangement and even assigned a special tutor to his service.

War:  Alexander’s interests, while at King’s, became increasingly focused on the nascent independence movement. He published a series of scathing but well reasoned pamphlets in which he defended the Continental Congress’s proposal to embargo trade with Britain. These pamphlets received wide recognition and, when the Revolutionary War began, he was commissioned to lead an artillery company. Hamilton fought in the battles at Trenton and Princeton. By 1777 he came to the attention of George Washington.

Washington – General Washington sought assistants to whom he could delegate a portion of his responsibility. Hamilton performed admirably, being able to find solutions that reflected Washington’s intent, even if not his precise instructions. One example is Hamilton’s notes to the Continental Congress and orders to the generals under Washington. As time passed Hamilton was able to speak for General Washington in a way no other staff member could. Washington described Hamilton as his “principal and most confidential aide.”

At Hamilton’s insistence, in 1781 Washington raised Hamilton to a field command (infantry) at the Battle of Yorktown, the last major battle of the war. Hamilton, in conjunction with the French, co-led the assault that contributed to the surrender of the British General Lord Cornwallis. At that time, battlefield victories were one of the few ways a basically unknown person could win public fame, and this victory advanced his career in ways nobody could have anticipated.

The Articles 

After the war, Hamilton read law, passed the bar, and promptly established offices in New York City. Soon thereafter the Philadelphia Convention was called to repair the flawed Articles of Confederation. New York presented three delegates. One of them was the new lawyer, Alexander Hamilton.

Coming so soon after the Revolution, the Convention was quick to recognize that the Articles of Confederation were inadequate to a balanced government: they simply gave too much power to individual states, any one of which held fiscal veto powers over the federal government. For example, under the Articles of Confederation only the individual states, and not the federal legislature, had authority to levy taxes. That made the federal government a perpetual supplicant to each and all of the individual states, who may (or, more likely, may not) deign to honor federal obligations. That effectively put the federal government on a cash-only basis. It’s hard to run a country that way.

Not only did the Articles of Confederation not allow for self-funding at the federal level, the Articles also failed to provide for a federal judicial branch superior to the courts operating within the individual states. How, then, was commerce between the states to be adjudicated?

And there was no common currency. As witnessed during the Revolution, permitting individual states to issue their own money stimulated the ancient principle that “bad money drives out good”. When $10 coins struck from 18K gold are in circulation at the same time as competing $10 coins compressed from the very, very best night soil, people will tuck the gold coins beneath their mattresses (i.e., it will be removed from circulation) and use the alternative in daily commerce. First articulated by Aristophanes in his play, The Frog (405 BC), and accepted as just plain common sense for the next 2,200 years, it wasn’t until 1860 that the principle bad money drives good money out of circulation became known as Gresham’s Law.

Recognizing the deficiencies of the Articles of Confederation, the Philadelphia meeting was refocused from moderating the Articles to writing entirely new governing documents. The Philadelphia meeting that originally intended to revise the Articles of Confederation became the Constitutional Convention. 

Drafting: As in Hamilton’s Hurricane Letter, which fell into two parts (first what happened, then how it affected people), so did the Constitutional Convention divide into (a) drafting the new document, and then (b) trying to convince people to adopt it. Hamilton was involved in both parts, only one successfully. In the matter of drafting, Hamilton gave a six-hour address to the Constitutional Convention detailing his plan for a robust central government. Besides the abrasive attitude he was born with he had, over time, developed a splendid disinterest in shutting up, and proved it that day.

Where the Articles of Confederation were too light on the need for a central government, Hamilton’s approach was seen as too heavy. The delegates thought that if they squinted their eyes just-so they could perceive a monarchy behind his speech. They quickly screwed their fingers into their ears and tuned the speaker out. Hamilton had little effect on the organization of the new Constitution, although he gave it his best.

Convincing:  Hamilton was, however, instrumental in its ratification. He shifted, with a politician’s seamless ease, from drafting the new Constitution to influencing the interpretation of the document. This was accomplished through a series of weekly articles in four New York newspapers.

The Federalist Papers consist of 85 essays, fifty-one of which were written by Alexander Hamilton. When reading those articles, it is Hamilton’s voice that one hears. James Madison and John Jay, the secondary authors responsible for the remaining 34 essays, had to massage their articles into compatibility with Hamilton’s pieces. Hamilton wouldn’t budge. Those 85 essays were written by three distinct men, but it is largely Hamilton’s voice throughout. 

Hamilton’s arguments for a constitution supporting a strong central government – but not a monarchy – of three branches (executive, legislative, judicial) were printed and reprinted throughout the former colonies. They were disputed, discussed, and debated until finally the mood of the country, initially cautious, shifted in favor.

Bill of Rights

There were, however, several states that demanded increased protections for individual liberty. They insisted on greater specificity to the limits on government power. To secure ratification, the arrangement was made that James Madison, a secondary author of the Federalist Papers, would write what eventually totaled 17 Amendments to follow Article VII of the Constitution. Ten Amendments survived the making of the sausage. Virginia, the final state to ratify the Bill of Rights, approved them on December 15, 1791.

Treasury Secretary:  Hamilton favored American industrialism (nascent as it was at the time) and a strong central government. This would seem to put him in political opposition to George Washington, a plantation owner with heavy agricultural sympathies, but that was not the case. Washington’s Revolutionary War agonies ran deep. He was fundamentally changed by (i) his wartime experiences when he was frequently held responsible for achieving certain strategic goals ordered by the government, while that same government was unable to fund their accomplishment, and (ii) the tactical difficulty of fighting a war while faced with constant shortages of even the most necessary items, such as powder and ball. Washington had to notice that both big war strategy (strategy: “Ok, first we sink their entire fleet so they can’t resupply. Then we get ‘em good!”) and skirmish level tactics (tactics: “You got any powder, Elias? I’m all out!”) were burdened by the lack of hard currency on the Colonials part. Washington turned from his agrarian past and warmed to Hamilton’s strong government / industrial position. The first Secretary of the Treasury would be Hamilton.

While at the Treasury, Hamilton demonstrated acute political acumen by organizing his goals almost as though they were a set of Russian nesting dolls. Any single goal was only possible if the entire list was approved: a state may not pick and choose. There was some back-and-forth on this, as one would expect, but eventually, agreement was achieved. The various matryoshka were:

First: Federal assumption of the war debts of the individual states. This was perhaps Hamilton’s biggest lever. States were desperate for relief from the immense burden of their wartime obligations.

Second: But debt relief could only be accomplished if the Federal government held seigniorage. Seigniorage comes in two forms: (1) the exclusive right to issue money, and the corollary (2) to keep the profit. Example: If it takes $0.02 to make a $1.00 bill, the seigniorage profit is $0.98. More if it’s a $50 bill. Under Definition One, this meant that all states were required to link to a common currency. If this were not so, a state incentivized by Definition Two could continue cranking out money in competition with the Feds, then we’d have a situation of bad money (the counterfeit) driving good money out of circulation, and Aristophanes taught us that nothing good happens there. 

Third: Seigniorage could be robust only if there were a federalized judicial branch superior to state-level courts. Without federal supremacy, how could the conflicting claims of state mints be adjudicated? 

Fourth: Among other things, a federalized judicial system made national import tariffs possible, and . . . 

Fifth: . . . thus the national government became self-funding.

Three basic deficiencies of the Articles of Confederation noted earlier were (i) the lack of Federal taxing power; (ii) no judiciary superior to state courts, and (iii) the lack of a common currency. Hamilton, through a trifecta of acute negotiation skills, overwhelming leverage, and applied banking experience corrected these three shortcomings and another two besides: (iv) state relief from war debts (this was the main lever), and (v) seigniorage.

 

Bank of New York

Washington was aware that Hamilton had joined with Aaron Burr in 1784 to establish the Bank of New York (now one of the largest investment banks in the world: BNY Mellon). This banking experience was central to Hamilton’s assumption of the Treasury in 1789.

Twenty years after Hamilton and Burr founded the Bank of New York, Burr killed him.

More, later.

 

This article is for informational purposes only and is not intended as professional advice. Klarise Yahya is not a financial planner. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate, perhaps Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected]