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Friday, July 3, 2015

Hamilton on Money

Wonky warning

Hamilton was trying to solve an impossible problem. On page 62 of "Washington's Circle" the author notes:

"Finances were the government's biggest problem as trickling revenue allowed an already mountainous public debt t ogrwo while accumulating interest, all in arrears. The amounts were terrifying. The States owed a total of $21 owed almost $12 million in foreign loans. The central government owed it's own citizens a whopping $42.5 million." ... "In sum, the total of $75 million could be calculated in modern worth at about $2 trillion in purchasing power but as much as $30 trillion in labor value." [page 62, "Washington's Circle"]

And this with a national population less than a tenth of what it is today the USA had a deficit that in modern money wouldn't be much different from our entire GDP. The problem Hamilton had to solve was greater than what we face.

In Hamilton's collected works, he was applying an expertise he'd developed from shortly after he retired from the military when he wrote a bank plan and sent it to Robert Morris. The problem he identified then had only grown since then (see Hamilton's Bank Plan from 1781). This article presents his writings on money:

On The Establishment Of A Mint

Communicated to the House of Representatives, January 28, 1791. [From Volume 4 of his collected works]


Hamilton broke his arguments down into 6 parts:

1st. What ought to be the nature of the money unit of the United States?
2d. What the proportion between gold and silver, if coins of both metals are to be established?
3d. What the proportion and composition of alloy in each kind?
4th. Whether the expense of coinage shall be defrayed by the government, or out of the material itself?
5th. What shall be the number, denominations, sizes, and devices of the coins?
6th. Whether foreign coins shall be permitted to be current or not; if the former, at what rate, and for what period?

Hamilton's vision couldn't be any clearer. He was ahead of his time. Of the founding fathers his understanding of the subject of finances was unparalleled. In answering basic questions he is setting for guidance for this country that we've done well to follow.


What ought to be the nature of the money unit of the United States?


He starts his exposition by discussing the history and weights of the standard "dollar" "piece of 8" from Spain and it's evolution into the money used by American Colonies. He starts by noting that the dollar reflects the relative scarcity of Gold in relationship to Silver:

"The difference established by custom in the United States between coined gold and coined silver has been stated upon another occasion to be nearly as 1 to 15.6."

Coins of Gold and Silver should reflect their relative scarcity.

And this also answers question two. He suggests that neither Gold nor Silver be established as the "standard". But he makes an almost surprising statement on whether one or the other should be preferred. He is famous for preferring the Gold Standard, where Congress preferred the more abundant silver standard. He then makes a surprising statement:

"Contrary to the ideas which have heretofore prevailed, in the suggestions concerning a coinage for the United States, though not without much hesitation, arising from a deference for those ideas, the Secretary is, upon the whole, strongly inclined to the opinion, that a preference ought to be given to neither of the metals, for the money unit. Perhaps, if either were to be preferred, it ought to be gold rather than silver."

Again he's referring to Gresham law. If we make an internal standard of gold coins (or silver coins) those gold coins become reservoirs of value and get driven out of circulation. He's been quoted by gold bugs as wanting a gold standard over a silver standard. But his opinion is more nuanced than that:

"The inducement to such a preference is to render the unit as little variable as possible; because on this depends the steady value of all contracts, and, in a certain sense, of all other property. And, it is truly observed, that if the unit belong indiscriminately to both the metals, it is subject to all the fluctuations that happen in the relative value which they bear to each other. But the same reason would lead to annexing it to that particular one, which is itself the least liable to variation, if there be, in this respect, any discernible difference between the two."

If the dollar is tied to either Gold or Silver, then fluctuations in the price of those commodities will affect the value of the dollar, and not in a positive way. But more important than the circulation of coin was it's value as a backing for notes circulated:

"But bank circulation is desirable, rather as an auxiliary to, than as a substitute for, that of the precious metals, and ought to be left to its natural course. Artificial expedients to extend it, by opposing obstacles to the other, are, at least, not recommended by any very obvious advantages. And, in general, it is the safest rule to regulate every particular institution or object, according to the principles which, in relation to itself, appear the most sound."

Hamilton Advocating for Paper Money

Hamilton was not advocating exclusive use of coins.

"In addition to this, it may be observed, that the inconvenience of transporting either of the metals is sufficiently great to induce a preference of bank paper, whenever it can be made to answer the purpose equally well."

Bank Paper is a term that includes paper money.

3d. Sound Money and the proportion and composition of alloy.

He wants sound money, yes, but he's talking about something more advanced than money as a precious commodity. He explains

"But, upon the whole, it seems to be most advisable, as has been observed, not to attach the unit exclusively to either of the metals; because this cannot be done effectually, without destroying the office and character of one of them as money, and reducing it to the situation of a mere merchandise; which, accordingly, at different times, has been proposed from different and very respectable quarters; but which would, probably, be a greater evil than occasional variations in the unit, from the fluctuations in the relative value of the metals; especially, if care be taken to regulate the proportion between them, with an eye to their average commercial value."

The Key to Sound money is whether the money is backed by goods and services.

Not a Gold Bug

But Hamilton understood the importance of providing sufficient currency for trade and commerce rather than focusing too much on Gold versus Silver. In this sense he anticipated issues that would come up years later as "Gold Standard" advocates bitterly contested "Silver Standard" advocates. He understood, long before Friedman became famous for it, the importance of using money and notes to make sure people have enough currency to buy and sell and engage in commerce:

"To annul the use of either of the metals as money, is to abridge the quantity of circulating medium, and is liable to all the objections which arise from a comparison of the benefits of a full, with the evils of a scanty circulation."

4th. Uniform Weights and Measures: Whether the expense of coinage shall be defrayed by the government, or out of the material itself?

Hamilton is talking about universal weights and measures. He doesn't seem attached to any particular solution. But he advances that the values be uniform. When answering the question of how much seignorage the government ought to receive. And he notes:

"It is sometimes observed, on this head, that, though any article of property might, in fact, be represented by a less actual quantity of pure metal, it would nevertheless be represented by something of the same intrinsic value. Every fabric, it is remarked, is worth intrinsically the price of the raw material and the expense of fabrication; a truth not less applicable to a piece of coin than to a yard of cloth."

He then notes that the value of money is related as much to the wealth and good name of the country, it's government and its ability to pay its bills. Thus money is not to be considered raw material/bullion but analogous to "fabric":

"The fact is, that the adoption of them as money has caused them to become the fabric; it has invested them with the character and office of coins, and has given them a sanction and efficacy, equivalent to that of the stamp of the sovereign. The prices of all our commodities, at home and abroad, and of all foreign commodities in our markets, have found their level in conformity to this principle."

This was a step along the way to fiat money. But most importantly money should have a standard measure so that it can be relied on:

"The foreign coins may be divested of the privilege they have hitherto been permitted to enjoy, and may of course be left to find their value in the market as a raw material. But the quantity of gold and silver in the national coins, corresponding with a given sum, cannot be made less than heretofore, without disturbing the balance of intrinsic value, and making every acre of land, as well as every bushel of wheat, of less actual worth than in time past."

There are some who would argue with this position, but the principle is incontrovertible. Money is used for trade and as such it has to measure the value of the thing it is traded for. And this is especially true if a country lives in trade with it's neighbors:

"If the United States were isolated, and cut off from all intercourse with the rest of mankind, this reasoning would not be equally conclusive. But it appears decisive, when considered with a view to the relations which commerce has created between us and other countries."

Fiat money in the context of the revolution would have had trouble surviving without the ability to trade for gold and silver.

5th. What shall be the number, denominations, sizes, and devices of the coins?

Following from his argument, he wanted to keep the US Dollar approximately equal to money already in circulation. To make it easier to use, more familiar to use and to regulate value. He concludes money should:

"continue to represent in the new coins exactly the same quantity of gold and silver as it does in those now current; to allow at the mint such a price only for those metals as will admit of profit just sufficient to satisfy the expense of coinage."

6th. And this also answered #6 about foreign money.

Of course:

" withdrawing it from those of foreign countries, and suffering them to become, as they ought to be, mere articles of merchandise."

Hamilton defines our money:

He suggested the following coins:

One gold piece, equal in weight and value to ten units, or dollars.
One gold piece, equal to a tenth part of the former, and which shall be a unit, or dollar.
One silver piece, which shall also be a unit, or dollar.
One silver piece, which shall be, in weight and value, a tenth part of the silver unit, or dollar.
One copper piece, which shall be of the value of a hundredth part of a dollar.
One other copper piece, which shall be half the value of the former.

Man that would be cool.

Bills of Exchange

Hamilton escoriated bills of exchange, paper money, on the grounds that it was usually used as a means to avoid paying bills and favor debtors over creditors. For example he wrote how:

"Rhode Island, New Jersey, North Carolina, and Georgia, making paper money a legal tender for the debts of those creditors; which, it is known, sustained a very great depreciation in every one of those States. These very serious and compulsory interferences with the rights of the creditors" [Vol 5]

So his opposition to paper money, was based more on the basis of the soundness of the underlying sureties and quality of the money produced.

The facilitating of pecuniary remittances from place to place—
"But much good would also accrue from some additional provisions respecting inland bills of exchange. If those drawn in one State, payable in another, were made negotiable everywhere, and interest and damages allowed in case of protest, it would greatly promote negotiations between the citizens of different States, by rendering them more secure, and with [159]it the convenience and advantage of the merchants and manufacturers of each." [Vol 4]

That is enough for this post.

Sources and Further Readings:
Online Library of Liberty: The Works of Alexander Hamilton, (Federal Edition), vol. 4
More on Alexander Hamilton:
LaRouche group on him (actually a very good article!):

Post Script.

I started this post months ago and had to pause due to other concerns. I'm glad I put it on pause because I didn't like my introduction. Now the post makes more sense because I was able to find another source to quote for the introduction and put the piece in the context of the year that he wrote his Report on Manufacturers. I'm also finding discrepancies between people's writings. Someone gave credit for the 1781 bank proposal to Robert Morris, but it's in Hamilton's hand then and so the biographer skipped over Hamilton's service to Morris. It's a minor discrepancy, but a similar one I just discovered on the subject of fisheries as Jefferson and Hamilton seem to have exchanged letters on the subject. Possibly they read each other's letters and might have acted on them had they not started squabbling like they did more and more as Washington's first Term finished. By the Second Term Jefferson left government and Hamilton soon followed. Hamilton won his arguments with Jefferson because he'd done his homework and because the Republicans were reacting to a scapegoat. Hamilton was not a saint. He was an elitist. But so were they. And he was not a monarchist and he cared about this country more than he cared for his personal aggrandizement.

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