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Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Table 3. Corporations Chartered in USA, 1607-1800
Table 3. Corporations Chartered in USA, 1607-1800
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Securities Markets: City Listings in 1811
Securities Markets: City Listings in 1811
Growth of the New York Securities Market, 1797-1832
Growth of the New York Securities Market, 1797-1832
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Alexander Hamilton and the US Financial Revolution of the 1790s
Centers of two empiresUK/England & Wales, and US Northeast (to scale)
Centers of two empiresUK/England & Wales, and US Northeast (to scale)
Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University

: rsylla. , . , Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University.ppt zip- 1047 .

Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University

Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University.ppt
1Alexander Hamilton and the US 45outstanding. Meredith, Treasurer of US,
Financial Revolution of the 1790s Richard purchases $133K par value of US debt for
Sylla, New York University. Financial $92K cash in Philadelphia, Mar. 21-Apr.
University lecture, Moscow 25.10.10. 25, 1792. Seton, cashier of Bank of New
2Financial Revolution. What is it? York, purchases $192K par value for $151K
Emergence, in a brief period of history, cash in New York, Apr. 2-17, 1792.
of a modern financial system with: Stable 461792: Hamiltons crisis management
public finances and public debt management tactics (2) Induces banks to extend
Stable Currency/Money A good banking credit. Directs banks in major cities to
system An effective central bank Efficient grant credit to merchants having US tax
securities markets Business payments falling duetwo examples: The
corporationsfinancial & merchants of New York have to pay
non-financial authorized by governments considerable sums in duties in this and
and with shareholders and managers. the next Month. You may boldly accommodate
3Historical Financial Revolutions. them under an assurance that the money
Which countries in modern history had shall in no event be drawn out of your
financial revolutions? Successful cases: hands in less than three Months, unless
Dutch Republic, 1550-1620 England, perfectly agreeable to you. Hamilton to
1688-1740s USA, 1789-1795 Japan, Seton of B of NY, Mar. 19, 1792.
1870s-1880s Aborted case: France, Considerable sums of duties have become
1715-1720 (John Law). due, or are to fall due, in Baltimore, in
4Who was Hamilton? (1). Born 1757 (or the course of the present month. I have
1755) on island of Nevis in West Indies determined to inform you that, if you
Illegitimate child; orphaned in 1768 should incline to make discounts for the
Showed high intelligence, and was sent to importers, to enable them to pay the
American mainland for education in 1772 duties which have become due or which
Kings College (now Columbia University) shall fall due on or before the 15th day
in New York, 1773 Revolutionary of April, I will leave a sum of money
(anti-British rule) pamphleteer, equal thereto in your hands, for sixty
1774-1775. days after the dates of the notes.
5Who was Hamilton? (2). Captain, New Hamilton to the Bank of Maryland, Mar. 29,
York Artillery Co., 1775-77 Lt. Colonel, 1792.
Continental Army, and principal aid de 471792: Hamiltons crisis management
camp to Gen. Washington, 1777-1781 Lawyer, tactics (3) Arranges cooperative
New York, 1782-1804 Member of agreements among banks and securities
Confederation Congress and New York dealers. Directs Bank of New York to grant
legislature, 1780 Founder, Bank of New credit to securities dealers
York, 1784. collateralized by US debt securities at
6Who was Hamilton? (3). Annapolis prices Hamilton names, and at a penalty
Convention delegate, 1786 Philadelphia rate of interest, with promisein case the
Constitutional Convention delegate, 1787 B of NY got stuck with the collateral, to
Principal author of Federalist Papers, repurchase the collateral at the prices he
1787-88 Washington, first president of US had named:
under Constitution, 1789-97, appoints 48Let deposits of stock be received to
Hamilton Secretary of the Treasury an amount not exceeding a millionSix per
(finance minister), 1789. Serves from 1789 Cents at par, three per Cents at 10
to 1795. shillings on the pound, and deferred at 12
7 shillingsLet credits be passed on your
8The US Financial Revolution. The US books in favor of the Depositors for the
financial revolution of the early 1790s amounts, according to those values,
gives the new federal government strong transferable at the Bank as in the case of
public finances and debt management, and deposits at the Bank of Amsterdam. Let
also jump starts the modern growth and the terms of the deposit be that the
development of the US economy. Depositors may withdraw their Stock at any
9 time paying in specie the sums credited
10US Growth Rates per year, 1790-2009. whenever the Credits have been
1790-1860 1860-1920 1920-2009. Real GDP transferredwith a right to the Bank after
4.40% 3.61% 3.36% Real GDP/Capita 1.30% six months to sell the Stock and pay them
1.52% 2.13% Population 3.02% 2.05% 1.20%. the overplus. Let the Bank engage at the
11Finance and Economic Growth. The USA end of six months to pay the amount of
grew at modern rates virtually from its these Credits in Gold or Silver; for the
start as a nation, from 1790 on undertaking of which let them receive a
Modernization of the US financial compensation in Interest at the rate of 7
systemthe financial revolution of the per Centum per annum. I take it for
early 1790swas a crucial input to growth granted in the prevailing disposition of
The US financial revolution was conceived your City, transfers of these Credits
and executed mainly by Hamilton. under the promise of the Bank to pay in
12US Financial System, 1788 and 1795. Specie at the end of six months would
13The US Financial Revolution, 1789-95. operate as Cash in mutual payments between
Stable public finances and debt management Individualswhile the Bank would be
Stable money An effective central bank A perfectly safe from the danger of a run
functioning banking system Active & undoubtedly safe eventually. To
securities markets Growing numbers of render the operation more perfectly safe
corporations, financial and non-financial to the Bank, I will engage at the
Before 1789, the US had none of these. By expiration of six months to take off your
1795, perhaps even by 1792, it had all of hands at the rate specified to amount of
them. 500,000 Dollarsin case the parties should
14Public Finance and Debt Management. not redeem & there should be no
Establishing Public CreditHamiltons adequate demand. Which however is not
January 1790 Report to Congress --Fund all supposeable. Hamilton to Seton, Mar. 22,
debts at par value (these were about 40% 1792.
of GDP then), but at reduced interest rate 49Bagehots rules, 1873, independently
--No discrimination between original and formulated by Alexander Hamilton in 1792.
present owners --Assume state debts The end is to stay the panic; and the
--Commence interest on US debts in 1791, advances should, if possible, stay the
and assumed state debts in 1792 Problem: panic. And for this purpose, there are two
Government revenues far from adequate to rules:--First. That these loans should
deliver on the promises Solution: Using only be made at a very high rate of
deft financial management, borrow from interest. Secondly. That at this rate
domestic banks and foreign lenders to meet these advances should be made on all good
obligations until tax revenues become banking securities, and as largely as the
adequate. public ask for them. If it is known that
15 the Bank of England is freely advancing on
16 what in ordinary times is reckoned as a
17Report on the Bank, December 1790. good securityon what is then commonly
Hamiltons plan for the Bank of the United pledged and easily convertiblethe alarm
States (1) --Limited liability of the solvent merchants and bankers will
corporation, privately managed, with be stayed. Walter Bagehot, Lombard Street
capital of $10 million divided into 25,000 (1873).
transferable shares with par value of $400 50Was Hamiltons Bagehot-like plan of
each --US government to take 5,000 shares March 22, 1792, implemented? Yes. The
(20%), paying for them with a loan from Dealers last Night had a meeting &
the Bank, to be repaid in installments appointed a Committee, to confer with the
over ten years --Private investors offered Directors of the two Banks. The
80% of shares, one-fourth payable in propositions which they are to hold out I
specie and three-fourths payable in the hear in general is to offer, funded debt,
new US 6% bonds issued as part of the plan at your price as pledges for their
to restore public credit. discounts--& they are to sign an
18Report on the Bank. Hamiltons plan Agreement to bind themselves not to draw
for the Bank of the United States (2) any Specie from the Banks, on account of
--BUS to have 25 directors, one to be the discounts which they shall obtain and
president --Prudent mean voting giving checks to each other, if anyone
rightsno shareholder to have more than 30 shall part with the Checkexcept to those,
votes, regardless of no. of shares owned who engage by the agreement, not to draw
--BUS bills and notes receivable in all out Specie, he shall be deemed infamous
payments to US --Branch offices of &... no one of the signers of the
discount and deposit can be established agreement will deal with him. Philip
throughout the US --BUS to report to Livingston, New York, to Hamilton,
Secretary of Treasury as often as weekly, Philadelphia, March 27, 1792.
and Secretary has right to inspect BUS 511792: Hamiltons crisis management
books. tactics (4) Induces banks to cooperate.
19Hamiltons Report on the Mint, January Directs US Treasury and banks not to draw
1791. Hamilton defines a new US dollar as on other banks reservesexamples: I
the monetary base: the unit in the coins have explicitly directed the Treasurer to
of the United States ought to correspond forbear drawing on the Bank of New York,
with 24 Grains and ? of a Grain of pure without special direction from me. And my
Gold and with 271. Grains and ? of a Grain intention is to leave you in possession of
of pure silver, each answering to a dollar all the money you may have or may receive
in the money of account. Recommends till I am assured the present storm is
various coins be minted, including ten effectually weathered. Hamilton to Seton,
dollar gold coins, one dollar silver and Jan. 24, 1792. I request that you will
gold coins, disme or tenth dollar coins, not draw out from the Bank of N America
and a copper Cent or Hundreth of a any further sum without a previous
dollar. Congress enacts the plan a year communication from me. Hamilton to John
later, but US Mint develops slowly, so Kean, cashier of Bank of the United
foreign coins with dollar ratings are used States, Philadelphia, Mar. 28, 1792.
for decades. A US dollar currency union 521792: Hamiltons crisis management
among American states is established in tactics (5) Releases reassuring news.
the 1790s, two centuries before the euro. Publicizes new loan from Dutch bankers to
Monetary unification. Banks moneynotes US at 4%: Private. I have just received
and depositsare convertible into dollar a Letter from Mr. Short, our Minister
base. US banking system expands rapidly Resident date Amsterdam 28th December, by
after 1790. which he informs me that he has effected a
20Hamiltons. loan for Three Millions of Florins [$1.2
21US State-Chartered Banks: Numbers and million] at 4 P Cent Interest on account
Authorized Capital, by Region and Total, of the United States. This may be
1790-1835 (Capital in millions of announced; and as in the present moment of
dollars). Region. New Engl. Mid-Atl. suspicion some minds may be disposed to
South. West. US. Year. No. Cap. No. Cap. consider the thing as a mere expedient to
No. Cap. No. Cap. No. Cap. 1790. 1. 0.8. support the Stocks, I pledge my honor for
2. 2.3. 3. 3.1. 1795. 11. 4.1. 9. 9.4. 20. its exact truth. Is the Treasury of Great
13.5. 1800. 17. 5.5. 11. 11.9. 28. 17.4. Britain comparatively in so good a state?
1805. 45. 13.2. 19. 21.7. 6. 3.5. 1. 0.5. Is the Nation comparatively so equal to
71. 38.9. 1810. 52. 15.5. 32. 29.4. 13. its debt? Why then is there so much
9.1. 5. 2.2. 102. 56.2. 1815. 71. 24.5. depression? I shall be answeredthe
107. 67.1. 22. 17.2. 12. 6.4. 212. 115.2. immediate necessity for Money. But if the
1820. 97. 28.3. 125. 74.4. 25. 28.6. 80. Banks are forbearing as to the necessity
28.4. 327. 159.6. 1825. 159. 42.2. 122. of paying upcannot the parties give each
71.2. 32. 33.3. 17. 9.4. 330. 156.6. 1830. other mutual credit and avoid so great a
186. 48.8. 140. 73.8. 35. 37.3. 20. 10.5. press? Hamilton to Seton, Mar. 25, 1792
381. 170.4. 1835. 285. 71.5. 189. 90.2. [Before Hamilton learned that his Mar. 22
63. 111.6. 47. 35.0. 584. 308.4. plan was being implemented in New York].
22Compare and Contrast. Canada did not 53Dutch loans served two purposes in
have chartered bank until 1817. It had 6 1792. Publicizing the loan of 3 million
banks in 1830 and 16 in 1840. Mexico did florins, or $1.2 million, was a tactic for
not have a chartered bank until 1863. It calming panicked markets in Mar. and Apr.
had 8 banks in 1883 and 46 in 1911. In 1792 As in 1791, Dutch loans financed the
England, until 1825 all banks apart from open market operations of Mar. and Apr.
the Bank of England had to be 1792: The whole sum successively received
unlimited-liability partnerships with no on account of Amsterdam bills, subsequent
more than six partners. By 1825 the US had to the 1st of March, and prior to July,
330 state banking corporations and a 1792, was $235,412.33. The amount of the
central bank with 25 branches carrying on moneys invested in purchases between those
interstate banking. England, France, and periods was $242,688. 31. Hamilton
Germany did not offer general reporting to the House of Representatives,
incorporation to banks and other business February 13, 1793.
until the latter half of the 19th century. 54Summary and an extension. Together,
By that time the US had thousands of the interventions Hamilton orchestrated
corporations. The US had 80 banks and ended the Panic of 1792 by May, after
branches by 1805, 600 by 1835, 1,600 by which securities markets recovered. There
1860, and 25,000 by 1910. In 1913, the US were numerous bankruptcies in New York
had at least 30% of the total bank City and fewer elsewhere. But there was
deposits of the entire world, and at least little economic damage. The US economy had
36% of commercial bank deposits--far more been growing at modern rates of 1.4% per
than any other country. capita per year from the time the new
23Table 3. Corporations Chartered in government appeared in 1789, and that
USA, 1607-1800. growth continued through the 1790s and
24 after. In May 1792, 24 dealers in
25 securities met under a buttonwood tree in
26Securities Markets: City Listings in Wall Street and founded the NYSE, a better
1811. trading system. Ten of the 24 had sold
27Growth of the New York Securities securities to Hamiltons agents during the
Market, 1797-1832. open market purchase program of March and
28 April, and probably had participated in
29 the plan for bank-dealer cooperation in a
30 crisis as unveiled in Hamiltons March
31Foreign Investment and Capital Flows 22nd letter.
to the US Emerging Market. One of 55Hamilton, Central Banking Theory, and
Hamiltons main reasons for establishing a Greenspan/Bernanke. There are parallels of
modern financial system in the US is that what Hamilton did in 1792 and what
it would attract foreign investment and Greenspan did more recently: 1987 stock
capital flows The new financial system did market crash Russian/LTCM crisis of 1998
exactly that The US economy and financial Late 90s bubble and 2000-2002 crash
system have continued to attract foreign 9/11/2001 terrorist attacks 2007-2009
investment and capital flows, with some credit crisis.
fits and starts, for more than two 56After the panic of 1792, US financial
centuries. system grows rapidly. Economic historians
32 often say that Britain had the most
33 developed financial system and was the
34A crucial US advantage: modern finance financial leader of the 19th C. But that
from the start. The US westward expansion was not true in the 1790-1830 period, when
depended on finance: e.g., the Louisiana the USA developed a more advanced
Purchase, lands sold on credit The US financial system and grew economically far
transportation revolution depended on more rapidly than Britain. After 1830
finance: e.g. turnpike and bridge Britain improved its financial system, and
companies, the Erie and other canals, the the USA weakened its system.
railroads The US industrial revolution 57The US Case: Part III. The US
depended on finance: e.g., textile financial revolution of the early 1790s,
manufacturers raised equity capital by and the jump start it gave to economic
selling stock, and obtained working growth and development A threat to
capital via bank loans Rapid industrial financial modernization that was handled
growth began with the establishment of a successfully: Wall Streets first crash in
modern financial system in the 1790s. 1792 Comparing the US and UK financial
35 systems in the early 19th century: Who had
36Growth of US Industrial Production, the better system?
1790-1913 (percent per year in the new 58Comparing UK and US levels, 1830. UK
Davis index). 1790-1913 5.2 1790-1802 5.3 US PF: Nat. Debt $3,830 m. $80 m. Money
1802-1815 3.9 1815-1833 5.3 1833-1860 6.0 stock $643 m.,M3 $129 m.,M2 Cent. Bank
1860-1913 5.0. assets $166.1 m. $68.4 m. Banking capital
37The US Case: Part II. The US financial $70-80 m. $154 m. (E&W is $55m) Secs.
revolution of the early 1790s, and the Mkts.-co. listings 206 216 Corps./ Jt.
jump start it gave to economic growth and Stk. Cos. 250-300 1,100-1,200.
development A threat to financial 59Comparing populations, 1830. UK 23.3
modernization that was handled m. England & Wales 13.8 m. US 12.9 m.
successfully: Wall Streets first crash in US Northeast 6.1 m.
1792 Comparing the US and UK financial 60Centers of two empiresUK/England
systems in the early 19th century: Who had & Wales, and US Northeast (to scale).
the better system? 61Per capita comparisons, 1830, in $. UK
38Threats to the Financial Revolution. US E&W US Northeast Pub. Debt/ cap.
Today we know that the Federalists $161 6-7 Money stock/cap. 27 10 Cent. Bank
financial revolution was a success. But it assets/cap. 6.97 5.30 6.97 8.41 Fin.
could have failed at a number of points. crises, 1790-1830 6 2 Bank assets/cap. 19
An instructive example is the securities 27.30 24 43 Annual bank failure rate/1000
market panic of 1792 when the US national 18 5 . SM: listed cos./mill. 8.7 16.7 14.9
debt lost 25% of its value in two weeks. 32 . Corps./Jt stk cos./mill. 13 93 22
Hamilton saved the day by modern 180.
central-bank-like interventions, which are 62After 1825-1835. UK got better1707
just now coming into historical focus. BoE monopoly ended, 1720 Bubble Act
39Panic of 1792 threatens to undo the US repealed, Jt stk banks come to England,
financial revolution, as had happened unltd. cos. by registration (1844) and
earlier in France and almost happened ltd. (1857), banks consolidate with
earlier in England: The collapse of the extensive branch systems US got worseBUS
Mississippi Bubble of 1720 actually undid recharter vetoed (1832), unit banking
John Laws plans for a French financial becomes entrenched UK orientation is
revolution. The collapse of the South Sea international, US is domestic.
Bubble of 1720 in Great Britain threatened 63Butby 1830, the winner is UK US
that countrys financial revolution, but Public finance, debt mgmt. X Money tied
modern finance survived there in a Central banking X Banking system X
weakened form. Securities markets X Corporations X
40Why you probably never heard of the US Financial system overall X.
panic of 1792: Interventions executed and 64From 1790 to 1830 US grew faster than
orchestrated by public agents, chiefly the UK, by 0.8 to 1%/yr US had fewer
Alexander Hamilton, Secretary of the financial crises, 2 vs. 6 US bank failure
Treasury, ended the financial crisis with rate was lower than that of England and
no damage to the US economy. There was Wales, 5 vs. 18 Admittedly, UK was at war
political fallout, as Federalist more of time, 1793-1815, than US US
(pro-business, pro strong central Northeast had more bank assets/capita than
government) and Republican England and Wales, $43 vs. $24 US
(pro-agriculture, pro states right Northeast had more co. securities
devolution) political parties formed. The listings/mill.pop. than England and Wales,
politics of Jefferson vs. Hamilton 32 vs. 15 US Northeast has many more
overshadowed the successful weathering of corps/mill.pop. than England and Wales,
the financial crisis in most subsequent 180 vs. 22 US Northeast, comparable in
historical accounts. size to UK, in 1830 arguably was the most
411792: Bubble, collapse, panic. financially developed large region in the
--Fueled by increases in bank credit and a world. Why?
speculative cabal, securities prices rose 65Foundation of US expansion: The
rapidly early in 1792 [see securities financial revolution planned and executed
price chartsnext slide]. --Prices crashed by Alexander Hamilton as Secretary of the
in March, after banks stepped on the Treasury in the years 1789-1795. 1788 1795
brakes and the cabal collapsed in default. Public finances, national Bankrupt
Panic selling drove US 6s in New York from Thriving, debt is serviced Money Fiat
126 on March 5 to 95 on March 20, a drop state paper, US dollar foreign coins
of 25% in two weeks. --Hamilton intervened Central bank No Yes, with 5 branches
on a number of fronts. ------------------------------------------
42 ------------------------------------------
43Causes of the 1792 Bubble. The ------------------------------------------
traditional story: Speculative cabal of Banks 3, isolated 20 state + 5 BUS
Wm. Duer and others to corner market for branches Securities markets Trivial,
US 6s. A more recent extension of the sporadic Organized, active in several
story: Rapid credit expansion by the new cities Corporations Few Many more.
Bank of the United States, opened Dec. 66The 100 most influential Americans of
1791, followed by credit contraction as it all time, in an Atlantic magazine poll of
lost reserves. historians, Dec. 2006. Top ten: Abraham
44Bank of the United States, Dec. 1791 Lincoln George Washington Thomas Jefferson
to Mar. 1792. Date/BUS data. Discounts. Franklin Delano Roosevelt Alexander
Notes and deposits. Specie reserves. Dec. Hamilton: Soldier, banker, and political
29, 1791. $0.96 mill. $1.10 mill. $0.706 scientist, he set in motion an agrarian
mill. Jan. 31, 1792. $2.68 mill. $2.17 nations transformation into an industrial
mill. $0.510 mill. Mar. 9, 1792. $2.05 power Benjamin Franklin John Marshall
mill. $2.06 mill. $0.244 mill. Martin Luther King, Jr. Thomas Edison
451792: Hamiltons crisis management Woodrow Wilson.
tactics (1) Open Market Purchases. Directs 67
open-market purchases of 1-2% of US debt
Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University.ppt

Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University

Alexander Hamilton and the US Financial Revolution of the 1790s Richard Sylla, New York University

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