Lecture LO I
LO I: Explain the trickle down theory and relate it to either Hamilton's reports on public credit or a national banking system.
Presidents Washington ($1), Lincoln ($5), Jackson ($20), and Grant ($50) all appear on currency. But what about this guy Alexander Hamilton on the ten-spot? How did he get there? A sawbuck says you'll know the answer after reading this piece.
A major problem facing the first federal government was how to deal with the financial chaos created by the American Revolution. States had huge war debts. There was runaway inflation. Almost all areas of the economy looked dismal throughout the 1780s. Economic hard times were a major factor creating the sense of crisis that produced the stronger central government under the new Constitution.
George Washington chose the talented ALEXANDER HAMILTON, who had served with him throughout the Revolutionary War, to take on the challenge of directing federal economic policy as the treasury secretary. Hamilton is a fascinating character whose ambition fueled tremendous success as a self-made man. Born in the West Indies to a single mother who was a shopkeeper, he learned his first economic principles from her and went on to apprentice for a large mercantile firm. From these modest origins, Hamilton would become the foremost advocate for a modern capitalist economy in the early national United States.
Hamilton's influential connections were not just with Washington, but included a network of leading New York merchants and financiers. His 1780 marriage to ELIZABETH SCHUYLER, from a wealthy Hudson River valley land holding family, deepened his ties to rich and powerful leaders in New York. His innovative financial policies helped overcome the fiscal problems of the CONFEDERACY, and also benefited an economic elite with which he had close ties.
Alexander Hamilton believed that self-interest was the “most powerful incentive of human actions.” Self-interest drove humans to accumulate property, and that effort created commerce and industry. According to Hamilton, government had important roles to play in this process. First, the state should protect private property from theft. Second, according to Hamilton, the state should use human “passions” and “make them subservient to the public good.” In other words, a wise government would harness its citizens’ desire for property so that both private individuals and the state would benefit.
Hamilton, like many of his contemporary statesmen, did not believe the state should ensure an equal distribution of property. Inequality was “the great & fundamental distinction in Society,” and Hamilton saw no reason to change this reality. Instead, Hamilton wanted to tie the economic interests of wealthy Americans, or “monied men,” to the federal government’s financial health. If the rich needed the government, then they would direct their energies to making sure it remained solvent.
Hamilton, therefore, believed that the federal government must be “a Repository of the Rights of the wealthy.” As the nation’s first secretary of the treasury, he proposed an ambitious financial plan to achieve that.
Any attempts by them to rule or for government to rule in their direct interest would only "... exciting their jealousies and apprehensions to throw affairs into confusion and bring on civil commotion."
The best hope for the survival of the Republic, Hamilton believed, lay with the country's monied classes. If the wealthy could be persuaded that their economic self-interest could be advanced (or made less insecure) by the central government, they would support it and bring a greater measure of prosperity to the common people. From Hamilton's perspective. there was no conflict between private greed and public good was the source of the other.
Hamilton realized America's strength and prosperity depended upon incentives for the wealthy and powerful, as well as the striving masses. Today this philosophy is referred to by the Reagan and Bush Administrations as "supply side economics" or the trickle down theory.
The bank had branches in other cities and played a valuable role in the commerce of the young nation. However, it was constantly under attack from the Jeffersonian Democrats who prevented its charter from being renewed in 1811. However, the financial stress of the War of 1812 showed the need for the bank, and the Second Bank of the United States was chartered after the end of the war. After Alexander Hamilton spearheaded a movement advocating the creation of a central bank, the First Bank of the United States was established in 1791.
During bad times: spend money to take care of people, cut taxes to create jobs.
During good times: Gradually raise taxes as the economy improves to lower government debt.
The above-mentioned theory is clearly demonstrated by reviewing Hamilton's reports on public credit and on a national banking system. Hamilton justified both reports by the doctrine of "implied powers." He originated the doctrine of "implied powers" or loose interpretation of the Constitution that freed the constitution from its exact wording, permitting the government to evolve in a changing world. Hence, Hamilton's reports and contributions are significant because they lead to the development and implementation of the economic philosophy that our society is governed by to this day.
Other significant contributions of the reports: They give the United States the best credit rating (report on public credit) or provides for a uniform money system and a stable economy (report on national bank).
Both reports gave people faith in the government.
Both reports got people to start thinking nationally.
- Both reports helped create our political two-party system.