Early US struggles with fiscal federalism: lessons for Europe?

Sylla, Richard

INTRODUCTION

The European Union's (EU's) continuing struggles to save the euro common currency and resolve the sovereign debt problems of a number of the Union's member states have invited numerous comparisons with other times and other countries. Because the United States struggled with similar problems in its founding era more than two centuries ago, many of the efforts involved comparisons and contrasts of the American and EUs, often with reference to how the Americans 'got things right' and suggestions from the American experience as to what Europe might do now to get things right. The focus of these comparative forays, at least as regards the American founding era, has been on the noted American statesman and financial genius, Alexander Hamilton (1757-1804), who served in President George Washington's cabinet as the new US government's first Secretary of the Treasury. (1)

While Treasury Secretary from 1789 to 1795, Hamilton deftly executed a complex program of fiscal re-organization and financial reform that transformed a weak confederation of individual US states into a strong American Union and nation state. Hamilton also designed his program to launch modern economic growth--increases of real GDP per capita of roughly 1% or more per annum--in the United States, and that was a happy result of it. What Hamilton and his allies in the first US Congress (1789-1791) and federal administration (1789-1793) under the Constitution accomplished is of obvious interest to a EU marked by indecision, seemingly incapable of taking bold actions, and with parts of it mired in economic recession.

There is, however, another and earlier story of the American founding era that is seldom mentioned in the modern comparative accounts but might prove of equal interest to Europeans. A decade before Hamilton worked his magic, another American leader, Robert Morris (1734-1806), was called in 1781 by the Confederation Congress, the national government of the United States until 1789, to become the nation's Superintendent of Finance and asked to carry out much the same agenda that was given to Hamilton in 1789. For the most part, despite heroic efforts, Morris failed. As a consequence, he is little remembered by the world, including even Americans. Morris's failure to achieve most of his goals resulted from the fact that the American Union then, like the EU now, was racked by indecision, seemingly incapable of taking bold actions, and mired in economic recession.

In this essay I will compare and contrast Morris and Hamilton as finance ministers, delving into some reasons why the former failed and the latter succeeded. There is no doubt that the American Union more than two centuries ago was very different from the EU now. But the American story of Morris's failures and Hamilton's successes might give us some grounds for considering where Europe is now and where it might possibly be headed if it is to put its current problems behind it.

ROBERT MORRIS, SUPERINTENDENT OF FINANCE, 1781-1784

Some background is necessary to appreciate what Morris during his time as Superintendent of Finance, 1781-1784, and Hamilton as Treasury Secretary, 1789-1795, accomplished. Armed hostilities broke out in April 1775 between Britain and its American colonies. They marked the start of the American War of Independence. In the summer of 1775, the Second Continental Congress represented by delegates from the 13 colonies that would become the United States met and became the de facto government of the country. (2) It declared the independence of the United States in July 1776, by which date Britain and America were in the second year of warfare. It also drafted the country's first governing document, the Articles of Confederation, by 1777, but it took until early 1781 for it to be adopted and become effective when the last of the 13 states finally ratified it.

One of the first acts of the Confederation Congress in 1781 was to appoint Robert Morris to be Superintendant of Finance. These were dark times for the American cause, for the war was entering its seventh year and Congress's finances had degenerated into chaos. It could not be known then that the decisive battle of the war would be fought later that year, in October 1781, at Yorktown in Virginia. There the combined forces of America and France compelled the surrender of British General Cornwallis and his army of seven to eight thousand soldiers. In Britain that was enough. The British war government fell and its replacement began peace negotiations that culminated in 1783 with the Treaty of Paris in which Britain recognized America's independence. Congress had brought Morris in to save the day, and in a way he did.

When Morris in early 1781 assumed his high national office, the young United States had none of what I as a financial historian have called the six key components of a modern financial system (Sylla (2009)). These components are suggested by the early histories of leading modern states. The Dutch Republic installed them shortly after 1600, for example. And Great Britain borrowed them from the Dutch and improved on them after 1688. American leaders of the 1780s were aware of those histories, especially Hamilton who often referred to them, as well as the failed attempt of John Law to accomplish something similar in France during the years 1715-1720.

The six key components of modern financial systems that one can discern in the histories of the earliest successful modern states are:

* Stable public finances and public debt management;

* A stable money or national currency;

* An effective central bank;

* A functioning banking system;

* Liquid securities markets;

* Corporations, financial and non-financial, to organize and extend business enterprise.

As finance ministers, both Morris and later Hamilton would have a direct say in establishing the first three components. Depending on how well public finances, money, and a central bank were established and managed, the other three components could complete the system via the actions of other parties, both public (eg, state governments) and private (eg, financiers and entrepreneurs).

Morris, perhaps the country's leading merchant, came into office in the spring of 1781 under dire circumstances for the American cause. The long War of Independence showed no signs of ending, and Congress had little to nothing in financial resources. The paper money 'Continentals' it issued to help finance the war had become so over-issued by 1779 that they lost almost their entire face value in terms of specie. Congress stopped issuing Continental dollars in 1780 and urged the states to call them in via taxation. States as well issued their own currencies, which also had depreciated in value but were buoyed somewhat because they could be used to pay state taxes. (3)

Under the Articles of Confederation, Congress had no taxing authority; it could merely requisition contributions from state governments. These were not always paid, and when they were it was often in the form of depreciated currencies that were of limited use in financing government operations. Foreign financial and military support, mostly from France, did much to keep American forces in the field. The situation was so dire that Morris demanded two concessions before he would accept his appointment: the right to continue in his private business ventures while serving in public office, and the right to hire and fire at will throughout the national government. A desperate Congress had little choice but to grant Morris's demands.

In terms of the key components, one of Morris's first actions in May 1781 was to ask Congress to authorize a bank to aid him in his public financial operations. Such a bank had been suggested to Morris in a long letter to him from Hamilton in April 1781. Morris indicated in his reply that he had already been thinking along the same lines. At the end of 1781, Congress did charter the Bank of North America (BNA), which had already begun organizing in the later months of the year. It opened for business at the start of 1782. This was the new nation's first modern bank. And it would be the country's only bank until the war was over because Morris requested such a monopoly, Congress agreed to it, and states also acquiesced to the monopoly.

Capitalized at US$400 thousand dollars, the BNA had trouble attracting subscriptions to its stock from private investors. As a result, Morris used a timely loan of specie from France in mid-1781 to purchase about two-thirds of the total stock on behalf of the national government. Morris also used proceeds of that loan along with his personal credit to help finance the crucial Yorktown campaign of 1781, which, as noted, would effectively end the war.

The bank performed as expected. It made loans to Morris in anticipation of revenues, as well as short-term loans to merchants. And it circulated bank notes convertible into specie, which became a more acceptable currency than the fiat paper issues of state governments and Congress's discredited Continental currency.

Morris also financed the government by issuing his own notes, so-called Morris notes. Congress's credit had sunk to such a low level that Morris's own credibility as a leading merchant was greater than that of the government he served. So Morris notes were accepted in preference to Congress's paper money by the contractors who supplied American forces and by the public.

Morris's greatest failure was in persuading the Confederation to grant Congress the power to tax. Without certain revenues, the national government could not be a credible borrower, so Morris asked Congress to impose a 5 % tax, called an impost, on imports to the United States. His plan called for guaranteeing payment only on debts he incurred or would incur as the government's financier. Thus, import tax revenues, had they been enacted, would be pledged only to service debts contracted after 1781, and not apply to debts contracted before that time. Even the modest tax, however, could not be enacted. Twelve of the 13 states approved the impost by late 1782, but under the Articles of Confederation the impost could become effective only when state approval was unanimous. One state, Rhode Island, withheld approval at the end of 1782, and the Confederation never managed to establish national tax revenues. Subsequent attempts to enact an import tax also failed. Frustrated, Morris resigned his office for good in late 1784.

But Morris had managed to bring about some useful innovations. His BNA marked the advent of American banking and was of substantial use to Morris in 1782 and 1783. With the war coming to an end--the Treaty of Paris granting the United States independence was finally signed in September 1783--Morris sold the government's shares in the BNA to private investors. Instead of being a national or central bank, the BNA became a private banking corporation serving the Philadelphia mercantile community. Two more banks of a similar mercantile nature, one in New York and one in Boston, were founded in 1784, soon after the war ended.

Another Morris accomplishment was establishing the basis for a more stable currency in the form of BNA notes and his Morris notes, both of which were convertible into specie. But this was a limited victory, as state fiat currencies continued to be used and new issues of them were still being made.

Finally, Morris established the principle that the debts of Congress were obligations of the union, not of the states that were members of that union. Toward that end, he supervised the conversion of old debts, many reflecting highly inflated wartime prices, into several categories of national securities that were expressed in specie values, and he launched a program of accounting for the total costs of the war and apportioning those costs to each state on the basis of its population. Without national revenues, of course, the Confederation Congress could not service those debts. But they served a purpose. Although some states in the 1780s serviced some of national debts held by their own citizens, most of the national debt reorganized by Morris remained outstanding and became one of the important drivers in the movement for a new constitution to replace the weak Articles of Confederation.

ALEXANDER HAMILTON, SECRETARY OF THE TREASURY, 1789-1795

The Philadelphia convention of the states in 1787 drafted a new constitution for the country. It was approved by the required number of states in 1788, and the new government with George Washington elected to be the first president met in 1789. Washington nominated Hamilton to be the nation's first Secretary of the Treasury--finance minister, and Congress approved the appointment. Hamilton immediately picked up where Morris had left off in 1784. The new Congress used that document's grant of taxing powers to pass something akin to the impost that Morris had tried and failed to get earlier in the decade. It then asked Hamilton to formulate a plan for establishing public credit, that is, for servicing the national debt. Hamilton reported his bold plan in January 1790. (4) It included not only an exchange of old debt at par for a package of three issues of newly issued US government bonds--a 6% bond, a 6% 'deferred' bond that would pay no interest (a 'zero') for 10 years and then 6%, and a 3% bond. The package would pay an effective interest yield of 4% instead of the 6% promised but almost never actually paid on the old debt. The interest write-down represented Hamilton's recognition that federal tax revenues were both uncertain and likely to be limited politically.

Further, Hamilton proposed assuming the debts of the states into the national debt, mainly on the ground that like Congress's debt, the state debts had been incurred for the common cause of American independence. But it also was based on recognition that some US states, especially Massachusetts and South Carolina, had particularly heavy debts and a limited ability to pay them. Had they raised taxes to levels required to service their debts, it might have proved self-defeating because citizens would leave for other states. Then the American union might have fallen apart not long after it was put together.

Despite such considerations, the federal assumption of state debts was controversial and almost failed of enactment. But in the end Hamilton used his political skills to prevail on the issue. After a crucial bargain that called for moving the US capital from New York to the Virginia-Maryland border in exchange for southern votes for assumption, Congress enacted Hamilton's recommendations in July 1790. They included both assumption of state debts and the ability to service foreign debts by taking out new loans in foreign capital markets. Interest in hard money or its equivalent commenced on the national debt as of 1791, and on assumed state debts as of 1792. By the time Hamilton left office in 1795, virtually all of the old national and state debts had been converted into the three new securities authorized in 1790. And foreign debts had been paid entirely by means of new loans issued in Dutch capital markets.

Successful with his debt restructuring program, Hamilton in his December 1790 Report on a National Bank proposed that Congress charter a national bank capitalized at $10 million, a sum vastly larger than the combined capitals of the three or four commercial banks then existing, for 20 years. Congress enacted the proposal in February 1791, but only after heated controversies over the constitutionality of the measure. The controversies may have been more about politics and horse-trading than principle, but Hamilton again prevailed. The Bank of the United States (BUS) had a successful, oversubscribed stock offering in mid-1791, and opened for business at the end of the year. It proved of even more help to Hamilton than the BNA had proved to Morris; by the time Hamilton left office, the BUS had provided the Treasury with some $6 million in loans.

In January 1791, as the BUS bill was being debated in Congress, Hamilton submitted his Report on a Mint. It was a rather technical document that defined the US dollar in terms of gold and silver as the monetary base of the country, and it called for establishing a mint to coin various fractions and multiples of the dollar unit. Congress enacted Hamilton's proposals a year later, and the first US mint opened that year, 1792, in Philadelphia.

In the barely 2 years, Hamilton had prevailed upon Congress to establish three of the six key components of a modern financial system: tax revenues adequate to fund a national debt enlarged by the assumption of state debts, a central bank that would serve as the federal government's fiscal agent and a lender to it, and finally a stable dollar currency defined in terms of gold and silver and convertible into those metallic bases. These executive and legislative triumphs prompted other parties to establish the other key components. Tens of millions of dollars in now prime public debt securities and BUS stock, for example, promoted active securities markets in leading cities of the country. It is no coincidence that the New York Stock Exchange traces its origins to a brokers' agreement of May 1792; all the new securities called for better, more modern trading arrangements.

Further, state governments, with the example of the BUS before them, began to charter more state banks and corporations. Where there were 3 state banks in 1790, by 1795 there were 25 of them, and these were joined by 5 offices of the BUS, the national bank. Where there were but a handful of corporations in 1790, some 300 would be created during the decade 17911800. The overall program of financial modernization enacted in 1790 and 1791 would make the US economy quite a different, more modern entity after those years than it had been before them. It was one of the most important and still underappreciated developments in the entire history of the United States.

US THEN, EUROPE NOW (5)

It would be easy to say that the American experience of establishing fiscal federalism and modern financial institutions more than two centuries ago is of limited relevance to modern-day Europe. The historical circumstances of the two cases appear to be quite different. The American founding generation, it seems, had the rare opportunity in history to design a new nation more or less from scratch, and they did so in the great documents--notably the Declaration of Independence, the Constitution, and the Federalist Papers--that remain the glue that binds Americans together in one union. In contrast, the nations comprising the EU and the Euro zone appear to carry much historical baggage: a range of ethnicities and languages, histories of either oppressing or being oppressed by one another (or both), and all the jealousies and hatreds that derive from those histories. But these differences can be exaggerated. The young United States had its ethnic minorities with their own languages, and it had a long history of oppressing both slaves and Native American peoples. Moreover, the 13 states jealously guarded what they considered to be their rights and prerogatives against both other states and the national government.

Even if there are differences between America then and Europe now, the relevant issues for both entities involved designing a better future instead of letting past and remaining differences derail such an enterprise. Often these issues are framed as concerning fiscal union, monetary union, banking union, and political union. The first three of these unions concern the key components of modern financial systems that I identified earlier. With that in mind, a brief look at the key components indicates that Europe is not in such a disadvantageous position compared to the United States at the end of the eighteenth century.

In the public finance and debt management component, a key issue for the United States then and Europe now is the assumption, or mutualization, of state debts. The United States did this during the 1790-1792 years, while it encounters considerable resistance in Europe now. The United States then probably had stronger reasons to assume the debts of its member states, for, as Hamilton pointed out, they were 'the price of liberty,' having been mostly incurred in the common enterprise of gaining independence in the long war with Britain from 1775 to 1783. The debts of the member states of the EU, in contrast, were incurred for state rather than union purposes.

The American union's assumption of the debts of member states long ago would therefore appear to have a stronger justification than any similar plan in Europe now, which would seem to be just a case of 'fiscally responsible' states bailing out 'fiscally profligate' states, with all the moral hazards that it may create. But if a more prefect EU is a desirable goal, even in today's circumstances the assumption of member-state debts could be a means to it. If assumption of state debts by the union was justified in America by their being 'the price of liberty,' in Europe now they might be justified by their being 'the price of union.'

The moral hazard problem of state debt assumption could be handled in the way the United States handled it; the federal government refused to bail out member states when by the 1840s they got into the same sorts of debt problems several European member states now have. That refusal led the states to enact constitutional restraints on future debt issues that made the problem go away during almost all of subsequent American history (see Wallis (2005)). American states more or less stumbled onto this solution after a painful experience in which nine of them defaulted in 1841-1842. Europe could learn from that experience by placing constitutional restraints on future member-state debt incurrence now.

Europe's main problems now are that its political union is weak compared with the American union, and that it did not create a fiscal union before creating a monetary union. The United States and Hamilton long ago made creating a fiscal union the first item on the agenda, with the crucial measures being creating a political union and then a revenue stream for the new federal government that was adequate to service both the union's debts and the assumed debts of the member state debts. Only then did Hamilton and Congress turn to creating a monetary union and the basis for a banking union with a new central bank.

In other respects, the EU has certain financial-system advantages the United States lacked two centuries ago. Europe has a central bank, the European Central Bank, built on the long-existing base of member-state central banks. Europe has a developed banking system (or systems), if not a banking union--but anyone familiar with US history knows that the American banking union took decades, if not centuries, to become a real banking union. Europe has developed securities markets. Europe has a developed corporate system. Europe, or at least the Euro Zone, has a working currency union, even if it is a currently troubled one because it came before a fiscal union. The United States in 1790 lacked all of these key financial components; it had to create them from scratch. Arguably, it should prove easier to correct flaws in a set of financial components that already exist than to create all these components when none of them previously existed. That is the challenge for Europe now. What is required is enlightened leadership, and here again the American experience long ago is instructive.

LEADERSHIP: COMPARING MORRIS AND HAMILTON

Returning to the United States then, let us now compare the roles, interactions, and effects of the two great financial planners of the founding era of the United States, and evaluate them as leaders. Robert Morris, Congress's Superintendent of Finance from 1781 to 1784, failed in his efforts to reform and put on a sound basis the finances of the Confederation. In contrast, Alexander Hamilton, Secretary of the Treasury from 1789 to 1795, succeeded in doing just about everything Morris had tried to do in the changed circumstances of the new national government under the Constitution.

What accounts for the different results of two financial programs that had much in common? The question was raised in the enigmatic last paragraph of American historian Clarence Ver Steeg's study of Morris more than half a century ago:

[O]ne fact is certain. Morris attempted to incorporate a financial program into the Confederation which Hamilton later succeeded in incorporating into the new government; and after the Financier's program had matured during the course of his administration, the two programs were similar in every significant detail.... But when the precocious, colorful, youthful Hamilton held the spotlight on the Federalist stage and repeated the identical play line by line, the audience on the whole responded with an accolade which still echoes down through the decades. Why the difference in the reaction to the two programs? Were the gesticulations of the leading actor the moving force? Was it the new theater in which he performed? Perhaps the acoustics lent resonance to his voice, or the lighting and staging affected his audience. Or had the audience itself changed? ... [O]ne conclusion is obvious. The play, in this case, is not the thing; only its reception is important.

(Ver Steeg, 1954, p. 199)

Rephrasing Ver Steeg, were the different outcomes the result of Hamilton's greater skills as a financial statesman? Or was it all the result of the change in the framework of government during 1787-1789? Might it have come from changes in economic and other conditions in America between the Morris and Hamilton eras? Or were there changes in the attitudes of the American people? Finally, I would challenge Ver Steeg's contention that 'the two programs were similar in every significant detail.' Let me now take them up these questions and issues.

The US Constitution (the new theater) obviously made a large difference. The Confederation government did not have the authority to levy national taxes. It could only request financial backing from the states--hence these revenues were termed 'requisitions.' States had an obligation to pay these requisitions, but there was no enforcement mechanism. (The EU seems to me to be ahead of the US confederation in this respect, but not as strong as the US federal government that emerged under the Constitution.)

Nationalist leaders, Robert Morris foremost among them, tried to change the national revenue situation dispensing with requisitions and getting the states to agree to a national impost--a 5% levy on imports--and to other national taxes. Morris in his report on public credit of 29 July 1782 assumed that the impost was about to be approved. As the impost alone would be inadequate in providing revenues for his program of funding the nation's debts, he further recommended a land tax, a poll tax, and an excise tax on spirits (Catanzariti and Ferguson, 1984, vol. 6, pp. 36-84). (6) But the impost was not approved.

Morris also got nowhere with his other tax recommendations. His frustrations led him in January 1783 to his tactic of resigning--for the first time, as he later agreed to stay on--from his position. In 1784 he resigned again and did not return.

Much more fortunate was Alexander Hamilton. When he became the nation's chief financial officer in September 1789, Congress, using the Constitution's mandate, had already approved a tariff similar to the impost Morris had sought 8 years ago, and would also approve Hamilton's request for excise taxes. Hamilton, of course, had to set up the procedures for collecting these revenues, which he did in a competent way. Morris was not given that opportunity, but there is little reason to doubt that he could have done just about as well. Like Hamilton, he possessed considerable administrative talent.

There is more to the story, however, than Hamilton's good fortune and Morris's bad fortune. As much as any American of his era, Hamilton had created the new constitutional 'theater' in which he acted as Treasury Secretary. He was among the first, if not the first, to pinpoint the fatal weaknesses of the Confederation and to call for a convention of the states to give the national government the powers it obtained with adoption of the Constitution. While still an officer in the Continental Army, Hamilton said this in long letters to James Duane, a New York delegate to the Continental Congress, in 1780, and to Robert Morris in 1781. The letter to Duane recommended that Morris be put in charge of the nation's finances, a step Congress took a few months later. In his letter to Morris, Hamilton wrote: 'I wish to see a convention of all the states, with full power to alter & amend finally and irrevocably the present futile and senseless confederation' (Syrett, 1961, vol. 2, pp. 401-418; Ibid., 604-635; Catanzariti and Ferguson, 1984, vol. 1, pp. 31-60).

Further, strengthening the powers of the national government was the grand theme of Hamilton's Continentalist essays of 1781-1782, as well as of his efforts as a member of the Confederation Congress during 1782-1783, at the Annapolis convention in 1786, the Philadelphia convention in 1787, in the Federalist Papers of 1787-1788, and at the New York State ratification convention in 1788. Hamilton foresaw the frustrations that would befall Morris as Superintendent of Finance because he saw that the whole framework of government in which they found themselves was defective. Morris, in contrast, was content to work within the framework of the Confederation. He maintained hopes--until they were dashed--that financial and other reforms within that framework were possible. In that sense, Morris was like most European leaders today. Still, like the good soldier that he was, Hamilton supported Morris's efforts as much as anyone and in every way he could--as an essayist, letter writer, Continental tax collector, and member of the Confederation Congress--only to see his initial pessimism confirmed.

James Madison, Hamilton's political ally in the 1780s and his political opponent thereafter, recognized Hamilton's key role in bringing about the 'change in our government.' In an 1805 letter to Noah Webster, after Hamilton was dead, he ascribed that change to 'a series of causes' and 'the participation of many,' but added specifically that 'The discernment of General Hamilton must have rendered him an early patron of the idea.' (7)

I conclude that, yes, Hamilton was more fortunate than Morris as the nation's chief financial officer. But he had worked incredibly hard to put himself in that position after his early recognition that the national government under the Articles of Confederation was unlikely to achieve a more perfect union.

The experience of Morris and Hamilton in the 1780s might have implications for Europe today. Can minor adjustments within the existing EU's political, fiscal, monetary, banking arrangements solve its problems? Or is more fundamental change necessary?

Returning to Ver Steeg's other questions, were economic and other conditions ('the acoustics,' 'the lighting and the stage') more favorable for Hamilton in 1789 than for Morris in 1781? To some extent, I think they were. There is not much evidence that the US economy overall was more prosperous in 1789 than in 1781. If anything, the entire decade of the 1780s seems to have been an economic mess, largely as a result of the war and its aftermath. But at least there was no war going on in 1789. Hamilton in 1789 and Morris in 1781 had to deal with major financial problems, but those facing the Secretary of the Treasury seem to have been less immediate and intense than those confronted by the Superintendent of Finance, who had hostile British armies in his country and the British fleet patrolling its coast.

The dramatic American-French victory of October 1781, which Morris did much to finance in his first months as Superintendent of Finance, marked a turning point, as it caused the British to reassess their position and enter peace negotiations. The War of American Independence was coming to an end. That helped Morris because the financial demands of war declined. But it also hurt his program of reform because it made it seem less urgent to the US states. There is an analogy with present-day Europe where reform appears to fall off the agenda as soon as the most recent crisis passes.

What about the attitudes of the American people (the audience)? Had they changed much from 1781 to 1789? I doubt it, at least in any way that mattered for a finance minister. Earlier in the decade, some states refused to approve the impost; later in the decade, some states refused to approve the Constitution. The national government had more power later in the decade than earlier. But it was all on paper--hardly a reality. Popular resentment of centralized governmental power had not changed much between 1781 and 1789. There is, moreover, a similarity in the negative popular and political reactions to measures put forward by Morris and Hamilton early in their terms. What had changed from early to late in the decade is that fundamental change itself no longer required the unanimity of the states. This was important, and perhaps has implications for Europe now.

I turn now to what I consider the more important issues raised by Ver Steeg, the skills of Morris and Hamilton as financial statesmen, and the related question of whether their 'two programs were similar in every significant detail.' The key components approach to defining a modern financial system offers a way to address these questions. As I read the records of the founding era, Hamilton had a far deeper understanding than Morris of modern financial systems and the manifold ways in which their key components fit together and reinforce one another. Along with his financial insights, Hamilton had a certain political steadfastness coupled with the ability to compromise on minor goals in order to achieve major ones. As a result, in the short span of 2-3 years as Treasury Secretary, he had each of the six components of a financial system up and running in a vigorous manner, reinforced by developments in the other components. It was a remarkable achievement.

The Morris and Hamilton programs were not, contrary to Ver Steeg, similar in every significant detail. The key components of Morris's program, in sequence, were the BNA, the issue of Morris notes, and plan for funding public debts. The bank was a success, but hardly in the manner that Morris intended. It was termed a 'national bank,' but it was much too limited in scope to fulfill that function. While Morris intended its capital to be entirely subscribed by private investors, to launch it he had to resort to the expedient of having the government buy the majority of its shares. After 1 year of operation, the bank essentially severed whatever relationship it had with the government, which paid off its loans from the bank by returning government-owned shares in it. From then on it was just an ordinary commercial bank serving Philadelphia; via a series of mergers, the DNA of Morris's bank is now in Wells Fargo, one of the leading US banks.

Morris missed an opportunity to build links of banking and securities market development when he advised the bank not to lend on public securities collateral. Hamilton in contrast built such links into his plan, and there appears to be no reason why Morris also could not have done so. Still, to Morris's historical credit, the BNA was the first modern bank in the country.

The Morris notes were a temporary currency backed by Morris's private credit, which was better than the credit of the nation he represented. They mixed the concept of a fiat paper money to be retired by tax payments Morris's intended outcome--with the concept of a paper currency convertible into precious metals. These large-denomination notes had limitations as an ordinary currency, a fact communicated to Morris by Hamilton, and they furthermore suffered from significant discounts to par value the further they circulated from Philadelphia. Some were payable on demand (called 'Short Bobs' in honor of Robert M.) and others in time (Long Bobs), another complication because it led to confusion on the part of those who were offered the notes in payments.

Morris's plan for debt funding bore some broad similarities to Hamilton's 1790 plan, but with much less in the way of detailed recommendations, alternatives for Congress to consider, and persuasive argumentation. These differences might have resulted from the fact that Morris could not count on national revenues (although he at first thought he could), whereas Hamilton could count on such revenues, barely adequate though they were for several years.

There was a major difference. Hamilton made national assumption of state debts a key part of his plan, whereas Morris only suggested assumption, as an afterthought prompted by a related suggestion of Congressman James Madison, some 8 months after delivering to Congress his own funding plan. The plan itself, as we know, got nowhere. Hamilton's assumption of state debts into the US national debt, controversial as it was, in fact greatly alleviated the financial problems of US states after 1790 and minimized the earlier tensions between state and national governments. The larger national debt also added to the initially shaky support for the new federal government by creating an enlarged creditor class that looked to that government, not the state governments, for interest payments on its bond holdings.

With national revenues assured, Hamilton placed debt funding and assumption at the top of his agenda. In getting the plan of January 1790 approved, Hamilton showed willingness to compromise politically that Morris seemed to lack as Superintendent of Finance, though not as a US senator in 1790. Morris did not like Hamilton's plan--in modern terms, a 'haircut'--to reduce the effective rate of interest US debt holders would receive to 4%, less than the 6% to which many debt holders felt entitled. But Morris came around to Hamilton's position when Hamilton consented to the famous compromise that moved the capital from New York to Morris's Philadelphia for 10 years. The compromise of 1790 also gained the support of Virginians, who had been adamantly opposed to the assumption of state debts, because it would move the capital in 10 years to a site on the Potomac, the future Washington DC.

Hamilton's BUS, his central bank, the next key component of his plan, unveiled in December 1790, was far grander than Morris's bank. Its capital was $10 million, in contrast to Morris's $400 thousand for the BNA. Moreover, Hamilton's Bank plan contained an up-front provision for nationwide branches, although Hamilton advised going slow on establishing branches because he foresaw potential managerial problems until the main office had well established itself. Unlike Morris, Hamilton implemented a feature of all of his national-bank proposals of 1779-1781, cementing the tie of the Bank to the government by having the government own a fifth of its stock. Government debt securities from the funding plan could be tendered in payment for three-fourths of the privately held Bank shares, a clever linking of the Bank and the securities markets that Morris's never envisioned. The result was that the Bank's initial public offering (IPO) in 1791 was a resounding success, particularly in comparison with the far smaller BNA IPO a decade earlier. In Hamilton's plan, the Bank, the public debt, and the securities markets reinforced one another.

Hamilton's Mint Report of February 1791 defined the US dollar as the country's monetary base and proposed a government mint to produce coins of various denominations. The plan, which Congress enacted, drew on precedents set forth by Thomas Jefferson in the Confederation era. Hamilton followed Jefferson in using the Spanish peso or 'dollar,' the coin most familiar to Americans, as a model, and he adopted Jefferson's innovative idea of decimal coinage. Hamilton's monetary plan was simpler than the complicated coinage and base-money plan that Morris drew up as Superintendent. It did embody a possibly unwarranted faith in bimetallism, but from that time forward the country had a unit of account easily understood in domestic and international markets.

On banking, Hamilton was more liberal than Morris. Hamilton promoted the concept of a national bank before there were modern banks of any kind in the country, to Morris among others, and he supported Morris's BNA. In 1784, Hamilton helped found the nation's second bank, the Bank of New York, and his BUS was the nation's fourth and by far largest bank. Hamilton instinctively favored banking competition--the more banks, the merrier--whereas Morris saw reasons why there should be only one bank in a community (Catanzariti and Ferguson, 1984, vol. 9, 70ff, pp. 128-130, 237, and 667ff). In particular circumstances, such as an incipient crisis, in which a new bank might threaten to weaken an existing bank by draining its specie reserves, Hamilton could see practical arguments against competition and in favor of bank cooperation. But his BUS stimulated a much more rapid growth of state-chartered banking after it appeared in 1791, a result he surely intended when pointed out in his December 1790 Report on a National Bank that the government would likely earn a profit (which in fact it did) on its investment in Bank shares. State legislatures got the message; they began to charter more and more banks, and extract state revenues from them in the form of dividends on state-owned shares, bonus charges, and taxes. Therefore, while Morris will always be remembered for founding the first US bank, it is fair to say that Hamilton should be regarded as the founder of the American banking system.

To review and conclude, more than Morris, Hamilton had a fully articulated conception of what a modern financial system should be, how its components fitted together in mutually reinforcing ways, and how that would promote both the strength of the federal government and the growth of the US economy. Hamilton no doubt had circumstantial advantages that Morris did not have, such as the Constitution. But, it should be reiterated, Hamilton had done as much as anyone to create the advantages he enjoyed. He did not simply appear on the national scene in 1789 to seize an opportunity that Morris lacked in 1781, but that others in the interim had made possible.

Hamilton learned a lot from Morris, who was 22 years older and had a wealth of practical business experience. But Morris while in office as Super-intendant of Finance and afterwards learned from Hamilton, too. As public men, the two were birds of a feather with similar goals for the country.

Negatively, Hamilton learned from Morris's example that mixing private business and public service could harm one's effectiveness, certainly in public service and quite likely in business as well. But that was an easy lesson, for Hamilton--unlike Morris--did not ever seem to care much about his own wealth. His goals appear to have been building a great nation, or at least the possibility of such a nation in the future, one that would be, in the words of Michael Lind in Hamilton's Republic, 'safe, well governed, and rich' (Lind, 1997, p. xxi). In return, Hamilton hoped to gain the fame that history might bestow on one who contributed so much to the American founding.

In the end, it seems to me, Morris was a person of considerable business and financial talent who in the card game of public life was dealt a rather bad hand, played it as best he could, and then folded. Hamilton was a rarer sort, a nation-building genius and financial statesman who first changed the game, and then played his hand in the new game superbly. Hamilton executed his plan much more deftly than Morris executed his plan a decade before. His legacy was a modern financial system that would fuel US economic growth and the new nation's rise in the world of empires and nation states.

Lessons for Europe?

What might Europe learn from this early US history? There are several possible lessons. One is that a weak central government is not the best way to form a more perfect union of states. That more perfect union probably requires taxing powers at the union level, not merely quotas and requisitions from member states. A second is that assumptions of the sovereign debts of member states by the union can solve many problems and help to create a union-wide capital market. A third is that it helps to have at the union level strong leadership that is capable of executing well-formulated plans. Although the EU today has a lot of things that the American Union lacked in 1790, it nonetheless bears similarities to the United States under the Articles of Confederation during the 1780s, when the interests and rights of member states trumped measures designed to foster a stronger union.

Europe today could ponder something Alexander Hamilton wrote in his Continentalist essay number 6, published on 4 July 1782, the sixth birthday of the American Union when it was still far from clear what the nature of that union would be:

There is something noble and magnificent in the perspective of a great Federal Republic, closely linked in the pursuit of a common interest, tranquil and prosperous at home, respectable abroad; but there is something proportionably diminutive and contemptible in the prospect of a number of petty states, with the appearance only of union, jarring, jealous and perverse, without any determined direction, fluctuating and unhappy at home, weak and insignificant by their dissensions, in the eyes of other nations. Happy America! If those, to whom thou hast intrusted the guardianship of thy infancy, know how to provide for thy future repose; but miserable and undone, if their negligence or ignorance permits the spirit of discord to erect her banners on the ruins of thy tranquility.

(Syrett, 1961, vol. 3, p. 106)

Might Europe see a reflection of itself in this American mirror held up by Hamilton in 1782?

Acknowledgements

I thank Paul Wachtel for many valuable comments and suggestions that have improved this article. A preliminary version of this paper was presented at the 19th Dubrovnik Economic Conference in June 2013.

REFERENCES

Bordo, MD, Markiewicz, A and Jonung, L. 2011: A fiscal union for the Euro: Some lessons from history. NBER Working Paper 17390, http://www.nber.org/papers/wl7390.

Catanzariti, J and Ferguson, EJ. 1984: Papers of Robert Morris. University of Pittsburgh Press: Pittsburgh.

Ferguson, EJ. 1961: The power of the purse: A history of American public finance, 1776-1790. University of North Carolina Press: Chapel Hill.

Henning, CR and Kessler, M. 2012: US history for architects of Europe's fiscal union. Bruegel: Brussels.

Lind, M. 1997: Hamilton's republic. The Free Press: New York.

Perkins, EJ. 1994: American public finance and financial services, 1700-1815. Ohio State University Press: Columbus.

Sargent, TJ. 2012: US then, Europe now. Journal of Political Economy 120(February): 1-40.

Sylla, R. 2009: Comparing the US and UK financial systems, 1790-1830. In: Atack, J and Neal, L (eds). The Origins and Development of Financial Markets and Institutions, from the Seventeenth Century to the Present. Cambridge University Press: Cambridge, pp. 199-232.

Sylla, R. 2011: Financial foundations: Public credit, the national bank, and securities markets. In: Irwin, D and Sylla, R (eds). Founding Choices: American Economic Policy in the 1790s. University of Chicago Press: Chicago, pp. 25-58.

Syrett, H. 1961: Papers of Alexander Hamilton. 27 vols. Columbia University Press: New York.

Unger, HG. 1998: The life and times of Noah Webster, an American patriot. John Wiley & Sons: New York.

Ver Steeg, CL. 1954: Robert Morris, revolutionary financier. University of Pennsylvania Press: Philadelphia.

Wallis, JJ. 2005: Constitutions, corporations, and corruption: American states and constitutional change, 1842-1852. Journal of Economic History 65(March): 211-256.

RICHARD SYLLA

Stern School of Business, New York University, 44 West, 4th Street, New York, NY 10012, USA.

E-mail: rsylla@stern.nyu.edu

(1) See Henning and Kessler (2012) for a comprehensive discussion of the history of US fiscal federalism with lessons for Europe. Also see Bordo et al. (2011).

(2) The First Continental Congress convened briefly in the fall of 1774 to discuss Britain's harsh measures toward its American colonies, and responses to them. Delegates from 12 of the 13 colonies that would become a part of the United States were represented. Many delegates of this first Congress would serve in the Second Continental Congress that convened in mid-1775.

(3) The most detailed scholarly account of America's finances in this period remains that of Ferguson (1961). See also the broader survey of Perkins (1994).

(4) For a full account of Hamilton's financial reforms while Treasury Secretary, see Sylla (2011). This section draws heavily on that account.

(5) I borrow this title from my NYU colleague Sargent (2012).

(6) The editors cite Ver Steeg's (1954) description of this document as 'the most important single [American] state paper on public credit ever written prior to Hamilton's First Report on Public Credit' (p. 36).

(7) Unger (1998), James Madison to Noah Webster, p. 85.