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Financial Founding Fathers: The Men Who Made America Rich
Financial Founding Fathers: The Men Who Made America Rich
David J. Cowen; Robert E. Wright
University of Chicago Press, 2006
216 pp., 25.00

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David Skeel

Banking on It

The financial Founding Fathers.

Every year or two, we are reintroduced by our leading historians to one or more of the nation's founding fathers. One year John Adams and his wife Abigail came as a revelation, another brought a new slant on Thomas Jefferson. Even more than Ben Franklin, who celebrated his 300th birthday last year and was the subject of a bestselling biography, the Founding Father of the moment is Alexander Hamilton. Well served by his star turn in Joseph Ellis' The Founding Brothers, Hamilton took center stage alone in Ron Chernow's superb 2004 biography.

Hamilton's story makes clear that the genius of the founding generation lay not just in the unlikely military success of the Revolution and the political brilliance of the Declaration of Independence and the Constitution (although Hamilton participated in these too, serving as an officer in Washington's army and penning many of the Federalist papers defending the Constitutional experiment). The third leg of the three-legged stool—the least appreciated—was finance. Establishing a credible national currency and a relatively stable banking system enabled the new nation to attract foreign investment and to finance the "nation of shopkeepers" that Tocqueville would discover during his wanderings several decades later.

Just about everything that went right with America's markets and finance can be attributed in one way or another to Hamilton. To refute Jefferson's claim that Congress did not have the power to establish a national bank, Hamilton concocted a theory of implied powers that persuaded President George Washington to sign the Bank of the United States, the first of two national banks, into existence. Hamilton also insisted that the new national government should assume, or repay, all of the old obligations of the states, even the debt owed to foreigners. To achieve this objective, he brokered one of the most remarkable political deals in American history: in return for a promise that the nation would establish its capital on the Potomac, not in New York or Philadelphia, Jefferson and Madison agreed to support assumption. A report by Hamilton also led to the founding of the mint and established the dollar as the nation's unit of account.

Hamilton was truly without peer, but a handful of others also played essential roles in the first decades of the nation's financial life. In Financial Founding Fathers, Robert Wright and David Cowen seek to resurrect these mostly forgotten figures and to foreground the role of banking and finance in America's emergence as a great power. The story begins and ends with the best known of the authors' characters, starting with Hamilton and concluding with Andrew Jackson and his foil Nicholas Biddle, who battled over the decision whether to extend the charter of the second national bank. (As promised in his 1832 election campaign, Jackson killed the bank, withdrawing government deposits even before the bank's charter expired in 1836.) In between, Wright and Cowen feature six less familiar figures, a few of them heroes (Albert Gallatin, Thomas Willing, Stephen Girard), one a villain (William Duer), the remainder a complex mix (Tench Coxe, Robert Morris).

The opening chapter suggests that Wright and Cowen will explore their subjects' religious commitments. The words "In God We Trust" on our coins, they write, "remind us that money, finance, the early nation, and religion are intertwined … . In fact, the source most widely cited by the Revolutionaries was not John Locke or Montesquieu, but Deuteronomy." The authors also assign a religious label to each of their subjects. Hamilton is the "Creator," Tenche Coxe the "Judas," Gallatin the "Savior," Willing and Morris "Angels Risen and Falling." But the religious motifs are a tease, thrown in simply to provide a narrative framework, finance as a morality tale. Virtually the only other reference to religion or religious commitments in the entire book is the authors' observation that "Jackson dueled repeatedly, took bullets, and somehow, perhaps by the grace of God, survived."

The structural conceit is forced (Girard, the "saint," named his ships for French revolutionary agnostics like Voltaire; "Judas" betrayed the "Creator," not the "Savior"; "Risen and Fallen Angels" is a stretch on both earthly and heavenly levels). It also clashes with the book's other relentlessly repeated, central metaphor, the "golden goose." Throughout the book the authors use the golden goose as a "metaphor for the financial system, the institutional financial intermediaries (banks and insurers) and markets (for equity and debt) that made the nation and its inhabitants rich by efficiently matching entrepreneurial energy to investor savings." Hamilton created the golden goose, and his successors sustained it. By the end of the story it has grown strong, "from gosling to magnificent bird" we are twice told.

If any one of the figures showcased in this wonderfully insightful book is poised for rediscovery, surely Albert Gallatin is the man.

 It was hardly preordained that the Creator's goose would survive, however, and the authors vividly portray both the personalities and the stakes involved. Although Robert Morris later landed in debtor's prison, he used his personal credit to help establish the First Bank. If Jefferson's financial advisors had shared his dim view of the First Bank, he might have killed it even before its charter expired in 1811. But both Tenche Coxe, who switched from Hamilton's Federalist party to the Jeffersonians, and—more important—Albert Gallatin, Jefferson's Treasury Secretary, understood the importance of the bank. Even apart from the political battles, ne'er-do-wells like William Duer (the "Sinner")—who used his post as Hamilton's assistant Treasury Secretary to line his own pockets and whose failed attempt to corner the market for U.S. government debt triggered a depression in 1792—threatened at times to derail the entire system.

Interwoven with the nine biographies are succinct explanations of early American finance and business. Far more elegantly than I can, Wright and Cowen explain how the First Bank carried out the monetary policy endorsed by the Treasury Secretary, providing liquidity—an ample supply of funds—during times of financial panic. The bank also served as "lender of last resort" for troubled financial institutions, as when it headed off a potential run on the bank of Columbia in 1801 by depositing (on Gallatin's instructions) substantial government funds in the bank.

Centralized banking was sweetness and light, but the authors do not simply praise its advocates and excoriate the other side. Nowhere is this more evident than in a fascinating section contrasting Jackson and Jefferson. Jefferson's quest to kill the bank might have "meant an abrupt end to the American economic miracle," according to Wright and Cowen, and he relied on a Constitutional argument (the government's limited powers) that he conveniently ignored in other contexts. But Jackson stuck to a single, coherent philosophy. He consistently opposed federal investment in private corporations (such as the two national banks, which did the government's bidding but were privately owned) and for local projects, while supporting active federal investment in truly national projects. Indeed, the authors hint that Jackson's successful campaign to end the Second Bank may even have been justified. The markets were strong enough by 1836 to survive without central banking, and the bank and its arrogant president Nicholas Biddle were a potent symbol of the gap between the rich and ordinary Americans. Because it eased class tensions, "Jackson's victory in the Bank War was a major contributor to the country's relatively tight embrace of free market capitalism."

If any one of the figures showcased in this wonderfully insightful book is poised for rediscovery, surely Albert Gallatin is the man. An orphan (as were Hamilton, Morris, Girard, and Jackson) from Geneva, Gallatin dazzled Washington and Patrick Henry in Richmond but wanted to make his way on the American frontier. After he had settled in Western Pennsylvania, Gallatin's fellow farmers sent him to Congress. There, his repeated demands that Hamilton release more information about the government's finances so incensed Hamilton that he tried to link Gallatin to the rebels whose violent opposition to a proposed whisky tax became known as the Whisky Rebellion. When Jefferson triumphed in the 1800 election, Gallatin was the obvious pick for Secretary of the Treasury, a position he would hold from 1801 to 1814, still the longest tenure ever. Although deeply Jeffersonian on most political issues, he defended centralizing banking, resisting

Jefferson's pressure to destroy the First Bank lest it "penetrat[e] by its branches every part of the union" and "upset the government." While the government could rein it in if necessary, Gallatin argued, the bank had effectively stabilized American finance.

Not since the 1950s has there been a major biography of this political liberal who nevertheless supported, defended, and artfully employed the financial system his nemesis Hamilton had put in place. It is tempting to call him the Robert Rubin of his time, but more accurate to say that in Rubin's best moments as Treasury Secretary in the Clinton administration, there were hints of Albert Gallatin. In this era of vast and increasing income inequality, with little evidence of fiscal responsibility anywhere in Washington, that is high praise indeed.

David Skeel, a law professor at the University of Pennsylvania, is the author most recently of Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Oxford Univ. Press).

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