[Morristown, New Jersey, December, 1779—March, 1780]
The present conjuncture is by all allowed to be peculiarly critical. Every man of reflexion employs his thoughts about the remedies proper to be applied to the national disorders; and every one from a partiality to his own ideas wishes to convey them to those who are charged with the management of affairs. The channel of the public papers commonly made use of for the purpose appears to me exceptionable on several accounts. It not only restrains a freedom of discussion from the extreme delicacy of the subject, but the discussion itself increases the evil by exposing our weak sides to the popular eye and adding false terrors to those well founded apprehensions which our situation authorises.
Instead of persuing this method, I prefer addressing myself to a member of that body in whose power alone it is by well digested system to extricate us from our embarrassments. I have pitched upon you from a personal knowledge of your abilities and zeal. If I offer any thing new and useful, I am persuaded you will endeavour to turn it to advantage; if the contrary is the case, I am at least certain of doing no harm. I shall only have had the trouble of writing, and you of reading a few useless pages.
The object of principal concern is the state of our currency. In my opinion ⟨a⟩ll1 our speculations on this head have been founded in error. Most people think that the depreciation might have been avoided by provident arrangements in the beginning without ⟨any aid⟩ from abroad, and a great many of our ⟨sanguine⟩ politicians ’till very lately imagined the ⟨money⟩ might still be restored by expedients ⟨within our⟩selves. Hence the delay in attempting ⟨to procure⟩ a foreign loan.
This idea proceeded from ⟨an igno⟩rance of the real extent of our resources⟨. The⟩ war, particularly in the first periods⟨, required⟩ exertions beyond our strength; to which ⟨neither⟩ our population nor riches were equ⟨al. We⟩ have the fullest proof of this in the co⟨nstant thin⟩ness of our armies, the impossibility⟨, at this time,⟩ of recruiting them otherwise than by ⟨compulsion,⟩ the scarcity of hands in husbandry ⟨and other oc⟩cupations, the decrease of our staple ⟨commodi⟩ties and the difficulty of every species ⟨of supply.⟩ I am aware that the badness of the ⟨money⟩ has its influence; but it ⟨was ori⟩ginally an effect not a cause⟨, though it⟩ now partakes of the nature of both. A part of those ⟨evils⟩ would ap⟨pear were⟩ our finances in a more flourishing con⟨dition.⟩ We experien[ce]d them before the ⟨money⟩ was materially depreciated, and they ⟨contri⟩buted to its depreciation. The want ⟨of men⟩ soon obliged the public to pay extra⟨vagant⟩ wages for them in every department⟨. Agri⟩culture languished from a def⟨ect of hands⟩. The mechanic arts did the same. ⟨The price⟩ of every kind of labor increased ⟨and the⟩ articles of foreign commerce from the ⟨interrup⟩tion it received more than kept pace ⟨with⟩ other things.
The relative value of m⟨oney⟩ being determined by the greater or less ⟨portion⟩ of labor and commodities which it ⟨will pur⟩chase, whatever these gained in price⟨, that of⟩ course lost in value.
The public expenditures from the dearness of everything necessarily became immense, great⟨er⟩ in proportion than in other countries and much beyond any revenues which the best concerted scheme of finance could have extracted from the natural funds of the state. No taxes which the people were capable of bearing on that quantity of money, which is deemed a proper medium for this country (had it been gold instead of paper) would have been sufficient for the current exigencies of government.
The most opulent states of Europe in a war of any duration are commonly obliged to have recourse to foreign loans or subsidies.A How then could we expect to do with out them and not augment the quantity of our artificial wealth beyond those bounds, which were proper to preserve its credit? The idea was chimerical.
The quantity of money formerly in circulation among us is estimated at about thirty millions of dollars. This was barely sufficient for our interior commerce. Our exterior commerce was chiefly carried on by barter. We sent our commodities abroad and brought back others in return. The ballance of the principal branch was against us; and the little specie derived from others was transferred directly to the payment of that ballance without passing into home circulation. It would have been impracticable by loans and taxes to bring such a portion of the forementioned sum into the public coffers as would have answered the purpose of the war; nor could it have spared so considerable a part without obstructing the operations of domestic commerce. Taxes are limited not only by the quantity of wealth in a state; but by the temper, habits and genius of the people, all which in this country conspired to render them moderate; and as to loans, men will not be prevailed upon to lend money to the public when there is a scarcity and they can find a more profitable way of employing it otherwise, as was our case.
The ordinary revenues of The United Provinces amount to about 25.000.000 of Guilders or 2.250.000 £ Sterling per annum. This is in proportion to its territory and numbers the richest country in the world, and the country where the people sustain the heaviest load of taxes. Its population is about equal to ours, 2000000 of souls. The burthens on the subject are so great that it is by some held almost impracticable even on extraordinary emergencies to enlarge the revenues by new impositions. It is maintained their dependence in these cases must be on the extraordinary contributions of wealthy individuals; with the aid of which in some of their wars they have raised 4000.000 Stg. a year. In a country possessed of so vast a stock of wealth, where taxes are carried to such a height and where the means of paying them so infinitely exceed those in our power, if the national revenues only amount to the sum I have stated, how inadequate must have been the product of any taxes we could have levied to the demands of the service? Loans for the reason before hinted would have been out of the question; at least they would have been so trifling as to be an object of little importance.
Suppose we should have been able to raise a million Sterling annually a sum that probably would have exceeded our ability; how unequal would this have been to our wants?B No œconomy could have made it bear any proportion, especially if we recur to the causes already enumerated by which the currency depreciated in its first stages.
From these reasonings it results that it was not in the power of Congress when their emissions had arrived at the 30,000,000 of dollars to put a stop to them.C They were obliged, in order to keep up the supplies to go on creating artificial revenues by new emissions; and as these multiplied their value declined. The progress of the depreciation might have been retarded but it could not have been prevented. It was in a great degree necessary.
There was but one remedy, a foreign loan. All other expedients should rather have been considered as auxiliary. Could a loan have been obtained and judiciously applied, assisted by a vigorous system of taxation, we might have avoided that excess of emissions which has ruined the paper. The credit of such a fund would have procured loans from the monied and trading men within ourselves; because it might have been so directed as to have been beneficial to them in their commercial transactions abroad.*
The necessity of a foreign loan is now greater than ever. Nothing else will retrieve our affairs. The wheels of government without it cannot much longer be kept in motion. Including loan-office certificates and state emissions, we have about 400.000.000 of dollars in circulation. The real value of these is less than 7.000.000, which is the true circulating medium of these states; for though the price of specie is 2 and the rate of Exchange for Sterling-bills 3 the nominal value of every commodity is at least 60 to 1 on an average. All the reasoning against the possibility of raising the current expences on the foundation of 30.000.000 apply to our present situation in the ratio of 30 to 7; that is, it is as 30 to 7 less practicable now, than when our emissions amounted to only thirty millions. Could every dollar in circulation be brought annually into the Treasury, which never was effected in any country and is politically impossible, the revenue would not be equal to the yearly expence.
The hope of appreciating the money by taxes and domestic loans is at an end. As fast as it could be received it must be issued in the dayly expenditures. The momentary interval between its being drawn out of circulation and returning into it, would prevent its receiving the least advantage.
These reasonings may appear useless; as the necessity of a foreign loan is now acknowleged, and measures are taking to procure it. But they are intended to establish good principles, the want of which has brought us to the desperate crisis, we are arrived at and may still betray us into fatal mistakes.
How this loan is to be employed is now the question; and its difficulty equal to its importance. Two plans have been proposed: one to purchase up at once in specie or Sterling bills all the superfluous paper and to endeavour by taxes, loans and œconomy to hinder its returning into circulation. The remainder it is supposed would then recover its value. This it is said will reduce our public debt to the Sterling cost of the paper.
Suppose 200.000.000 were to be purchased and the rest called in by taxes. At 4 this would require bills to the amount of 5 of dollars. But I doubt whether four times this sum would be sufficient. The moment it was known such purchases were to be made the avarice of speculators would begin to operate. The demand would immediately occasion an artificial appreciation; each successive million would cost more than the preceding. But this appreciation would be more relative to the purchasing medium than to the prices of commodities. The raising the value of the paper relative to the former would depend on the combinations of a few artful individuals, and would be easily accomplished. The diminution of prices must be slow, as it implies a change in the sentiments of the body of the people with respect to the money. A sudden revolution in the general rates of all the necessaries of life is not to be expected. The prices of these as they have reached their present summit by degrees must by degrees revert to their former station. The minds of the peoples will not readily admit impressions in favour of the currency. All their past experience has given a habit of diffidence; and the epidemical spirit of extortion will maintain a violent struggle with whatever has a tendency to produce a fall of prices. A permanent reduction of the quantity of circulating cash will alone gradually effect it. But this will not happen on the present plan.
The necessity of continuing the supplies at nearly the same rates now given, (which would be the case if my reasonings are true) would have nearly the same effect mentioned with respect to taxes and domestic loans. The money would return into circulation almost as fast as it was drawn out; and at the end of the year we should find our treasury empty, our foreign loan dissipated and the state of our finances as deplorable as ever. At a moderate calculation we should have spent ten or twelve millions of real dollars for the sole purpose of carrying on the war another year. It would be much better instead of purchasing up the paper currency, to purchase the supplies out of our specie or Bills. In the first instance the public would suffer a direct loss of the artificial appreciation relative to the purchasing medium; in the last it would buy at the value of the commodities in specie or bills.
A great source of error in disquisitions of this nature is the judging of events by abstract calculations, which though geometrically true are false as they relate to the concerns of beings governed more by passion and prejudice than by an enlightened sense of their interests. A degree of illusion mixes itself in all the affairs of society. The opinion of objects has more influence than their real nature. The quantity of money in circulation is certainly a chief cause of its decline; but we find it is depreciated more than five times as much as it ought to be by this rule. The excess is derived from opinion, a want of confidence. In like manner we deceive ourselves when we suppose the value will increase in proportion as the quantity is lessened. Opinion will operate here also; and a thousand circumstances may promote or counteract the principle.
The other plan proposed is to convert the loan into merchandize and import it on public account. This plan is incomparably better than the former. Instead of losing on the sale of its specie or bills, the public would gain a considerable profit on the commodities imported. The loan would go much further this way towards supplying the expences of the war, and a large stock of valuable commodities useful to the army and to the country would be introduced. This would affect the prices of things in general and assist the currency. But the arts of monopolize[r]s would prevent its having so extensive and durable an influence as it ought to have.
A great impediment to the success of this as well as the former scheme will be the vast sums requisite for the current expences. The arguments adduced in the former case are applicable here also, though not with equal force. The necessity the public will be under of parting with its stock to defray the dayly demands will give designing men an opportunity by combinations not to purchase, to oblige it to sell at a rate below the real value of the money. This they may the more easily effect as the demand for foreign commodities is much less than formerly, on account of the general spirit of parisimony which has obtained from necessity and the manufactures carried on in private families for their own use. The greatest part of the country people now almost intirely cloath themselves.
The public must either sell very cheap to collect rapidly the superfluous paper in hopes of raising the value of the remainder, or it must sell very slow to preserve the due proportion between the articles it has for sale and those it wants to buy. By persuing the first method, it will soon exhaust its stock at a very considerate loss and only give temporary relief to the currency. According to my principle, ⟨though⟩ it sells cheap it must still buy dear; and consequently the money collected cannot remain in the Treasury long enough to preserve the rise in its appreciated state. If it persues the second method the expenditures will be equal to the income, and though the public will make the natural profits on its goods, as it will lay up nothing, it will do nothing towards the appreciation.D
The Farmers have the game in their own hands and will make it very difficult to lower the prices of their commodities. For want of labourers there is no great superfluity of the most essential articles raised. These are things of absolute necessity and must be purchased as well by the other classes of the society as by the public. The farmers on the contrary, if they do not like the price are not obliged to sell because they have almost every necessary within themselves, salt and one or two more excepted, which bear a small proportion to what is wanted from them and which they can obtain by barter for other articles equally indispensible. Heavy taxes, it may be said will oblige them to sell but they can pay with a small part of what they have any taxes our legislatures will venture to impose or would be able to inforce.
One measure alone can counter-ballance these advantages of the Farmers and oblige them to contribute their proper quota to the support of government; a tax in kind. This ought instantly to begin throughout the states. The present quantity of cash though nominally enormous would in reality be found incompetent to domestic circulation were it not that a great part of our internal commerce is carried on by barter. For this reason it is impossible by pecuniary taxes to raise a sum proportioned to the wants of the state. The money is no longer a general representative, and when it ceases to be so, the state ought to call for a portion of the thing represented; or in other words to tax in kind. This will greatly facilitate whatever plan of finance is adopted, because it will lessen the expenditures in cash and make it the easier to retain what is drawn in.
I said the demand for foreign goods is less than it formerly was. I mean there is not a demand for so large a quantity, which the reasons already assigned clearly demonstrate; nor are the exorbitant rates now given any objection to this doctrine. There is an absolute scarcity even in comparison of the present consumption; and of course a demand for what there is. But should an importation of two millions sterling take place the market would be glutted and there would be no way of keeping up the price but by making very slow sales. A less quantity would stand no chance of calling in the money and keeping it in long enough to effect any thing in favour of its credit.
I say nothing about the risk of importation. I do not believe we could obtain a convoy sufficient to justify our hazarding it without the precaution of insurance. But with this expedient we are safe and must be satisfied with smaller profits for the sake of security.
This is a plan not altogether to be rejected. With prudent management it might enable us to carry on the war two or three years (which perhaps is as long as it may last) but if we should expect more from it, the restoration of the currency, we should be disappointed.
The only plan that can preserve the currency is one that will make it the immediate interest of the monied men to cooperate with government in its support. This country is in the same predicament in which France was previous to the famous Mississippi scheme projected by Mr. Law.6 Its paper money like ours had dwindled to nothing, and no efforts of the government could revive it, because the people had lost all confidence in its ability. Mr. Law who had much more penetration than integrity readily perceived that no plan could succeed which did not unite the interest and credit of rich individuals with those of the state; and upon this he framed the idea of his project, which so far agreed in principle with the bank of England. The foundation was good but the superstructure too vast. The proprietors aimed at unlimited wealth and the government itself expected too much; which was the cause of the ultimate miscarriage of the scheme and of all the mischiefs that befel the Kingdom in consequence.
It will be our wisdom to select what is good in this plan and in any others that have gone before us, avoiding their defects and excesses. Something on a similar principle in America will alone accomplish the restoration of paper credit, and establish a permanent fund for the future exigencies of government.
Article 1st The plan I would propose is that of an American bank, instituted by authority of Congress for ten years under the denomination of The Bank of The United States.
2d A foreign loan makes a necessary part of the plan; but this I am persuaded we can obtain if we persue the proper measures. I shall suppose it to amount to 2000000 £ Sterling. This loan to be thrown into the Bank as a part of its stock.
3 A subscription to be opened for 200.000.000 of dollars and the subscribers erected into a company called the company of the Bank of the United States.
4th. The Government to guarantee this subscription money to the proprietors at the rate of one for twenty; that is to engage at the dissolution of the Bank to make good to them the sum of ten millions of dollars in lieu of the 200.000.000 subscribed, payable in spanish milled dollars or a currency bona fide equivalent to them.
5th. The taxes raised in money annually to be thrown into stock.E
6th. All the remaining paper to be called in (at the option of the possessor) and bank-notes issued in lieu of them for so much Sterling payable to the bearer in three months from the date at 2 per Cent an[num] interest. A pound Sterling to be estimated at 266⅔ of the present dollars.F The interest to be punctually paid in specie at the end of the three months; when it shall be at the choice of the possessor to have the bank notes renewed or to receive the sum deposited, in the old paper.
7 All the money issued from the bank to be of the same denomination and on the same terms.G
8 The Bank to furnish Congress with an annual loan of two millions sterling if they have occasion for it at 4 Cent interest.
9 The whole, or such part of the stock as is judged necessary, to be employed in commerce, in the manner and on the terms which shall be agreed upon from time to time between the Company and a Board of Trade to be appointed by Congress.
10. The Bank to issue occasionally by permission of Congress such sums as may be thought safe and expedient in private loans on good securities at six per Cent interest.
11 The government to share one half of the whole stock and profits of the Bank.
12. The Bank to be managed by the trustees of the company under the inspection of the Board of Trade,H who may have recourse to the company books whenever they think proper, to examine the state of its affairs. The same is done in England and in other countries where banks are established, and is a priviledge which the Government has a right to demand for its own security. It is the more necessary in this case from the commercial nature of the bank.
To give an idea of the advantages
[part of manuscript missing]
which having all [the] operation of money, and of a more advantageous kind than that which the lenders have parted with will have all the efficacy of a payment. It is for this reason they are made to bear interest; and there can be no doubt that every man will prefer a species of money which answers all the purposes of a currency and even when lying idle brings in a profit to the possessor. The same consideration will prevent the lenders recalling the old paper at the quarterly payments; because they hold a more valuable property instead of it. The interest is to be paid in specie as a further temptation, for which a small sum will suffice. The denomination of the money is altered because it will produce an useful illusion. Mankind are much led by sounds and appearances; and the currency having changed its name will seem to have changed its nature.
The Bank will advance Bills to the amount of £2.000.000 Sterling to Congress, and in addition to its stock will now have a debt due it of this sum, which is to be considered as so much gained.
[part of manuscript missing]
|To be deducted . . .|
|Drawn out of circulation by the sale of goods imported||4.000.000|
|By governmental taxes supposed to be||1.000.000||5.000.000|
|Remaining in circulation the fourth year||£2.075.000|
This will be less than the preceding which is occasioned by the million supposed to be drawn in by taxes.
The national debt on this plan will stand thus at the end of three years.
|Domestic loan at 2 Millions per annum||6.000.000|
|Interest at 4 per Cent||320.000|
|Half the value of the Bank||7.900.000|
|Ballance against the United States||£ 420.000|
We may therefore by means of this establishment carry on the war three years and only incur a debt of 420.000 £; over and above the Guarantee of the subscription money which however is not to be paid ’till the end of ten years.
I have said in one place that abstract calculations in questions of finance are not to be relied on, and as the complex operations of trade are involved in the present plan, I am myself diffident of those flattering results which it presents at every step. I am aware how apt the imagination is to be heated in projects of this nature and to overlook the fallacies which often lurk in first principles. But when I consider on the other hand, that this scheme stands on the firm footing of public and private faith, that it links the interests of the state in an intimate connexion with those of the rich individuals belonging to it, that it turns the wealth and influence of both into a commercial channel for mutual benefit, which must afford advantages not to be estimated, that there is a defect of circullating medium which this plan supplies by a sort of creative po⟨wer⟩ converting what is so produced into a real and efficacious instrument of Trade; I say, when I consider these things and many more that might be added, I cannot forbear feeling a degree of confidence in the plan, and at least hoping that it is capable of being improved into something that will give relief to our finances.
I do not believe that the advantages will be so great in fact as they seem to be in speculation. They will be limited by the means of commerce, which the states produce and these may not be so extensive in the beginning as the plan supposes. Besides this, the profits of the commerce will not be so large in proportion after the first or second year as during those years; neither will it be possible to increase the paper credit in the same degree. But the bank of England is a striking example how far this may be carried, when supported by public authority and private influence. On the other hand a variety of secondary expedients may be invented to enlarge the advantages of the bank. The whole system of annuities, as practiced in England may be ingrafted upon it with such differences as are proper to accommodate it to our circumstances. The European loan may also be converted into an European bank, the interests of which being interwoven with the American bank may engage rich individuals there in promoting and extending the plan.
Very beneficial contracts may be made between Government and the company for supplying the army; by which money may be saved to the public, the army better furnished and the profits of the Bank extended.
I have confined the bank to the space of ten years; because this will be long enough to judge of its advantages and disadvantages, and the latter may be rectified by giving it a new form. I do not suppose it will ever be discontinued, because it seems to be founded on principles that must always operate well and make it the interest both of Government and the company to uphold it. But I suppose the plan capable of improvement which experience will suggest.
I give one half the whole property of the bank to The United States; because it is not only just but desireable to both parties. The United States contribute a great part of the stock; their authority is essential to the existence of the Bank; their credit is pledged for its support. The plan would ultimately fail if the terms were too favourable to the company and too hard upon Government. It might be incumbered with a debt which it could never pay and be obliged to take refuge in a bankruptcy. The share which the state has in the profits will induce it to grant more ample privileges, without which the trade of the company might often be under restrictions injurious to its success.
It is not perhaps absolutely necessary that the sum subscribed should be so considerable as I have stated it, though the larger the better: It is only necessary it should be considerable enough to engage a sufficient number of the principal monied men in the scheme. But Congress must take care to proportion the advantages they give and receive.
It may be objected that this plan will be prejudicial to trade by making the Government a party with a trading company, which may be a temptation to arrogate exclusive privileges, and thereby fetter that spirit of enterprise and competition on which the prosperity of commerce depends. But Congress may satisfy the jealousies on this head by a solemn resolution not to grant exclusive privileges, which alone can make the objection valid. Large trading companies must be beneficial to the commerce of a nation, when they are not invested with these; because they furnish a capital with which the most extensive enterprises may be undertaken. There is no doubt the establishment proposed would be very serviceable at this juncture merely in a commercial view; for private adventurers are not a match for the numerous obstacles resulting from the present posture of affairs.
The present plan is the product of some reading on the subjects of commerce and finance and of occasional reflexions on our particular situation, but a want of leisure has prevented its being examined in so many lights, and digested so maturely as its importance requires. If the outlines are thought worthy of attention and any difficulties occur, which demand explanation or if the plan be approved, and the further thoughts of the writer are desired, a letter directed to James Montague7 Esqr. lodged in the Post Office at Morris Town will be a safe channel of any communications you may think proper to make and an immediate answer will be given. Though the Writer has reasons which make him unwilling to be known, if a personal conference with him should be thought material, he will endeavour to comply.
You will consider this as a hasty production and excuse the incorrectnesses with which it abounds.
I am Sir very respectfully Your most Obedt & humble serv
ADf, Hamilton Papers, Library of Congress.
1. Material within broken brackets has been taken from Hawks, The Official and Other Papers of Alexander Hamilton description begins Francis L. Hawks, The Official and Other Papers of the Late Major-General Alexander Hamilton (New York, 1842). description ends , 388–413.
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6. The “Mississippi scheme” was a plan drawn up by John Law, a Scottish economist who ruled over French financial affairs from 1716 to 1720. In 1717, Law formed the Compagnie d’Occident with a monopoly over commercial privileges in Louisiana and Canada. In 1719, the company merged with several concerns controlling trade in other parts of the world and changed its name to the Compagnie des Indes. The new company assumed control over French finances and began issuing unlimited quantities of stock. Following a wild speculative spree, the bubble burst in 1720, and Law left France in disgrace.
7. As mentioned in the Introductory Note, this is probably a fictitious name.