FROM THESE first steps, Hamilton’s report turned to the repair of the country’s economy and its financial system. In this, his insight showed most clearly, for he not only explained the needs but also laid out a novel and ingenious way to deal with both simultaneously. In doing so, this eighteenth-century document offers a remarkable insight into the ephemeral nature of finance and how economic health depends on that unavoidably vague base. It is an insight from which today’s journalists, academics, policymakers, civil servants and politicians might well gain.

The economic challenge of independence lay at the base of these efforts. Hamilton was acutely aware of his country’s economic disadvantages. No doubt his early education in an import-export office on the Caribbean island of Nevis made him especially sensitive to the benefits and shortcomings of Britain’s imperial system. The United States enjoyed being part of the British imperial system as a colony but once it left, this system posed a significant challenge. Europe’s imperial systems denied the independent United States ready, viable markets anywhere in the world in which to sell its agricultural surplus and raw materials or buy manufacturers. Accordingly, the country’s only option, Hamilton concluded, was to broaden its economy from existing colonial structures, to develop prowess in manufacturing and commerce, as well as in agricultural and raw materials. That way, America could absorb more of its own agricultural surplus and raw materials even as it supplied its own manufacturing and commercial needs.

To some extent, tariff hikes served these objectives. By raising the cost of foreign goods—by no small amount either—these levies fostered the development of a domestic answer and so encouraged a shift, at least at the margin, in economic effort from agriculture toward commerce and industry. To be sure, this “infant industry” rationale for tariffs flies in the face of most modern economic thought, which holds that free trade serves the country’s needs best. It is hardly surprising, however, that Hamilton nowhere defends his tariffs from such thinking. When he introduced them, the seminal work advocating free trade, by the British economist David Ricardo, lay decades in the future. Even if Hamilton had been aware of such thinking, he surely would have countered with the argument that Europe’s imperial systems precluded the option of free trade. But whatever tariffs might have done to help the economic shift, it was a minor consideration. Their main purpose was to raise needed federal revenues. Hamilton’s primary and most insightful effort to foster the economic change came through his management of a broad domestic financial solution.

More robust domestic finance, he argued, would not only remove impediments to daily business, but, by facilitating domestic borrowing and lending, it would also promote the growth of manufacturing and commerce. At the very least, the country needed a uniform system for daily transactions and strong enough finance to provide capital for businesses’ everyday borrowing needs—something that British capital had provided when America was a colony. The United States would need still more robust capital support if it was to develop its own manufacturing. Building factories, ships, ports, roads, and everything involved in making and shipping goods would require large amounts of lending over long periods. He hardly needed to point out that the ensuing economic growth would benefit the public as well as federal revenues, answering both the economy’s needs and those of debt service.

To accomplish all this, he needed a reliable basis for currency and finance, something that people could confidently rely on to hold its value over time, something as good as gold. Of course, had the country enjoyed a good base of gold and silver, his job would have been easier. Americans had confidence that these metals would hold their value and so would use them as a basis for the borrowing and lending necessary to support commerce and development. But because the country’s already-meager supply of precious metals went abroad at regular intervals to pay interest on the government’s debt, Hamilton needed a substitute. The continentals were worthless and the public would understandably suspect any new paper currency. With remarkable insight, he tied his solution back to the debt restructuring.

His thinking on this score relied on a small bit of history, which he took the time to explain to Congress. When gold was the only acceptable medium of exchange in the Middle Ages, those who fretted over the security of their holdings sought out respectable goldsmiths for its safekeeping. The smiths gave gold depositors paper receipts for the weight of gold left with them. People soon discovered that merchants and business associates would readily accept the receipts of trustworthy smiths as if they were gold. But since receipts for all the gold a person had were a cumbersome means for exchange, people asked the smiths to issue receipts in smaller, standardized denominations. In time the goldsmiths noticed that no one ever came for the gold. They realized they could make receipts for more gold than they actually held, and as long as they avoided excessive writing, they could use these receipts for their own buying and for lending. As the smiths became bankers, the resulting expansion of trade and credit fostered greater levels of economic activity and development than the gold ever could have.

Hamilton used this reference to bring home the critical lesson about money and finance: It matters not what lies behind the system just so long as people have confidence that it will hold its value. Even gold is only worth what people believe it is. It has no intrinsic value. If, he reasoned, he could convince people that the United States would always pay its debts, the government’s bonds would retain a stable price over time. As people gained confidence in this stability, they would willingly accept the debt, or paper money backed by it, in payment for goods and services. The United States would acquire a uniform currency for daily transactions. The debt would also provide a standard on which to base short- and long-term lending that, in their turn, would promote an expansion of trade and the development of the economy’s manufacturing and commercial side. In the jargon of economists, he would “monetize” the debt. He had evidence that it could work. In both Britain and the Netherlands, reliable government obligations had substituted for gold and silver in all ways. His debt restructuring would form a base for a domestic monetary and financial system that, in its turn and in time, would secure economic growth, development and economic independence from Europe. In doing so, it would also provide the government with additional revenues that would further reinforce confidence in the debt.

His plans, of course, demanded that the debt remain outstanding. Repaying it would steal the stuff he needed to replace gold in the nation’s monetary-financial system. He talked publicly of repaying the debt. The sinking fund seemed to stand as an agent of that purpose. Such talk built confidence in the reliability of the debt and its ability to hold value. And indeed, the structure he created aimed at repaying any individual holder. Otherwise, the system required that the Treasury, rather than pay off the debt, seek only to fund it securely. Even the sinking fund, unlike its British model, could never commit to a schedule for paying down the debt. In Hamilton’s scheme, the fund would became a manager of its market value, keeping it constant by buying when for some reason prices slipped, and cease buying then they rose again. Presumably, he meant for the fund to sell bonds into the market should their price rise, though he never explicitly mentioned such an intention.

It was precisely in this context—as backing for currency and as a basis of an expansion of credit and so development and economic growth—that he described the “national debt” as a “national blessing.” To facilitate the process, Hamilton sought two additional pieces of legislation, one to create a national mint that would strike coins and bills to replace the cumbersome mélange of currencies circulating at the time and to serve as a kind of emblem of public confidence. Second, he also pushed to establish a national bank, the First Bank of the United States, a public-private partnership that would serve as the government’s bank and set the tone for extending credit based on the security of the government’s promises. It, like the sinking fund, could act in the market, buying and selling U.S. government bonds to stabilize their value.

THE LEGISLATIVE effort to get this massive plan into law demanded herculean effort. Powerful interests lay on all sides. In favor were the original owners of the debt, the merchants who had taken the paper in payment for goods and services and the speculators who began accumulating U.S. government debt on the initial rumors of Hamilton’s plans. On the other side were many in government who objected to any hint that speculators might make gains, especially with paper bought at a discount from the original holders. Hamilton had to show the impossibility of these people’s mind-bogglingly complex schemes to find the original buyers and see to it that they got full value. He also had to explain that such efforts, morally attractive as they were, would undermine the nation’s public credit which would only gain when the government showed an unalloyed willingness to honor all contracts from all comers. Also opposing Hamilton’s plan were a powerful group of land speculators. They were making fortunes by purchasing deeply discounted paper and presenting it at state and federal land sales where the authorities valued it at par. There were others, too. Jefferson and many of his political allies—including Madison and the Revolutionary War hero, Henry Lee—opposed anything that might shift the nature of the economy away from agriculture.