Published: Monday, Dec. 9, 2002

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December 9-14, 1790

December 13, 1790 was the day on which First Treasury Secretary Alexander Hamilton wrote the second of his seminal documents establishing the institutional framework for the American System of Economics. It was entitled The Second Report on the Further Provision Necessary for Establishing Public Credit (Report on a National Bank). The first Report on Public Credit had established a sinking fund and the assumption of debts incurred during the war; the third, to be issued approximately one year later, was the celebrated Report on Manufactures.

These three documents must be understood as being of a piece, that piece being the establishment of a sovereign republic, with sound finances and public credit, and with the means for expanding its industry and commerce for the benefit of its population. They can only be understood from the standpoint of Hamilton's intention, the intention of implementing a Leibnizian nation able to provide for the nation's necessities, and to "procure the true happiness" of its people. Hamilton was willing to borrow forms of organization from anyone, as long as they could be used to reach this goal.

That said, we shall focus this report on the National Bank, which was indeed established, pursuant to Hamilton's recommendation, and which became, as a concept, a cornerstone of the American System tradition, that was continued up through Abraham Lincoln's Presidency.

Hamilton began by outlining three major "advantages" to be gained from the creation of a National Bank. Most important was: "the augmentation of the active or productive capital of a country." "It is a well established fact, that Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold & Silver," Hamilton wrote. Thus, "by contributing to enlarge the mass of industrious and commercial enterprise, banks become nurseries of national wealth: a consequence, as satisfactorily verified by experience, as it is clearly deducible in theory."

As the remainder of the report makes clear, the National Bank is not intended to help the government, as much as it is to help the citizens in their private, productive enterprise. Indeed, the use of government debts in providing the initial capital for the Bank, made it even more obvious that the Bank was at the service of the economy as a whole.

Only after emphasizing this, does Hamilton mention the other two advantages of a National Bank: first, greater facility to the government in obtaining pecuniary aids, in the case of emergency; and second, the facilitation of the payment of taxes.

The rest of Hamilton's Report on a National Bank is devoted to answering the critics of the plan, and to laying out the principles of organization of the bank itself. From studying history, we know that the major domestic opponents who were making these criticisms, came from the two groupings who opposed Hamilton's intention of turning the United States into an industrial nation. These were, on the one hand, the New England merchants, who followed Adam Smith's dictum of making money, not wealth, by buying cheap, and selling dear. The other opponents were the Southern plantation oligarchy, or their spokesmen, who, while often putting their objections in populist language, were seeking to hang on to their aristocratic way of life.

The criticisms Hamilton dealt with, boiled down, essentially, to charges of usury, over-lending, and the impact such a bank, which would establish a national paper currency, would have on the accumulation of gold and silver. What the young Treasury Secretary showed was that, in fact, a sound national banking system would reduce usury, because it would ensure there was no dearth of credit, and would tend to reduce rates of interest. He also argued that over-lending was unlikely. Most important, he insisted that the bank would actually increase the amount of gold and silver available, because it would improve the actual wealth of the economy, which depends upon the production of labor and industry.
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