FROM THE ARCHIVES: A FREE NATION DEEP IN DEBT:

Alexander the Great: Hamilton saved America from the Founding Fathers' economic ignorance. (RICHARD BROOKHISER, July 4, 2005 , Opinion Journal)

Cleaning up the American mess had to start with political reform. The Constitution, which Washington, Hamilton and both Morrises signed, gave the United States a revenue stream by allowing Congress to tax imports and products, such as whiskey and salt. (Income taxes were unconstitutional.) This change alone began to boost the value of American securities even as Hamilton took office. Hamilton strengthened American credit further by taking over the states' debts and announcing that all creditors would be paid at a common rate. To make good on that pledge, he had to overcome congressional resistance to rewarding speculators who had bought up debt. But Hamilton knew that if the United States started picking and choosing among its creditors, its credit would go back into the outhouse.

By paying America's debts responsibly, Hamilton made American IOUs valuable. "It is a well known fact," he wrote, "that in countries in which the national debt is properly funded . . . it answers most of the purposes of money." He thus monetized a cash-strapped, backwater economy. To handle the government's funds, and to regulate the money supply, Hamilton asked Congress to charter the Bank of the United States. America would join Holland and Britain in the vanguard of the financial revolution. The Bank had to overcome the objections of Secretary of State Jefferson, and Virginia's Rep. James Madison, who thought chartering such a corporation was unconstitutional. Madison's opposition pained Hamilton, since he and Madison had worked together in the struggle to ratify the Constitution. Madison, he concluded, was a "clever man," but "very little acquainted with the world." The world recognized Hamilton's knowledge. When he stepped down as Treasury secretary in 1795, American securities were trading at 110% of face value.

[originally posted: 2005-07-04]