President Trump has appointed four of the five serving governors to the seven-member Board of the Federal Reserve System. Last week he bruited his plans to make another attempt to nominate two more, Judy Shelton and Christopher Waller. (Four previous proposals have gone nowhere this year:: Herman Cain and Steven Moore, and, before that, Marvin Goodfriend and Nellie Liang. So I spent the better part of the Fourth of July perusing the stack of books on the history of the Fed that have appeared since the financial crisis.
I started out with Alexander Hamilton on Finance, Credit, and Debt (Columbia, 2018), a compilation of eighteen compositions by America’s first secretary of the Treasury on the subject of finance. It was arranged by Richard Sylla, of New York University, and David Cowen, president of the Museum of American Finance
At least until recently, Hamilton was best known as the author of many of The Federalist Papers, a leader of the movement for the Constitution. As George Washington’s Treasury Secretary, he was also architect of the US financial system, the authors note in their introduction. It’s hard to believe that Hamilton’s writings on finance haven’t previously been collected, but as the editors point out in their introduction, it was only in recent decades that economists and economic historians have come to understand in their own terms the centrality of finance to growth and power.
As a voracious reader of history (while serving as a young officer in the Continental Army, for four years as Washington’s chief staff aide), Hamilton understood how institutions of public and private credit had enabled the Dutch Republic to win its independence from Spain, and go on to became the richest nation in Europe; how Britain after 1688 had copied and improved upon the Dutch system. The government bank, national currency, private banks and securities markets the British created fueled rapid economic growth and financed its frequent wars with France. Hamilton argued that the newly independent United States should follow its example.
Sylla is among America’s leading economic historians. Introductions to each document make clear and compelling reading; abridgements are welcome and, no doubt, judicious. Still, eighteenth-century arguments require careful reading in the twenty-first. That led me to The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy (Harvard Belknap, 2012, by Thomas McCraw). Another distinguished historian, McCraw begins,
Of the six major “founders” of the United States, Alexander was the only immigrant. He was also much the youngest of the six: fifty-one years younger than Benjamin Franklin, twenty-five years younger than George Washington, twenty-two years younger than John Adams, fourteen years younger than Thomas Jefferson, six years younger than James Madison. Hamilton alone died violently, in his famous duel with Aaron Burr.
Young, well, yes. And hot-blooded? The circumstances of Hamilton’s youth couldn’t have been more different from those of the other founders, all of whom lived far longer than he did. But his immigrant pedigree? He was born in 1757, on Nevis, a tiny Caribbean island near St. Kitts and St. Croix in the Danish Virgin Islands, to a headstrong mother and an aristocratic Scottish father, who abandoned the family when Alex was eight. The next year his mother died of yellow fever. After an astonishing series of further misfortunes, Hamilton was taken in by the family of a young friend (who may have been Hamilton’s half-brother) and went to work for a local merchant house of New York-based traders. Hamilton learned bookkeeping, inventory control, short-term finance, and exchange-rate mechanics. He dealt with traders from ports throughout Western Europe. He emigrated to New York when he was fifteen.
McCraw had just finished the first leg of a new line of inquiry when he died, at 72, in 2012. His study of the work of Hamilton and Albert Gallatin, who succeeded him as Treasury Secretary under Jefferson and Madison, took the story through the War of 1812. What might have been a second book, following the American financial revolution into the twentieth century, would not be written. But Founders and Finance is a capstone work. McCraw’s first book, TVA and the Power Fight: 1933-1939, appeared in 1971. His second Prophets of Regulation: Charles Francis Adam, Louis D. Brandeis, and Alfred E. Kahn (Harvard Belknap, 1984), won a Pulitzer Prize. His third. Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Belknap Harvard,2007), broadened his view. It is remarkable McCraw finished either one of the last two: a mysterious heart condition kept him flat on his back and away from the archives for most of his last ten years. Of all the books about Hamilton’s contributions, including Ron Chernow’s massive biography, on which the Lin-Manuel Miranda musical is based, Founders and Finance is the one to read. After 364 pages, McCraw concludes:
So the dream of an integrated, diversified, and booming economy – the aspiration of Hamilton, Gallatin and many other immigrants – eventually came true. Robert Morris, who had grown up in England, Hamilton in St. Croix, Gallatin in Geneva, Haym Solomon in Poland, Alexander James Dallas in Jamaica, Stephen Girard in France, John Jacob Astor and David Parish in Germany – all emigrated from their homelands with open minds, fresh eyes, and a flair for finance. All, in both the public and private sectors, took the profound personal step of uprooting themselves because they believed they might achieve a better future in North America. And that is what they did, both for themselves and for the United States.
Finally, as dusk approached, I picked up Bagehot: The Life and Times of the Greatest Victorian (Norton, 2019), a curiously off-the-mark biography of the great nineteenth-century financial journalist, famous chiefly as the third editor of The Economist, author of The English Constitution and Lombard Street: A Description of the Money Market by James Grant, founder of Grant’s Interest Rate Observer, an eminent practitioner of the same craft in the present day. It was Bagehot’s advice – in a banking panic, lend freely at penalty rates to solvent institutions, until fear goes away – that central bankers and finance ministers followed in halting a global panic during a desperate five weeks in the autumn of 2008. In his memoir, The Courage to Act, Fed chairman Ben Bernanke cited Bagehot more often than any living economist, Grant notes.
Yet Grant begins the book by confessing his doubts about the wisdom of the very dictum for which Bagehot (pronounce it Badge-it) is remembered, “his embrace of the dubious notion, so corrosive to financial prudence, that the central bank has a social obligation to the citizens who present themselves as borrowers and lenders, investors and speculators. No other class of person enjoy special access to the government’s money machinery,” Grant says. He resurrects Bagehot’s great foe in the arguments of the 1860s and 1870s, Thomas Hankey, a former governor of the Bank of England, to argue against central bank intervention in banking panics.
This makes for some strange moments in Grant’s account, as when Britain experiences no bank run in 1873, after the Bank of England adopted the lending rule Bagehot spelled out in Lombard Street, which appeared the same year. Instead the Panic of 1873, which began in Vienna with the default of Egypt’s Suez Canal bonds, quickly spread to North America and the rest of Europe, and, as Grant puts it, “disarranged commerce and finance on both sides of the Atlantic long after the first shock waves subsided” – twenty hard years known at the time in the US as the Great Depression and in Britain as the Long Depression.
The recurring US panics of the Gilded Age, culminating in the Panic of 1907, led the US Congress to create the Federal Reserve System. The Fed opened for business in 1915 – the central government bank and banking system regulator that Hamilton had envisioned one hundred and twenty-five years before. Events since then are a story for another day.
Of the most recent pair of putative nominees, Waller, director of research of the Federal Reserve Bank of St. Louis, would ordinarily be a perfectly presentable candidate, except that his views are more or less a carbon copy of those of his boss, St. Louis Fed president James Bullard, who already is a rotating member of the all-important policy-making Federal Open Market Committee. And Shelton’s views, especial her enthusiasm for a gold standard, are fairly controversial. There is, of course, no telling what the current Republican-led Senate might do. But given the president’s fierce assault on the authority and independence of the Fed, I won’t be surprised ff those vacancies are still around next year.