Hamilton's Wall Street: What They Never Told You

Hamilton, the 2015 musical on the subject of Alexander Hamilton, the first U.S. Treasury secretary, did the country a valuable service. It staked out a key story of America's founding as belonging to the whole nation, not just a select group. The overwhelming success of the production—created by Lin-Manuel Miranda—shows just how welcome and rare the achievement is.

What's Missing from Broadway

Hamilton leaves a lot out, though, due to time constraints and the limits of hagiography. Apart from some deeds portrayed in Miranda's hit play, Alexander Hamilton's real-lief set the country's finances on a strong course. He founded the Treasury, the first (short-lived) central bank, and Wall Street for all intents and purposes. It's hard to imagine the U.S. as a prosperous hub of global commerce in 1850, 1950, or 2017 if Hamilton had gotten in a musket ball's way at Yorktown. 

He isn't just responsible for the proud parts of the country's financial history, though. Wall Street has a history of booms and busts and its fair share of scandals. It has often enjoyed close relationships with political power centers, through which privileged information flows perhaps too easily. These descriptions characterized the Wall Street of Hamilton's day as much as the Wall Street of the 1920s or today.

Two incidents stand out. While he was formulating the famous "funding and assumption" plan, financiers and politicians close to Hamilton were snapping up reams of war-era debt, which the market priced as junk. The farmers and soldiers who sold these notes did not know, as Hamilton's circle somehow did, that the Treasury would redeem them at full value. In another event, financial panic struck because Hamilton thwarted an ex-colleague plan, which he perceived as threatening the young country's carefully crafted financial system.

Hamilton was Wall Street's most influential early leader. He deserves much credit for two centuries of national prosperity, but he also set sad, familiar precedents.

The Bank of New York

On Nov. 25, 1783, Evacuation Day, British commanders pulled their troops out of Manhattan along with around 27,000 loyalist refugees who had fled fighting upstate. A British gunner fired the last shot of the war as his ship passed crowds of ex-colonist hecklers but didn't hit anyone.

New Yorkers, newly free of British occupation and endowed with an excellent harbor, were perfectly placed for trade, but they had almost no access to financing. The British and their supporters took most of the city's gold and silver. The Continental, the paper money issued by the revolutionary government, had been inflated into oblivion by 1780 so it took 400 Continental dollars to buy one silver dollar.

By 1781, it had stopped circulating as money entirely. State currencies held up only slightly better, so colonists used a grab bag of private scrip and foreign coins. (Spanish pieces of eight were a favorite.) Meanwhile, the only commercial bank, the Bank of North America, was 100 miles away in Philadelphia.

In March 1784, Hamilton gathered a group of loyalists and revolutionaries at a coffee shop on the corner of Wall Street and Water Street to find the city's first bank, the Bank of New York. (The coffee shop was a block away from the city's slave market, where Hamilton had closer connections than Hamilton lets on.) This bank would finance the city's merchants, safeguard the founding fathers' deposits—Thomas Jefferson was a telling exception—and facilitate Hamilton's other schemes from a planned manufacturing town in New Jersey.

Hamilton proposed the Bank of the United States in 1790, and it opened in Philadelphia the following year. In April 1792, it opened a New York branch, Wall Street's second bank. This period would see two of Wall Street's formative scandals unfold. Hamilton was front and center in both cases, ensuring his plans for a prosperous, fiscally responsible nation didn't go off the rails—regardless of the collateral damage.

Funding and Assumption

The cornerstone of Hamilton's plan to secure American creditworthiness—depicted in a rap battle between Hamilton and Jefferson in the musical—was "funding and assumption." Under the proposal "Report Relative to a Provision for the Support of Public Credit," Hamilton put forward in January 1790, the federal government would honor the country's debts at face value.

Controversially, it would fund the union's debts, which Hamilton estimated at $54 million, and assume the individual states' obligations. Hamilton estimated these at $25 million, but Congress settled on $21.5 million.

He said, "when the credit of a country is in any degree questionable, it never fails to give an extravagant premium in one shape or another, upon all the loans it has occasion to make." In other words, the U.S. would always pay high interest rates if it did not establish itself as creditworthy. 

Few at the time saw this policy coming. The wartime Continental currency, which could, in theory, be redeemed for hard money when it was first issued, had become worthless. Other government debt, such as the promissory notes used by the military to pay conscripts and farmers, still had some value but changed hands for a fraction of what was promised. Now, these notes would be replaced by Treasury securities at par. Continentals were only redeemed at 1% of face value, which was much more than expected.

Skeptics have noted the uncanny foresight displayed by Wall Street traders, whose calm and cooperation Hamilton would rely on when he multiplied the price of government debt overnight. Members of Congress, whose votes Hamilton would need to pass the four 1790 laws that realized his plan, also appeared to know the market was severely undervaluing government bonds. (In those days, Congress convened on Wall Street in Federal Hall.)

After the plan became public, a Revolutionary War veteran wrote to the Massachusetts Centinel on March 20, 1790, about his friends' dealings with speculators: "What was the encouragement when they offered their paper for sale? That government would never be able to pay it and that it was not worth more than 2s for 20s. This was the language of all the purchasers."

Howard Wachtel's View

Howard Wachtel, professor emeritus of economics at American University, quotes that letter to the Massachusetts Centinel in his historical research, "Alexander Hamilton and the Origins of Wall Street." He also tallies the stakes congressmen built up in federal and state debt even as, "with great solemnity," they gave speeches urging fellow lawmakers to vote for funding and assumption. Below are a few examples from the House of Representatives:

• George Clymer, Pennsylvania: $12,500
• Roger Sherman and Jeremiah Wadsworth, Connecticut: $29,500
• Elbridge Gerry, Massachusetts: $49,000
• Elias Boudinot, New Jersey: $49,500

Speaking with Investopedia by phone, Wachtel asked the obvious question: "I mean, how could this have happened without some passing of information? There were no laws against it, and there was a kind of a casual atmosphere of people living close to each other, eating together, having coffee together, talking about public affairs together."

The corner of Wall and Water in 1797. The Merchants' Coffee House, where the Bank of New York was founded, is to the right (southeast corner). The Tontine Coffee House, to the left (northwest corner), would supersede Merchants' as Wall Street's premier hangout upon opening in 1793. The business was the forerunner to the New York Stock Exchange and was structured as an actual tontine. Source: Wikimedia.

Wachtel cites a letter William Constable, a Wall Street broker, wrote to his colleague Andrew Craigie in late 1789: "I dined with Hamilton on Saturday. He is strong in the faith on maintaining public Credit...I tried him on the subject...' they must no doubt be funded though it cannot be done immediately,' was his remark." Craigie and his partners owned $100,000 in state debt. 

Wachtel also argues someone as meticulous and driven as Hamilton would not neglect to lay the groundwork for his plans with those in power, even if his actions drew criticism at the time and strike us centuries later as insider trading. "You have to put it in context," he told Investopedia. "Hamilton was obsessed with making this work. This was his great dream and project."

In his research, Wachtel cites the Columbia University historian Charles Beard, who in the early 20th century revived questions about Hamilton's possible collusion with Wall Street: "Those who assume that the Secretary of the Treasury could have carried out his enormous reorganization of the finances without conferring with the leading financiers of the time have only an elementary knowledge of Treasury administration." Something similar could be said of conferring with politicians.

It is worth noting that the first Treasury secretary was not following precedent; he was setting it. And while Hamilton himself did not engage in this speculation, the department he ran may not have been clean. Wachtel suggests William Duer bought up deeply discounted debt while serving as Hamilton's first Treasury secretary. True or not, Duer resigned in April 1790; Wachtel writes that even by 18th-century standards, his "extensive investment in public securities" was a bridge too far. After leaving office, the Treasury veteran would stoke Wall Street's first speculative bubble, backing Hamilton into a corner and forcing him to set off the Street's first panic.

Wall Street's First Boom and Bust

When he resigned, Duer was one of the richest men in the new republic, perhaps due to savvy investments in soon-to-be-funded war-era debt. Not ready to retire, he hatched a plan to corner the market in shares of the Bank of New York. These shares had already been the subject of a brief speculative mania in 1791 because Hamilton structured them so investors could buy immediately and pay in installments.

According to Wachtel, Duer convinced Wall Street a rival bank was in the works, driving down shares in Hamilton's bank. Meanwhile, he snapped up as many of the discounted shares as possible, planning to let the rival bank rumor die and wait for the stock to appreciate again.

Robert Wright and David Cowen, authors of Financial Founding Fathers, present the episode slightly differently. The Million Bank was a sincere proposal by Wall Street entrepreneurs; Duer sought to control it, failed, and decided to kill it instead. Nor was his aim, in their telling, simply to corner the Bank of New York, but to "effectively own the stock and the bond markets."

In either case, he borrowed with reckless abandon to finance his scheme. When the banks stopped lending to him, he turned to friends. When they'd had enough, he took high-interest loans from the better part of New York's population. The bubble that resulted in early 1792 dwarfed the previous years. Hamilton was appalled. Wright and Cowen quote letters calling the new projects "in every way pernicious" since they gave "a wild air to everything" and jeopardized the "whole system of public credit." With his blessing, the Bank of New York and the Bank of the United States pulled the punch bowl, calling in loans and cutting back on new credit issues.

Duer's creditors—that is, the whole city—suddenly felt squeezed. Some were forced to sell assets to pay the banks. His situation wasn't helped by the fact the market for his borrowed securities had evaporated, along with any willingness to lend. He defaulted in March 1792, and the city's economy went into freefall. He had taken money from "shopkeepers, widows, orphans, Butchers, Carmen, market women & even the noted Bawd, Mrs. Macarty," according to the contemporary observer Alexander Maxcomb, who also wrote:

Every countenance is gloomy, all confidence between individuals is lost, credit is at a stand, and distress and general Bankruptcy to be daily expected–for everyone gambled more or less in these cursed Speculations.

Duer died in debtor's prison in 1799. He was lucky to be there, all things considered: In the early days of the panic, a lynch mob did its best to drag him out of jail.

The Invention of Wall Street

New York's legislature debated outlawing the brokerage industry entirely after this incident. To keep themselves in business, a group of 24 Wall Street merchants signed the Buttonwood agreement in May 1792, which set the industry up along the lines of a medieval guild: self-contained, membership-only, self-policing. Outsiders could do business with the brokers but at their own risk. This self-regulating framework lasted until the 1817 Constitution, when the New York Stock Exchange Board replaced it with seventeen new governing rules.

Hamilton's contemporary critics argued that something should be done to compensate the soldiers and farmers who sold their debt holdings to in-the-know speculators at a pittance. Hamilton argued doing so would set a dangerous precedent. He wrote the following in 1790:

The idea proceeds upon a principle destructive of that quality of public debt, or the stock of the nation, which is essential to its capacity for answering the purposes of money—that is the security of transfer; the other, that as well on this account, as because it includes a breach of faith, it renders property in the funds less valuable; consequently induces lenders to demand a higher premium for what they lend, and produces every other inconvenience of a bad state of credit.

Hamilton won, and Wachtel thinks it's a good thing he did. "To take the country from a destitute nation just being born into a powerful engine of commerce," Wachtel told Investopedia, "it was brilliant."

Hamilton's actions set important precedents: The state would pay its debts and not barge into the market to cancel contracts and alter property rights. But Hamilton also set harmful precedents: Finance and government would go hand in hand, and those in power could use this relationship to profit with impunity, and Wall Street would periodically make extravagant promises to ordinary citizens, then yank the rug out from under them. 

"Hamilton's view was this is what had to be done to get the country going," Wachtel says. "and he was right."

Mr. Burr, Sir

Hamilton's Bank of New York survives today as the Bank of New York Mellon Corp. It is, of course, no longer the only bank on Wall Street. One of BNY Mellon's competitors, appropriately enough, is the modern incarnation of the Manhattan Company, which was founded by the man who shot Hamilton to death in July 1804, Aaron Burr. Hamilton blocked Burr's attempts to found a bank, so in 1799 he started a water company instead. The firm devoted as little attention as possible to water, though, using hollowed-out logs instead of metal pipes and serving only a handful of households.

Hamilton realized soon enough that Burr had fooled him, hiding a clause in the company's charter that allowed it to act as a bank in all but name. In 1955, when bank mergers were illegal, a lawyer channeled Burr's savvy and argued the Bank of the Manhattan Company could legally merge with Chase National Bank of the city of New York since the former wasn't a bank at all and never had been. Following a few more mergers, the firm is now known as JPMorgan Chase & Co. Hamilton's legacy outshines Burr's in every way, with one exception: as of September 2021, JPMorgan Chase (JPM) is worth $473 billion to BNY Mellon's (BK) $45 billion.

The Bottom Line

The popular Broadway musical Hamilton has popularized the life story of the eponymous founding father. But the show doesn't mention key details relating to real-life Hamilton's economic impact. Those include his efforts to establish a central bank and his success in pushing through a controversial plan for the federal government to assume states' debts accrued during the Revolutionary War. Many of Hamilton's proposals, ideas, and impacts remain evident in the U.S. economic system today.