The Page 99 Test: Thomas K. McCraw's "The Founders and Finance"

Thomas K. McCraw is Straus Professor of Business History Emeritus at Harvard Business School. In addition to his new book, The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy, McCraw's publications include Prophets of Regulation, which won the Pulitzer Prize

for History, and his biography Prophet of Innovation: Joseph Schumpeter and Creative Destruction, which won four other prizes and is available in six languages.

He applied the “Page 99 Test” to The Founders and Finance and reported the following:

The page 99 test works extremely well for The Founders and Finance. U.S. debt and deficit problems are bad enough today, but they were much worse when the nation was founded in 1776, more than 230 years ago. At that time, the country was bankrupt and vulnerable to disintegration. This book is about how immigrant financial experts devised a series of ways to rescue the economy. The key to the story is Alexander Hamilton's solution to the debt problem, and page 99 comes in the middle of a four-page passage detailing the heart of that story.

The United States government started out with very little money and almost immediately went broke. Its War of Independence from Britain forced it to borrow from banks in Holland and to wheedle large sums from France, Britain's historic rival. The Continental Congress had no power to tax, so it continually asked the 13 new "Free and Independent States" -- as the Declaration of Independence calls them -- for financial support that they were either unable or unwilling to provide. Both the Continental Congress and the state governments sold reams of bonds to help finance the war and printed huge stacks of currency. The value of the bonds quickly depreciated and most of the currency lost its value and became "not worth a Continental." There seemed no way out. The Revolution might well have failed because of financial problems alone.

Nobody in America knew how to manage a national economy because there had been no nation. Nobody had any experience with large-scale finance because there had never been a bank in the 13 colonies and there were none in the new states. There was lots of expertise in managing land and slaves, reflected in the prominence of George Washington, Thomas Jefferson, and James Madison in the forming of the new government. All three were major Virginia tobacco planters, but none had much familiarity with the tools of finance: bonds, currency, banks, and public credit. Neither did other founders such as John Adams, who grew up on a farm in Massachusetts and distrusted banks.

Enter such immigrants as Robert Morris, Alexander Hamilton, and Albert Gallatin. Morris came from Liverpool at the age of 13, Hamilton from the Danish West Indies at 15, and Gallatin from Geneva at 19. None fit the later image of immigrants as tired, huddled masses or wretched refuse. None had an agrarian frame of mind and each -- unlike the vast majority of native-born Americans -- had grown up in a city. All were extremely bright and energetic, with a special aptitude for numbers. Morris and Hamilton had spent their teens working in merchant houses dealing with international trade, and Gallatin had led his math classes at elite academies in Geneva. As the War of Independence wore on, Congress appointed Morris as Superintendent of Finance, and he did an outstanding job. But he was frustrated by the government's inability to tax, a problem solved only after the adoption of the Constitution in 1788.

The percentage of immigrants in the total population was only about half what it is today, and the odds against three "aliens" -- Morris, Hamilton, and Gallatin -- becoming the three leading financial executives of the early Republic were prohibitive. Yet that is what happened. It is a tribute to the wisdom of George Washington for appointing Hamilton Secretary of the Treasury twice, and to that of Jefferson and Madison for appointing Gallatin four times. Of the three immigrants, the most important was Hamilton, who conceived and executed a plan so audacious, and so difficult to get through Congress, that we must regard his achievement as the most dazzling economic performance of any public official in U.S. history.

Hamilton's three-pronged strategy was: (1) to "fund" (refinance) the existing debt at its face value, so as to restore the creditworthiness of the country; (2) to "assume" (transfer to the federal government) all state debts, in order to gain first call over tax receipts; and (3) to create a Bank of the United States, which would issue a vast amount of new currency and increase the nation's money supply. The Bank would have branches in all major cities.

Hamilton's plan was widely admired during the two centuries after he presented it. But, incredibly, only in the last few years have the true -- and shocking -- numbers he was dealing with been discovered, in the archives of a Dutch bank that lent money to the United States. (Professor Richard Sylla of NYU made this discovery.) During Hamilton's first full year in office, 1790, the nation's debt-to-income ratio was a crushing 46 to 1 (today, by comparison, it's 6.6 to one). Five years later, in 1794, after the prosperity resulting from Hamilton's program, the ratio had shrunk to 15 to 1. By 1800 it was only 8.6 to one, and the United States enjoyed one of the highest credit ratings of any country on earth. This is a big reason why Secretary of the Treasury Albert Gallatin was able to finance the $15 million Louisiana Purchase, one of the epic events in the nation's history.

Hamilton and Gallatin were political enemies, but they shared many of the same views, like most of the other immigrants discussed in The Founders and Finance. They actively opposed slavery. They favored the Bank of the United States. They supported federal aid to "internal improvements" (roads and canals), and federal promotion of manufacturing. They always thought in a framework of the national interest, favoring no particular state or region. Here they differed from most native-born Americans, who were tied tightly to their home states by bonds of family, heritage, and the ownership of land. These powerful local loyalties persisted for many decades after the Revolution. Not until after the Civil War of the 1860s was the nation commonly spoken of in the singular: the United States is rather than the United States are.

Compared to most native-born Americans, the immigrants Morris, Hamilton, and Gallatin thought of the United States in the singular almost from the beginning. Tied only loosely to any particular state, they remained personally rootless. The saw financial capital as rootless, too, as it is in fact -- movable, portable, migratory in the same sense that they themselves were. For the first two generations of U.S. history, these immigrants and others like them influenced national financial policy much more strongly than citizens born in the thirteen colonies did. And over the next two hundred years, their ideas formed much of the framework for American development -- a story of sustained economic success that has no parallel in any other country. The Founders and Finance shows how those ideas evolved and were first put into practice.