The Founding Scam

by MARK SCARAMELLA


The dashing face of Alexander Hamilton, first Treasurer of the United States, is a fitting portrait for the $10 bill because back in 1790 he engineered what became the great insider trading scam that founded the United States of America.

Although the illegitimate son of an itinerant Scottish merchant and a planter’s daughter, Hamilton was a devout monarchist — so devout that he spied for the British King while a founding cabinet member, undermining early treaty negotiations with England.

Hamilton made his way into George Washington’s graces by studying the famously corrupt English system of finance and credit, and military theory. As George Washington’s aide-de-camp during the Revolutionary War, Hamilton’s assignment was "to think for me," said Washington, "as well as execute orders."

Hamilton went on to become a lawyer, of course, representing the nation’s founding money men at 57 Wall Street. This experience, combined with his well-honed intellectual capacities and his marriage to the extremely wealthy Elizabeth Schuyler, brought him into contact with New York’s richest bankers and businessmen, not the least of whom was his father-in-law.

At the end of the Revolutionary War, the loose confederation of states which wore down the British and forced them to abandon their colonies had accumulated a huge war debt to soldiers, farmers, tradesmen and suppliers who had sold goods to the army — paid in currency called "Continentals." The Continentals became virtually worthless after the war, yet they remained in circulation, falling in value and creating price inflation. The states had borrowed and printed a lot of money to fight the Brits themselves, too. Many of their currencies fell in value, reflecting their debt levels; others rose. Financial confusion reigned. European backers of the Revolution, predominantly Dutch bankers and the French government, awaited repayment and US investors awaited assurances of monetary stability.

But "the government" didn’t yet exist and there was no money to pay with.

Would the holders of the Continental IOUs be stiffed? Would the US try to pass off Continentals to the Europeans, ruining its credit? Amid factional and geographic disputes, ordinary American IOU holders expected to be left holding the bag of Continentals.

But the ingenious Hamilton had other ideas, ideas known to his banking associates and other insiders. Hamilton privately convinced President Washington (who didn’t bother himself with financial arcana and left such details to Hamilton) that the newly formed government should pay off the debts at full value.

Soon, Hamilton’s associates — bankers, agents, and speculators — got wind of the government’s secret plans to pay off the debt in full and bought up the supposedly worthless Continentals at 10% of their face value, letting the rubes believe that they’d starve before there would ever be a government capable of paying them off, or that they’d never be able to prove that their claims on the government were valid.

But Hamilton’s circle knew they stood to make ten times their money when Hamilton’s clever plans were implemented. The main opposition to Hamilton was Thomas Jefferson who thought that Hamilton’s financial schemes were too royal, too British, and therefore too corrupt. Jefferson and James Madison hoped that the nascent government would be less centralized and more democratic.

Hamilton had General Washington in his hip pocket, but he had to get Jefferson’s agreement on the scheme before the (mostly southern) states and their representatives would buy in. So Hamilton arrogantly promised Jefferson that if Jefferson agreed to the financial system of centralized banks, credits, and paper money, the capitol of the new country would be in Jefferson’s backyard in Virginia, making it more accessible to Virginia and other southern states, putting them in a better position to profit from the access.

Hamilton also proposed that the federal government assume all the outstanding state debts, convincing the wealthy representatives of the individual states to sign on to the Constitution at a Convention — also famously secret. And so Jefferson and most of the founders agreed to Hamilton’s plans. In fact, many of the nation’s first congressional representatives had bought up the Continentals themselves and made quick personal windfalls from the governmental payoff.

With great solemnity they spoke in favor of Hamilton’s plan on the floor of Congress and voted against James Madison, one of the few to remain unconvinced by Hamilton. Madison wrote to Thomas Jefferson in July of 1791 and sadly reported, "Of all the shameful circumstances of this business, it is among the greatest to see the members of this legislature who were most active in pushing this job openly grasping its emoluments."

Hamilton’s Treasury Department bought up the Continentals with dollars at face value and issued new government bonds to cover it.

Hamilton’s stated purpose was to design a byzantine financial system which would be difficult for ordinary citizens to understand, larded with British monetary lingo that even lawyers would find difficult. It would also give those in charge of issuing credit a powerful ability to influence the country’s unruly citizens with discretionary credit — the so-called "mother’s milk" of politics. Hamilton explained that "winning and keeping the confidence of men with money to bestow or withhold was essential to the fiscal operations of the new government."

Otherwise, Hamilton argued, financial anarchy would reign and the big piles of cash and credit necessary to finance the new government would be inaccessible.

Using the ever-expanding land value of the new country and the already burgeoning agricultural surplus being generated by farmers, slaves and indentured servants, Hamilton arranged to borrow more money from Europe to finance the debt and pay off congressmen and other wealthy Continental holders — including his father-in-law — with the proceeds. This new debt would in turn be paid off by offering stakes in Indian land and a British style system of tariffs (later converted to income taxes since tariffs were thought to be bad for international trade).

And thus began the financial system of the United States.

If Martha Stewart had been as smart as Alexander Hamilton she would have defended herself against the charges of insider trading by explaining that the country was founded on it and depends on it to this day — she was just following in the grand tradition.

Insider trading and conjured credit is the American way.

MARK SCARAMELLA is the managing editor of the Anderson Valley Advertiser. He can be reached at: themaj@pacific.net

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