A recent 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 the native-born or the white male 30% (projected to be 20% before long). The production's overwhelming success – in terms of accolades and execution – shows how welcome Lin-Manuel Miranda's achievement is, and how rare.

Hamilton leaves a lot out, though, due to time constraints and the limitations of hagiography. Alexander Hamilton set the country's finances on a strong course. He founded the Treasury, the first (short-lived) central bank and – for all intents and purposes – Wall Street. 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 stoking booms, followed inevitably by busts, and of running off with ordinary people's money. 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 2000s. (See also, Wall Street History).

Two incidents stand out. While he was formulating the famous "funding and assumption" plan, financiers and politicians close to Hamilton – personally and geographically – 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. Shortly afterwards financial panic struck because Hamilton thwarted an ex-colleague's plan, which he perceived as a threat to the young country's carefully-crafted financial system.

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

The Bank of New York

On November 25, 1783, Evacuation Day, British commanders pulled their troops out of Manhattan along with around 30,000 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, except that they had almost no access to financing. The British and their supporters took most of the city's gold and silver with them. The Continental, the paper money issued by the revolutionary government, had been inflated into oblivion by 1780, so that it took 400 Continental dollars to buy one silver dollar. By 1781 it had stopped circulating as money entirely. State currencies held up little better, so colonists used a grab bag of private scrip and foreign coins (Spanish pieces of eight were a favorite). North America's only bank, meanwhile, was 100 miles away in Philadelphia.

In March 1784, Hamilton gathered a group of loyalists and revolutionaries together at a coffee shop on the corner of Wall Street and Water Street to found the city's first bank, the Bank of New York. (The coffee shop was a block away from the city's slave market, a place Hamilton had closer connections to 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 to the central bank.

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. The eight years between the opening of the first bank, in 1784, and that of the second would see two of Wall Street's formative scandals unfold. In both cases Hamilton was front and center, ensuring that his plans for a prosperous, fiscally responsible nation didn't go off the rails – whatever the collateral damage.

Never Assume

The cornerstone of Hamilton's plan to secure American creditworthiness – and the subject of a rap battle between Hamilton's protagonist and Thomas Jefferson – was "funding and assumption." Under the proposal, which Hamilton put forward in 1790, the federal government would honor the country's debts at face value. Controversially, it would not only fund the union's debts, which Hamilton estimated at $54 million, but assume the individual states' obligations as well (Hamilton estimated these at $25 million, but Congress settled on $21.5 million).

His view was that "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 from the start. (See also, The Risks of Sovereign Bonds.)

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. "Not worth a Continental," goes an acid refrain coined at the time. Other government debt, such as the promissory notes the army used to pay conscripts and farmers, still had some value, but changed hands for a fraction of what was promised. These notes would be replaced by Treasury securities at par. Continentals were only redeemed at 1% of face value, but that was much more than expected.

Not worth a Continental. Source: Wikimedia.

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

At the end of 1789, exactly two weeks before Hamilton submitted his "Report Relative to a Provision for the Support of Public Credit" to Congress, 70 Manhattan merchants owned around $2.7 million worth of state debt. In March 1790, after the plan became public, a Revolutionary War veteran wrote 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, professor emeritus of economics at American University, quotes that letter to the Massachusetts Centinel in his 2003 history of Wall Street, "Street of Dreams – Boulevard of Broken Hearts" (the Green Day song came out later). 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 at-large, $12,500
• Roger Sherman and Jeremiah Wadsworth, Connecticut at-large – $29,500
• Elbridge Gerry, Massachusetts 3rd – $49,000
• Elias Boudinot, New Jersey at-large – $49,500

Speaking with Investopedia by phone in June, 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 that 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 that 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 book he 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, though, 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 totally clean. Wachtel suggests that William Duer was buying 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 the 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 that investors could buy immediately and pay in installments.

According to Wachtel, Duer convinced Wall Street that 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 appreciate again.

Robert Wright and David Cowen, authors of Financial Founding Fathers, present the episode in a slightly different way. 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." (See also, 5 Steps of a Bubble.)

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 year's. Hamilton was appalled. Wright and Cowen quote letters in which he called 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 that 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 a contemporary observer, 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 New Deal, according to Wachtel.

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 that to do so would set a dangerous precedent. The idea, he wrote in 1790,

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

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

Mr. Burr, Sir

Hamilton's Bank of New York survives today as the Bank of New York Mellon Corp. (BK). It is of course no longer the only bank on Wall Street, though the Million Bank never came to fruition. 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 that 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. (JPM). Hamilton's legacy outshines Burr's in every way, with one exception: JPMorgan Chase is worth $336 billion to BNY Mellon's $54 billion.

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