We all know about Alexander Hamilton.
But most folks don’t really know him.
I mean, say his name to most folks, ask what they know … and they’ll tell you:
We know he’s on America’s $10 bill.
We know he was killed in a duel with Aaron Burr.
And we know he had “something to do with banking” in America’s earliest days.
But Hamilton was more … much more … than these couple of trivia points.
In fact, you could argue that the America we know today – with its modern financial markets, achievement-based economy, position as a world leader and society that affords safety to us, our family members and all our “stuff” – wouldn’t exist were it not for Hamilton, financial historian Mark J. Higgins told me in a brand-new interview.
Mark is the author of the book Investing in U.S. Financial History: Understanding the Past for Forecast the Future.
He also operates the Investing in Financial History newsletter here on Substack. And he’s a senior vice president at Index Fund Advisors, where he focuses on institutional investment plans and select high-net-worth individuals.
And in a wide-ranging talk earlier this week, the Portland-based Higgins told me about his work as an institutional investment consultant, his work as a financial historian, the four-year effort to write his book … and Hamilton.
America beat Britain in the Revolutionary War.
But it was almost what historians like to call a “Pyrrhic” victory. America won that war. But without change, that victory would be “hollow.”
We’re talking about a “new” nation that:
Had amassed a mountain of war debt … with no solid payoff plan.
It was saddled with a government structure – a confederation – that blunted its revenue potential.
Scared by the default potential, foreign investors were steering clear.
The country’s first war veterans – who’d fought so heroically – were “outraged” by the lack of support.
And a nation that lacked the financial system needed to evolve from a frontier-farming economy into a country that had industry and could trade with countries overseas.
Hamilton was the first U.S. treasury secretary (1789-1795), working under U.S. President George Washington.
And it was Hamilton – the financial genius who didn’t see himself as one – who mapped out the financial reforms, pushed them through and then protected them when they were attacked … again and again. (And it was likely that role as “protector” that led to the duel that cost him his life.)
Hamilton was the architect of the First Bank of the United States. He made sure that institution was well-funded and had gold and silver reserves. He understood the key principles of a “fractional banking system” – which expanded the money supply and fueled decades of economic growth. And he created demand for the U.S. government bonds needed to make this happen.
“Bill, this guy was brilliant … although he didn’t see himself that way,” Mark told me in our “walkup” chat before our interview. “People today don’t realize the impact he had … you could argue that we owe him everything. It’s not just that our financial system – the one we know today – wouldn’t exist were it not for him. America itself may very well have failed during those tumultuous early years.”
Mark’s statement is both dramatic … and no doubt true.
And it makes a key point: There’s much to learn from history. You see, history tends to repeat itself – in patterns you can recognize.
And once you learn those patterns, you can use them to make better financial decisions … and reduce risk.
“It was Edwin Lefevre who wrote ‘there’s nothing new in Wall Street’ … and that’s true,” Mark told me. “As I researched this, I found that these patterns repeat themselves over and over. It is a true rarity to see something new, but many people fail to see the repetition because they unnecessarily restrict their knowledge to the recent past and their own personal experiences.”
Want proof? Let’s circle back to Alexander Hamilton. And then to a couple of lessons from history.
That First Bank created by Hamilton wasn’t technically a “central bank” – at least, not in the sense the U.S. Federal Reserve is today (for example, it didn’t have regulatory powers).
However, that First Bank really was a “table-setter” for the U.S. financial system. And despite intense opposition – and despite competing agendas – that de facto “first central bank” never lost sight of its prime directive … which was creating and maintaining financial “order.”
Hamilton’s First Bank created order from chaos. As I heard Mark’s history tale, it seemed to me that the current version of the Fed has forgotten that “history lesson” … about the importance of focus on that true objective – keeping order.
But Mark sees a different history lesson that today’s Fed seems to have missed. And a failing grade here carries a hefty (and painful) potential price tag.
“Here again, Bill, we see the value of understanding history … and the damage that can result from not knowing it,” Mark said. “Today’s Fed … and the situation I believe we’ll soon be facing … has to do with the central bankers’ lack of an appreciation of the lessons from the Great Inflation of 1965-1982. I think they mistakenly believe that their credibility is tied to them being early to end monetary tightening because they were late starting it in 2022. The problem is that being early at the end of an inflationary cycle risks allowing inflation to reignite.”
Here's what he means: By cutting rates as it did recently, the Fed gave in to competing interests, and lost sight of that one “enemy” that can savage a financial system and kill long-term economic health: Inflation.
I know what Mark’s saying … because I experienced it myself.
My family and I lived through the inflation-ridden 1970s … with the WIN (Whip Inflation Now) buttons, two energy crises and the pall of uncertainty that stifled dreams of an upbeat U.S. future. After his miscues by his predecessors, Fed Chairman Paul Volcker eventually took action: He didn’t “whip” inflation – he crushed it.
The Volcker-led central bank took the Fed Funds rate from an average just over 11% in 1979 to a peak of 20% in June 1981. That took the prime rate to 21.5% in 1981, helping trigger the 1980-82 recession, a downturn that kicked the U.S. jobless rate up over 10%.
“Every time you tackle inflation by tightening monetary policy – but then fail to fully extinguish it – you risk allowing it to return … and become even stronger,” Mark told me. “Financial history strongly suggests that the [recent] rate cut was a mistake … and I fear we are already seeing the embers of inflation starting to reignite.”
That’s just one of the (many) lessons he details in his book …
I love financial history. Especially “investing-related” financial history.
This is one of those rare history lessons where you can reap a direct benefit from your study efforts … and enjoy your work while you’re doing it.
And this is one of the best pure efforts I’ve seen.
Check out our chat. Then check out Mark’s book.
I think you’ll be glad you did …
See you next time,
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