1st President of the United States
April 30, 1789 – March 4, 1797
George Washington remains the only president to be unanimously elected.
Part of Washington’s leadership skill was recognizing when other people were smarter than he was on a particular subject. There was probably no one better equipped to build trust in the fledgling American economy than Alexander Hamilton.
George Washington and the The Goat-Haircut Problem
What more can you say about George Washington that hasn’t already been said?
In the United States (and in many places around the world), George Washington is a mythical figure. He is larger than life. But as historian David McCullough likes to remind us, the so-called “Founding Fathers” didn’t wander around 18th century America saying how great it was to live “in the past”. They certainly had a sense for their place in history (many of their letters survive to attest to their foresight), but they were real people, and in many ways, they were just like us. They faced many of the same problems.
In the case of the nascent United States, those problems were many, but one seemed to loom over all the others: Money.
The United States was broke.
Actually, the country was worse than broke. The former British colonies won their legal independence from Great Britain, but one could argue not their economic independence. The trade imbalance with Great Britain meant an economy that struggled to get off its feet in the early years following the surrender of General Charles Cornwallis to then-General George Washington at Yorktown.
The trouble did not end there. Because there was no strong central, “Federal” government before the ratification of the Constitution, the states shouldered the debt burden of the war. Also, as one might expect, they did so unevenly. Some states were in tremendous trouble; others, not so much. In any case, no matter the frustration of the more solvent states with the situation of those less well off, those debts did need to be paid. The problem was that the new government did not have a way of funding itself.
Yes, the scrappy rebel army just dispatched the greatest army in the world at the time, but with all of the swirling uncertainty in its aftermath, it was natural to wonder if the average person should believe in the United States as an entity at all. In 2018, that may sound foolish. It did not sound foolish in 1789. And belief is the basis of money. Nothing else.
A (very) short primer on “money” is in order. Let’s start by explaining what money is not: Money is not a barter or exchange of goods and services. In other words, if I have goats and you give haircuts, you and I could arrange a trade for, say, one goat for one haircut. The problem becomes obvious in this example: What if you’re a vegan and I’m bald? Money serves as the intermediary. I can use a certain amount of money to pay for your haircut (or you, my goat). The soybean farmer or barber can then exchange their newfound money for the goods or services they need. And so on. As a practical idea, money is critical to an efficient and scalable economy. But it’s just an idea. You and I need to trust that the money we exchange may be used for any other good or service. If not – say, the tofu vendor won’t accept your “money” – you would be foolish to accept it as payment from me. And we’re back to the goat-haircut problem inherent in a so-called “barter” economy. It’s inefficient and does not scale.
The United States had a goat-haircut problem.
If the average person did not believe the United States would last, or believed more in their own state’s money (every state of this era had their own currency), the central, Federal government could not function.
Washington needed an answer. Fast.
Luckily, he had better than an answer. He had Alexander Hamilton, the first Secretary of the Treasury and one of the most brilliant people of his age. He deeply understood finance at a level that even other brilliant people (namely, Thomas Jefferson and James Madison) did not. Hamilton understood that the threat of a return to a centralized “monarchy” would be moot if the government collapsed. The confederation government set up in the intervening years already had. With Washington’s unstinting support, Hamilton pulled the new Federal government along, sometimes kicking and screaming.
First, the Federal government needed a source of capital. Without its own resources, it had no leverage. Hamilton used the general welfare clause (among others) in the freshly-minted Constitution to craft the Tariff of 1789, which passed Congress and which Washington immediately signed into law. The new tariff took advantage of the trade imbalance with Great Britain by creating a tax on goods carried by foreign ships (basically, most of them) while levying a much smaller tax on American shipping. In later years, the move would be seen as protectionist, but Hamilton successfully argued that it was necessary for the young government to assert itself. In the next decade (1790 to 1800), the shipping tariff accounted for more than 87 percent of the government’s revenue.
Later tariffs, specifically targeting distilled spirits were less popular (duh). They led to the first real test of the new government’s ability to levy taxes at all: The Whiskey Rebellion. In a show of force, this was the first (and last) time a sitting President would take the field as “commander in chief” to put down the rebellion.
Second, Hamilton arranged a standard weight and measure for coinage, ensuring consistency. The particulars aren’t important, but the strategy is telling. Hamilton recognized that the easiest was to introduce a national currency would be to base it on the only one widely in circulation between the states at the time: The Spanish gold peso. The Coinage Act of 1792 dispensed with the confusing “eighths” in fractions of a peso for a decimal system for the new gold coins, but otherwise, the first “dollars” were knockoff pesos. What underlies the importance here is that the US government now had a monopoly on the basics of economic exchanges. In essence, if you had goats in Vermont you could trade them in Gold Turban Eagle coins for a haircut in South Carolina, and everyone in the transaction would agree on the value. (Presumably, there was a barber shortage in Vermont).
Finally, the new government established the US Customs Office to collect said tariffs. It may seem obvious now, but the Constitution did not establish this infrastructure, it simply created the framework to create it.
Not everything Hamilton proposed worked out – some ideas on centralization of the economy going a bit too far for Jefferson and Madison. But the actions, collectively and over time, gave the government the legitimacy it needed to serve as the arbiter of currency.
As it turns out, “money” is one of those things us marketing people think about a lot … read on below.
Doubt that anyone would “believe” in something with no tangible value? You can track Bitcoin’s performance over the past several years at Coindesk.
When governments no longer control the money supply, we need to rethink what “money” is … and how it works.
So why does Hamiltonian monetary policy matter to modern marketing? Only government mints money, right?
Until 2009, marketers didn’t need to pay attention. Bitcoin changed all that.
Bitcoin is a cryptocurrency – a form of electronic, software-defined “money” that is distinct from its state-issued counterpart in some important ways, and remarkably similar in others. At its core, Bitcoin is a peer-to-peer money system. In the goat and haircut example, instead of using US Dollars, we might exchange a certain number of Bitcoins. There is no physical money (coin, or other manifestation) that represents that transaction. It is completely virtual and electronic. There also is no government sanction of the transaction, and hence no guarantee from a “higher authority”. The authority comes from the trust both of us have in the technology that underpins the system. In fact, the technological framework that underpins Bitcoin is in some ways more robust.
Built on a technology called “Blockchain”, each transaction enters a publicly accessible record of all transactions ever recorded. In other words, I cannot use the same Bitcoin to buy more than my allotted goats because the barber partner in the transaction could easily verify that I already had spent my goat money. We’ll leave behind the technical details for a moment, because the mix of tech and economics isn’t necessary to grasp the central idea. In a vast oversimplification: In software code we trust.
Critics like to point out that the Bitcoin market is wildly speculative, acting more like an electronic Ponzi scheme than a real “money” as most of us would recognize it. Moreover, only a small number of vendors accept Bitcoin, making its practicality for everyday transactions suspect at best. More troubling, Bitcoin is associated with the so-called “dark web” of shady (and often illegal) marketplaces. Finally, the Blockchain technology itself could present a systemic risk as the number of “blocks” in the “chain” become unfathomably large. If any link of this trust chain breaks, the Bitcoin “bubble” will burst.
Critics miss the point.
Whether Bitcoin (or one of the other several forms of cryptocurrencies) end up becoming viable, everyday currencies is not what’s important. It is that any non-government currency could become viable at all. This is such a big deal, that economists don’t know exactly what to think of it. For anyone in marketing, we’re surprised it took this long.
Bitcoin actually is quite like the US dollar. While the US Dollar is “centralized” and “controlled”, and Bitcoin is neither, both are subject to market conditions and fluctuations in “trust” and “belief”. At its core, the only reason money (no matter US Dollars, Bitcoins, or Tulips in Holland) has any value is because you believe that it does.
Marketing is in the belief manipulation business. We always have been.
There may be different ways to believe in 2018 than 1798, and we may be far more sophisticated about it now, but humans aren’t that different. Marketing principles truly control any money supply because they are the only ones that explain how to manipulate belief on masse.
If that’s true, what are the real lessons from both Washington and Bitcoin?
- The first lesson is how to build faith. In the 1790s, the US government had to be willing to put their guns where their dollars went. Marketers in the future may not have to rise up with weapons, but they certainly will need to use all legal tools at their disposal to protect the full faith and credit of the “Amazon crypto-dollar” or whatever the new currency happens to be.
- The second lesson is skin in the game, or shared risk. If there is a problem, our organizations will need to step up and protect downside risk, playing the role of the “government” in today’s money supply. It’s okay if a few people lose, but when everyone does, you get a Great Depression.
Before we feel like we’ve entered the Twilight Zone, if you think about it, marketing isn’t that far out of its comfort zone. Larger organizations more than dipped their toe into the water with branded credit cards and store credit arrangements. In fact, many organizations have gotten so good at it, that financing activities generate a disproportionate share of their annual profits. An organizational cryptocurrency is the next logical step.
And it will all rest on marketing as a broker of faith.
In marketing we trust?
God help us all.