August 4, 1790: Alexander Hamilton’s Debt Plan and the Foundation for American Capitalism
On September 11, 1789, the Senate confirmed President George Washington’s appointment of Alexander Hamilton as Secretary of the Treasury. Hamilton wasted no time and worked all weekend to address immediate financial concerns and spent the next few years formulating the financial policies to engage in nation-building for the new republic.
As one of the primary authors of the Federalist and as a key delegate to the New York Ratifying Convention, Hamilton had been instrumental in winning ratification of the new Constitution strengthening the national government. During the 1790s, he would use the constitutional authority of that new government to build a lasting republic.
Hamilton’s visionary financial plan was the foundation of his nation-building in the 1790s. He wanted to establish the credit of the United States and encourage economic growth through a national bank. While he wanted to support a strong manufacturing base, he sought to integrate merchants, artisans, planters, farmers, and shippers from different sections of the country into a unified national economy. Strong economic growth would allow the young republic to build a strong national security state to survive in a world of contending empires. He believed that the soundness of the nation’s finances was essential for American prosperity and political stability for the national honor and future greatness.
The first part of the plan was to remedy the teetering financial footing of the new nation. President Washington thought the issue was of central importance to the new nation as he told Congress in his first State of the Union address. He said it was a “measure in which the character and permanent interests of the United States are so obviously and so deeply concerned.” In the fall, Congress had requested that the new treasury secretary submit a Report on Public Credit, which Hamilton did on January 14, 1790.
In the report, Hamilton wrote that the public debt totaled an estimated $79 million. He thought that it was a matter of national honor and natural law that the United States meet its financial obligations and the “punctual performance of contracts.” Practically, the good faith and respectability of the country was at stake.
A solid public credit in Hamilton’s estimation would result in many benefits. It would restore confidence in the United States. The country would enjoy lower interest rates and borrow on easier terms, freeing up capital for productive investment. The public credit would encourage domestic and foreign trade and thereby prosperity for all sectors of the economy. The public credit would “cement more closely the union of the states” and provide “security against foreign attack.”
The plan aroused a significant amount of opposition. The first major controversy was that some states had paid their Revolutionary War debts and others had not. Another source of contention was that many veterans had been paid in Continental securities but had sold the certificates when wartime inflation caused their value to drop. Speculators had bought them for ten or twenty cents on the dollar and would seemingly gain from gambling on the “distresses” of the soldiers.
Hamilton wanted to redeem the certificates of the current holders of the debt as a matter of contracts and justice. He also had a plan for the “assumption” of the state debts by the national government. He thought the costs of the war should be shared equally by all and wanted to empower the national government to collect the revenue to extinguish the debt gradually. He thought that “the proper funding of the present debt, will render it a national blessing” because it would restore the public credit and promote the productive engines of the American economy.
James Madison helped lead the opposition to the plan in the House of Representatives. He was particularly concerned by what he considered to be injustice against the Revolutionary War veterans who were supposedly victims of speculators. He also thought that a “public debt is a public curse.” Madison and other congressmen such as Representative William Maclay and Senator James Jackson used revolutionary ideology to criticize the proposal as encouraging rapacious speculators, vice, corruption, and political centralization that threatened republican self-government.
In late June, Thomas Jefferson hosted a dinner for Hamilton and Madison in which they helped to hammer out the Compromise of 1790 in which Hamilton won his financial plan and southerners won a capital in Washington, D.C. In July, after much debate and controversy, Congress eventually passed his plan for the federal government to assume the Revolutionary War debts of the states as well as the tariffs and excise taxes he wanted gradually to extinguish the debt.
In December, Hamilton submitted another major part of his financial vision for the country with his Report on a National Bank. Congress more easily passed the National Bank to circulate currency and lend money to promote economic growth. Washington was unsure of the constitutionality of the bank and solicited opinions from his cabinet because he took seriously his presidential duty only to sign bills that were constitutional. He sided with Hamilton’s more expansive view of the Necessary and Proper Clause that the bank was related to several other congressional powers in Article I, Section 8.
In a few short years, Hamilton’s triumph was vindicated by a thriving, dynamic economy. Hamilton successfully used the federal government to provide stability and order to the financial system that allowed individuals to thrive in the private free market. In the 1790s, Hamilton and Washington established the finances of the new nation and shaped the American regime of republican liberty and self-government.
Tony Williams is a Senior Fellow at the Bill of Rights Institute and is the author of six books including Washington and Hamilton: The Alliance that Forged America with Stephen Knott. Williams is currently writing a book on the Declaration of Independence.
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