A Biography of Alexander Hamilton (1755-1804)
The Reports on Public Credit I
Report Relative to a Provision for the Support of Public Credit (Submitted to Congress on January 9, 1790)
In this massive and detailed report which would determine the permanent financial foundation of the United States, Hamilton began by humbly stating the overwhelming nature of the task he had tackled and the underlying principle of his plan:
“In the discharge of this duty, he has felt, in no small degree, the anxieties which naturally flow from a just estimate of the difficulty of the task, from a well-founded diffidence of his own qualifications for executing it with success, and from a deep and solemn conviction of the momentous nature of the truth contained in the resolution under which his investigations have been conducted. ‘That an adequate provision for the support of the Public Credit is a matter of high importance to the honor and prosperity of the United States.'”
The debt would be funded; that is, the federal government would convert its debts into interest bearing bonds which would mature after an assigned period of time. A sinking fund of revenue from the post office would be established for the payment of the principal of the debt.
The plan contained three basic provisions for the handling of the debt:
The principal of the domestic debt would be paid at par (with 4 percent interest on long-term, and 6 percent on short-term bonds–slightly less than the interest promised by the Confederation government) to current bearers.State debts would be assumed by the federal government with interest payments deferred until 1792.
- As mandated by the constitution, the foreign debt and interest would be paid in full according to the terms initially agreed to.
Federal stocks would circulate as money, thus making capital more plentiful and readily available. Large reserves of capital would encourage commerce, as well as agriculture and manufactures. The availability of cash, and its rapid circulation would lower interest rates, making it “easier and cheaper” for individuals and smaller businesses to secure loans for their enterprises.
Hamilton’s plan for revenue was based upon an import tariff and an excise. To soften the blow of such a tax plan, Hamilton painted the items to be taxed as darkly as possible: “They are all of them, in reality–luxuries–the greatest part of them foreign luxuries. pernicious luxuries. ” Spirits, which because of their “cheapness” are imbibed to an extreme, “which is truly to be regretted, as well in regard to the health and the morals, as to the conomy of the community. “
THE OPPOSITION – FUNDING
If asked how he came to his conclusions on the funding of the public debt, Hamilton might have answered in a Sherlock Holmes deadpan, “why, it’s elementary.” It was not so evident to congress.
It took some time for congress to digest the report, but when they did, a bitter controversy ensued. Hamilton obviously had expected some objections to his plan, but he had not bargained for the extent of the outcry, nor for the direction from which it came.
The voice of the opposition came from James Madison, whom Hamilton considered a friend and ardent fellow Federalist. He had depended upon Madison’s support for his plans, and his former collaborator’s opposition was to Hamilton a shocking blow both personally and politically.
Madison and the opposition did not object to the funding of the debt, rather they disagreed as to who should be paid and how much. During the course of the war and afterward, many holders of continental bonds, often veterans and farmers who had contributed goods and services to the war effort, sold their certificates at depreciated prices for much needed cash. Now that provisions had been made to fund the certificates, those who had bought bargain certificates would reap monstrous profits, leaving nothing for the original bearers.
Madison argued that this was unfair, and only served to further enrich an already wealthy class of merchants and “stock-jobbers” at the expense of farmers, soldiers, and backwoodsmen. Madison favored a plan of discrimination, paying the original bearers the nominal value of the certificates they once held, while paying the current bearer the highest market value plus interest. Granting benefits to both types of investors, in Madison’s view, would be more just.
THE OPPOSITION – ASSUMPTION
The plan for assumption of states’ debts was also seen as unfair in that it favored states that still retained large wartime debts. Some states, such as Virginia, had already paid much of their debt and would not benefit as much as states who had been less assiduous about paying their bills. Indeed, the Virginians asserted that, given the opportunity to balance their accounts with the federal government, they would be owed some three million dollars. The opposition called for the balancing of accounts between individual states and the government before making a decision on assumption. The decision, of course, would be based on whatever was more profitable to the states.
Although he had briefly toyed with the idea of discrimination, Hamilton eventually rejected it on a number of grounds. At the very base, it would be an administrative nightmare to track down the original bearers and verify claims. More far-reaching problems were inherent in Madison’s plan, however. Hamilton understood that the foundation of any financial system was faith. Investors needed faith in the strength of the system and the prospect of dividends before risking capital on an enterprise. It would be a breach of that faith if holders of public securities marked “payable to the bearer” were not given their due return. The United States needed to be consistent in its policies, and to uphold basic tenets of good faith from the outset in order to generate confidence with investors at home and abroad. In fact, the original bearers had already engaged in a speculation of their own. The current bearers, who had gambled on the certificates themselves, should not be penalized.
Hamilton did not deny that the funding plan would ultimately concentrate large amounts of capital in select hands; but this was part of his larger plan. Those in possession of large bankrolls would reinvest their capital in the government and in enterprise which would benefit the economy as a whole.
Underlying Hamilton’s reasoning, as always, was the intention of strengthening the union and diminishing as much as possible the strength of the states. Fusing the interests of the public creditors to the central government was a necessary step in that direction.
The report was fiercely debated in congress throughout the spring. Hamilton waited anxiously, and monitored the proceedings with mounting anguish as his former ally denounced his work and endeavored to defeat it. If that was not enough, he also had to endure cruel personal attacks in the press. One such diatribe which appeared in papers in both Virginia and New York indicates that details of Hamilton’s background were circulating and being used as cheap ammunition against him and his policies. It described the assumption plan as a “bastard of eastern speculators,” delivered through the midwifery of the Secretary of the Treasury, and baptized “Alex–der Assumption.”
With defeat of the entire plan imminent, Hamilton appealed to Secretary of State Thomas Jefferson to help him win over the largely Virginian-led opposition. Jefferson invited Madison and Hamilton to dinner, and offered to cut a deal. Jefferson proposed to Hamilton that he and Madison would conjure the extra votes needed to pass his plan if it were tied in with a bill to place the national capitol on the Potomac–near Virginia, and more accessible to the south as a whole. An interim location in Philadelphia would placate those politicians who had favored that city as the capitol; and the fact that it would be far removed from Hamilton’s power base of Manhattan was probably significant to the Virginians as well.
Hamilton agreed, and as promised, the Virginians brokered the two extra votes needed to pass the funding and assumption in the House. Hamilton had triumphed; and the entire central government packed their bags for Philadelphia.