Hamilton's Financial Plan
Designing a New Government
Late in his life, George Washington declared that “Colo. Hamilton [was]… the principal and most confidential aid[e] of the Commander in Chief….” This trust in Hamilton dated back to the Revolutionary War, and it continued when Washington was inaugurated as President, on April 30, 1789. While the new Constitution provided the young nation with a general frame of government that has since proven itself both robust and flexible, nevertheless, the document remained silent on numerous issues, and Washington often turned to Hamilton for advice. For example, he asked Hamilton for recommendations on presidential protocol, i.e. how the president should interact with the public. In his letter of response, dated May 5, 1789 (pictured here), Hamilton suggests that the president should strike a balance between maintaining contact with the public and protecting the dignity of the office.
Hamilton as the First Secretary of the Treasury
During his time as the first Secretary of the Treasury of the United States (1789-1795), Alexander Hamilton engaged all his energy, talents, knowledge, and experience in laying the foundations of America’s financial and economic system. Nominated by George Washington to his post on September 11, 1789, and confirmed by the Senate on the same day, Hamilton stepped into his new role immediately. A task of enormous proportions awaited him: reining in the national debt accumulated since the onset of the Revolutionary War and saving the country from financial collapse. He organized a highly functional Treasury Department with employees throughout the Union. Hamilton believed that establishing a modern financial system would promote economic growth. His plan for placing the country on solid financial and economic footing was presented to Congress in the form of several major reports: on Public Credit, on the National Bank, on the Establishment of a Mint, and on Manufactures.
Hamilton’s Report on Public Credit
In the Report on Public Credit, Hamilton urged the federal government to honor both its domestic and international debts and to assume the crushing wartime debts that some of the states still struggled with. Passing the Assumption Bill by Congress was the first major step in building the creditworthiness of the federal government at home and abroad and placing all thirteen states on equal ground.
Six Percent Bond
Hamilton established the credit and credibility of the new government by convincing Congress and the president to pass a series of important laws related to increasing tax revenues, refinancing old debts, and establishing a new national bank. Under his “funding” policy, the Treasury issued new bonds, fully funded by taxes, in exchange for a variety of old obligations to soldiers and other wartime creditors. Some, like the one here, paid investors 6 percent interest per year. Others paid 3 percent, while still others, called deferreds, paid nothing until 1801, when they started to pay 6 percent. All were freely transferable to third parties, leading to the creation of an active and important market for securities issued by governments as well as corporations.
Assumption
Hamilton also convinced the new government to “assume,” or take responsibility for, the wartime debts of the states. Pictured here is a bond created as part of his program, which was called assumption. The policy of assumption was controversial because, to some, including Virginia politicians James Madison and Thomas Jefferson, it seemed an unfair redistribution of resources, and a power grab by the federal government. Hamilton countered that these measures were essential to establishing a firm foundation for the economy.
Jefferson vs. Hamilton
In one of the many ironies of history, the wealthy Virginia slaveholder pictured here, Thomas Jefferson, considered himself a democrat and a man of the people. The political faction he led came to be called Democratic-Republicans, while Hamilton was the guiding force behind the Federalist Party. Jefferson and his followers castigated Hamilton, an abolitionist from a humble background, as a royalist and aristocrat. The two became bitter political rivals during the disputes over funding, assumption, and the Bank of the United States and remained so for the rest of their lives, although each at times evinced a grudging respect for the other. Hamilton’s early death, and the triumph of Jefferson’s party in the elections of 1800 and beyond, allowed Jefferson, Madison, and their supporters to shape the historical record.
Moving the Capital: The Compromise of 1790
In order to ensure sufficient support for his economic policies in Congress, Hamilton needed to compromise. At the famous “Dinner Table Bargain” or “Compromise of 1790,” Jefferson and Madison agreed to accept Hamilton’s assumption plan, and Hamilton agreed to allow the new national capital district (later named Washington, D.C.), to be located on the banks of the Potomac River in Northern Virginia, the location preferred by Madison and Jefferson. As part of the compromise, the nation’s capital was moved from New York to Philadelphia for a decade while the new site near George Washington’s Mt. Vernon plantation was prepared. The political cartoon pictured here describes the reactions of different individuals (including “Bob,” the Philadelphia financier Robert Morris) and groups affected by the compromise.
The Bank of the United States
The Bank of the United States, pictured here in the left panel, was another financial policy initiated by Hamilton that encountered resistance from Madison, Jefferson, and their Democratic-Republican followers. After they failed to prevent the bank’s charter from passing Congress, Jefferson and Madison contested its constitutionality. Washington asked both Jefferson and Hamilton to make their case in writing. Hamilton’s defense of the institution, pictured here in the right panel, persuaded Washington to sign the bill. It includes a masterful explanation of the Constitution’s “elastic clause.” (Article I, section 8, clause 18: “The Congress shall have power … To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”) The Bank of the United States proved itself an important institution that made loans to businesses as well as the government and that successfully safeguarded both the overall economy and the government’s money from its inception in 1791 until its charter expired in 1811.
Report on Manufactures
The Report on Manufactures, presented to Congress in December 1791, carefully analyzed the structure and development of the national economy and presented compelling reasons for encouraging manufacturing in the U.S., foremost among them gaining economic independence – in addition to political independence – for the new nation. Far from being opposed to agriculture, Hamilton argued that agriculture and manufacturing should work hand in hand to make the country self-sufficient. The Report also included specific tariff proposals, outlined by Hamilton in detail. Though the Report on Manufactures in its entirety was not passed by Congress, Hamilton again included his tariff recommendations in a defense bill six months later that was passed by Congress as Hamilton proposed. In the summer of 1778, Hamilton, Washington, and Lafayette happened to have lunch by the Great Falls of the Passaic River. Hamilton recognized the potential of the tremendous water power from the falls to create a manufacturing location.
Society for Establishing Useful Manufactures
Hamilton played a critical role in founding the Society for Establishing Useful Manufactures (S.U.M.), at the Great Falls of the Passaic River in New Jersey, in 1791. He envisioned the S.U.M. as a pilot project, as a center for innovation and diversified manufacturing, and as an incubator of other manufacturing startups in Paterson and around the country. Hamilton wrote the S.U.M. corporate charter and offering documents with all the necessary powers to put his vision into practice and urged Governor William Paterson to secure passage by the New Jersey legislature, thus laying the foundations of Paterson as the first planned industrial city in the nation. Pictured here is an S.U.M. stock certificate.
Whiskey Rebellion
In 1794, a group of farmers in Western Pennsylvania, outraged over excise taxes on whiskey, one of the region’s major products, rebelled against the federal government and rejected its authority. Washington, concerned about the fragile state of the young republic, decided to mobilize troops to oppose the “Whiskey Rebellion.” This 1794 painting depicts President Washington reviewing the assembled troops. Hamilton also joined Washington in the field. Both men thought such a show of force necessary to signal the strength of the new national government in the face of foes, whether foreign or domestic. Washington pardoned the ringleaders for their transgression of national law, but Pennsylvania punished numerous offenders for rioting and assault.
Hamilton’s Achievements as Treasury Secretary
During his service as America’s first Secretary of the Treasury, Hamilton secured America’s credit; established the First Bank of the U.S. and the U.S. Mint; set up a stable and uniform national currency (the dollar); promoted manufacturing to ensure the country’s economic independence; and created the Revenue Marine, known today as the U.S. Coast Guard. These actions greatly strengthened the country’s economic foundations and encouraged investment and enterprise. Hamilton strove to unite the states under a strong federal government and make them a powerful, self-reliant, and truly independent nation. Effective the last day of January 1795, Hamilton resigned his cabinet position. However, even after he returned to his law practice in Manhattan, he remained an active advisor to the administration, including to Oliver Wolcott, his successor at Treasury.