Empire of Liberty: A History of the Early Republic, 1789-1815 (18 page)

Americans were thoroughly familiar with these radical Whig and “country opposition” ideas, and in fact had used them to explain their separation from a corrupt and despotic Britain in the 1770 s.
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Any attempt to follow England’s example was therefore bound to make many Americans uneasy.

Hamilton was extremely confident of his knowledge of commerce and finance, and he set forth his financial program in defiance of this critical libertarian and anti-capitalist literature. He dismissed the idea that the stability of government required that the diverse interests and occupations of people be represented. In his mind “the confidence of the people will easily be gained by a good administration.”
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In light of the inexperience of eighteenth-century Americans with positive state power, his program was truly breathtaking. Hamilton worked his remarkable program out in a series of four reports to Congress in 1790–1791 : on credit (including duties and taxes), on a national bank, on a mint, and on manufactures. These reports, powerfully written and argued, established Hamilton as one of the greatest statesmen of his era.
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Drafting these impressive reports was one thing, however; implementing them in the face of widespread and deeply rooted country-Whig opposition thinking would prove to be quite another.

3
The Federalist Program

On September 21, 1789, ten days after Hamilton’s appointment as secretary of the treasury, the House of Representatives, stating that “an adequate provision for the public credit” was a “matter of high importance to the national honor and prosperity,” directed the treasury secretary to “prepare a plan for that purpose.”
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Hamilton was more than ready. Long before he became secretary of the treasury Hamilton had been thinking about the problem of the $79 million debt from the Revolutionary War. In 1790 the amount owed foreigners—the French and Spanish governments and Dutch bankers—was about $12 million, including the arrears of interest, and was easily calculated. The domestic debt, that is, the debt the states and the federal governments owed their own citizens, was another matter. It was made up of a bewildering array of bills, notes, and certificates issued by various agencies of both the Confederation and state governments. Of the domestic debt about $42 million was owed by the federal government; the various state governments owed an estimated $25 million.

Hamilton had to untangle this mass of debts and set forth a plan of payment. He did so in a forty-thousand-word Report on Public Credit submitted to Congress on January 14, 1790, five months after he had taken office.

Hamilton had no doubt that the foreign debt had to be paid off in full, and every American leader agreed with him. Yet paying off the domestic debt was not so easily dealt with. He faced a variety of options. Perhaps the domestic debt could be scaled down, or some proportion of it repudiated, or at least a distinction could be drawn between the original and the present holders of the public securities. After all, during the 1780s much of the debt had been bought up by speculators at a fraction of its face value; and many of these speculators had little expectation that the debt and interest would be paid in full and in specie. But Hamilton thought that any attempt to repudiate the debt or to discriminate between its
original and present holders would be not only unjust to those who had taken the risk of purchasing the securities but ruinous to the honor and creditability of the nation. Only by paying its debts in full would the new government assure future creditors of its ability to meet its obligations. Besides, Hamilton had no objection to having the public debt concentrated in the hands of a few moneyed men, for he hoped to use the debt as a source of economic productivity for the nation.

In the boldest and most controversial part of his plan Hamilton proposed that the United States government assume the obligation of paying not just the federal government’s $42 million of war debts but all $25 million of the states’ debts as well. This, of course, would relieve the states of raising taxes to pay off their debts and would eliminate one of the major problems behind the democratic turbulence of the 1780s. But then, instead of immediately retiring either these assumed state debts or the Confederation’s debts, Hamilton urged that the United States government “fund” them, that is, transform them into a more or less permanent debt on which annual interest would be regularly paid. The new national government would collect into a single package all the various federal and state notes, bonds, and loan certificates left over from the Revolutionary War and would issue new federal securities in their place with more or less the same value as the old debts. Lacking the tax revenues to retire immediately the principal of the debt, Hamilton hoped that regular payments of interest alone would convince creditors that the government was committed to paying it off eventually.

To reassure people further of the government’s intention to retire all the debts in time, and to stabilize the prices of the new national securities, Hamilton proposed the creation of a sinking fund, which presumably would be used gradually to redeem the debt over the coming years. In fact, a sinking fund, as Adam Smith pointed out, “though instituted for the payment of old, facilitates very much the contracting of new debts.”
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Hamilton used the sinking fund to maintain the confidence of creditors in the government’s securities; he had no intention of paying off the outstanding principal of the debt. Retiring the debt would only destroy its usefulness as money and as a means of attaching investors to the federal government.

With these funding plans Hamilton hoped to create a consolidated and permanent national debt that would strengthen America in the same way that the British national debt had strengthened Great Britain. The Federalists hoped to wean the people’s affections away from their state
governments and to get them to feel the power of what they hoped would become a consolidated national government. The Constitution had attempted to reduce drastically the power of the states. Article I, Section 10, among other things, had forbidden the states from levying tariffs or duties on imports or exports and had barred them from issuing paper money or bills of credit. As these were the principal means by which pre-modern governments raised money, their prohibition cut deeply into the fiscal competency of the state governments. Consequently, as Samuel Chase pointed out in the Maryland ratifying convention, the states would end up “without power, or respect and despised—they will sink into nothing, and be absorbed in the general government.” Some Federalists actually hoped for this to happen—for the states eventually to be reduced to mere administrative units of the national government.
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Under the new system creditors would be drawn away from the states and attached to the new federal government. With the federal government’s assumption of the states’ war debts, the states would have no war debts to pay and thus would lose much of the need to tax their citizens as heavily as they had in the 1780s.
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Some like Washington hoped that the states might in time have “no occasion for Taxes and consequently may abandon all the subjects of taxation to the Union,” which would then become the principal political force in people’s lives, especially in the lives of the propertied and wealthy creditor class.
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The national government would levy customs duties and excise taxes to supply the revenue to make regular interest payments on the refunded debt. Indeed, more than 40 percent of this federal revenue in the 1790s went to pay interest on the funded debt.

Hamilton expected that these regular interest payments would make the United States the best credit risk in the world, as well as create an attractive system of investment for American moneyed groups that lacked the stable alternatives for investment that Europeans had. Whereas land in Europe was generally a very safe form of investment, in America it was highly speculative and very risky, as many speculators in the 1790s only too poignantly came to realize.

Besides giving investors a secure stake in the new national government, these new bonds, Hamilton hoped, would become part of the nation’s money supply as negotiable instruments in business transactions. But for
Hamilton an even more important source of money was a national bank. Indeed, Hamilton defined a bank for President Washington in 1791 in just these terms of creating money. “For the simplest and most precise idea of a bank,” he wrote, “is a deposit of coin or other property as a fund for
circulating a credit
upon it, which is to answer the purpose of money.”
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Hamilton laid out his plans for a bank in a report submitted to Congress on December 14, 1790.

Most Americans in 1790 were not at all familiar with banks. In 1781 the Confederation Congress had set up the Bank of North America in Philadelphia, and by 1790 there were three more banks established in New York, Boston, and Baltimore. Yet compared to England, banking in America was new and undeveloped. Nothing in America resembled the array of different monetary notes and the dozens upon dozens of private and county banks scattered over eighteenth-century Great Britain. When the Bank of North America was first opened, it was “a novelty,” said Thomas Willing, its president. Banking in America, he said, was “a pathless wilderness ground but little known to this side the Atlantic.” English rules, arrangements, and bank bills were then unknown. “All was to us a mystery.”
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So Hamilton’s proposal for a national bank was bold and novel. He recommended that Congress grant a twenty-year charter to a corporation to be called the Bank of the United States (BUS). This central bank would be capitalized at $10 million, which was far more than all the specie, that is, gold and silver, in the country. One-fifth of the capital was to be provided by the government itself; the rest of the Bank’s stock was to be sold to private investors, who could pay for up to three-fourths of the shares with government securities and the remaining one-fourth in gold or silver. This Bank of the United States, like its model the Bank of England, would be the only bank chartered by the national government. For fear of diluting its strength Hamilton actually opposed establishing branches of the Bank in states outside of Pennsylvania, though by 1805 eight branches had been created. Some Federalists hoped that the Bank of the United States would sooner or later absorb the state banks and monopolize all banking in the country.
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Even if this proved impossible, the BUS would facilitate the payment of federal taxes and import duties, loan money to the United States, serve as the government’s sole depository and fiscal agent, and act as a central control on the state banks, of
which there were only four in 1791.
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But most important, the Bank of the United States would create paper money.

The BUS would issue its notes as loans to private citizens, and these notes would become the principal circulating medium of money for a society that lacked an adequate supply of gold and silver coin. Above all, Hamilton wanted a paper money that would hold its value in relation to this specie. By being assured that the federal government would accept the Bank’s notes at face value in payment of all taxes, holders of the notes would be less likely to redeem them for gold or silver coin—the only real money that most people in the eighteenth century trusted. The notes would pass from hand to hand without depreciating, even though a fraction of their worth was available in specie at any one time. Although many American leaders continued to believe, as John Adams did, that “every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults, represents nothing, and is therefore a cheat upon somebody,” these multiplying bank notes quickly broadened the foundation of the nation’s economy.
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Yet it is important to emphasize that Hamilton’s Bank would make money available only to large merchants and others who wanted short-term loans, ninety days or less. Most banks, including the BUS, as yet did not want to get involved in making long-term mortgage loans to farmers; to do so would tie up money for too long a time, as the Bank waited for the land-based loans to be paid back. But that would soon change, for most farmers and entrepreneurs needed long-term credit. In spite of opposition from Hamilton and the BUS, these farmers and entrepreneurs soon pressured their states to create state banks, many of them, that eventually gave them the credit they wanted. Hamilton’s insensitivity to the entrepreneurial needs of these ordinary farmers and small businessmen suggests how little he and other Federalists appreciated the real sources of the capitalist future of America.

On January 28, 1791, Hamilton submitted his recommendations for establishing a national mint to Congress, where they met little opposition. America had been long plagued by a bewildering variety of foreign coins—English shillings, Spanish pistareens, French sous, and even German carolins—and had none of its own. Hamilton and others were convinced that a national coinage would make for a greater sense of nationhood. His report therefore had little that was original; indeed, much of it, especially the proposal for a decimal system, was borrowed from Jefferson.

Hamilton’s final report on manufactures, completed in December 1791, laid out what a century later looked like prescient plans for industrializing the United States. Some historians have described this as his most creative and powerful proposal. But others have been less excited; some have even gone so far as to suggest that, unlike his interest in the other parts of his financial program, his heart was never really in manufacturing. He certainly took his time in writing it. As early as January 1790 the House of Representatives had directed Hamilton to “prepare a proper plan . . . for the encouragement and promotion of such manufactories as will tend to render the United States independent of other nations for essential, particularly for military, supplies.”
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Nearly two years later he completed it, with considerable help from Tench Coxe of Pennsylvania, whom Hamilton had appointed assistant secretary of the treasury in May 1790.