This is in response to a question found on Yahoo. Just for background who is Alexander Hamilton? Alexander Hamilton (January 11, 1755 or 1757 – July 12, 1804) was an American statesman and one of the Founding Fathers of the United States. Alexander Hamilton was an American statesman, politician, legal scholar, military commander, lawyer, banker and economist.
HAMILTON’S ECONOMIC POLICIES
HAMILTON’S ECONOMIC POLICIES. When Congress created the Department of the Treasury in 1789, it also created the position of Secretary of the Treasury. This post was a cabinet post which reported directly to the US Congress. The first President of the US George Washington made Alexander Hamilton the first Secretary of the Treasury.
Between 1790 and 1791, Secretary Hamilton embarked on an ambitious plan of economic nationalism. His intention was to solve the economic problems which had plagued the United States since and as a result of the American Revolution. He also wanted to provide the new country the ability to defend itself. In January 1790, Hamilton published his “Report on the Public Credit,” in which he presented his plan contained in a series of reports presented to Congress. This plan had seven key elements.
Element #1 – Foreign Debts
Key to Hamilton’s plan was to pay off all loans made to the US government by foreign governments to finance the Revolution against Great Britain. The total principal amounted to about $10 million. France was owed about two-thirds of this total, with about another third to the Netherlands, and then a small portion to Spain. This debt was accruing about $1.6 million in interest. Hamilton planned that the US government would collect tax revenues as well as borrow additional amounts over the next 15 years to pay off the original principal of the loans. There was no serious challenge from Congress or the administration of Hamilton’s arguments saying that the US was obligated both legally as well as morally to pay these debts. This would also help the US establish itself as a reliable borrower to banks as well as other countries.
Element #2 – Domestic Debts
This was an element which was controversial. Hamilton’s idea of borrowing domestically, or from the individual citizens and state governments, to repay debts incurred by both the Continental Congress as well as the Confederation government. The amount of these debts totaled around $42.4 million, which came from selling of bonds to supporters of the Revolution as well as issuing of various notes to pay soldiers and farmers and merchants who had supplied the revolutionary armies. There were two parts to this proposal.
The first piece was called “redemption.” This meant that debtors would be offered a trade for the full value of their debt for new long-term federal bonds. These federal bonds, which were a new form of securities which would pay fixed and more attractive interest rates.
The next part is that the US government would make these new federal bonds a permanent part of the federal fiscal plan. Hamilton said that the government should create a “sinking fund” similar to the way the British government managed its debt. This fund would be established by Treasury through a national bank. This bank would be supplied through the surplus revenues from the post office along with the proceeds from a new loan from Europe. There would be a management committee made up of the secretary of the Treasury, the vice president of the United States, the speaker of the House, the chief justice, and the attorney general. This committee would use this fund to purchase public securities when and if they circulated below their par value. This would allow a floor to be maintained supporting the price federal bonds.
Hamilton was confident that his plan, if it contained both parts, would work. The plan would be supported by a wealthy class of citizens who, created by this plan, would support the federal government and be loyal to it as long-term creditors of the same government. This meant that the citizens would have a vested interest in the success of the government. This would also provide needed capital to support the expanding expanding economy as well as finance major government projects.
While most of the members of Congress agreed the US government was obligated legally to pay these debts incurred by the Confederation, especially the domestic debt many felt that the US government should negotiate for better terms. James Madison felt that speculators had taken advantage of the situation and should be offered lower amounts. These were people who purchased the debt from original investor who had to sell because of difficult times. Hamilton believe that determining who was a speculator and who was not would be too difficult. In the end, Hamilton prevailed.
Element #3 – Debts of the States
Hamilton’s third element was his proposal that the US government take over the $25 million in debt which the states had accumulated during the American Revolution. Hamilton believed this would strengthen the reputation of the new nation, to bolster the nation’s stock of capital, and to enhance the financial power of the federal government.
Secretary of State Thomas Jefferson was concerned about the actual cost of assumption, as well as the political aspirations of Hamilton. Jefferson was concerned that centralizing financial power in this way would threatened the Republic. Madison sided with Jefferson, and the two combined to defeat assumption in April 1790. Hamilton was not deterred and made the concession of lowering the amount of the assumption program to $21.5 million along with agreeing to adjust the accounts in a way that Virginia’s net payments to the federal government would be zero. Hamilton also agreed to support the idea of moving the nation’s capital from New York to Virginia. This would occur after a 10 yr interlude in Philadelphia. Madison and Jefferson hoped this move would create some economic stimulation for their state, weaken the kind of ties that Hamilton sought to promote between the federal government and the financial elites of New York and Philadelphia, and bring the government more under the influence of Virginia’s leaders. In addition, Madison and Jefferson became worried that if the fledgling government failed to pass a funding bill the divergence of sectional interests might break up the new union. They allowed southern votes to shift to support for Hamilton’s plan for assumption of the state debts, and in July it won congressional endorsement in what historians later called the Compromise of 1790.
Element #4 – Taxation
Number four element on Hamilton’s financial plan was taxation. Before the Congress had even created the Treasury, on 4 July 1789, President George Washington signed a law which was a tariff act designed to raise revenues for the new US government. The act established by a complex set of actions such as:
1. Duties on imports
2. Rebates for re-exported goods
3. Special favors for imports carried in American vessels.
The act brought in more than $1 million per year. This however was far less than the $3 million which Hamilton determined would be necessary each year for interest payments alone to the holders of federal debt. So, in January 1790 in his “Report on the Public Credit,” Hamilton discussed a recommendation for an increase in tariffs as well as the introduction of an excise tax on distilled spirits. Hamilton stopped short of proposing direct taxes. He didn’t propose taxes like poll taxes and property taxes. Hamilton was concerned that these taxes would create a backlash. Instead, he wanted to encourage state cooperation with his financial program by leaving direct taxation as the exclusive province of state and local governments.
Element #5 – The Bank of the United States
In December 1790, Hamilton’s fifth element of his financial plan was a national bank modeled after the Bank Of England. This national bank would be a commercial bank, which was at that time was a rare institution for the US. There were 4 banks chartered by state governments. Similar to the existing four state banks, the Bank of the United States could accept deposits, issue bank notes (as loans or as evidence of deposits), discount commercial paper, and loan short-term funds to the government. Hamilton envisioned something more. The Bank of the United States, would be very different from the other commercial banks in several ways:
1. Size – Hamilton proposed capitalization for the bank that would make it five times the size of all the other commercial banks combined. This meant that the bank could expand significantly the size of the nation’s money supply and thus enhance economic activity.
2. Reach – The Bank of the United States would conduct business on a national scale and thus be able to expedite the movement of federal funds around the nation. In an era of slow communication, this ability promised to enhance the efficiency and power of both the federal government and the nation’s capital markets.
3. US Government As A Partner – Having the federal government as a partner in the bank’s ownership, would enable the government to share in the returns from the bank’s operations and thus enhance federal revenues.
4. The Ability To Use Long-Term Federal Debt – A final difference, the requirement that investors in the bank use long-term obligations of the federal government to purchase bank stock, would support the price of government bonds. Hamilton meant for these differences, taken as a package, to reinforce other elements in his economic program.
In February 1791, Congress passed a bill that adopted most of Hamilton’s specific ideas for the new bank. The US Congress setup a twenty-year charter along with a pledge that the US government would not charter another other banks during that period. This initial capitalization was $10 million with 20% of the ownership being the US government. There was a requirement that 75% of all stock subscribed by private parties be purchased with United States securities. The final provision was that the headquarters for the bank was to be in Philadelphia.
During the congressional discussion regarding the bank, Madison along with other Virginians were concerned that locating the bank in Philadelphia for 20 years could interfere with the relocation of the permanent capital to Virginia in ten years. To offset this a demand was put forth that Congress reduce the term of the charter to 10 years. This was blocked by the Pennsylvania contingent. So Madison at that point claimed that the US Congress had no authority to charter a bank, or any corporation for that matter. In making this argument, Madison advanced a “narrow” interpretation of the powers in the Constitution afforded the US Congress. Even though Congress rejected Madison’s assertion, President Washington took Madison’s argument seriously. Washington was already worried about jeopardizing the decision to move the capital near his home of Mount Vernon. Still, Hamilton made a very powerful case to President Washington which ultimately influenced the president, who finally signed the bill making the Bank of the United States possible.
Element #6 – The Mint
In January 1791, during the ongoing debate regarding the Bank of the United States, Hamilton submitted his “Report on the Establishment of a Mint.” With the creation of a mint, Hamilton’s goal, wanting coinage for the new country, was to create a system of coinage that would be uniform across the United States. This was designed to provide monetary stability. This was part of Hamilton’s desire to:
1. Promote commerce
2. Enhance the credit worthiness of the United States
3. Protect the value of tax revenues
While Hamilton wanted gold coinage he understood that many members of Congress were concerned about the shortage of gold as well as the potential deflationary impact of having a gold standard. To counteract these concerns, Hamilton offer the solution of a bimetallic standard. This would be based on the minting of both gold as well as silver coins. Congress adopted almost all of Hamilton’s proposals in the Coinage Act of 1792.
Element #6 – Promotion of Manufacturing
The House of Representatives asked Hamilton, in January of 1791, to put together a plan for the seventh element of his program: “the encouragement and promotion of such manufactories as will tend to render the United States independent of other nations for essentials, particularly for military supplies” (Journal of the House of Representatives of the United States, 15 January 1791, quoted in Jacob E. Cooke, ed., The Reports of Alexander Hamilton, p. 115). In December of that year, Hamilton responded with the last of his reports, the “Report on Manufactures.” Hamilton went beyond the charge to consider preparations for war; he recommended an ambitious, national program of industrial advancement. Hamilton made a case that, complementing America’s vast agricultural sector, manufacturing, and especially the introduction of machine production, would contribute to “The Produce and Revenue of the Society” (Alexander Hamilton, “Report on Manufactures,” quoted in Cooke, ed., The Reports of Alexander Hamilton, p. 127). He concluded that the development of modern manufacturing in America would be difficult because of “fear of want of success in untried enterprises” (Hamilton, “Report on Manufactures,” p. 140) and competition from European manufacturers, who had reaped the benefits of the mercantilist policies of European governments.
Hamilton believed that in order to overcome these obstacles, the federal government must, adopt a range of broad policies that would help to encourage Americans to spend their money as well as their energy for the advancement of technological change in industry. The policies included:
1. Tariffs crafted to protect new industries
2. Exemptions from tariffs for raw materials important to industrial development
3. Prohibitions on the exporting of raw materials needed by American industry
4. Promotion of inventions
5. Award of premiums and bonuses for “the prosecution and introduction of useful discoveries” by a federal board
6. Inspection of manufactured goods to protect consumers and enhance the reputation abroad of American manufacturing
7. Improvement of transportation facilities.
The US Congress passed most of the tariff program, in March of 1792 Hamilton had proposed: increases in tariffs on manufactured goods, including the iron and steel of Pennsylvania, and reductions in tariffs on raw materials. However, Congress rejected the rest of Hamilton’s policy for manufactures. Jefferson and Madison hated the prospect of an industrial revolution and believed that Hamilton had already gained excessive power and might even be plotting to replace the Republic with a monarchy. (Their suspicion was incorrect.) In addition, prominent merchants feared that Hamilton’s industrial program would disturb their profitable trade with Great Britain.
Some of Hamilton’s economic policies, especially the creation of the Bank of the United States and excise taxation, stimulated the development of organized opposition to the Washington administration and led to the formation of what became the Republican Party of Thomas Jefferson and James Madison. Particularly troublesome to Hamilton was the Whiskey Rebellion in 1794, in which thousands of farmers in western Pennsylvania challenged the legitimacy of the excise tax on distilled spirits. They waved banners denouncing tyranny and embracing “liberty, equality, and fraternity,” the ideals of the French Revolution. With Hamilton’s enthusiastic support, President Washington mobilized 15,000 troops to suppress the rebellion.
Hamilton’s economic policies may have undermined the future of the Federalist Party, but they established a fiscally strong federal government, just as Hamilton had planned. In 1793, under Hamilton’s tax regime, the federal government collected enough revenue to pay off interest on the public debt ($2.8 million in 1793), fund the army and navy (over $1 million in 1792), and still balance the federal budget. By 1795 the regular payment of interest enabled the Treasury to float new loans in the Netherlands and pay off its debts to Spain and France. Meanwhile, Hamilton redeemed the domestic debts, including the debts of state government, and the new securities circulated at close to par value. Vigorous capital markets, in turn, contributed to a dramatic economic expansion that began in the early 1790s and continued for a decade. Finally, Hamilton’s economic policies established a model of a central government that worked creatively, positively, and effectively to unleash the nation’s economic energies. For the next two centuries, Hamilton’s model would influence the development of the federal government as an integral part of American capitalism.
Brown, Roger H. Redeeming the Republic: Federalists, Taxation, and the Origins of the Constitution. Baltimore: Johns Hopkins University Press, 1993. Emphasizes the role of fiscal concerns in the movement for the Constitution.
Bruchey, Stuart. Enterprise: The Dynamic Economy of Free People. Cambridge, Mass.: Harvard University Press, 1990. Contains an incisive assessment of Hamilton’s program.
Cooke, Jacob E., ed. The Reports of Alexander Hamilton. New York: Harper and Row, 1964.
Elkins, Stanley, and Eric McKitrick. The Age of Federalism: The Early American Republic, 1788–1800. Oxford and New York: Oxford University Press, 1993. Best book on the rise and fall of the Federalists.
Ellis, Joseph J. Founding Brothers: The Revolutionary Generation. New York: Knopf, 2001. Contains insightful essay on the Compromise of 1790.
Ferguson, E. James. The Power of the Purse: A History of American Public Finance, 1776–1790. Chapel Hill: University of North Carolina Press, 1961. Best history of the financing of the American Revolution.
McDonald, Forrest. Alexander Hamilton: A Biography. New York: Norton, 1979. Intertwines Hamilton’s ideas with the development of his political career.
Mitchell, Broadus. Alexander Hamilton: The National Adventure, 1788–1804. New York: Macmillan, 1962. Contains lucid and detailed discussion of Hamilton’s program.