In 1789, the most embarrassing feature of the national government was its finances. The Revolution had necessitated vast debts by both the general and state governments, the weak Confederation had been unable to pay even the interest on its part of these obligations, and many of the states had been unwilling, or unable, to do any better. The result was a prostrate credit at home and abroad.
Over against these debts were great natural resources, capable, as any man of experience could see, of profitable manipulation, and holding the promise of splendid development in the future. The serious feature of the situation lay in the fact that the states had from colonial days been so used to careless management of their credit that it was not certain that they could now be brought to protect it in a satisfactory manner. One man there was who proved himself able to rouse the people to the necessary measures, and his name was Alexander Hamilton.
This remarkable statesman was a financier by nature. Before he was a mature man his mind was full of schemes for establishing the national credit. When he was only twenty-three years old he had projected a great national bank, which the Continental Congress did not feel authorized to charter. He came into the treasury with the confidence of the business interests. He was well acquainted with the process by which English commerce had been able to extend itself into most parts of the world, and his ultimate purpose was to give our own relations a tendency in the same direction.
Hamilton's scheme had also a political purpose, which was more important than its financial side. He saw that by pursuing a strong fiscal policy he would draw to his party -following the moneyed classes. In this respect he profited by his knowledge of English history; for he knew that since the days of Walpole the wealthy part of the population had exercised a political influence out of proportion to its numbers. More than this, he calculated that a strong financial policy might be made to knit the nation together, and thus to aid in breaking down that separateness which he deeply deplored. If individuals held the obligations of the nation, they would sacrifice more to prevent its dissolution, and thus a national debt might be made a national blessing. It was an argument which men had heard for many years in England, where it had long since ceased to be believed that the public debt would ever be paid.
We may get some valuable light on Hamilton's financial views by considering those of his opponents. Of all the men who criticised him the best financier was Gallatin. He did not come on the national arena till 1795, but his views will do no injustice to the Republicans of 1791. He would have the government follow the careful policy of a thrifty business man: let expenses be reduced to the lowest point and the savings be carefully applied to the payment of debts. Let debts be scrutinized closely before they are paid. Let everything be done deliberately and without eclat. Gallatin was, therefore, economical, safe, and cautious. Hamilton was audacious, sagacious, and brilliant. The former counted on the well-tried principles of thrift. The latter counted on the rapid development of the country, which he could fore-see. Had the policy of the former been followed from the beginning the debt would have been paid slowly and surely, and gradually we should have secured the confidence of the world. By Hamilton's brilliant plan our credit leaped at once into good repute, but the payment of the debt was greatly deferred.
The strongest criticism of Hamilton's project was its extravagance. His political ideas were partly responsible for this, and the trying situation of foreign affairs was also somewhat to blame; but besides these two factors he was lacking in thrift. To the charge of extravagance the best answer is that the results he obtained for the nation were worth all he paid for them. It was a service not to be estimated in dollars that in a year we changed from a nation with no credit to one which could borrow on the same terms as the older and most responsible nations of Europe.
Hamilton entered office on September 11, 1789. Ten days later Congress asked him to prepare a report on the state of the finances. In compliance he submitted to Congress at various times four principal reports: the first report on the public credit, January 14, 1790; the second report on the public credit, December 13, 1790; the report on the national bank, December 13, 1790; and the report on manufactures, December 5, 1791. In these four documents, intimately connected by a common idea, his whole system was embraced.
The first dealt with the payment of the debt. After some appropriate remarks about the nature of credit, the secretary summarized the state of the indebtedness. To foreign creditors, chiefly to the French government, we owed, including arrears of interest, $11,710,378. To domestic creditors we owed $42,414,085, including interest, and $2,000,000 of unliquidated claims and currency. These debts Hamilton proposed to refund.
To this course there was not much objection in Congress or out of it; in fact, the Constitution provided that the United States must pay the debts of the old confederation; but there was everywhere difference of opinion as to how they should be settled. Hamilton argued that to protect our credit they should be paid to the holders at par; and he also made it clear that it would be very difficult to make any distinction against the present holders in favor of the original possessors.
In Congress, however, were many persons who did not accept this idea. The certificates of the debt had depreciated till they were worth only twenty to twenty-five cents on the dollar. The first intimation that they were to be funded at par caused many of the shrewd money-dealers to buy them up as a speculation, thus raising the price to forty or forty-five per cent. These speculators had always been unpopular with the ordinary thrifty citizens, particularly with the farmers and planters of the south; and to pay them what was nothing but a handsome bonus on their speculation had the air of indorsing their craftiness. Those who put the public credit above all else, and those who were intolerant of speculation, thus found themselves on opposite sides. There was another group concerned — the speculators themselves. They were city people, financiers, controlling some newspapers, and having alliances, as the moneyed class ever has, with many of the most influential men in public life, including some members of Congress itself. The persistence with which this small group stood by their leader, Hamilton, gave a color to the charge of the Republicans that they were corruptly selfish.
Throughout the first session, Madison was looked upon as the administration leader in the House, but he did not indorse this first measure of Hamilton's. Possibly he was influenced by the strong opposition to it on the part of the Virginians. He waited till much had been said in opposition and then he brought in a compromise measure. He proposed to pay the face value of the debt, but to allow the present owners only the market value at the time the discussion began, and to the original owners the difference between that sum and par. This measure was supported by all who opposed Hamilton's plan of payment.
It was not difficult to show that it was impossible to ascertain who were the original holders of the debt. Many certificates had been issued to persons to whom the right to collect them had been assigned, or to agents, and of these complications the treasury books took no account. For the sake of such hair splitting Congress did not think it worth while to tamper with the public credit, and it passed the bill essentially as proposed by Hamilton.
The old debt, accordingly, was to be exchanged for new bonds. Two-thirds of this debt was to bear interest at six per cent, from date of issue, and one-third was to bear interest at the same rate from 1801, and the arrears of interest were to be funded at three per cent. Before this it had been customary for the government to issue its bonds redeemable at pleasure. But Hamilton provided that only two per cent, of those outstanding should be redeemable each year, a provision which gave color to the charge, freely made against him, that he wished to make the debt all but perpetual.
The next feature of Hamilton's scheme in regard to the debt was unexpected, even by the keen-scented speculators. He proposed to assume for the national government all the unpaid debts incurred by the individual states on account of the recent struggle, a total estimated at $25,000,000; but he fixed on the sum of $21,500,000, and proposed to divide it as fairly as possible between the states in proportion to their indebtedness. For the amounts stated, the holders of adjusted claims against the states might receive new bonds from the national government. As a matter of fact, only $18,271,786.47 were assumed on this account. Another source of state assumption came from the balancing of accounts between the state and federal governments for money advanced. It was found that some of the former owed the latter $3,517,584, whereas the federal government owed the other states an equal sum. The government assumed $3,517,584 for these creditor states, trusting to their debtor sisters to reimburse it. Except for $200,000 which New York paid for certain harbor defences none of this sum was repaid to the government. The ultimate amount of debt, therefore, created by assumption, was more than $21,500,000.
Hamilton's argument in support of assumption was threefold: the state debts were incurred in the common defence, and they ought to be paid by all; if assumed, they would serve as a further cement of union; and by removing from the market a large quantity of American obligations of varying value, the credit of American securities would be strengthened.
The states which had the largest unpaid debts wore naturally the most anxious for assumption. Of these Massachusetts, Connecticut, and South Carolina were most notable. On the other hand, the states having small debts were against the measure, and among them was Virginia, who had paid much of her Revolutionary debt through the sale of western lands. Assumption, therefore, meant that she would have to bear a large part of the burden of paying the debts of other states. All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was still being debated they were trying by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values. Those persons, and there were many, who favored a strong central government, also declared for assumption.
In the wake of Virginia followed the states south of her, save South Carolina, while New England was for assumption. The middle states divided, the commercial parts going for and the agricultural parts against the measure.
The leader of the opposition was Madison. Loath to forsake Hamilton, he stood for a compromise in regard, to the funding bill; but on the question of assumption he went over entirely. He was opposed to the Hamilton idea; Virginia was in revolt, his popularity was weakened by the matter of amendments, and the mighty Henry was watchful for a chance to destroy him. Under the circumstances, to favor assumption would have meant political death.
The debate in Congress was the most exciting yet heard in that body. March 3, assumption won in committee of the whole by eight votes. Before it could pass the House formally the North Carolina delegation appeared, reversed the majority, and on April 26 it was defeated in the House. There was much sparring, during which the friends of the bill succeeded in keeping it alive till May 25, but on that day it was definitely rejected in the House. This had been the last of it had not Hamilton in his extremity made a deal with the southerners, which secured its passage.
In 1788-1789 the location of the capital of the new nation was considered one of the most important measures before Congress. New York City would have been glad to be the capital. Pennsylvania desired it also and probably would have had it if her own representation had not been divided in accordance with their own private interests, so that they could not unite on the exact place. The matter led to an acrimonious but inconclusive debate in the first session of Congress.
It was taken up in the second session, and after some debate the choice settled down to one of two places, one somewhere in Pennsylvania, and the other on the Potomac near Georgetown. The southern states, including Maryland, were for the latter place, and the north favored the former, there being a small total majority for Pennsylvania.
This situation gave Hamilton an opportunity which he knew well how to use. He cared nothing about the location of the capital and the Virginians cared much about it. He accordingly proposed to Jefferson, then newly arrived in Philadelphia, that he would get some northern votes for a Potomac capital if Jefferson would get some Virginia votes for assumption. This idea, which, however, did not originate with Hamilton, recommended itself to Jefferson, but with characteristic caution he chose to throw the responsibility for it on Madison. He invited Hamilton and Madison to dinner, and between those two the terms were settled. The capital was ordered to remain in Philadelphia for ten years, and after that to be permanently in a district ten miles square on the Potomac, the exact spot to be selected by Washington.
Jefferson later came to say much against the wisdom of assumption. At that time he sought to justify himself for the part he took in passing it into law by saying that he was new in the politics of the country and did not understand them; but his contemporary letters show that he was not much opposed to the measure, and he had been in America ever since assumption had been proposed, most of the time in close connection with the Virginia politicians. It is evident that his objection to assumption was chiefly an after-thought, born of his later opposition to Hamilton.
One of the complaints of the Republicans, repeated frequently in the next few years, was that nearly half of the amount thus assumed was needlessly assumed. To this charge Gallatin gave his approval. In his Sketch of the Finances (1796), he argued: Each state was a part of the old government; but if the government owed certain sums to each of them, it was the same as if each state owed the other. Each was also a creditor of the others. Ascertain, therefore, what each state owed to, and was due from, each other state, make a mutual cancellation of equal sums, add up the remainders, and the sum would be the true amount which ought to be assumed. By an intricate calculation Gallatin cancelled out several millions and concluded that assumption might have been consummated for $11,609,259.
To this argument one need only say that the question was not one of state credits. It was concerned with the claims of individuals against the states. Equalizing and cancelling out state claims would not have paid all the individual creditors. Therein was the gist of the whole matter. Hamilton desired to substitute national credit for state credit, and the best way of doing this was to assume the state debts in their entirety.
December 13, 1790, Hamilton sent to Congress his second report on the public credit and his report on a national bank. In the former he recommended an increase of duties and an excise on the manufacture of spirituous liquors. Both were designed to raise money to pay the additional expenses on account of the new interest charges. The excise encountered serious objection from those who were suspicious of consolidating influences. Hamilton urged that it would increase the power of government to collect a tax directly from the individual. The truth of this argument made it unpopular with those who were jealous of the power of the government. Although in the western parts of Pennsylvania, Virginia, Maryland, and North Carolina spirituous liquor was one of the chief products, and the excise was particularly unpopular, the measure passed into law on March 3, 1791. The prestige of its author was at its highest point, and his confident following had their way in Congress.
In the mean time they pressed for the bill to charter a national bank; but against this measure the whole Republican influence was thrown with great earnestness. There was no explicit warrant in the Constitution for such a bank, but Hamilton argued that the right to establish one was implied in specific clauses. His followers supported him closely and the bill became a law on February 25, 1791. Washington watched the debates with interest, and he was struck by the constitutional argument. Before he would sign the law he called on the members of the cabinet for their opinions on the disputed points. Jefferson and Randolph thought that it was unconstitutional, and Hamilton and Knox took the other side. The president was not clearly convinced but signed the charter on the principle that where there was equal division of opinion he would support the officer in whose department the business under discussion fell.
The bank which was thus incorporated had a capital stock of ten million dollars, one-fifth of which was to belong to the government. Its notes were receivable for all debts due the United States, three-fourths of its private stock might be paid in national bonds, and branch offices might be established for discount and deposit. It was to be the depository of government funds, but it was not to lend more than one hundred thousand dollars to the treasury without the consent of Congress.
The services of the bank to the infant government were important. It gave an easy and safe means of handling the public revenue, it provided a steady and ample currency, it was a wholesome restraint on the issue of state bank notes, and it offered facilities for the business of the country. But the favors it received from the government were equally important. Its monopoly of the public funds, and the receipt of its bills for government dues were substantial advantages. Keen-scented business men foresaw that it would be a profitable affair, and days before subscriptions for stock were received the rush to get its shares had become a mere scramble. In Philadelphia the amount offered to the public was subscribed in an hour after the books were opened. Within a year thereafter the stock was selling at fifty per cent, above par, much to the dismay of Hamilton, who feared inflation. Its average dividend for eighteen years was eight and one-half per cent., and the government stock was sold a few years after the date of the charter at a handsome profit.
Three other features of Hamilton's financial system demand a consideration, (1) December 5, 1791, he sent to Congress his report on manufactures, in which he outlined the argument for protection. His broad reasoning rested on the necessity of a proper distribution of agriculture, manufactures, and commerce in a great and prosperous society; but it was many years before this feature of his policy was accepted by Congress. (2) A sinking-fund was a part of his funding scheme. It was conceived according to the prevalent idea of English financiers; but experience was to prove its inutility. Its history demonstrated the truth of the principle that "nothing pays a debt except clear income." (3) Hamilton recommended the establishment of a mint, and Congress adopted the suggestion. The only point which roused debate was a proposition of Hamilton's to place on the coins the head of the president in whose administration they were issued. To the opposition this smacked too much of the practice in monarchies, where coins were adorned with the heads of sovereigns. It was finally agreed to stamp on the coins the head of the goddess of liberty.