Hamilton Forges an Economic Agenda

The new government’s leaders recognized that without a stable economy, the best political structure could falter. Thus Hamilton’s appointment as secretary of the treasury was especially significant. In formulating his economic policy, Hamilton’s main goal was to establish the nation’s credit. Paying down the debt and establishing a national bank would strengthen the United States in the eyes of the world and tie wealthy Americans more firmly to the federal government.

Hamilton advocated funding the national debt at face value and assuming the remaining state debts as part of the national debt. To pay for this policy, he planned to raise revenue through government bonds and new taxes. Hamilton also called for the establishment of a central bank to carry out the financial operations of the United States. In three major reports to Congress—on public credit and a national bank in 1790 and on manufactures in 1791—he laid out a system of state-assisted economic development.

Hamilton’s proposal to repay at face value the millions of dollars in securities issued by the confederation was particularly controversial. Thousands of soldiers, farmers, and shopkeepers had been paid with these securities during the war; but needing money in its aftermath, most sold them to speculators for a fraction of their value. These speculators would make enormous profits if the securities were paid off at face value. One of the policy’s most ardent critics, Patrick Henry, claimed that Hamilton’s policy was intended “to erect, and concentrate, and perpetuate a large monied interest” that would prove “fatal to the existence of American liberty.” Despite such passionate opponents, Hamilton gained the support of Washington and other key Federalists.

The federal government’s assumption of the remaining state war debts also faced fierce opposition, especially from southern states like Virginia that had already paid off their debt. Hamilton again won his case, though this time only by agreeing to “redeem” (that is, reimburse) states that had repaid their debts. In addition, Hamilton and his supporters had to agree to move the nation’s capital from Philadelphia to a more central location along the Potomac River.

Funding the national debt, assuming the remaining state debts, and redeeming state debts already paid would cost $75.6 million (about $1.5 billion today). But Hamilton believed maintaining some debt was useful. He thus proposed establishing a Bank of the United States, funded by $10 million in stock to be sold to private stockholders and the national government. The bank would serve as a repository for federal revenues and grant loans and sell bills of credit to merchants and investors, thereby creating a permanent national debt. This, he argued, would bind investors to the United States, turning the national debt into a “national blessing.”

Not everyone agreed. Jefferson and Madison argued vehemently against the Bank of the United States, noting that there was no constitutional sanction for a federal bank. Hamilton fought back, arguing that Congress had the right to make “all Laws which shall be necessary and proper” for carrying out the provisions of the Constitution. Once again, he prevailed. Congress chartered the bank for a period of twenty years, and Washington signed the legislation into law.

The final piece of Hamilton’s plan focused on raising revenue. Congress quickly agreed to pass tariffs on a range of imported goods, which generated some $4 million to $5 million annually. Some congressmen viewed these tariffs as a way to protect new industries in the United States, from furniture to shoes. Excise taxes placed on a variety of consumer goods, most notably whiskey, generated another $1 million each year.

Hamilton’s financial policies proved enormously successful in stabilizing the American economy, repaying outstanding debts, and tying men of wealth to the new government. The federal bank effectively collected and distributed the nation’s resources. Commerce flourished, revenues rose, and confidence revived among foreign and domestic investors. And while the United States remained an agricultural nation, Hamilton’s 1791 “Report on the Subject of Manufactures” foreshadowed the growing significance of industry, which gradually lessened U.S. dependence on European nations.

REVIEW & RELATE

What issues attracted the most intense debate during the drafting and ratification of the Constitution? Why?

How did Hamilton’s policies stabilize the national economy, and why did they nonetheless arouse opposition?