Hamilton's Report on Public Credit

Date January, 1790

Alexander Hamilton’s report to the U.S. Congress on public credit—which gave high priority to paying interest and principal on the securities constituting the national debt—became the basis for the federal government’s economic policy.

Locale Philadelphia, Pennsylvania

Key Figures

• Alexander Hamilton (1755-1804), U.S. secretary of the treasury, 1789-1795
• William Duer (1747-1799), New York merchant and assistant U.S. secretary of the treasury
• Thomas Jefferson (1743-1826), U.S. secretary of state, 1790-1793, and president, 1801-1809
• James Madison (1751-1836), U.S representative, 1789-1797, and later secretary of state, 1801-1809, and president, 1809-1817

Summary of Event

The United States government, operating under the Articles of Confederation, had incurred large debts in the successful Revolutionary War, but the Articles of Confederation provided no tax resources for the national government. The securities issued to borrow money declined in value after the war. Desire to provide a stronger fiscal system and pay off these securities was one of the motives for adopting the new federal Constitution.

When the newly formed Congress convened, one of its first acts was a resolution in September, 1789, instructing the secretary of the treasury to “prepare a proper plan for the support of the Public Credit.” Secretary of the Treasury Alexander Hamilton submitted his plan in January, 1790. The Report on Public Credit touched off a vigorous congressional debate and was the basis for the Funding Act of August, 1790. This act gave high priority to the payment of the principal of and the interest on the securities constituting the public debt. As a result, investors came to regard United States government securities as a high-grade investment with no significant risk of default.

The Report on Public Credit was the first of three classic reports emanating from Hamilton’s fertile mind. In December, 1790, he submitted his Report on a National Bank, virtually an auxiliary to the funding program. A year later came his Report on Manufacturers. Taken together, the reports outlined a comprehensive system of economic nationalism. They were intended to strengthen the newly formed federal government by enlisting the political support of wealthy entrepreneurs and to promote the economic and industrial development of the new nation.

It was urgent that the new government take steps to provide for the government debt, which amounted, according to Hamilton’s calculations, to $77 million. This included debts incurred by individual state governments of $25 million and interest in arrears of more than $14 million. Hamilton proposed that holders of securities and claims against the government could turn them in and receive new securities in exchange. (At the time, these were called stocks; eventually, they would be called bonds.) Payment of these securities’ interest and, ultimately, the principal would be given high priority in the government’s fiscal program.

The funding of this enormous debt would serve several purposes, according to Hamilton. The credit of the nation would be restored at home and abroad, security prices would increase, and the government would able to borrow on favorable terms in the future, if necessary. Interest rates would be lowered, which would promote investments in land, commerce, and industry. Hamilton believed the new securities would serve somewhat as money, stimulating business.

Hamilton’s credit proposals ran into immediate opposition in Congress. Leading the opposition was Hamilton’s former ally, James Madison of Virginia. There was no opposition to the funding of the foreign debt, amounting to $11.7 million. It was also agreed that the debt contracted by the Continental Congress and Confederation should be funded. There was considerable debate, however, about Hamilton’s proposal to pay off the holders of this debt at its full specie value.

Most of the original holders of the debt had sold their holdings to speculators such as William Duer, often at greatly depreciated prices. If Hamilton’s proposal were carried, speculators would receive large benefits. Some members of Congress believed that part of this windfall should go to the original owners. The secretary of the treasury rejected this idea, arguing that such discrimination violated the terms of the implied contract between the government and those who had sufficient faith in it to buy its bonds.

Hamilton’s plan for the assumption of the states’ debts encountered even more strenuous opposition. Southern states were especially hostile, because many of them had made substantial progress toward paying their debts. New England states, in contrast, had large debts outstanding. Furthermore, large portions of the remaining debts of Southern states were owned in the North. For the states of Virginia, North Carolina, and South Carolina, it has been estimated that nonresident owners, largely Northern, held 53 percent of the total combined debt.

Because of such opposition, Hamilton’s measures suffered four successive defeats in Congress. Then occurred one of the classic political deals in U.S. history. Hamilton agreed to support locating the new national capital on the Potomac River. In turn, Secretary of State Thomas Jefferson promised to use his influence to gain Madison’s support for the Funding Act, which passed by a narrow margin and was signed into law August 4, 1790. The law authorized issue of three new types of federal securities in exchange for old ones. One component would pay 6 percent interest immediately, while a second (deferred stock) also would pay interest only from 1801. Owners of these securities would receive redemption payments by scheduled installments. A third issue of securities would pay only 3 percent per year and could not be redeemed until all other parts of the national debt were paid off.

A crucial question concerned the willingness and ability of the government to make the payments that the Funding Act promised. One important step was creating a federal tax system, the most important part of which was achieved by imposing tariff duties on imports beginning in 1789. The second step was the consistent commitment of Congress and the successive administrations to scrupulous dedication of federal funds to debt service as promised, even when this required new borrowing, and even when some of the bondholders resided in enemy countries (as during the War of 1812).

Significance

The funding program got under way in late 1790. In December of that year, Hamilton proposed that the federal government charter a national bank. The proposal was designed in part to make the newly issued federal securities more attractive to investors. Those securities could be used to buy stock in the new bank, stock that was expected (correctly) to pay generous dividends. Thus began a pattern whereby United States government securities became a customary investment for banks, providing them with a low-risk asset that could be sold to raise cash if necessary—a pattern that has continued to exist.

The political accommodation between Hamilton and the two Virginia statesmen, Madison and Jefferson, soon dissolved. Within a year, Jefferson and Hamilton were embroiled in a dispute without hope of compromise over the constitutionality of Hamilton’s proposed national bank. Ironically, one of Jefferson’s greatest achievements, the purchase of Louisiana Territory in 1803, was made financially possible by the excellent credit standing of the United States government resulting from the adoption of Hamilton’s funding plan.

Bibliography

Beard, Charles A. Economic Origins of Jeffersonian Democracy. New York: Macmillan, 1915. A provocative study that tries to identify the roots of the political split between Hamilton and Jefferson in the economic interest groups strongly affected by policies regarding the national debt and national bank.

Chernow, Ron. Alexander Hamilton. New York: Penguin Press, 2004. A comprehensive and meticulously detailed biography, offering new information about Hamilton’s ancestry, personality, and relationships with other Founding Fathers. Includes information about the Report on Public Credit.

Ferguson, E. James. The Power of the Purse: A History of American Public Finance, 1776-1790. Durham: University of North Carolina Press, 1961. Corrects many of Charles Beard’s errors and shows how important Hamilton’s measures were in saving the country from “currency finance” and creating an environment favoring economic growth and stability.

Gordon, John Steele. Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt. New York: Walker, 1997. Gordon argues that the accumulation of the American national debt is not a new development. Instead, it has a long history, originating with Hamilton’s ideas that a national debt could create a vital American economy. The first chapter of the book examines Hamilton’s theories about debt.

Mitchell, Broadus. Alexander Hamilton. 2 vols. New York: Macmillan, 1957-1962. Hamilton’s colorful life and political career are fully explored. Volume 2 contains extensive discussion of public debt policy.

Nettels, Curtis P. The Emergence of a National Economy, 1775-1815. New York: Holt, Rinehart and Winston, 1962. Chapters 5 and 6 of this traditional economic history present Hamilton’s program in economic and political contexts.