Hamiltonian economic program
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The Hamiltonian economic program is one of many names given by historians to the set of measures that were proposed by Secretary of the Treasury Alexander Hamilton and implemented by Congress during George Washington's first administration.
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[edit] Background
Hamilton was tasked with giving a series of reports to Congress on the public credit. The United States had borrowed money in Europe and at home during the American Revolution, and the various states had likewise borrowed money to finance the war effort. The total of all these debts came to $12 million owed to Europe and $42 million owed at home. Hamilton proposed a remarkable set of policies for handling this problem.
- All debts were to be paid at face value.
- The federal government would assume all of the debts owed by the states.
- The debt would be financed with new U.S. government bonds paying about 4% interest.
- The government would not pay back the principal on this debt, but merely pay the interest owed.
- The annual interest on the debt would be paid by a new tariff and a stiff excise tax on liquor.
[edit] Goals
Hamilton's economic plan had multiple goals:
- The debts and honor of the nation would be secured.
- The federal government would gain creditworthy status should a future emergency require heavy borrowing.
- Bondholders would find it in their direct financial interest to help the new federal government and the new nation survive and thrive.
- By assuming the state debts, the financial elites in each state would be more strongly tied to the national government and less so to the state government, which reduced the risk of secession.
- This plan would create a bureaucracy of Treasury agents throughout the country that would be beholden to the federal government, not to the states. They would also, incidentally, be patronage jobs that Hamilton could farm out to his political allies.
[edit] Opposition
The need for funding the foreign debt was clear, but strong opposition arose to funding the state debts. James Madison began moving away from his commitment to a strong national government, and more and more joined Thomas Jefferson as the spokesman for agrarian South, especially in opposition to New York, Philadelphia, Boston, and other commercial cities of the North. They argued that many patriots who loaned money to the wartime government, or soldiers who had been paid in certificates, had come on hard times and sold their securities to speculators for 25 cents on the dollar (which was the going price as late as Washington's inauguration in March 1789). They claimed that it was unfair to reward the speculators with 100 cents and give the original patriots nothing. (The argument was disingenuous, for the opponents had no intention of ever asking their state governments to reward the patriots.) Hamilton retorted that the future credit of the government depended on honoring the exact terms of past contracts. With the government unable to resolve its first major crisis, there was talk of disunion in the air. Noting that southerners also insisted on having the national capital in their region, Hamilton saw his chance. He cut a deal with Madison and Jefferson that gave the future capital to Maryland and Virginia, while southerners allowed passage of the assumption plan.
[edit] Results
Hamilton's initial program was an immediate success; it proved the government could handle its affairs, established very good credit, and inaugurated an era of wide prosperity. Hamilton immediately followed up his success with a plan for a national bank, privately operated but owned in part by the government. Jefferson said he could find no enabling principle in the Constitution for a bank, but Hamilton said there were "implied powers" in the document which were needed to make the system work.
With Washington's support, Hamilton won again, and in 1791 the First Bank of the United States was given a 20 year charter, and immediately provided services to government, merchants, and financiers that helped create a national market. Hamilton won another round in 1791 when the Congress imposed heavy taxes on distilled liquor.
Although the Republicans denounced "speculation" as evil incarnate, Hamilton's program had strong positive effects on the economy. The creation of paper securities created liquid wealth that could be moved by entrepreneurs to the areas of fastest growth; they also attracted much needed European investment. The securities provided collateral for loans which were used to invest in new turnpikes, bridges, canals, steamboats, mines, mills, factories and international trade. Nationwide there were perhaps 100 speculators in operation in the early 1790s, comprising less than 10% of the business community. Apart from their role as devils, they were not politically important. The economy flourished in the 1790s; exports, for example, tripled in value from 1791 ($19 million) to 1796 ($67 million), with most carried in American ships.
