The First Report on Public Credit was the first of three major reports on economic policy issued by American Founding Father and first United States Treasury Secretary Alexander Hamilton on the request of Congress. The report analyzed the financial standing of the United States of America and made recommendations for the retirement of the national debt. Commissioned by the House of Representatives on September 21, 1789 and presented January 9, 1790, this 140,000-word document was the first proposed federal assumption of debt owed by the states.
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The United States had borrowed money from Europe and at home during the American Revolution. The Continental Army had not been paid what was due to them, and many of the independently-wealthy officers of the army had spent their entire fortunes on equipment and supplies for their particular combat unit. The various states had likewise borrowed money to finance the war effort; some states owed private citizens for the purchase of supplies, exchanged for a promissory note due sometime in the future. Hamilton sought to inspire the confidence of domestic and foreign investors in the public credit of the new nation. The US national debt in 1790 was US$54 million,[1] which would be comparable to a US national debt of US$4.1 trillion in 2009 by relative share of GDP.[2] The Congress endorsed his plan to pay off the US$11 million owed to foreign creditors, but balked at funding the domestic debt of US$27 million and assuming the state debts of US$25 million.[3] This monetary policy may have contributed to an economic downturn at the turn of the decade.
Hamilton proposed a remarkable set of policies for handling the debt problem. All debts were to be paid at face value. The Federal government would assume all of the debts owed by the states, and it would be financed with new U.S. government bonds paying about 4% interest. The government would not pay back the principal on the bonds, merely the interest, which would be paid by a new tariff and a stiff excise tax on liquor.
Hamilton's economic plan had multiple goals. First, the debts and honor of the nation would be secured. Hamilton felt that the Federal government would not be able to borrow money from anyone in the future if these debts were not paid. By selling bonds to pay the debt, bondholders would have a direct financial interest to help the new United States government survive and thrive. Creditors who purchased the bonds could use them as collateral for loans, stimulating the economy even more.[4]
The plan would also create a bureaucracy of agents across the country who would be tied to the Federal government instead of the individual states. Assuming the debts of the states would likewise couple financial elites in those states to the national government and less so to state governments, thereby reducing the risk of secession. Hamilton's scheme was called "debt assumption plan," and it was a radical idea in 1790.
Hamilton’s Report supported ideas of war debt assumption, redemption of Confederate securities at face value, and funding of new national securities as a permanent national debt. Hamilton reasoned that creating a large financial structure, which wealthy citizens would support and belong to, would enhance the revenue and fiscal system of the national government and bring prosperity to the Federal government. He also reckoned that failure to establish the creditworthiness of the Federal government would weaken the United States, and called a permanent, reasonably-sized public debt "the powerful cement of our Union."[5]
Funding foreign debt was not strongly debated, although James Madison had already shared his concerns about a long-term government debt with Hamilton prior to the report's publication.[4] Serious opposition, however, arose to funding the state debts. Hamilton's proposals drew sharp criticism from Secretary of State Thomas Jefferson and House leader Madison. Madison, alarmed at Hamilton's hard push for a powerful central administration, began moving away from his commitment to a strong national government and joined sides with Jefferson, who favored the smaller, decentralized, agrarian economy of the South over New York, Philadelphia, Boston, and the commercial economy of the North. Madison also presented his own Madisonian Economic Model, which he called "discrimination".
The major difference between Hamilton's report and Madison's "discrimination" concerned the fate of the many patriots and soldiers who were owed money; some of whom had sold their securities to speculators for 25 cents on the dollar (which was the going price as late as George Washington's inauguration in March 1789). Jefferson and Madison claimed that rewarding the speculators with 100 cents while giving the original patriots nothing was unfair. The plan would also penalize states which had paid off most or all of their debt, such as Virginia, and force those states to finance the states who still owed money.
The House voted down Hamilton's assumption plan in April 1790, largely due to Madison's influence. With the government unable to resolve its first major crisis, talk of disunion filled the air. Other contentious issues, such as the location of a new national capital city, were also stalemated.
However, Jefferson and Hamilton saw opportunity in chaos. Jefferson and Madison were Virginians, but the three men were living in New York City, then the capital of the United States, and were neighbors. The story which Jefferson related in his later years was that Hamilton and Jefferson met while walking on their residential street one day in June. Jefferson noted Hamilton's haggard appearance, from worrying over his assumption plan, and offered to host a dinner where Hamilton and Madison could discuss the issues. In what came to be called the "dinner table compromise," Hamilton cut a deal with Madison and Jefferson on June 20, 1790 that gave the future capital to an area along the Potomac River while Madison allowed passage of the assumption plan. Madison and Jefferson also got a key concession from Hamilton that eliminated $1.5 million of Virginia's debt under the assumption, a large sum in 1790.
The compromise held up in fact. On July 10, the House passed the Residence Act. Hamilton's assumption plan, together with his proposals for funding the debt, passed by four votes on July 26.
Hamilton's initial program was an immediate success. It established excellent credit for the Federal government, proved the government could handle its affairs, and inaugurated an era of wide prosperity. When Jefferson transacted the Louisiana Purchase, credit and funding were available because of Hamilton's debt assumption plan.
The Treasury Department quickly grew in stature and personnel, encompassing the United States Customs Service, the United States Revenue Cutter Service, and the network of Treasury agents Hamilton had foreseen.[5] Hamilton immediately followed up his success with the Second Report on Public Credit, containing his plan for the Bank of the United States – a national, privately-operated bank owned in part by the government, which became the forerunner of the Federal Reserve System. In 1791 Hamilton released a third report, the Report on Manufactures, which encouraged the growth and protection of manufacturing.
The disagreements between Jefferson and Hamilton did not end with financial details. The men were the figureheads of two polar opposite theories of government: Hamilton's strong national government stance and Jefferson's decentralized, agrarian, small-government position. The disputes grew especially bitter and personal. Hamilton's followers began to call themselves Federalists and Jefferson's supporters called themselves Democratic-Republicans (not to be confused with the present-day Republican Party or Democratic Party). These two groups were the first manifestations of political parties in the United States.