First Report on the Public Credit
Encyclopedia
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.
. 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, which would be comparable to a US national debt of US$4.1 trillion in 2009 by relative share of GDP. 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. 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.
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.
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."
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. 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.
, 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. 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.
Founding Fathers of the United States
The Founding Fathers of the United States of America were political leaders and statesmen who participated in the American Revolution by signing the United States Declaration of Independence, taking part in the American Revolutionary War, establishing the United States Constitution, or by some...
and first United States Treasury Secretary
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
on the request of Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
. The report analyzed the financial standing
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
of the United States of America and made recommendations for the retirement of the national debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
. Commissioned by the House of Representatives
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
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.
Hamilton's plan
The United States had borrowed money from Europe and at home during the American RevolutionAmerican Revolution
The American Revolution was the political upheaval during the last half of the 18th century in which thirteen colonies in North America joined together to break free from the British Empire, combining to become the United States of America...
. The Continental Army
Continental Army
The Continental Army was formed after the outbreak of the American Revolutionary War by the colonies that became the United States of America. Established by a resolution of the Continental Congress on June 14, 1775, it was created to coordinate the military efforts of the Thirteen Colonies in...
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, which would be comparable to a US national debt of US$4.1 trillion in 2009 by relative share of GDP. 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. 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.
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
Secession
Secession is the act of withdrawing from an organization, union, or especially a political entity. Threats of secession also can be a strategy for achieving more limited goals.-Secession theory:...
. Hamilton's scheme was called "debt assumption plan," and it was a radical idea in 1790.
Debate
Hamilton’s Report supported ideas of war debt assumption, redemption of ConfederateArticles of Confederation
The Articles of Confederation, formally the Articles of Confederation and Perpetual Union, was an agreement among the 13 founding states that legally established the United States of America as a confederation of sovereign states and served as its first constitution...
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."
Funding foreign debt was not strongly debated, although James Madison
James Madison
James Madison, Jr. was an American statesman and political theorist. He was the fourth President of the United States and is hailed as the “Father of the Constitution” for being the primary author of the United States Constitution and at first an opponent of, and then a key author of the United...
had already shared his concerns about a long-term government debt with Hamilton prior to the report's publication. Serious opposition, however, arose to funding the state debts. Hamilton's proposals drew sharp criticism from Secretary of State
United States Secretary of State
The United States Secretary of State is the head of the United States Department of State, concerned with foreign affairs. The Secretary is a member of the Cabinet and the highest-ranking cabinet secretary both in line of succession and order of precedence...
Thomas Jefferson
Thomas Jefferson
Thomas Jefferson was the principal author of the United States Declaration of Independence and the Statute of Virginia for Religious Freedom , the third President of the United States and founder of the University of Virginia...
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
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
, Philadelphia
Philadelphia, Pennsylvania
Philadelphia is the largest city in the Commonwealth of Pennsylvania and the county seat of Philadelphia County, with which it is coterminous. The city is located in the Northeastern United States along the Delaware and Schuylkill rivers. It is the fifth-most-populous city in the United States,...
, Boston, and the commercial economy of the North. Madison also presented his own Madisonian Economic Model
Madisonian Economic Model
The Madisonian Economic Model was James Madison's plan for the repayment of domestic debts after the American Revolution.It was referred to by Madison as "discrimination" and was proposed in opposition to Hamilton's First Report on the Public Credit....
, 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
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
to speculators for 25 cents on the dollar (which was the going price as late as George Washington
George Washington
George Washington was the dominant military and political leader of the new United States of America from 1775 to 1799. He led the American victory over Great Britain in the American Revolutionary War as commander-in-chief of the Continental Army from 1775 to 1783, and presided over the writing of...
'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
Virginia
The Commonwealth of Virginia , is a U.S. state on the Atlantic Coast of the Southern United States. Virginia is nicknamed the "Old Dominion" and sometimes the "Mother of Presidents" after the eight U.S. presidents born there...
, 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
Compromise of 1790
The Compromise of 1790 was the first of three great political compromises made in the United States by the Northern and Southern states, occurring every thirty years, in an attempt to keep the Union together and prevent civil war...
," Hamilton cut a deal with Madison and Jefferson on June 20, 1790 that gave the future capital to an area along the Potomac River
Potomac River
The Potomac River flows into the Chesapeake Bay, located along the mid-Atlantic coast of the United States. The river is approximately long, with a drainage area of about 14,700 square miles...
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
Residence Act
The Residence Act of 1790, officially titled An Act for establishing the temporary and permanent seat of the Government of the United States, is the United States federal law that settled the question of locating the capital of the United States, selecting a site along the Potomac River...
. Hamilton's assumption plan, together with his proposals for funding the debt, passed by four votes on July 26.
Results
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 PurchaseLouisiana Purchase
The Louisiana Purchase was the acquisition by the United States of America of of France's claim to the territory of Louisiana in 1803. The U.S...
, 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
United States Customs Service
Until March 2003, the United States Customs Service was an agency of the U.S. federal government that collected import tariffs and performed other selected border security duties.Before it was rolled into form part of the U.S...
, the United States Revenue Cutter Service
United States Revenue Cutter Service
The United States Revenue Cutter Service was established by Secretary of the Treasury Alexander Hamilton in 1790 as an armed maritime law enforcement service. Throughout its entire existence the Revenue Cutter Service operated under the authority of the United States Department of the Treasury...
, and the network of Treasury agents Hamilton had foreseen. Hamilton immediately followed up his success with the Second Report on Public Credit
Second Report on Public Credit
The Second Report on Public Credit was the second report of three major reports on economic policy issued by Founding Father of the United States and first United States Treasury Secretary Alexander Hamilton on the request of Congress for consideration on establishing a national banking system with...
, containing his plan for the Bank of the United States
First Bank of the United States
The First Bank of the United States is a National Historic Landmark located in Philadelphia, Pennsylvania within Independence National Historical Park.-Banking History:...
– a national, privately-operated bank owned in part by the government, which became the forerunner of the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
. In 1791 Hamilton released a third report, the Report on Manufactures
Report on Manufactures
The Report on Manufactures is the third report, and magnum opus, of American Founding Father and 1st U.S. Treasury Secretary Alexander Hamilton...
, 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
Federalist Party (United States)
The Federalist Party was the first American political party, from the early 1790s to 1816, the era of the First Party System, with remnants lasting into the 1820s. The Federalists controlled the federal government until 1801...
and Jefferson's supporters called themselves Democratic-Republicans (not to be confused with the present-day Republican Party
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
or Democratic Party
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
). These two groups were the first manifestations of political parties
First Party System
The First Party System is a model of American politics used by political scientists and historians to periodize the political party system existing in the United States between roughly 1792 and 1824. It featured two national parties competing for control of the presidency, Congress, and the states:...
in the United States.
See also
- Second Report on Public CreditSecond Report on Public CreditThe Second Report on Public Credit was the second report of three major reports on economic policy issued by Founding Father of the United States and first United States Treasury Secretary Alexander Hamilton on the request of Congress for consideration on establishing a national banking system with...
- Report on ManufacturesReport on ManufacturesThe Report on Manufactures is the third report, and magnum opus, of American Founding Father and 1st U.S. Treasury Secretary Alexander Hamilton...
- Political economyPolitical economyPolitical economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
- Federalist PapersFederalist PapersThe Federalist Papers are a series of 85 articles or essays promoting the ratification of the United States Constitution. Seventy-seven of the essays were published serially in The Independent Journal and The New York Packet between October 1787 and August 1788...
- Forum for Stable CurrenciesForum for Stable CurrenciesForum for Stable Currencies is a political advocacy group in the United Kingdom seeking economic democracy through freedom from national debt. Founded in 1998, the group is a non-governmental organization without governmental funding...