Hamilton's Financial Plan

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Hamilton's Financial Plan


Alexander Hamilton is one of the few American figures featured on U.S. Currency who was never president. He was killed in 1804 in a duel with Aaron Burr.

A major problem facing the first federal government was how to deal with the financial chaos created by the American Revolution. States had huge war debts. There was runaway inflation. Almost all areas of the economy looked dismal throughout the 1780s. Economic hard times were a major factor creating the sense of crisis that produced the stronger central government under the new Constitution.

George Washington chose the talented Alexander Hamilton, who had served with him throughout the Revolutionary War, to take on the challenge of directing federal economic policy as the treasury secretary. Hamilton is a fascinating character whose ambition fueled tremendous success as a self-made man. Born in the West Indies to a single mother who was a shopkeeper, he learned his first economic principles from her and went on to apprentice for a large mercantile firm. From these modest origins, Hamilton would become the foremost advocate for a modern capitalist economy in the early national United States.

The first issue that Hamilton tackled as Washington's secretary of the treasury concerned the problem of public credit. Governments at all levels had taken on so much debt during the Revolution. The commitment to pay them back was not taken very seriously. By the late 1780s, the value of such public securities had plunged to a small fraction of their face value. In other words, state IOU's — the money borrowed to finance the Revolution — were viewed as nearly worthless.

Hamilton issued a bold proposal. The federal government should pay off all Confederation (state) debts at full value. Such action would dramatically enhance the legitimacy of the new central government. To raise money to pay off the debts, Hamilton would issue new securities bonds). Investors who had purchased these public securities could make enormous profits when the time came for the United States to pay off these new debts.

Hamilton's vision for reshaping the American economy included a federal charter for a national financial institution. He proposed a Bank of the United States. Modeled along the lines of the Bank of England, a central bank would help make the new nation's economy dynamic through a more stable paper currency.

The third major area of Hamilton's economic plan aimed to make American manufacturers self-sufficient. The American economy had traditionally rested upon large-scale agricultural exports to pay for the import of British manufactured goods. Hamilton rightly thought that this dependence on expensive foreign goods kept the American economy at a limited level, especially when compared to the rapid growth of early industrialization in Great Britain.

Rather than accept this condition, Hamilton wanted the United States to adopt a mercantilist economic policy. This would protect American manufacturers through direct government subsidies (handouts to business) and tariffs (taxes on imported goods). This protectionist policy would help fledgling American producers to compete with inexpensive European imports.

However, the central bank faced significant opposition. Many feared it would fall under the influence of wealthy, urban northeasterners and speculators from overseas. Many Americans neither like Hamilton's elitist attitude nor his commitment to a British model of economic development. His pro-British foreign policy was potentially explosive in the wake of the Revolution. Hamilton favored an even stronger central government than the Constitution had created and often linked democratic impulses with potential anarchy. Finally, because the beneficiaries of his innovative economic policies were concentrated in the northeast, they threatened to stimulate divisive geographic differences in the new nation.

Thomas Jefferson, who was the secretary of state at the time, thought Hamilton's plans for full payment of the public debt stood to benefit a "corrupt squadron of paper dealers." To Jefferson, speculation in paper certificates threatened the virtue of the new American Republic. Even Madison, who had worked closely with Hamilton in co-authoring The Federalist Papers, thought the public debt repayment plan gave too big a windfall to wealthy financiers.

As a counter-measure, Madison proposed that Congress should set aside some money for the original owners of the debts who tended to be ordinary Americans and not new investors and speculators. On a pragmatic level Madison's idea would have been difficult to implement. Nearly half the members of Congress invested in public securities. They stood to benefit financially from Hamilton's plan. Its passage was doubly assured.

Hamilton's successful bid to charter a national Bank of the United States also brought strong opposition from Jefferson. Their disagreement about the bank stemmed from sharply opposed interpretations of the Constitution. For Jefferson, such action was clearly beyond the powers granted to the federal government. In his "strict interpretation" of the Constitution, Jefferson pointed out that the tenth amendment required that all federal authority be expressly stated in the law. Nowhere did the Constitution allow for the federal government to create a bank. Hamilton responded with a "loose interpretation" that allowed such federal action under a clause permitting Congress to make "all Laws which shall be necessary and proper." Neither side was absolutely right. The Constitution needed interpretation.

Opposition to Hamilton's financial policies spread beyond the cabinet. The legislature divided about whether or not to support the Bank of the United States. This split in Congress loomed as a potential threat to the union because northern representatives overwhelmingly voted favorably, while southerners were strongly opposed. The difference stemmed from significant economic differences between the sections. Large cities, merchants, and leading financiers were much more numerous in the north and stood to benefit from Hamilton's plans.

Keen observers began to fear that sharp sectional differences might soon threaten the union. Indeed, the Bank ultimately found support in Congress through a compromise that included a commitment to build the new federal capital on the banks of the Potomac River. In part this stemmed from the fact that southern states such as Virginia had already paid off their war debt and stood to gain nothing from a central bank. While most of the commercial beneficiaries of Hamilton's policies were concentrated in the urban northeast, the political capital of Washington, D.C. would stand in the more agricultural south. By dividing the centers of economic and political power many hoped to avoid a dangerous concentration of power in any one place or region. In the end, with the support of George Washington, the bank was chartered with its first headquarters in Philadelphia.

1. Explain the reasons why the First National Bank was chartered.

2. What were the main arguments against the National Bank?

3. How did Alexander Hamilton argue in favor of his plans for the Bank?

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