By Allen Guelzo, Ph.D., Gettysburg College
Alexander Hamilton, the first secretary of the Treasury, sent to Congress three reports that outlined his plan for dealing with the problem of federal debt, but in effect what he did was to sketch out the financial future of the United States. So what were Hamilton’s recommendations?
The Report on the Public Credit
The first of Alexander Hamilton’s three reports, The Report on the Public Credit, was sent to Congress in the January of 1790. In this report, Hamilton addressed the debt crisis head on. He rejected the suggestions from the states that the federal government simply repudiate all responsibility for the war debt. They had suggested that the war debt had been contracted under two previous American governments—the Continental Congress and then the Confederation Congress. Therefore, they said, the war debt was not the responsibility of the new constitutional government, and could be repudiated entirely.
The states suggested, as an alternative, to offer to redeem the Continental securities, but at a few pennies on the dollar, or to allow the individual states to divide up the national debt among themselves and pay it off out of their own state tax revenues.
Hamilton argued that these would hurt American citizens and war veterans who had bought these securities or taken these IOUs in good faith. Also, he said, it would irreparably damage the trustworthiness of the new American government on the markets of the world.
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Resolving the War Debt Problem
On the other hand, Hamilton was aware that there were many people in the states who welcomed these suggestions on the grounds that dealing in securities was little better than gambling.
Then, there were voices in the states that believed that anything that weakened the federal government—or kept it weak—necessarily strengthened the individual states.
Therefore, Hamilton insisted to Congress that Congress must not only fund the existing war debt, but it must also take over the war debts owed by the states as well.
Now, to deal with this added burden, Hamilton proposed three immediate solutions: raise federal taxes in the form of tariffs on imports; impose a 25 percent excise tax on whiskey, a major agricultural byproduct; and the most radical of all, create a Bank of the United States.
The Bank of the United States
Hamilton’s second report on December 13, 1790, The Report on the National Bank, was an even bigger mechanism for creating not just a means of funding the war debt, but of creating a National Republican economy.
Before 1776, no banks of any description had existed in British North America. The colonial British government had thought that banking would permit big concentrations of wealth in the colonies.
There were also American republicans, like Thomas Jefferson, who feared that banking infected people with a speculative fever, a desire to deposit money into banking pools in the false hope of attaining unreal wealth.
The Report on the National Bank sketched out for Congress the creation of a joint public sector/private sector venture, a Bank of the United States, in which both the federal government and private investors would pool funds.
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A Truly Federal Bank
The report stated that the federal government would provide one-fifth of the capitalization from its own revenues. In return, the federal government would use the Bank of the United States as its agency for receipt and disbursement of funds.
In addition, the federal government would use the bank’s paper notes as the national paper currency. The federal government’s involvement in the Bank of the United States would guarantee its soundness for private investors.
The remaining four-fifths of the bank’s capitalization that private investors contributed would be available for lending out to entrepreneurs and business to fuel economic development.
The profits that the bank earned from those entrepreneurs would not only enrich the private depositors, but would also help pay off the federal debt in proportion to the federal government’s one-fifth holding of the bank.
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Encouraging Manufacturing in the United States
The most obvious question that the creation of the bank posed was: In whose interest is this national bank going to operate? Hamilton answered that question in the last of his three reports at the end of 1791, The Report on the Subject of Manufactures.
Here, Hamilton plainly declared his intention to build American manufacturing up to a par with American agriculture. Hamilton wrote: “The foregoing considerations seem sufficient to establish as general propositions that it is the interest of nations to diversify the industrious pursuits of the individuals who compose them.”
One of Hamilton’s main devices for the establishment of manufacturers in the American republic was the Bank of the United States that he had proposed in the second report. The Bank of United States would lend entrepreneurs money to build a system of manufacturers.
Make in America; Immigrants Welcome
In addition, Hamilton proposed to juggle the new tariff system so that it would increase the cost of importing foreign manufactured goods and make the purchase of American-made goods more attractive at home.
Hamilton also encouraged lifting barriers to immigration. This was to permit the recruitment of a cheap labor force for manufacturing. The great dilemma of the American landscape was that there was much landscape and little labor.
Hamilton’s proposals in these three reports were not only politically daring, but they were also financially risky because there were no guarantees that any of this was going to work. Hamilton also had to deal with the combined opposition of Thomas Jefferson in the cabinet, and most of the southern agriculturists in Congress.
Common Questions about Alexander Hamilton’s Three Reports
In The Report on the Public Credit, Hamilton proposed three solutions: imposing a tariff on imports, imposing a 25% excise tax on whiskey, and creating a national bank.
In The Report on the National Bank, Hamilton proposed the creation of a Bank of the United States, in which the federal government would provide one-fifth of the capitalization, and private investors would provide the rest. This bank would operate as a government bank.
The four-fifths of the bank’s capitalization that private investors contributed would be available for lending out to entrepreneurs to fuel economic development. The profits that the Bank of the United States earned would help pay off the federal debt in proportion to the government’s one-fifth holding in the bank.
In The Report on the Subject of Manufactures, Hamilton suggested that the Bank of United States would lend the entrepreneurs money to build a system of manufacturers. Also, Hamilton planned to increase the tariff on foreign-made goods, so that people would prefer to manufacture in the United States. Finally, Hamilton proposed to encourage immigration, as there was a lack of labor.
