Because he was raised in the West Indies and came to the North American continent as a teenager, Hamilton had little of the emotional attachment to a particular colony or state that most of the other Founders had. He naturally thought nationally, and from the outset of the Revolution he focused his attention on the government of the United States. In 1781–1782 he wrote an extraordinary series of papers on ways of strengthening the Confederation. In 1782 New York elected him, at age twentyseven, one of its representatives in Congress. There he met James Madison, and a fruitful collaboration for the strengthening of the national government was begun. This partnership led from the stymied efforts to add to the powers of the Confederation in the early 1780s to the Annapolis Convention in 1786, then to the Philadelphia Convention in 1787, and finally to the production of the Federalist papers on behalf of the Constitution. When Hamilton became secretary of the treasury, he had every reason to believe that this cooperation between himself and Madison, the Federalist leader in the House of Representatives, would continue.
Ultimately, however, Hamilton’s image of what the federal government should be differed from Madison’s. Instead of Madison’s disinterested adjudicatory state, Hamilton envisioned the United States becoming a great powerful nation like Great Britain and the other states of modern Europe, led by an energetic government and designed, as he said, “for the accomplishment of great purposes.”129 As secretary of the treasury Hamilton was in a perfect position to realize his idea of what the United States should become. As if in emulation of Britain’s famous prime minster and First Lord of the Treasury Sir Robert Walpole, who had successfully built up the British state in the early decades of the eighteenth century, Hamilton saw himself as a kind of prime minister to Washington’s monarchical presidency. He sometimes even talked about “my administration.” Because he believed that “most of the important measures of every government are connected with the treasury,” he felt justified in meddling in the affairs of the other departments and in taking the lead in organizing and administering the government.130
Unlike Jefferson as head of the State Department and Knox as head of the War Department, Hamilton as secretary of the treasury had an extraordinary degree of authority and independence. Washington treated Jefferson and Knox as advisors only and often directly involved himself in the conduct of foreign affairs and military matters. But he treated Hamilton differently—essentially because he believed the Treasury Department was constitutionally different from the other departments. When Congress created the Departments of State and War in 1789, it simply declared that the secretaries were to perform such duties as the president required. When it created the Treasury Department, however, it made no mention of the president and instead required the secretary to report directly to the Congress. Unwilling to encroach on the authority of Congress, Washington thus gave Hamilton a much freer hand in running the treasury than he gave the other secretaries.131
Emboldened in this way, Hamilton even began interfering in the legislative business of Congress. Indeed, one of the reasons the House of Representatives in the early congresses dispensed with standing committees was because it soon came to rely on the heads of the executive departments, in particular, the secretary of the treasury, to draft most of its bills. At the end of July 1789 the House of Representatives set up a Committee of Ways and Means to advise it on financial matters, but on September 2, 1789, the Treasury Department was created. On September 11 Alexander Hamilton was appointed secretary of the treasury, and six days later the House discharged its Committee of Ways and Means, stating that it would rely on Hamilton instead for its financial knowledge. Congress might as well go home, complained the dyspeptic William Maclay in 1791; “Mr. Hamilton is all powerful and fails in nothing which he attempts.”132 Not until 1795, after Hamilton’s resignation from the Treasury Department, did the House reestablish its Ways and Means Committee.
Since opposition groups in Britain had traditionally considered the treasury as an important source of political corruption, some members of the First Congress regarded the new secretary of the treasury with suspicion—and with good reason: his opportunities for the abuse of patronage and influence were immense. The treasury was by far the largest department, with several dozen staff members in the treasury office and well over two thousand customs officials, revenue agents, and postmasters scattered around the country.133 The secretary of the treasury began in 1789 with thirty-nine members in the central office, including six chief officers, thirty-one clerks, and two messengers; by 1792 this number had grown to ninety. By comparison, the other departments were tiny: at the outset the secretary of state had four clerks and a messenger, the secretary of war had only three clerks, and the attorney general had none, there being as yet no Department of Justice.
Yet by contemporary European standards the treasury headquarters staff was minuscule and marked by republican simplicity. A French visitor to the treasury office in 1794 was startled to find the secretary attended by only a single crudely dressed servant, seated at a plain pine table covered with a green cloth, his records laid on makeshift plank shelves, in a “ministerial office” whose furnishings could not have cost more than ten dollars—”Spartan customs” everywhere.134
As secretary of the treasury, Hamilton set out to do for American finances what the early eighteenth-century English monarchical government had done in laying the basis for England’s stability and commercial supremacy. Although Hamilton denied being a monarchist, Gouverneur Morris later recalled that Hamilton was “on Principle opposed to republican and attached to monarchical Government.”135 During his five-hour speech in the Constitutional Convention Hamilton had declared that the British government was “the best in the world” and that “he doubted much whether any thing short of it would do in America.”136 However much his sentiments shifted between monarchy and republicanism, the monarchical government of England was certainly the model for his financial program in the 1790 s. More than any other American, he saw England’s eighteenth-century experience as an object lesson for the United States, and he deliberately set out to duplicate England’s great achievements in political economy and public policy.
By the eighteenth century England had emerged from the chaos and civil wars of the seventeenth century, which had killed one king and deposed another, to become the dominant political and commercial power in the world. That this small island on the northern edge of Europe with a third of the population of continental France was able to build the greatest and richest empire since the fall of Rome was the miracle of the age. The eighteenth-century English “fiscal-military” state, in historian John Brewer’s apt term, could mobilize wealth and wage war as no other state in history ever had. Its centralized administration rested on its bureaucratic ability to acquire and use knowledge, and it had developed an extraordinary capacity to tax and to borrow from its subjects without impoverishing them.137
Hamilton saw that the secret of England’s success was its system of funded debt together with its banking structure and its market in public securities. By attempting to duplicate the English experience, Hamilton was flying in the face of several generations of bitter intellectual opposition to the commercialization of British society and the corruption of British politics. Most English writers of the century—whether famous Tory satirists like Alexander Pope and Jonathan Swift or little-remembered radical Whig publicists like John Trenchard and Thomas Gordon—had expressed a deep hostility to the great social, economic, and political changes taking place in eighteenth-century England. These critics thought that the general commercialization of English life, including the rise of trading companies, banks, stock markets, speculators, and new moneyed men, had undermined traditional values and threatened England with ruin. The monarchy and its minions had used patronage, the national debt, and the Bank of England to corrupt the society, including the House of Commons, and to build up the executive bureaucracy at the expense of the people’s liberties, usually for the purpose of waging war. In
the face of these frightening developments, both radical Whigs and estranged Tories alike had championed a so-called “country” opposition to the deceit and luxury of the “court” that surrounded the monarch. Some of these reformers were so radical that they were accused of harboring republican sentiments. The radical Whigs called for expansion of the suffrage, more liberty for the press, greater freedom of religion, more representation in Parliament, and a substantial reduction in the crown’s inflated power, including its standing army. These country-Whigs, in other words, were opposed to the very fiscal-military institutions and programs that had made Great Britain the most powerful nation in the world.
Americans were thoroughly familiar with these radical Whig and “country opposition” ideas, and in fact had used them to explain their separation from a corrupt and despotic Britain in the 1770 s.138 Any attempt to follow England’s example was therefore bound to make many Americans uneasy.
Hamilton was extremely confident of his knowledge of commerce and finance, and he set forth his financial program in defiance of this critical libertarian and anti-capitalist literature. He dismissed the idea that the stability of government required that the diverse interests and occupations of people be represented. In his mind “the confidence of the people will easily be gained by a good administration.”139 In light of the inexperience of eighteenth-century Americans with positive state power, his program was truly breathtaking. Hamilton worked his remarkable program out in a series of four reports to Congress in 1790–1791 : on credit (including duties and taxes), on a national bank, on a mint, and on manufactures. These reports, powerfully written and argued, established Hamilton as one of the greatest statesmen of his era.140
Drafting these impressive reports was one thing, however; implementing them in the face of widespread and deeply rooted country-Whig opposition thinking would prove to be quite another.
3
The Federalist Program
On September 21, 1789, ten days after Hamilton’s appointment as secretary of the treasury, the House of Representatives, stating that “an adequate provision for the public credit” was a “matter of high importance to the national honor and prosperity,” directed the treasury secretary to “prepare a plan for that purpose.”1 Hamilton was more than ready. Long before he became secretary of the treasury Hamilton had been thinking about the problem of the $79 million debt from the Revolutionary War. In 1790 the amount owed foreigners—the French and Spanish governments and Dutch bankers—was about $12 million, including the arrears of interest, and was easily calculated. The domestic debt, that is, the debt the states and the federal governments owed their own citizens, was another matter. It was made up of a bewildering array of bills, notes, and certificates issued by various agencies of both the Confederation and state governments. Of the domestic debt about $42 million was owed by the federal government; the various state governments owed an estimated $25 million.
Hamilton had to untangle this mass of debts and set forth a plan of payment. He did so in a forty-thousand-word Report on Public Credit submitted to Congress on January 14, 1790, five months after he had taken office.
Hamilton had no doubt that the foreign debt had to be paid off in full, and every American leader agreed with him. Yet paying off the domestic debt was not so easily dealt with. He faced a variety of options. Perhaps the domestic debt could be scaled down, or some proportion of it repudiated, or at least a distinction could be drawn between the original and the present holders of the public securities. After all, during the 1780s much of the debt had been bought up by speculators at a fraction of its face value; and many of these speculators had little expectation that the debt and interest would be paid in full and in specie. But Hamilton thought that any attempt to repudiate the debt or to discriminate between its original and present holders would be not only unjust to those who had taken the risk of purchasing the securities but ruinous to the honor and creditability of the nation. Only by paying its debts in full would the new government assure future creditors of its ability to meet its obligations. Besides, Hamilton had no objection to having the public debt concentrated in the hands of a few moneyed men, for he hoped to use the debt as a source of economic productivity for the nation.
In the boldest and most controversial part of his plan Hamilton proposed that the United States government assume the obligation of paying not just the federal government’s $42 million of war debts but all $25 million of the states’ debts as well. This, of course, would relieve the states of raising taxes to pay off their debts and would eliminate one of the major problems behind the democratic turbulence of the 1780s. But then, instead of immediately retiring either these assumed state debts or the Confederation’s debts, Hamilton urged that the United States government “fund” them, that is, transform them into a more or less permanent debt on which annual interest would be regularly paid. The new national government would collect into a single package all the various federal and state notes, bonds, and loan certificates left over from the Revolutionary War and would issue new federal securities in their place with more or less the same value as the old debts. Lacking the tax revenues to retire immediately the principal of the debt, Hamilton hoped that regular payments of interest alone would convince creditors that the government was committed to paying it off eventually.
To reassure people further of the government’s intention to retire all the debts in time, and to stabilize the prices of the new national securities, Hamilton proposed the creation of a sinking fund, which presumably would be used gradually to redeem the debt over the coming years. In fact, a sinking fund, as Adam Smith pointed out, “though instituted for the payment of old, facilitates very much the contracting of new debts.”2 Hamilton used the sinking fund to maintain the confidence of creditors in the government’s securities; he had no intention of paying off the outstanding principal of the debt. Retiring the debt would only destroy its usefulness as money and as a means of attaching investors to the federal government.
With these funding plans Hamilton hoped to create a consolidated and permanent national debt that would strengthen America in the same way that the British national debt had strengthened Great Britain. The Federalists hoped to wean the people’s affections away from their state governments and to get them to feel the power of what they hoped would become a consolidated national government. The Constitution had attempted to reduce drastically the power of the states. Article I, Section 10, among other things, had forbidden the states from levying tariffs or duties on imports or exports and had barred them from issuing paper money or bills of credit. As these were the principal means by which pre-modern governments raised money, their prohibition cut deeply into the fiscal competency of the state governments. Consequently, as Samuel Chase pointed out in the Maryland ratifying convention, the states would end up “without power, or respect and despised—they will sink into nothing, and be absorbed in the general government.” Some Federalists actually hoped for this to happen—for the states eventually to be reduced to mere administrative units of the national government.3
Under the new system creditors would be drawn away from the states and attached to the new federal government. With the federal government’s assumption of the states’ war debts, the states would have no war debts to pay and thus would lose much of the need to tax their citizens as heavily as they had in the 1780s.4 Some like Washington hoped that the states might in time have “no occasion for Taxes and consequently may abandon all the subjects of taxation to the Union,” which would then become the principal political force in people’s lives, especially in the lives of the propertied and wealthy creditor class.5 The national government would levy customs duties and excise taxes to supply the revenue to make regular interest payments on the refunded debt. Indeed, more than 40 percent of this federal revenue in the 1790s went to pay interest on the funded debt.
Hamilton expected that these regular interest payments would make the United States the best credit risk in the world, as well as c
reate an attractive system of investment for American moneyed groups that lacked the stable alternatives for investment that Europeans had. Whereas land in Europe was generally a very safe form of investment, in America it was highly speculative and very risky, as many speculators in the 1790s only too poignantly came to realize.
Besides giving investors a secure stake in the new national government, these new bonds, Hamilton hoped, would become part of the nation’s money supply as negotiable instruments in business transactions. But for Hamilton an even more important source of money was a national bank. Indeed, Hamilton defined a bank for President Washington in 1791 in just these terms of creating money. “For the simplest and most precise idea of a bank,” he wrote, “is a deposit of coin or other property as a fund for circulating a credit upon it, which is to answer the purpose of money.”6 Hamilton laid out his plans for a bank in a report submitted to Congress on December 14, 1790.
Most Americans in 1790 were not at all familiar with banks. In 1781 the Confederation Congress had set up the Bank of North America in Philadelphia, and by 1790 there were three more banks established in New York, Boston, and Baltimore. Yet compared to England, banking in America was new and undeveloped. Nothing in America resembled the array of different monetary notes and the dozens upon dozens of private and county banks scattered over eighteenth-century Great Britain. When the Bank of North America was first opened, it was “a novelty,” said Thomas Willing, its president. Banking in America, he said, was “a pathless wilderness ground but little known to this side the Atlantic.” English rules, arrangements, and bank bills were then unknown. “All was to us a mystery.”7
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