Alexander Hamilton’s
Economic Plan
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The new nation faced serious
economic problems
Debt from the
Revolutionary War
Unstable currency
No national bank
No tax system in
place
No income for the
government
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The new nation was in debt from the
Revolutionary War
The federal and state governments
borrowed large sums of money from both
private individuals and other nations to
finance the war.
Much of the money was borrowed through
the sale of bonds.
Bonds are promissory notes that promise to
pay back the amount borrowed plus interest.
Many patriotic Americans had supported
the war effort by buying bonds
Many of the soldiers that fought in the war
were paid with bonds.
3
Secretary of the Treasury Alexander
Hamilton made debt repayment a high
priority. He believed that if the U.S. did not
pay back the debts it would be impossible to
borrow money in the future.
Hamilton’s plan
had support, but
was
controversial.
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The U.S. debt owed in 1790 would be equivalent to
$2,180 billion 2004 dollars (using GDP per capita).
45
40
42
35
30
Amount owed
to Europe
Amount owed
to Americans
25
20
15
10
This was just
the federal
debt, some of
the states owed
millions also.
12
5
0
$millions$
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Secretary of the Treasury Alexander
Hamilton’s debt assumption plan
The federal government
would assume the debts of the
states.
Federal government would
repay both the national debt
from the Revolution and the
state’s debts at face value.
The total debt would be
paid by issuing new bonds to
replace the old bonds.
The federal government
would only pay the interest on
the bonds, not the principle.
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Hamilton had multiple goals in managing the nation’s debt.
•The debts and honor of the nation would be secured (paid).
•The national government would have good credit.
•The financial interests of the bondholders would be tied to the
success of the nation.
•The interests of the states would be more tied to the success of the
national government.
•Create a bureaucracy of treasury agents loyal to Hamilton and the
national government rather than the states.
80000
70000
60000
50000
Budget Receipts
Budget Expenditures
Public Debt
40000
30000
20000
10000
0
Government Finances: 1789-1791
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Secretary of State, Thomas Jefferson, and Speaker of the
House, James Madison opposed Hamilton’s plan to pay off
the debt by issuing new bonds to replace the old bonds.
The two Virginians and other Southerners realized that
Hamilton’s plan would reward wealthy speculators.
Speculators, investors who take risks, bought bonds
from their original owners for a fraction of the face value.
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Original bond price
Speculators bought
bonds for this price
Price Hamilton's
plan would buy
bonds from
speculators
Bonds
Jefferson
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Hamilton’s plan would pay the full value of the bonds to
speculators, while the original owners, who patriotically
risked their savings in the country's time of need, would
get nothing.
Washington and many Northern Congressmen supported
Hamilton’s plan.
Jefferson and Madison had another problem with
Hamilton’s debt assumption plan, most of the Southern
states had paid off their debts by 1789.
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Original bond price
Speculators bought
bonds for this price
Price Hamilton's
plan would buy
bonds from
speculators
Bonds
9
Madison
Another underlying issues for the Southerners was that
the permanent capital of the US was to be Philadelphia.
Jefferson and Madison felt that the national
government in a “northern” capital would be too
influenced by Northern business interests.
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Assuming state debts
To win Southern
support for his plan of
assuming all state
debts, Hamilton
proposed that the new
nation’s capital city be
located in the South.
In July 1790, Congress
voted to repay state
debts and move the
capital to a strip of
land along the Potomac
River between Virginia
and Maryland.
This became the
District of Columbia,
the city of Washington
D.C.
1803 map of Washington D.C.
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Alexander Hamilton’s ideas to raise revenue
for the day to day operation of the national
government.
After his success with the Debt
Bill and the Assumption Bill,
Hamilton proposed more ideas.
Impose a high tariff on imports
to protect American
manufacturers against foreign
competition.
Impose a federal excise tax on
the sale of whiskey to raise
revenue for the government.
Establish a national bank to
issue money, deposit taxes and
make loans.
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Hamilton proposed a tariff to help
encourage the growth of domestic
industry and stimulate the economy.
A tariff is a tax on imports.
Retail
price of
iron
cooking
pot made
in USA:
$10
Retail price
of iron
cooking
pot
imported
from Great
Britain: $8
To make a profit
with a 25% tariff
on pots imported
from Britain, they
would have to
sell for at least
$12
Whose iron
cooking
pot would
you buy?
Who does
a tariff
benefit?
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Business owners in
Baltimore,
Maryland, signed a
petition requesting
a protective tariff,
1789.
“…your Petitioners expect to derive
that Aid and Assistance, which alone
can dissipate their just
Apprehensions, and animate them
with Hopes of Success in future, by
imposing on all Foreign Articles.
which can be made in America. such
Duties as will give a just and decided
Preference to their Labours, and
thereby discountenancing that Trade
which rends so materially to injure
them, and empoverish their Country;
and which may also. in their
Consequences, contribute to the
Discharge of the National Debt, and
the due Support of Government.” 14
Two kinds of tariffs
1. Protective tariff: its purpose is to protect
American industry by making foreign
imported goods much more expensive then
domestic (produced in the U.S.) goods.
Hamilton favored this type and wanted a tariff
with very high rates.
1. Revenue tariff: its purpose is to raise money
from imports to run the government, not to
protect American industry.
Congress refused to pass the high
protective tariff Hamilton asked for, but did
pass a smaller revenue-producing tariff.
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Hamilton proposed a national bank to
stabilize the new economy
The Bank would issue currency
up to $10 million.
Its major functions were:
To supply loans
Be a depository for federal
revenues
Handle transfers between
cities
Be a clearing agent for
payments on the national
debt.
Sell government bonds
The government, as the
largest stockholder, shared the
profits, but had no direct
participation in the management.
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Jefferson and Madison oppose Hamilton’s
National Bank on constitutional grounds
Madison wrote the Constitution
He and Jefferson believed in a “strict”
interpretation or strict reading of the Constitution.
The Constitution is very specific about what powers
the federal government has and also about what
powers the federal government doesn’t have.
According to the powers listed in the Constitution,
there is nothing mentioned about creating a national
bank.
Therefore Jefferson and Madison argued that a
national bank would be unconstitutional.
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Jefferson and Madison oppose Hamilton’s
National Bank on constitutional grounds
Hamilton had helped get the Constitution ratified by
writing a series of essays advocating the qualities and
benefits of the new Constitution.
Hamilton supported a “loose” interpretation or
broad reading of the Constitution.
Hamilton realized that the Constitution did not
specifically list creating a national bank as a power
that the national government has
However, he also realized that the Constitution did
not specifically prohibit the national government from
creating a national bank.
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Jefferson and Madison oppose Hamilton’s
National Bank on constitutional grounds
Therefore Hamilton reasoned that the national
government could establish a national bank and he
supported his argument by referring to a loophole
clause in the Constitution: Article 1, Section 8,
paragraph 18, known as the “elastic clause” or the
“necessary and proper clause.”
“To make all laws which shall be necessary and proper
for carrying into execution the foregoing powers, and
all other powers vested by this Constitution in the
government of the United States, or in any department
or officer thereof.”
19
Washington sided with Hamilton over
Jefferson’s objections
The Bank of the United States was created
In February 1791, the First Bank of the U.S. received a
national charter for 20 years.
The Bank of the United
States in 1791
The bank building in New
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York today
INTERPRETATION OF THE CONSTITUTION
This conflict over the creation of a national bank
started a debate over the proper way to interpret the
Constitution.
Jefferson, Madison
and their supporters
believed in a “strict”
interpretation of the
Constitution.
Hamilton and his
supporters believed
in a “loose”
interpretation of the
Constitution.
This conflict over the proper way to interpret the
Constitution would energize the development of the
first political parties.
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