Decision Making: Hamilton’s Economic Policies
Part 1: The Debt
PROBLEM
The year is 1790, and George Washington has been President under the new national
government, The Constitution, for about a year. A major problem facing the nation is
financial. The United States had to borrow tons of money to finance the American
Revolution. The federal debt is roughly 53 million dollars—13 million to foreign creditors
(people who lend money, like banks) and 40 million is domestic (private American banks,
states, and citizens). The interest is on this loan is 6% (over 3 million per year). The amount
of money the United States is expected to collect this year in taxes is about 500,000 dollars.
You are a senator from Massachusetts. You have just heard the Secretary of the
Treasury, Alexander Hamilton, give his Report on the Public Credit. In this report, he offers his
solution to the debt crisis. Your job as senator is to listen to his ideas and decide whether or
not you want to support his suggestions.
Funding the Debt: Hamilton suggested that the US pay off the foreign debt first.
To do this, we would take the entire debt, refinance it, and borrow at a lower interest rate.
This is like what your parents do if they refinance their mortgage. By paying a lower interest
rate, they can pay the debt off faster. Basically, Hamilton wants to borrow money from new
creditors to pay the creditors we already owe. Additionally, Hamilton wants to sell bonds to
cover the rest of the debt. Bonds work like this: You buy a $50 bond for, say, $25, but in a
certain number of years you can cash it in for the full value plus interest. Governments do
this to make money quickly and people buy them as long-term investments. Bonds are
frequently given to people when they have children. The government is under the
assumption that when the bond matures (is worth the full value), it will have the money pay
the full amount to the bondholder.
Assumption of the State Debt: Unfortunately, the problem is more complicated
because, in addition to the federal debt, most states also have debt. Hamilton wants to
assume, or take over the debt of the states, so the states can start fresh. Hamilton wants the
federal government to be supreme, so he wants to get rid of state bonds and he wants
creditors in the states to invest in the federal government by buying federal bonds. He
thinks this will be easier if the state debt becomes part of the federal debt.
Hamilton recognizes that in order for this system to work, America has to raise
taxes. He supports import duties (taxes on goods coming into the country) and excise taxes
(taxes on the sale or distribution of goods). He likes the idea of an excise tax on whiskey,
because he feels Americans drink too much. Ultimately, Hamilton proposes these two
attempts to eliminate the debt because he believes that if we do not pay off our debts
quickly, we will be seen by the world as dishonest and it will be difficult to borrow money in
the future. Also, if our nation can not raise money, we will be weak forever.
Not everyone agrees with Hamilton’s plans. Funding the debt by borrowing more
money is dangerous. What if we can not pay the second loan back? Additionally, there has
been serious inflation in America (value of the money has gone down). What if people do
not buy the new bonds? Many people do not like the idea of assuming the debts of the
states. Some states, especially southern states, claim to have already paid off their debt.
They do not think that it is fair. They feel like their tax money will be helping to pay off the
debt of northerner states instead of helping southerners.
Will you vote to support Hamilton’s plan to fund the national debt and assume the debts of
the states? Note: you can vote for one, but not the other.
Questions:
1. Do you think paying off the debt should be the nation’s number one priority?
2. Do you agree with Hamilton that nations need to actively repaying their debts to be
considered strong and trustworthy?
3. Do you think it is important that Europeans think the United States is strong and
trustworthy?
4. What are the potential benefits and drawbacks to Hamilton’s debt plan?
Decision Making: Hamilton’s Economic Policies
Part 1: The Debt
OUTCOMES
Funding: The plan to fund the debt passes in Congress pretty easily—there is generally little
controversy over this issue. The plan works well and the United States pays off the debt
from the Revolutionary War quickly. The United States builds a positive credit relationship
with foreign and domestic creditors.
Assumption: Many southern states refuse to support the idea that the federal government
assumes the debts. Also, many who fear a strong federal government believe that
assumption will help the federal government become more powerful than the individual
states. Hamilton realized that he need to compromise with the southern states in order to
get his ideas to pass. He met with leaders from Virginia, Thomas Jefferson and James
Madison. His suggestion was to build a new capital in the South, on the banks of the
Potomac. This idea was popular among southerners, because they thought that if the capital
was in their region, the government would be more likely to support their interests.
The debt plan bill passed in 1790, and Congress authorized the construction of new capital,
which would one day be called Washington D.C.
Britain and the Colonies: A Constitutional Debate
Background: Representation and Britain’s Constitution
Representation: approx. 300,000 of the 15 million people in England could vote—best in the world
at the time
Eligible voters in districts or boroughs elected representatives to Parliament who were supposed to
make decisions for the good of England
Parliament: legislative body—bicameral (Lords and Commons)
Constitution: unwritten—based on common law, customs, Magna Carta
•
Common law: developed by judges through court decisions rather than through legislative
laws or executive branch action
•
Customs: a set of generally accepted rules, norms, standards or criteria
•
Magna Carta: written document-1215-placed limits on king’s authority
Significance: too much room for interpretation
British Interpretation
Colonies: conquered territory of Britain—residents don’t get to elect representatives to Parliament
Virtual representation: The colonists by virtue of being British subjects are represented by the
members of Parliament. Parliament will not hurt the colonists, because it defends the liberty of
British subjects.
Colonial Interpretation
Colonies: lands settled by British subjects—residents should be treated equally
Actual representation: Colonists should be able to elect representatives to Parliament. There are
checks and balances—Parliament can be checked by the monarch
Britain and the Colonies: A Constitutional Debate
Background: Representation and Britain’s Constitution
Representation: approx. 300,000 of the 15 million people in England could vote—best in the world
at the time
Eligible voters in districts or boroughs:
Parliament: legislative body—bicameral (Lords and Commons)
Constitution: unwritten—based on common law, customs, Magna Carta
•
Common law:
•
Customs:
•
Magna Carta:
Significance:
British Interpretation
Colonies: conquered territory of Britain—
Virtual representation:
Colonial Interpretation
Colonies: lands settled by British subjects—
Actual representation:
Directions: Think about each term in the context of the lecture on British and
Colonial interpretation of the British constitution. In each box, explain how each
side would have justified or condemned the term according to their interpretation.
Event
British Interpretation
Colonial Interpretation
Proclamation of
1763
Stationing of troops
in the colonies
Sugar Act
Stamp Act
Stamp Act
Congress
Townshend Acts
Seizure of The
Liberty
Boston Massacre
Committees of
Correspondence
Tea Party
Intolerable Acts:
shut down Boston
Harbor
Directions: Think about each term in the context of the lecture on British and
Colonial interpretation of the British constitution. In each box, explain how each
side would have justified or condemned the term according to their interpretation.
Intolerable Acts:
marital law
Intolerable Acts:
Quartering Act
First Continental
Congress
Lexington/Concord
Second Continental
Congress
Bunker Hill
Olive Branch
Petition
Declaration of
Independence