Toward the end of 1788, New Yorkers elected Alexander Hamilton to represent them in the national Congress once again, and so Hamilton moved his family from New York to the capitol in Philadelphia. This particular Congress was the last to ever meet under the authority of the Articles of Confederation, and there was little for Hamilton to do in the area of national legislation. Instead, Hamilton focused his attention on convincing General George Washington to accept the nomination to become the first President of the United States under the Constitution. Washington accepted the nomination, but Hamilton was not satisfied because he feared that another candidate might try and campaign against Washington. To prevent this from happening, Hamilton waged a counter- campaign by asking to his political friends and colleagues to encourage their representatives in the Electoral College to vote for Washington. Hamilton's fears, however, proved to be unfounded. In April 1789, the Electors unanimously voted for Washington to be the first President, with Hamilton's political foe John Adams as his Vice President.
President Washington looked to people he knew and trusted to fill his small cabinet. Washington named Thomas Jefferson as his Secretary of State, Henry Knox as his Secretary of War, and Hamilton as his Secretary of the Treasury. Although Hamilton came to be known as the most important Secretary of the Treasury in U.S. history, he spent only five years in that position. Hamilton began his tenure as Secretary of the Treasury by drafting a report on the future of American economic stability entitled [A] Report on the Public Credit. This was the first of two such reports; the second was published just before Hamilton resigned from the cabinet in 1795. This first report outlined Hamilton's recommendation to the President and to Congress concerning the best methods to eliminate the national debt. By the time the Constitution came into effect in 1792, the United States had borrowed nearly forty million dollars from other countries and from individual speculators, and in addition to this principal, owed an additional fifteen million in interest. During the early years, some states had paid off their debts, but the majority of them had not. This accumulation of debt was a huge problem for the new nation.
New governments often try to cancel debts, but Hamilton stepped forward instead to encourage the U.S. Government to assume the debts of all the states and to pay them off in full along with the interest. Hamilton argued that if the new government did not pay its creditors in full, the United States would never be seen as a stable and reliable nation. His report said that the country must establish its trustworthiness and earn respect if it were ever to borrow money again. To pay off the debts, Hamilton planned to raise taxes throughout the country. Many politicians protested Hamilton's proposals, and states that had paid off their own debts resented that they had help pay the debt of other states. Other politicians felt only the principle should be paid, while still others cried out against the new taxes.
James Madison, who had once collaborated with Hamilton in authoring the Federalist Papers, lead the opposition Hamilton's proposals, and for several months their respective camps were deadlocked. Finally, Hamilton struck a bargain with Madison that changed history. At the time, the capitol of the United States had just moved from Philadelphia to New York City. Hamilton offered to convince Congress and the President to move the capitol south to a designated area near Virginia known as the District of Columbia. Hamilton believed that moving the capitol to a more southern location would allay Southern fears of tyranny from the North. Madison, Congress, and Washington accepted the proposal to relocate the seat of government, and arrangements were made to carry out the agreement. In exchange, Hamilton's policies on debt were enacted. For his work on the matter, the new Secretary of the Treasury was awarded an honorary law degree from Dartmouth College.
After he succeeded in clearing his program on the national debt through Congress, Hamilton turned to the urgent matter of the banking problem. Since his early days as a New York Assemblyman, Hamilton had advocated that a new national bank should be created to control the nation's wealth and finances. Now, as the head of the national treasury, Hamilton had more political weight, and in 1790 he presented a proposal to Congress to create a National Bank with one central branch and several regional branches throughout the country. The total initial worth of the bank would be ten million dollars, and capital would be exchanged for shares sold to the public. Although the National Bank would be independent from the government, Hamilton's plan also stipulated that the federal government would hold one fifth of the bank's total stock. Furthermore, the directors of the bank would be required to submit weekly transaction reports to the Secretary of the Treasury.
Congress liked Hamilton's proposal, but Secretary of State Thomas Jefferson and his political ally Madison stepped forward to argue that a national bank would be unconstitutional since the Constitution made no explicit provisions for such an entity. Immediately, a new and very serious problem concerning the interpretation of the Constitution emerged. Jefferson and the strict constructionists argued that the Constitution forbade whatever it did not expressly permit. Hamilton and the loose constructionists, on the other hand, argued that what the Constitution permitted whatever it did not expressly forbid. In the end, President Washington settled the dispute. Washington conceded that the Constitution had to be interpreted loosely at times in order to promote national well-being, and approved Congress's and Hamilton's desire to establish the national bank. Even though there were no true political parties at this point in time, the philosophical rift between Hamilton and Jefferson was clearly widening.