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Building the State (1781-1797)

Alexander Hamilton and Finance in the Washington Administration

Defining the National Government

Increasing Tensions and The Whiskey Rebellion

Summary

Despite the growing concern throughout the nation over a string of acts asserting national over state power, the Washington administration remained dominated by Federalists, led by Secretary of Treasury Alexander Hamilton. Hamilton's initiatives aroused the ire of those who maintained the politics of the Anti-federalists. Hamilton's main goals were to achieve the financial stability necessary to fight another war should one arise with the foreign threats of Britain and Spain, and to dull assertions of state power that might diminish national power. In his Report on Public Credit, submitted to Congress in January 1790, Hamilton calculated the US debt at $54 million, with individual states owing an additional $25 million. American credit abroad was poor, and continued to fall with every day the debt was left unpaid. Hamilton suggested funding the debt by selling government bonds, and further proposed that state debts be assumed by the national government.

Hamilton advocated the selling of western land to pay off US debt to European nations in order to rebuild credit, but suggested that the debt to US creditors be maintained as a perpetual debt. He argued the US could continue paying interest on its domestic debt, thus maintaining good credit, if the US creditors would accept the debt as a secure investment which paid yearly interest. This plan generated opposition from many, objecting to the fact that under the plan, astute wealthy speculators who had bought the debt certificates of others, many at great discounts, would benefit, while the Americans who actually financed the war would lose out.

Heavy opposition arose to Hamilton's proposal that the national government assume the debts of the states as well. Opposition ran especially high in the South, which, excluding South Carolina, had paid off 83 percent of the region's debt. Southern states saw in Hamilton's proposal a plan to alleviate the tax burden on northern states lagging in their debt payments, while southern states had already reduced their debt at great internal cost. In the end, Hamilton pushed his proposals through Congress with the aid of much political wheeling and dealing. The nation reaped the economic rewards of Hamilton's efforts to improve credit, as Europeans increasingly purchased US government bonds and invested elsewhere in the US economy.

In December 1790, Hamilton began his second controversial policy campaign. Having increased the amount of capital available for investment, he planned to establish a national bank. One-fifth of the bank's stock would be owned by the US Treasury, which would have one-fifth control of the board of directors. The remainder would fall into private hands. Hamilton claimed the Bank of the United States would, at negligible cost, provide a secure depository for federal revenue and a source of federal loans, as well as issue currency. The bank would regulate the activities of the nation's banks and extend credit to US citizens in order to expand the economy.

The proposal for the national bank brought Hamilton more opposition than had any previous initiative. Most notably, Thomas Jefferson, the Secretary of State, joined the ranks of Hamilton's opponents. Jefferson and other political leaders recalled how the Bank of Britain had undermined democracy, and feared that the creation of the bank would tie private individuals too closely to public institutions. They predicted that politicians would manipulate bank shareholders and that members of Congress who held bank shares would vote for the best interests of the bank over those of the nation. Hamilton's opponents further pointed out that the Constitution did not grant the federal government the power to grant charters. Despite this opposition, Congress approved the bank by a thin margin, and the Bank of the United States obtained a twenty-year charter in February 1791.

Commentary

Alexander Hamilton, a veteran of the Revolutionary War, was an idealist who had become disillusioned by the faltering morals that many of his countrymen had exhibited during the revolution and following decade. He believed that Americans could not be motivated by self-sacrifice, but rather, had to be motivated by appeals to their own self-interest. Thus he advocated building ties between the government and wealthy and influential individuals, who he believed would support the nation were it in their own interest. Distrustful of the masses, he argued for the consolidation of power in the hands of the national government.

Hamilton's proposals as Secretary of Treasury reflected this ideological standpoint. The funding of the US debt through the sale of US government bonds would undoubtedly fill the nation's treasury. The assumption of state debt, he further claimed, would prevent states from failing to repay debts, thus injuring US credit abroad. However, the true motive of his Report on Public Credit was to win the loyalty of state creditors to the national government and take the matter of debt out of the hands of the states. Even knowing Hamilton's aims, legislatures in debt-wracked states could not resist the offer to alleviate their debt.

Hamilton's proposal to maintain a perpetual national debt meant that the US could act almost as a bank, securely keeping the savings of the wealthy and paying a competitive interest rate. Thus the fate of the wealthy and powerful owners of the US debt would be tied to the fate of the nation. Through this appeal to economic self-interest, Hamilton thought he could harness the wealth and power of these individuals for purposes of public good. Astutely, the opponents of Hamilton's plan to maintain a running debt claimed the plan was antagonistic to the concept of equality, since it rewarded public creditors over common Americans. Also, many feared that the plan would give the wealthy creditors undue influence in the national government, a seemingly valid fear considering Hamilton's true intentions.

Hamilton's most controversial proposal was the creation of the Bank of the United States. For Hamilton, the creation of the bank was yet another way in which the national government could take control of the nation's day-to-day operations and rely less on private institutions for services such as loans. To his opponents, Hamilton's proposal grossly overstepped the bounds of the executive branch and the national government. Any claim that Congress could create the Bank of the United States relied upon a loose reading of the Constitution, especially the elastic clause. Article I, Section VIII of the Constitution states that Congress shall have the power "to make all laws which shall be necessary and proper for carrying into execution...powers vested by this Constitution in the government of the United States." The opponents of the bank argued that a strict interpretation of the Constitution was necessary to protect against tyranny. These so-called strict constructionists, led by Thomas Jefferson, focused on the latter part of the clause, claiming that nowhere did the Constitution give Congress the power to grant the bank a charter, so that the passing of the bank charter could not be considered necessary and proper. Loose constructionists, on the other hand, focused on the beginning of the clause, claiming it gave Congress the power to do anything not expressly forbidden by the Constitution. Though Hamilton's proposals succeeded in becoming law, the debates his proposals instigated were by no means settled.

The debate over Hamilton's measures in regard to public credit and the bank exposed the differing ideologies developing in the United States, and set the stage for future conflicts between the strict and loose constructionists. Moreover, the debates over Hamilton's proposals demonstrated how more and more, the differing ideologies developing in the United States were merely a matter of the differing desires and needs of North and South. The industrial North had rallied to Hamilton's cause, supporting the measures to improve credit and increase investment. Meanwhile, the agricultural South saw no need for the national government's usurpation of power to these ends, and was content to govern itself by local rule. This rift would steadily widen well into the nineteenth century, dominating (and dividing) US politics.

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