Building the State (1781-1797)

Alexander Hamilton and Finance in the Washington Administration

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.