The Constitution (1781–1815): Washington Strengthens the Nation: 1789–1792

Hamilton’s Reports on the Public Credit

Secretary of the Treasury Alexander Hamilton, meanwhile, set out to establish firm financial policies for the country. In his famous Reports on the Public Credit, he proposed that the federal government should assume and pay off all state debts, as well as federal debt—a then-staggering sum in the tens of millions of dollars. Furthermore, Hamilton believed that the new government should sell bonds to encourage investment by citizens and foreign interests.

Controversy over National Debt

Hamilton wanted his measures to establish confidence in the new U.S. government at home and abroad. His proposal stipulated that Congress would have to fund the entire debt at par, which meant that the federal government would pay back all borrowed money with interest. Hamilton believed that funding the debt at par would send a signal that the United States was a responsible new member of the international community and a safe environment for speculators to invest their money. He also believed that a sizeable national debt would prevent states from drifting from the central government and thus bind them together.

However, Hamilton’s ideas seemed ludicrous to many. Secretary of State Jefferson, for instance, believed that a large national debt would be a “national curse” that would depress poor farmers and ruin the economy. To the dismay of the Jeffersonians, assumption and funding at par both worked, as foreign investment began to boost the fledgling U.S. economy.

The Excise Tax of 1790

To raise money to pay off these debts, Hamilton suggested that Congress levy an excise tax on liquor. However, because farmers often converted their grain harvests into liquor before shipping (since liquor was cheaper to ship than grain), many congressmen from southern and western agrarian states believed that the excise tax was a scheme to make northern investors richer.

A compromise was finally reached in 1790: Congress would assume all federal and state debts and levy an excise tax to raise revenue. In exchange, the nation’s capital would be moved from New York City to the new federal District of Columbia in the South.

The Bank of the United States

Hamilton then set out to create a national Bank of the United States, which would serve as a storehouse for federal money but also be funded by private investments. This proposal infuriated Secretary of State Jefferson and sparked even more of a debate than had the Reports on the Public Credit.