Alexander Hamilton: “First Report on Public Credit”

Explanation and Analysis of the Document

When Hamilton became the nation's first secretary of the Treasury under President George Washington, he faced a number of difficulties. One was that the nation was still in debt from the Revolutionary War. He calculated that debt as $54 million on the part of the federal government, with individual states owing a further $25 million. Another was that he had no precedent for his duties as secretary of the Treasury. In large measure, Hamilton shaped the activities of future Treasury secretaries and other cabinet officials: investigating issues, writing reports, submitting those reports to Congress for action, and then taking measures to carry out plans for dealing with the issue. He dealt with both of these difficulties in the “First Report on Public Credit,” which he submitted to Congress on January 14, 1790.

Hamilton wrote his report in the context of growing friction between the Federalists, who dominated the Washington administration and favored a strong federal government, and such Antifederalists as Thomas Jefferson, who distrusted a strong central government and wanted more power reserved to the states. Hamilton, though, recognized that ongoing debt is damaging American credit in foreign markets. He thus makes two proposals in his report. The first is to pay off the debt through the sale of government bonds. These bonds would be a perpetual debt; the nation could pay off foreign creditors and then use future revenues to pay continuing interest on the domestic debt. By paying off foreign creditors, Hamilton argues, “trade is extended,” “agriculture and manufactures are also promoted,” and “interest of money will be lowered” (that is, the interest rate the government is paying on its debt can be lowered).

Hamilton, however, anticipated objections to this proposal. At the time, debt instruments functioned as a form of currency. Often, creditors were strapped for money, so they sold the debt certificates they held, frequently at steep discounts, to wealthy speculators. The question would inevitably arise: Should the federal government redeem these certificates for their original face value or for what the speculator paid for them, thus assuring the speculators a healthy profit at the expense of the original owner of the certificate? As Hamilton puts it, “It is alledged that it would be unreasonable to pay twenty shillings in the pound to one who had not given more for it than three or four.” Hamilton argues that such a debt certificate should be redeemed at face value because, like any other security (or any other property, for that matter), a seller sells it “for as much as it may be worth in the market, and that the buyer may be safe in the purchase.”

The other proposal, which many observers found startling, was for the federal government to assume the debts of the states. This proposal met with intense opposition, primarily in the South. In the years after the Revolution, most of the southern states had paid off a substantial portion of their debts (an exception being South Carolina). They concluded that Hamilton's plan was at bottom a way to provide relief to the northern industrial states, which had lagged behind in their debt payments, at the expense of the southern states, which had not. In the end, Hamilton's plan was approved by Congress, U.S. credit abroad improved markedly, and foreign investors put their money into the U.S. economy. The resultant expansion was aided by a controversial proposal Hamilton made in 1791: the creation of a national bank.

Hamilton's proposals for funding the public debt put the nation on a firmer economic footing. They were motivated in large part by his belief that influential and wealthy people would act in their own self-interest by supporting the new nation. Hamilton believed that the federal government could tie the economic fortunes of such people to the fortunes of the nation, thus winning their support and loyalty. His actions with regard to both funding the debt and the creation of a national bank deepened the divisions between the Federalists and the Antifederalists, giving rise to the emergence of political parties: the Federalists and the Democratic-Republicans. Further, Hamilton's policies were embraced by the more commercial and industrial North—and opposed by the agricultural South—sowing the seeds of the division that would culminate in the Civil War.