Hamilton's Reports

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HAMILTON'S REPORTS

The War for Independence (1775–1783) created a new nation and an opportunity to chart a future very different from the one inherited from Great Britain. With the implementation of the Constitution in 1788, the American people formally rejected monarchy and aristocracy in favor of a democratic republic. Yet the economic, cultural, and social shape of the new nation was unformed. Beginning in 1790 with Alexander Hamilton's reports to Congress, the national government began to shape the country's future direction and identity. Hamilton submitted three reports to Congress from 1790 to 1791 that charted a vision of the early American republic. As secretary of the treasury in George Washington's administration, Hamilton wrote his reports to secure the legacy of the war for American independence and chart the nation's path toward greater power and prestige. The reports evoked protest that produced the first American political party system.

report on the public credit

On January 14, 1790, Congress read Alexander Hamilton's first report on public finance and debt. Hamilton declared that the debt of the United States was the cost of liberty and that its payment would generate respect among nations, a widely held view. A nation's reputation, like an individual's, depended on honoring the commitments and obligations made toward others. More daringly, Hamilton argued for transforming the debt into an asset of the national government to be used as money. Hamilton proposed dividing the debt into two categories, domestic and foreign. Foreign debt would be paid in full, while domestic debt would be paid at market value, or par, with the money going to the current owner. It did not matter if either the original owner held the debt or the original value differed from the current market rate. Hamilton asserted that the domestic debt encompassed that of the national government and respective states. To pay the total debt of $85 million, Hamilton outlined the floating of a new loan with varying interest rates and annuities; he also proposed taxes on coffee, tea, wine, and alcohol, and postal revenues.

Hamilton's vision in the Report on Public Credit was twofold. First, a debt-based currency would smooth economic transactions and reduce reliance on barter or undisciplined schemes of paper money. Second, stronger ties between the national government, the financial classes, and the states would stabilize American independence.

Critics assailed the report. Led by Representative James Madison of Virginia, Hamilton's critics accused him of favoring financial speculators over workers and farmers. Madison believed that many original debt-holders were poor and had sold their obligations to people that dealt with money for a living. Madison charged that the plan gave the national government too much power and invested a small group of people with selfish motivations, particularly in the North, to protect the national government at the expense of the states.

Congress grappled until mid-1790 with the proposals embedded in the Report on Public Credit. Then, in a secret deal between Hamilton and the Virginia delegation and with Jefferson's approval, a small section of Virginia became the site of the nation's proposed capital in exchange for Congress's passage of Hamilton's plan.

report on a national bank

The report on public credit lacked a key ingredient. Hamilton had articulated the "what" but not the "how." On December 14, 1790, almost a year after his first report, he sent to the House of Representatives a Report on a National Bank. The "how" had arrived, and with it the sparks of opposition exploded.

Hamilton described a Bank of the United States. It would be capitalized at $10 million and comprised of 25,000 shares. The national government would own one-fourth of the shares, and the public could purchase the rest. One-fourth of the shares could be bought in coin or hard money, while three-fourths could be secured with the debt-based paper mentioned in the first report. Twenty-five directors would govern the bank, most of whom would be private shareholders and not government officials. The bank could issue paper notes as legal tender for all debts owed to the United States and could open branch offices. For twenty years the bank would function under a charter and at the end of that time seek a renewal for continued operations.

The bitter debate of 1790 returned. In early 1791 the House of Representatives examined the report and a bill for establishing the bank. A representative from Georgia repeated arguments heard in opposition to the debt plan, including favoritism to speculators. Opposition took on new tones when James Madison rose to speak. Known as an active and forceful participant in the Constitutional Convention of 1787, Madison declared that the Constitution gave the national government limited powers that did not include establishing a bank. The bill was therefore "unconstitutional." Hamilton's backers retorted that several laws had been adopted through powers "implied" in the Constitution. Against furious opposition, both houses of Congress passed the bank bill.

The debate illuminated two visions of the American nation. Hamilton envisioned a national government that used its power creatively and aggressively, and an economy that thrived on trade. An interlocking relationship would connect the national government to financial and economic institutions. For Hamilton, the American identity was best expressed in the vitality of its national government. By mid-1791 Hamilton's vision became the central ideology of the Federalist Party.

James Madison and Thomas Jefferson developed alternative ideas. They desired a smaller, restrained national government with greater emphasis on state and local autonomy. They interpreted the Constitution as the final barricade of national governmental power, not the first tool it could use to find and wield new powers. The American identity resided in the connections that people had with farming and the land, and those layers of government closest to them, the states and localities. These became the tenets of the new Jeffersonian Republican Party.

The debate revealed a divide beyond political parties. An observer perceived a geographic split on significant constitutional questions. Another commentator went further and said North and South had radically different opinions on the Constitution and government, and that these differences threatened the viability of the national union. The twin reports of Alexander Hamilton had crystallized divergent views among two political parties, regions, and ways of life.

the report on manufactures

Hamilton owed Congress a third report from early 1790, on how to encourage manufactures in the United States. Congress believed the nation would be more secure, particularly in military material, if a stable manufacturing base existed in the United States. Hamilton had made his public credit and banking reports higher priorities, but now that both were law, he submitted the Report on Manufactures on December 5, 1791.

Hamilton's third report demonstrated his ability to research, analyze, and write with breadth and creativity. He had gathered data for this report since spring 1790, seeking input from manufacturers in the United States, Europe, and Asia. He encouraged manufacturers to write their views in letters and to convene discussion groups among their peers. He ordered government officials charged with collecting public revenues to amass information on manufacturing in their respective regions. This great flood of data swept into Hamilton's office, where he sorted and sifted until he produced a startling set of conclusions.

In the third report Hamilton recognized the centrality of agriculture in American life. He noted that many regarded agriculture as the best form of human economy and an enhancer of the nation's wealth, stability, and population. Hamilton wrote that agriculturists preferred that government not act to support manufacturing because it might transfer wealth to a less desirable form of economic endeavor.

Hamilton stated that the American economy needed manufacturing. He made three points. First, manufacturing complemented agriculture. As more people worked in manufacturing, the demand for agricultural products would increase, benefiting farmers. Second, manufacturing enabled the nation to make better use of diverse resources and population, especially in using women and children in a labor force stretched thin. Third, unless officials nurtured domestic manufacturing, other nations with robust manufacturing would continue to trade with the United States from a position of superiority. Strong American manufacturing would permit the United States to trade abroad on an equal footing.

Hamilton made several recommendations. He urged tariffs on foreign goods; prohibition of manufacturing imports; bounties for specific American industries; stimulation of inventions; governmental inspection of manufacturing goods; and a transportation system to haul raw materials and finished goods. Through these measures, the third piece of Hamilton's economic triad would fall into place—sound public finances, a thriving national bank, and a growing manufacturing sector.

Jefferson and the agriculturists seethed at the report. Jefferson predicted that women and children would be dragged from farms to work with machines in filthy settings. He warned that manufacturing workers would lose their independence in factories and would form mobs. Jefferson's criticisms, combined with the Republicans' hatred of Hamilton's entire economic vision, led to vigorous opposition to the report, which nevertheless passed both houses of Congress.

conclusion

The memory of war was a thread that ran through Hamilton's reports. As an officer and aide to General Washington, Hamilton witnessed the effects of disintegrating currency, incoherent public finances, and weak manufacturing. These weaknesses had nearly destroyed the Continental Army and the cause of American independence. The vision outlined in the reports reflected Hamilton's desire to strengthen the new American government that had emerged with the Constitution of 1787. But although many agreed with the memory, they did not agree with the vision, and from the controversy over Hamilton's works sprang the American political party system.