Hamilton's Economic Plan

views updated


In 1790 and 1791, Secretary of the Treasury Alexander Hamilton presented four major reports that dealt with the financial, social, and constitutional future of the United States. Three were public documents, presented to Congress as proposals for policies that Congress might enact. One of the reports was private, written for President George Washington, who was in a quandary about whether to veto one of those proposals. Taken together, the reports sketched out a coherent vision for the new Republic. Hamilton saw them all as continuing the work of establishing a coherent national economy that had begun with the adoption of the Constitution.

paying the debt

One of his proposals received unqualified assent. This was to pay off at full value the principal and interest of the enormous foreign debt that the United States had built up during its struggle for independence. Hamilton, Washington, the president's other advisers, Congress, and the interested public all understood that any other course would destroy America's financial credibility. His other proposals, however, provoked great controversy, both at the level of public policy and at the level of what the Constitution permits the government to do. The result was to open a gap among the very men who were responsible for the Constitution, beginning with Hamilton and his former close ally, James Madison. The friendship of those two highly talented thinkers came to an end; Hamilton and Secretary of State Thomas Jefferson, never close, became bitter enemies, and political parties started to emerge.

Nobody doubted in 1790 that both the instruments of American finance and the structure of the American economy faced very severe problems. One aspect was the war debt. The old Confederation Congress had possessed absolutely no means to pay off what it owed, either abroad or at home. Federal taxing power under the new Constitution offered a means to solve that problem, but once the issue shifted from debts owed overseas to debts owed at home, grounds for dispute emerged. Some of the domestic debt was owed to the soldiers who had fought the War of Independence. Some was owed to farmers and artisans who had accepted paper in return for their wartime goods and services. Some of the debt was owed not by Congress but by the states. Virtually all of the debt was in the form of badly depreciated paper currency and certificates. Those certificates could be transferred, and many were in the hands of secondary purchasers, who had paid far less than face value to the original owners. Controversy centered on who should gain from the new government's apparent power to raise taxes and pay off what American institutions owed.

Hamilton's view was that the public debt could be a means for the new government to acquire the strength that he believed it should have. Overseas it would gain that strength by paying its debts off in full. Within the United States, he wanted the federal government to assume what remained of the wartime debts that the states had contracted. He wanted the domestic debt to be paid off as close to full value as possible, to whomever held the appropriate paper. Because of Confederation-era agreements about the level of interest, this would be at par rather than in full, so domestic creditors would receive less than their foreign counterparts. Nonetheless, the program of duties on imported goods and excise taxes on domestic products that Hamilton proposed would generate revenue that might well end up very far from the person who had suffered and sacrificed during the war. Hamilton dealt with foreign debt, domestic debt, and assumption of the state debts in his first Report on Public Credit of 9 January 1790.

creating a national banking system

Hamilton wanted more, having in mind an American future that would resemble the reality of Britain in his own time. He had been instrumental in establishing America's first two banks, in Philadelphia in 1782 and New York in 1784. Though he never visited England, he carefully studied its system of privately held banks under the direction of a private-public Bank of England and proposed that there be a national bank in the United States on the same model, to serve the same goals. He wanted central direction for the financial sector, and he believed that the federal government had the power under the "necessary and proper" clause of the Constitution to create an institution that would bring that direction about. This was the subject of his second Report on Public Credit, which actually pre-dated the first report by a month.

Hamilton believed that a system of interconnected banks was necessary. Others, including Madison and Jefferson, regarded the idea with horror, particularly should the federal government became involved. They saw a banking system as a harbinger of the very corruption they thought their America had escaped thanks to the Revolution. Madison led ineffectual opposition in Congress. Jefferson, asked by President Washington for his opinion on signing the bill, objected on constitutional grounds. To his mind, no such power for establishing a bank existed. Hamilton replied with the third of his reports, arguing the case that the "elastic clause" should be broadly rather than narrowly interpreted. He won the battle for Washington's mind. But the dispute over strict and loose construction of the Constitution that he and Jefferson began continues into the twenty-first century.

promoting manufactures

Hamilton's final proposal did not become law, but it too set the terms of a continuing debate. He wanted to set the United States on a course of industrial development emulating Britain's. He did not submit his Report on Manufactures until December 1791. Within it he proposed a comprehensive program of protective taxes, government bounties, and federal public works, all with a view to nourishing the sprouts of industrialism that he could see emerging among the primarily northeastern, commercial-minded, well-off Americans with whom he felt most comfortable. As a program, it looked forward to the state-sponsored attempts at economic development of many late-twentieth-century countries. Historian John Nelson has suggested that Hamilton's ultimate goal was a neocolonial economy, subordinate to Britain, rather than independent development. However that may be, Congress rejected the report entirely. American industrial creativity and energy, however, were not to be denied. By 1860 the United States was second only to Britain among industrializing economies. But not until the administration of President Abraham Lincoln would the federal government begin to assume the active, fostering economic role that Hamilton proposed in 1791.

See alsoBank of the United States; Hamilton, Alexander; Jefferson, Thomas; Madison, James; Presidency, The: George Washington; Taxation, Public Finance, and Public Debt .


Elkins, Stanley, and Eric McKitrick. The Age of Federalism. New York: Oxford University Press, 1993.

Hamilton, Alexander. The Reports of Alexander Hamilton. Edited by Jacob E. Cooke. New York: Harper and Row, 1964.

Nelson, John R. Liberty and Property: Political Economy and Policymaking in the New Nation, 1789–1812. Baltimore: Johns Hopkins University Press, 1987.

Wright, Robert E. Hamilton Unbound: Finance and the Creation of the American Republic. Westport, Conn.: Greenwood, 2002.

Edward Countryman

About this article

Hamilton's Economic Plan

Updated About encyclopedia.com content Print Article


Hamilton's Economic Plan