The First Report on the Public Credit was one of four major reports on fiscal and economic policy submitted by Founding Father and first US Treasury Secretary Alexander Hamilton on the request of Congress.Brock, 1957, p. 40 The report analyzed the financial standing of the United States and made recommendations to reorganize the national debt and to establish the public credit.Staloff, 2005, p. 91, Malone, 1960, p. 259 p. 259 Commissioned by the US House of Representatives on September 21, 1789, the report was presented on January 9, 1790,Malone, 1960, p. 260 at the second session of the 1st US Congress.Brock, 1957, p. 41, Smith, 1980, p. 147
The 40,000-word documentEllis, 2000, p. 60 called for full federal payment at face value to holders of government securities ("redemption") and the federal government to assume funding of all state debt ("assumption"). The political stalemateEllis, 2000, p. 50 in Congress that ensued led to the Compromise of 1790, which located the permanent US capital on the Potomac River ("residency").
The Federalists' success in winning approval for Hamilton's reforms led to the emergence of an opposition party, the Democratic-RepublicansBrock, 1959, p. 44, p. 45, Ellis, 2000, p. 80, Hofstadter, 1957, p. 14 and set the stage for political struggles that would persist for decades in American politics.Brock, 1957, p. 41, Hofstadter, 1948, p. 14, Malone, 1960, p. 265
Government debt under the Articles of Confederation During the American Revolution, the Continental Congress, under the Articles of Confederation, amassed huge war debts but lacked the power to service these obligations by tariffs or other taxation.Staloff, 2005, p. 69Miller, 1960, p. 37 As an expedient, the revolutionary government resorted to printing money and bills of credit, but that currency rapidly underwent depreciation. To avoid bankruptcy, the Continental Congress eliminated $195 million of its $200 million debt by fiat. After the American Revolutionary War, the Continental currency, called "Continentals," would be deemed worthless.
With its finances in disarray, the legislature abdicated its fiscal responsibilities by shifting them to the 13 states. When the state legislatures failed to meet quotas for war material by local taxation, Patriot armies turned to confiscating supplies from farmers and tradesmen, compensating them with IOUs of uncertain value.Staloff, 2005, p. 69-70 By the end of the war, over $90 million in state debt was outstanding.Staloff, 2005, p. 70 Much of the state and national fiscal disorder, exacerbated by an economic crisis in urban commercial centers,Hofstadter, 1957, p. 125 had remained unresolved when the Report was issued.Ellis, 2000, p. 61
Funding of national debt With ratification of the US Constitution in 1787,Miller, 1960, p. 14 Congress could impose import duties and levy taxes for the raising of revenue to honor those financial obligations.Malone, 1960, p. 256
The US national debt, according to the Report, included $40 million in domestic debt and $12 million in foreign debt, both of which were inherited from the Continental Congress.Smith, 198, p. 147Staloff, 2005, p. 91-92 In addition, the 13 states altogether owed $25 million from debts incurred during the American Revolution. The combined US debt, as calculated, stood at $77 million.Staloff, 2005, p. 92Ellis, 2000, p. 55
A consensus arose in Congress for the primary source of revenue to be tariff and tonnage duties,Miller, 1960, p. 15Malone, 1957, p. 256 which would serve to cover operating expenses for the central government and to pay interest and principal on foreign and domestic debt. Under the guidance of US Representative James Madison, who led the House,Miller, 1960, p. 33 a tariff act was passed on July 4, 1789.
Congress created the executive departments in September 1789, and Alexander Hamilton was confirmed by the Senate to regulate the powerful Treasury Department.Malone, 1957, p. 257 Madison, having "actively promoted" Hamilton's appointment,Miller, 1960, p. 36 was expected to co-operate in creating an energetic central government.Miller, 1960, p. 35
Schemes to establish public credit: repudiation, discrimination, redemption
With sources of revenue legislated, Congress proceeded to address the pressing issue of public credit.Miller, 1960, p. 36-37, Malone, 1957, p. 259, Establishing government credit, the government's ability to borrow, was deemed a necessity if the nation was to endure. To convince investors to purchase US securities, a system was needed for the reliable payment of interest. Considering the magnitude of the debt burden that it had inherited,Miller, 1960, p. 14, p. 38 Congress wished to dispose of it with economy, and "the only real difference of opinion... was how much of the existing debt had to be redeemed in order to establish the government credit."
Various plans had been considered to pay down the domestic debt under the new federal government. Some advocates wanted to scale back the debt to ease tax burdens abruptly to retire the debt quickly. Proposals to default on the loans were termed partial or full "repudiation." None of them, however, suggested defaulting on any portion of the $12 million foreign debt,Brock, 1957, p. 41, Burstein, 2010, p. 214 with $1.5 million in interest,Miller, 1960, p. 38 which was regarded as a "sacred obligation [to be] paid in full."
A significant portion of the nation's $40 million domestic debt was owed to Patriots who had supported the War of Independence by loans or personal service. Many of them were combat veterans who, during demobilization in 1783, had been paid in IOUs, "certificates of indebtedness"Malone, 1960, p. 260, Brock, 1957, p. 41 or "securities" (not to be confused with the worthless Continental currency or bills of credit) and redeemable when the government's fiscal order had been restored.
Schemes more in sympathy with the ex-soldiers who had relinquished their certificates to speculators at reduced rates were termed "discrimination" and called for paying the original holder of the security at full value and for reimbursing the current holder of the security at its purchase price. The combined payments would, however, exceed the denomination of the original certificate.Brock, 1957, p. 41-42
US Representative James Madison of Virginia offered his own variation of "discrimination" that would preserve the federal obligation of face value debt repayment. In his version, current certificate holders would be reimbursed at their purchase price for the devalued certificate, and the balance would be handed to the original holder. The government outlay would match the face value of the original certificate.
Hamilton rejected both "repudiation" and "discrimination" and championed "redemption," the reserving of payment at full value strictly to the current holders of the certificates, with arrears of interest.Malone, 1960, p. 259
Near the close of the first session of the 1st Congress in September 1789, with the matter of establishing public credit unresolved, the legislature directed the new Secretary of the Treasury, Alexander Hamilton, to prepare a report on credit.Malone, 1957, p. 259, Miller, 1960, p. 39
Political debate over Hamilton's "Redemption"
Hamilton's First Report on the Public Credit was delivered to Congress on January 9, 1790. It called for payment in full on all government debts as the foundation for establishing government credit.Miller, 1960, p. 39 Hamilton argued that to be required for the creation of a favorable climate for investment in government securities and for the transformation of the public debt to a source of capital.Staloff, 2005, p. 93 His model was the British financial system, which absolutely required fidelity to creditors.Miller, 1960, p. 40
Before the government could resume borrowing, Hamilton insisted for the $13 million in arrears of interest to be converted into principal, with payments at 4% on reissued securities.Staloff, 2005, p. 92-93, Brock, 1957, p. 39 The plan would be funded by pledging a portion of the government tariff and tonnage revenue irrevocably to the payment schedule.Miller, 1960, p. 39-40 Additionally, contracted debt would be serviced by sinking funds derived from postal service revenue that was earmarked for that purpose.
Rather than seeking to liquidate the national debt, Hamilton recommended for government securities to be traded at par to promote their exchange as legal tender equivalent in value to hard currency. Regular payments of the public debt would allow Congress to increase federal money supply safely, which would stimulate capital investments in agriculture and manufacturing. With economic prosperity, the enterprises would more easily carry their tax burdens and provide the revenue to service the national debt.Staloff, 2005, p. 94
Monied speculators, alerted that Congress, under the new Constitution, might provide for payment at face value for certificates, sought to buy up devalued securities for profit and investment.Ellis, 2000, p. 56, Brock, 1957, p. 42, Miller, 1960, p. 44 Concerns arose since many certificates, almost three quarters of them,Staloff, 2005, p. 92-93 had been exchanged for well below par during periods of inflation,Ellis, 2000, p. 55-56 some as low as 10 cents on the dollar,Burstein, 2010, p. 214 but they sold at 20-25% while the Report was debated.Malone, 1960, p. 260, Staloff, 2005, p. 92
When the report was made public in January 1790, speculators in Philadelphia and New York sent buyers by ship to southern states to buy up securities before the South became aware of the plan. Devalued certificates were relinquished by holders at low rates even after the news had been received, which reflected the widely held conviction in the South that the credit and assumption measures would be defeated in Congress. The value of government certificates continued to fall months after Hamilton's scheme was published, and "the sellers speculated upon the purchasers."Miller, 1960, p. 44-45
US Representative James Madison led a vigorous opposition to Hamilton's "redemption"Ellis, 2000, p. 56Burstein, 2010, p. 214-215 but fully supported the development of good credit. In his address to the House on February 11, 1790, Madison characterized Hamilton's "redemption" as a formula to defraud "battle-worn veterans of the war for independence" and a handout to well-to-do speculators, mostly rich Northerners, including some members of Congress.Burstein, 2010, p. 214, Brock, 1957, p. 42, Miller, 1960, p. 42 Madison's "discrimination" promised to correct those abuses in the names of financial rectitude and natural justice.
Introducing political rhetoric into the debate that resonated with his home state of Virginia,Brock, 1957, p. 45 Madison laid the groundwork for a national party for democrats.Brock, 1957, p. 46 His principled opposition to "redemption" was consistent with his view of a federal government designed to shield the less powerful from a majority interest, in this case his agrarian constituency, from Federalist-sponsored economic nationalism.Brock, 1957, p. 46, Miller, 1960, p. 41,
The essence of Hamilton's economic position on "redemption" was that any compromise on the sanctity of promissory notes would undermine confidence in creditBrock, 1957, p. 42, Ellis, 2000, p. 62 and that concentrating capital into fewer hands would strengthen commercial investment and encourage constructive economic growth,Miller, 1960, p. 53 which would enlarge government credit available to business enterprises.Ellis, 2000, p. 56, Miller, 1960, p. 41, Brock, 1957, p. 43
As Hamilton's plan would greatly simplify and streamline finances, he found Madison's concern over the question of honoring both original and present holders of government securities naïve and counterproductive.Ellis, 2000, p. 61, Miller, 1960, p. 41, Staloff, 2005, p. 95