Treasury Secretary Alexander Hamilton’s plan to pay America’s debts.
In January 1790, Secretary of the Treasury Alexander Hamilton presented his Report on Public Credit. He had prepared the report in response to Congress, which believed that solid support of the public credit (that is, the reputation of or confidence in the ability of the government to fulfill its obligations) was important to the “honor and prosperity” of the United States. Hamilton heartily agreed that the United States must place itself on a firm financial footing to win the world’s respect. He worked diligently for nearly four months to prepare his 20,000-word report.
Hamilton calculated that the United States owed more than $11 million to foreign nations and more than $40 million to its own citizens. He argued that the government must repay the foreign debt according to the exact terms of the original loan agreements. He recommended the funding of the domestic debt at face value. He proposed to accomplish this goal by calling in outstanding government securities and issuing new bonds of the same value in their place. The national government would also assume the remaining debts of the individual states and pay them off under similar terms. Finally, he proposed the establishment of a sinking fund (which would be used to retire the debt) to guarantee payment of both the interest and principal of the national debt.
Hamilton recommended repaying the foreign debt by taking out new loans overseas. These loans would prevent a serious cash drain from the American economy. Increased duties on imports and tonnage (duties on ships based on their weight when loaded with cargo) could fund repayment of the domestic debt. The government could raise more money by placing new duties on imported wines, distilled spirits, tea, and coffee. He proposed a duty of 20 to 35 cents per gallon on Madeira and other wines, 20 to 40 cents per gallon on distilled spirits depending on the proof, 12 to 40 cents per pound on tea, and 5 cents a pound on coffee.
Republican Representative James Madison of Virginia led the Congressional opposition to Hamilton’s recommendations. Madison favored “discrimination,” a policy that would pay all the original as well as current owners of government securities. He also opposed the assumption of state debts, because Virginia and most of the other Southern states had already paid off their debts. Hamilton convinced most representatives that discrimination would not work, but Congress remained deadlocked over the assumption of state debts incurred before ratification of the Constitution in 1789. In July 1790, Hamilton offered to move the national capital from New York to Philadelphia for ten years and then to a site along the Potomac River in exchange for Madison’s support. The compromise broke the deadlock, and Congress approved Hamilton’s plans.
