Download lesson 1: financial policies, 1790

LESSON 1: FINANCIAL POLICIES, 1790
Student Handout 1: Problem
New Republic
1 0
1795
1800
1805
1810
1815
Financial proposals
It is 1790, the first year of the United States under the new
Constitution. The atmosphere in the country is tense. While
people are optimistic about the new government, no one
is sure if it will work. There could be riots or civil war.
Alexander Hamilton, the Secretary of the Treasury, has
made several financial proposals to strengthen the country
economically. Currently, the federal government takes in
about $5.6 million per year. Decide whether you would
support each proposal and explain why.
Proposal 1--Pay off government bonds at face value:
The government is in debt to Americans who bought bonds,
Alexander Hamilton
mainly during the American Revolution. Many of those who
bought bonds sold them to pay off their own debts. They sold the bonds for a fraction of
the original value. For example, let's assume a farmer in Maryland bought a 10-year bond
for $100 in 1780. The farmer lent the government $100 and received an I.O.U. (the bond)
from the government to pay him back $110 (principal plus interest) in 1790. But in 1786
the farmer needed money to pay expenses (or feared that the government would never
pay back the bondholders) and sold the bond for $65. The buyer bought it hoping the
government would still pay back $110 in 1790. Many of the bonds held by people now,
in 1790, were bought for as little as $17 on a $100 bond. The government owes about
$44 million to owners of bonds, which is a large sum of money. Hamilton argues that
the government should pay the debt at face value (the value on the original bond) plus
interest. That is, Hamilton wants to pay back $110 to holders of $100 bonds even though
the owners may have paid as little as $17 for them.
Opponents argue that rich investors, including friends of Hamilton, will make a huge
amount of money. Congressman James Madison proposes that the government pay the
present bondholders the highest price in the market, with the remaining funds going to the
original hardworking people who bought the bonds to help their country. For example,
if an investor bought a $100 bond for $17, the government would pay the highest price
for that bond over the past few years. If the highest price was $30, the government would
pay $30 to the investor (still a good profit) and $70 to the patriotic American soldier or
hardworking shopkeeper who bought the bond originally. Hamilton's proposal will cost
the government about $2.6 million in interest per year.
Permission granted to reproduce for classroom use only. ©2009 Social Studies School Service. (800) 421-4246. http://socialsmdies.com
10
LESSON 1" Handout 1, Page 2
I
I Decision 1
Will you support this proposal to pay off bonds at their full, original value? Explain.
Proposal 2--The federal government will pay off all the state debts: Besides the
federal government, the states also have debts from the Revolution. Some states have
paid off ahnost all the debts to their bondholders, while others have repaid very little.
Hamilton proposes that the federal government pay off whatever debts are still owed by
any state. This means the national debt will be much higher (about $21 million), but will
tie the states much more closely to the federal government. The proposal will cost the
government about $1.3 million in interest per year.
I Decision 2
Will you support this proposal to pay off all state debts? Explain.
Proposal 3--Tariff: At this point, the tariff provides about 90% of the money that the
government takes in each year, and the government has been running yearly deficits
(spending more than it takes in) of about 7%. At this point, the tariff rate on various
goods averages about 7%. There are three distinct options for trade:
A. Free trade (no tariff)--Americans will buy and sell products with foreigners without
government tariffs. Some American companies may go out of business because foreign
companies can make goods more cheaply. But that would help American consumers by
bringing lower prices, and it will push American investors to focus on products with
which Americans are more productive. In the long run, competition will keep American
businesses improving and will make the American economy stronger.
B. A low tariff to raise revenue--The tariff is the main source of revenue for the
government. Hamilton argues that the government needs to maintain the tariff at a low
rate to keep imports high and thereby raise money to pay off government debts and keep
the government strong. He wants to protect "infant industries" in America, but he wants
to protect them through bounties (see Proposal 4), not through a high protective tariff.
C. A high tariff to protect small, new industries against foreign competition--High tariffs
on imports from other countries, such as cloth or iron, would make those products more
expensive than American products. Americans would stop buying imports and instead
buy the cheaper American products, expanding American businesses. Those who favor
the high tariff argue that America, as a new country, needs to build up its own industries,
which are having trouble competing, especially against British industries. More than half
of American imports are from Britain.
I
I Decision 3
Will you support free trade, a low tariff for revenue, or a high protective tariff'?. Secretary
Hamilton favors the low tariff (Option B). Explain which you would support.
Permission granted to reproduce for classroom use only. ©2009 Social Studies School Sen, ice. (800) 421-4246. htlp://socialstudies.coln
11
LESSON 1: Handout l, Page 3
Proposal 4---Bounties: Hamilton proposes that the government pay bounties for
the invention of new machinery in order to bring about innovation and change. The
government should do what it can to aid key industries that will provide economic growth
for the future. Bounties would help businesses to compete in the American market and
increase exports, whereas high tariffs might reduce exports.
Decision 4
Will you support this proposal to pay bounties for inventions? Explain.
Proposal 5--National bank: Hamilton proposes a national bank. The federal
government would own 20% of the stock and appoint 20% of the directors of the bank.
The bank would be the leading depository of government funds, and would issue bank
notes (money) to control the supply of money and keep it stable. At this time, there
are over 50 types of money in the United States; the national bank would reduce the
number of currencies and uncertainty by issuing just one type of currency. The power
to issue bank notes would allow expansion of the money supply as needed, but reduce
the likelihood of inflation by putting the power of the government behind the notes.
The bank would also control the operations of state banks (partly to prevent banks from
causing inflation by issuing too many notes). Finally, the national bank would help
provide a stable source of loans, which would promote business expansion but also
avoid overexpansion.
There are several arguments against the bank proposal. If the national bank fails, it could
cripple the whole economy. It would be better to have several smaller banks. A national
bank would also allow the rich to become richer by using the bank for their own ends.
Finally, Secretary of State Thomas Jefferson is against the proposal, arguing that it is
unconstitutional. Nowhere in the Constitution, according to Jefferson, does it say that the
federal government can set up and run a bank. He argues that the government can only
make use of the powers specifically listed in the Constitution.
I
Decision 5
Will you support this proposal to start a national bank? Explain.
Permission granted to reproduce for classroom use only. 02009 Social Studies School Service. (800) 421-4246. http://socialstudies.com
12