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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