Download Chapter 7 Alexander Hamilton`s Financial Plan

Hamilton’s
Financial Plan
Revolutionary War Debts
The United States had
acquired about $54
million in debts from
the Revolutionary War
– $42 million to
American citizens
– $12 million to
foreigners
 The states had $25
million more in war
debts.

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1

Secretary of the Treasury
President Washington’s
Secretary of the
Treasury Alexander
Hamilton proposed in
his Report on Public
Credit his plan to fix the
economic crisis facing
the young nation
ALEXANDER HAMILTON
Report on Public Credit

Hamilton’s plan in this report (1790)
featured four major areas:
1) Assumption of states’ war debts by
the federal govt.
2) Redemption of bonds sold by the
govt. under the Articles of
Confederation
3) Selling of new national securities to
create a permanent national debt
4) Excise tax on whiskey
1 – Assumption of State Debts
Many southern states had
repaid all of their debts
 Most indebted states were
in the North
 Southerners claimed
Hamilton was protecting
Northern business interests
at the expense of the South
 Hamilton was able to sway
Southerners to support this
by promising the
permanent capital would be
located in the South

SITE OF THE FUTURE CAPITOL
(Between Maryland and Virginia
along the Potomac River)
2 – Redemption of Bonds
During the war the government issued bonds to
people who had lent it money or served in the
army
 When the govt. failed to repay the bonds,
speculators offered to buy them at much lower
than their face value.
 Hamilton proposed that all bonds be repaid at
face value.
– This would be a way to win confidence in the
new government
– Sound bonds would be a a sign of nations
financial and health and encourage Americans
to invest in nation’s future

2 – Redemption of Bonds
Opponents, like James Madison,
wanted the original bond holders
to be paid.
– He stated that only Hamilton’s
speculator friends (rich
northeasterners) would profit
– war veterans would be
cheated out of their money as
they sold their bonds for next
to nothing to speculators
 This proved unworkable as govt.
was unable to identify the
original bond holders, and
Hamilton’s plan passed

JAMES MADISON
3 – Selling Securities for Permanent
National Debt
Hamilton planned to raise the $54 million to
pay off the national debt (to foreign nations
and Confederate bond holders) by “funding”
it
 New securities would be sold which would be
a combination of federal stock and western
lands
 The new securities would pay 4% interest as
the old bonds paid 6% (thus govt. saved
money) and would be safer investments than
the old bonds

3 – Selling Securities for Permanent
National Debt

Hamilton recommended that the debt
from the new securities should not be
paid off
– The 4% annual interest could easily
be paid off by collecting tariff money
and excise taxes
– Investors would enjoy the profits and
safety of investing money in these
new securities
4 – Excise Tax on Whiskey
This tax on whiskey was
relatively small but
angered western farmers
who relied on the sale of
whiskey produced from
their grain
 Led to the 1794 Whiskey
Rebellion
 Hamilton was sent by
Pres. Washington with
13,000 troops to put this
rebellion down

TAX COLLECTOR RUN OFF

Money from this tax
helped pay state
debts and interest on
new securities sold
Further Economic Measures

ALEXANDER HAMILTON
Hamilton later added
two other reports (in
1791) that featured the
following:
5) A National Bank
6) Tariffs to support
industry
5 – Bank of the United States
Private investors would own
and operate the bank.
 The federal government would
have a safe place to deposit
tax revenues.
 The bank could give
inexpensive loans to the govt.
in times of need
 The bank would also have the
power to issue paper currency
backed by the federal govt.

1ST BANK OF THE U.S.
5 – Bank of the United States
Arguments over the creation of the B.U.S.:
– Opponents argued it would give rich northerners
who invested in the bank too much influence
over government
– Opponents argued that no mention of Congress
setting up national banks is contained in the
Constitution (strict construction or strict
interpretation)
– However, Hamilton argued that Congress can
pass any laws necessary to carry out its
expressed duties (loose construction)
 A 20 year charter for the B.U.S. was passed in 1791

6 – Protective Tariffs
Hamilton sought tariffs to:
– protect infant American industry for a short term
until it could compete
– raise revenue to pay the expenses of government
– raise revenue to directly support manufacturing
through bounties (subsidies)
 Both parties supported the idea of a tariff though
southerners and westerners in time would support
lower ones than those sought by northerners
 Subsidies to industry didn’t pass, but became part
of the upcoming American System plan

Results of Hamilton’s Plan

Two political parties formed:
– Federalists – those who
supported Hamilton’s plan
– Democratic-Republicans –
led by Thomas Jefferson
who feared the plan
would give too much
power to the national
govt. and support the rich
in the north
THOMAS JEFFERSON
Results of Hamilton’s Plan
Revolutionary War debts were paid off
– High state taxes (like those that led to Shay’s
Rebellion in Mass.) were lightened when states
war debts were assumed by the federal govt.
 U.S. Economy grew:
– Exports tripled in the next 5 years
– Paper money and securities led to wealth which
allowed entrepreneurs to invest in new
businesses
– U.S. had money available when it needed it (for
example the Louisiana Purchase)
