On September 11, 1789, George Washington officially appointed Alexander Hamilton to be the United States’ first Secretary of the Treasury. Hamilton was actually Washington’s second choice after seasoned financial expert Robert Morris turned down the post, but he would be more than capable in the role and prove to be a key figure in managing the early growth of the nation. Finance can be boring, a point that many of the founding fathers would have agreed with, but without Hamilton's deft financial maneuvering this country might not have survived very long at all.
When we think of 1789 and Washington’s first term, we often recall the historically evocative moments like Washington choosing the humble “Mr. President” as the official honorific for his office, or Washington’s subtle and reserved demeanor which continues to cast him as an enigmatic, yet inspiring figure in our history. And while the creation of our national precedents were important, this was also a time of crisis. We had won a moral and military victory and won the right to establish our own nation, and James Madison had led the founders back to the drawing board to draft the Constitution, but we were not out of the woods just yet. The war had cost the colonies a pretty penny, and in their new arrangement bound together under the Constitution the federal government would need to find a way to settle these accounts.
Alexander Hamilton made it his first priority to come up with a plan for America’s debt. As it stood, the federal government actually owed nothing; individual states had taken on obligations to foreign countries as well as the soldiers who had been paid in I.O.U.’s. Hamilton, who had argued in The Federalist Papers for a strong federal government, proposed a plan in which the federal government would assume all of the state debts. His plan was rooted in placing more power in the federal government, while also eliminating the variances in the debt levels of the states. Hamilton worried that if states owed different amounts, which was very much the case, they would have different tax rates and people would flock from high tax states to low tax states. For the Constitution and the new federal system to prevail, there would need to be a strong bond between the states with no resentment or discord. A national debt would bind the states together under this new governmental model.
Hamilton’s plan, which was submitted to Congress as his first Report on Public Credit, faced strong opposition from a number of key figures both in and out of Congress. James Madison, who had been a strong Hamilton ally during the Constitutional Convention and with whom Hamilton had co-authored The Federalist Papers, strongly objected to the assumption plan. He joined forces with Thomas Jefferson, a fellow Virginian and the Secretary of State, to oppose it. They viewed the plan as a power grab for the federal government, which it most certainly was, and also objected to the idea of the nation being founded under a specter of debt. The future of the country was uncertain as-is, and the thought of plunging it into an instant and overwhelming obligation could only be a step in the wrong direction.
Madison and Jefferson opposed the assumption plan for another, more practical reason. With the federal government assuming the debts, the remaining burden would be spread equally among the taxpayers of the entire country. This would essentially reward the states that had been slow to pay their debts, and punish the taxpayers of the states that had dispensed with their obligation. Virginia, home to Jefferson and Madison, belonged to the latter group. Additionally, much of the outstanding debts, especially the I.O.U.’s owed to soldiers, had been bought up by speculators at a huge discount. These speculators would now profit when the debt was repaid at face value, something honest men like Jefferson and Madison found despicable. Here we see the beginnings of the Main Street vs. Wall Street debate in America, all the way back in 1790.
The assumption issue was mired in stalemate, with the stubborn Hamilton refusing to compromise his plan in the face of the opposition led by Madison. The issue came to a head when the two men met over dinner at Thomas Jefferson’s house on Maiden Lane in New York City, the temporary capital of the United States. They struck a deal, later dubbed the Compromise of 1790, that would change the face of the nation. Madison would throw his support behind an unadulterated version of Hamilton’s assumption plan, and in exchange Hamilton would rally his allies in Congress to name a permanent capital somewhere on the Potomac River. Hamilton, an adopted New Yorker, had hoped to keep the capital in the city permanently, but was willing to acquiesce to a southern seat of power in exchange for this crucial debt deal. The deal was struck and both men held up their ends of the bargain.
The capital soon moved south, and the federal government assumed the state debts and followed Hamilton's plan for paying them down. While Hamilton's dinnertime deal was one of the hallmarks of his time as Secretary of the Treasury, his accomplishments are many. He set his sights on establishing financial stability and standards and was responsible for the inception of the first National Bank as well as the U.S. Mint. While he was generally liked by Washington, his stubbornness and confrontational style of politicking afforded him a growing list of political adversaries, one of whom was Aaron Burr, the man who would shoot Hamilton dead atop a Weehawken bluff. Regardless of how his career ended, Hamilton's contributions to early American finances and politics were inestimably important in setting this country on a solid footing and a path towards success.
