George Washington's Presidency – The Public Debt
Alexander Hamilton’s Financial Program Becomes Source of Contention
Aug 25, 2009
In 1789, when George Washington became president, America’s financial position was dire, perhaps the worst in its history to date. The Federal debt of the nation just starting anew was over $50 million. Foreign powers, principally the French and the Dutch, held $11 million, with the rest owed to its own citizens, mainly soldiers and farmers who had contributed to the war effort.
Lack of Confidence in US Debt Securities
The Dutch were concerned that the American debt it held would become worthless, so from time to time they provided some cash to prop up the price. Debt held by Americans was bought and sold in a secondary market at a deep discount, sometimes as low as ten percent of face value.
The mere change from the Articles of Confederation to the Constitution boosted both confidence and the underlying value of the debt, but Washington had to figure out how to pay off a debt that was thirty times anticipated annual Federal revenue.
With the future of the US hanging on successful handling of the debt, and with America having immense economic potential, what was needed was the right balance of taxation, debt service, and commercial regulation. Washington understood none of this, so he turned to his young aide-de-camp from the Revolutionary War, Alexander Hamilton.
Hamilton’s Financial Genius Resulted in a Workable National Plan
Hamilton went straight to work on the new nation’s financial problems. Some in the government had already suggested that the United States should repudiate the debt in whole or in part, including a convoluted system that would see initial holders of the debt—mainly the soldiers and farmers—paid the face amount and speculators paid market price, the difference going to the original holders.
Hamilton did not agree; he believed the US should stand by its debt and in so doing earn trust and respect at home and abroad. His plan was to “monetize the debt.” Since he knew it could not be paid off quickly, and a constant state of currency shortage existed in the nation, certificates of Federal debt could serve as a kind of surrogate currency. His plan included these steps.
- Devote a regular source of revenue to paying interest on the debt. This, he hoped, would stabilize the value of debt certificates, which would allow them to circulate like money.
- Negotiate interest rate on all debt, which varied to as high as 8 percent, to a uniform rate of 4 percent.
- Fund interest payments only on debts that had 4 percent interest, as an inducement to renegotiate.
- Raise customs duties on imported tea, coffee, and alcohol.
- Enact an excise tax on domestically produced spirits.
- Create a “sinking fund,” based on the British model, which would receive any excess revenue to use for two purposes: retire debt, and drive up the value of remaining debt.
- Create the Bank of the United States, to give the government easy access to financial markets.
Compromise Needed to Pass Hamilton’s Plan
Hamilton’s program had great promise, but could not be understood by the average citizen and it was opposed by many in Congress, especially those members most fearful of a strong central government and those who came from the agricultural South and West. Some of the drawbacks were:
- Driving up the trading value of debt seemed to favor speculators over ordinary citizens
- Tying debt service and reduction to commerce and the tariffs that would be collected seemed to favor the commercial North at the expense of other sections.
The plan went before Congress in stages between 1790 and 1792. Each separate item presented was fiercely debated. The plan was mostly passed, but not without changes made by Congress. One of the compromises needed to secure Southern votes was that the national capitol would be established in the South.
George Washington did little to devise or promote Hamilton’s plan, believing it was the prerogative of the legislative branch, not the executive. He was thus able to stay out of the sectional rivalry developing between the North and the other regions. In so doing, Washington preserved his political capital and established precedent in executive-legislative relations.
The Results of Hamilton’s Financial Plan
The years of the Washington presidency showed that Hamilton was right: his plan did all the things he wanted it to do. The price of debt securities stabilized. Tariffs on imports provided the revenue needed for debt service and liquidation. The Bank of the United States was a success. Washington had struck the right balance of neutrality in the debate while having the right person in place to devise a plan that would move the new nation forward.
Source:
The Presidency of George Washington by Jack D. Warren, Jr.; Mount Vernon Ladies Association, 2000
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