America’s First Financial Plan - dummies

By Steve Wiegand

Every country needs a sound financial plan (at least every successful country does), and it fell to Alexander Hamilton to devise one for America. The first thing he had to do was establish the new nation’s credit.

To do that, he had to clean up its existing debts, such as the $54 million the federal government owed foreign and domestic creditors. Hamilton proposed the debt be paid off in full, rather than at a discount as creditors had feared. Hamilton argued that if America didn’t make good on what it already owed, no one would want to lend it money in the future.

In addition, he proposed that the federal government also pay off about $21 million in debts the individual states had run up. The old debts would be paid off by issuing bonds. But states like Virginia, which had paid off much of its Revolutionary War debts, were peeved at the thought of the federal government picking up other states’ tabs and then sticking all U.S. residents with the bill.

So they engaged in a little horse-trading. Virginia withdrew its objections to the plan, and in return, Hamilton and the Washington administration agreed to locate the new federal district next door to Virginia on the Potomac. Whatever advantage Virginia thought that would give it has certainly evaporated by now.

Many members of Congress supported Hamilton’s plan to pay off the debts dollar for dollar, especially because many of them either held the old bonds or had snapped them up for next to nothing and stood to make enormous profits. Hamilton himself was accused of using his office to make money off the bonds, but if he was guilty, he didn’t do a very good job, because he died broke.

To raise money to pay off the bonds, the federal government established taxes, called tariffs, on goods imported into America. It also slapped a tax of 7 cents a gallon on whiskey, which was pretty steep considering whiskey in many of the southern and western states sold for only 25 cents a gallon.

Finally, Hamilton proposed a nationally chartered bank that would print paper money backed by the federal government and in which the government would be the minority stockholder and deposit its revenues. To be located in Philadelphia, the bank would be chartered for 21 years.

Jefferson howled that the whole idea would cripple state banks and was unconstitutional, but Hamilton, with the backing of Washington, prevailed. The bank’s stock sold out within four hours after going on sale.

Hamilton’s plan worked, in large part because the American economy kicked into high gear in the 1790s. Another war between France and England helped increase America’s share of the world market; trade in the West Indies that had been stunted by the Revolutionary War was revived; and industry, particularly in the North, began to develop. America, the new kid on the block, now had some change in its pockets.