Financial History Issue 121 (Spring 2017) | Page 41

HOW MUCH DO YOU KNOW ABOUT FINANCIAL HISTORY? continued from page 27 The federal government would assume the debts of the states, amounting to $22 million, and add them to the domestic debt of $42 million. It would then inform holders of any old debt certificates bear- ing 6% interest that they could turn them in for new US certificates bearing a lower interest, averaging 4%, but having a guar- anteed payment from a permanent pledge of revenues from Congress. 3 Where were the revenues to come from? The Constitution had empowered Con- gress to create a tax system that could provide sufficient revenues without unduly burdening the public. Hamilton’s report called for more efficient, indirect consump- tion taxes using federally levied and col- lected import duties and excises to replace direct state taxation. Once Congress passed the report in three Acts from August 4-12, 1790, with these assured and pledged rev- enues for payment of interest, the value of the new funded public debt certificates increased rapidly, rising in value from $15 million to $45 million by the end of 1790. Congress effectively created a capital resource of liquid assets for the economy equal to the rising value of the debt, which traders would purchase with specie and bank notes, and for which lenders would readily issue credit. As Hamilton said in 1782, a new capital and medium of com- merce “equal to the whole amount of the domestic debt” could be created with the proper commitments in place. The assumption of state debts freed the states of the biggest part of their state budgets. Direct taxes were cut throughout the states by as much as 85%, on average, between 1785 and 1795. The Bank of the United States Hamilton’s funding system of 1790, fore- told almost a decade earlier, contributed to wide prosperity. But the factor that ensured the success of the new financial system was the Bank of the United States. In December 1790, Hamilton urged Con- gress to authorize private parties to put their assets in the form of newly-funded debt into a bank. Holders of the new gov- ernment debt certificates, he said, could turn them in to buy shares of the capital stock of the bank, as long as they included one dollar of specie for every three in debt. The bank provided a stable and suffi- cient currency to meet taxation needs, dis- counted US securities and bills of exchange, created a payment system in notes and deposit credit, allowed merchants to pay duties on credit and the government to pay its domestic debts in bank notes and deposit credit instead of specie, accelerated agriculture and industry with its credit and amplified the value of government deposits in loans. In the 1790s, many state banks also rose into place to facilitate growth. Trade and commerce rapidly expanded with the credit supply from the developing banking system. For example, the value of US exports doubled between 1790 and 1795, dramatically increasing tariff rev- enues for the Treasury. And the total ton- nage of US ships entering US ports with cargo increased by 63%. Hamilton’s two initiatives, creating a funded debt and establishing a sound banking system based upon it, pulled the economy out of the long depression of the 1780s, established the credibility of Amer- ica’s finances and created the basis for a strong financial system. Hamilton’s early statements while serving in the Continental Congress provide important hints as to how he came to these financial initiatives.  This article draws from Chapters 3–7 of the author’s book, The Challenge of Credit Supply: American Problems and Solutions 1650–1950. For further detail on the perio d and events described, the reader is encouraged to obtain a copy on Amazon or Vernon Press. Notes 1. January 9, 1790, “Report Relative to a Provision for the Support of Public Credit,” and his December 13, 1790, “Second Report on the Further Provi- sion Necessary for Establishing Public Credit (Report on a National Bank).” 2. Hamilton had engaged with Morris and others about bank plans from 1779–1781. 3. Hamilton also instructed Congress to take out a new loan for the amount of the foreign debt, $12 million, to pay interest in arrears and pay off the prin- cipal in installments. Duties secured the interest payments on the new loan. TRIVIA QUIZ  1. What city housed the only branch of the US Mint located outside the United States?  2. How does the image on the $100 Liberty gold coin issued on April 6, 2017 differ from that on earlier Liberty coin issues?  3. What bank was founded in Washington, DC to serve the needs of freed slaves following the Civil War?  4. Who was the first Treasurer of the United States?  5. What small financial newspaper beat its giant newspaper rivals in exposing the “Keating Five” scandal in the 1980s?  6. In what year was US paper money of its current size placed into circulation?  7. Of the 15 US Treasurers appointed since 1949, how many have been women?  8. What CEO of AIG returned the insurance giant to profitability following the Financial Crisis of 2008?  9. What was the first de facto central bank in the Unites States? 10. The Museum is located on the corner of Wall and William Streets. William Street is named after William Beekman, who traveled to New York on the same ship as Peter Stuyvesant. What was the name of that ship? 1. Manila, Philippines  2. Lady Liberty is portrayed as an African-American woman   3. The Freedman’s Bank  4. Michael Hillegas  5. National Thrift News  6. 1929  7. 15 (all of them)  8. Bob Benmosche  9. The Bank of North America  10. The Princess Amelia Alexander Hamilton’s Defining Moments  |  Spring 2017  |  FINANCIAL HISTORY  39