Financial History Issue 121 (Spring 2017) | Page 29

the difference? Would not the same dollar
amount of taxes be collected? And what
difference does five years make?
The issue was one of having definite
security. In addition to other objections,
Hamilton had the following to say when
writing to New York Governor George
Clinton about the plan later that May:
For want of an adequate security
[a certain source of funds], the evi-
dences of the public debt will not be
transferrable for anything like their
value — that this not admitting an
incorporation of the creditors in the
nature of banks [allowing them to use
bonds as capital for bank stock] will
deprive the public of the benefit of an
increased circulation, and of course
will disable the people from paying the
taxes for want of a sufficient medium.
Hamilton’s statement is remarkable. It
was not a simple matter of obtaining taxes
to collect money to pay the debt, but the
financial system overall had to be kept in
mind: To collect more taxes required a suf-
ficient circulation and stable system of paper
credit; a stable currency required a proper
way to capitalize banks. But there was not
enough specie to capitalize banks; therefore,
the government needed to turn US debt
into valuable securities equal to money. The
latter was not possible unless the debt was
funded, requiring an import duty that was
broad enough, dependable and coextensive
in time with the duration of the debt.
The quote from Hamilton is also excit-
ing because it shows the point of concep-
tual transition from the 1781 design of the
Bank of North America to the 1791 Bank
of the United States and other state banks
in the 1790s: the specie basis of the former
limited its capital size, while the design of
the latter recognized the importance of
government securities for banking capital
and reserve assets.
Though he voted against it, Congress
tasked Hamilton in April to co-write an
explanation of the plan to the states with
Madison and Oliver Ellsworth. More ele-
ments of his 1790 credit plan can be found
in the following points of their argument:
• That providing for paying the inter-
est on the debt would enable creditors
(buyers of the government debt and
receivers of debt certificates for pay-
ment) to “transfer their stock at its full
value,” for trade purposes;
• That the “capital of the domestic debt,”
which bore an interest of 6% could be
“canceled by other loans” obtained at
a lower interest; in other words, they
proposed refinancing the debt for a bet-
ter rate.
• That it would be a mistake to discrimi-
nate amongst the creditors, whether
they were French or Dutch, soldiers,
domestic lenders or those who had
purchased the debt certificates from the
original creditors.
All three of these were explicit points
of Hamilton’s future credit report of 1790.
The last is quite interesting since Madison
became the chief opponent in Congress of
Hamilton’s 1790 plan, objecting that it did
not discriminate amongst the creditors to
be paid back.
The April 1783 tax plan never went into
operation because the states did not all
approve it; New York was still objecting to
congressional taxation power in 1787.
The Depression of the 1780s
In 1784, a deep post-war depression set in.
It was caused in part by a large negative
trade balance that caused merchants to
withdraw specie from the Bank of North
America to pay for imports. Other fac-
tors included speculative trading, credit
contraction, interest rate hikes, lack of
war demand, government crowding out
of Bank of North America credit due to
war debts and Britain closing its ports to
American ships in the West Indies.
Increases in direct taxes by the states after
the war to pay off state debts increased five
to 10 times. These taxes became unbearable
as farmers had little specie. The dramatic,
increasing weight of direct taxation under
conditions of depression led to farmers’
revolts, movements and legislation for
debt and tax relief, depreciating state cur-
rencies and reduced property values.
Congress went broke. Morris had to
begin postponing interest payments on
the debt in 1784, marking the beginning
of their steady decline in value. The Con-
gress then collected only 20% of what it
requested in 1785 and only 2% in 1786. In
1787, it would be insolvent and unable to
pay the first principal payments due to
their foreign creditors.
Hamilton’s 1790 Credit Plan
This situation created the climate for the
Constitutional Convention, for which
taxation, debt and currency reform were
major motivators. Consequently, in his
January 1790 report to Congress on Sup-
porting the Public Credit, Hamilton, then
Treasury Secretary, combined these issues
into one package.
Hamilton devised his plan at a time
when the debts of the Congress, both for-
eign and domestic, were unpayable with
existing revenues, as were the debts of
the state governments. Debt certificates
were trading for a small fraction of their
original value. As he had first explained in
1782–1783, Hamilton’s solution was to refi-
nance and fund the debt. This was made
possible by his pledge that the government
would pay all debts to all creditors at face
value.
» continued on page 39
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