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.
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
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.
1. What city housed the only branch
of the US Mint located outside the
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
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
7. Of the 15 US Treasurers appointed
since 1949, how many have been
8. What CEO of AIG returned the
insurance giant to profitability
following the Financial Crisis of
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
www.MoAF.org | Spring 2017 | FINANCIAL HISTORY 39