The First Report on Public Credit, January 1790 (Hamilton 60)

Tiptoeing on eggshells across a minefield: a non-economist grapples with Hamilton’s major works as secretary of the Treasury.

This week’s post includes an outline of Hamilton’s First Report on Public Credit, submitted to Congress in January 1790. The next two posts will consist largely of outlines of Hamilton’s four other major writings as secretary of the Treasury. The introduction to the trilogy (killer to write!) takes up the first half of this post.

Why, you ask, am I diving so deeply into Hamilton’s financial proposals? Because I’ve wanted for years to figure out where Hamilton draws the line between politics and economics. I’m a fan of laissez-faire capitalism for the reasons first explained by Ayn Rand – because to survive long term, men must be free to think, to act on their own judgment, and to enjoy or suffer the consequences. The government’s role is to defend the rights of individuals (life, liberty, the pursuit of happiness, property: here and here and here). What I want to know is: Did Hamilton think the government should do more than that? If so, in what areas, and what reasons did he give for doing it?

On this matter, secondary sources aren’t very satisfying, because scholars don’t always use terms precisely. For instance, Richard Sylla and Ron Chernow state that Hamilton designed a central bank; that would, by my standards, be a Very Bad Thing; but the modern “central bank” is quite a different creature from the “national bank” that Hamilton proposed. More on that coming up in Hamilton Musical 61.

Caveat: To keep this post manageable, I’ve narrowed my focus to sketching Hamilton’s political and economic context, and outlining what he advocated in his official writings as secretary of the Treasury. If you’re hoping for a condemnation of the modern uses and abuses of  “implied powers,” the “general welfare,” and the “necessary and proper” clauses, you might as well peel off now. I don’t think Hamilton, or anyone of his era, could have predicted what happened when an FDR rather than a George Washington was elected – with all that implies about the changes in the philosophy of American intellectuals and in the sense of life of most Americans.

But we can hold Hamilton responsible for what he proposed in his major writings as secretary of the Treasury, and for much of the economic legislation passed during his tenure. He was the very first secretary of the Treasury. He had no precedents to restrict him. His actions were restricted only by his own premises, by the Constitution, and by what he could persuade Congress was appropriate and feasible.


About those eggshells and minefields …

  1. I’m not an economist, and I tend to trip over economic jargon. So I translate it into terms I can understand. For example, I consistently refer to the U.S. Revolutionary War debt as “government IOUs”. Since the securities market was created by Hamilton’s programs, it confuses the hell out of me to call the IOUs “government securities” or “public securities” (as many writers do). But (not an economist) it’s quite possible I’ve screwed up some of the “translations” of economic terms.
  2. To judge Hamilton accurately in his context, I’d need to read (at minimum) John Locke, some Physiocrats, David Hume, and Adam Smith. What I really need is an outline for the Second Treatise on Government, the Wealth of Nations, etc., of the sort I’m giving below for Hamilton’s First Report on Public Credit. Lacking that background, it behooves me to be very careful what innovations (good and bad) I attribute to Hamilton. The man read widely and voraciously, and had a helluva retentive memory.


Before I launch into an outline of the First Report on Public Credit, a couple more preliminaries:

  • A chronology of major events in Hamilton’s life, 1789-1792, including his most important writings as secretary of the Treasury to Congress and to President Washington
  • A summary of the issues most immediately relevant to the First Report
  • A summary of what I see as Hamilton’s premises. I’ve put this before rather than after the outline of the First Report, so you can consider whether you agree as you read the outline.

Chronology of Hamilton’s financial program, 1789-1792

  • 1789, September 11: Hamilton takes office as secretary of the Treasury
  • 1790, January 9: Hamilton submits to Congress the Report Relative to a Provision for the Support of Public Credit, referred to here as the First Report on Public Credit, re paying off U.S. debts and funding the ongoing operation of the government
  • 1790, August: Congress passes the debt and funding programs, including assumption of states’ debts (in return for shifting the U.S. capital from New York to Philadelphia and then to the future site of Washington, D.C.)
  • 1790, December 13: Hamilton submits to Congress the Second Report on the Further Provision Necessary for Establishing Public Credit, referred to in these posts as Report on a National Bank
  • 1790-1792: Ongoing disputes with Jefferson over relations with the French
  • 1791, January 28: Hamilton submits to Congress the Report on the Establishment of a Mint
  • 1791, February 23: Hamilton submits to Washington An Opinion on the Contitutionality of an Act to Establish a Bank
  • 1791, July: Stock of the Bank of the United States sells out within a few hours of going on sale
  • 1791, July: Hamilton meets Maria Reynolds
  • 1791, July: Hamilton travels to Paterson, New Jersey, for a meeting of the Society for Establishing Useful Manufactures
  • 1791, December 5: Hamilton submits to Congress the Report on the Subject of Manufacturesthe final major step in Hamilton’s financial program
  • 1791, December 15: James Reynolds sends first blackmail letter to Hamilton
  • 1792, March-April: William Duer’s attempt to corner the market on 6% government bonds results in the Panic of 1792, which leads directly to the signing of the Buttonwood Agreement (precursor to the New York Stock Exchange) on May 17, 1792
  • 1792, December 15: Hamilton meets with Muhlenberg, Monroe and Venable regarding the Reynolds affair

Context of the First Report

When the Revolutionary War began, neither the new nation nor its constituent states had money or income. American citizens were mostly farmers who barely made ends meet. The War was waged partly with paper money printed by the national government (“Continentals”) and the states. Such paper quickly lost its value. The federal government also borrowed large sums from the Dutch and the French. In addition, the state and national governments handed out thousands of IOUs to soldiers, merchants, farmers, and others whose goods and services were needed for the war effort.

Since the Confederation government (1781-1789) had no ability to tax, it was unable to pay off any of this enormous debt. Prospects for doing so in the future were almost nil. By the late 1780s, many of those who held government IOUs were selling them to third parties for whatever meager price they would fetch. (See Henry Lee’s letter in Hamilton Musical 59.)

Hamilton’s premises relevant to the First Report

Government debt

Hamilton grew up in the world of international business. He was convinced that the U.S. government – like a business – needed sound credit. That required paying off its past debts as soon as possible. But while the staggering debt existed, Hamilton considered it useful in two ways.

  1. Paying the debt off as a nation would help cement the union of the states.
  2. All those government IOUs could be exchanged like money, if their value became stable. (See next section.)

Despite the short-term benefits, Hamilton wanted to pay the debt off as quickly as possible, short of crippling the economy by high taxes. He also argued that in the future, the government should never borrow unless it arranged, at the same time, the means to pay the debt off. See VI.E.2 below, and Hamilton’s letter to Rufus King of 2/21/1795, where Hamilton states that the thought of Congress incurring a debt without establishing at the same time the means to pay it off

haunts me every step I take, and afflicts me more than I can express … To see the character of the Government and the country so sported with, exposed to so indelible a blot puts my heart to the Torture. (Letter 2/21/1795, more here)

Money in circulation

A lack of money – a universally accepted medium of exchange – would not be a severe problem in a nation of subsistence farmers. Who needs money if you produce what you consume, and need nothing else from nobody? But Hamilton believed that if the United States was to pay off its debt and recover its credit, and if Americans were to prosper, then they must engage in manufacturing and trade as well as agriculture.

Manufacturing and trade require money in circulation.  Thinking this through in my non-economical (non-economistical?) way: suppose Tom is saving to build a factory, and puts every coin he can spare under his mattress. If there’s little money in circulation, then there won’t be enough coins left for Dick to save up for a tavern and Harry to save up for a ship. The lack of money in circulation throttles all sorts of profitable enterprises.

By the time Washington was inaugurated in April 1789, money was in very short supply in the United States. Government-printed paper from the Revolutionary War was worthless. Only a very limited number of foreign gold and silver coins were circulating. Coining more wasn’t an option: the thirteen original states had no gold or silver mines.

Hamilton conceived three ways to increase the amount of money in circulation. All were part of his financial program as secretary of the Treasury.

  1. Increase trade so that more money entered the U.S. than left it. That would mean more agriculture, more industry. (See next week’s Hamilton Musical 61, Report on a National Bank II.B.6: “A nation that has no mines of its own …”)
  2. Bank notes. Banks could issue notes based on the gold and silver they had on deposit. If the bank’s reputation was sound, such notes would be as trustworthy as gold and silver, and the bank could issue more notes than it had gold and silver. (See next week’s Hamilton Musical 61, outline of Report on a National Bank, II.A.)
  3. Government IOUs. If the government arranges to pay off its debt, the value of the IOUs will be stable. Then the IOUs can be exchanged like money. By the time the debt is repaid in 20 years, increased trade will have brought more money into circulation in the United States. (See below, III.B.)

Why didn’t Hamilton just have the government print money and put it into circulation? Because he thought that was a very bad idea. In next week’s Hamilton Musical 61, in the outline of the Report on a National Bank, see II.C.2.a:

Paper emissions … are so liable to abuse … that the wisdom of the Government will be shewn in never trusting itself with the use of so seducing and dangerous an expedient.

Hamilton and big government

Here’s some food for thought over this and the next two posts. Hamilton is often praised (or condemned) as a proponent of Big Government. I’ve seen people who advocate Big Government because they lusted after power. I’ve seen people who advocate it because they believe (or pretend to believe) that men can’t take care of themselves, and that loss of some freedom is a fair exchange for having a benevolent, all-knowing, paternalistic government protect men from their own vices and follies.

I haven’t seen indications of either of those motives in the thousands of pages by Hamilton that I’ve read, or the thousands more pages that I’ve read about him. If you can find a paragraph in his writings that shows Hamilton as a power-luster or as a fan of paternalistic government, I’d be interested to read it.

Hamilton submits his First Report

Hamilton submitted his First Report on Public Credit to Congress on January 9, 1790. It’s one of the most important documents that he produced as secretary of the Treasury – the first step in his financial system. He wrote its 40,000 words (the length of a short novel) in three months. That’s pretty remarkable, given the scope of the material covered and the fact that every draft had to be hand copied.

The House of Representatives decided that Hamilton should not present the Report in person, even though that meant he could not answer any questions the Congressmen might have. (See Records of Debates in the House of Representatives on 1/9/1789, here and here.) Instead, the Report was printed for distribution to the members of the House (1/14/1789, here).

Below, I’ve boiled the Report down to a 2,000-word outline, including excerpts of the spiffy bits. The full Report is available via the Founders Archives. At the beginning of each major section, I’ve given you enough words so that if you want to read more of Hamilton than I’ve included, you can easily find the section in Founders Archives. The Founders Archive introduction discusses Hamilton’s sources and influences.

Deep breath. (Eggshells, minefields.) Here we go.

I. Introduction to the First Report

The House of Representatives resolved 9/21/1789 (ten days after Hamilton took office as secretary of the Treasury): “That an adequate provision for the support of the Public Credit, is a matter of high importance to the honor and prosperity of the United States.” They asked Hamilton to present a plan on how to handle debt.

Hamilton concurs that America’s debts must be repaid, so that its credit is restored, because 1) unexpected circumstances that require borrowing are bound to occur; 2) loans in times of war are indispensable; and 3) the U.S. has few wealthy individuals from whom to borrow.

II. Maintaining good credit [Begins: “If the maintenance …”]

A. Since borrowing will be necessary, the U.S. must be able to do it on good terms.

  • How does one maintain credit? “By good faith, by a punctual performance of contracts.”
  • Good faith is a moral obligation, especially for the U.S., due to

the nature of the debt of the United States. It was the price of liberty. The faith of American has been repeatedly pledged for it, and with solemnities, that give peculiar force to the obligation.

B. People expect the new government (under the Constitution) to pay. That’s why the value of government IOUs has been rising steadily.

III. Why should we pay off the debt? [Begins: “It cannot but merit”]

A. Obvious reasons

The obvious reasons for repaying the debt are: it will promote confidence in the U.S.; it will make America respectable; it is just; it will restore landed property to its true value; it will give new resources to agriculture and commerce; it will cement the union of the states; it will add to their security against foreign attacks; and it will establish public order.

B. Less obvious reasons

If government IOUs have a reliable value, they can circulate in place of gold and silver. That benefits merchants, manufacturers, and farmers. It also lowers interest rates, because more money in circulation lowers the demand for it. Hamilton notes:

  • Government IOUs only have reliable value if the government has a plan to pay off its debt.
  • If the value of the IOUs fluctuates because no one’s sure they’ll be paid off, then the IOUs will be attractive only to speculators, and their purchase will divert money from useful purposes.

C. Land value

The value of land has fallen 25-50% since the Revolution, largely due to the scarcity of money. If there were more money in circulation, land values would rise.

D. Time frame

The effects of setting up funding for the debt might not be instantaneous, but perhaps they will come sooner than expected: people have already started buying the government IOUs issued during the War, and their price has been rising.

IV. Preliminary issues regarding payment of the debt [Begins: “Having now taken”]

Everyone agrees that America’s foreign debt must be paid in full. Regarding the domestic debt, we have to deal with 3 issues.

A. Discrimination [Begins: “The Secretary has too much deference”]

Some argue that we should pay the full amount to the original holders of the government IOUs, but pay less to those who purchased the IOUs from the original owners. [An example of discrimination: a soldier who was given an IOU instead of a paycheck and kept the IOU until 1790 would be paid in full. To a man who bought the soldier’s  IOU at 10% of the face value, because the soldier thought it was worthless paper, the government would pay much less than the value of the IOU. -DD] Hamilton says discrimination 1) is unjust, 2) would cause future government loans to come at a higher rate of interest [because lenders wouldn’t trust that they’d be repaid in full], and 3) negates promises made by the Confederation Congress and the Constitution. [Hamilton discusses discrimination at great length in a letter to Washington of 5/28/1790. His stance here is part of the reason he’s credited with founding the securities markets in the U.S.]

[Discrimination] is inconsistent with justice, because in the first place, it is a breach of contract; in violation of the rights of a fair purchaser.

The nature of the contract in its origin, is, that the public will pay the sum expressed in the security, to the first holder, or his assignee. The intent, in making the security assignable, is, that the proprietor may be able to make use of his property, by selling it for as much as it may be worth in the market, and that the buyer may be safe in the purchase.

Every buyer therefore stands exactly in the place of the seller, has the same right with him to the identical sum expressed in the security, and having acquired that right, by fair purchase, and in conformity to the original agreement and intention of the government, his claim cannot be disputed, without manifest injustice.

That he is to be considered as a fair purchaser, results from this: Whatever necessity the seller may have been under, was occasioned by the government, in not making a proper provision for its debts. The buyer had no agency in it, and therefore ought not to suffer. He is not even chargeable with having taken an undue advantage. He paid what the commodity was worth in the market, and took the risks of reimbursement upon himself. He of course gave a fair equivalent, and ought to reap the benefit of his hazard; a hazard which was far from inconsiderable, and which, perhaps, turned on little less than a revolution in government.

That the case of those, who parted with their securities [IOUs] from necessity, is a hard one, cannot be denied. But whatever complaint of injury, or claim of redress, they may have, respects the government solely.

B. Assumption [Begins: “The Secretary, after mature reflection on this point, entertains”]

The federal government should undertake to pay debts incurred by the states during the Revolutionary War.

[I]t appears difficult to conceive a good reason, why the expences for the particular defence of a part in a common war, should not be a common charge, as well as those incurred professedly for the general defence. The defence of each part is that of the whole; and unless all the expenditures are brought into a common mass, the tendency must be, to add, to the calamities suffered, by being the most exposed to the ravages of war, an increase of burthens.

Why we should assume states’ debts:

  1. The amount to be paid doesn’t change whether it’s paid by the feds or the states; and it will be easier to take care of it with one plan, rather than having 13 states compete for tax revenues to pay off their debts
  2. If all the public creditors are being paid by the feds, they’ll unite in support of the government’s fiscal arrangements, rather than pulling apart as each scrabbled to pay its own debts.
  3. If the states’ debts are paid by the states, their creditors will suffer if the state can’t find sources of revenue. Customs duties, the largest source of government revenue, are reserved for use of the feds.
  4. Both state and federal debts were contracted in the fight for liberty: both must be paid.
  5. One of the objections to assumption is arranging an equitable settlement re states that have already paid off their debts. Hamilton suggests a complex formula to make adjustments.

C. Paying principal vs. interest [Begins: “The only discussion of a preliminary kind, which remains”]

Some argue that only the principal of the loans should be repaid. Hamilton argues that we should pay the principal PLUS arrears in interest. The fact that it inconveniences us doesn’t negate the fact that we promised to pay.

With regard to the arrears of interest … these are now due, and those to whom they are due, have a right to claim immediate payment. To say, that it would be impracticable to comply, would not vary the nature of the right.

V. What do we owe and how shall we arrange payments? [Begins: “The next enquiry, in order”]

A. What do we owe?

  1. The federal debt consists of foreign principal, interest, and arrears PLUS domestic debt that’s been paid off PLUS domestic debt that has not been paid off, for a total of $54 million.
  2. The states’ debts: total is uncertain. Hamilton estimates it at $25 million plus $4 million in arrears of interest.

B. Providing for payments on the whole debt at its current rate of interest would require very high taxes. Hamilton hopes creditors will agree to modification. He proposes paying off the old debt by selling new government IOUs. The purchasers can choose to be repaid with a combination of land and annuities, and with varying interest rates and terms.

[T]he Secretary thinks it advisable, to hold out various propositions, all of them compatible with the public interest, because it is, in his opinion, of the greatest consequence, that the debt should, with the consent of the creditors, be remoulded into such a shape, as will bring the expenditure of the nation to a level with its income. ’Till this shall be accomplished, the finances of the United States will never wear a proper countenance. Arrears of interest, continually accruing, will be as continual a monument, either of inability, or of ill faith; and will not cease to have an evil influence on public credit. In nothing are appearances of greater moment, than in whatever regards credit. Opinion is the soul of it, and this is affected by appearances, as well as realities. By offering an option to the creditors, between a number of plans, the change meditated will be more likely to be accomplished. Different tempers will be governed by different views of the subject.

C. The interest on the new debt will be paid quarterly, to keep money circulating [i.e., so government isn’t amassing money in its accounts that could be used by private individuals for economically beneficial purposes].

VI. Where will the money come from to repay this new debt? [Begins: “The remaining part”]

A. Total needed

Hamilton calculates how much income is needed to pay the interest on the foreign and domestic debt, plus the government’s annual operating expenses.

B. Foreign payments

Hamilton argues that the U.S. should arrange to repay foreign debts via a foreign loan [i.e., consolidate the loans and borrow the money to repay them at a lower rate of interest], because the U.S. can’t afford to drain its meager supply of cash by paying huge sums right now. The U.S. is in a very good situation to borrow money from European lenders, because it’s much less subject to wars than any European country.

C. Sources of revenues

1. The U.S. currently collects duties on imports when they arrive at U.S. ports, plus tonnage fees [i.e., fees that vary according to the size and nationality of the ships carrying the imports].

2. The government should impose new taxes on wines, spirits, tea, and coffee: these are luxuries rather than necessities. Most are produced abroad, and some (such as alcohol) are “pernicious.” [N.B.: I disagree with Hamilton here: legislators shouldn’t be taxing any item on grounds that it discourages behavior that they consider immoral. -DD]

  • The best way to collect these duties is upon arrival in U.S., and also by scrutinizing those who deal in such items.
  • Current duties on such articles should cease as of 5/31/1790, and new ones should be imposed that depend (for spirits) on the source of the materials, place of manufacture, and proof. Hamilton attaches a draft of a bill setting out his proposed rates. The bill includes provisions intended to ensure that revenue officers can’t abuse their positions.

D. Which revenue goes toward which debts?

Hamilton sets out the order of priority.

E. Additional revenue

  1. Money from the postal service will be put into a sinking fund. [A sinking fund is a fund apart from the government’s general budget, used only to pay off debt.] The sinking fund is to be administered by a board of commissioners including the vice president and the speaker of the House of Representatives. They will use this fund to purchase government IOUs or to pay off the principal of the debt.
  2. On the national debt. [I don’t know why this is right here, but it’s crucial to Hamilton’s long-term fiscal policy, and often overlooked by Thomas Jefferson and others who think Hamilton favors perpetual debt.]

Persuaded as the Secretary is, that the proper funding of the present debt, will render it a national blessing: Yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality, and liable to dangerous abuse,—that he ardently wishes to see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal. And he presumes, that it is difficult to conceive a situation, in which there may not be an adherence to the maxim. At least he feels an unfeigned solicitude, that this may be attempted by the United States, and that they may commence their measures for the establishment of credit, with the observance of it.

3. The same commissioners who oversee the sinking fund from post-office revenues may also borrow up to $12 million.

  • This fund is for a) paying interest and installments on foreign debt through the end of 1790; b) making up any deficiency in funds for paying interest on the domestic debt; c) refinancing foreign debt that has more than 5% interest; d) purchasing public debt at the market price if it’s selling below its true value.
  • This fund is to be managed by a national bank, for which Hamilton will soon submit a plan. (See next week’s post, Hamilton Musical 61.)

VII. Steps to the assumption of states’ debts [Begins: “The Secretary now proceeds, in the last place”]

Hamilton offers a resolution to the House of Representatives for assuming the states’ debts, and gives details on making payments after they have been assumed.

VII. Conclusion [Begins: “Deeply impressed”]

Hamilton to Congress: Please get this debt plan enacted during this session of Congress!


  • Jefferson stated 9/9/1792, “I would wish the debt paid tomorrow; [Hamilton] wishes it never to be paid, but always to be a thing wherewith to corrupt and manage the legislature.” That’s part of a long, vehement letter to Washington in which Jefferson argues that the “internal dissensions” Washington lamented were all Hamilton’s fault.
  • For the heated Congressional debate over Hamilton’s plan, see Chernow, Hamiltonpp. 304-9 and 319-31.
  • Richard Salsman’s “America at Her Best is Hamiltonian” is a very good overview of Hamilton’s achievements. See The Objective Standard XII:1 (Spring 2017). I particularly like the formulation: “The question for Hamilton wasn’t whether government was ‘too big’ or ‘too small’ but whether it did the right things (uphold law and order, protect rights, practice fiscal integrity, provide for the national defense) or the wrong things (enable slavery, redistribute wealth, issue paper money, impose discriminatory tariffs, or engage in selfless wars). In Hamilton’s view, government must do the right things in big ways and mustn’t do the wrong things even in small ways.”
  • Richard Sylla’s “Hamilton and the Federalist Financial Revolution, 1789-1795” (New-York Journal of American History) was also very useful as an overview, although it includes frequent references to Hamilton’s “central bank.” In Sylla’s Alexander Hamilton: An Illustrated Biography, Chapter VII (on Hamilton’s tenure as secretary of the Treasury) was particularly useful for an overview.
  • I occasionally add comments based on these blog posts to the pages on the Hamilton Musical. Follow me @DianneDurante.
  • The usual disclaimer: This is the sixtieth in a series of posts on Hamilton: An American Musical My intro to this series is here. Other posts are available via the tag cloud at lower right. The ongoing “index” to these posts is my Kindle book, Alexander Hamilton: A Brief BiographyBottom line: these are unofficial musings, and you do not need them to enjoy the musical or the soundtrack.
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