Hamilton's Economic Bailout

In light of President Obama's recent address to Congress regarding the $750 billion plus economic stimulus package, I thought it might be fun to discuss America's first "economic bailout."

As we all know, the eight-year war for American independence with Great Britain was extremely costly. At the war's conclusion, the thirteen separate states had each incurred a tremendous debt, due to the tremendous economic burden brought on by the revolution itself. According to Alexander Hamilton, the nation's first Secretary of the Treasury, the total debt of the United States was a whopping $77.1 million (or roughly $750 billion by today's standards). Of this, $11.7 million was owed to foreign governments, $40,4 million was the result of domestic debt, and $25 million the result of war expenditures of the various states (Ellis, Founding Brothers, 55). As a result, each state's credit was shot leaving them with little credibility on the international stage.

It was under these circumstances that Alexander Hamilton proposed a "bailout" of sorts. Under his plan of assumption, Hamilton suggested that the nation's legitimacy on the international market might be improved if the federal government were to assume the entire debs of the various states. Not only would his plan call for a radical new concept in terms of the federal government's scope and responsibility, but it would remove a measure of state sovereignty when it came to economics.

As could be expected, not everyone was happy with the deal. Most opponents of Hamilton's plan were furious over the fact that Hamilton proposed to pay off at face value all of the war bonds, which had not only been purchased by the masses, but had been used as a means of payment to thousands of veterans of the war. What infuriated these opponents was the fact that the war bonds, which had become virtually worthless, had been sold by the masses to greedy speculators (many who were friends of Hamilton) for a fraction of their original worth. Once Hamilton proposed to pay off the bonds at face value, these speculators stood to make a fortune off of what had once been a worthless bond.

The anger over the war bond saga was evident across the nation. In a letter to James Madison, Dr. Benjamin Rush wrote the following, which captures just how polarizing and upsetting Hamilton's plan had become:

Never have I heard more rage expressed against the Oppressors of our country during the late War than I daily hear against the men who...are to reap all the benefits of the revolution, at the expense of the greatest part of the Virtue & property that purchased it.

James Madison and his Virginian comrade, Thomas Jefferson, felt the same. The idea of subjugating the economic sovereignty of the states to the federal government seemed like a violation of everything the Revolution had stood for.

To make a long story short, Hamilton's economic plan of assumption was finally supported by Madison, Jefferson and other influential Virginians, who had originally opposed it, in exchange for the nation's capital to be built on the Potomac. In a historical compromise, Hamilton conceded the location of the federal capital to his Virginian opponents, in exchange for their support of his economic plan. Simply put, the compromise killed two birds with one stone.

Historians have, for the most part, praised Hamilton's economic plan as a stroke of brilliance. The plan delivered the infant United States from the brink of economic turmoil and gave the federal government more centralized control over the economic future of the nation. The economic "bailout" of the states eliminated a large amount of the economic tension between the smaller, more vulnerable states and the larger juggernaut states like Virginia, who had a virtual monopoly on American commerce. By placing the economic future of the nation in the hands of the federal government, Hamilton foreshadowed the often-repeated debate in America between a powerful, centralized union and the independent sovereignty of the states.