This is an excerpt of the prologue to the book that I’m writing, which chronicles financial panics and crises in America that stretches from the modern era back to the nation’s founding…..
It was a fateful dinner. The young American Republic is no more than a decade old but already staring at its first crisis. Thomas Jefferson, the U.S. Secretary of State, brokered a dinner meeting between US Treasury Secretary Alexander Hamilton and Virginian leader James Madison. The trio were in a heated battle over the proper role of national government in resolving fundamental issues in the fledgling economy. Congressional lawmakers formed coalitions based on their view of what would be the optimal structure for America’s economic foundation.
Even at its founding, America is characterized by compromise, conflict, and crisis. The Republic was in a chaotic state coming out of the Revolutionary War. It was more like a loose collection of sovereign states, much less a perfect union. States were divided geographically and economically. The country had a $80 million debt, with a mix of foreign, domestic and state debts. Absent a credible repayment plan, the United States runs the risk of destroying its ability to borrow from creditors and undermining its obligation to pay the Continental Army. Yet, the national government was ill equipped to deal with the crisis.
The predecessor to the Constitution was The Articles of Confederation, an agreement among the 13 states, written against the backdrop of wartime urgency. There was a valid fear against a central government coming out of the War for Independence. The post-war document outlined America’s first government, but the temporary framework was missing a president and a court system. The only branch was the Continental Congress which wielded little power. Absent a federal government and a coherent national economic strategy, the thirteen states organized themselves around their own economic interests. They freely imposed tariffs on imports and exports to and from other states.
Making matters worse, economic security was inextricably linked with national security. During the War for Independence, Union troops starved and faced backlogs of unpaid compensation for their services. In December 1777, 11,000 Continental Army Troops made camp at Valley Forge. Washington’s troops were in a desolate situation, cold and starving. Washington petitioned the Congress for food, clothes and fresh supplies. Congress failed to act. Compounded by diseases like influenza and typhoid, 2,000 troops died.
Hamilton served as a Captain of the New York Independent Artillery Company during the first two years of the War. Washington enlisted Hamilton to his staff as a lieutenant-colonel thanks to his fine writing skills. This skill was tested in Valley Forge, as Hamilton joined other aides-de-camp to pen letters to governors and members of Congress, seeking help. On February 13th, 1778, Hamilton wrote to New York Governor George Clinton: “…exert yourself upon this occasion, our distress in infinite…Desertions have been immense and strong features of mutiny begin to show themselves…” (Chernow 2004)
To fund supplies for the Continental Army and national operations, the country scraped money from the states. With good reason, states were skeptical of sending funds to a dubious central authority. In an ill-attempt to fix financial woes, Congress printed money which rendered currency in the colonies near worthless and undermined public confidence in the currency and the government’s ability to respond.
Congress didn’t have the authority to raise revenue through taxation to fund a federal government. It was actually the preference of influential players such as Thomas Jefferson who believed in the vision of a pastoral America with individual liberty, land ownership, unfettered by government. Alexander Hamilton, then a New York delegate to the Continental Congress, held the opposite view. He saw the dangers of states pursuing their disparate interests that counteract national goals. He even warned George Washington and his superiors about this lack of unity but failed several times. At one point he asked to resign from his state public office to retreat into private life but Washington talked him out of it.
Valley Forge was a pivotal moment that solidified Alexander Hamilton’s view that without real political reform, the country would not have the institutions to foster economic stability. Without necessary reforms, the country could disintegrate into factioning states.
Hamilton’s fear would escalate a few years later. States were cash strapped from Revolutionary war debt. On June 17, 1783, while meeting at the Pennsylvania State House, Congress received a message from soldiers of the Continental Army stationed in Philadelphia that they are demanding backlog pay for their service during the War. Congress balked. In the next several days, soldiers from Lancaster, Pennsylvania, abandoned their posts to join with brothers in arm from the city barracks. United with 400 strong, they surrounded the State House and refused to let the Delegates leave without getting addressing their demands. Soldiers forged an insurgency to trap Congressional delegates in the halls of Philadelphia, including Hamilton. This became known as the Philadelphia Mutiny.
Hamilton would draw the hard lessons learned from the Philadelphia Mutiny to his duties as Treasury Secretary. He did not want the new country to start off on shaky foundations. He would formalized this proposal into a grand plan that everyone now knows as the Hamiltonian economics program. Approving this package is not an easy feat. A different post will cover the fateful dinner that drove the grand bargain of 1789.
Chernow, Ron. Alexander Hamilton. New York: Penguin, 2004. Print.
When George Washington became president, one of the most pressing issues was the nation’s crippling fiscal crisis. States racked up a great deal of debt from financing the war. Washington needed someone with the wits, political acumen, and deep knowledge of public finance. Hamilton was the man of the hour. After winning a landslide election, Washington rode to New York. On his way, Washington stopped in Philadelphia to see Robert Morriss, who was the superintendent of finance for the Continental Congress. In a concerned state, Washington asked Morriss: “What are we to do with this heavy debt?” Morriss responded: “There is but one man in the United States who can tell you; that is, Alexander Hamilton.”
On September 11, 1789, Washington appointed Hamilton Secretary of the U.S. Treasury after months of fighting with Congress on whether the nation’s finances should be in the hands of a
single person in the executive branch. It didn’t help that the Constitution doesn’t specify how the executive branch or departments ought to be organized. Hamilton was charged with coming up with a national economic plan in 120 days. Hamilton got to work knowing full well deep seated opposition from those who feared a strong government. There is an economic rationale for their skepticism.
Some states like Virginia have managed to pay off the debt early while other states have not. Alexander Hamilton wanted the new country to start off with a strong economic footing so he wanted the national government to help the states that had outstanding debt balance. There is Congressional gridlock on how to move forward.
Though Hamilton was an immigrant from the Caribbeans, he had adopted the U.S. as his country and is a war hero. As General Washington’s aides-de-camp, Hamilton was put in charge of New York and Connecticut regiments, responsible for attacking the British forts in the siege of Yorktown. This was arguable the grand finale of the Revolutionary War. With the War behind them, Hamilton wanted the country to start on a strong economic footing. And that meant resolving the crushing burden of post-war debt. But he had broader ambitions than the debt situation. He wanted to build a foundation for the financial system.
As the first Secretary of the Treasury, one would think Hamilton was staring into the abyss without guidance or plan. But he drew on a remarkable depth and breadth of experience, including his role as a politician, legal scholar, military commander, lawyer, banker, and economist, with extensive networks in New York and elite circles. Most importantly, he took practical lessons from England with a rich history of business and finance. But Hamilton does something that becomes part of America’s DNA, adapt old finance principles to spur financial innovations and new foster new markets.
Hamilton had fierce critics, the most prominent being Thomas Jefferson, a worldly statesman, who practically opposed Hamilton on very major policy issue. On this particular economic agenda, Jefferson paired up with Madison, another founding Father who served as a member of the Virginia House of Delegates, Member of the U.S. House of Representatives from Virginia organized America’s first political party. The trio were in a battle over power. These men were on opposing ends in several political and economic issues. Hamilton wanted the Federal Government to hold the bulk of the political and economic power while Madison and Jefferson, Republicans, wanted that power to remain with the states.
Hamilton used everything in his toolbox in a belief that the country could not go forward without political and economic reform, hand in hand. He articulates his vision: “‘Tis by introducing order into our finances–by restoring public credit-not by gaining battles, that we are finally to gain our object.”
In Hamilton’s first public credit report to Congress, he lays out an ambitious package in three prongs: (1) funding the national debt at par; (2) federal government assumption of state debt; (3) consolidation of state debt (Hamilton 1790).
The plan called for the federal government to shoulder the burden of state debts by issuing federal bonds at par, which would be backed by the full faith and credit of the United States with a rational schedule of revenue sources. Hamilton’s package was met with mounting opposition though not the level of criticisms varied by issue. The House of Representatives approved funding the national debt at par with a vote of 36 to 13. But that vote was a breeze compared to the assumption of state debt proposal. Hamilton just didn’t have the votes on that measure. James Madison was a leading critic of state debt consolidation. That is a 180-degree turn since just a few years earlier, Madison co-authored with Hamilton the Federalist, a series of pamphlets that provided an intellectual defense of a strong national government.
The policy disagreement may be traced to the men’s origins and backgrounds. Congress had been at a standstill over the location of the permanent capital. Hamilton favored a capital close to the major commercial centers of the Northeast, while Washington was a Virginia native. Similarly, Jefferson and Madison wanted it located to the south (on the banks of the Potomac River), fearing loss of influence for their states.
In Hamilton’s mind, without approving the economic package in entirety, it would not address the multi-faceted problems facing the country. The country was desperate for a grand bargain and a way forward. Enters Thomas Jefferson, the first Secretary of State, who has been appointed by President George Washington after being the Minister to France for about 5 years. He was also the second Governor of Virginia and represented as a delegate from Virginia in several different positions.
Jefferson brokered a meeting between Treasury Secretary Hamilton and James Madison. Of the limited first hand account we have, it was documented from Jefferson’s perspective. According to Jefferson, Hamilton looked “somb[er], haggard, and dejected beyond comparison” when he ran into Hamilton that June outside Washington’s New York office (Jefferson 1792). Jefferson then offered to host a dinner that would bring Hamilton and Madison together to break the impasse.
The dinner took place on an evening mid-June, 1790, at Jefferson’s residence in New York, at 57 Maiden Lane, which is in today’s Financial District near Wall Street.
Jefferson rented the house for 106 pounds per year. Since Jefferson didn’t care much for the urban New York lifestyle, he didn’t spend much time at the residence other than to set up operations for the new department to deal with foreign affairs (Tao 2014). Jefferson had moved into permanent quarters at 57 Maiden Lane only four days before the dinner (Norman K. Risjord, 1976).
With the backing of Madison and Jefferson, Hamilton had what he needed for a grand bargain to push forward the economic package. It should be noted that, negotiations for the compromise had been going on before June 20 as a number of meetings had been held between various interested parties.
With this economic plan, the national government would absorb state debts and pay it off. This became known as the Residence Act of 1790, which established Washington, DC as the new permanent national capital along the Potomac River, just outside Virginia, a big win for the state. During this tumultuous period, the federal government was operating out of New York City. The temporary capital during the transition period would be in Philadelphia until the permanent capital is ready.
There’s a larger theme coming out of this negotiation process. Decades later, Tim Geithner, the 75th U.S. Secretary of Treasury, framed that dinner bargain as a struggle over ‘power’ (Geithner 2018). Each person came to the table with different perspectives on the issue. They came with their own interests and beliefs. Hamilton wanted to improve the national financial reputation, bolster the nation’s stock of capital, and enhance the financial power of the federal government.
For Madison and the people from other southern states which had been aggressive in paying off their war debts like Georgia, North Carolina, Virginia, and Maryland, it seemed unfair to carry all the debt of states which had been sluggish in paying off theirs. For Jefferson, besides concerns
over the cost of assumption, Hamilton’s political intentions and possible threats to the Republic with the centralizing financial power was what worried him.
However, in that context, all of them must understand that, if neither side gives in or steps back a little bit, it would threaten the very survival of the young nation. Therefore, by agreeing to some tradeoffs, each side achieved its goals and all benefited from the compromise.
This is one of the earliest examples of legislative “logrolling”, or voting trading in Congress. With this event, the methods of hosting social engagements to discuss political matters to resolve partisan issues became a practice. In particular, Madison agreed not to block assumption of state debt and convince enough southern members to support it. In exchange, Hamilton would use his influence to pass a bill that would locate the capital city along the Potomac River, bordered by Virginia and Maryland, after a 10-year temporary move to Philadelphia. Virginia benefited from the deal by lowering its tax obligations on the debt under the assumption plan. To abate fear of the government centralizing finance, Hamilton downsized the total cost of the assumption plan.
To get Pennsylvania’s support, the deal would designate the city as the temporary capital for 10 years before setting up Washington DC as the permanent capital. Robert Morris negotiated this piece out of the concern that they could not push it through Congress by reassigning the country’s capital in a desolate wetland. Interestingly, Philadelphia harbors bad memories where troops trapped the doors of Independence Hall demanding unpaid salary for their service. Hamilton persuaded troops to let Congressional members go to Princeton to forget a deal for repaying troops. He even tried to get Pennsylvania’s state troops to counteract against federal troops but no to avail.
In exchange for relocating the permanent capital to the Potomac region outside Maryland and Virginia, Madison committed to garnering enough swing votes to pass Hamilton’s bill for assumption of state debt. Madison convinced four Congressional men, two from Virginia and two from Maryland to shift their votes. With a few other votes in the affirmative, that reversed the vote to 32-to-29 in favor of the bill, in April 1790 (it was previously 32-to-29 against). On August 4, 1790, Congress enacted into law the funding and assumption law.
Jefferson’s Account of the Bargain on the Assumption and Residence Bills, [1792?],” Founders Online, National Archives, accessed September 29, 2019, https://founders.archives.gov/documents/Jefferson/01-17-02-0018-0012. [Original source: The Papers of Thomas Jefferson, vol. 17, 6 July–3 November 1790, ed. Julian P. Boyd. Princeton: Princeton University Press, 1965, pp. 205–208.]
Geithner, Timothy. “Bernanke, Geithner and Paulson the 2008 Crisis.” Interview by Andrew Ross Sorkin. CNBC, 12 Sept. 2018. https://www.cnbc.com/2018/09/12/watch-ben-bernanke-tim-geithner-and-hank-paulson-discuss-the-financial-crisis-10-years-later.html
Hamilton, Alexander 1778-1804; 1790; [Jan. 9]. Alexander Hamilton Papers: Speeches and Writings File, “Report Relative to a Provision for the Support of Public Credit”
Tao, Mary. “Historical Echoes: Thomas Jefferson Slept Here on Maiden Lane/The Compromise of 1790.” Liberty Street Economics (blog). Federal Reserve Bank of New York, February 21, 2014. https://libertystreeteconomics.newyorkfed.org/2014/02/historical-echoes-thomas-jefferson-slept-here-on-maiden-lanethe-compromise-of-1790.html