There was no question in Washington's mind as he took the presidential seat in the national capitol of New York City in the spring of 1789, that Alexander Hamilton was the best man to be the nation's first Secretary of the Treasury. The position was critical. The incumbent had the daunting task of putting the national wheels in motion after over a decade of crippling ineptitude. During Hamilton's tenure as Secretary of the Treasury, that position would be the most powerful in the government. This was due in part to Hamilton's own interpretation of his duties, and to the all-encompassing nature of total financial reconstruction. Hamilton was often mistaken as Washington's prime minister by foreign visitors; in fact, because of his close advisory position to the President, he in essence was.

Hamilton's appointment was approved by the senate on September 11, 1789. Two days later, the thirty-four year old statesman was hard at work organizing the fiscal future of the United States.

Although the administrative quagmire facing Hamilton as he stepped into office on a late summer Sunday would have daunted the most able, he was driven by a boundless confidence in himself and guided by a clear vision of what needed to be done and the principles behind that plan. Revenue, the most important issue, was to be generated primarily through a tax on imports, and an excise. In order to gauge the most efficient methods of collection, Hamilton sent out a request to his revenue agents, merchants, and financiers around the country, asking for statistics and general information, giving him a clear picture of what was happening on the ground—another of Hamilton's prodigious fact-finding enterprises.

While responses began dribbling into the treasury office, Hamilton got to work drawing up reports, requested by congress, detailing this plan of action. As we have seen, Hamilton spent the better part of his American career puzzling out these issues. Hamilton was greatly influenced by the great 18th century Scottish economists, primarily David Hume, who considered the consequences and possibilities of the merger of their comparatively backwards, agrarian country with Britain, whose economy was largely mercantile. Britain's fiscal underpinnings were comprised of a funded national debt, a large base of paper capital, and a national bank which issued a circulating currency and regulated fiscal policy and interest rates. The situation of the early 18th century Scots was quite similar to that faced by Hamilton, who needed to plan for the future of a young, underdeveloped country as a competitor in the world market.

Hume in particular was cautionary about the British system, but pointed out some advantages to a credit-based economy. Securities, Hume observed, provide ready capital with the value and function of specie, the availability of which enables merchants to engage in more extensive trade enterprises, which in turn makes commodities cheaper and easier to procure, and thus helps spread "arts and industry throughout the whole society." Landed wealth, Hume contended, makes "country gentlemen" out of wealthy merchants; whereas paper capital fosters a more international mentality, and a more diverse economy.

However, Hume emphasized the many evils of a credit-based economy, warning that a funded debt necessitates oppressive taxes to pay the interest, creates dangerous disparities in wealth, indebts the nation to foreign powers, and renders the stock holders largely idle and useless for everything but playing the market. Hume felt that the evils greatly outweighed the advantages.

Hamilton dismissed Hume's warnings and instead focused on the positive aspects of national credit; the continuing vitality of the British economy was enough to prove the efficacy of their system. Hamilton based his program primarily on the British model, with variations more suited to the United States' unique characteristics. Public credit was to become the pillar of Hamilton's fiscal reform package, the "invigorating principle" which would infuse the United States with the energy and international respectability he had envisioned.

In order to stimulate the economy, Hamilton needed big investors. The support and capital of the nation's wealthiest citizens would provide the foundation and security of his system. He wrote in 1780:

"The only plan that can preserve the currency is one that will make it to the immediate interest of the monied men to cooperate with the government in its support….No plan could succeed which does not unite the interest and credit of rich individuals with that of the state."

This was Hamilton's most controversial position about which he was quite frank, and which would incite fierce protest on the part of those who feared that Hamilton aimed to create an aristocracy. Hamilton was, as usual, simply drawing on realities that he felt, although not necessarily equitable, would benefit the nation as a whole in the long run. Securing the support of the wealthy was only a first step in his complete economic picture. The accumulation of wealth was not Hamilton's goal; he wanted to encourage the use of private wealth for beneficial enterprises. Hamilton envisioned a strong economy in which everyone could participate and profit. Landed wealth, represented by the Virginia opposition, was limiting and limited; whereas paper wealth was fluid, and opened up wider vistas in international trade and domestic industrialization. Industry would diversify labor, thus creating more jobs and income sources for a burgeoning population. Hamilton's vision was dynamic and made use of all the possibilities of a young nation with unlimited resources and boundless potential. His reports were the culmination of the vision he had cultivated during his fifteen years as an American, but which he soon found was not shared by all.

The Reports on Public Credit I

Report Relative to a Provision for the Support of Public Credit
(Submitted to Congress on January 9, 1790)

In this massive and detailed report which would determine the permanent financial foundation of the United States, Hamilton began by humbly stating the overwhelming nature of the task he had tackled and the underlying principle of his plan:

"In the discharge of this duty, he has felt, in no small degree, the anxieties which naturally flow from a just estimate of the difficulty of the task, from a well-founded diffidence of his own qualifications for executing it with success, and from a deep and solemn conviction of the momentous nature of the truth contained in the resolution under which his investigations have been conducted…'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.'"

The debt would be funded; that is, the federal government would convert its debts into interest bearing bonds which would mature after an assigned period of time. A sinking fund of revenue from the post office would be established for the payment of the principal of the debt.

The plan contained three basic provisions for the handling of the debt:

As mandated by the constitution, the foreign debt and interest would be paid in full according to the terms initially agreed to.

The principal of the domestic debt would be paid at par (with 4 percent interest on long-term, and 6 percent on short-term bonds—slightly less than the interest promised by the Confederation government) to current bearers.

State debts would be assumed by the federal government with interest payments deferred until 1792.

Federal stocks would circulate as money, thus making capital more plentiful and readily available. Large reserves of capital would encourage commerce, as well as agriculture and manufactures. The availability of cash, and its rapid circulation, would lower interest rates, making it "easier and cheaper" for individuals and smaller businesses to secure loans for their enterprises.

Hamilton's plan for revenue was based upon an import tariff and an excise. To soften the blow of such a tax plan, Hamilton painted the items to be taxed as darkly as possible: "They are all of them, in reality — luxuries — the greatest part of them foreign luxuries…pernicious luxuries…" Spirits, which because of their "cheapness" are imbibed to an extreme, "which is truly to be regretted, as well in regard to the health and the morals, as to the economy of the community…"

The Opposition: Funding

If asked how he came to his conclusions on the funding of the public debt, Hamilton might have answered in a Sherlock Holmes deadpan, "why, it's elementary." It was not so evident to Congress.

It took some time for Congress to digest the report, but when they did, a bitter controversy ensued. Hamilton obviously had expected some objections to his plan, but he had not bargained for the extent of the outcry, nor for the direction from which it came.

The voice of the opposition came from James Madison, whom Hamilton considered a friend and ardent fellow Federalist. He had depended upon Madison's support for his plans, and his former collaborator's opposition was to Hamilton a shocking blow both personally and politically.

Madison and the opposition did not object to the funding of the debt, rather they disagreed as to who should be paid and how much. During the course of the war and afterward, many holders of continental bonds, often veterans and farmers who had contributed goods and services to the war effort, sold their certificates at depreciated prices for much needed cash. Now that provisions had been made to fund the certificates, those who had bought bargain certificates would reap monstrous profits, leaving nothing for the original bearers.

Madison argued that this was unfair, and only served to further enrich an already wealthy class of merchants and "stock-jobbers" at the expense of farmers, soldiers, and backwoodsmen. Madison favored a plan of discrimination, paying the original bearers the nominal value of the certificates they once held, while paying the current bearer the highest market value plus interest. Granting benefits to both types of investors, in Madison's view, would be more just.

The Opposition: Assumption

The plan for assumption of states' debts was also seen as unfair in that it favored states that still retained large wartime debts. Some states, such as Virginia, had already paid much of their debt and would not benefit as much as states who had been less assiduous about paying their bills. Indeed, the Virginians asserted that, given the opportunity to balance their accounts with the federal government, they would be owed some three million dollars. The opposition called for the balancing of accounts between individual states and the government before making a decision on assumption. The decision, of course, would be based on whatever was more profitable to the states.

Hamilton's Justification

Although he had briefly toyed with the idea of discrimination, Hamilton eventually rejected it on a number of grounds. At the very base, it would be an administrative nightmare to track down the original bearers and verify claims. More far-reaching problems were inherent in Madison's plan, however. Hamilton understood that the foundation of any financial system was faith. Investors needed faith in the strength of the system and the prospect of dividends before risking capital on an enterprise. It would be a breach of that faith if holders of public securities marked "payable to the bearer" were not given their due return. The United States needed to be consistent in its policies, and to uphold basic tenets of good faith from the outset in order to generate confidence with investors at home and abroad. In fact, the original bearers had already engaged in a speculation of their own. The current bearers, who had gambled on the certificates themselves, should not be penalized.

Hamilton did not deny that the funding plan would ultimately concentrate large amounts of capital in select hands; but this was part of his larger plan. Those in possession of large bankrolls would reinvest their capital in the government and in enterprise which would benefit the economy as a whole.

Underlying Hamilton's reasoning, as always, was the intention of strengthening the union and diminishing as much as possible the strength of the states. Fusing the interests of the public creditors to the central government was a necessary step in that direction.

The Deal

The report was fiercely debated in Congress throughout the spring. Hamilton waited anxiously, and monitored the proceedings with mounting anguish as his former ally denounced his work and endeavored to defeat it. If that was not enough, he also had to endure cruel personal attacks in the press. One such diatribe which appeared in papers in both Virginia and New York indicates that details of Hamilton's background were circulating and being used as cheap ammunition against him and his policies. It described the assumption plan as a "bastard of eastern speculators," delivered through the midwifery of the Secretary of the Treasury, and baptized "Alex—der Assumption."

With defeat of the entire plan imminent, Hamilton appealed to Secretary of State Thomas Jefferson to help him win over the largely Virginian-led opposition. Jefferson invited Madison and Hamilton to dinner, and offered to cut a deal. Jefferson proposed to Hamilton that he and Madison would conjure the extra votes needed to pass his plan if it were tied in with a bill to place the national capitol on the Potomac — near Virginia, and more accessible to the south as a whole. An interim location in Philadelphia would placate those politicians who had favored that city as the capitol; and the fact that it would be far removed from Hamilton's power base of Manhattan was probably significant to the Virginians as well.

Hamilton agreed, and as promised, the Virginians brokered the two extra votes needed to pass the funding and assumption in the House. Hamilton had triumphed; and the entire central government packed their bags for Philadelphia.

The Reports on Public Credit II

The Second Report on the Further Provision Necessary for Establishing Public Credit
(Submitted to Congress on December 13, 1790)

In this report, Hamilton argued the necessity of a national bank, and raised yet another host of issues.

The bank proposed by Hamilton would be a national institution run by a private board of directors. Private ownership, Hamilton reasoned, would prevent the corruption which might result if the bank were run by government officials as was the Bank of England. He explained: "The keen, steady, and, as it were, magnetic sense, of their own interest, as proprietors, in the Directors of a Bank, pointing invariably to its true pole, the prosperity of the institution…"

Hamilton explained that a national bank would provide a safe depository for government funds, regulate banking practices around the country, provide a uniform currency, provide capital for investments and industry, and loan the government money in times of emergency. Hamilton saw it as no less than an engine of national prosperity and a necessary ancillary to his overall plan.

The Opposition

Banks had long been controversial, and were commonly associated with mercantile countries such as England and Holland. Madison, again leading the opposition along with a majority of Southerners, raised the familiar point that the bank was another policy which would only benefit merchants and speculators, not the planters and yeomanry of which the country was largely comprised.

Madison challenged the bank proposal by claiming that it was unconstitutional. Arguing for strict construction of the constitution, he stated that since the constitution did not explicitly sanction such action, the United States government had no power to create a bank or any other type of corporation.

The plan for the bank was passed by congress under circumstances that would become increasingly alarming: the vote was split between the north and south—the Southerners being uniformly opposed to the bank, the north, which held the majority of mercantile interest, in favor.

When the bill hit Washington's desk, the President was already harboring strong doubts about the constitutionality of the bank. Washington was poised to veto the bill, but first asked both Attorney General Edmund Randolph and Jefferson for their opinions. Both wrote in support of a veto on constitutional grounds. Washington forwarded their responses to Hamilton informing him that if he did not provide a convincing response, he would have to veto the bank plan. Hamilton did not disappoint. Within a few days, Hamilton handed back his now famous Opinion on the Constitutionality of the Bank. His lengthy response was no less than an exhaustive treatise on implied powers of the constitution. Interestingly, the basic argument he used was originated by Madison himself in the Federalist (No. 44), that "wherever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power necessary for doing it is included." (See Federalist 44)

Realizing that the statement in itself would surely give rise to moral objections, Hamilton issued a qualified version: "[the government has] a right to employ all the means requisite, and fairly applicable to the attainment of the ends of such power; and which are not precluded by restrictions & exceptions specified in the constitution; or not immoral, or not contrary to the essential ends of political society."

The argument swayed Washington, who passed the bank bill in February of 1791.

Jefferson and Madison Create a Party

The passage of the bank plan immediately set off alarm bells in the Madison/Jefferson opposition camp. The scope of power inherent in the position of Treasury Secretary had begun to hit home, as well as how much the vision and predilections of the officeholder influenced the country's future, financial and otherwise.

Madison and Jefferson began increasingly to see Hamilton's victories as serious losses for themselves and the interests of their constituents, the southern planter class. They viewed the Secretary of the Treasury as an uncontrolled force with the backing of powerful, monied men from the northeast. Cries of a monarchical conspiracy by Hamilton were heard and most likely originated from anti-Hamiltonians, like Madison, who were present for Hamilton's speech at the constitutional convention. They determined that emergency measures needed to be taken to prevent Hamilton and his "monarchists" from taking over.

For statesmen of the eighteenth century, political parties were anathema. They were seen as unruly bodies of men run by demagogues, reeking of excess and eventual tyranny. However, parties were acceptable in the face of a demonstrable crisis, and, in the summer of 1791, Hamilton and his policies were considered by Jefferson and Madison as a threat to liberty of crisis proportion warranting an organized resistance.

In the summer of 1791, under the ruse of taking a botanical study trip, Madison and Jefferson traveled to New England and New York to rally support for their anti-Hamilton cause. They returned with a party — which would shortly become the Republican party — complete with a national network of supporters and functionaries, including a journalist named Philip Freneau, recruited from New York to begin publishing the official party newspaper. Jefferson and Madison had properly girded themselves to battle the "colossus" when Congress reconvened in the fall.

Hamilton and Madison:
The Partnership that Never Was (1783-1789)

The Federalist Papers, considered a political classic and the definitive statement on the principles underlying the United States constitution, appear on the surface the product of two minds in complete concord about the subject at hand. Indeed, the ratification of the Constitution was a goal of absolute importance to both authors, which is why Hamilton called for Madison's help on the project; and why Madison agreed to do it. Both ambitious and brilliant, equally knowledgeable on a wide variety of subjects, Hamilton and Madison sparked immediately when they met in the continental congress in 1783. They agreed that the confederation government was ineffective and were dedicated to creating a system which would solidify the union and make the United States a viable and great nation. On an intellectual level they were perfectly matched; politically, however, they were diametrically opposed. The issue on which they differed was to become the most divisive in American politics: states' rights.

Their disagreement was a matter of experience. Hamilton, the immigrant with no grounding in a particular state, understood only the destructiveness of localist politics from his time as a staff officer in the war, and during his tenure as a government employee and congressional delegate. He felt that, at most, states could be helpful in the administration of federal objectives on the local level, but state sovereignty had long been an absurdity to him.

Madison, on the other hand, was from the proud landed gentry of Virginia. Virginians were notorious for their loyalty to their state — even Washington had referred to it as his "country" — and Madison felt likewise. Madison and other Virginians saw their state as a model for the planter/yeoman society, insular and self-reliant, which they projected upon the whole of the country. In contrast, Hamilton was from a cosmopolitan background, having been an insider to the international trade community during his time in St. Croix, and choosing to settle in the commercial metropolis of New York City when he came to America. The wealthy, slave-owning planter community, among which he lived in the West Indies and with whom his own impoverished situation direly contrasted, had no attraction to him, and no particular virtues that he could see.

Madison's intrinsic disagreement with Hamilton's ideas can be seen emerging as early as the Constitutional Convention where he registered his opposition to Hamilton's plan of government by countering with a speech of his own emphatically endorsing state' rights. During the course of the Federalist project, Hamilton sent a letter to Madison, then back in Virginia, which indicates Madison's concerns about certain aspects of states' rights. Hamilton offers a conciliatory response assuring Madison that "The states retain all the authorities they were before possessed of…but this does not include cases which are the creatures of the New Constitution." Madison's letter is not extant, but it can be reasonably assumed that he had conveyed his Virginian colleagues' concerns about states' rights. Eventually, the states' rights question congealed into the north/south debate, which made Virginia's concerns tantamount to the moral and economic concerns of the south as a whole. Although Madison was committed to a strong union with authority over the individual states, he came under increasing pressure to protect the planter society of the south. That pressure, coupled with his own deeply entrenched Southern mores caused his initial wariness to transform into outward and vehement opposition to Hamilton and his policies.

The two also differed immensely in their personal styles which likely had an abrasive effect. Hamilton was naturally passionate, emotive; Madison tended to be shy and reserved. Hamilton was opinionated. He was a stranger to subtlety, and [to this owes] much to his misfortune later on. As he admitted to his friend John Laurens in 1780: "The truth is I am an unlucky, honest man, that speak my sentiments to all and with emphasis." Hamilton depended upon what he perceived to be the truth and rightness of his opinions to sway others. To a seasoned Virginia politician and backroom insider like James Madison, such straightforwardness was as distasteful as it was imprudent. Madison's involvement in the Federalist project was to him a political expedient, a necessary project to generate the support needed to ratify the constitution in a critical state. He dealt with Hamilton only as much as he had to; the rest of the time he put as much distance, physically and ideologically, between himself and Hamilton as was possible.

That Hamilton did not perceive these differences early on is puzzling and probably due to a combination his own self-absorption and Madison's characteristic evasiveness. Finding what he considered Madison's change of opinion unfathomable, Hamilton blamed Jefferson for stealing Madison away from him. He explained his theory to a friend in 1792:

"I cannot persuade myself that Mr. Madison and I, whose politics had formerly so much the same point of departure, should now diverge so widely…Mr. Madison had always entertained an exalted opinion of…Mr. Jefferson. A close correspondence subsisted between them during the time of Mr. Jefferson's absence from this country. A close intimacy arose upon his return."

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This document is chapters 19-22 of A Biography of Alexander Hamilton by Lisa Marie DeCarolis, from Revolution to Reconstruction website.