Hamilton's Reports and Opinion on the Bank

Summary

This anthology gathers three state papers that Alexander Hamilton wrote during his first two years as Secretary of the Treasury. On 21 September 1789 the House of Representatives asked him for a plan to support the public credit. His First Report on the Public Credit, dated 9 January and communicated to the House on 14 January 1790, starts from the premise that every nation must sometimes borrow and can borrow on good terms only when its credit is firmly established. Calling the Revolutionary debt the price of liberty, he proposed to fund it in full: about 54 million dollars of foreign and domestic federal debt, together with state debts he estimated at 25 million dollars, which the Union would assume. He rejected any discrimination between original holders, many of them soldiers and farmers who had sold their certificates cheaply, and the later purchasers, holding that it would break the public contract and ruin credit; James Madison urged such a discrimination in the House, and it was voted down. Hamilton offered creditors a choice of new securities, including land, annuities and a tontine, pledged duties on wines, spirits, tea and coffee, and proposed a sinking fund drawn from post office revenue and managed by senior officers of the government. Funding and assumption passed in the summer of 1790 after the Compromise of 1790, which linked assumption to placing the permanent capital on the Potomac. The library text lists but omits the report's schedules. The second document is Hamilton's opinion of 23 February 1791 for President Washington. Secretary of State Thomas Jefferson and Attorney General Edmund Randolph had advised that the bill chartering a Bank of the United States was unconstitutional because the Constitution gives no power to create corporations. Hamilton replied that every power vested in a government is sovereign in its sphere and carries the right to use the means fairly applicable to its ends; that the word necessary in the necessary and proper clause commonly means useful or conducive to, not indispensable; and that a bank relates directly to the express powers to collect taxes, borrow money, regulate trade and support armies. Washington signed the bill on 25 February. Chief Justice John Marshall's reasoning in McCulloch v. Maryland (1819) follows the same line. The third paper, the Report on Manufactures of 5 December 1791, answers the doctrine that agriculture alone is truly productive. Hamilton lists seven advantages of manufacturing, from the division of labour and the extension of machinery to immigration, scope for varied talents and enterprise, and a steadier home market for the farmer's surplus. He then reviews the means of encouragement, including protecting duties, prohibitions, bounties, premiums, drawbacks and rewards for inventions, and surveys particular articles such as iron, copper, coal, cotton, wool, glass, gunpowder and paper. Congress adopted some of its tariff proposals in 1792 but not the program as a whole.

Plot or Argument

• Public Credit: why credit matters

  The Secretary answers the House's resolution of September 1789. Nations must borrow in war and emergencies; credit that is doubted forces them to pay extravagant premiums; good faith in keeping engagements is the foundation of credit, and the American debt, contracted for independence, carries a peculiar moral obligation. A well-funded debt would also serve as capital, extending trade and agriculture and lowering interest.

• Public Credit: no discrimination, and assumption

  Hamilton considers and rejects paying original holders more than present holders who bought their certificates, calling discrimination a breach of contract and impossible to administer fairly. He argues that the Union should assume the state debts so that one government, with one plan of revenue, deals with all public creditors, and that arrears of interest be paid on the same footing as principal.

• Public Credit: the plan of funding

  He states the debt at about 54.1 million dollars for the Union and an estimated 25 million for the states, and offers subscribers several alternatives: part in land and part in stock, annuities, and an experimental tontine. Revenue is to come from increased duties on wines, distilled spirits, tea and coffee, and a sinking fund from post office revenue, managed by the President of the Senate, the Speaker, the Chief Justice, the Secretary of the Treasury and the Attorney-General, is to buy up and extinguish debt.

• Opinion on the Bank: the general principle

  Answering the written opinions of Jefferson and Randolph, Hamilton argues that every power vested in a government is in its nature sovereign and includes a right to employ the means fairly applicable to its ends, unless the Constitution forbids them or they are immoral. Since the United States is sovereign within its specified objects, it may erect a corporation as a means to those objects.

• Opinion on the Bank: the meaning of necessary

  Hamilton rejects Jefferson's reading that necessary means only those means without which a power would be nugatory. In ordinary and grammatical usage the word means needful, useful or conducive to. He points to existing practice, such as the act for lighthouses and buoys, and to the danger of a construction that would paralyze the government.

• Opinion on the Bank: the bank and the express powers

  The final part shows how a bank relates to the collection of taxes, borrowing, the regulation of trade, and the raising and support of armies, and answers particular objections, including the claim that a corporation violates state laws of alienage, descent and monopoly.

• Manufactures: answering the agricultural doctrine

  Hamilton states the arguments of those who hold agriculture to be the only productive industry and who would leave industry to its natural course, then argues that manufacturing labour is also productive and that the two branches strengthen each other.

• Manufactures: seven advantages

  He enumerates the benefits of manufactures: the division of labour; the extension of machinery; employment for classes not ordinarily engaged in business, including women and children; the promotion of immigration; greater scope for the diversity of talents; a more ample field for enterprise; and a more certain demand for the surplus of the soil.

• Manufactures: objections and means of encouragement

  He answers the objections from scarcity of hands, dearness of labour and want of capital, and lists eleven means of encouragement, including protecting duties, prohibitions, bounties, premiums, exemption of raw materials from duty, drawbacks, encouragement of inventions, inspection of manufactured goods, and easier remittances and transportation.

• Manufactures: particular articles and a fund

  A survey of individual industries follows, among them iron, copper, lead, coal, wood, skins, grain, flax and hemp, cotton, wool, silk, glass, gunpowder, paper, printed books and refined sugar, with specific duties and bounties proposed. He closes by recommending a fund for bounties and for a board to promote arts, agriculture, manufactures and commerce.

Characters

• Alexander Hamilton, author, Secretary of the Treasury

  Writes each document in his official capacity, referring to himself as the Secretary.

• George Washington, President

  Requested opinions on the bank bill and signed it on 25 February 1791 after reading Hamilton's reply.

• Thomas Jefferson, Secretary of State

  Advised Washington that the bank bill was unconstitutional; the Opinion answers his narrow reading of necessary.

• Edmund Randolph, Attorney General

  Also advised against the bank bill; Hamilton answers his objections alongside Jefferson's.

• James Madison, Virginia congressman

  Proposed discrimination between original and present holders of the debt and opposed the bank in the House.

Lessons

• Credit as a matter of good faith

  The First Report treats public credit less as a technical device than as a reputation earned by keeping promises. Hamilton argues that a nation which pays its debts honestly borrows cheaply in emergencies, and that the Revolutionary debt carried a special obligation because it bought independence.

  • Why does Hamilton say a nation with doubtful credit pays more for everything it buys on future terms?
  • In what sense was the debt of the United States the price of liberty?
  • Is a government's promise to its creditors like a private person's promise, or different?

• Justice to holders and purchasers

  Hamilton refused to pay original holders, often veterans who had sold their certificates in hard times, more than the speculators who had bought them. He argued that the purchaser had made a fair contract and that the government could not fairly sort out every case. Madison saw an injustice to the soldiers; Hamilton saw an injustice to the contract.

  • What practical difficulties does Hamilton raise against discrimination?
  • Which party, the soldier who sold or the buyer who paid, has the stronger claim?
  • Can a policy be just in general and still hard on particular people?

• Reading a constitution

  The Opinion on the Bank is an argument about interpretation. Jefferson read necessary strictly to keep federal power within narrow bounds; Hamilton read it in its ordinary sense of useful or conducive to, so that the government could choose suitable means. The dispute shaped American constitutional debate and resurfaced in McCulloch v. Maryland.

  • What limits does Hamilton himself place on the means a government may use?
  • Why did Jefferson fear Hamilton's reading, and why did Hamilton fear Jefferson's?
  • Should the words of a constitution be read in their ordinary sense or in the narrowest sense?

• Industry and the variety of talents

  The Report on Manufactures argues that a country of farms alone leaves many abilities unused. Hamilton values manufactures for multiplying the objects of enterprise, giving each kind of talent a fitting work, and creating a home market that helps the farmer, and he proposes public encouragement to overcome the advantages of established foreign industries.

  • Which of Hamilton's seven advantages of manufacturing seems most persuasive, and why?
  • Why does he think a new country cannot simply leave industry to take its natural course?
  • How does Hamilton try to show that manufacturing helps agriculture rather than harming it?

Context

In 1789 the new federal government inherited the debts of the Continental Congress, foreign loans from France and the Netherlands, and the war debts of the states. Certificates of debt had fallen far below face value, and many original holders had sold them. Hamilton's program to fund the debt, assume the state debts, charter a national bank and encourage manufactures became the central controversy of Washington's first term and helped divide the political leadership into the Federalist and Republican parties.

Composition

The House asked for the credit plan on 21 September 1789; Hamilton prepared the report during the recess at New York, dated it 9 January 1790, and it was communicated on 14 January. The bank opinion was written in Philadelphia in the week before 23 February 1791, after Washington had received opinions from Jefferson and Randolph. The House requested the manufactures report in January 1790; Hamilton's assistant Tench Coxe contributed early drafts, and the report was communicated on 5 December 1791. The library text takes the two reports from Henry Cabot Lodge's Federal Edition of the Works (1904) and the opinion from the Avalon Project.

Reception

Funding and assumption passed in July and August 1790 after the Compromise of 1790, in which Jefferson and Madison agreed to assumption and Hamilton's allies agreed to a permanent capital on the Potomac. The Bank of the United States was chartered for twenty years in February 1791. The Report on Manufactures was not adopted as a whole, though Congress raised several duties in 1792. Hamilton's reading of the necessary and proper clause was echoed by John Marshall in McCulloch v. Maryland (1819), and the manufactures report was later cited by advocates of protective tariffs, including Henry Clay's American System. Historians continue to differ over whether the program chiefly secured national stability or chiefly favoured commercial and financial interests.

Comparisons

• the-wealth-of-nations

  The Report on Manufactures borrows Smith's account of the division of labour while arguing, against Smith's preference for leaving industry to its natural course, that a young country should encourage manufactures by duties and bounties.

• the-federalist-papers

  Hamilton's Federalist essays on taxation and the necessary and proper clause (especially Nos. 30-36 and 33) anticipate the argument of the Opinion on the Bank.

• jefferson-selected-writings

  Jefferson's own opinion against the bank and his agrarian vision in Notes on the State of Virginia are the positions Hamilton's opinion and Report on Manufactures answer.

• madison-selected-writings

  Madison, Hamilton's collaborator on The Federalist, led the House opposition to discrimination-free funding and to the bank, so the two former allies read the same Constitution differently.

• the-founding-documents

  The Opinion on the Bank is an extended commentary on Article I, Section 8 of the Constitution, especially the taxing, borrowing and commerce powers and the necessary and proper clause.

• washington-farewell-address-and-selected-letters

  Washington's Farewell Address, drafted with Hamilton's help, urges the cherishing of public credit and the avoidance of needless debt, echoing the First Report.

Quotes

For Students

A reading companion for classical Christian high school students. See the student guide.

Reading Guide

Watch for

• The opening of the First Report, where Hamilton lays out plain and undeniable truths about borrowing before he makes any proposal.
• His long treatment of discrimination, where he imagines particular cases of soldiers and buyers to show why the policy could not be administered fairly.
• The sentence in the Opinion stating that every power vested in a government is in its nature sovereign; the rest of the argument depends on it.
• Hamilton's handling of the word necessary, and his examples from the existing practice of Congress such as the lighthouse act.
• The numbered list of seven advantages of manufactures and the later list of means of encouragement.

Key terms and names

Public credit

The confidence lenders have that a government will pay its debts; Hamilton treats it as the condition for borrowing cheaply in emergencies.

Funding

Pledging specific revenues to pay interest on the debt regularly, which Hamilton proposes to do with import and excise duties.

Assumption

The federal government's taking over the war debts of the states, which Hamilton estimated at twenty-five million dollars.

Discrimination

Paying original holders of debt certificates differently from later buyers; Hamilton rejects it as a breach of contract.

Sinking fund

A fund set aside to buy up and retire the debt over time; Hamilton proposes one from post office revenue.

Necessary and proper clause

The final clause of Article I, Section 8, letting Congress pass laws needed to carry out its powers; the bank dispute turns on its meaning.

Implied powers

Powers not listed in the Constitution but following from the listed ones; Hamilton notes that his opponents conceded such powers are delegated equally with express ones.

Bounty

A payment from the government to encourage a particular industry; Hamilton calls bounties one of the most efficacious means of encouragement.

Seminar Questions

1. Comprehension According to the First Report, why must a nation be able to borrow, and why does doubtful credit make borrowing expensive?
2. Comprehension What objections did Jefferson and Randolph raise to the bank bill, and what does Hamilton say the word necessary means?
3. Comprehension Name four of the seven advantages Hamilton attributes to manufactures.
4. Interpretation Why does Hamilton insist that the Union assume the state debts rather than leave each state to pay its own?
5. Interpretation Hamilton limits a government's means to those not forbidden by the Constitution, not immoral, and not contrary to the ends of political society. Do these limits answer Jefferson's fear of unlimited power?
6. Interpretation How does the Report on Manufactures try to persuade a nation of farmers that industry is in their interest?
7. Big Question Is keeping a promise to creditors more important than relieving those who lost out when they sold their claims cheaply?
8. Big Question Should a government try to shape what kind of work its citizens do, or leave that to individual choice?

Faith Connections

• Psalm 37:21 (Scripture)

  The wicked borroweth, and payeth not again; Hamilton likewise treats the payment of public debt as a test of a nation's integrity and good faith.

• Romans 13:7-8 (Scripture)

  Paul tells believers to render to all their dues and owe no one anything but love, a teaching that bears on both Hamilton's insistence on paying the debt and his maxim that debt should come with the means of extinguishing it.

• 1 Corinthians 12:4-12 (Scripture)

  Paul's picture of many gifts in one body resembles Hamilton's argument that a nation with diverse employments gives each kind of talent its proper use.

• Adam Smith, The Wealth of Nations, Book I, ch. 1 (Great Conversation)

  Smith's account of the pin factory and the division of labour stands behind Hamilton's first advantage of manufactures, though Hamilton departs from Smith on public encouragement.

Logic and Rhetoric

Central argument: A nation must be able to borrow; it can borrow cheaply only if its credit rests on kept promises; therefore the United States should fund its whole debt, assume the states' debts and provide for extinguishing them. The government may use any means fairly applicable to its granted powers that the Constitution does not forbid, so it may charter a bank; and because a balanced economy of farms and manufactures makes the nation richer and more secure, it should encourage manufactures.

Rhetorical device: enumeration (numbered division). The Report on Manufactures organizes its case as a numbered series of seven advantages, opening with the division of labour (quote 5), and later a numbered list of means of encouragement, so the reader can weigh each step separately.

Debate: Resolved: that Hamilton's reading of the word necessary in the necessary and proper clause is the better reading of the Constitution.

Memory Work

This reflection derives additional strength from the nature of the debt of the United States. It was the price of liberty.

According to both, necessary often means no more than needful, requisite, incidental, useful, or conducive to.

Writing Prompts

Essay: Using the First Report and the Opinion on the Bank, explain how Hamilton connects national honour, public credit and the powers of the federal government.

Comparison with The Wealth of Nations: Compare Smith's case for leaving industry to its natural course with Hamilton's case in the Report on Manufactures for bounties and protecting duties, and explain why each thinks his policy serves the wealth of a nation.

Medical Lens

These are financial and constitutional papers; they discuss revenue, debt, banking, tariffs and industry, and have no medical content beyond passing references to the health of trade and credit.

Creative Prompts

• Dialogue

  Write the June 1790 dinner conversation between Hamilton, Jefferson and Madison at which assumption and the site of the capital were linked, using only positions each man actually held.

• Classroom

  Stage Washington's cabinet in February 1791: one group argues Jefferson's strict reading of necessary, another Hamilton's broad one, and a student playing Washington decides whether to sign the bank bill.

• Fiction

  Tell the story of a Continental Army veteran who sold his pay certificate for a fraction of its value in 1784 and reads in 1790 that it will be paid in full to the buyer.

• Essay

  Explain how the three documents together form a single plan for the new nation's economy, using the debt, the bank and manufactures as its three parts.

Further Reading

• Alexander Hamilton, Ron Chernow

  Full-length biography with detailed chapters on the Treasury years and the three documents.

• Alexander Hamilton: A Biography, Forrest McDonald

  Biography concentrating on Hamilton's financial thought and statecraft.

• The Age of Federalism, Stanley Elkins and Eric McKitrick

  History of the 1790s with extended treatment of funding, assumption and the bank controversy.

• Alexander Hamilton and the Idea of Republican Government, Gerald Stourzh

  Study of Hamilton's political ideas and their sources.