The Battle Over Alexander Hamilton’s Plan for Assumption of States’ Debts

New York City Is Named America’s Temporary Capital

•  In 1787, the Constitutional Convention adopted the U.S. Constitution (though the document would not be ratified until the following year).

• The enclave clause (Art. I, § 8, cl. 17) of this Constitution, states that Congress may choose an area, not exceeding 100 square miles, to become the national capital. 

• The Convention also agreed that New York City would serve as the nation’s temporary capital until such time as Congress chose a permanent location for the capital.

The Battle over Assumption of States’ Debts

• By the end of the American Revolutionary War (1775-1783) America’s individual states were deeply indebted, having borrowed heavily to finance the war effort.

• Moreover, inflation had rendered Continentals, the fiat money issued by the Continental Congress to finance the war, worthless.

• So Alexander Hamilton, America’s first Treasury Secretary (1789-1795), sought to get the newly formed country’s finances in order.

• To this end, Hamilton proposed a two-part strategy detailed in two major reports he submitted to Congress in 1790.

• The second of these reports was his Report on a National Bank submitted to Congress in December of 1790.

• The report called for the creation of a national bank which would act as a quasi-central bank.

• Hamilton – after an intense debate over the constitutionality of the plan – ultimately got his wish with Congress establishing the National Bank of the United States in the city of Philadelphia.

• The other prong of Hamilton’s two-part plan for repairing the nation’s finances was laid out in his Report on Public Credit, submitted to Congress in January 1790.

• The report called for the federal government to consolidate and assume the $25 million worth of debts hobbling states’ budgets.

• But the proposal, like Hamilton’s proposal for a national bank, was highly contentious.

• And the principal opponents to this plan were the same two individuals that opposed his plan for a national bank: Secretary of State Thomas Jefferson and Congressman James Madison.

• The two Virginians’ opposition to the plan stemmed from multiple concerns.

• First, some southern states – such as Virginia – were less indebted than others.

• Jefferson and Madison saw the plan as requiring these southern states who had paid off most of their war debts to prop-up states who had not (of course, this view ignored the role plantation slave labor played in propping-up the economies of these agrarian southern states).

• Second, Jefferson feared that concentrating power in a strong federal government could one day lead to oppression of the sort the fledgling nation had just fought a war to escape.

• And Hamilton’s plan would undoubtedly concentrate new power in his Treasury Department, the branch of the federal government that oversees its finances.

• On the other, Hamilton felt that every American citizen, regardless of what state they resided in, benefitted equally from the Revolution.

• It followed, his argument went, that the debts incurred by the union in the financing of that revolution should be a shared burden, rather than one that fell more heavily on states – such as Massachusetts – that played a bigger role in the war effort, and therefore took on more debt.

• But more important for Hamilton than this argument from equality of financial burden was his view that this financial plan was essential to the long-term survival of the union: he viewed it necessary to bind the disparate states that made up the country in a fiscal union.

• By tying the states together in a fiscal union, he hoped to make it less likely that states would one day seek to secede from the union (a similar argument has today been applied to the European Union).

• Hamilton viewed this financial plan as being so essential that he was willing to trade away another ambition of his: to have New York City, then serving as the nation’s temporary capital, remain the nation’s permanent capital.

• So in June of 1790, Hamilton, Jefferson, and Madison met behind closed doors for dinner at Jefferson’s New York City residence on Maiden Lane.

• The location of this home is today marked by a plaque and is - fittingly considering that Hamilton’s vision of an American economy based on commerce and finance came to be realized at the expense of Jefferson’s hope for an economy based on agriculture -  overshadowed by the imposing façade of the New York Federal Reserve.

• At this dinner, Hamilton sought to get the support he needed to pass his fiscal program through Congress and was willing, however unhappily, to trade away New York’s position as the seat of the federal government to do so.

• Meanwhile, Jefferson and Madison were instinctively opposed to any proposals that would strengthen the federal government. But being Virginians, they also sought to have the capital city be as close to Virginia as possible.

• Moreover, the agrarian-minded Jefferson loathe New York City which he viewed – not without reason – as a heaven for financial speculators. The city was so associated with Alexander Hamilton and finance that the Treasury Secretary’s detractors referred to it as Hamiltonopolis. Moving the nation’s capital from New York to the Virginia area was thus doubly important to Jefferson.

• The chance for a grand compromise was ripe.

• At the dinner, Hamilton agreed to urge congressmen from Pennsylvania to support Philadelphia becoming the nation’s temporary capital for 10 years.

• After this period of 10 years, a yet-to-be determined location along the Potomac River located between Maryland and Virginia would become the nation’s permanent capital.

• In exchange for Hamilton’s efforts on the issue of the temporary and permanent capitals, Madison would muster up support for Hamilton’s fiscal program from southern congressmen.

• Today this agreement is referred to as The Compromise of 1790.

• And that location along the Potomac is now Washington D.C., seat of the U.S. federal government.

• Many of the buildings used by the federal government while Philadelphia served as America’s capital remain standing today and are open to visitors.

• Congress Hall, shown in the picture below, served as the seat of Congress from 1790 to 1800.

• Old City Hall, seen in the picture below, served as the seat of the U.S. Supreme Court.

• And the foundations of the executive residence used by presidents George Washington and John Adams, seen to the right of the frame in the video below, remain standing today.

• Moreover, the headquarters of the Bank of the United States, a semi-public institution created while Philadelphia served as America’s capital, also remains standing.

Written By: Aiden Singh Published: July 15, 2020 Sources