William Fowler

Memo to Geithner: Learn from Hamilton

By William Fowler
March 27, 2009
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WHEN IT comes to dealing with "toxic assets," Treasury Secretary Timothy Geithner might take a lesson from the first person to hold his office - Alexander Hamilton.

Hamilton understood politics and "toxic assets." When he took office the new republic was drowning in a sea of wild financial speculation and crushing debt from the Revolution. To pay off these obligations the 13 states and the Continental and Confederation Congresses printed paper money to the point where it had become worthless. When the printing press could no longer suffice, they resorted to borrowing funds. Altogether by the time Hamilton took office the states and the federal government owed more than $77 million, a sum roughly equivalent to more than 10 times the government's budget. In a decade and a half of incessant printing and borrowing, these obligations had been sold, resold, bartered, and bundled so many times that no one understood their "real" value. Unless Hamilton could bring sense to this financial mess the republic might collapse.

Hamilton proposed that regardless of their "real" value the federal government should assume these debts at their face value. Southerners saw this as a power grab by northern bankers and merchants aimed at enhancing the power of the federal government over the states. Worse, they argued, it would reward greed and double dealing.

For years, speculators had been warning farmers and soldiers who had received these pieces of paper as payment for food and services during the war that these obligations were nearly worthless. Desperate for cash, many unwary owners panicked, selling them for a fraction of their face value.

Speculators stood to gain a fortune should the new government agree, as Hamilton suggested, to honor these obligations at their par value.

Congress was divided and paralyzed. Hamilton fell into a funk and despaired of the nation's future until June 1790 when he encountered Secretary of State Thomas Jefferson in the street. Jefferson's good friend and fellow Virginian James Madison was leading the opposition to Hamilton's plan. Jefferson proposed a private dinner where the three might discuss the issue.

It was a convivial evening and by the time the port reached the table they had struck a deal. Madison agreed that Hamilton's measure might be "brought before the House." Although "he would not vote for it, nor entirely withdraw from opposition, yet he would not be strenuous, but leave it to its fate." Even so, it would be a "bitter pill" for southerners, and so Madison suggested that something needed to be done "to soothe them."

Congress was also deeply split, north versus south, over the location of the capital. Article One of the Constitution authorized the body to establish a "District (not exceeding ten miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of Government of the United States." A solution needed to be found, but neither the north nor south would yield. Each wanted the capital.

Here was the opportunity for Hamilton to secure southern votes for his plan. To "soothe" the southerners, and grab their votes, Hamilton offered to support "the removal of the seat of government to the Patowmac."

The bargain was struck. On July 9, 1790, the House passed the Residence Bill establishing the seat of government on the Potomac, leaving to President Washington to determine the precise location. The vote was 32 to 29. On July 26, Hamilton's finance bill came up. As he promised, Madison voted against it, but he did nothing to rally others to join him. The bill passed by nearly the same vote, 34 to 28.

This was one of the great compromises in American history. Like all political compromises it did not fully satisfy all the parties, nor did it reconcile fundamental differences between Hamiltonians and Jeffersonians. Those debates would continue. But at this moment of great crisis three of America's greatest political leaders pushed aside politics and ideology to embrace a national vision. Over dinner that evening in June 1790, Madison, Jefferson, and Hamilton saved the republic. Perhaps it is time for someone in Washington, our compromise capital, to arrange another dinner.

William Fowler is a professor of history at Northeastern University.

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