In looking back at history, we can all learn a thing or two from those that have come before us. In this case, Treasury Secretary Timothy Geithner could have learned a thing or two from the man that was the first to hold the position of Treasury Secretary, and that was Alexander Hamilton. In the spirit of compromise, today’s politicians also stand to learn a valuable lesson from those that have come before them.
Not only did Alexander Hamilton understand how to play the political game, but he also understood financial assets that have fallen significantly, otherwise known as “toxic assets”. Upon taking the position of Treasury Secretary, the United States was still in its infancy, as well as sinking in the financial quicksand, which were harsh financial speculations and the enormous debt from the American Revolution. The Continental and Confederation Congresses, along with the 13 states, printed paper money to pay off these debts, but because there was so much paper money being printed, its value was diminished. As a result of the printing no longer being sufficient, they resorted to borrowing funds.
Once Hamilton took office, the states and federal government owed more than $75 million, which was equivalent to more than 10 times of the federal government’s budget. Due to nonstop printing and borrowing for over a decade and a half, these obligations or debts had been sold, resold, traded, swapped and bundled so many times that not one person understood their real value. This mess was so great that it could actually collapse the new republic if Hamilton could not make sense of this financial crisis.
Alexander Hamilton suggested that regardless of the real value of these obligations, the federal government should assume these debts at their face value. This sparked an outrage amongst southerners, as they saw this as a power grab by northern bankers and merchants, with the goal of increasing the power and presence of the federal government over the states. They also argued that this would reward greed and double dealing by pretending to entertain one set of intentions while acting under the influence of another.
Over the course of many years, speculators and investors warned soldiers and farmers who had received paper money as payment for food and services during the American Revolution that these obligations were virtually worthless. In desperate need of cash, many unsuspecting holders had panicked, which caused them to sell for a fraction of their face value.
Because of this, speculators and investors stood to greatly increase their wealth if the new government agreed with Hamilton, as he suggested honoring these obligations at their face value. When this was proposed, Congress was largely divided, and as a result, could not make a decision. This threw Hamilton into a tailspin and he had lost hope in the future of this new republic.
In June of 1790, Alexander Hamilton had a chat with Secretary of State Thomas Jefferson. After briefly speaking about the financial crisis that was crippling this young nation, Jefferson had proposed a private dinner to discuss the issue. Along with Hamilton, Jefferson invited James Madison, a fellow Virginian, who was not only a good friend to Jefferson, but was also leading the opposition to the plan that Hamilton proposed.
The dinner went smoothly and by the time it was nearly over, a deal had been struck. James Madison agreed that Hamilton’s measure might be “brought before the House”. Though, “he would not vote for it, nor entirely withdraw from opposition, yet he would not be strenuous, but leave it to its fate“. Since this was going to be tough for southerners, Madison suggested that something be done to compensate for this and calm the southerners.
It is important to keep in mind that Congress was extremely split, in regards to the north and south, on a location for the nations’ capital. 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“, is stated in Article One of the Constitution of the United States and authorizes Congress to do so. Nevertheless, a solution needed to be found quickly, but neither north nor south was willing to budge, as each wanted the capital.
This had given Hamilton a great opportunity to obtain the southern votes needed for his plan. To calm the southerners, Hamilton offered to back “the removal of the seat of government to the Potomac“.
As it turned out, the deal was struck and the vote was 32 to 29. The House passed the Residence Bill on July 9, 1790, establishing the seat of government on the Potomac and now leaves President Washington to pick the location. The matter of Hamilton’s finance bill came up on July 26, 1790. James Madison voted against it, as he promised, but did not lift a finger to gain support from others to join against Hamilton. Similar to the vote for moving the seat of government, the finance bill passed 34 to 28.
Like all political compromises in American history, this did not fully satisfy all parties, nor did it settle important differences between Jeffersonians and Hamiltonians, as those debates would carry on. However, this is one of the great compromises in American History and at that moment of an enormous crisis, three political leaders put aside their political ideology to support a national vision. It was at that dinner in 1790, Thomas Jefferson, Alexander Hamilton and James Madison saved this new nation and young republic. Hopefully, in our nation’s capital that was a compromise, maybe our elected officials could arrange another dinner.