The great work of Hamilton, which was to stamp his name forever upon American history and our frame of government, was yet before him. Washington was inaugurated in April, 1789, but it was not until September 2 that an act passed Congress establishing the Treasury Department. Hamilton was the selection of Washington for the new post. It was a selection so well approved by all who were familiar with Hamilton's great abilities as an organizer and financier that the nomination was confirmed on the day that it reached the Senate. The studies of many years, the programme which had been outlined in letters to Morris and in the newspapers, were now to bear fruit under the directing genius of Hamilton. Only ten days passed after his appointment before Congress requested him to prepare a report upon the public credit. Then came calls for reports on the collection and management of the revenue; estimates of receipts and expenditures; the regulation of the currency; the navigation laws; the post-office, and the public lands. Money had to be found at once for the pressing needs of the new government before the more elaborate projects of the young minister of finance could be put in operation. But Hamilton did not delay long even for the more important and permanent work. When Congress met in January, he submitted his celebrated report "On Public Credit," which laid the corner-stone of American finance under the Constitution.

This report of Hamilton's on the public credit has long stood out as one of the master state papers of American history. Read to-day in the light of the economic progress of more than a century, its conclusions are not entirely novel, but are in the main clear and sound. To obtain a proper perspective regarding their value, the mind should be projected back to the beginning of 1790, when political economy as a science had barely been born, and the work of Adam Smith, although about fourteen years old, was probably known to but few in America. Many public men of to-day with the proper preliminary training might evolve as sound a report as that of Hamilton, but no ordinary man could have done it a hundred and ten years ago, and few men could do it to-day with the force of diction, precision and directness of statement, the grasp of principles, and the mastery of detail which marked the work of Hamilton.

He seemed to gather in his hands all the tangled threads of the disordered finances of the Continental Congress and of the states and show how they could be woven into a band of strength and symmetry, holding together by the motive of enlightened self-interest all the parts of the new Union. He proposed to plant the public credit upon a firm foundation, satisfy the public creditors, and put the nation on the high road to industrial and financial progress. The difficulties which Hamilton confronted were not merely a bankrupt Treasury and a loose system of finance under the federal government, but large expenditures by the states for carrying on the Revolutionary War, for which reimbursement was demanded by the states which had spent the most and was opposed by those which had spent the least. Hamilton endeavored to show that all would gain by the assumption of these debts by the federal government. Although a thinker rather than a tactician, he was shrewd enough to make an appeal early in his report to all men engaged in industry by pointing out the importance of public credit upon the volume and profits of private business. He endeavored first to make clear the benefit to any government of a sound fiscal system. He said upon this point:—

"As, on the one hand, the necessity for borrowing in particular emergencies cannot be doubted, so, on the other, it is equally evident that to be able to borrow upon good terms, it is essential that the credit of a nation should be well established. For, when the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all the loans it has occasion to make. Nor does the evil end here; the same disadvantage must be sustained upon whatever is to be bought on terms of future payment. From this constant necessity of borrowing and buying dear, it is easy to conceive how immensely the expenses of a nation, in the course of time, will be augmented by an unsound state of the public credit."

Taking up the demonstration how closely the public credit is linked with the fortune of the individual, Hamilton points out that public securities are a part of the medium of exchange, that sound credit will extend trade by preventing the export of money, and that agriculture and manufactures will be promoted because "more capital can be commanded to be employed in both," and that the interest of money will be lowered.

Hamilton took up and punctured in his report several fallacies regarding the treatment of the debt which had obtained lodgment in the public mind and threatened to influence the action of Congress. One of these was that a distinction should be made between those holders of the debt to whom it was originally issued and those who had acquired it by purchase. As the latter holders had bought the debt in some cases at a mere fraction of its face value and for speculative purposes, the specious argument was made that they were entitled in the settlement with the government only to what they had paid the original holders. Hamilton set himself to dissipate this prejudice by showing that the man who had been willing to purchase the public debt might be quite as patriotic as the man who had parted with it for a price. He suggested that if the debt was thus purchased in the confidence that it would rise to par, the act was a proof of the patriotism of the purchaser, and it would be a sorry return for this confidence to make it a reason for discrimination against him.

But much more important from the public point of view, he pointed out, was the sanctity of contracts guaranteed by the new Constitution, and absolutely required to give a stable character to the securities of the government. If the government were to discriminate between the original holders of the debt and other holders, he made it clear that a degree of discredit would be cast on all the obligations of the United States, no matter in whose hands they were found, which would tend to defeat the end and aim of all his measures,—the restoration of public credit. Upon this point he said:—

"The nature of the contract, in its origin, is, that the public will pay the sum expressed in the security, to the first holder or his assignee. The intent in making the security assignable is, that the proprietor may be able to make use of his property, by selling it for as much as it may be worth in the market, and that the buyer may be safe in the purchase.

"Every buyer, therefore, stands exactly in the place of the seller, has the same right with him to the identical sum expressed in the security, and having acquired that right, by fair purchase, and in conformity to the original agreement and intention of the government, his claim cannot be disputed without manifest injustice.

"The impolicy of a discrimination results from two considerations: one, that it proceeds upon a principle destructive of that quality of the public debt, or the stock of the nation, which is essential to its capacity for answering the purposes of money, that is, the security of transfer; the other, that, as well on this account as because it includes a breach of faith, it renders property in the funds less valuable, consequently induces lenders to demand a higher premium for what they lend, and produces every other inconvenience of a bad state of public credit."

One of the most serious obstacles which confronted Hamilton in carrying out his financial policy was the opposition to the assumption by the new federal government of the debts of the several states incurred in the prosecution of the war. The states which had been remiss in paying their quota for the general expenses and those which had not been called upon to pay much for local defense did not see why a burden should be imposed upon them, even in equitable proportion with the other states, for the purpose of relieving those states which had been prompt with their payments or had been compelled to spend freely for the protection of their own boundaries and people. This prejudice Hamilton faced with the same clear vision and resolute purpose as that against providing for the debt of the Union. He set forth at the outset that if these debts were to be paid at all, whether by the states or by the Union, "it will follow that no greater revenues will be required, whether that provision be made wholly by the United States, or partly by the states separately." He pointed out that the control of the entire matter by the federal government would secure uniformity of treatment for the public creditors, would prevent competition between the Union and the states for the sources of the revenue, which otherwise might cause collision and confusion, and would secure a distribution of taxation more just to industry in all the states. The assumption of the state debts, moreover, he insisted was vital to the credit of the Union. Upon this head, and upon the equity of charging to the Union of the states the debts which had been incurred for the benefit of all, Hamilton observed:—

"Should the state creditors stand upon a less eligible footing than the others, it is unnatural to expect they would see with pleasure a provision for them. The influence which their dissatisfaction might have could not but operate injuriously, both for the creditors and the credit of the United States. Hence it is even the interest of the creditors of the Union, that those of the individual states should be comprehended in a general provision. Any attempt to secure to the former either exclusive or peculiar advantages would materially hazard their interests. Neither would it be just that one class of the public creditors should be more favored than the other. The objects for which both descriptions of the debt were contracted are in the main the same. Indeed, a great part of the particular debts of the states has arisen from assumptions by them on account of the Union. And it is most equitable, that there should be the same measure of retribution for all.

"The general principle of it seems to be equitable, for it appears difficult to conceive a good reason why the expenses for the particular defense of a part, in a common war, should not be a common charge, as well as those incurred professedly for the general defense. The defense of each part is that of the whole, and unless all the expenditures are brought into a common mass, the tendency must be to add to the calamities suffered by being the most exposed to the ravages of war, an increase of burthens."

Hamilton found the public debt of the Union to be $54,124,464.56. This would not be a formidable debt to-day, even with full allowance for the difference in population, but it was formidable for that time because of the comparative poverty of the country, and the scanty resources for paying it. The great increase in the productive power of man in our time, by means of machinery, improved means of communication, and other devices for saving labor and increasing its efficiency, makes it easy for prosperous nations to bear taxation without feeling the burden which would have paralyzed industry and arrested national progress a century ago. The United States in 1790 were not far beyond the primitive condition in which the entire sum of production is required for the necessaries of existence, and little is left for the luxuries of life and of state enterprise.

The total of the debt, as computed by Hamilton, was made up by adding the foreign debt, $10,070,307, with arrears of interest amounting to $1,640,071.62, to the principal of the domestic debt, $27,383,917.74, with arrears of interest amounting to $13,030,168.20, and estimating the unliquidated debt at $2,000,000. The amount of the state debts he was not able to ascertain with precision, but estimated at about $25,000,000. This made the total debt to be dealt with something more than $75,000,000. The annual interest required at the rates provided in the contract would amount to $542,599.66 on the foreign debt, and $4,044,845.15 on the domestic debt, including that of the states, making a total of $4,587,444.81. While urging the most conscientious fulfillment of obligations, Hamilton admitted that this demand would require the extension of taxation to a degree and to objects which the true interests of the public creditors themselves forbade. "It is therefore to be hoped," he said, "and even to be expected, that they will cheerfully concur in such modifications of their claims, on fair and equitable principles, as will facilitate to the government an arrangement substantial, durable, and satisfactory to the community."

This arrangement he did not propose to reach by repudiating any portion of the debt. He proposed to reduce the rate of interest, in course of time, in accordance with the decline in the rate for the rental of capital abroad, but to those holders of the debt who desired settlement in full at the old rates of interest, he made liberal offers. A number of optional plans for accepting funds at different rates of interest for different terms were presented, which it is not necessary to set forth in detail. The statement of the first two will give an idea of their general character:—

"First, That, for every hundred dollars subscribed, payable in the debt, (as well interest as principal,) the subscriber be entitled, at his option, either to have two-thirds funded at an annuity or yearly interest of six per cent., redeemable at the pleasure of the government, by payment of the principal, and to receive the other third in lands in the western territory, at the rate of twenty cents per acre. Or, to have the whole sum funded at an annuity or yearly interest of four per cent, irredeemable by any payment exceeding five dollars per annum, on account both of principal and interest, and to receive, as a compensation for the reduction of interest, fifteen dollars and eighty cents, payable in lands, as in the preceding case."

Hamilton thus reserved the right to redeem the debt at the pleasure of the government, when new securities could be floated at reduced rates. This was in accordance with the enlightened policy of governments before and since in availing themselves of the increase of capital and the improved condition of the public credit. The holder of the public funds could find no fault if he received back his principal, while an attractive investment at current rates of return upon capital would be offered to new investors in the form of funds at a reduced rate of interest, if such new funds were not acceptable to the old holders of the debt.

The proposal for using the public lands in part settlement of the debt was a happy device for employing a resource of immense value to the country, and promoting early settlement of the great areas of uncultivated land which became the property of the Union. It was in pursuance of this comprehensive policy that Connecticut, Virginia, and other states had ceded to Congress, even before the adoption of the Constitution, their indefinite claims to the great stretches of country between the Allegheny Mountains and the Mississippi.