Our First Bail-Out

Our country's first bail-out has enchanting similarities to the present state of affairs. The year was 1790. The republic was young, merely one year separated from George Washington becoming our first president, having sworn the oath of office on the steps of Federal Hall in New York, overlooking Wall Street. 

The starring role then was also played by the Secretary of the Treasury, a fellow named Alexander Hamilton. The beneficiaries of the bail-out were the 13 original states themselves. The amount was $25 Million of debt incurred by the states as an outcome of fighting the revolutionary war. The titanic clash that ensued was a fight over whether the federal government should assume the states' debt. It was called the "assumption debate". As a side note, doesn't assumption sound so much less desperate than "bail-out"?

Hamilton saw assumption as an opportunity to forge a union of the states, a true United States. To Hamilton, it was akin to an act of patriotism. The chief assumption dissenter was James Madison, seconded by a fellow Virginian and Secretary of State, Thomas Jefferson. They argued that Virginia and other southern states had almost retired the debt and vehemently opposed the idea of now paying the other states' share. Plus, they didn't trust Hamilton and disliked his combative, take-no-prisoners style. 

As the rancorous debate raged in the summer of 1790, it became evident that Mr. Madison's side had the votes to reject assumption and that's exactly what they did. Alexander Hamilton did not relent. Knowing that the sites for both the temporary capital and the permanent capital were still undecided, the brilliant Mr. Hamilton saw an opportunity. 

Other than New Yorkers, and perhaps other northeasterners, there was not a wave of support for either a temporary or a permanent capital in New York City. The reasons for the "just say no to New York" were many: it was distant from the geographic center of the states; many desired an agrarian, rather than an urban, personality to the capital; New York City would be too close to commercial and financial interests. Nevertheless, New York was a distinct possibility for a temporary capital and there was fear that the temporary would become permanent.

Hamilton needed Pennsylvania congressmen to side with him and he needed Virginia to rescind its opposition. It went down like this: in exchange for assumption backing, Hamilton told the Pennsylvanians that he would support Philadelphia as the location for the temporary capital. To please the Virginians, he would lobby for a permanent capital on the Potomac. (the establishment of a ten square mile federal district for the capital had been agreed upon at the constitutional convention). The Pennsylvanians assented and Madison voted against assumption but encouraged four Virginians to vote for the measure.

There are two enduring consequences of our first bail-out: (1) Jefferson later intimated that this bitter division gave rise to two distinct factions, our first political parties that remain with us today if one accepts the "Republican Democrats" becoming just "Democrats" in the 1820s and the Whigs morphing into Republicans in the 1850s; and, (2) the federal government gained the power to tax. The second consequence was Hamilton's aim in his mission to create a strong federal government. Once gained, the power to tax would not be ceded.

Where was President Washington in all of this? He supported assumption but wanted to not appear partisan so he stayed out of the fray.