## The History of the U.S. Financial System ## Source details **Canonical URL:** [The History of the U.S. Financial System](https://www.imf.org/en/publications/fandd/issues/2018/03/gaspar) ## Other formats - [Markdown version](/en/publications/fandd/issues/2018/03/gaspar/index.md) - [Structured JSON version](/en/publications/fandd/issues/2018/03/gaspar/index.json) - [Bundle manifest](/en/publications/fandd/issues/2018/03/gaspar/bundle-manifest.json) ## Bibliographic details - Authors: VITOR GASPAR, DAVID AMAGLOBELI - Published: March 1, 2018 --- ### Historic meeting and political deal - On June 20, 1790, James Madison and Alexander Hamilton met at Thomas Jefferson’s home on Maiden Lane, New York, and struck a deal: Madison agreed to have the US federal government take over the states’ Revolutionary War debt; Hamilton agreed to support moving the nation’s capital to the banks of the Potomac River. - The episode illustrates that public finance reform is fundamentally political and that political negotiation can enable institutional transformation. - Jefferson’s later reflection (September 1792) on the episode: “When I embarked in government, it was with a determination to intermeddle not at all with the legislature & as little as possible with my co-departments. The first and only instance of variance from the former part of my resolution, I was duped by the Secretary of the Treasury and made a tool for forwarding his schemes, not then sufficiently understood by me; and of all the errors of my political life, this has occasioned me the deepest regret.” ### Early fiscal consolidation and institutional building (1789–1792) - Timeline highlights: - April 8, 1789: Madison introduced the First Tariff Act. - August 1, 1789: The First Tariff Act became law. - September 1789: The Treasury Department was created. - By 1792: The new administration had restructured wartime debt, built federal tax capacity, laid foundations of public credit, created a national bank, and promoted financial market development. - Revenue structure and collection: - Tariffs provided a stable source of revenue and contributed about 90 percent of the total federal revenue. - Fiscal condition and debt: - Hamilton estimated the stock of public debt at $79 million (roughly 40 percent of GDP), of which $54 million was owed by the federal government and $25 million by the states. - Debt service costs alone exceeded tax revenues prior to debt reforms. ### Hamilton’s pragmatic program and five core areas - Hamilton’s three landmark reports: - Public credit (January 1790) - A national bank (December 1790) - Manufactures (December 1791) - The reports collectively addressed five core areas: - Taxation - Public credit - Financial markets and organizations - Financial stability and crisis management - Trade policy - Hamilton’s inspiration: a state model like Britain’s post–Glorious Revolution (1688–89) capable of mobilizing resources for war and economic competition, and actively engaged in economic and financial development. ### Debt-conversion proposal and contentious issues - Hamilton proposed offering domestic creditors the choice of swapping existing government notes for new debt to: - Reduce the interest rate from 6 percent to 4 percent, saving about one-third of domestic interest costs. - Offer call protection limiting the government’s ability to redeem the debt early if market interest rates declined. - Political controversies: - The swap at face value created windfall gains for speculators who had purchased original securities at small fractions of face value, sometimes as little as 20 percent. - Debate over federal assumption of states’ debt: Hamilton argued state debts were incurred for the common good (the War of Independence) and therefore appropriate for federal assumption. - Market reaction: - Credibility was gained rapidly after passage of Hamilton’s proposals; in 1791 prices rose above par before falling again during the financial crisis of 1792. ### Liquid markets, federal power, and the location of the capital - Hamilton aimed to: - Ensure creditors’ allegiance to the federal government. - Foster deep and liquid markets for Treasury securities. - Shape the structure of government through the structure of public finances (concentrating taxation capacity at the federal level). - Political bargaining over the capital: - By June 1790, Congress had not yet decided to assume states’ debt; the House passed Hamilton’s funding bill on June 2, 1790, but without the debt-assumption provision. - A compromise at the June 20, 1790 dinner led to Congress’s passage in July 1790 of the Residence and Assumption bills in quick succession. ### Political consequences and the emergence of party politics - The policy confrontations revealed fundamental differences between two camps: - Federalist Party (Hamilton and John Adams): advocated a strong federal government. - Democratic-Republican Party (Jefferson and Madison): favored decentralized government with limited federal powers. - In 1792, Madison and Jefferson organized their party to rival the Federalist party, marking the beginning of professional, competitive party politics in the United States. - The narrative emphasizes that fiscal policy, finance, and politics are inextricably intertwined; debts, taxes, and state capacity shaped the political system. ### Key statistics and exact figures - Dates and events: - June 20, 1790: Madison–Hamilton–Jefferson dinner on Maiden Lane. - April 8, 1789: Madison introduced the First Tariff Act. - August 1, 1789: First Tariff Act became law. - September 1789: Treasury Department created. - January 1790: Hamilton’s report on public credit. - December 1790: Hamilton’s report on a national bank. - December 1791: Hamilton’s report on manufactures. - June 2, 1790: House passed Hamilton’s funding bill (without debt-assumption provision). - July 1790: Congress passed the Residence and Assumption bills. - 1791: Prices rose above par. - 1792: Financial crisis and Madison/Jefferson party organization; by 1792 administration had restructured wartime debt and built institutions. - September 1792: Jefferson’s letter to President Washington reflecting regret. - Fiscal and financial figures: - Tariffs contributed about 90 percent of federal revenue. - Stock of public debt estimated at $79 million (roughly 40 percent of GDP): $54 million federal, $25 million state. - Interest reduction target: from 6 percent to 4 percent (saving about one-third of domestic interest costs). - Speculators sometimes purchased original securities at as little as 20 percent of face value. *VITOR GASPAR, Special Advisor to the Managing Director (until the end of the month of November); DAVID AMAGLOBELI, deputy division chief in the IMF’s Fiscal Affairs Department.* --- ## Content in this bundle - **Política fiscal ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018** - [Política fiscal ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018 (Markdown version)](/-/media/files/publications/fandd/article/2018/march/es/gaspar.pdf.md){rel="alternate" type="text/markdown"} - [Política fiscal ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018 (PDF)](/-/media/files/publications/fandd/article/2018/march/es/gaspar.pdf){rel="external" type="application/pdf"} - **Budget et politique** - [Budget et politique (Markdown version)](/-/media/files/publications/fandd/article/2018/march/fr/gaspar.pdf.md){rel="alternate" type="text/markdown"} - [Budget et politique (PDF)](/-/media/files/publications/fandd/article/2018/march/fr/gaspar.pdf){rel="external" type="application/pdf"} - **The History of the U.S. Financial System - IMF F&D Magazine** - [The History of the U.S. Financial System - IMF F&D Magazine (Markdown version)](/-/media/files/publications/fandd/article/2018/march/gaspar.pdf.md){rel="alternate" type="text/markdown"} - [The History of the U.S. Financial System - IMF F&D Magazine (PDF)](/-/media/files/publications/fandd/article/2018/march/gaspar.pdf){rel="external" type="application/pdf"} - **Политика и финансы – Финансы и развитие – март 2018 года** - [Политика и финансы – Финансы и развитие – март 2018 года (Markdown version)](/-/media/files/publications/fandd/article/2018/march/ru/gaspar.pdf.md){rel="alternate" type="text/markdown"} - [Политика и финансы – Финансы и развитие – март 2018 года (PDF)](/-/media/files/publications/fandd/article/2018/march/ru/gaspar.pdf){rel="external" type="application/pdf"} - **财政政治 - <金融与发展>, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊** - [财政政治 - <金融与发展>, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊 (Markdown version)](/-/media/files/publications/fandd/article/2018/march/zh/gaspar.pdf.md){rel="alternate" type="text/markdown"} - [财政政治 - <金融与发展>, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊 (PDF)](/-/media/files/publications/fandd/article/2018/march/zh/gaspar.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2018/03/gaspar_