Indeed, shortly before Hamilton took office, Gouverneur Morris, a delegate to the Constitutional Convention and chair of the document’s drafting committee, succumbed to something very much like this temptation. He and a syndicate of similarly wealthy Americans had in 1787 made just such a bid for a portion of the country’s outstanding debt. They focused on the paper held by the French treasury. Because France was then near bankruptcy, and its debt, like America’s, sold at a very deep discount, Morris and his associates proposed to buy French bonds cheaply and swap them back to the French treasury for its American holdings. France could gain by retiring some of its debt. The United States would gain because the transaction would have turned some of its foreign debt into a domestic obligation where the U.S. Treasury would have had more options. If the U.S government paid off only a portion of what it owed, Morris and his friends would also have turned a handsome profit.

As it turned out, the deal fell through. When Morris approached the French treasury, Finance Minister Jacques Necker explained that he needed cash. Profit prospects from the trade were so good that Morris and his friends were willing to make half the exchange in cash and the rest in French government debt. Necker showed a good deal of interest in this proposal, but shortly thereafter, pricing turned against the trade. Tension between Britain and the Netherlands had sent Dutch bankers in search of substitutes for their British investments. They seized, accurately it turned out, on the adoption of the Constitution as a good sign for American public finance. Led by the great Amsterdam bank, Willinks, Van Staphorst, and Hubbard, they raised money to buy the most deeply discounted part of U.S. debt in Europe—the overdue portion of American bonds held by France. In a short time, Dutch buying had increased the European price of this paper enough to render Morris’ venture impractical. France was better off selling its American paper to the Dutch in what was a completely cash deal.

Though Hamilton might well have felt a measure of sympathy for his friend Morris, he surely welcomed the Dutch buying. Though it precluded the easy fix of buying up some, if not all, U.S. paper cheaply, Hamilton never seriously considered this option. It would have fallen far short of the country’s needs, and what Hamilton surely saw as his official duty as Treasury Secretary. He needed more than a clever maneuver to restore the nation’s public credit so that the United States could borrow easily in the future, as he knew the exercise of the government would surely demand. To meet this goal, he had to reject any solution that bilked the original lenders and others who had acquired the paper since. On the contrary, he needed to demonstrate unequivocally that the United States would always honor its obligations as originally contracted. The country’s other needs, he subsequently made clear, impelled him to go still further. More than a clever financial fix or even the re-establishment of the country’s credit standing, the new government under the Constitution required that its Treasury Secretary also find ways to repair the country’s domestic payments and financial systems as well as set the economy on a path to cope with independence. Hamilton’s willingness to deal with all speaks to character and energy. His ultimate success speaks to genius.

HE LAID out his plans and the analysis behind them in an immense communication to Congress called Report Relative to a Provision for the Support of Public Credit. There he made clear how a solution to any part of the country’s separate economic and financial problems would reinforce the solutions to the others. A restoration of public credit would help to improve domestic finance, which in turn would help the economy. This would raise government revenues and so improving the country’s public credit and its financial system still more. It showed the breadth of his vision and his character that in all he did—including in the inevitable cut and thrust of politics—he never shrank from or compromised on these larger goals.

The debt solution, the most purely financial aspect of the plan, actually constituted its most straightforward part. Here Hamilton set what has since become a standard approach when sovereign governments run into payment difficulties. He refused to repudiate any of the debt, as some in Congress and the administration wanted. That would have destroyed the nation’s credit for years, possibly decades to come. But because he lacked the resources to meet the terms of the original contracts he had to ask creditors for concessions. He proposed that the nation postpone payments to France in order to dedicate what resources it had to come entirely up to date with the Dutch bankers. Based on these on-time payments, he planned to float a loan in Amsterdam large enough to substitute for the existing debt. That new paper, Hamilton knew, had to carry a lower interest rate than the debt it replaced. He focused on 4 percent because, even after raising taxes, likely Treasury revenues available to service the $50 million outstanding came to roughly 4 percent of that figure. That was as low as he dared go. Even at that, he could have retired none of the debt, which, it turned out, he used to serve another of the country’s needs.

As in many such cases since, the creditors readily gave up the 6 percent to take 4. They did so less out of a desire to help than from irrefutably practical reasoning. They knew that at 6 percent the United States would fail to pay, and 4 percent of something is always better than 6 percent of nothing. Still, he sought to bolster the nation’s credit as much as possible by making it appear as if the country had met all its original obligations. Holders, he suggested, should have the choice to stay with the 6 percent bonds. He would promise them that the United States would eventually honor those obligations but would make clear that the new debt was senior, so those who held onto the old paper would have to accept a lower priority should problems arise and receive repayment only according to Congress’ annual appropriations. He also would give creditors the option to take paper that paid 6 percent interest but that postponed the payment of interest, if not its accrual, for some years. He reckoned that he could manage the additional expense at a later date after the economy and federal revenues had time to grow.

To further encourage buyers of the new paper, the plan would equip it with two other appealing characteristics. It would promise to make interest payments entirely in gold and silver, which the old debt had not. He would also seek to inspire confidence by establishing a sinking fund modeled on the one Britain used some years before to encourage buying of its government bonds. He would use $5 million from the new Dutch loan to seed the fund and earmark for it $100,000 a year from the post office’s surplus (it had one at the time) up to an accumulation of $1 million. With these monies, the sinking fund could, at its discretion, gradually retire the outstanding debt—in financial jargon, “sink” it.

Hamilton then explained how the government could secure greater revenues to support the new loan. Tariffs stood as his only substantive option. Direct levies on income and property were out of the question. These, the thinking of the time held, belonged to the states. Indeed, federal income tax ultimately required a Constitutional amendment, the sixteenth in the early twentieth century. Excise taxes, too, belonged to the states. Only the urgent need for revenue pushed Hamilton into this area. He sought such taxes on luxuries, tobacco and liquor. Even though such a move infringed only little on state prerogatives, the notion of an intergovernmental competition for revenues so distressed all in government at the time that it, among other things, prompted Hamilton to seek to compensate the states by absorbing their debts into the federal obligation. Ensuring that state obligations were paid also served his broader goal of establishing the country’s credit with lenders at home and abroad.

Accordingly, he asked Congress to raise import duties to between 5 and 10 percent, 10 percent more if the cargo arrived in a foreign ship. This, he no doubt reasoned, would invite little retaliation by the country’s trading partners, since in their basics his plans mimicked the imperial systems that the European powers had long had in place. By 1790, the average tariff had risen to 20 percent. He reasoned that 20 percent was about as far as he could push matters. Beyond that, they would raise the cost of living for the average American enough to prompt pushback. For today’s professional economists, it is sobering indeed to realize that Hamilton considered matters of optimal taxation almost two centuries before it occurred to the theoreticians.