One of the most important agreements in United States history was the Compromise of 1790. As such, the deal had massive implications for the political and economic future of the nation.
The Compromise of 1790 involved two rivals with drastically different visions for the direction of the United States. Thomas Jefferson was an advocate of limited government and retaining power within the states. Alexander Hamilton, meanwhile, favored a strong federal government at the expense of state power.
The two men were diametrically opposed, each believing that their ideas were superior. Constantly at odds, the two men grappled and used as much of their influence as possible to persuade Congress and President Washington to accept their vision.
When the important dual issues of how to establish the nation’s public credit and pay off Revolutionary war debts, as well as the permanent location of the capitol arose, the two men struck an unlikely bargain now known as the Compromise of 1790.
Why was the Compromise of 1790 Important?
The Compromise of 1790 was important for four primary reasons: the permanent capital moved to Washington, D.C., the federal government assumed state debts, it gave the wealthy a stake in the nation, and the federal government was able to establish a foundation of strong public credit.
Thomas Jefferson wrote of the compromise among himself, James Madison, and Alexander Hamilton struck over a dinner at Jefferson’s New York home in June 1790. While only Madison was in Congress at the time, the three men wielded great influence over the First Congress.
No one knows for certain the exact details discussed, but the prime topics at hand were the Residence Bill to determine the permanent location of the nation’s capital and Hamilton’s Funding Bill, including the assumption of state debts.
Supposedly a deal was reached where Hamilton would supply northern votes for a capital in the south, and Madison would swing southern votes to support Hamilton’s financial plan. In the weeks following the meeting, the stalemate broke with Congress passing both bills.
Although historians like Jacob E. Cooke raised doubts over the true impact of the clandestine meeting and many different parties played a hand in the passage of the two bills, the result was the same with both parties satisfied.
Capital Moved to Washington, D.C.
The first aspect of the Compromise of 1790 occurred when Congress passed the Residence Act in July 1790. The Residence Act officially selected a site along the Potomac River to be the nation’s future capital. As the law stated:
“That a district of territory, not exceeding ten miles square, to be located as hereafter directed on the river Potomack… and the same is hereby accepted for the permanent seat of the government of the United States”
Importantly, this new site had not been specified as of yet. The act gave President Washington the authority to appoint commissioners to find, develop, and build the capital over a period of ten years.
In the meantime, to the delight of Pennsylvanians, Philadelphia was to serve as the nation’s temporary capital. Senator Robert Morris was instrumental in leading the charge to move the capital to Philadelphia on a temporary or permanent basis.
Although the city was only granted the capital on a temporary basis, Philadelphians hoped that something would happen during the decade to prevent the move down to the Potomac. In fact, Pennsylvania legislators tried in vain throughout the 1790s to delay to move on several occasions.1
The bill took months to pass in Congress as legislators were divided along sectional lines. Northerners opposed a site along the Potomac, while southerners favored the site.
Historians generally focus on the House debates and emphasize their importance, however, the critical vote was actually in the Senate. It is here where a crucial Pennsylvania/Virginia alliance supplied most of the votes in favor of the Residence Act.2
Most noteworthy is that Hamilton had very little influence over northern legislators. There is virtually no evidence that he supplied any votes in favor of the site along the Potomac, casting doubt on how influential the meeting with Jefferson and Madison really was.2
More likely than not, legislators negotiated their own compromises to satisfy their own states’ desires around the location of the nation’s capital.
Assumption of State Debts
So the legend goes, in exchange for helping the Residence Bill pass, James Madison and Thomas Jefferson would help sway southern votes to support the passage of Hamilton’s financial plan and specifically a key provision calling for federal assumption of state Revolutionary war debts.
While legislators generally supported Hamilton’s financial plan to address the funding of federal debt, the provision to assume state debts proved extremely divisive. States with large unpaid debts favored federal assumption, while those who prioritized and paid down large portions of their debt were not in favor.2
The debate essentially came down to who gained the most from assumption. States like Pennsylvania felt cheated that they would receive less benefit than other states, and they therefore opposed the measure.1
Just as important as assumption was the final settlement of the debts of the Union. If assumption were passed before final settlement, many feared that it would be pushed off or never completed.
The problem was that southern records of their war debts were largely in disarray. Due to their poor record-keeping regarding damages and expenses the federal government had no choice but to deny many debt claims.
As northern records were far more complete, most of their claims would be assumed without issue, a huge grievance in southern eyes. Despite the grievances, assumption of state debts narrowly gained a majority in July following passage of the Residence Act and finally passed in the House.3
Madison’s influence on assumption was also less than traditionally assumed. As voters fluctuated monthly on the issue it was nearly impossible to predict who would vote for what. Madison himself did not even vote for the Funding Act out of principle.
Congressman Elbridge Gerry (known for his role in the XYZ Affair) summed up the general feeling in Congress when he predicted the disastrous results of delaying a funding bill:1
"The Government will be in danger of a convulsion, the revenue will probably be impaired or lost, and citizens attached to you will no longer be able to support your administration.”
While Madison and Jefferson were surely influential in the bill’s passage, fear of disunion may have held greater sway to finally pass Hamilton’s financial plan.
Bound the Wealthy Aristocracy to the Nation
In total, the federal government assumed ~$21.5 million of state debts as part of Hamilton’s financial plan. In addition to other federal domestic and foreign debt, the total public debt of the United States now exceeded $75 million, a large sum for the time.4
Of the assumed debts, larger states like Massachusetts, South Carolina, Virginia, and North Carolina had the most debts assumed. Interestingly, despite their opposition, over 50% of the assumed debts came from the south.
The Funding Act of 1790 also provided the method to pay off this large amount of debt. The Department of the Treasury would issue federal securities backed by the “full faith and credit” of the United States.
It was key for the wealthy and affluent Americans to buy the new federal bonds. Hamilton wrote that the United States could not be built and maintained on nationalism alone.
Providing interest-bearing bonds to the wealthy would give them a stake in the success of the nation, helping to give “cement of union.” Many wealthy citizens were driven by self-interest, and this could work to the advantage of the United States.1
With the affluent’s financial stake tied to the nation’s fate, these influential citizens could dissuade others from favoring disunion; a constant threat in the early days of the nation.
In just a few years’ time, Hamilton’s financial plan completely transformed the nation’s economy. Congress introduced federal tariffs and excise taxes to help pay down the debt, but states also reduced their own high taxes, lowering the tax burden in many of the larger states with high debts.
In many respects, the plan also shifted the burden of taxation to pay these debts from the state to federal level.
Established Foundation of Public Credit
Released in January 1790, Hamilton’s “First Report on the Public Credit” was an instrumental document in establishing the principles included in his financial plan. Essentially, Hamilton wished to establish a strong public credit profile for the new government.
As a new nation, creditors saw a lot of risk in loaning money to the federal government. Since there was no guarantee that the government would survive long enough to pay back its debts, creditors demanded high interest rates on their loans.
High interest rates could be crippling to a young nation and seriously drag down the economy. If a nation had high debt obligations and interest payments to make, it had little money for other endeavors including for military, defense, tariff enforcement, and other investments.
The plan to establish public credit relied on paying interest regularly and guaranteeing the payments to creditors.4
One of the main issues of the proposal revolved around the interest rates on the new federal debt. Most of the revolutionary war debt was issued at 6% interest, while the new federal debt would be at a lower rate, causing some issues even amongst Hamilton’s supporters.
Many of Hamilton’s supporters (like his father-in-law Philip Schuyler) owned large portions of the outstanding war debt and did not want to accept lower interest payments on their loans.
However, the federal government could not afford a 6% interest rate on all the new debt without significantly raising taxes. Compromise won and the final bill featured different tiers of interest rates ranging between 3-6%.
Between the funding bill and the later creation of the first national bank, Hamilton achieved his goal of transforming the nation from weak to strong credit where it could borrow on the same terms as leading European nations.4
Conclusion
To recap, the Compromise of 1790 was important for four primary reasons:
- Established the nation’s capital in Washington, D.C.
- Included the federal assumption of state debts
- Bound the wealthy aristocracy to the nation
- Established a foundation of strong public credit
The Residence and Funding Acts and resulting stalemate in Congress were a big test for the new government. If the legislators couldn’t come together and agree on a course forward, the experiment of the new Constitution was doomed.
The Compromise of 1790 was an important step to not only address major concerns, but to also show that men with competing interests could come together and make a deal where all parties were satisfied.
While overshadowed by other major Congressional agreements such as the Missouri Compromise and Compromise of 1850, this one was no less significant.
Southerners were happy to obtain the nation’s capital, while New Englanders rejoiced at the federal assumption of state debts. Though difficult and contentious times lay ahead, the spirit of compromise guided the nation during Washington’s first term.
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Sources
1) Baumann, Roland M. “‘HEADS I WIN, TAILS YOU LOSE’: THE PUBLIC CREDITORS AND THE ASSUMPTION ISSUE IN PENNSYLVANIA, 1790–1802.” Pennsylvania History: A Journal of Mid-Atlantic Studies, vol. 44, no. 3, 1977, pp. 195–232. JSTOR, http://www.jstor.org/stable/27772464.
2) Cooke, Jacob E. “The Compromise of 1790.” The William and Mary Quarterly, vol. 27, no. 4, 1970, pp. 524–45. JSTOR, https://doi.org/10.2307/1919703.
3) Bowling, Kenneth R. “Dinner at Jefferson’s: A Note on Jacob E. Cooke’s ‘The Compromise of 1790.’” The William and Mary Quarterly, vol. 28, no. 4, 1971, pp. 629–48. JSTOR, https://doi.org/10.2307/1922191.
4) Swanson, Donald F. “Thomas Jefferson on Establishing Public Credit: The Debt Plans of a Would-Be Secretary of the Treasury?” Presidential Studies Quarterly, vol. 23, no. 3, 1993, pp. 499–508. JSTOR, http://www.jstor.org/stable/27551109.
