Thomas Jefferson opposed the Alexander Hamilton plan to fund America's debt and the establishment of a National Bank. Then President George Washington, a Federalist, asked Hamilton, his Federalist Secretary of Treasury, and Jefferson to make arguments for and against. Washington eventually sided with Hamilton -- and the first version of the Fed was created.
Robert R. Blain, writing in his paper ‘United States public and private debt: 1791 to 2000’, explains some of these issues:
One problem was Revolutionary War debt . . .
The problem faced by the First Congress was Revolutionary War debt. Under the Articles of Confederation, Congress had been unable to collect the taxes needed to pay interest on that debt, so the debt had grown by compounding interest from about $40 million to $75 million. The Constitution strengthened the central government precisely to collect taxes to pay interest on the debt. Abraham Lincoln at Gettysburg may have said that the new nation was "conceived in liberty" but the Constitution was conceived in debt.
The other problem was no money supply . . .
As a new nation, the United States needed to create a money supply. Congress could have created that money by the authority given it in the new Constitution: "to coin money and regulate the value thereof." It chose instead to use the authority also given it in the Constitution to borrow money. The choice was fateful. It shifted control of the country's money from Congress to its creditors, private bankers.
Hamilton's "funding" plan . . .
The funding system that was adopted was recommended to the First Congress by the first US Secretary of the Treasury, Alexander Hamilton. He was a banker and a plutocrat. He believed that wealthy people should rule the country. He distrusted the common people. So Hamilton recommended a "funding system" -- an odd name because no funds were created -- that put the wealthy in control of the money supply and, therefore, the country. The first step was that Congress pass a law obligating itself to pay interest to holders of Revolutionary War debt certificates. By so doing, Hamilton argued that people would consider the debt certificates valuable and would exchange them for goods and services, thus the debt certificates would circulate as money.
Hamilton's Bank plan . . .
The second part of Hamilton's recommended plan was to allow holders of debt certificates to use them to buy stock in a national bank that Congress was also to charter, The Bank of the United States. That bank would create the country's money as loans costing interest. By putting these two parts of the plan in place, the $75 million debt would become the base for a growing money supply, but all of it as debt.
Interest causes debt to compound . . .
The problem with Hamilton's plan was that interest had to be paid on the debt-circulating-as-money. If the debt certificates were used to pay the interest, the money supply would shrink and money shortages would cause economic recessions. To maintain debt-money in circulation, owners of the debt, the creditors, would add more debt to what was already owed. So debt would grow at about the rate of interest forever. After 200 years of debt money, total public and private debt has grown to about $20,000,000,000,000. That's $20 trillion, and it will continue to grow, like a snowball rolling downhill, by ever-larger amounts.
Why did they do it?
If such a system had caused bankruptcy is so many cases in Europe [Florence, Genoa, Venice, Spain and England] why did members of the First Congress adopt it? On January 28, 1790, a few days before his speech to the First Congress predicting a debt explosion, [Congressman] James Jackson gave another speech in which he accused [certain] congressmen of sending agents throughout the country to buy up the depreciated debt certificates before Hamilton's plan became known to the public. In this way, these congressmen would own the certificates when the Funding Act was passed into law and the value of the certificates appreciated to their face value. Then, they and their friends would become stockholders in the new Bank of the United States and profit from interest and growing debt.
Thomas Jefferson tried to stop it. His words are worth remembering.
If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless.... The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions (having the issuing power of money) are more dangerous to liberty than standing armies. My zeal against these institutions was so warm and open at the establishment of the Bank of the United States (Hamilton's foreign system), that I was derided as a maniac by the tribe of bank mongers who were seeking to filch from the public.