“ELI5”
I had to look that up. Okay, I dunno if I can quite equal the 5 yr old requirement but I’ll try-
From 1777 until 1789 the United States operated under the Articles of Confederation. Taxing power for the national government was essentially non-existent. The 13 states owed a lot of money for war debts. To “pay” their debts they had been issuing their own currency, as had the Continental Congress. But no one wanted to get paid in that money, people regarded it as being worthless. The 13 states and the Continental Congress were close to financial collapse.
The United States reorganized under the Constitution in 1789. The national government now had taxing power, which at that time was mostly tariffs collected on imported goods. Treasury Secretary Alexander Hamilton offered to accept either gold or American currency as payment for the taxes owed. This immediately made the formerly “worthless” American money as good as gold, since the government would accept either one as payment.
Hamilton also announced that he would pay, in gold, the interest owed on all debt issued by the US Treasury. This made US Treasury debt highly desirable to investors because they would now have a reliable income stream paid in gold, backed by the taxing power of the United States government. There was a lot of this US Treasury debt because the US Treasury had taken over all of the debts that the 13 States and the Continental Congress during and after the Revolution.
When he took office Secretary Hamilton had inherited a huge debt burden that the country owed but couldn’t pay for. He inherited a worthless currency that no one wanted to accept. The United States in 1789 was a financial basket case that couldn’t pay its bills. And no one was willing to lend the country the money it needed to keep functioning. His innovations described above converted that massive debt and worthless currency into an asset that saved the United States from ruin at its birth. It’s a variation of the funded public debt that the Dutch Republic had used in the 1600s.
Thank you for that explanation, it is clear and precise.