one of the master state papers of American history. Read to-day in the
light of the economic progress of more than a century, its conclusions
are not entirely novel, but are in the main clear and sound. To obtain
a proper perspective regarding their value, the mind should be
projected back to the beginning of 1790, when political economy as a
science had barely been born, and the work of Adam Smith, although
about fourteen years old, was probably known to but few in America.
Many public men of to-day with the proper preliminary training might
evolve as sound a report as that of Hamilton, but no ordinary man
could have done it a hundred and ten years ago, and few men could do
it to-day with the force of diction, precision and directness of
statement, the grasp of principles, and the mastery of detail which
marked the work of Hamilton.
He seemed to gather in his hands all the tangled threads of the
disordered finances of the Continental Congress and of the states and
show how they could be woven into a band of strength and symmetry,
holding together by the motive of enlightened self-interest all the
parts of the new Union. He proposed to plant the public credit upon a
firm foundation, satisfy the public creditors, and put the nation on
the high road to industrial and financial progress. The difficulties
which Hamilton confronted were not merely a bankrupt Treasury and a
loose system of finance under the federal government, but large
expenditures by the states for carrying on the Revolutionary War, for
which reimbursement was demanded by the states which had spent the
most and was opposed by those which had spent the least. Hamilton
endeavored to show that all would gain by the assumption of these
debts by the federal government. Although a thinker rather than a
tactician, he was shrewd enough to make an appeal early in his report
to all men engaged in industry by pointing out the importance of
public credit upon the volume and profits of private business. He
endeavored first to make clear the benefit to any government of a
sound fiscal system. He said upon this point:--
"As, on the one hand, the necessity for borrowing in particular
emergencies cannot be doubted, so, on the other, it is equally evident
that to be able to borrow upon good terms, it is essential that the
credit of a nation should be well established. For, when the credit of
a country is in any degree questionable, it never fails to give an
extravagant premium, in one shape or another, upon all the loans it
has occasion to make. Nor does the evil end here; the same
disadvantage must be sustained upon whatever is to be bought on terms
of future payment. From this constant necessity of borrowing and
buying dear, it is easy to conceive how immensely the expenses of a
nation, in the course of time, will be augmented by an unsound state
of the public credit."
Taking up the demonstration how closely the public credit is linked
with the fortune of the individual, Hamilton points out that public
securities are a part of the medium of exchange, that sound credit
will extend trade by preventing the export of money, and that
agriculture and manufactures will be promoted because "more capital
can be commanded to be employed in both," and that the interest of
money will be lowered.
Hamilton took up and punctured in his report several fallacies
regarding the treatment of the debt which had obtained lodgment in the
public mind and threatened to influence the action of Congress. One
of these was that a distinction should be made between those holders
of the debt to whom it was originally issued and those who had
acquired it by purchase. As the latter holders had bought the debt in
some cases at a mere fraction of its face value and for speculative
purposes, the specious argument was made that they were entitled in
the settlement with the government only to what they had paid the
original holders. Hamilton set himself to dissipate this prejudice by
showing that the man who had been willing to purchase the public debt
might be quite as patriotic as the man who had parted with it for a
price. He suggested that if the debt was thus purchased in the
confidence that it would rise to par, the act was a proof of the
patriotism of the purchaser, and it would be a sorry return for this
confidence to make it a reason for discrimination against him.
But much more important from the public point of view, he pointed out,
was the sanctity of contracts guaranteed by the new Constitution, and
absolutely required to give a stable character to the securities of
the government. If the government were to discriminate between the
original holders of the debt and other holders, he made it clear that
a degree of discredit would be cast on all the obligations of the
United States, no matter in whose hands they were found, which would
tend to defeat the end and aim of all his measures,--the restoration
of public credit. Upon this point he said:--
"The nature of the contract, in its origin, is, that the public will
pay the sum expressed in the security, to the first holder or his
assignee. The intent in making the security assignable is, that the
proprietor may be able to make use of his property, by selling it for
as much as it may be worth in the market, and that the buyer may be
safe in the purchase.
"Every buyer, therefore, stands exactly in the place of the seller,
has the same right with him to the identical sum expressed in the
security, and having acquired that right, by fair purchase, and in
conformity to the original agreement and intention of the government,
his claim cannot be disputed without manifest injustice.
* * * * *
"The impolicy of a discrimination results from two considerations:
one, that it proceeds upon a principle destructive of that quality of
the public debt, or the stock of the nation, which is essential to its
capacity for answering the purposes of money, that is, the security of
transfer; the other, that, as well on this account as because it
includes a breach of faith, it renders property in the funds less
valuable, consequently induces lenders to demand a higher premium for
what they lend, and produces every other inconvenience of a bad state
of public credit."
One of the most serious obstacles which confronted Hamilton in
carrying out his financial policy was the opposition to the assumption
by the new federal government of the debts of the several states
incurred in the prosecution of the war. The states which had been
remiss in paying their quota for the general expenses and those which
had not been called upon to pay much for local defense did not see
why a burden should be imposed upon them, even in equitable proportion
with the other states, for the purpose of relieving those states which
had been prompt with their payments or had been compelled to spend
freely for the protection of their own boundaries and people. This
prejudice Hamilton faced with the same clear vision and resolute
purpose as that against providing for the debt of the Union. He set
forth at the outset that if these debts were to be paid at all,
whether by the states or by the Union, "it will follow that no greater
revenues will be required, whether that provision be made wholly by
the United States, or partly by the states separately." He pointed out
that the control of the entire matter by the federal government would
secure uniformity of treatment for the public creditors, would prevent
competition between the Union and the states for the sources of the
revenue, which otherwise might cause collision and confusion, and
would secure a distribution of taxation more just to industry in all
the states. The assumption of the state debts, moreover, he insisted
was vital to the credit of the Union. Upon this head, and upon the
equity of charging to the Union of the states the debts which had been
incurred for the benefit of all, Hamilton observed:--
"Should the state creditors stand upon a less eligible footing than
the others, it is unnatural to expect they would see with pleasure a
provision for them. The influence which their dissatisfaction might
have could not but operate injuriously, both for the creditors and the
credit of the United States. Hence it is even the interest of the
creditors of the Union, that those of the individual states should be
comprehended in a general provision. Any attempt to secure to the
former either exclusive or peculiar advantages would materially hazard
their interests. Neither would it be just that one class of the public
creditors should be more favored than the other. The objects for which
both descriptions of the debt were contracted are in the main the
same. Indeed, a great part of the particular debts of the states has
arisen from assumptions by them on account of the Union. And it is
most equitable, that there should be the same measure of retribution
for all.
* * * * *
"The general principle of it seems to be equitable, for it appears
difficult to conceive a good reason why the expenses for the
particular defense of a part, in a common war, should not be a common
charge, as well as those incurred professedly for the general defense.
The defense of each part is that of the whole, and unless all the
expenditures are brought into a common mass, the tendency must be to
add to the calamities suffered by being the most exposed to the
ravages of war, an increase of burthens."
Hamilton found the public debt of the Union to be $54,124,464.56. This
would not be a formidable debt to-day, even with full allowance for
the difference in population, but it was formidable for that time
because of the comparative poverty of the country, and the scanty
resources for paying it. The great increase in the productive power
of man in our time, by means of machinery, improved means of
communication, and other devices for saving labor and increasing its
efficiency, makes it easy for prosperous nations to bear taxation
without feeling the burden which would have paralyzed industry and
arrested national progress a century ago. The United States in 1790
were not far beyond the primitive condition in which the entire sum of
production is required for the necessaries of existence, and little is
left for the luxuries of life and of state enterprise.
The total of the debt, as computed by Hamilton, was made up by adding
the foreign debt, $10,070,307, with arrears of interest amounting to
$1,640,071.62, to the principal of the domestic debt, $27,383,917.74,
with arrears of interest amounting to $13,030,168.20, and estimating
the unliquidated debt at $2,000,000. The amount of the state debts he
was not able to ascertain with precision, but estimated at about
$25,000,000. This made the total debt to be dealt with something more
than $75,000,000. The annual interest required at the rates provided
in the contract would amount to $542,599.66 on the foreign debt, and
$4,044,845.15 on the domestic debt, including that of the states,
making a total of $4,587,444.81. While urging the most conscientious
fulfillment of obligations, Hamilton admitted that this demand would
require the extension of taxation to a degree and to objects which the
true interests of the public creditors themselves forbade. "It is
therefore to be hoped," he said, "and even to be expected, that they
will cheerfully concur in such modifications of their claims, on fair
and equitable principles, as will facilitate to the government an
arrangement substantial, durable, and satisfactory to the community."
This arrangement he did not propose to reach by repudiating any
portion of the debt. He proposed to reduce the rate of interest, in
course of time, in accordance with the decline in the rate for the
rental of capital abroad, but to those holders of the debt who
desired settlement in full at the old rates of interest, he made
liberal offers. A number of optional plans for accepting funds at
different rates of interest for different terms were presented, which
it is not necessary to set forth in detail. The statement of the first
two will give an idea of their general character:--
"First, That, for every hundred dollars subscribed, payable in the
debt, (as well interest as principal,) the subscriber be entitled, at
his option, either to have two-thirds funded at an annuity or yearly
interest of six per cent., redeemable at the pleasure of the
government, by payment of the principal, and to receive the other
third in lands in the western territory, at the rate of twenty cents
per acre. Or, to have the whole sum funded at an annuity or yearly
interest of four per cent, irredeemable by any payment exceeding five
dollars per annum, on account both of principal and interest, and to
receive, as a compensation for the reduction of interest, fifteen
dollars and eighty cents, payable in lands, as in the preceding
case."
Hamilton thus reserved the right to redeem the debt at the pleasure of
the government, when new securities could be floated at reduced rates.
This was in accordance with the enlightened policy of governments
before and since in availing themselves of the increase of capital and
the improved condition of the public credit. The holder of the public
funds could find no fault if he received back his principal, while an
attractive investment at current rates of return upon capital would be
offered to new investors in the form of funds at a reduced rate of
interest, if such new funds were not acceptable to the old holders of
the debt.
The proposal for using the public lands in part settlement of the debt
was a happy device for employing a resource of immense value to the
country, and promoting early settlement of the great areas of
uncultivated land which became the property of the Union. It was in
pursuance of this comprehensive policy that Connecticut, Virginia,
and other states had ceded to Congress, even before the adoption of
the Constitution, their indefinite claims to the great stretches of
country between the Allegheny Mountains and the Mississippi.
IV
CONGRESS SUSTAINS HAMILTON
The plans of Hamilton having been formulated, it remained to be
determined whether they should be adopted by the lawmaking power or
should remain a splendid but abortive monument to the constructive
skill of their author. Vigorous opposition was expected by Hamilton to
the measures which he proposed. He had endeavored to meet and disarm
such opposition as far as possible in the careful and illuminating
language of his report, but it soon became evident that against nearly
all parts of it a bitter and persistent battle would be waged. The
owners of capital and the commercial element were represented in the
Northern and Eastern States rather than in the South, and the
representatives of the former states strongly supported from the first
the entire policy of the Secretary of the Treasury. Rumors were
already abroad that something was to be done to restore the national
credit, but it was not until the reading of Hamilton's report in the
House (January 14, 1790) that the full scope of his plans was made
manifest.
The effect of the report was so favorable upon the public credit as to
forge weapons for its enemies. This came about through the sudden rise
in the public funds, and the promptness with which speculators bought
them up from holders who were ignorant of their value. Funds which
would have been gladly disposed of at three shillings to the pound, or
fifteen per cent. of their face value, at any time within the previous
three years, rose before noon the next day fifty per cent. of their
quoted price. It was not yet certain that the project would be adopted
by Congress, but shrewd men were willing to discount the future in
much the same manner that brokers in Wall Street do at the present
time. The absence of a well-organized stock market, with the
ramifications of telegraphic quotations throughout the Union, put in
the hands of the more daring of these speculators an opportunity to
avail themselves of the ignorance of others to an extent which would
not be possible to-day. Agents were soon scouring the country, buying
up the certificates of the debt in all its varied forms, before the
news of Hamilton's great report had reached the humble holders, some
of whom were old soldiers or quiet farmers who had been compelled to
furnish supplies for the army. Jefferson says in his Anas:--
"Couriers and relay horses by land, and swift-sailing pilot-boats by
sea, were flying in all directions. Active partners and agents were
associated and employed in every state, town, and county, and the
paper bought up at five shillings, and even as low as two shillings in
the pound, before the holder knew that Congress had already provided
for its redemption at par."
This sudden and remarkable effect of Hamilton's recommendations put
weapons in the hands of the enemies of the project, because it seemed
to give force to their argument that a distinction should be made
between those to whom the debt was originally issued at par and the
new holders who had obtained it at a discount. Long and bitter were
the debates in the House over this and other branches of Hamilton's
project. But it was so obvious that a distinction between the holders
of the debt would run directly counter to its character as negotiable
paper, and would be almost impossible of just execution, that the
friends of the funding project easily had the best of the argument.
Madison, although inclined to oppose Hamilton, was forced to admit
that the debt must be funded at par without discrimination. He brought
forward a project to pay the original holders the difference between
par and the price at which they had sold, and to pay to the present
holders only what they had paid for the securities. This was shown to
be so impracticable that only thirteen votes were given for it in a
House of forty-nine members voting. The advocates of the entire
funding project carried it in committee of the whole (March 9, 1790)
by a vote of 31 to 26.
The debates had so strengthened the position of Hamilton that the
wisdom of funding the debt of the Union at par was now generally
admitted. His opponents and those who feared too great a concentration
of power in the capitalist class and the central government made their
stand on the proposal to assume the state debts. When the resolution
reported by the committee of the whole was taken up in the House on
March 29, several representatives from North Carolina appeared in the
House and swelled the ranks of the opposition. North Carolina had been
late in accepting the Constitution, and her members had not been
present on previous votes. When, therefore, a motion to recommit the
financial projects was made, it was carried by a vote of 29 to 27. The
advocates of assumption were so indignant, and so convinced that one
part of the project was as vital as the other, that they voted to
recommit the original funding resolution. Further debate took place,
but without shaking the firmness of the opposition to the assumption
of the state debts. The project was rejected in committee (April 12)
by a vote of 31 to 29.
The situation was a grave one. Hamilton felt that the future of the
Union was at stake. If his projects were not adopted substantially as
a whole, the new government would be without credit and the work of
the Convention of 1789 would be in vain. The government at Washington
would be as helpless as the Continental Congress and its committees
had been. This opinion was shared by all those who favored a vigorous
central government, and practically by all the members of the party in
Congress which was forming in support of the measures of Hamilton and
looking to him as their leader. While casting about for some means for
meeting the emergency, Hamilton fell upon a plan which represents one
of the few cases in which he had recourse to diplomacy in his public
career. The question of the location of the national capital had been
for some time pending in Congress. It had already become involved with
the assumption of the state debts. A strong bid had been made by the
opponents of assumption for the five votes of Pennsylvania by the
offer to locate the capital for fifteen years at Philadelphia.
The importance of having Congress and its officials in a given city
represented more at that time, in spite of the small size of the body
and the relative insignificance of the interests before it, than would
be the case to-day with either of the great commercial cities of New
York, Boston, or Philadelphia. Local interests played the same part
then as now in political man[oe]uvring, and possession of the capital
looked larger in the eyes of some members than the financial policy of
the Union. In the sarcastic language of Professor McMaster, "The state
debts might remain unpaid, the credit of the nation might fall, but
come what might, the patronage of Congress must be drawn from New York
and distributed among the grog-shops and taverns of Philadelphia."
Hamilton took advantage of this situation to save assumption and to
fix the financial policy of the United States. The Senate had
rejected the proposal to establish the capital at Philadelphia, and
when the project came back to the House, Baltimore was substituted by
a majority of two. The Pennsylvanians and their friends in the Senate
retaliated by mutilating the funding bill and daring the
assumptionists to reject it. The latter held to their position and
rejected the bill, 35 to 23. It was while matters were in this acute
stage, while threats were made on behalf of the North that the Union
would be broken up if assumption were not carried, that Hamilton one
day in front of the President's house met Thomas Jefferson. Jefferson
had recently returned from France to assume the position of Secretary
of State. What followed is best told in Jefferson's own words, because
he afterwards claimed that he had been "duped" by Hamilton and acted
without knowledge of the effect of what he was doing. Jefferson's
account of the matter is as follows:--