CHAPTER IX.

THE FEDERALIST FINANCIAL POLICY.

Hamilton's first

report on the public credit.

N January, 1790, Hamilton submitted to Congress his first report on the public credit. The objects of his financial policy were clearly stated in the following paragraph: "To justify and preserve the confidence of the most enlightened friends of good government; to promote the increasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources both to agriculture and commerce; to cement more closely the union of the states; to add to their security against foreign attacks; to establish public order on the basis of an upright and liberal policy: these are the great and invaluable ends to be secured by a proper and adequate provision at the present period for the support of the public credit."*

In order to attain these objects, he recommended the payment of the foreign debt in full; the payment of the domestic debt in full, interest and prin

His recommendations.

cipal, to those who held certificates of debt whether they were the original holders of them or not; and the assumption of the debts of the states.

* Works (Hamilton's Edition), III., 5.

The

Congress re

dur

solves to pro

vide for the foreign debt.

There were no differences of opinion in Congress as to what should be done about the foreign debt. All agreed that it must be paid in full. action of the various state legislatures ing the period of the Confederation does indeed plainly show that they were ready enough, to find if they could, excuses for not paying it. The unanimity, therefore, with which the resolution to pay it was passed by the House of Representatives* rather indicates the difficulty of finding plausible reasons for evading these obligations than the existence of a strong public opinion in favor of meeting them.

Objections to

mestic debt in

full.

But when the question arose as to the payment of the domestic debt in full to those who held the certificates of debt, plausible reasons for opposing it were not wanting. A great number paying the doof the original holders-soldiers who had fought for their country and had been paid off at the end of the war with certificates of indebtedness, citizens who had furnished the government with supplies for carrying on the war-had sold off their certificates, sometimes through necessity and sometimes through a lack

* There were, as yet, very few standing committees in either House of Congress. The method adopted was to determine first the leading principles of a bill in committee of the whole and then appoint a special committee to report a bill accordingly. For example, the resolution to make provision for the payment of the foreign debt was first passed by the House in committee of the whole. Later in the session, a special committee was appointed to report a bill accordingly.

of confidence in the government, at a ruinously low price,-in some instances for as little as one eighth of the nominal value.* Was it just that the original holders should receive so little, while a lot of speculators reaped a rich harvest out of their necessities? Why should the government give to the present holders of the debt more than they had paid for it? Because it was so nominated in the bond, said the friends of Hamilton. The government had promised to pay the original holders of the certificates, or their assignees, the nominal value of the debt; on the strength of that promise, speculators had taken the risk and had bought them. Not to carry out the contract with the assignees was for the government to imitate the example of so many of the states during the period of the Confederation and arbitrarily impair the obligations of contract.

These considerations carried the day. The resolution to provide for paying in full the owners of the certificates of debt passed both Houses February 28, 1790, by a large majority.

The debate showed that Madison was beginning to diverge from the straight course laid down by Hamilton. Madison certainly had no sympathy with Madison's plan. the repudiating spirit of the Confederation, and the proposition to scale down the public debt received no support from him. But he proposed that the government should pay the assignees only what they

* Gallatin's Works, III., 127.

had paid, and should hand over the balance of the principal to the original holders. His motion received the vote of but thirteen members of the House, and of these thirteen, nine, significantly enough, were from Virginia.*

Why Hamilton

assumption.

No sooner had this resolution passed than another was introduced which provided for the assumption of the debts of the states. From the point of view of Hamilton, assumption was an recommended inseparable part of his financial system. Designed to accomplish political as well as financial objects of the first importance-"to cement more closely the union of the states"; "to establish public order on the basis of an upright and liberal policy "-his system would have failed in a matter of vital moment if it had not included a provision for the assumption of the debts of the states. In his speech in the federal convention he mentioned state debts as one of the interests which tended to array the states against the government. Not to assume the debts of the states was greatly to increase the danger that the government would not be able to maintain itself against the states; indeed, without assumption it was hardly worth while to attempt the experiment. And this opinion was accepted as orthodox doctrine by influential

* Fisher Ames' remarks about Madison in a letter to a friend about this time are suggestive: "He [Madison] is not a little of a Virginian, and thinks that state the land of promise; but is afraid of their state politics and of his popularity there more than I think he should be. He is our first man."

Federalists generally. George Cabot (an influential Massachusetts Federalist), for example, said that the powers which must be exercised by the states in providing for their own state debts were such as belonged to a supreme government only, and could not be entrusted to subordinate ones. He had settled it as an irrefragable truth, he said, that the national government could not go on without assuming the debts of the states.

The policy of assumption.

Nevertheless, the proposal to assume the debts of the states rested on entirely different ground from the proposal to make provision for the payment of the foreign and the domestic debt. The nation owed its foreign and domestic creditors. Should it pay them or not? That was the simple question, and Congress had answered it affirmatively.

But the nation did not owe the debts of the states. Hamilton argued that those debts were incurred for a national purpose, since they were incurred in carrying on the war, and that, therefore, the nation ought to assume them. Such an argument, however, cannot be used to defend the sort of assumption which Hamilton recommended. If it was right for the nation to reimburse the states for expenses incurred for national purposes, then manifestly the amount to reimburse was not what they owed at the time the constitution was adopted, but the amount they owed at the close of the war, postulating that they had made equal exertions in prosecuting the war and that they had been equally