B. FUNDING THE NATIONAL DEBT AT PAR 1. Jefferson Accuses Hamilton of Graft (1790) President Washington’s new government inherited a burdensome debt of more than $54,000,000 from its predecessor. Secretary of the Treasury Hamilton, in his famed First Report on the Public Credit (January 14, 1790), boldly recommended that the depreciated securities representing this obligation be redeemed at par by exchanging them for interest-bearing bonds. His purposes were to establish the public credit by one dramatic stroke and also to enlist solid support for the new regime. He was later savagely (and unfairly) criticized for enriching the speculators who had bought up the depreciated certificates, and for not having attempted to search out the original security holders. The truth is that a lively speculation in the depreciated securities had begun just as soon as there was any real prospect of a new Constitution. Secretary of State Jefferson put together the following version of this episode some twenty-eight years later from notes taken at the time. Ascertain in what respects Jefferson was unfair to Hamilton, and why. . . . Hamilton’s financial system had then passed. It had two objects: Ist, as a puzzle, to exclude popular understanding and inquiry; 2nd, as a machine for the corruption of the legislature. For he avowed the opinion that man could be governed by one of two motives only, force or interest. Force, he observed, in this country was out of the question; and the inter- ests, therefore, of the members must be laid hold of, to keep the legislative in unison with the executive. And with grief and shame it must be acknowl- edged that his machine was not without effect; that even in this, the birth of our government, some members were found sordid enough to bend their duty to their interests, and to look after personal rather than public good. It is well known that during the [Revolutionary] war the greatest diffi- culty we encountered was the want of money or means to pay our soldiers who fought, or our farmers, manufacturers, and merchants who furnished the necessary supplies of food and clothing for them, After the expedient of paper money had exhausted itself, certificates of debt were given to the individual creditors, with assurance of payment so soon as the United States should be able. But the distresses of these people often obliged them to part with these for the half, the fifth, and even a tenth of their value; and speculators had made a trade of cozening them from the holders by the most fraudulent practices, and persuasions that they would never be paid. In the bill for funding and paying these, Hamilton made no difference between the original holders and the fraudulent purchasers of this paper. 1. A. A. Lipscomb, ed., Writings of Thomas Jefferson (1904), I, 271-73,Great and just repugnance arose at putting these two classes of creditors on the same footing, and great exertions were used to pay the former the full value, and to the latter the price only which they had paid, with in- terest. But this would have prevented the game which was to be played, and for which the minds of greedy members [of Congress] were already tutored and prepared. When the trial of strength on these several efforts had indicated the form in which the bill would finally pass, this being known within doors sooner than with- out, and especially, [sooner] than to those who were in distant parts of the Union, the base scramble began. 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 country neighborhood, and this paper was 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. Immense sums were thus filched from the poor and ignorant, and for- tunes accumulated by those who had themselves been poor enough before. Men thus enriched by the dexterity of a leader [Hamilton] would follow of SATIRE ON THE JEFFERSONIANS As illiterate boors, they are here aping the radical Jacobin clubs of France. Massachusetts Historical Society. course the chief who was leading them to fortune, and become the zealous instruments of all his enterprises. 2. A Defense of Speculators (1790) Secretary Hamilton had electrified the nation, on January 14, 1790, by his report urging the funding of the national debt at par. But not until nearly seven months later did Congress approve the scheme, and with the votes of certain members who held the depreciated securities. Note that the following anonymous letter to the press appeared two weeks after Hamilton’s report, and long before anyone actually knew that Congress would act favorably, Observe what light it sheds on the charge that Hamilton helped cheat the original holders out of their securities. Note also what prejudices are appealed to. 2, Pennsylvania Gazette, Feb, 3, 1790.= The holders of such certificates are called speculators. And what then? Ts not every member of the community a speculator? Is it not as just and ‘as honorable to speculate in certificates as in houses, land, articles of merchandise, etc.? Nay, in many instances, much more so; especially when the present holders had compassion on the original holders, and bought their certificates at the market price, and at a considerable risk, while those of Toryish principles would not touch them. And T am mistaken if it be not these [Tories] that are now endeavoring to raise an outcry. But the certificates have altered in value, Very true. And what species of property is it that has not undergone the same fate, gold itself not excepted? Did they not change value in the hands of the holders for the time being? Must not every holder of property, be it of what kind it may, abide by the change of its value? Have not houses and land fell one half in value within ten years? He that sells a house or land for five hundred pounds, for which he gave a thousand pounds but a few years ago, must hhe come on [demand reimbursement from] the person he bought it of, or does anyone dream that he ought to petition Congress? If the holders of alienated certificates are to be stripped of their prop- erty, it must-be on the footing of equity, or justice, or the leveling [share- the-wealth] principle. The latter of these would, I imagine, suit a great many among us; and something of it, I fear, is in fact at bottom, if those writers alluded to above would but speak out plainly. 3, A Farmer Condemns Hamilton (1790) Injustices would result if Hamilton did not seek out the original holders of the depreciated securities; injustices would result if he did. So he (and Congress) were prepared to follow the quicker and easier path. Tn reading the following complaint by a farmer to the press, discover the most serious grievance of the original security holder, aside from losing his investment. In a former paper [letter] I took notice of the injuries which the pro- posed funding system will do the soldiers and other original holders of certificates, by compelling them to pay taxes in order to appreciate [increase the value of] their certificates in the hands of quartermasters, speculators, and foreigners. The Secretary of the Treasury has declared in his report that these people sold their certificates from choice, and not always from necessity. This I believe is true in a very few instances. A hungry creditor, a distressed family, or perhaps, in some instances, the want of a meal’s victuals, drove most of them to the brokers’ offices, or compelled them to surrender up their certificates. "Two eases of this kind I shall briefly relate. A merchant in the city of Philadelphia put £10,000 into the [public] funds in 1777. In the year 1788 his Britich creditors called upon him for payment of some old debts, In vain he looked up to Congress to refund him the principal he loaned to them. He had their notes, but they were worth only £2,500, and at that rate only, 3. Ibid.his creditors received them from him. Now, is it just that the British creditor should receive from our government £10,000, instead of the £2,500, and the person from whom they were torn by the treaty of peace be abandoned to poverty, despair, and death by his country? Perhaps that very £10,000 fed the American army on the very day that General Gates captured General Burgoyne [at Saratoga]. The other case I shall mention is of a sick soldier, who sold his certificates of £69.7.0 for £3.0.11 to a rich speculator. He went to this speculator after he recovered, and offered to redeem his certificate—but he refused to give it up. Now, can it be right that this poor soldier, every time he sips his bohea tea, or tastes a particle of sugar, should pay a tax to raise £3,0.11 to £69.7.0 in the hands of this speculator? Thus we see public credit (that much hackneyed and prostituted phrase) must be established at the expense of national justice, gratitude, and humanity. The whole report of the Secretary (as he so often styles himself) is so flimsy, and so full of absurdities, contradictions, and impracticabilities, that it is to be hoped it will be voted out of Congress without a dissenting voice. It would be well enough to ask this Mr. Secretary, whether his friends have bought or sold most certificates? . . . Would it not be proper for the farmers to unite immediately, and remonstrate against all these evils? They never were in half the danger of being ruined by the British government that they now are by their own. Had any person told them in the beginning of the war that, after paying the yearly rent of their farms for seven years to carry on this war, at the close of it their farms should not. he worth more than. one fourth of theix original cost and value, in consequence of a funding system—is there a farmer that would have embarked in the war? No, there is not. Why then should we be deceived, duped, defrauded, and ruined by our new rulers? Let us do justice to our brave officers and soldiers. Great Britain paid the Tories for their loyalty, although they did her cause more harm than good. Certainly the United States should not have less gratitude to her most deserving citizens than Great Britain has shown to her least deserving subjects. C. STATE DEBTS AND THE NATIONAL BANK 1. Jefferson Duped (?) by Hamilton (1790) ‘The brilliant young Secretary Hamilton, in his First Report on the Public Credit, proposed to couple the national debt with an assumption of state debts amounting te $21,500,000. His argument was that the states had incurred these burdens while fighting for independence, and hence the obligation was shared by all. One of his main purposes was to weaken states’ rights and strengthen the federal government by tying the states financially to the federal chariot, Those states staggering under large 1. A.A. Lipscomb, ed., The Writings of Thomas Jefferson (1904), I, 273-76.i140 anpatd debts, chiefly in New England, applauded the scheme; those in better finan- tial shape, chiefly in the South, condemned the scheme. The resulting stalemate was broken ‘by a compromise allegedly engineered by Hamilton and Jefferson together. Jefferson, who had recently come to New York after a five-yeat sojourn in France as minister, here recounts the story from contemporary notes and the vantage point of TB18. Decide whether be was really as naive as he professes to have been, and whether he is fair in his analysis of Hamilton’s motives. Assess also the significance of the early tee oe secession, and determine why Souther Congressmen should have been parties to this logrolling operation. This [funding] game was over, and another was on the carpet at the moment of my arrival; and to this I was most ignorantly and innocently made to hold the candle. This fiscal manoeuvre is well known by the name of the Assumption. Independently of the debts of Congress, the states had during the war contracted separate and heavy debts; . - - and the more debt Hamilton could rake up, the more plunder for his mercenaries. This money, whether wisely or foolishly spent, was pretended to have been spent for general purposes, and ought, therefore, to be paid from the general purse. But it was objected that nobody knew what these debts were, what their amount, or what their proofs. No matter; we will guess them to be twenty millions. But of these twenty millions, we do not know how much should be reimbursed to one state, or how much to another. No matter; we will guess. And so another scramble was set on foot among the several states, and some got much, some little, some nothing, But the main object was obtained: the phalanx of the Treasury was reinforced by additional recruits [bureaucrats]. This measure produced the most bitter and angry contest ever known in Congress, before or since the Union of the states. I arrived [in New York] in the midst of it. But a stranger to the ground, a stranger to the actors on it, so long absent as to have lost all familiarity with the subject, and as yet unaware of its object, I took no concern in it. The great and trying question [of assumption], however, was lost in the House of Representatives [31 to 29]. So high were the feuds ex- cited by this subject that on its rejection business was suspended, Con- gress met and adjourned from day to day without doing anything, the parties being too much out of temper to do business together. The Eastern [New England] members particularly, who, with Smith from South Caro- lina, were the principal gamblers in these scenes, threatened a secession and dissolution. Hamilton was in despair. As I was going to the President’s one day, I met him in the street. He walked me backwards and forwards before the President’s door for half an hour. He painted pathetically the temper into which the legislature had been wrought; the disgust of those who were called the creditor states; the danger of the secession of their members, and the separation of the states. He observed that the members of the ‘Administration ought to act in concert; that though this question was notof my [State] Department, yet a common duty should make it a common concern; that the President was the center on which all administrative questions ultimately rested; and that all of us should rally around him, and support, with joint efforts, measures approved by him; and that the question having been lost by a small majority only, it was probable that an appeal from me to the judgment and discretion of some of my friends might effect a change in the vote, and the machine of government, now suspended, might be again set into motion. I told him that I was really a stranger to the whole subject; that not having yet informed myself of the system of finances adopted, I knew not how far this was a necessary sequence; that undoubtedly, if its rejection endangered a dissolution of our Union at this incipient stage, I should deem that the most unfortunate of all consequences, to avert which all partial and temporary evils should be yielded. I proposed to him, however, to dine with me the next day, and I would invite another friend or two, bring them into conference together, and I thought it impossible that reasonable men, consulting together coolly, could fail, by some mutual sacrifices of opinion, to form a compromise which was to save the Union. The discussion took place. I could take no part in it but an exhortatory one, because I was a stranger to the circumstances which should govern it. But it was finally agreed that, whatever importance had been attached to the rejection of this proposition, the preservation of the Union and of concord among the states was more important, and that therefore it would be better that the vote of rejection should be rescinded, to effect which some members should change their votes. But it was observed that this pill would be peculiarly bitter to the Southern states, and that some concomitant measure should be adopted, to sweeten it a little to them. There had before been propositions to fix the [permanent] seat of govern- ment either at Philadelphia, or at Georgetown on the Potomac; and it was thought that by giving it to Philadelphia for ten years, and to Georgetown permanently afterwards, this might, as an anodyne, calm in some degree the ferment which might be excited by the other measure alone. So two of the Potomac members (White and Lee, but White with a revulsion of stomach almost convulsive) agreed to change their votes, and Hamilton undertook to carry the other point. In doing this, the influence he had established over the Eastern members, with the agency of Robert Morris with those of the Middle states, effected his side of the engagement. And so the Assumption was passed, and twenty millions of stock divided among favored states, and thrown in as a pabulum to the stock-jobbing herd. This added to the number of votaries to the Treasury, and made its chief the master of every vote in the legislature which might give to the government the direction suited to his political views. I know well . . . that nothing like a majority in Congress had yielded to this corruption. Far from it. But a division . . . had already taken place . . - between the parties styled republican and federal.2, Hamilton Defends Assumption (1792) ‘The scheme for assuming the state debts, proposed formally by Hamilton early in 1790, was not passed by Congress until nearly seven months later, again with the ates of certain members who stood to gain personally. During this delay a brisk Speculation in the depreciated state securities occurred, largely among Northern finan. Meet amilton, in this private memorandum for Washington, denies that there was anything sinister in such purchases. Locate his strongest ‘argument, and decide who took advantage of whom. Note that much of the same argument could be used to support the funding of the national debt at par. Is a government to bend the general maxims of policy and to mold jts measures according to the accidental course of private speculations? Ts it to do this, or omit that, in cases of great national importance, ‘because one set of individuals may gain, another lose, from unequal opportunities of information, from unequal degrees of resource, craft, confidence, or enterprise? Moreover, there is much exaggeration in stating the manner of the alienation of the debt. The principal speculations in state debts, whatever may be pretended, certainly began after the promulgation of the plan for assuming by the report of the Secretary of the Treasury to the House of Representatives. The resources of individuals in this country are too limited to have admitted of much progress in purchases before the knowledge of that plan was diffused throughout the country. After thet, purchasers and sellers were upon equal ground. If the purchasers speculated upon the sellers, in many instances the sellers speculated upon the purchasers, Each made his calculation of chances, and founded upon it an exchange of money for certificates. It has tumed out generally that the buyer had the best of the bargain, but the seller got the value of his commodity according to hig estimate of it, and probably in a great number of instances more. This shall be explained. It happened that Mr. Madison, and some other distinguished characters of the South, started in opposition to the assumption. The high opinion entertained of them made it be taken for granted in that quarter that the opposition would be successful. The securities quickly rose, by means of purchases, beyond their former prices. It was imagined that they would soon return to their old station by a rejection of the proposition for assum- ing, And the certificate holders were eager to part with them at their current prices, calculating on a loss to the purchasers from their future fall. ‘This, representation. is not conjectural; it is founded on information from. respectable and intelligent Southern characters, and may be ascertained by inquiry. Hence it happened that the inhabitants of the Southem states sustained a considerable loss by the opposition to the assumption from Southern gentlemen, and their too great confidence in the efficacy of that opposition. Further, a great part of the debt which has been purchased by the 2. H. C. Lodge, ed., The Works of Alexander Hamilton (1904), II, 468-70 (Aug. 18, 1792).Northern and Southern citizens has been at higher prices—in numerous instances beyond the true value. In the late delirium of speculation large sums were purchased at 25 percent above par and upward. The Southern people, upon the whole, have not parted with their prop- erty for nothing. They parted with it voluntarily, in most cases, upon fair terms, without surprise or deception—in many cases for more than its value. "Tis their own fault if the purchase money has not been beneficial to them; and, the presumption is, it has been so in a material degree. 3. Jefferson versus Hamilton on the Bank (1791) There were only three banks in the entire country when Hamilton, in 1790, pro- Posed the Bank of the United States as the keystone of his financial edifice. Modeled upon the Bank of England and located in Philadelphia, it would be capitalized at $10,000,000, one-fifth of which might be held by the federal government, As a private concer under strict government supervision, it would be useful to the Treasury in issuing notes, in safeguarding suxplus tax money, and in facilitating numerous public financial transactions. Before signing such a bank bill, Washington solicited the views of his Cabinet members. The opinions of Jefferson, given below, elicited a rebuttal from Hamilton, also given below. Note that Jefferson, the strict constructionist of the Constitution, based his case on the ten’ ith amendment in the Bill of Rights, about to be ratified. Hamilton, the loose constructionist of the Constitution, based his views on the implied powers in Article I, Section VIII, paragraph 18, which stipulates that Congress is empowered “to make all laws which shall be necessary and proper for carrying into execution the foregoing powers. . . -” Which of the two men seems ‘to be on sounder ground in interpreting “necessary”? JEFFERSON Feb. 15, 1791 I consider the foundation of the Constitution as laid on this ground— that all powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are re- served to the states, or to the people (12th [10th] amend.). To take a sin- gle step beyond the boundaries thus specifically drawn around the powers of Congress is to take possession of a boundless field of power, no longer susceptible of any definition. The incorporation of a bank, and the powers assumed by this bill, have not, in my opinion, been delegated to the United States by the Constitution. The second general phrase is “to make all laws necessary and proper for carrying into execution the enu- merated powers.” But they can all be HAMILTON Feb, 23, 1791 If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not for- bidden by any particular provision of the Constitution, it may safely be deemed to come within the compass of the national authority, There is also this further criterion, which may materially assist the de- cision: Does the proposed measure abridge a pre-existing right of any state or of any individual? If it does not, there is a strong presumption in favor of its constitutionality. . . . ++ + “Necessary” often means no more than needful, requisite, inciden- tal, useful, or conducive to... . [A] restrictive interpretation of the word 3. Joid., IIT, 458, 452, 455, 485-86; P. L. Ford, ed., The Writings of Thomas Jeffersor (1895), V, 285, 287,carried into execution without a bank. ‘A bank therefore is not necessary, and consequently not authorized by this phrase. It has been much urged that a bank will give great facility or convenience in the collection of taxes. Suppose this were true; yet the Constitution allows only the means which are “necessary,” not those which are merely “conven- jent,” for effecting the enumerated powers. If such a latitude of construc- tion be allowed to this phrase as to give any non-enumerated power, it [the latitude] will go to every one; for there is not one [power] which inge- nuity may not torture into a conven- ience, in some instance or other, to some one of so long a list of enumer- ated powers. It would swallow up all the delegated powers [of the states], and reduce the whole to one power. “necessary” is also contrary to this sound maxim of construction: namely, that the powers contained in a consti- tution . . . ought to be construed liberally in advancement of the public good. A hope is entertained that it has, by this time, been made to appear to the satisfaction of the President, that a bank has a natural relation to the power of collecting taxes—to that of regulating trade—to that of providing for the common defense—and that, as the bill under consideration contem- plates the government in the light of a joint proprietor of the stock of the bank, it brings the case within the provision of the clause of the Con- stitution which immediately respects [relates to] the property of the United States, [Evidently Art. IV, Sec. Ii, para. 2: “The Congress shall have power to... . make all needful rules and regulations respecting the terri- tory or other property belonging to the United States... .”]