by Ron Chernow
To make sure the debt was extinguished over time, Hamilton proposed the creation of a sinking fund, financed by post-office revenues and manned by the government’s chief officers. (A sinking fund is a repository, set up apart from the general budget, for revenues to pay off debt.) It would sequester revenues from the sudden whims of grasping politicians who might want to raid the Treasury for short-term gain. The sinking fund would retire about 5 percent of the debt each year until it was paid off. Because outstanding bonds currently traded below their original face value, such purchases would benefit the government as the securities rose in price. Thus, the government would profit from rising prices alongside private investors. Hamilton concluded, “In the opinion of the Secretary . . . it ought to be the policy of the government to raise the value of stock to its true standard as fast as possible.”33 Little did he know how quickly he was to succeed or how much trouble this success was to bring in its wake.
Even as Hamilton compiled this magnum opus, the prices of government securities streaked upward in anticipation of its publication, the psychological effect being even more pronounced than Hamilton had expected. For the treasury secretary, it was a stunning affirmation of confidence in the new government. Interest rates were tumbling and faith in American credit was being restored.
The exact contents of Hamilton’s report remained a mystery until mid-January. When Congress convened, so-called jobbers—or wealthy dealers in securities— swarmed around Federal Hall and buttonholed members, trying to ferret out details of Hamilton’s program. Speculators could reap huge profits if they divined Hamilton’s intentions correctly, and at New York dinner parties they hung on his every word. Many rich merchants had already posted agents to backwoods areas of the south to scoop up depreciated state debt that would become more valuable if the federal government assumed the debt. Amid this atmosphere of contagious greed, Hamilton deflected attempts to pry loose information from him. In November, his Virginia friend Henry Lee wrote to inquire if Hamilton could divulge any information about his plan. Lee said that he hoped his request was not improper. In response, Hamilton was the very model of a scrupulous treasury secretary:
I am sure you are sincere when you say you would not subject me to an impropriety. Nor do I know that there would be any in my answering your queries. But you remember the saying with regard to Caesar’s wife. [That she should be beyond suspicion.] I think the spirit of it applicable to every man concerned in the administration of the finances of a country. With respect to the conduct of such men, suspicion is ever eagle-eyed and the most innocent things are apt to be misinterpreted.34
On the eve of filing his report, Hamilton succumbed to jitters. “Tomorrow I open the budget and you may imagine that today I am very busy and not a little anxious,” he wrote to Angelica, who soon began to send him financial treatises from London bookshops.35 Skittish and high-strung, Hamilton knew that his proposals would spark frenzied debate and that legislative foes were sharpening their knives. When he informed Congress that he was ready to deliver his report, a controversy flared over whether he should do so in person or on paper. So great was the residual fear of executive encroachment on the legislature that Hamilton was not allowed to present his text in person, so the fifty-one-page pamphlet was read aloud to the House of Representatives on January 14. It was so lengthy that, by the end, many representatives sat there in stupefied silence.
Much later, Daniel Webster rhapsodized about Hamilton’s report as follows: “The fabled birth of Minerva from the brain of Jove was hardly more sudden or more perfect than the financial system of the United States as it burst forth from the conception of Alexander Hamilton.”36 This was the long view of history and of many contemporaries, but detractors were immediately vocal. They were befuddled by the complexity of Hamilton’s plan and its array of options for creditors. Opponents sensed that he was moving too fast, on too many fronts, for them to grasp all his intentions. He had devised his economic machinery so cunningly that its cogs and wheels meshed perfectly together. One could not tamper with the parts without destroying the whole. Hamilton later said of this ingenious structure, “Credit is an entire thing. Every part of it has the nicest sympathy with every other part. Wound one limb and the whole tree shrinks and decays.”37
Perhaps the most settled prejudice Hamilton had to combat was a visceral sense that any program even faintly resembling British practice was pernicious. It was not just that a large funded debt seemed reminiscent of England’s. It was also the fear that Hamilton was switching the power balance in government, tilting it from the House of Representatives, the “people’s” branch, to the executive branch. Senator William Maclay recorded his horror at Hamilton’s program: “He recommends indiscriminate funding and in the style of a British minister has sent down his bill.”38 Beyond this assertion of Treasury power, critics feared outright corruption of legislators by the executive. Maclay and others suspected that several congressmen dabbled in government securities. This “villainous business,” Maclay concluded, will “damn the character of Hamilton as a minister forever.”39 The myth of Alexander Hamilton as the American Mephistopheles was being born. Maclay saw New York financiers as satanic henchmen in collusion with Hamilton to foster “the most abandoned system of speculation ever broached in our country.”40
Hamilton denied that congressmen were speculating in government securities. “As far as I know, there is not a member of the legislature who can properly be called a stock-jobber or a paper dealer,” he assured Washington. Of those who did own such securities, most had held them since the war, and Hamilton saw nothing wrong with this: “It is a strange perversion of ideas... that men should be deemed corrupt and criminal for becoming proprietors in the funds of their country. Yet I believe the number of members of Congress very small who have ever been considerably proprietors in the funds.”41
Maclay scoffed at such claims and saw Congress in an unholy league with New York speculators: “The whole town almost has been busy at it and, of course, all engaged in influencing the measures of Congress. Nor have the members [of Congress] themselves kept their hands clean from this dirty work.... [H]enceforth we may consider speculation as a congressional employment.”42 Maclay was sincere in his misgivings and yet, like many of Hamilton’s naysayers, basically ignorant of finance. When the sinking fund began buying up government debt later in the year, Maclay descried a plot to line the pockets of speculators. He didn’t seem to realize that such market operations reduced debt and drove down interest rates, benefiting the entire economy. Maclay and other critics were correct that the Hamiltonian system didn’t necessarily reward the just or the virtuous, yet they missed the larger social benefits that accrued to society.
Hamilton’s Report on Public Credit had an electrifying effect. Securities began to change hands with a speed never before seen in America. Robert R. Livingston observed that the speculative craze “invaded all ranks of people,” even infecting hardened antifederalists such as George Clinton and Melancton Smith.43 Staggered by this rampant speculation, Congressman James Jackson dubbed the perpetrators “rapacious wolves seeking whom they may devour.”44 Jackson stood up on the House floor in late January to protest the “spirit of havoc, speculation, and ruin” that had followed Hamilton’s report and charged that many speculators had profited from advance knowledge of it. He alleged that three vessels loaded with speculators had departed from New York within the past fortnight, bound for the south to sweep up state debt from unsuspecting investors who had not yet heard about Hamilton’s program. “My soul arises indignant at the avaricious and immoral turpitude which so vile a conduct displays,” he thundered.45
Another critic, Benjamin Rush of Philadelphia, exhibited the often untutored indignation that greeted Hamilton’s plan. Making the exaggerated claim that Congress was now “legislating for British subjects,” Rush objected not just to public debt but to all debt as harmful to society. “Let us not overvalue public credit,” he warned. “It is to nations what pri
vate credit and loan offices are to individuals. It begets debt, extravagance, vice, and bankruptcy....I sicken every time I contemplate the European vices that the Secretary’s gambling report will necessarily introduce into our infant republic.”46
Compounding Hamilton’s problems was that his report crystallized latent divisions between north and south. There was a popular conception (to Hamilton, a gross misconception) that the original holders of government paper were disproportionately from the south and that the current owners who had “swindled” them were from the north. Hamilton denied that any such regional transfer took place, contending that the debt was now concentrated in northern hands only because much of the war had been fought there and more northern soldiers had received debt certificates. Still, the impression persisted that crooked northern merchants were hoodwinking virtuous southern farmers. It didn’t help that many New Yorkers in Hamilton’s own social circle—James Duane, Gouverneur Morris, William Duer, Rufus King—had accumulated sizable positions in government debt. Philip Schuyler alone had a sixty-seven-thousand-dollar stake and was reportedly so alarmed by Senate diatribes against Hamilton’s plan that his hair stood “on end as if the Indians had fired at him.”47 And it didn’t seem to occur to Hamilton that legislators, like Caesar’s wife, should also be beyond suspicion. From the controversy over his funding scheme, we can date the onset of that abiding rural fear of big-city financiers that came to permeate American politics.
Hamilton knew that many current creditors who would profit from his measures were less than angelic. His vision, however, was fixed on America’s future, not the partisan bickering of the moment. He was laying the groundwork for a great nation. “The general rules of property, and all those general rules which form the links of society, frequently involve in their ordinary operation particular hardships and injuries,” he told Washington. “Yet the public order and the general happiness require a steady conformity to them. It is perhaps always better that partial evils should be submitted to than that principles should be violated.”48
On February 8, 1790, the House of Representatives began to debate Hamilton’s Report on Public Credit, which monopolized most of the second session of the First Congress. Maclay’s diary tells us that the edgy Hamilton had started lobbying a week earlier, flitting from one member to the next: “Mr. Hamilton is very uneasy, as far as I can learn, about his funding system. He was here early to wait on the Speaker and I believe spent most of his time in running from place to place among the members.”49 Many congressmen experienced Hamilton’s influence as an unrelenting pressure. To mental vigor, he added organizational bustle. A day after the House debate began, Maclay got a visit from another early Hamilton mentor, the theologian Dr. John Rodgers, who expounded Hamilton’s system “as if he had been in the pulpit.... The [Society of the] Cincinnati is another of [Hamilton’s] machines and the whole city of New York.”50 Before long, the disgruntled Maclay berated Hamilton’s “tools” and “gladiators” for badgering him without remorse.51 Americans had rejected a parliamentary system on the British model, forbidding executive officers from sitting in the legislature, but Hamilton’s ubiquitous presence in Congress seemed to violate that understanding.
In fashioning his program, Hamilton had counted on loyal backing from James Madison, now a Virginia congressman. Ever since his inaugural address, President Washington had consulted regularly with Madison on matters ranging from etiquette to the selection of ambassadors. By dint of his seminal role at the Constitutional Convention, his Bill of Rights, and his work on The Federalist Papers, Madison was the most influential congressman.
If Hamilton thought Madison would support his plans, he was rudely undeceived on February 11, 1790, when the Virginian made a speech attacking the funding scheme. Madison was prepared to allow current holders of government debt to profit from past appreciation of their government securities. But as to future appreciation resulting from Hamilton’s program, he wanted that windfall to go to the original holders, no matter how long ago they had sold off their securities. For Madison, these original holders had not surrendered faith in government, as Hamilton alleged, but had merely sold in desperation. He thought that blameless patriots were being victimized, and it disturbed his sense of justice that speculators were buying up debt from ignorant country folk. Madison saw a betrayal of the American Revolution in the making.
Hamilton was flabbergasted. He had laid out all the practical problems that made such “discrimination” unworkable, especially the missing documents that would be needed to trace original holders. And Madison’s proposal would damage the invaluable principle that buyers of securities should reap all future dividends and profits. In Hamilton’s view, government interference with this right amounted to confiscation of private property. Madison’s arguments had a strong sentimental appeal to patriotic veterans, while Hamilton’s contained a core of hardheaded practicality.
As the debate dragged on, the Federal Hall galleries filled with speculators wagering on the outcome, and tension built as a vote approached on Madison’s proposal. On February 20, Abigail Adams told her sister that she was to attend the great debate on discrimination: “It is thought that tomorrow will be the decisive day with respect to that question....On this occasion I am going for the first time to the House.”52 Hamilton had marshaled his forces effectively, whereas Madison had proven clumsy and inflexible. Madison’s “pride seems of that kind which repels all communication,” a disappointed Maclay wrote on February 22. “The obstinacy of this man has ruined the opposition” to Hamilton’s plan.53 That day, the House defeated Madison’s motion by a thirty-six to thirteen vote. But in an ominous sign for Hamilton, nine of the thirteen dissenting votes came from Virginia, the most populous state.
Madison was beginning to drift away from Hamilton. Although he claimed that he objected only to parts of Hamilton’s program, he admitted privately to more fundamental grievances, telling one correspondent, “I go on the principle that a public debt is a public curse.”54 Whereas the “Publius” team of Hamilton, Madison, and Jay had seen the supreme threat to liberty coming at the state level, Madison now began to direct his criticism at federal power lodged in the capable hands of the treasury secretary. John Adams, among others, seemed disillusioned with Madison as a legislator. “Mr. Madison is a studious scholar,” the vice president told a friend in April, “but his reputation as a man of abilities is a creature of French puffs. Some of the worst measures, some of the most stupid motions, stand on record to his infamy.”55
For Hamilton, Madison’s apostasy was a painful personal betrayal. One of Hamilton’s supporters, minister-cum-speculator Manasseh Cutler, told a friend that Hamilton regarded Madison’s opposition to his plan as “a perfidious desertion of the principles which [Madison] was solemnly pledged to defend.”56 This fallingout was to be more than personal, for the rift between Hamilton and Madison precipitated the start of the two-party system in America. The funding debate shattered the short-lived political consensus that had ushered in the new government. For the next five years, the political spectrum in America was defined by whether people endorsed or opposed Alexander Hamilton’s programs.
Even as Madison flailed at Hamilton’s funding scheme, a seemingly unrelated drama was being enacted in Congress over the slavery issue. Quakers from New York and Pennsylvania had submitted a petition to abolish the slave trade, while the Pennsylvania Society for Promoting the Abolition of Slavery, led by eighty-fouryear-old Benjamin Franklin, filed a more aggressive petition to abolish slavery itself. On this sensitive issue, southern delegates flamed up in righteous anger. Aedanus Burke of South Carolina accused the Quakers of “blowing the trumpet of sedition” and asked that the galleries be cleared of spectators whose ears might be defiled by such heresy.57 James Jackson of Georgia said that the Bible itself had approved slavery. The vehemence of southern legislators made plain that, on this issue, they would brook no compromise. William Loughton Smith of South Carolina reminded fellow legislators that sout
hern states had ratified the Constitution on the proviso that it would not interfere with slavery. Any attempt to renege on this pledge would threaten the survival of the union.
This fracas was more than a footnote in the country’s early history. Slavery was gradually fading away in many parts of the north, but with each passing year it became more deeply embedded in the southern economy. As Fisher Ames of Massachusetts complained to a friend of southern indignation, “Language low, indecent, and profane has been used.... The Southern gentry have been guided by their hot tempers and stubborn prejudices and pride in regard to Southern importance and negro slavery.”58
The abolitionist petitions were referred to a House committee. When this group reported back in March, it cited the twenty-year grace period for the slave trade adopted by the Constitutional Convention, meaning that Congress lacked authority to eliminate the slave trade before 1808, much less to emancipate the slaves. Whether from reluctant pragmatism or outright cowardice, abolition was now officially dead. After the House committee report, Madison, who had just masterminded the Bill of Rights, told Edmund Randolph that the south should bury the slavery issue with benign neglect. “The true policy of the Southern members,” he wrote approvingly, “was to let the affair proceed with as little noise as possible.”59 Madison was torn between intellectual sympathy for abolitionism and fear of irate southern reactions. Whether or not he was more motivated by a desire to save the union than to preserve slavery, his views would increasingly be colored by personal and regional self-interest as he curried favor with his Virginia constituents.
Tabling the slavery issue had been a precondition of union in 1787 and now again in 1790. Though a passionate slavery critic, Hamilton knew that this inflammatory issue could wreck the union. He couldn’t be both the supreme nationalist and the supreme abolitionist. He certainly couldn’t push through his controversial funding program if he stirred up the slavery question, which was probably a futile battle anyway. So this man of infinite opinions grew mute on that all-important matter, though he may have taken a secret swipe at slaveholders the following year. Historian Philip Marsh has argued that Hamilton, using the pen name “Civis” in a newspaper piece of February 23, 1791, penned the following telling sarcasm to Madison and Jefferson: “As to the negroes, you must be tender upon that subject.... Who talk most about liberty and equality ...? Is it not those who hold the bill of rights in one hand and a whip for affrighted slaves in the other?”60 If Hamilton wrote this, he was updating a gibe by the English radical Thomas Day, who had written in 1776, “If there be an object truly ridiculous in nature, it is an American patriot, signing resolutions of independence with the one hand and with the other brandishing a whip over his affrighted slaves.”61
