Max M. Edling

"So immense a power in the affairs of war": Alexander Hamilton and the Restoration of Public Credit

AS its second session drew to a close, the first Congress passed one of its most controversial acts of legislation. Debate on the funding act had taken up most of the session. It had caused the authors of The Federalist to fall out and had resuscitated sectional feelings. To the secretary of the Treasury, the very existence of the Union seemed to hang in the balance. In the greater drama of American history, the funding and assumption of the revolutionary debt was the moment that set the stage for the party struggles of the 1790s. Disagreement over the management of the public debt led to the rivalry between Alexander Hamilton and Thomas Jefferson, who became not only leaders of clashing parties but also symbols of two radically different visions of the destiny of the American Republic. Their conflict has dominated interpretations of Hamilton's financial program to the extent that the original rationale behind funding and assumption has become obscured. The origins of Hamilton's program lay in the United States' situation as a relatively weak power in a world of hostile empires and nation-states. Regardless of any other intentions Hamilton may have harbored, the funding act aimed to equip the fledgling Republic with a crucial institution of the modern state: a well-managed public debt. Though few historians have altogether missed this dimension of the Federalist program, they have accorded it no more than fleeting interest. And they have paid much less attention than Hamilton himself did to the importance of public credit to a state's ability to act decisively in international affairs. Yet uncovering the history of government policies and institutions requires more than just interpreting the heated political rhetoric they could provoke. Because the funding act is crucial to the history of the early Republic, scholars need a better understanding of why it was propsed and how it worked.¹

The impetus for of the funding act came right after Hamilton's appointment as secretary of the Treasury in September 1789, when the House of Representatives asked him to prepare a plan "for the support of the public credit, as a matter of high importance to the national honor and prosperity." Hamilton responded with his "Report Relative to a Provision for the Support of Public Credit," better known as the "Report on Public Credit," in mid-January of the next year. With some important changes, the report formed the basis of the act adopted by Congress on August 4, 1790. The funding act reformed the enormous debt that the new government had inherited from the American War of Independence. It stipulated that outstanding securities would be exchanged for a new emission that was funded, meaning that the government pledged to pay interest on the debt from earmarked, or mortgaged, tax incomes. The new securities had no fixed maturation date and the government's right of redemption was restricted. Neither the "Report on Public Credit" nor the funding act offered more than limited means to pay off the principal of the debt. Failure to ensure repayment led contemporary critics to charge that Hamilton wished to prolong or even perpetuate the debt, a charge that has sometimes been repeated by modern historians. With the funding act, the federal government also assumed responsibility for the main share of the state debts run up during the American War of Independence. In the end the federal government assumed $18 million owed by the states, thereby nationalizing almost the entire revolutionary debt.²

Though he later pointed to the funding act as the centerpiece of Hamilton's schemes to destroy the Republic, Jefferson did not immediately awake to the dangers of the public debt. Much to his surprise, Hamilton's first major critic was his erstwhile nationalist ally James Madison. Madison's position on funding arose from his wish to protect the interests of original security holders against the actions of speculators. Most of the outstanding securities had been issued as a form of payment to soldiers and military suppliers in the early to mid-1780s. These securities represented the government's promise to pay the holder in real money at a later date. Because the government's financial situation was desperate, many doubted that such a day would ever come and therefore most original holders sold their securities to third parties, often at prices far below face value. If the government put its financial house in order, however, the value of the securities would rise, benefiting those who had bought securities from the people who had originally received them as compensation for their services. In what to Madison seemed a blatant act of injustice, the funding act disregarded the original holders' right to compensation. Historians have often been impressed by Madison's arguments and have sometimes repeated his charge that the funding plan generated "enormous profit" for undeserving speculators. It was an exaggerated charge, however, that held true only for public creditors who bought certificates cheaply in the late 1780s. Investors who bought securities around the time when the army was disbanded in 1783 did not make significantly greater profits than they would have earned from private investments, and they were exposed to far greater risk.³

Support for Madison was only lukewarm in the House of Representatives, which voted thirty-six to thirteen against his proposal to discriminate between present and original security holders. The question of federal assumption of state debt, however, generated much more animosity. When Hamilton presented his report, Congress was still auditing the respective contributions made by state governments to the American War of Independence. Madison believed that Virginia had paid off much of its debt and therefore that assumption would force his own state to pay more than its fair share of the total war costs. He also feared that federal assumption of state debts would unduly strengthen the central government at the expense of state governments. Many others agreed and the House deadlocked over the issue. It was at this point that Jefferson claimed to have stepped in to arrange the famous dinner table bargain by which Madison supplied enough Southern votes to pass the funding act in return for a promise to locate the national capital on the Potomac River.⁴

Hamilton's report and the subsequent funding act aimed to modernize American public finances by introducing contemporary European practices of debt management. The most controversial measures—nondiscrimination between creditors, federal assumption of state debt, and restriction on the government's right to pay off the debt—all stemmed from this attempt. Though controversial the reform was successful in rapidly restoring public credit. Despite its role in provoking the split between Federalists and Republicans, the funding act introduced policies and institutions of debt management that outlived the Federalist administrations of George Washington and John Adams. Republicans upheld the right of public creditors and managed the debt well after they assumed power in 1801. They accepted the importance of sound public credit as much as the Federalists and made much more use of it than their predecessors. Federalists and Republicans also shared a concern about the uncontrolled growth of public indebtedness. In furnishing means for debt reduction, the American funding system constituted a major divergence from European practice. The architect of this provision was Hamilton, who initiated a program of debt redemption that set the revolutionary debt on the road to extinction. It was a program that would be faithfully administered by the Virginia dynasty.

Broadly speaking, modern historians have identified two distinct but not incompatible motives behind the funding and assumption of the revolutionary debt. The first was Alexander Hamilton's and the Federalists' wish to use the debt to forge a link between public creditors and the new federal government for political ends. This interpretation originates in the Jeffersonian critique of Hamiltonianism and is based on the arguments of Hamilton's critics rather than his own words. The second motive historians have identified was Hamilton's belief that the debt could be used to promote the American economy. In contrast to the political interpretation of his aims, this interpretation finds much support in Hamilton's own writings on the funding and assumption of the revolutionary debt.

In the early days of George Washington's administration, Thomas Jefferson shared the Federalists' belief in the importance of restoring public credit. As minister to France, he had personally experienced difficulties in borrowing money on the credit of the United States. Midway through Washington's first term, however, Jefferson had developed second thoughts. He now regretted his role in shepherding the funding act through Congress, describing it as the greatest error of his political life. In a letter to Washington, he claimed to have been "duped" by Hamilton and "made a tool for forwarding his schemes." By this time Jefferson was convinced that Hamilton meant to use the public debt to destroy the Republic. "I would wish the debt paid tomorrow," Jefferson wrote to Washington. In contrast, Jefferson said, Hamilton "wishes it never to be paid, but always to be a thing wherewith to corrupt and manage the legislature." According to Jefferson there existed a Treasury faction in Congress that followed every bid from the Treasury secretary. These men were bound to the Treasury because as public creditors they had a vested interest in maintaining a system of public indebtedness and heavy taxes as a means to transfer the community's wealth into their own pockets. But to Jefferson the problem went deeper than an attempt by the creditors to lay their hands on the taxpayers' money. The aim of this "corrupt squadron" was to undermine the Constitution and republican liberty and ultimately to establish a monarchy on the British model.⁵

Jefferson was not alone in raising such concerns about Hamiltonian finance. Nor was his critique original; he merely applied arguments derived from the British Country Whig tradition to Hamilton's measures. The intellectual origin of this idiom lies in a body of thought that first appeared in opposition to new governmental institutions established in England in the wake of the Glorious Revolution of 1688. One of the most striking novelties of the new system was the introduction of a large and seemingly ever-increasing public debt, which was believed to undermine the political independence of the House of Commons by introducing executive influence in the legislative branch of government. As historians have long pointed out, the Country Whig tradition was adopted wholesale in the American colonies before the Revolution, and it remained strong in the early national period. It furnished powerful arguments with which to fight Federalist policies because Hamilton seemed intent to imitate British developments. Thus when the Virginia House of Delegates protested against the funding act, they did so by making explicit comparisons with the former mother country. The delegates claimed there was "a striking resemblance" between the funding act and the system "which was introduced into England at the Revolution—a system which has perpetuated upon that nation an enormous debt, and has moreover insinuated into the hands of the Executive an unbounded influence."⁶

Modern historians have only rarely shared Jefferson's view of Hamilton's ultimate aims, though he has on occasion been referred to as a "true Machiavellian" and a closet "dictator." Rather they tend to accept Jefferson's interpretation of Hamilton's intentions without questioning his loyalty to the American Republic. By the time he wrote the "Report on Public Credit," the public debt had concentrated in the hands of the social and economic elite. Hamilton's principal aim, most historians agree, was to ensure the stability of the new regime by giving the elite a reason to support it. The funding and assumption of the revolutionary debt could help serve this purpose. Though Hamilton may have been skeptical about democracy, he never wished to replace the Republic with a monarchy.⁷

Unsurprisingly, Hamilton denied Jefferson's charge that he had used the debt to corrupt the Republic. Yet the terms in which Hamilton framed his denial are intriguing. Looking back on the funding act half a decade later, Hamilton "frankly acknowledge[d]" that the public debt could "strengthen our infant Government by increasing the number of ligaments between the Government and the interests of Individuals." He seems to have found nothing wrong in principle with using the debt to buy the electorate's support, believing such support would help maintain the Constitution and the Union. The new government was weak and needed every assistance against "the excentricities of State ambition and the explosions of factious passions." But if funding and assumption would secure the support of public creditors, it also threatened to antagonize taxpayers. Such support would therefore be "in a considerable degree counterballanced by ... the necessity which it imposed on the government of resorting early to unpalateable modes of taxation which jeopardized its popularity and gave a handle to its enemies to attack." Furthermore the debt was likely to be bought up by foreigners with little or no political influence in America. "Had this then been the weightiest motive to the measure," Hamilton wrote, "it would never have received my patronage."⁸

The economic motive behind the funding act was the attempted use of the debt to improve the economy by creating new investment capital and increasing the money stock. Hamilton repeatedly spoke in such terms when he argued in favor of his measures. Funding would create capital out of thin air as almost worthless bonds suddenly appreciated in value and then stabilized around par. Because these securities had been bought up by merchants, this new capital was placed in the hands of the dynamic force of the American economy: men who were able to invest money productively. Part of the capital would go into banks where it would support the issue of bank notes. Funding therefore promised to increase the money stock, an important achievement in a nation where wealth had long been abundant but money scarce. Finally, the federal assumption of state debts promised to increase the capital market by as much as 30 to 40 percent, thus further promoting the economy.⁹

Like the politics of corruption, Hamilton's economic ideas can also be traced back to England. After the Glorious Revolution, the English public debt had increased the amount of capital in the hands of merchants and had thereby spurred "phenomenal" economic development. But historians have pointed to a crucial difference between the policies pursued in Britain and in the United States. In Britain public finance was a way to raise money to wage wars. Even if the economic consequences of the government's actions were important, they were no more than "incidental" by-products. Hamilton reversed these priorities. To him financial policy was a means to strengthen the economy and not the state. His intention to actively manage the national economy is why he has appeared so modern to many interpreters. It has been claimed that "few of the techniques available to modern finance ministers and central bankers" in managing a modern economy "were not known and used by Hamilton two centuries ago."¹⁰

Apart from the question of intellectual origins, both major interpretations of the rationale behind funding and assumption point to the domestic origins and consequences of Alexander Hamilton's policies, whether these are conceived to be mainly political or economic. But Hamilton and the Federalists were also concerned with the American Republic's relations to the outside world. Independence had made the United States a new member of the international state system and the heir to Britain's imperial aspirations on the North American continent. To defend and promote American national interests it was essential that the Republic acquire some of the features of contemporary European states.

Ever since Hamilton first began to think seriously about public finance, he treated public credit as a crucial resource of the modern state, of "immense importance" to "the strength and security of nations." In an April 1780 letter to the newly appointed superintendent of finance, Robert Morris, Hamilton argued that independence would be secured "not by gaining battles" but "by restoreing public credit." Even "the most powerful and opulent" nations were "obliged to have recourse to loans, in time of war," he declared in "The Continentalist No. IV" a few months later. A state able to borrow money could mobilize resources far beyond what its tax base ordinarily allowed. In contrast a state unable to borrow would be left at the mercy of stronger states. Credit, Hamilton wrote in his unpublished "Defence of the Funding System," composed after his retirement from the Treasury, "is so immense a power in the affairs of war that a nation without credit would be in great danger of falling a victim in the first war with a power possessing a vigorous and flourishing credit." Elsewhere he wrote, "It is impossible for a Country to contend on equal terms, or to be secure against the enterprises of other nations without being able equally with them to avail itself of this important resource." Public credit allowed governments not only to raise unprecedented sums of money but also to do so in ways that were less painful to the population and less disruptive of the economy than alternative means of resource mobilization. In modern wars, Hamilton wrote," the current revenues of a nation do not ... suffice. Plunder or Credit must supply the deficiency." Since the first alternative was obviously unacceptable and entailed "a subversion of all social order," credit was the only option.¹¹

International events including the French Revolution, the Jay Treaty, the Quasi War, and the War of 1812 have always figured prominently in the political history of the early Republic. Yet historians have been much more interested in the effects of these events on domestic politics—such as the rise of the first party system, the election of 1800, and the decline of the Federalist party—than in their effects on America's relations to foreign nations. Outside the subfield of diplomatic history, American historians typically show little interest in foreign policy and international relations after the colonies' exit from the British Empire in 1783. Though no one denies the outside world's influence on the United States, it has been quite legitimate to write the history of the early American Republic with no more than passing reference to anything outside it. Nor has there been much interest in studying the influence of the United States on the rest of the globe apart from the radical shock that the Revolution sent through the Atlantic world. But with the growth of Atlantic history and world history has come an awareness of the importance of foreign relations, such as war, commerce, and territorial expansion, to internal political and economic developments as well as a greater interest in how Americans affected the world around them. More important still is a new willingness to see the political history of the American Republic not only as the unfolding of democracy and freedom but also as the realization of "imperial ambitions" that were largely the legacy of the first British Empire.¹²

The federal union created by the Declaration of Independence and the adoption of the Constitution was as much a peace pact intended to preserve harmonious relations among the member states as it was a national state intended to defend and promote common interests against European powers. Independence and union turned thirteen colonial dependencies into a sovereign state within an intensely competitive transatlantic state system. In this system the United States had to negotiate its political and commercial relationships with other nations. To do so it had to formulate policies and build institutions that would secure American interests in the international arena. On the North American continent, the young Republic continued the expansion of territory and settlement begun under British imperial rule. Over time this expansion grew ever more rapid. Territorial expansion (through annexation, wars of conquest, and purchase), the subjection of foreign peoples, and the transformation of the natural environment are therefore central aspects of one history of the early Republic.¹³

As historians analyze this development, they challenge the idea of American exceptionalism by pointing to the similarities between the history of the American Republic and the histories of nineteenth-century European empires and great powers. The existence of similarities does not mean that the United States was in every respect just like the states of Europe. In important respects it was not. Nevertheless it has to be recognized that "the long-term pattern of America's development look[s] broadly similar to those of other large, successful nations."¹⁴ Because American expansion was directed by the government or at least realized by means of the state apparatus, it is pertinent to investigate the governmental institutions that made such expansion possible. Such work will further challenge the concept of American exceptionalism by questioning the extent to which the early American Republic was a stateless society.

If analyses of international relations and foreign policy have lately existed only on the margins of mainstream scholarship, the study of governments and governmental institutions has not been much more popular. The statelessness of the early American Republic has been a "rigid orthodoxy" of American history in the second half of the twentieth century. Yet it has come under increasing attack from so-called new institutionalist history. Institutionalist historians claim that even in the Republic's early history the United States possessed governmental institutions that were comparable to, even if not identical with, those existing at the same time in other nations. Further they claim that these institutions matter because of their ability to shape American social, political, and economic development. Institutional history takes policies and institutions seriously. It shifts the focus of political history away from culture and language, interest-group politics, and electioneering to the formulation and implementation of policies and the creation of governmental institutions.¹⁵

New interest in the imperial role played by the United States and in the ability of governmental institutions to shape American political development makes it possible to revisit the funding act and Federalist public finance and ascribe greater weight to what Hamilton and others explicitly declared to be their central purpose: the restoration of public credit. Regardless of other political and economic effects, the government's ability to borrow money was an important end in itself. It equipped the United States with the means to compete in the international state system. In the decades that followed the funding act's adoption, government loans were used repeatedly to fund war and territorial expansion. In contrast to the story of American democracy, at least in its most familiar version, there was no great break in historical trends when Federalists were replaced by Republicans. If anything the revolution of 1800 signaled an even more aggressive policy against Indian nations and an even more active policy against European states.¹⁶ These policies forced Republicans to make vigorous use of governmental institutions created by their predecessors. For all the rhetorical steam, Jefferson's empire was made possible by a Federalist fiscal system and Federalist policies of debt management.

The "Report on Public Credit" opened with a set of "plain and undeniable truths." Like every other nation, the United States would engage in wars in the future. In the modern age, even "the wealthiest" of nations were forced to finance their wars with loans. Since the United States possessed "little monied capital," it would be even more dependent on this resource than other nations. But it was not just necessary to be able to borrow money; such loans had to be made "upon good terms." Therefore it was "essential that the credit of a nation should be well established." The report thus clearly identified public credit as an instrument of war. From the struggle for independence to the Second World War, American statesmen and political thinkers have often claimed that the United States differs from Europe largely because it is far removed from European wars and power politics. There is some truth in this claim, yet it is also problematic. Political independence introduced a turbulent period of repeated international crises together with the Quasi War against France and the War of 1812 against Britain. Only with the close of the Napoleonic Wars in 1815 did the international situation calm down. By then, however, the American Republic had begun a policy of expansion that generated its own conflicts. Though early American statesmen may have dreamed of political and commercial isolation, they knew that this dream was impossible. Western expansion and involvement in Atlantic trade made conflicts and wars inevitable.¹⁷

During Alexander Hamilton's term as Treasury secretary, the United States managed to avoid a European war. Still Hamilton had to borrow to finance Indian wars and to pay for the army sent against the whiskey rebels in western Pennsylvania. Given the constant danger of war, it seemed clear to Hamilton that the United States "ought to aim at rendering its credit, that is its faculty to borrow, commensurate with the utmost extent of the lending faculties of the community and of all others who can have access to its loans. Tis then that it puts itself in a condition to exercise the greatest portion of strength of which it is capable and has its destiny most completely in its own hands." Failure to make provisions for the nation's credit would force the Republic to "a mean surrender of our rights and interests to every enterprising invader." This argument did not convince everyone. In the congressional debate on the "Report on Public Credit," Michael Jenifer Stone rejected all funding systems as "monuments of the folly and vice of mankind" precisely because they made nations able to wage war. They gave a government without "money of its own" the ability to pursue "mad schemes of ambition" and "the means of purchasing mercenary soldiers, of shedding the blood of their neighbors, and of cutting so many more throats than they would otherwise be able to do."¹⁸

Stone's critique pointed to the origins of funding systems in what one late-eighteenth-century British writer called "the prevalence and extension of the war-system throughout Europe." Loans allowed nations to multiply their resources. Money could be had quickly and without need to pressure the taxpayers. As Adam Smith pointed out, borrowing was a way to avoid reforming the tax system. "By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetual funding they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money." Only rarely did governments manage to reduce debts in peacetime. Hence their debts grew with every new war. By the mid- to late eighteenth century, the Continent's rapidly growing public debts were seen as one of the foremost problems of political economy.¹⁹

In principle a government could reduce its debt by paying it off or by repudiating it, wholly or in part. In practice neither alternative was viable. Paying off the debt required greater incomes, which in turn required fiscal reform. Tax reform was difficult in part because the surplus generated by eighteenth-century economies was not large and also because any substantial reform would have to tax powerful and privileged groups. Debt repudiation was not an attractive alternative because governments feared that such action would ruin their ability to borrow in the future. In Amsterdam, Europe's primary market for government loans in the eighteenth century, bankers assessed creditworthiness solely on the record of past debt management. Though public bankruptcies had been common in sixteenth- and seventeenth-century Europe and would become so again during the long and expensive wars that followed the French Revolution, the eighteenth century was a period when governments did the utmost to honor their debts.²⁰

Unable to increase their revenue, unwilling to repudiate their debts, but still seeking to maximize their capacity for borrowing, European governments were caught in a fix. The solution lay in the renegotiation of interest rates and repayment terms. If the interest rate could be reduced and the principal need not be repaid, the amount of debt a government could sustain on a given income would increase. As interest rates on private loans fell in the eighteenth century and capital outlays in public funds gradually came to be regarded as low-risk investments, the interest on public loans fell too. Thus in Britain, where the government was exceedingly careful to service the public debt according to contract, the interest rate on government loans fell from 10 percent in the late seventeenth century to merely 3 percent by the middle of the next century. On the international securities market in Amsterdam, interest rates had fallen to between 4 and 5 percent by the second half of the eighteenth century. Governments were quick to take advantage of falling interest rates by replacing old, expensive loans with new, cheap ones.²¹

The cost of indebtedness was further reduced when governments stopped making repayments of the principal, a practice that had become common in most European nations by the late eighteenth century. Creditors accepted this arrangement because government securities could be freely sold to third parties. Such a right may seem self-evident today, but making securities freely alienable was a major financial innovation. A creditor could always liquidate an investment in the public funds by selling the claims on the government in the securities markets that had sprung up in London and Amsterdam. The pressure on the government to repay the loan was thereby removed and the state was able to carry a greater burden of debt.²²

The management of public debt was widely discussed in economic treatises and newspapers in eighteenth-century Britain and Europe. These texts were also read on the American side of the Atlantic, and informed Americans knew much about European funding systems. At the same time, such systems were new to the United States and had not formed part of the colonial experience. As Fisher Ames remarked in the House of Representatives, the "science of finance is new in America," and among the population at large there existed a strong aversion to public debts as the herald of oppressive taxes and overbearing government. Though historians have discussed the extent to which Hamilton copied from European and primarily British financial institutions, there is no question that he knew them well. The "Report on Public Credit" was his attempt to adapt European principles of debt management to an American setting. It generated a good deal of controversy.²³

Hamilton's plan to restore public credit began with the need to restore the faith of present and future creditors in the ability and readiness of the government to service its debts according to contract. Faith was the essence of public and private credit. In his 1786 "An Essay on Credit," Pelatiah Webster defined credit "in a commercial sense" as "the confidence which people place in a man's integrity and punctuality, in fulfilling his contracts, and performing his engagements." As Congress debated the "Report on Public Credit," Elias Boudinot, an old friend of Hamilton, also pointed to trust as the crucial aspect of public credit, which amounted to "the confidence reposed in a state, or body politic, who are borrowing money." In a later report, Hamilton described the public debt as "a property subsisting in the faith of the Government. Its essence is promise. Its definite value depends upon the reliance that the promise will be definitely fulfilled." The "Report on Public Credit" therefore declared that a government could only hope to maintain a high credit rating by observing "good faith" and "a punctual performance of contracts." Hamilton concluded, "States, like individuals, who observe their engagements, are respected and trusted: while the reverse is the fate of those, who pursue an opposite conduct."²⁴

Federalists in Congress opposed discriminating between the original and subsequent owners of securities by pointing to the sanctity of contracts. They did so to establish a moral position from which to counter James Madison's accusation that funding would defraud virtuous soldiers and suppliers and benefit self-interested speculators. But even if much of the funding debate was framed as a discussion of the justice or equity of the measure, there was also a debate over the policy, or practical implications, of upholding the rights of final security holders against the claims of original holders. In Hamilton's words a breach of faith with the creditors, whether just or unjust, "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." Federalists in Congress were more outspoken. On "principles of policy," the United States ought to honor the contract with the creditors, "in order, that when public exigencies require it, we may borrow money with greater facility; we have no right, by our conduct, to put it out of the power of the United States hereafter to defend themselves, and unless we support the credit of America by a just performance of our engagements, we shall depreciate her credit to so low a state, as to prevent her forever obtaining any future loan."²⁵

To honor the contract with the creditors, the government needed sufficient revenues to service the public debt. Raising money had been a major problem for the Confederation Congress since its inception, and fiscal reform was central to the agenda of the nationalists and later the Federalists during the ratification of the Constitution. The tax system created after the adoption of the Constitution relied heavily on customs duties, supplemented by minor incomes from excises. Over time customs duties would generate large incomes, but in 1790 these duties were new and Hamilton did not expect them to yield enough to pay the revolutionary debt's stipulated interest of 6 percent, much less the principal. The "Report on Public Credit" estimated the domestic debt, including unpaid interest, at more than $42 million. In addition there was the foreign debt of $11.7 million. Interest charges alone on the two debts amounted to around $3 million annually. For the debt to be paid off within a reasonable period of time, say twenty-five years, it would require an additional $1 million per year. Furthermore the running costs of even the most limited federal government would be some $600,000 every year. Annual expenses would therefore amount to about $4.5 million. In 1790 Hamilton calculated that the income of the federal government would be no more than $2.8 million.²⁶

The Federalists in general and Hamilton in particular are sometimes portrayed as friends of big government. In the fiscal sphere, however, most American statesmen and legislators seem to have shared the view that there were narrow limits to the amount of taxes American citizens were ready to pay in support of the federal government. During the debate on the funding act, congressmen at one point contrasted the high tax pressure in France to the low levels of taxation in America. To some this comparison suggested there was ample room for a tax increase in the United States. Others disagreed. To Hugh Williamson there was no doubt that American taxpayers would always flee from undue pressure from the government: "The people in England, France, and most parts of Europe, are surrounded by the sea, or by nations with whom they cannot mix; they cannot remove with any degree of ease, wherefore they groan and bear the oppression of taxes. Press the American in the same manner, and he will fly to the boundless wilderness, that he may be free as the original inhabitants."²⁷

To Hamilton and other Federalists, emigration from the eastern states to the western territories was certainly problematic. Yet a more immediate threat to the American fiscal system stemmed from obstructions and even tax rebellions. From the crisis with Britain through the American War of Independence and the postwar fiscal crisis to Shays's Rebellion, resistance to taxation had been at the center of American politics for a quarter century. Contemplating additional taxes to customs duties in an October 1789 letter to Madison, Hamilton remarked that the difficulty lay "not so much in the want of [taxable] objects as in the prejudices which may be feared with regard to almost every object. The Question is very much What further taxes will be least unpopular?" About to retire from the Treasury five years later, he was of the same opinion. "To extinguish a Debt which exists and to avoid contracting more are ideas almost always favored by public feeling and opinion," he noted, "but to pay Taxes for the one or the other purpose, which are the only means of avoiding the evil, is always more or less unpopular." From this aversion to taxation came the habit of governments to "shift off the burden from the present to a future day" by acquiring more debt, "a propensity which may be expected to be strong in proportion as the form of the State is popular."²⁸

But even if citizens had been willing to pay higher taxes, a high level of taxation may have proven detrimental to public credit. Should the state appropriate the entire surplus generated by the economy, there would be no funds on which to contract new loans in future crises. Some of the nation's wealth ought therefore to be held in reserve. "It will not be forgotten," Hamilton reminded Congress in the "Report on Public Credit," "that exigencies may, ere long, arise, which would call for resources greatly beyond what is now deemed sufficient for the current service; and that, should the faculties of the country be exhausted or even strained to provide for the public debt, there could be less reliance on the sacredness of the provision." Faced with the choice between raising taxes to pay off the debt rapidly or accepting indebtedness for at least the foreseeable future, Hamilton opted for the latter alternative.²⁹

Despite the increased cost of indebtedness, the assumption of state debts was primarily a means to make ends meet. A well-running revenue service was essential to the restoration of public credit. Assumption would "leave the field of revenue more open to the US" by ensuring that the states were "under as little necessity as possible of exercising the power of taxation." Without assumption there would be "a conflict of interests and feelings among the public creditors." State creditors had an interest in seeing the states raise taxes to service their debts. They would therefore pressure state legislatures to adopt fiscal programs but would care little if such programs interfered with federal taxation. Hence there would be a danger that the state fiscal systems and the federal fiscal system would come into conflict, perhaps resulting in insufficient incomes for both governments. In the congressional debates, Federalists stressed this point repeatedly. The proposed solution to this potential conflict presented in the "Report on Public Credit" was to place the responsibility for debt servicing and taxation in the same hands. "If all the public creditors receive their dues from one source, distributed with an equal hand, their interest will be the same. And having the same interests, they will unite in the support of the fiscal arrangements of the government: As these, too, can be made with more convenience, where there is no competition: These circumstances combined will insure to the revenue laws a more ready and more satisfactory execution."³⁰

Hamilton made no attempt to identify who the state creditors were. Elbridge Gerry, however, claimed it was "well known that the commercial interest throughout the union" held the "greatest part of the state securities." The fact that they did so supplied an additional reason in favor of assumption. Merchants were the chief source of loans "in cases of emergency," and for this reason "their friendship is cultivated by the governments of all commercial states." The merchants were the group from which the main part of the tax revenue would be collected. Because the means of coercion available to the United States revenue service were limited, tax collection could only succeed if taxes were regarded as legitimate and paid voluntarily. The Whiskey Rebellion and Fries's Rebellion may of course suggest otherwise. But they happened precisely because the taxes that were imposed, or at least the taxes that the people thought were being imposed, failed this test of legitimacy. The coercion involved in suppressing the rebellions was not typical of day-to-day Federalist tax administration, which rested on the taxpayers' "confidence in, and attachment to your government," as Gerry put it. "If you lose that confidence and attachment, what means have you to prevent their smuggling? Cruizers you have none; and if you had, it would be difficult to reconcile the citizens to coercion."³¹

In the fall of 1789, when working on the "Report on Public Credit," Alexander Hamilton found himself in a predicament that would easily have been recognized by contemporary European financiers. On the one hand, he had to honor the government's contract with its creditors. On the other hand, he did not possess the money to do so and doubted that he could find it. In one respect Hamilton was actually worse off than European finance ministers. In 1790 Britain was the most indebted nation in Europe in absolute terms and relative to tax income. Its debt was about fifteen times greater than its tax revenue. The public debt of the United States was much smaller than that of Britain, $80 million compared with more than $1 billion. But so was the tax revenue. The British government could count on close to $70 million annually, whereas Hamilton expected to raise only $2.8 million. The American debt was almost thirty times greater than the expected annual income, which made it twice as great as the British debt in terms of the debt-to-revenue ratio. The situation led Thomas Jefferson to anxiously compare levels of indebtedness in Europe and America, concluding that the United States was not just "the youngest nation in the world," it was also "the most indebted." In contrast to developments in Europe, however, the American debt stayed more or less constant during the next decade, whereas the tax income grew rapidly. By 1800 the United States debt was less than eight times the annual tax revenue, lower than the debt of most European states. Yet when Hamilton wrote his report, this development lay in the future and could not be counted on with certainty. In 1790 the Treasury secretary looked forward to servicing a substantial debt with too little revenue.³²

The course Hamilton followed out of this dilemma would also have been recognized by contemporary European statesmen. As European governments had done, Hamilton proposed to refinance the revolutionary debt. He did not make any explicit reference to European practice, but other Federalists such as Fisher Ames did, and there is little doubt where Hamilton's models came from. By renegotiating interest rates and terms of repayment, the United States could reduce the cost of indebtedness and avoid a heavy tax burden. Whereas replacing expensive, old loans with cheap, new ones could reduce the cost of the foreign debt, the domestic debt required a different solution. Hamilton first redefined the outstanding debt as redeemable annuities without a fixed maturation date. The securities had been issued either with a fixed due date or with the assumption that they would be paid as soon as Congress could afford to, but Hamilton claimed that over time they had been "converted into a capital ... without any definitive period of redemption." They were therefore redeemable at the pleasure of the government, and as long as the government took care to pay the promised interest the creditor had no legitimate right to claim repayment of the principal. "For it seems to be a clear position, that when a public contracts a debt payable with interest, without any precise time being stipulated or understood for payment of the capital, that time is a matter of pure discretion with the government, which is at liberty to consult its own convenience respecting it, taking care to pay the interest with punctuality." This move not only took care of the need to make installments on the principal but also gave Hamilton a bargaining position from which to negotiate a reduction of the interest rate.³³

The change from fixed-term securities to securities without maturation date made it necessary to uphold the creditors' right to transfer their securities. If the government did not plan to repay the principal in the near future, public creditors could only liquidate their investments by selling them to third parties. Final settlement certificates as well as Continental loan office certificates stated that they were payable to bearer, and the right of a secondary holder could not "be disputed, without manifest injustice." Such a breach of contract would inevitably raise the price of future loans because it would add an element of risk to investments in the public funds. Here Hamilton followed the recommendations laid down by Malachy Postlethwayt, whose Universal Dictionary of Trade and Commerce Hamilton is known to have consulted. Postlethwayt was certain "that no body would lend their money to the support of the state under the most pressing emergencies, unless they could have the privilege of buying and selling their property in the public funds, when their occasions required. 'Tis certain, therefore, that the greatest delicacy and tenderness is to be observed, in laying any restraints upon these transactions, lest the public credit should be thereby irrevocably prejudiced." The right to sell securities was also an important inducement for men and women of capital to lend their money to the public. David Hume wrote that a holder of British "public securities" held "funds which will answer the most sudden demand that can be made upon him. No merchant thinks it necessary to keep by him any considerable cash. Bank-stock, or India-bonds, especially the latter, serve all the same purposes; because he can dispose of them, or pledge them to a banker, in a quarter of an hour." In the same way, Hamilton thought that "from their negotiable and easily vendible nature," American public securities could "at any moment" be applied "to any useful or profitable undertaking which occurs." The right to sell or transfer securities "without restriction" was therefore "an ingredient of value to the holder."³⁴

Hamilton's next move was to reduce the interest rate. He believed that payment of the stipulated interest rate of 6 percent would require tax levels the people were unlikely to accept. It was therefore necessary to bring it down to a lower level. The offer eventually presented to the creditors by the funding act, which was a simplified version of Hamilton's original proposal, was 4 percent rising to 6 percent in 1801. Two-thirds of the capital would start to earn a 6 percent interest immediately; one-third, the so-called deferred debt, would start to earn interest only after ten years. Because it was "evidently impracticable" to pay the $13 million of accumulated interest owed on the debt, Hamilton suggested that the outstanding interest, which had been paid in paper certificates called indents, also be converted into interest-bearing securities redeemable at the pleasure of the government. Congress accepted this proposal, but the funding act converted them into securities bearing 3, rather than 6, percent interest.³⁵

Opponents inside and outside Congress had no difficulty detecting a breach of contract in this reduction of the interest rate. It appeared to be a clear example of an arbitrary change in the terms of the government's obligations. All of a sudden, the Federalists seemed to have abandoned every concern for the sanctity of contract. Some of the public creditors, as well as some of Hamilton's allies in Congress, also expressed their discontent with anything short of 6 percent. In fact the charge that the government had broken the contract with the creditors was a serious one. Precisely because the "Report on Public Credit" suggested a partial debt repudiation in the form of a reduced interest rate, it was of great importance to Hamilton and his supporters that the reform of the debt was not the effect of a unilateral change in contractual terms but of a renegotiation of terms entered into voluntarily by the public creditors. As informed Americans knew, each of Britain's eighteenth-century debt conversions had taken place with the creditors' consent. Hamilton was therefore careful to stress that "no change in the rights of creditors ought to be attempted without their voluntary consent; and that this consent ought to be voluntary in fact, as well as in name." The perceived need to secure the consent of the creditors was why Hamilton's original proposal contained six different options to creditors to convert their old securities into a combination of new securities, tontines, and western land.³⁶

In part Hamilton hoped that creditors would consent to new terms because as enlightened men they would realize that the original terms were not realistic. Heavy taxes were likely to produce tax resistance. It was essential that the government create a fiscal system that was "substantial, durable and satisfactory to the community." In a public but anonymous address to the creditors, Hamilton was even more straightforward. The funding act, he said, asked them to accept a temporary reduction of interest "in order to avoid the necessity of burthening the community, or carrying taxation to objects which might be displeasing to them. And you cannot wonder that a government, so lately formed, and not without considerable opposition, should be cautious in this respect." Yet he also held out a material incentive. If the creditors agreed to new terms, the government would be able to pay interest in "actual gold and silver" rather than practically worthless "paper money," which had hitherto been the case. The certain effect of such a change was rising prices that would benefit the public creditors.³⁷

On its own the hope of rising prices did not clear the government from the charge that it had arbitrarily broken the contract with its creditors. To secure the consent of the creditors, "a fair equivalent should be offered for what may be asked to be given up, and unquestionable security for the remainder. Without this, an alteration, consistently with the credit and honor of the nation, would be impracticable." The fair equivalent Hamilton offered the public creditors was to make their investments safer in two ways, both of which became controversial. First the government's right of redemption was limited. Second the debt was funded. Hamilton argued that the rate of interest in the United States was likely to fall to 4 percent in twenty years' time. Even if creditors lost on the reduced interest rate in the short run, they could look forward to a return on their investments considerably above the market rate of interest in the long term. If the government's right to redeem the debt was not restricted, however, nothing would stop it from taking advantage of the falling interest rate to refinance the debt at lower cost. It was therefore in the creditors' interest "to be able to arrest the hand of Government from paying him, when it is in his interest not to receive." For this reason Hamilton proposed that the combined annual payment on interest and principal should not exceed $7 on every $100 subscribed to the new loan. Payment on the deferred debt would not be allowed to start before it began to earn interest in 1801. Congress accepted Hamilton's reasoning, but the funding act increased the maximum annual payment "on account both of principal and interest" to "eight dollars upon a hundred of the sum" subscribed to the loan.³⁸

Funding had been practiced in England since the late seventeenth century and meant that specific tax revenues were permanently allocated to service a contracted debt. As Hamilton was well aware, legislators found it easier to spend rather than to raise money. Permanently allocating specific tax revenues to debt servicing would ensure that the government would use its income toward interest payments. The alternative to funding was an annual provision for the debt, "with an intire uncertainty whether it would be continued." Because the "essence" of property held in the funds was "Contract," its value depended on the certainty that the contract would be honored. In Britain public credit had been established by curtailing the monarch's role in fiscal and financial matters. Parliament rather than the king guaranteed public loans. Whereas Hamilton spoke of the revolutionary debt as the price of liberty, he knew there were people who favored the repudiation of the debt. At the time of his retirement from the Treasury, Hamilton had seen enough opposition to the public debt emanate from Congress to conclude that in the American Republic the legislature was more likely than the executive to threaten public credit.³⁹

In a revealing passage, Hamilton wrote that funding was necessary "to guard the Government and the Creditors against the danger of inconstancy in the public Councils." If debt service depended on annual appropriations, the support of both houses of Congress would have to be secured every year. There was a real risk such support would not always be forthcoming. "Whoever has attended to the course of our public Councils and to the dispositions which have been manifested by a powerful party in them must be sensible that danger in this case was not ideal." In fact "the accidental result of a single election" was enough to "violate the justice and prostrate the Credit of the Nation." When Congress debated the "Report on Public Credit," Hamilton's allies made clear what a failure to fund the debt would mean. If the debt was not funded, "no exigencies however great, would enable government to command those resources which every country may be necessitated to apply to." Indeed failure to fund the debt would itself produce "exigence that would not otherwise take place" because it was likely "to induce powers to enter into contest with us that would not do it otherwise. They would see a possibility of making a conquest of [the] United States."⁴⁰

If specific revenues were pledged to service the debt until such time that the debt was repaid, investments in the public funds would be safe from contract violations. Repealing a funding law would require the support of not only the House of Representatives and the Senate but also the president or, failing that, a two-thirds majority in both houses. As Hamilton said, the American system of government with its checks and balances made it "far more difficult to undo than to do." To such a government, "a suspension of action is far more natural ... than action. It can hardly happen, that all the branches or parts of it can be infected at one time with a common passion, a disposition, manifestly inimical to justice and the Public good; as to prostrate the public Credit by revoking a pledge given to the Creditors."⁴¹

The restriction of the government's right of debt redemption and the funding act's failure to offer a timetable for debt repayment led to repeated accusations that Alexander Hamilton and the Federalists wished to saddle the nation with a permanent debt. Such accusations were not correct, however. Though it has often been overlooked, Hamilton in fact set the revolutionary debt on the road to extinction before he left the Treasury. He had declared a wish to "see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment" already in the "Report on Public Credit." It is true that the funding act did not supply such means. It did set aside proceeds from the United States Post Office in a sinking fund intended to reduce the debt through open market purchase, but this money would allow for only limited debt reduction. Midway into the 1790s, however, the nation's finances were "prosperous beyond expectation," and it now seemed possible for the first time to address the question of debt redemption.⁴²

George Washington asked Congress to adopt "a definite plan for the redemption of the public debt" in his annual message of 1794. As far as practicable, such a plan should place "credit on grounds which can not be disturbed" as well as "prevent that progressive accumulation of debt which must ultimately endanger all governments." In response to the president's message, Congress asked the Treasury secretary to work out a plan for debt redemption, and Hamilton communicated his "Report on a Plan for the Further Support of Public Credit" to the House of Representatives on January 19, 1795.⁴³

To the extent that the Federalists intended to use the debt to cement the public creditors to the federal government or to make public securities a substitute for money, the report signaled a reversal of their program. There existed reasons for such a course change. The Federalists were well aware that the "funding of the Debt has unhappily proved an occasion of division and jealousy in the country." The debt was a recurrent theme in the Republicans' opposition to the administration. Adopting a plan for the repayment of the debt would deprive them of an important weapon in the ongoing party struggle and promised to restore unity and harmony to the political life of the Republic. Federalists thus did not hesitate to declare that removing the causes of Republican objections was an "auxiliary motive" for extinguishing the debt. As far as the need to use the debt as a form of money is concerned, this approach may have been more pressing in 1790 than in 1795. During these years there had been a rapid growth of the money stock, which may have reduced the need for public securities to substitute for money. But if the Federalist program is interpreted as an attempt to strengthen the federal government's ability to borrow money, however, then debt repayment was not a policy reversal.⁴⁴

The terms of the political debate on the debt changed from 1790 to 1795. In the 1790 "Report on Public Credit," Hamilton had declared his wish to eventually extinguish the public debt, yet he had also said that "the proper funding of the present debt, will render it a national blessing." In Congress Federalists had also argued that the economic benefits of funding the debt would outweigh any drawbacks. By 1795 no Federalist spoke of the debt as a blessing. Instead they dreamed of "the novel spectacle of a great nation which has freed itself from debt." Hamilton sounded like a convert to Jeffersonianism as he recycled Country Whig doctrine. The "progressive accumulation of Debt" formed a "danger to every Government," Hamilton now declared. It was "the natural disease of all Governments; and it is not easy to conceive any thing more likely than this to lead to great & convulsive revolutions of Empire." Closer inspection shows that what the Federalists feared was not "a system of paper influence, of treasury corruption, of certificate nobility," which was the Republicans' great terror, but the demise of public credit. Fisher Ames made their point well: "I am one of those who believe a nation ought to cherish public credit, for the same reason it ought to have strength; for, in critical situations, credit is strength, and the want of it may happen to be not only weakness, but subjugation and ruin," he told the House of Representatives. "And it is my belief that although it may answer for a time to pay the interest, and neglect the principal, yet, at last, in the course of affairs, it will appear that a nation which neglects to pay its debts will have no credit."⁴⁵

British writers had long warned about the dangers of a growing debt. By the late eighteenth century, this warning had become so common that it could be described as "a sort of national music" struck up by anyone attempting to curry favor with the English people. The growing indebtedness following the wars of the French Revolution added fuel to the fears of national bankruptcy. By the mid-1790s, Thomas Paine noted that commentators on the "English system of finance ... have been uniformly impressed with the idea of its downfall happening some time or other," and it now seemed that this moment had finally arrived. Famous eighteenth-century British writers on politics and political economy such as William Blackstone, David Hume, and Adam Smith, all of whom were widely read in the United States, denounced the public debt as a major danger to their nation's future. None of them, however, were alive when the Wars of the French Revolution broke out. Paine's The Decline and Fall of the English System of Finance was part of a polemic against a set of largely forgotten writers who questioned the assertion that the public debt would inevitably lead to the nation's ruin, at least in the foreseeable future. Compared with the usual complaints about the dangers of the public debt, their arguments sounded remarkably fresh. They pointed out that inflation had reduced the debt's real value over time; that public loans meant public spending, which supplied incomes for many subjects and increased their means to pay taxes; and above all that the proper measure of public indebtedness was the size of the debt relative to the size of the national economy. As long as the economy grew faster than the debt, all was well. "The situation of that country can never give ground for alarm, where the debt is increasing, but where the resources are also proportionally increasing."⁴⁶

These defenders of the English system of finance were no friends to an uncontrolled growth of the public debt. Yet they believed that the policies introduced by William Pitt in 1792 established controls on the increase of indebtedness. "The system of borrowing money to carry on war is in itself one that tends ultimately to ruin any nation that adopts it," William Playfair wrote. Significantly, however, he added, "unless a fund is assigned for paying it off by degrees, without which it would be perpetually augmented." From 1792 "every new loan" contracted by the British government had "a sinking fund attached to it." The sinking fund introduced by Pitt had old origins. Its best-known proponent was Richard Price, who had advocated its establishment in a series of writings in the 1770s. On every new loan, the House of Commons now pledged not only the means necessary to pay interest charges but also money for the gradual repayment of the principal. Repayment took the form of adding 1 percent of the principal to the annual interest charges on the loan. Similar to a modern fixed-rate mortgage, annual payments would go toward a greater share of the principal every year and, given the British rate of interest, would fully repay a loan in forty-five years. The introduction of the sinking fund meant that government loans were given a fixed termination date and were no longer redeemable at the pleasure of the government, which in practice had meant the perpetuation of debt. As Playfair noted, "our loans are not ... now to be considered as perpetual ones, but as annuities for forty-five years only. This is a very great difference, and if adhered to, will destroy entirely the fatal tendency of national debt."⁴⁷

In Britain the redemption of the public debt was a means to preserve public credit to secure the nation's ability to continue its wars with France. On the other side of the Atlantic, the Federalists were much more traditional in their approach to the public debt than were the British defenders of the funding system. The American debt was small, and by the mid-1790s it must have been clear to everyone that the country was growing fast in population, land, and wealth. Indeed Hamilton was only too willing to take credit for the strong state of the economy. There should have been little doubt that the nation could sustain a far greater debt and that there was no real need to pursue debt redemption. Yet the Federalists rarely questioned the wisdom of this policy. Robert Goodloe Harper was one of the few who criticized suggested tax increases intended to pay back the debt owed to the Bank of the United States. He pointed to the growth "beyond all former calculation in population, commerce, wealth, and all the pursuits of industry." In contrast to a "stationary" nation, the United States could expect the income from present sources of revenue to grow rapidly over time, thereby removing the need to impose new taxes. Why then "take the capital out of the pockets of our constituents, when an annuity equal to the interest would satisfy the creditor?"⁴⁸

Influenced by the British experiment with a sinking fund and no doubt with Hume's famous discussion of the "natural death" of Britain's public credit in mind, Hamilton repeatedly declared in the "Report on a Plan for the Further Support of Public Credit" his wish to make American public credit "immortal" by avoiding the accumulation of debt. To give "immortality to credit," it was necessary "that with the creation of debt should be incorporated the means of extinguishment; which means are two fold, the establishing at the time of contracting a debt funds for the reimbursement of the Principle [principal], as well as for the payment of Interest within a determinate period—The making it a part of the contract that the funds so established shall be inviolably applied to the object." The aim was to guarantee that public borrowing was sustainable by ensuring that every loan contract included the terms for its eventual liquidation, thus filling in the only gap in the provisions made for the revolutionary debt by the funding act in 1790. Inevitably, Ames told Congress, the United States would be involved in war in the future. "Peace is the time to prepare for it by extinguishing the burdens of the last war." Should Congress fail in paying down the debt in "the interval of peace and prosperity," it would be impossible "to avoid the occasion of adding to it."⁴⁹

The "Report on a Plan for the Further Support of Public Credit" and the debate it prompted have been overshadowed by the great turmoil about the Jay Treaty and have been little noticed by historians. But the report was adopted by Congress and formed the basis for two acts that made provisions for the gradual redemption of the public debt, which were passed on March 3, 1795, and April 28, 1796. Hamilton had left the Treasury by then and been succeeded by his close collaborator, Oliver Wolcott Jr., who set up an amortization plan for the foreign debt, the 6 percent debt, and the deferred 6 percent debt. No provision was made at that time for the 3 percent indents. According to Wolcott's plan, there would be no further attempts to roll over or refinance foreign loans on their maturation date, but they would be repaid according to contract. The foreign debt would therefore be completely paid back in 1809. The 6 percent debt would be repaid by making use of the right to pay $8 on every $100 of original stock. With the help of compound interest, such payments would terminate the debt in twenty-four years, by 1818. Because the government was prohibited by the funding act to begin repayment of the principal on the deferred 6 percent securities before they began to earn interest in 1801, this part of the debt would be repaid by 1824.⁵⁰

The legislation passed on March 3, 1795, transformed the nature of the securities in the same way that British securities had been transformed after 1792. Wolcott pointed out that since the act had supplied "unconditional" instructions to the commissioners of the sinking fund, and since "permanent funds have been vested and appropriated, it is conceived that a successive reimbursement annually ... has become an irrevocable stipulation with the creditors." The securities had thereby been converted from "an annuity of six per centum per annum, for an indefinite period, into an annuity of eight per centum per annum, for a period of somewhat less than twenty-four years, commencing with the year 1795."⁵¹

For political reasons Federalist critics focused on the overall growth of the public debt rather than on the program to extinguish the revolutionary debt. The Federalists' record of debt redemption has also passed unnoticed by historians. Republicans argued that the public debt did not decrease but grew under Federalist administrations. They were correct about the first half of the 1790s but wrong about the second half. In 1795 the total public debt was $83.8 million. Six years later it was $80.7 million, suggesting a debt reduction of around $3 million. In reality the federal government paid off around $4 million of the 6 percent debt, about $2 million of the foreign debt, and around $5.5 million of its short-term loans as well as the debt to the Bank of the United States. This considerable achievement is hidden from view to anyone who focuses on the total indebtedness of the United States because the government simultaneously increased the debt by borrowing around $7 million to pursue the Quasi War with France. In 1795 Hamilton had argued that war, at least against "Civalized powers," was a legitimate reason for increasing the long-term debt but that there "should be a steady effort, as a rule of administration, not to encrease the permanent Debt of the Country by permanent loans, except when it is inevitable by the existence of a war with some European power." Rather than signifying a break with the Federalist policy of debt management, the loans contracted during the Quasi War suggest adherence to the plan to repay the principal of old loans to maintain a credit rating that made it possible to borrow during wartime.⁵²

Historians routinely give Republicans the credit for paying off the revolutionary debt. To a large extent, they are right in doing so. Thomas Jefferson and his Treasury secretary, Albert Gallatin, certainly deserve top marks on debt redemption.⁵³ But they were not the initiators of the debt redemption policy. Rather they implemented a policy formulated by the Federalists. The repayment of the revolutionary debt actually followed the Federalist plan adopted in 1795 and 1796 closely (Figures I–III). Contrary to what may have been expected, there was no sharp break in the management of the debt after 1801. Only midway through his second term did Jefferson find the means to speed up debt repayment and to diverge significantly from the Federalist amortization plan.

Figure I
Repayment of the 6 percent debt. Status of debt on January 1 each year. This figure compares the repayment plan presented by Oliver Wolcott Jr. to the actual repayments made on the 6 percent debt (Wolcott, "Public Debt," in American State Papers: Documents, Legislative and Executive, of the Congress of the United States ... Selected and Edited, under the Authority of Congress ..., 3, Finance [Washington, D.C., 1832], 5: 383). Actual repayments are based on the compilation made by Rafael A. Bayley (Bayley, "History of the National Loans of the United States from July 4, 1776, to June 30, 1880," in Report on Valuation, Taxation, and Public Indebtedness in the United States, as Returned at the Tenth Census [June 1, 1880], comp. Robert P. Porter [Washington, D.C., 1884], 403–4). Bayley's figures have been compared with the statement of the public debt from 1791 to 1815 found in A. J. Dallas, "State of the Finances," American State Papers, 3, Finance, 7: 21–23. In his report on the public debt, Wolcott printed the formula for his amortization plan rather than the sums of planned installments. It is this formula that has been applied to Bayley's figure for the total debt on January 1, 1795.

Figure II
Repayment of the 6 percent deferred debt. Status of debt on January 1 each year. This figure compares the repayment plan presented by Wolcott to the actual repayments made on the deferred 6 percent debt (Wolcott, "Public Debt," American State Papers, 3, Finance, 5: 383). Actual repayments are based on the compilation made by Bayley (Bayley, "History of the National Loans," 403–4). Bayley's figures have been compared with the statement of the public debt from 1791 to 1815 found in Dallas, "State of the Finances," American State Papers, 3, Finance, 7: 21–23. In his report on the public debt, Wolcott printed the formula for his amortization plan rather than the sums of planned installments. It is this formula that has been applied to Bayley's figure for the total debt on January 1, 1801.

Figure III
Repayment of the foreign debt. This figure compares the repayment plan presented by Wolcott to the actual repayments made on the foreign debt (Wolcott, "Public Debt," American State Papers, 3, Finance, 5: 374–76). The foreign debts included in the figure are the Amsterdam and Antwerpen loans; the French loans had been liquidated when Wolcott presented his plan. Actual repayments are based on the compilation made by Bayley (Bayley, "History of the National Loans," 468–69).

Looking beyond political rhetoric to the governmental institutions and policies of the early Republic allows historians to question the conception of Federalists as the advocates of big government and Jeffersonians as their antithesis. Federalists were not in favor of a permanent or growing debt. The debt funded in 1790 was inherited from the Revolution and was not their own creation. In 1795 they developed and adopted a plan for the debt's eventual redemption. Yet they also embraced public credit and the government's ability to borrow money as a crucial instrument of modern war.⁵⁴

The Jeffersonian attitude to public debt is more complex. There is no doubt that Republicans wished to see their country free from debt and that they subscribed to Country Whig arguments condemning public debts, central banks, and public creditors. But their actions sometimes ran counter to their words. In his first inaugural address, Jefferson promised "the honest payment of our debts and sacred preservation of the public faith." Before his election was confirmed, as Congress struggled to break the deadlock between Jefferson and Aaron Burr, Alexander Hamilton had suggested that Federalist Congressmen "make it a ground of exploration with Mr. Jefferson or his confidential friends" to obtain "some assurances of his future conduct." To Hamilton there were "three essential points" that Federalists should try to secure. They concerned "the maintenance of the present system especially on the cardinal articles of public Credit, a Navy, Neutrality." "Other matters," he added, "may be left to take their chance."⁵⁵ Whether or not a deal was ever struck with Jefferson, his policies upheld most of the Federalist system, suggesting a significant amount of common ground between Federalists and Republicans with regard to not only foreign policy and defense but also principles of public finance.

At several junctures Republican leaders were instrumental in realizing important financial policies and institutions associated with the Federalists. James Madison was crucial to the creation of the Treasury Department and especially to the elevation of the Treasury secretary to a powerful position. For all their later opposition, the funding act would never have passed Congress without the support of both Madison and Jefferson. When Jefferson came to power, he upheld the contract with the creditors and made no attempt to repudiate the debt. Though the Virginia dynasty presided over the liquidation of the revolutionary debt, Jefferson, Madison, and James Monroe actually administrated a Federalist repayment plan. There was also continuity in fiscal policies. Both Federalists and Republicans preferred low taxes and gradual debt repayment to high taxes and rapid debt liquidation. Furthermore Republicans followed Federalist precedent in their approach to the financing of extraordinary expenditures with loans rather than increased taxation. Fisher Ames's idea that wars should be financed with loans to be paid off in times of peace and plenty, which Hamilton subscribed to, was echoed almost verbatim by Jefferson and Gallatin a decade later, forming the policy followed during the War of 1812.⁵⁶

Far from rejecting the use of government loans, Republicans and later Democrats made much greater use of public credit as an instrument of statecraft than Federalists ever did. It was public credit that allowed the United States to purchase Louisiana. Public credit also allowed the United States to embark on a second war for independence in 1812. Loans paid for land acquired from Spain following the treaty of 1819 and for compensation for territory and claims of the state of Texas after its annexation to the United States. Loans also paid for the invasion of Mexico in 1846. In retrospect the expansion of the American empire across the North Atlantic continent may look inevitable. Yet the policies pursued from 1790 to the 1840s should be contrasted to the situation in the 1780s, when the national government was impotent and insolvent and therefore unable to pursue territorial expansion or to project military power. The American history of expansion and growing power cannot be explained by a single cause only. But among the factors that made it possible must be counted the creation of efficient public financial institutions and the restoration of public credit.

"The only exact testimony of a man is his actions," Thomas Jefferson once wrote with reference to his own political reputation.⁵⁷ In the popular imagination, Alexander Hamilton and Jefferson will surely continue to serve as symbols of conflicting visions of America's purpose and future. But professional historians at least would do well to move beyond this dichotomy by supplementing the study of ideas with studies of actions and institutions. An improved understanding of American history, and especially of the nation's role in world history, does not require further investigations of the rhetorical battles between the statesmen of the early Republic as much as studies of the policies they formulated and implemented and the political institutions they created and put to use.

Max M. Edling is a research fellow in the History Department at the University of Uppsala. The author is grateful to Roger H. Brown, Richard Buel, Robin L. Einhorn, Woody Holton, Richard John, Richard Leffler, Edwin J. Perkins, and Susanna Rabow-Edling, who have read and commented extensively on various drafts of this article. Research for this article was funded by the Bank of Sweden Tercentenary Foundation.

Notes

¹ On the visions of Hamilton and Jefferson, compare Dumas Malone, Jefferson and the Rights of Man, vol. 2, Jefferson and His Time (Boston, 1951), 286, with Forrest McDonald, Alexander Hamilton: A Biography (New York, 1979), 361–62. Calvin H. Johnson and I have argued that an important reason for the framing and adoption of the Constitution was the need to restore public credit so the Union could borrow money in times of crisis (see Max M. Edling, A Revolution in Favor of Government: Origins of the U.S. Constitution and the Making of the American State [New York, 2003]; Johnson, Righteous Anger at the Wicked States: The Meaning of the Founders' Constitution [New York, 2005]).

² "Report Relative to a Provision for the Support of Public Credit," in Harold C. Syrett et al., eds., The Papers of Alexander Hamilton (New York, 1962), 6: 66 n. 99 (quotation). Historians who have claimed that Hamilton wished to perpetuate the debt include Curtis P. Nettles, The Emergence of a National Economy, 1785–1815 (New York, 1962), 116–17; Stanley Elkins and Eric McKitrick, The Age of Federalism (New York, 1993), 112–13; Lance Banning, Jefferson and Madison: Three Conversations from the Founding (Madison, Wis., 1995), 44; Cathy Matson, "The Revolution, the Constitution, and the New Nation," in The Colonial Era, ed. Stanley L. Engerman and Robert E. Gallman, vol. 1, The Cambridge Economic History of the United States (New York, 1996), 390; Herbert E. Sloan, Principle and Interest: Thomas Jefferson and the Problem of Debt (Charlottesville, Va., 2001), 126. Authoritative accounts of the funding and assumption proposals include E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776–1790 (Chapel Hill, N.C., 1961), 289–343; McDonald, Alexander Hamilton, 163–88; Elkins and McKitrick, Age of Federalism, 114–23; Edwin J. Perkins, American Public Finance and Financial Services, 1700–1815 (Columbus, Ohio, 1994), 199–234.

³ Saul Cornell, The Other Founders: Anti-Federalism and the Dissenting Tradition in America, 1788–1828 (Chapel Hill, N.C., 1999), 174 (quotation). On Madison's opposition, see Irving Brant, James Madison: Father of the Constitution, 1787–1800 (Indianapolis, Ind., 1950), 290–305; Lance Banning, The Sacred Fire of Liberty: James Madison and the Founding of the Federal Republic (Ithaca, N.Y., 1995), 309–25. Historians who have argued that funding and assumption created undeserved profits for speculators include John M. Murrin, "The Great Inversion; Or, Court versus Country: A Comparison of the Revolutionary Settlements in England (1688–1721) and America (1776–1816)," in Three British Revolutions: 1641, 1688, 1776, ed. J. G. A. Pocock (Princeton, N.J., 1980), 407; Banning, Jefferson and Madison, 41–43. This view is challenged by Edwin J. Perkins, "Madison's Debt Discrimination Proposal Revisited: The Application of Present Value Financial Analysis" (unpublished paper available from Perkins at perkinsej@aol.com).

⁴ Madison's proposal was to give the present holders the equivalent of the highest market price for securities and to give the difference between the market price and the par value to the original holder. Contemporaries debated to what extent it was even possible to determine who the original owners were. Whereas this would most likely have been feasible, it would no doubt have been a time-consuming process (see Brant, James Madison, 293–99; Perkins, American Public Finance and Financial Services, 222–23). On the dinner table bargain, see Brant, James Madison, 306–18; Malone, Jefferson and the Rights of Man, 286–306; Jacob E. Cooke, "The Compromise of 1790," William and Mary Quarterly, 3d ser., 27, no. 4 (October 1970): 523–45; Kenneth R. Bowling with a rebuttal by Jacob E. Cooke, "Dinner at Jefferson's: A Note on Jacob E. Cooke's 'The Compromise of 1790,'" WMQ 28, no. 4 (October 1971): 629–48; McDonald, Alexander Hamilton, 181–87; Elkins and McKitrick, Age of Federalism, 155–61; Joseph J. Ellis, Founding Brothers: The Revolutionary Generation (New York, 2002), 48–80. Jefferson's own account is found in the opening preface to the Anas. See Franklin B. Sawvel, ed., The Complete Anas of Thomas Jefferson (New York, 1903), 30–34.

⁵ Thomas Jefferson wrote two important letters to George Washington in which he denounced Alexander Hamilton and the funding and assumption of the public debt in traditional Country Whig terms. He also explained that his own role in securing adoption of the funding act was due to his failure to perceive Hamilton's ulterior motives. See Jefferson to Washington, Philadelphia, May 23, 1792, in Julian P. Boyd et al., eds., The Papers of Thomas Jefferson (Princeton, N.J., 1990), 23: 535–41 ("corrupt squadron," 537); Jefferson to Washington, Monticello, Sept. 9, 1792, ibid., 24: 351–60 ("duped," 352, "I would wish," 355). For more on Jefferson's views on public debt, see McDonald, Alexander Hamilton, 184; Sloan, Principle and Interest, 44–48, 132, 148–49, 182–83.

⁶ For the Virginia protest, see American State Papers: Documents, Legislative and Executive, of the Congress of the United States ... Selected and Edited, under the Authority of Congress ..., 3, Finance (Washington, D.C., 1832), 5: 90–91; Sloan, Principle and Interest, 169–70. The principal works on the role and influence of the Country Whig tradition in America are Bernard Bailyn, The Ideological Origins of the American Revolution (Cambridge, Mass., 1967); Gordon S. Wood, The Creation of the American Republic, 1776–1787 (Chapel Hill, N.C., 1969); J. G. A. Pocock, The Machiavellian Moment: Florentine Political Thought and the Atlantic Republican Tradition (Princeton, N.J., 1975); Lance Banning, The Jeffersonian Persuasion: Evolution of a Party Ideology (Ithaca, N.Y., 1978).

⁷ Malone, Jefferson and the Rights of Man, 305 ("dictator"); Paul Douglas Newman, "The Federalists' Cold War: The Fries Rebellion, National Security, and the State, 1787–1800," Pennsylvania History 67, no. 1 (Winter 2000): 64 ("true Machiavellian"). The idea that Hamilton aimed to use the debt to interest the elite in the government's fate can be found in Brant, James Madison, 291–92; Banning, Jeffersonian Persuasion, 134–40; Murrin, "Great Inversion," 407; E. James Ferguson, "Political Economy, Public Liberty, and the Formation of the Constitution," WMQ 40, no. 3 (July 1983): 389–412; Richard K. Mathews, The Radical Politics of Thomas Jefferson: A Revisionist View (Lawrence, Kans., 1984), 114; John R. Nelson, Liberty and Property: Political Economy and Policymaking in the New Nation, 1789–1812 (Baltimore, 1987), 28–32; Gordon S. Wood, The Radicalism of the American Revolution (New York, 1992), 262–64; James Roger Sharp, American Politics in the Early Republic: The New Nation in Crisis (New Haven, Conn., 1993), 40; Banning, Sacred Fire of Liberty, 311. Hamilton's reputation is traced in Stephen F. Knott, Alexander Hamilton and the Persistence of Myth (Lawrence, Kans., 2002).

⁸ "The Defence of the Funding System," in Syrett et al., Papers of Alexander Hamilton, 19: 40–42 (quotations). Hamilton apparently shared the view of Malachy Postlethwayt, a British writer with whom he was familiar, that "the throne of that prince, in a free nation, must be most firmly established, whose affairs will permit him to ask, and who desires to collect, the fewest taxes from his people" (see Postlethwayt, The Universal Dictionary of Trade and Commerce, 4th ed. [London, 1774], 1: s.v. "funds").

⁹ John C. Miller, Alexander Hamilton (New York, 1959), 229–37, 252–55; Nettles, Emergence of a National Economy, 113; McDonald, Alexander Hamilton, 165–66; Elkins and McKitrick, Age of Federalism, 115; Perkins, American Public Finance and Financial Services, 214; Banning, Sacred Fire of Liberty, 310; Richard Sylla, "Shaping the US Financial System, 1690–1913: The Dominant Role of Public Finance," in The State, the Financial System and Economic Modernization, ed. Sylla, Richard Tilly, and Gabriel Tortella (New York, 1999), 262; Ellis, Founding Brothers, 64; Sean Wilentz, The Rise of American Democracy: Jefferson to Lincoln (New York, 2005), 43–45.

¹⁰ Elkins and McKitrick, Age of Federalism, 112 ("phenomenal"); McDonald, Alexander Hamilton, 161 ("incidental"); Sylla, "Shaping the US Financial System," 258 ("few of the techniques").

¹¹ "Defence of the Funding System," in Syrett et al., Papers of Alexander Hamilton, 19: 60 ("immense importance"), 57 ("so immense a power"); Alexander Hamilton to Robert Morris, De Peyster's Point, New York, Apr. 30, 1781, ibid., 2: 604–35 ("not by gaining battles," 606); "The Continentalist No. IV," ibid., 2: 669–74 ("most powerful and opulent," 672); "Report on a Plan for the Further Support of Public Credit," ibid., 18: 125 ("It is impossible"), 106 ("current revenues"). Hamilton's early thoughts on public credit before his appointment as Treasury secretary can be traced in Hamilton's letter to Morris; "The Continentalist No. IV"; "The Federalist No. 30," in Jacob E. Cooke, ed., The Federalist (Cleveland, Ohio, 1961), 187–93.

¹² Fred Anderson and Andrew Cayton, The Dominion of War: Empire and Liberty in North America, 1500–2000 (New York, 2005), xiii ("imperial ambitions"). Gordon S. Wood's Radicalism of the American Revolution and Sean Wilentz's Rise of American Democracy are two grand syntheses of the early Republic's political development that hardly make any mention of international affairs. An important attempt to give greater weight to external factors in early American political history comes from the discipline of political science. See Ira Katznelson, "Rewriting the Epic of America," in Shaped by War and Trade: International Influences on American Political Development, ed. Katznelson and Martin Shefter (Princeton, N.J., 2002), 3–23; Katznelson, "Flexible Capacity: The Military and Early American Statebuilding," ibid., 82–110; Aristide R. Zolberg, "International Engagement and American Democracy: A Comparative Perspective," ibid., 24–54. For a study of the American Revolution's effect on political debates in France, see Philipp Ziesche, "Exporting American Revolutions: Gouverneur Morris, Thomas Jefferson, and the National Struggle for Universal Rights in Revolutionary France," Journal of the Early Republic 26, no. 3 (Fall 2006): 419–47. On Atlantic history, see Bernard Bailyn, Atlantic History: Concept and Contours (Cambridge, Mass., 2005). On world history, see Thomas Bender, A Nation among Nations: America's Place in World History (New York, 2006). On the United States as the heir of Britain's imperial ambitions, see Alan Taylor, American Colonies (New York, 2001), xv–xvii, 477; Linda Colley, "The Difficulties of Empire: Present, Past and Future," Historical Research 79, no. 205 (August 2006): 367–82.

¹³ Peter S. Onuf and Nicholas G. Onuf, Federal Union, Modern World: The Law of Nations in an Age of Revolutions, 1776–1814 (Madison, Wis., 1993); James R. Sofka, "The Jeffersonian Idea of National Security: Commerce, the Atlantic Balance of Power, and the Barbary War, 1786–1805," Diplomatic History 21, no. 4 (Fall 1997): 519–44; P. Onuf, "A Declaration of Independence for Diplomatic Historians," Diplomatic History 22, no. 1 (Winter 1998): 71–83; P. Onuf, Jefferson's Empire: The Language of American Nationhood (Charlottesville, Va., 2000); P. Onuf and Leonard J. Sadosky, Jeffersonian America (Malden, Mass., 2002), 172–221; David C. Hendrickson, Peace Pact: The Lost World of the American Founding (Lawrence, Kans., 2003); Leonard Joseph Sadosky, "Revolutionary Negotiations: A History of American Diplomacy with Europe and Native Americans in the Age of Jefferson" (Ph.D. diss., University of Virginia, 2003); Eliga H. Gould, "The Making of an Atlantic State System: Britain and the United States, 1795–1825," in Britain and America Go to War: The Impact of War and Warfare in Anglo-America, 1754–1815, ed. Julie Flavell and Stephen Conway (Gainesville, Fla., 2004), 241–65; P. Onuf, "Nations, Revolutions, and the End of History," in Revolutionary Currents: Nation Building in the Transatlantic World, ed. Michael A. Morrison and Melinda Zook (Lanham, Md., 2004), 173–88; Anderson and Cayton, Dominion of War; Sofka, "'A Commerce Which Must Be Protected': Thomas Jefferson and the Atlantic International System," paper presented at The Old World and the New: Exchanges between America and Europe in the Age of Jefferson, international conference arranged by the Robert H. Smith International Center for Jefferson Studies, at Schloss Leopoldskron, Salzburg, Austria, Oct. 12–16, 2005. On new directions in the study of the early Republic, see the special forum in the Journal of the Early Republic 24, no. 2 (Summer 2004).

¹⁴ Anderson and Cayton, Dominion of War, xv ("long-term pattern"). On the comparative success of the American empire, see Colley, Historical Research 79: 371 (citing a lecture by Dominic Lieven). C. A. Bayly points out that in the life span of only one generation the newly independent United States seized more land on the American continent than had been occupied during the entire imperial period (Bayly, The Birth of the Modern World, 1780–1914: Global Connections and Comparisons [Malden, Mass., 2004], 115). Similarly, Alan Taylor argues that "Americans proved worthy heirs to the British as the predominant colonizers of North America" (Taylor, American Colonies, 477).

¹⁵ New institutionalist history should be distinguished from old institutionalist history as practiced by the first generation of professional American historians in the late nineteenth and early twentieth centuries. The latter analyzed institutions in a narrowly legalistic way and did not always pay attention to how they worked in practice. In contrast new institutionalist history is concerned with the function and above all the effects of political institutions on social, economic, and political practice. It also pays attention to social and cultural themes that did not concern old institutionalist history. Richard R. John presents the case for institutional history in John, "Governmental Institutions as Agents of Change: Rethinking American Political Development in the Early Republic, 1787–1835," Studies in American Political Development 11 (Fall 1997): 347–80; John, "Ruling Passions: Political Economy in Nineteenth-Century America," in Ruling Passions: Political Economy in Nineteenth-Century America, ed. John (University Park, Pa., 2006), 1–20 (quotation, 6). Studies in American Political Development and Journal of Policy History are the major journals publishing institutional history. In general institutional historians and so-called APD (American political development) scholars tend to work on twentieth-century topics, but some historians are applying the perspective to the early Republic. See John, Spreading the News: The American Postal System from Franklin to Morse (Cambridge, Mass., 1995); William J. Novak, The People's Welfare: Law and Regulation in Nineteenth-Century America (Chapel Hill, N.C., 1996); Robin L. Einhorn, American Taxation, American Slavery (Chicago, 2006); John, Ruling Passions.

¹⁶ Sofka, Diplomatic History 21: 519–44; Onuf and Sadosky, Jeffersonian America, 172–221; Sadosky, "Revolutionary Negotiations"; Sofka, "'Commerce Which Must Be Protected.'"

¹⁷ "Report Relative to a Provision for the Support of Public Credit," in Syrett et al., Papers of Alexander Hamilton, 6: 67 (quotations). See also Elias Boudinot, in Helen E. Veit et al., eds., De