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Funding and Assumption

alexander hamilton The First Report on Public Credit 14 January 1790

Already thinking far beyond the reestablishment of public credit, Hamilton took pains in the report to counter alternative suggestions that were already circulating in the country. He particularly objected to the ideas of funding the debt at its depreciated value, discriminating between original and current holders of the notes, or forgoing an assumption of the debts of the states.

… While the observance of that good faith which is the basis of public credit is recommended by the strongest inducements of political expediency, it is enforced by considerations of still greater authority. There are arguments for it which rest on the immutable principles of moral obligation. And in proportion as the mind is disposed to contemplate, in the order of Providence, an intimate connection between public virtue and public happiness, will be its repugnancy to a violation of those principles.

This reflection derives additional strength from the nature of the debt of the United States. It was the price of liberty. The faith of America has been repeatedly pledged for it, and with solemnities that give peculiar force to the obligation. There is indeed reason to regret that it has not hitherto been kept; that the necessities of the war, conspiring with inexperience in the subjects of finance, produced direct infractions; and that the subsequent period has been a continued scene of negative violation, or non-compliance. But a diminution of this regret arises from the reflection that the last seven years have exhibited an earnest and uniform effort, on the part of the government of the union, to retrieve the national credit, by doing justice to the creditors of the nation; and that the embarrassments of a defective constitution, which defeated this laudable effort, have ceased… .

It cannot but merit particular attention that among ourselves the most enlightened friends of good government are those whose expectations are the highest.

To justify and preserve their confidence; to promote the increasing respectability of the American name; to answer the calls of justice; to restore landed property to its due value; to furnish new resources both to agriculture and commerce; to cement more closely the union of the states; to add to their security against foreign attack; to establish public order on the basis of an upright and liberal policy. These are the great and invaluable ends to be secured by a proper and adequate provision, at the present period, for the support of public credit.

To this provision we are invited, not only by the general considerations which have been noticed, but by others of a more particular nature. It will procure to every class of the community some important advantages and remove some no less important disadvantages.

The advantage to the public creditors from the increased value of that part of their property which constitutes the public debt needs no explanation.

But there is a consequence of this, less obvious, though not less true, in which every other citizen is interested. It is a well known fact that in countries in which the national debt is properly funded and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie; or in other words, stock, in the principal transactions of business, passes current as specie. The same thing would in all probability happen here, under the like circumstances.

The benefits of this are various and obvious.

First. Trade is extended by it; because there is a larger capital to carry it on, and the merchant can at the same time afford to trade for smaller profits as his stock, which, when unemployed, brings him in an interest from the government, serves him also as money, when he has a call for it in his commercial operations.

Secondly. Agriculture and manufactures are also promoted by it: For the like reason, that more capital can be commanded to be employed in both; and because the merchant, whose enterprize in foreign trade gives to them activity and extension, has greater means for enterprize.

Thirdly. The interest of money will be lowered by it, for this is always in a ratio to the quantity of money and to the quickness of circulation. This circumstance will enable both the public and individuals to borrow on easier and cheaper terms.

And from the combination of these effects, additional aids will be furnished to labour, to industry, and to arts of every kind.

But these good effects of a public debt are only to be looked for when, by being well funded, it has acquired an adequate and stable value. Till then, it has rather a contrary tendency. The fluctuation and insecurity incident to it in an unfunded state render it a mere commodity, and a precarious one. As such, being only an object of occasional and particular speculation, all the money applied to it is so much diverted from the more useful channels of circulation, for which the thing itself affords no substitute: So that, in fact, one serious inconvenience of an unfunded debt is that it contributes to the scarcity of money.

This distinction, which has been little if at all attended to, is of the greatest moment. It involves a question immediately interesting to every part of the community; which is no other than this —Whether the public debt, by a provision for it on true principles, shall be rendered a substitute for money; or whether, by being left as it is, or by being provided for in such a manner as will wound those principles and destroy confidence, it shall be suffered to continue, as it is, a pernicious drain of our cash from the channels of productive industry.

The effect which the funding of the public debt, on right principles, would have upon landed property, is one of the circumstances attending such an arrangement which has been least adverted to, though it deserves the most particular attention. The present depreciated state of that species of property is a serious calamity. The value of cultivated lands, in most of the states, has fallen since the revolution from 25 to 50 per cent. In those farthest south, the decrease is still more considerable. Indeed, if the representations continually received from that quarter may be credited, lands there will command no price which may not be deemed an almost total sacrifice.

This decrease in the value of lands ought, in a great measure, to be attributed to the scarcity of money. Consequently, whatever produces an augmentation of the monied capital of the country must have a proportional effect in raising that value. The beneficial tendency of a funded debt, in this respect, has been manifested by the most decisive experience in Great-Britain.

The proprietors of lands would not only feel the benefit of this increase in the value of their property, and of a more prompt and better sale when they had occasion to sell; but the necessity of selling would be, itself, greatly diminished. As the same cause would contribute to the facility of loans, there is reason to believe that such of them as are indebted would be able, through that resource, to satisfy their more urgent creditors.

It ought not however to be expected that the advantages described as likely to result from funding the public debt would be instantaneous. It might require some time to bring the value of stock to its natural level, and to attach to it that fixed confidence which is necessary to its quality as money. Yet the late rapid rise of the public securities encourages an expectation that the progress of stock to the desirable point will be much more expeditious than could have been foreseen. And as in the mean time it will be increasing in value, there is room to conclude that it will, from the outset, answer many of the purposes in contemplation. Particularly it seems to be probable that from creditors who are not themselves necessitous it will early meet with a ready reception in payment of debts, at its current price.

Having now taken a concise view of the inducements to a proper provision for the public debt, the next enquiry which presents itself is, what ought to be the nature of such a provision? This requires some preliminary discussions.

It is agreed on all hands that that part of the debt which has been contracted abroad, and is denominated the foreign debt, ought to be provided for according to the precise terms of the contracts relating to it. The discussions which can arise, therefore, will have reference essentially to the domestic part of it, or to that which has been contracted at home. It is to be regretted that there is not the same unanimity of sentiment on this part as on the other.

The Secretary has too much deference for the opinions of every part of the community not to have observed one which has, more than once, made its appearance in the public prints, and which is occasionally to be met with in conversation. It involves this question, whether a discrimination ought not to be made between original holders of the public securities and present possessors by purchase. Those who advocate a discrimination are for making a full provision for the securities of the former, at their nominal value, but contend that the latter ought to receive no more than the cost to them and the interest: And the idea is sometimes suggested of making good the difference to the primitive possessor.

In favor of this scheme, it is alledged that it would be unreasonable to pay twenty shillings in the pound to one who had not given more for it than three or four. And it is added, that it would be hard to aggravate the misfortune of the first owner, who, probably through necessity, parted with his property at so great a loss, by obliging him to contribute to the profit of the person who had speculated on his distresses.

The Secretary, after the most mature reflection on the force of this argument, is induced to reject the doctrine it contains, as equally unjust and impolitic, as highly injurious even to the original holders of public securities; as ruinous to public credit.

It is inconsistent with justice, because in the first place, it is a breach of contract; in violation of the rights of a fair purchaser.

The nature of the contract in its origin is that the public will pay the sum expressed in the security to the first holder, or his assignee. The intent, in making the security assignable, is that the proprietor may be able to make use of his property by selling it for as much as it may be worth in the market, and that the buyer may be safe in the purchase.

Every buyer therefore stands exactly in the place of the seller, has the same right with him to the identical sum expressed in the security, and having acquired that right, by fair purchase and in conformity to the original agreement and intention of the government, his claim cannot be disputed, without manifest injustice.

That he is to be considered as a fair purchaser results from this: Whatever necessity the seller may have been under was occasioned by the government, in not making a proper provision for its debts. The buyer had no agency in it, and therefore ought not to suffer. He is not even chargeable with having taken an undue advantage. He paid what the commodity was worth in the market, and took the risks of reimbursement upon himself. He of course gave a fair equivalent, and ought to reap the benefit of his hazard; a hazard which was far from inconsiderable and which, perhaps, turned on little less than a revolution in government.

That the case of those who parted with their securities from necessity is a hard one, cannot be denied. But whatever complaint of injury or claim of redress they may have respects the government solely. They have not only nothing to object to the persons who relieved their necessities, by giving them the current price of their property, but they are even under an implied condition to contribute to the reimbursement of those persons. They knew that by the terms of the contract with themselves, the public were bound to pay to those to whom they should convey their title the sums stipulated to be paid to them; and, that as citizens of the United States, they were to bear their proportion of the contribution for that purpose. This, by the act of assignment, they tacitly engage to do; and if they had an option, they could not, with integrity or good faith, refuse to do it, without the consent of those to whom they sold.

But though many of the original holders sold from necessity, it does not follow that this was the case with all of them. It may well be supposed that some of them did it either through want of confidence in an eventual provision or from the allurements of some profitable speculation. How shall these different classes be discriminated from each other? How shall it be ascertained, in any case, that the money which the original holder obtained for his security was not more beneficial to him than if he had held it to the present time, to avail himself of the provision which shall be made? How shall it be known whether, if the purchaser had employed his money in some other way, he would not be in a better situation than by having applied it in the purchase of securities, though he should now receive their full amount? And if neither of these things can be known, how shall it be determined whether a discrimination, independent of the breach of contract, would not do a real injury to purchasers; and if it included a compensation to the primitive proprietors, would not give them an advantage to which they had no equitable pretension.

It may well be imagined, also, that there are not wanting instances in which individuals, urged by a present necessity, parted with the securities received by them from the public and shortly after replaced them with others, as an indemnity for their first loss. Shall they be deprived of the indemnity which they have endeavoured to secure by so provident an arrangement?

Questions of this sort, on a close inspection, multiply themselves without end, and demonstrate the injustice of a discrimination even on the most subtle calculations of equity, abstracted from the obligation of contract.

The difficulties too of regulating the details of a plan for that purpose, which would have even the semblance of equity, would be found immense. It may well be doubted whether they would not be insurmountable and replete with such absurd, as well as inequitable consequences, as to disgust even the proposers of the measure… .

But there is still a point in view in which it will appear perhaps even more exceptionable than in either of the former. It would be repugnant to an express provision of the Constitution of the United States. This provision is that “all debts contracted and engagements entered into before the adoption of that Constitution shall be as valid against the United States under it, as under the confederation,” which amounts to a constitutional ratification of the contracts respecting the debt, in the state in which they existed under the confederation. And resorting to that standard, there can be no doubt that the rights of assignees and original holders must be considered as equal.

In exploding thus fully the principle of discrimination, the Secretary is happy in reflecting that he is only the advocate of what has been already sanctioned by the formal and express authority of the government of the Union, in these emphatic terms—“The remaining class of creditors (say Congress in their circular address to the states of the 26th of April 1783) is composed partly of such of our fellow-citizens as originally lent to the public the use of their funds or have since manifested most confidence in their country by receiving transfers from the lenders; and partly of those whose property has been either advanced or assumed for the public service. To discriminate the merits of these several descriptions of creditors would be a task equally unnecessary and invidious. If the voice of humanity plead more loudly in favor of some than of others, the voice of policy, no less than of justice, pleads in favor of all. A wise nation will never permit those who relieve the wants of their country, or who rely most on its faith, its firmness, and its resources, when either of them is distrusted, to suffer by the event.”

The Secretary, concluding that a discrimination between the different classes of creditors of the United States cannot with propriety be made, proceeds to examine whether a difference ought to be permitted to remain between them and another description of public creditors—Those of the states individually.

The Secretary, after mature reflection on this point, entertains a full conviction that an assumption of the debts of the particular states by the Union, and a like provision for them as for those of the Union, will be a measure of sound policy and substantial justice.

It would, in the opinion of the Secretary, contribute, in an eminent degree, to an orderly, stable and satisfactory arrangement of the national finances.

Admitting, as ought to be the case, that a provision must be made in some way or other for the entire debt, it will follow that no greater revenues will be required whether that provision be made wholly by the United States or partly by them and partly by the states separately.

The principal question then must be whether such a provision cannot be more conveniently and effectually made by one general plan issuing from one authority than by different plans originating in different authorities.

In the first case there can be no competition for resources; in the last, there must be such a competition. The consequences of this, without the greatest caution on both sides, might be interfering regulations, and thence collision and confusion. Particular branches of industry might also be oppressed by it. The most productive objects of revenue are not numerous. Either these must be wholly engrossed by one side, which might occasion an accumulation upon them beyond what they could properly bear. If this should not happen, the caution requisite to avoiding it would prevent the revenue’s deriving the full benefit of each object. The danger of interference and of excess would be apt to impose restraints very unfriendly to the complete command of those resources which are the most convenient; and to compel the having recourse to others, less eligible in themselves, and less agreeable to the community… .

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.

If on the contrary there are distinct provisions, there will be distinct interests, drawing different ways. That union and concert of views among the creditors, which in every government is of great importance to their security and to that of public credit, will not only not exist, but will be likely to give place to mutual jealousy and opposition. And from this cause, the operation of the systems which may be adopted, both by the particular states and by the Union, with relation to their respective debts, will be in danger of being counteracted.

There are several reasons which render it probable that the situation of the state creditors would be worse than that of the creditors of the Union if there be not a national assumption of the state debts. Of these it will be sufficient to mention two; one, that a principal branch of revenue is exclusively vested in the Union; the other, that a state must always be checked in the imposition of taxes on articles of consumption from the want of power to extend the same regulation to the other states and from the tendency of partial duties to injure its industry and commerce. Should the state creditors stand upon a less eligible footing than the others, it is unnatural to expect they would see with pleasure a provision for them. The influence which their dissatisfaction might have could not but operate injuriously, both for the creditors and the credit of the United States.

Hence it is even the interest of the creditors of the Union that those of the individual states should be comprehended in a general provision. Any attempt to secure to the former either exclusive or peculiar advantages would materially hazard their interests.

Neither would it be just that one class of the public creditors should be more favoured than the other. The objects for which both descriptions of the debt were contracted are in the main the same. Indeed a great part of the particular debts of the states has arisen from assumptions by them on account of the Union. And it is most equitable that there should be the same measure of retribution for all.

There is an objection, however, to an assumption of the state debts which deserves particular notice. It may be supposed that it would increase the difficulty of an equitable settlement between them and the United States.

The principles of that settlement, whenever they shall be discussed, will require all the moderation and wisdom of the government. In the opinion of the Secretary, that discussion, till further lights are obtained, would be premature.

All therefore which he would now think adviseable on the point in question would be that the amount of the debts assumed and provided for should be charged to the respective states, to abide an eventual arrangement. This, the United States, as assignees to the creditors, would have an indisputable right to do… .

Persuaded as the Secretary is that the proper funding of the present debt will render it a national blessing, yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality and liable to dangerous abuse, that he ardently wishes 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. This he regards as the true secret for rendering public credit immortal. And he presumes that it is difficult to conceive a situation in which there may not be an adherence to the maxim. At least he feels an unfeigned solicitude that this may be attempted by the United States, and that they may commence their measures for the establishment of credit with the observance of it.

Under this impression, the Secretary proposes that the net product of the post-office, to a sum not exceeding one million of dollars, be vested in commissioners to consist of the Vice-President of the United States or President of the Senate, the Speaker of the House of Representatives, the Chief Justice, Secretary of the Treasury and Attorney-General of the United States, for the time being, in trust, to be applied by them, or any three of them, to the discharge of the existing public debt, either by purchases of stock in the market or by payments on account of the principal, as shall appear to them most adviseable, in conformity to the public engagements; to continue so vested until the whole of the debt shall be discharged… .

Debates in the House of Representatives on the First Report on Public Credit 9–18 February 1790

Deliberations on Hamilton’s report opened on 9 February with a resolution “that permanent funds ought to be appropriated for the payment of interest on and the gradual discharge of the domestic debt of the United States.” The proceedings could be followed closely by the public, since newspapers at the seat of government published the House of Representatives’ debates and papers around the country copied them from these sources.

James Jackson (Ga.)

Believe me, Mr. Chairman, I have as high a sense of the obligation we are under to the public creditors, and feel as much gratitude toward them, as any man on this floor. I shall ever cheerfully acknowledge the duty we owe to our benefactors and, in a peculiar manner, to those brave soldiers who, at the risk of their lives and fortunes, secured the independency of America. I have also the most sincere wishes for the re-establishment of public credit, and that upon firm and solid ground, and on principles which cannot be called in question. But there appears to me a previous question, which has not yet been brought forward; it is this, whether there exists an immediate necessity of funding the national debts, or not, in the permanent manner proposed?

The high regard I have for the nature and circumstances of the foreign debt induced me to let the first proposition pass without any animadversion. The vote which has been taken on that point will serve to show foreigners that we are concerned to preserve our credit with them, by a rigid performance of our stipulations; trusting, at the same time, that our fellow citizens cannot object to a distinction so just and proper in itself; for, notwithstanding what the domestic creditors may say, it is the money of foreigners that has, in a great measure, established our independence.

But it is doubted with me whether a permanent funded debt is beneficial or not to any country. Some of the first writers in the world, and who are most admired on account of the clearness of their perceptions, have thought otherwise; and declared that wherever funding systems have been adopted in a government, they tend more to injure posterity than they would injure the inhabitants to pay the whole debt at the time it was contracted. This principle, I apprehend, is demonstrated by experience. The first system of the kind that we have an account of originated in the state of Florence, in the year 1334; that government then owed about 60,000 sterling, and being unable to pay it, formed the principal into a funded debt, transferable, with interest, at 5 per cent. What is the situation of Florence in consequence of this event? Her ancient importance is annihilated. … Spain seems to have learned the practice from the Italian republics, and she, by the anticipation of her immense revenue, has sunk her consequence beneath that level which her natural situation might have maintained. France is considerably enfeebled and languishes under a heavy load of debt. England is a melancholy instance of the ruin attending such engagements. In the reign of King William, 1706, the policy of the English parliament laid the foundation of what is called the national debt; but the sum was inconsiderable; it little exceeded 5,000,000 sterling. The example then set has been closely followed. In 1711, it amounted to 9,177,769 sterling, during the wars in the reign of Queen Anne. Since that, the capital of the debt of Great Britain amounted, in 1777, to about 136,000,000 sterling; and to such a pitch has the spirit of funding and borrowing been carried in that country that, in 1786, the national debt there had increased to 230,000,000 sterling; a burthen the most sanguine mind can never contemplate they will ever be relieved from. If future difficulties should involve that nation still further, what must be the consequence? The same effect must be produced that has taken place in other nations; it must either bring on a national bankruptcy or annihilate her existence as an independent empire. Hence I contend, sir, that a funding system, in this country, will be highly dangerous to the welfare of the republic; it may, for a moment, raise our credit and increase the circulation, by multiplying a new species of currency; but it must, in times afterward, settle upon our posterity a burthen which they can neither bear nor relieve themselves from. It will establish a precedent in America that may, and in all probability will, be pursued by the sovereign authority until it brings upon us that ruin which it has never failed to bring, or is inevitably bringing, upon all the nations of the earth who have had the temerity to make the experiment. Let us take warning by the errors of Europe and guard against the introduction of a system followed by calamities so universal. Though our present debt be but a few millions, in the course of a single century, they may be multiplied to an extent we dare not think of; for my part, I would rather have direct taxes imposed at once, which, in the course of a few years, should annihilate the principal of our debt. A few years exertion, in this way, will prevent our posterity from a load of annual interest amounting to the fifth, or perhaps the half, of the sum we are now under engagements to pay.

But why, Mr. Chairman, should we hasten on this business of funding? Are our debts ascertained? The report of the secretary of the treasury proposes that we should not only fund the debts that are ascertained, but the unliquidated and unsettled debts due from the continent; nor does the plan stop here, it proposes that we should assume the payment of the state debts, debts, to us, totally unknown. Many of the states, sir, have not yet ascertained what they owe, and if we do not know the amount of what we are, or are to be, indebted, shall we establish funds? Shall we put our hands into the pockets of our constituents, and appropriate monies for uses we are undetermined of? But more especially shall we do this when, in doing it, it is indisputably certain that the incumbrance will more than exceed all the benefits and conveniencies? Gentlemen may come forward, perhaps, and tell me that funding of the public debt will increase the circulating medium of the country, by means of its transferable quality; but this is denied by the best informed men. They occasion enormous taxes for the payment of the interest. These taxes hurt both agriculture and commerce. It is charging the active and industrious citizen, who pays his share of the taxes, to pay the indolent and idle creditor who receives them, to be spent and wasted in the course of the year without any hope of a future reproduction; for the new capital which they acquire must have existed in the country before, and must have been employed, as all capitals are, in maintaining productive labor. Thus the honest, hard working part of the community are adding to the ease and luxury of men of wealth. Such a system may benefit large cities, like Philadelphia or New-York, but the remote parts of the continent may not feel the invigorating warmth of the American treasury; in the proportion that it benefits one, it depresses another… .

Under these impressions, sir, I am led to conclude that it is becoming the wisdom of congress to postpone the consideration of the remaining propositions; let us endeavor to discover whether there is an absolute necessity for adopting a funding system or not. If there is no such necessity, a short time will make it apparent, and let it be remembered what funds the United States possess in their Western Territory. The disposal of those lands may, perhaps, supercede the necessity of establishing a permanent system of taxation. The secretary of the treasury is directed to report on this head to the House, and perhaps that report may show us that this property is likely to be more productive than we at present apprehend. These considerations induced me to wish that the further consideration be postponed for the present.

Roger Sherman (Conn.)

… I think, whatever doubts there may be with respect to the advantage or disadvantage of a public debt, we can none of us hesitate to decide that provision of some kind ought to be made for what we have already incurred. It is true, if we were now about to borrow money, it would be highly prudent to consider whether the anticipation should not be repaid by a speedy collection of taxes or duties to the amount; but when a debt is acquired beyond our present ability to discharge, we ought to make some provision for its gradual extinction, but, in the interim, we ought to pay punctually the interest. Now, this resolution goes no further.

Some of the propositions which follow go further than this; they propose perpetual annuities and talk of irredeemable stock. Now, this is more than I am willing to agree to, because I think it prudent for us to get out of debt as soon as we can. But then I do not suppose we can raise money enough to pay off the whole principal and interest in two, three, or ten years. If I am right in this, we ought to agree to some mode of paying the interest in the interim.

William Loughton Smith (S.C.)

The report of the secretary of the treasury contains a proposition for the establishment of a sinking fund. I wish the gentleman who brought forward the resolutions under consideration had included that part of the system in his propositions, as it might have had a tendency to ease the mind of the honorable gentleman from Georgia and to have shown him that the public debt was not intended to acquire the permanency which he dreads. If our present debt cannot be paid off at once, all that can be done is to provide such funds for its gradual extinction as will morally ensure the object.

The gentleman has contended that public funding is a public injury. I agree with him that funding a debt to a very great amount may be very injurious; yet, funding a small debt is beneficial. But whether this is or is not a fact is not the object of our present enquiry. We are not in a situation to determine whether we will, or will not, have a public debt. ’Tis already acquired, and it appears to me to be a matter of necessity that we should appropriate some funds for the payment of the interest thereon. When we consider the nature of the contract, for what it is we owe the money, and our ability to comply, it follows, of consequence, that we must pay; it follows as close as the shadow follows its substance, or as close as the night does the day. The only question that can come before us is the mode of doing it… .

James Jackson

begged the committee would not understand him that he was against paying the debts of the United States; he had no such object in view. The sinking fund alluded to by the gentleman from South-Carolina had not escaped his attention; but he very much doubted whether it ought to be relied on to effect the purpose he had in view. He believed sinking funds were generally considered as a kind of stand-by or subsidiary fund, always at hand to be mortgaged when money was proposed to be raised on any exigency of the state… .

Samuel Livermore (N.H.)

I do not clearly understand the import of the resolution before the committee; it seems worded rather in a doubtful manner. If it means that funds ought to be appropriated for the payment of the interest and principal of the domestic debt as the amount appears on the face of the certificates, I shall be totally against it; whether it pointedly carries that meaning or not I cannot say.

For my part, I consider the foreign and domestic debt to carry with them very material distinctions. The one is not like a debt, while the other has all the true qualities of one. However gentlemen may think on this subject, there is a great difference between the merits of that debt which was lent the United States in real money, in solid coin, by disinterested persons, not concerned or benefited by the revolution, and at a low rate of interest; and in those debts which have been accumulating upon the United States at the rate of 6 per cent interest and which were not incurred for efficient money lent, but for depreciated paper or services done at exorbitant rates, or for goods or provisions supplied for more than their real worth, by those who received all the benefits arising from our change of condition. It is within the notice and knowledge of every gentleman that a very considerable part of our domestic loan-office debt arose in this manner; it is well known that loan-office certificates were issued as a kind of circulating medium when the United States were in such straits for cash that they could not raise the necessary supplies in any other way; and it is very well known that those who sold goods or provisions for this circulating medium raised their prices from six shillings to ten shillings at least.

There is another observation I would beg leave to make. The prices at which our supplies were procured were such, even in hard money, that it might be said specie had depreciated, or what amounted to the same thing, the commodities were sold for more than they ought to have fetched; in many cases, half the price would now purchase the same thing. If so, there is as much reason that we should now consider these public securities in a depreciated state as every holder of them has considered them from that [time forward] …

Thomas Scott of Pennsylvania then moved for a discrimination between current and original holders of the government’s obligations.

Thomas Scott

… All I contend for is this, that the present government pay the debts of the United States, but as the domestic part of the debt has been contracted, in depreciated notes; [and] that less interest should be paid upon it than 6 per cent. Six per cent was the usual interest upon the certificates when they were issued by Congress; but if the possessor has received no part of his 6 per cent until this time, that now the principal and interest be consolidated into one sum, hereafter to bear an interest of three or four per cent; then those citizens who now stand as creditors of the union will find that [that] part of their property has been the most productive of any, much more productive than the property of the citizens of the United States has generally been. Those who lent their money to individuals before and during the late war generally lost, or suffered by the depreciation, some three-quarters of the capital, nay some 39/40ths. But is this the case of the domestic creditor of the United States? No, Mr. Chairman, he will preserve his property through the chaos of the revolution and be put now in a more eligible situation than he was at the time he loaned his money. The capital sum which he lent is now encreased, and very rapidly encreased, for 6 per cent is a very large interest. He will now receive 160 dollars for his 100, and putting that into the funds, at three or four per cent, he will find more productive than any other method in which he could employ his money; for I contend that neither improved nor unimproved lands will give an interest of near half of what the public creditor will have. People who have held real property have sunk, with the taxes and other losses, the greatest part of it; but the public creditor has let his run through the confusion of the revolution and nevertheless gets it returned to him safe and, so far from being impaired, that it has prodigiously accumulated, not only in a manner superior to the property of his fellow-citizens, but superior to the foreigner who lent his money at 4 per cent. Justice and equity require, on the behalf of the community, that these people be content with reasonable profit. They ought not, therefore, to receive, on a funded debt, so much as six per cent; whether three or four, or something between three and four, would be a proper sum, I shall not pretend to determine. But I consider it a proper question for this committee to consider, in justice to those who are to pay, as to those who are to receive; nor do I believe the domestic creditors would be dissatisfied with it, provided they were sure of receiving this annual interest; for their debts, on such a footing, would be better to them than if they were established on an extravagant plan that could never be effected, but which would be likely to throw the nation into confusion. Every body has suffered more or less by the depreciation, but the public creditors very little in regard to that part of their property which they had deposited in the hands of government. It is true that it has slept; but it is now waked up to some purpose.

Roger Sherman

I do not differ much in principle from the gentleman who spoke last, from Pennsylvania (Mr. Scott) but I do not extend my views so far as he extends his in the exercise of the power which he contends is vested in this body. I look upon it that every legislature acts in a threefold capacity: They have a power to make laws for the good government of the people and a right to repeal and alter those laws as public good requires. In another capacity, they have a right to make contracts. But here I must contend that they have no right to violate, alter or abolish [those contracts]. … When bills of credit were first emitted, it was declared that they should be redeemed with specie; indeed, they passed as such at first, but the opinion of their real value was changed by common consent. … I don’t see but what the public are bound by that contract, as much as an individual, and that they cannot reduce it down in either principal or interest unless by an arbitrary power, and in that case there never will be any security in the public promises. If we should now agree to reduce the domestic debt to 4 per cent, the world may justly fear that we may, on some future occasion, reduce it to two; if this government once establishes such a principle, our credit is inevitably gone for ever… .

James Jackson

… Gentlemen … contend that no sort of discrimination ought to take place, yet from what they have let fall on this occasion, I am led to believe that they favor that part of the report of the secretary which makes a discrimination, in fact, equal to one-third loss of the principal. What will hold good in one case ought to hold good in another, and a discrimination might take place upon the same principles between those to whom the government were originally indebted and who have never received satisfaction therefor and those who had nothing to do with the government in the first transaction but have merely speculated and purchased up the evidence of an original debt. Some gentlemen think that this latter class merit that greater degree of attention should be paid to their claims because, by their actions, they seem to have evinced a greater degree of confidence in the government than those who sold them. But, sir, these men have had more information; they have been at the seat of government and knew what was in contemplation before the other parts of the union could be acquainted with it. There has been no kind of proportion of knowledge between the two classes. To use the expression of a British minister, the reciprocity has been all on one side. The people in this city are, sir, informed of all the motions of government; they have sent out their money, in swift sailing vessels, to purchase up the property of uninformed citizens in the remote parts of the union; but were those citizens acquainted with our present deliberations and assured of the good intent of congress to provide for their just demands, they would be on an equal footing; they would not incline to throw away their property for considerations totally inadequate. Such attempts at fraud, Mr. Chairman, would justify the government in interfering in the transactions between individuals, without a breach of the public faith… .

11 February 1790 James Madison (Va.)

… It has been said by some gentlemen that the debt itself does not exist in the extent and form which is generally supposed. I confess, sir, I differ altogether from the gentleman who takes that ground. Let us consider, first, by whom the debt was contracted, and then let us consider, sir, to whom it is due. The debt was contracted by the United States, who, with respect to that particular transaction, were in a national capacity. The government was nothing more than the agent, or organ, by which the whole body of the people acted. The change in the government which has taken place has enlarged its national capacity, but it has not varied the national obligation with respect to the engagements entered into by that transaction. For, in like manner, the present government is nothing more than the organ, or agent, of the public. The obligation which they are under is precisely the same with that under which the debt was contracted; although the government has been changed, the nation remains the same. There is no change in our political duty, nor in the moral or political obligation. The language I now use, sir, is the language of the constitution itself; it declares that all debts shall have the same validity against the United States, under the new, as under their old form of government. The obligation remains the same, though I hope experience will prove that the ability has been favorably varied.

The next question is, to what amount the public are at present engaged? I conceive the question may be answered in a few words. The United States owe the value they received, which they acknowledge, and which they have promised to pay. What is that value? It is a certain sum in principal, bearing an interest of six per cent. No logic, no magic, in my opinion, can diminish the force of the obligation.

The only point on which we can deliberate is, to whom the payment is really due. For this purpose, it will be proper to take notice of the several descriptions of people who are creditors of the union and lay down some principles respecting them, which may lead us to a just and equitable decision. … It may here be proper to notice four classes into which they may be divided.

First. Original creditors, who have never alienated their securities.

Second. Original creditors, who have alienated.

Third. Present holders of alienated securities.

Fourth. Intermediate holders, through whose hands securities have circulated.

The only principles that can govern the decision on their respective pretensions I take to be 1. public justice; 2. public faith; 3. public credit; 4. public opinion.

With respect to the first class, there can be no difficulty. Justice is in their favor, for they have advanced the value which they claim; public faith is in their favor, for the written promise is in their hands; respect for public credit is in their favor, for if claims so sacred are violated, all confidence must be at an end; public opinion is in their favor, for every honest citizen cannot but be their advocate.

With respect to the last class, the intermediate holders, their pretensions, if they have any, will lead us into a labyrinth for which it is impossible to find a clue. This will be the less complained of because this class were perfectly free, both in becoming and ceasing to be creditors; and because, in general, they must have gained by their speculations.

The only rival pretensions, then, are those of the original creditors who have assigned, and of the present holders of the assignments.

The former may appeal to justice, because the value of the money, the service, or the property advanced by them, has never been really paid to them.

They may appeal to good faith, because the value stipulated and expected is not satisfied by the steps taken by the government. The certificates put into the hands of the creditors, on closing their settlements with the public, were of less real value than was acknowledged to be due; they may be considered as having been forced, in fact, on the receivers. They cannot, therefore, be fairly adjudged an extinguishment of the debt. They may appeal to the motives for establishing public credit, for which justice and faith form the natural foundation. They may appeal to the precedent furnished by the compensation allowed to the army during the late war, for the depreciation of bills, which nominally discharged the debts. They may appeal to humanity, for the sufferings of the military part of the creditors can never be forgotten while sympathy is an American virtue. To say nothing of the singular hardship, in so many mouths, of requiring those who have lost four-fifths or seven-eighths of their due to contribute the remainder in favor of those who have gained in the contrary proportion.

On the other hand, the holders by assignment, have claims, which I by no means wish to depreciate. They will say that whatever pretensions others may have against the public, these cannot affect the validity of theirs: That if they gain by the risk taken upon themselves, it is but the just reward of that risk. That as they hold the public promise, they have an undeniable demand on the public faith. That the best foundation of public credit is that adherence to literal engagements on which it has been erected by the most flourishing nations. That if the new government should swerve from so essential a principle, it will be regarded by all the world as inheriting the infirmities of the old. Such being the interfering claims on the public, one of three things must be done; either pay both, reject wholly one or the other, or make a composition between them on some principle of equity. To pay both is perhaps beyond the public faculties; and as it would far exceed the value received by the public, it will not be expected by the world, nor even by the creditors themselves; to reject wholly the claims of either is equally inadmissible; such a sacrifice of those who possess the written engagements would be fatal to the proposed establishment of public credit; it would moreover punish those who had put their trust in the public promises and resources. To make the other class the sole victims was an idea at which human nature recoiled.

A composition, then, is the only expedient that remains. Let it be a liberal one in favor of the present holders; let them have the highest price which has prevailed in the market; and let the residue belong to the original sufferers. This will not do perfect justice; but it will do more real justice and perform more of the public faith than any other expedient proposed. The present holders, where they have purchased at the lowest price of the securities, will have a profit that cannot reasonably be complained of; where they have purchased at a higher price, the profit will be considerable; and even the few who have purchased at the highest price cannot well be losers, with a well funded interest of 6 per cent. The original sufferers will not be fully indemnified; but they will receive from their country a tribute due to their merits, which, if it does not entirely heal their wounds, will assuage the pain of them. I am aware that many plausible objections will lie against what I have suggested, some of which, I foresee, will be taken some notice of. It will be said that the plan is impracticable. Should this be demonstrated, I am ready to renounce it; but it does not appear to me in that light… .

The discrimination proposed by me requires nothing more than a knowledge of the present holders, which will be shown by the certificates; and of the original holders, which the office documents will show. It may be objected that if the government is to go beyond the literal into the equitable claims against the United States, it ought to go back to every case where injustice has been done. To this the answer is obvious: The case in question is not only different from others in point of magnitude and of practicability, but forces itself on the attention of the committee, as necessarily involved in the business before them. It may be objected that public credit will suffer, especially abroad: I think this danger will be effectually obviated by the honesty and disinterestedness of the government displayed in the measure, by a continuance of the punctual discharge of foreign interest, by the full provision to be made for the whole foreign debt, and the equal punctuality I hope to see in the future payments on the domestic debts. I trust also that all future loans will be founded on a previous establishment of adequate funds and that a situation like the present will be thereby rendered impossible.

I cannot but regard the present case as so extraordinary, in many respects, that the ordinary maxims are not strictly applicable to it. The fluctuations of stock in Europe, so often referred to, have no comparison with those in the United States. The former never exceeded 50, 60, or 70 per cent. Can it be said that because a government thought this evil insufficient to justify an interference, it would view in the same light a fluctuation amounting to seven or 800 per cent?

I am of opinion that were Great Britain, Holland, or any other country to fund its debts precisely in the same situation as the American debt, some equitable interference of the government would take place. The South-Sea scheme, in which a change amounting to 1000 per cent happened in the value of stock, is well known to have produced an interference, and without any injury whatever to the subsequent credit of the nation. It is true that, in many respects, the case differed from that of the United States; but, in other respects, there is a degree of similitude which warrants the conjecture. It may be objected that such a provision as I propose, will exceed the public ability. I do not think the public unable to discharge honorably all its engagements, or that it will be unwilling, if the appropriations shall be satisfactory. I regret, as much as any member, the unavoidable weight and duration of the burdens to be imposed, having never been a proselyte to the doctrine that public debts are public benefits. I consider them, on the contrary, as evils which ought to be removed as fast as honor and justice will permit, and shall heartily join in the means necessary for that purpose. I conclude with declaring, as my opinion, that if any case were to happen among individuals bearing an analogy to that of the public, a court of equity would interpose its redress; or that if a tribunal existed on earth by which nations could be compelled to do right, the United States would be compelled to do something not dissimilar in its principles to what I have contended for… .

Elias Boudinot (Mass.)

said, he had long been in the habit of paying great respect to the sentiments of the gentleman from Virginia, but he feared, on this occasion, he had not viewed the subject with his usual accuracy. But he was not surprised that the gentleman was led away by the dictates of his heart, for he believed he really felt for the misfortunes of his fellow-citizens who had been the prey of avaricious men. Indeed, it is matter of less surprise, on another account, said he, for heretofore I contemplated the subject in nearly the same point of view. Influenced by a desire to do justice to every person connected with the public, I wished for the means of compensating the original holders who had sold their certificates at a great loss; but I found the thing, upon long and careful examination, to be both unjust and impracticable.

The honorable gentleman tells us that the debt was contracted for meritorious services and enquires whether the creditor received an adequate compensation in full discharge? I say, sir, the debt is still due and that the person to whom it is due has received nothing but a certificate as evidence of his claim; but then, if any of our first creditors have put another person in their shoes, the question will arise, are we to disown the act of the party himself? Are we to say, we will not be bound by your transfer, we will not treat with your representative, but insist upon a resettlement with you alone? But the same reasoning will oblige us to go farther and investigate all the claims of those who received of the government continental money, which they afterwards parted with for ten, forty, or one hundred for one.

But, putting all this out of the question and supposing the motion to be founded on principles of justice, I would ask how it is to be carried into execution? The nature of the public debt will demonstrate its impracticability. A great part of this was contracted by the clerks in office, who, when the continental money was stopped, were supplied with some millions of dollars in loan-office certificates; they were given out in their names and afterwards distributed among the farmers, mechanics, and others who had furnished supplies or performed services. Now, how is it possible that you can ever trace a certificate, under these circumstances, up to the man who was the original bona fide creditor? Not from the name on the face of the paper, because it is the name of the clerk in office, the mere agent of the public. Other certificates were taken out of the loan-office by persons who were not concerned in making the loan; many neighbors sent money by one hand, who went and took out certificates in his own name, which he afterward returned to the real lender. I have been entrusted myself with numerous commissions of this kind, when I have been going to the capital where the loan-office was kept. Now, suppose, as has been the case, that I took 10,000 dollars from ten of my neighbors, each 1000 dollars, and that I placed the whole in the continental loan-office at Philadelphia, taking out therefor ten loan-office certificates of 1000 dollars each, which, on my return, I gave to those who had sent their money by me; all these certificates had my name in them, and here I should appear to be the original holder of 10,000 dollars without any right whatever, and the men, who deserve much of their country, for the aid they furnished her in the hour of distress, are stripped, in a moment, of the greatest part of their property. I believe, if we adopt this motion, we shall give room for such scenes of enormity as humanity will be shocked at the bare prospect of. I am, therefore, clearly of opinion, that, if the principles be ever so just, we ought to reject it on account of its impracticability… .

15 February 1790

Mr. Madison’s motion for a discrimination being under consideration,

Theodore Sedgwick (Mass.)

The proposition, Mr. Chairman, contains a question of the utmost importance. And the committee must be obliged to the gentleman who brought it forward for his very ingenious discussion of the subject of the domestic debt. With respect to the question now before the committee, so much has been said that I think it will not be necessary to consume much of their time in the investigation. On the subject of contracts I have to observe that whenever a voluntary engagement is made for a valuable consideration for property advanced or services rendered, and the terms of the contract are understood, if no fraud or imposition is practiced, the party engaging is bound to the performance according to the literal meaning of the words in which it is expressed. Such contract, whether of a Government or an individual, may be either transferable or not transferable. The latter species of contract receives an additional value from its capacity of being transferred, if the circumstances of the possessor should render the sale of it necessary or convenient to him. To render the transferable quality of such evidences of contract in any degree advantageous to the possessor, it is necessary to consider, in case of sale, the alienee possessed of all the property of the original holder; and indeed it is highly absurd and even contradictory to say that such evidences of debt are transferable and at the same time to say that there is in them a kind of property that the holder could not convey by bona fide contract.

This is the construction which has invariably been given to these contracts, whether formed by Government or by individuals. To deprive the citizen of the power of binding himself by his own voluntary contract, or to prevent a disposition of property in its nature alienable, would be a violent and unjustifiable invasion of one of those rights of which man, as a citizen, is the most tenacious, and would indeed break one of the strongest bonds by which society is holden together.

In the transfers which have been made, the contracts were fairly made; the whole rights have been transferred. It is not pretended any fraud or imposition has been practiced. The risk was calculated by the parties, and it was observed that the risk contemplated a revolution in the Government.

From the foregoing deduction of particulars, it is presumed to be proved that a property is vested in the transferees. That if this property is divested by the Government, the law for that purpose would have a retrospective operation, and that no ex post facto law could be more alarming than that by which the right of private property is violently invaded… .

With regard, more particularly, to the proposition before the committee, I have to observe, that with regard to these contracts, there has existed a depreciation in consequence of the failure of Government regularly to pay the interest. That in this depreciated state, the securities have been alienated; that of course the original holders have sustained a loss; that if the loss resulted from the fault and not the misfortune of Government, the creditors have, undeniably, a demand against the Government for compensation; that this demand, however well founded, can never authorize the Government to invade the honestly acquired property of the present possessors, a property warranted by the terms of the contract itself and sanctioned by the act of Congress of April, 1783, and the validity of it recognized by the Constitution we have sworn to support.

With regard to the claims of the original holders, it is, however, observable, that the domestic creditor, at the time the contract was formed, well knew the nature of the Constitution of the Government administered by Congress, the other contracting party; that its power of performance depended on the ability and good-will of the States; that Congress had always performed its duty, had made the necessary requisitions; that this was its utmost power; and that the failure had arisen wholly from the neglect of the States. I therefore submit it to the committee, whether, if the original holder has a just or equitable demand, he should not resort to the State of which he is a member?

I admit that the case of an original holder is indeed a hard one; that I have a respect for his misfortunes and for his pretensions; that if satisfaction is discovered to be just and practicable, I would not hesitate to go to the utmost ability of the Government for that purpose. But let me ask, what merit will the Government possess if we strip one class of citizens, who have acquired property by the known and established rules of the law, under the specious pretence of doing justice to another class of citizens?

It was implicitly agreed, that eighty per cent depreciation would not authorize the interference proposed by the motion. I ask, then, for some point of depreciation to be pointed out which will authorize such interference.

The question for which I contend has received the universal approbation of mankind, there are no instances of the interference contended for, and this general sense of mankind affords me some evidence of truth… .

… By reason of the circumstances which have taken place, the honorable gentleman (Mr. Madison) supposes that if the whole amount of security shall be paid to the present possessor he will have a sum of money to which the original holder is equitably entitled. If this is true, then no interposition is necessary, it being a well-known rule of law that an action will always lie to recover money out of the hands of another to which the plaintiff, from the principles of equity and good conscience, is entitled.

With regard to the effects which will probably result from this measure, I have to observe that they will be destructive to our national character. That the world is now willing, charitably, to impute our former miscarriages to events we could not control; but should our first measures in regard to public faith be a violent infraction of our contracts, it will sanction all our bitterest enemies have said to our disadvantage. With regard to its effects on credit, little dependence will be placed on the plighted faith of a Government which, under the pretence of doing equity, has exercised a power of dispensing with its contracts and has thereby formed for itself a precedent of future violations, both with respect to its funds and contracts. With regard to discovering who was the original holder, except so far as respects the army debt, I am certain there are no documents by which the necessary facts can be discovered… .

I have only to add, that the proposed system will lay a foundation for infinite frauds and perjuries, and that it will, beyond all powers of calculation, multiply the evils of speculation.

John Laurence (N.Y.)

observed that the proposition of the gentleman from Virginia (Mr. Madison) derived force from the talents and knowledge of that gentleman in public transactions; but that, on examination, it would be found to contain doctrines very repugnant to the interest and prosperity of the Union.

He then stated that the debts contracted by the United States were for loans of money, supplies of articles necessary for the public wants, and for actual services rendered in different employments. That these debts were ultimately adjusted and reduced to their present transferable form. That every part of the contract was essential to it. The negotiability was a material part. That the nature of the contract was frequently recognized by the late Government. That, in 1783, Congress recommended certain funds to be established to pay the interest and put the principal in a course of discharge. That this recommendation was unequivocal, as to the nature of it, and made no discrimination between the possessor and original holder. That the subsequent conduct of that body was conformable to this recommendation. That they had annually called on the States to furnish money to pay the interest without discriminating between the original holder and present possessor. That they had paid interest on the securities without making any discrimination. That provision had been made for holders of loan-office certificates that were subject to liquidation to have them cancelled and others issued for the specie value. That the holders of certificates were enabled to have them registered to guard against accidents; and that no distinction was made between the original holder and the alienee. That the transferable nature of the claim was for the benefit of the creditor, because it gave it an active value. That he consented to take it, and consulted his own advantage. That the conduct of the late Congress, since the war, had been uniform in the support of this contract, and they had done no act to impair its obligation according to the terms of it. That this contract was valid against the Government; for, notwith- standing the truth of the gentleman’s observations that the nation is the same, though the bodies that administered the Government were different, there was yet far greater security; and to remove all doubt, a clause that made all debts and engagements valid against the United States under the late General Government valid against the present was inserted in the Constitution.

He further observed that this contract having descended upon the Government, there was no right in the Legislature to impair the force of it. That the particular Governments are restrained from passing laws impairing the obligations of contracts. That this interference would be a violation of the contract between individuals when the certificate was transferred; and it would not be presumed, the States being prohibited, that the General Government had the power to do it.

He then adverted to the principles of the gentleman, to wrest the obligation of the public to the original holder, and observed that the same principles were in favor of the present possessor. That public justice required a performance of contracts when there was no fraud on the part of the holder. That the possessor had been guilty of no fraud, no deception. That the contract between him and the original holder was fair, and that a hazard and risk attended the purchase adequate to the advantage. That nothing short of a revolution in Government could have produced payment. That if there was an imposition, the public occasioned it; and between the original holder and the public, there might be a claim for retribution. That public faith was as sacredly pledged to the bearer, or present possessor, as to the original creditor. That public credit results from fair and upright conduct. That the Government, to support it, must perform its contract. That this was a contract recognized by them, and as such should be discharged. That the condition we have been in made it proper for us to be cautious on this subject; and even at present, people doubted our disposition to establish our credit. That this would give a fatal blow to it, and when we should recover, if ever, was doubtful. That the public opinion was difficult to be ascertained; gentlemen had different modes to determine it. He supposed it was better ascertained by the acts of public bodies than by squibs in the newspapers or by pamphlets written by individuals. That the uniform conduct of men deputed by the particular States to represent them in the late General Government was the best standard; and their opinion, from the year 1783, was in favor of the present possessor. That the conduct of the particular States was another circumstance; that he did not know of any discrimination made by them, though it had been attempted. That the general opinion of men of property was in favor of it; and that these sources of public opinion were more certain than those he had before mentioned.

He further observed, that although he believed gentlemen supposed no advantage would be derived to the United States from this discrimination, yet much would arise. That part of the army was composed of foreigners; many had left the country, others were dead. All their part would be unclaimed. That certificates were issued to public officers to a great amount and were paid by them to persons from whom they purchased. The difficulty of making proof of the original creditor would be great; and, from this circumstance, great sums would be gained to the public. That there were persons enough who would have sagacity to discern this; and they would doubt the purity of the public motive, should the gentleman’s plan be adopted.

He then adverted to the circumstance of the new creditor receiving paper. That this paper might be subject to another liquidation on the same principle as the present. That it would introduce doubt and distrust of public engagements; and there would be no greater security, although a fund was pledged, than there is at present, for whenever the public pleased, they might destroy the obligation. Arguments were improperly addressed to their feelings; but that, however hard it may be for the original creditor who had parted with his certificates to contribute to pay the debt, yet it would be equally hard on him who had been injured by the Continental money, who had been plundered by the enemy, who had had his property burned by them in the course of the war; and that instances of these kinds were numerous.

He then adverted to the doctrine of the Court of Equity and urged that this Court must be governed by principle. That were the Committee this high Court and the United States, the original creditor, and the present possessor before them, and if there appeared no fraud on the part of the possessor, the original creditor would have no just claim on him. That between the United States and original creditors, the United States were in fault, and the claim, if good, would be against them… .

He concluded with saying that he was still open to conviction; but that he was, at the time of speaking, against the gentleman’s propositions.

William Loughton Smith (S.C.)

remarked that it was necessary and proper the House should give the subject the most ample discussion. The question had long agitated the public mind, and the people should know that it had occupied the serious attention of their Representatives and be made acquainted with the principles of their decision. For his part, having bestowed on it the most attentive consideration, he could assert that the more he contemplated it, the more he was impressed with a conviction that the proposition was unjust, impolitic, and impracticable. It consisted of two parts: The one was to take away the property of one person; the other was to give that property to another; and this by a voluntary interposition of the House, by a mere act of power, without the assent of the former or without even the application of the latter. For it was remarkable that the original holders who had alienated their certificates had not come forward with this demand; and it is presumable that, had they applied for redress, they would reject any indemnification which was the result of such manifest injustice. To prove that this was taking away the property of a citizen by force, he observed that the purchaser had, by a fair purchase, acquired a right to the full amount of the sum expressed in the certificate, which it was not within the power of the House to divest him of. No tribunal on earth could lawfully deprive a man of his property fairly obtained. The purchaser bought under the act of Congress making the securities transferable; and having given the market price, without fraud or imposition, he was, by virtue of such purchase, vested with the complete and absolute ownership of the certificate, as fully as the original holder; and had as much right to demand full payment as the original holder would have had, had the security been still in his hands. Even should the House refuse, by an act of power, to pay him more than half his demand, the other half would still remain against the public; it could not be extinguished. The debt would continually haunt them; the creditors would loudly clamor for justice, and sooner or later the balance would be paid. Then would they incur all the odium of a violation of private rights, without deriving to the public any advantage whatever. He considered the measure as doing a certain evil, that a possible good might result from it. This was not, in his opinion, the proper mode of doing good. Justice cannot be founded on injustice; and to take money out of the pocket of one man to put it into that of another is a precedent which may justify future interferences. This step would lead the House to others: for, if the principle be a just one, then the Government should look into all the transactions and speculations of individuals in order to correct them and make retribution to every individual according to his losses. He was persuaded that the true policy of a Legislative body was, to pursue the broad road of justice, clearly marked out before them; for it was an undeniable truth, that whenever they deviated into by-roads and trackless paths, without any other guide than their own imagination, they would get bewildered in a labyrinth of difficulties, and rejoice to trace back their steps, and regain the plain road. Now, the plain line of conduct is to do strict justice, such as is enforced in judicial tribunals, between man and man, in a similar case. The debtor is bound to pay the debt to the holder of the security; the contract between the giver of the bond and the person to whom it was given is done away the moment the latter assigns it to another person. If A gives a bond to B, who parts with it to C, there is no longer any obligation on the part of A to pay B, but he must pay it to C. A has nothing to do with the private negotiations between B and C, nor to inquire what consideration was given for the security. All that he has to inquire is whether he really signed it and had value received for it, and the amount of it. He cannot say to the holder, you gave but fifty dollars for this security of one hundred dollars, and I will pay you only fifty; for the law will compel him to pay the hundred. This is a point of justice between man and man. Is there another point of law and justice for the Government? By what rule is the Government to square its conduct if not by those sacred rules which form the basis of civil society and are the safeguard of private property? …

18 February 1790 James Madison

next rose and observed that the opponents of his proposition had imposed on its friends not only a heavy task, by the number of their objections, but a delicate one by the nature of some of them… .

It could not have escaped the committee that the gentleman to whom he was opposed had reasoned on this momentous question as on an ordinary case in a court of law; that they had equally strained all the maxims that could favor the purchasing or be adverse to the original holder; and that they had dwelt with equal pleasure on every circumstance which could brighten the pretensions of the former or discredit those of the latter. He had not himself attempted, nor did he mean, to undervalue the pretensions of the actual holders: in stating them he had even used as strong terms as they themselves could have dictated; but beyond a certain point he could not go. He must renounce every sentiment which he had hitherto cherished before his complaisance could admit that America ought to erect the monuments of her gratitude, not to those who saved her liberties, but to those who had enriched themselves in her funds.

All that he wished was that the claims of the original holders, not less than those of the actual holders, should be fairly examined and justly decided. They had been invalidated by nothing yet urged. A debt was fairly contracted. According to justice and good faith, it ought to have been paid in gold or silver. A piece of paper only was substituted. Was this paper equal in value to gold or silver? No: it was worth in the market, which the argument for the purchasing holders makes the criterion, no more than one-eighth or one-seventh of that value. Was this depreciated paper freely accepted? No: the government offered that or nothing. The relation of the individual to the government and circumstances of the offer rendered the acceptance a forced, not a free one. The same degree of constraint would vitiate a transaction between man and man before any court of equity on the face of the earth. There are even cases where consent cannot be pretended, where the property of the planter or farmer has been taken at the point of the bayonet and a certificate presented in the same manner. But why did the creditors part with their acknowledgment of the debt? In some instances from necessity; in others, from a well-founded distrust of the public. Whether from the one or the other, they had been injured: they had suffered loss through the default of the debtor, and the debtor cannot, in justice or honor, take advantage of the default.

Here then was a debt acknowledged to have been once due and which was never discharged, because the payment was forced and defective. The balance consequently is still due, and is of as sacred a nature as the claims of the purchasing holder can be; and if both are not to be paid in the whole, is equally entitled to payment in part.

He begged gentlemen would not yield too readily to the artificial niceties of forensic reasoning; that they would consider not the form, but the substance—not the letter, but the equity—not the bark, but the pith of the business. It was a great and an extraordinary case. It ought to be decided on the great and fundamental principles of justice. He had been animadverted upon for appealing to the heart as well as the head: he would be bold, nevertheless, to repeat, that in great and unusual questions of morality, the heart is the best casuist.

It had been said, by a member from Massachusetts, that the proposition was founded on a new principle in Congress. If the present Congress be meant, that is not strange, for Congress itself is new; if the former Congress be meant, it is not true, for the principle is found in an act which had been already cited. After the pay of the army had, during the war, been nominally and legally discharged in depreciated paper, the loss was made up to the sufferers.

It had been said by a member from New York that the case was not parallel, there being no third party like the present holder of certificates. This objection could not be valid. The government paid ten dollars, worth in fact but one, to a soldier: the soldier was then the original holder. The soldier assigned it to a citizen; the citizen then became the actual holder. What was the event? The loss of the original holder was repaired, after the actual holder had been settled with according to the highest market value of his paper… .

It had been said by another member, from Massachusetts, that the old government did every thing in its power. It made requisitions, used exhortations, and in every respect discharged its duty; but it was to be remembered that the debt was not due from the government, but the United States. An attorney with full powers to form without the means to fulfill engagements could never by his ineffectual, though honest efforts, exonerate his principal.

He had been repeatedly reminded of the address of Congress in 1783, which rejected a discrimination between original and purchasing holders. At that period, the certificates to the army and citizens at large had not been issued. The transfers were confined to loan-office certificates, were not numerous, and had been in great part made with little loss to the original creditor. At present the transfers extend to a vast proportion of the whole debt, and the loss to the original holders has been immense. The injustice which has taken place has been enormous and flagrant, and makes redress a great national object. This change of circumstances destroys the argument from the act of Congress referred to; but if implicit regard is to be paid to the doctrines of that act, any modification of the interest of the debt will be as inadmissible as a modification of the principal.

It had been said that if the losses of the original creditors are entitled to reparation, Congress ought to repair those suffered from paper money, from the ravages of the war, and from the act barring claims not produced within a limited time. As to the paper money, either the case is applicable or it is not: if not applicable, the argument falls; if applicable, either the depreciated certificates ought to be liquidated by a like scale as was applied to the depreciated money or the money, even if the whole mass of it was still in circulation, ought now to be literally redeemed like the certificates. Leaving the gentleman to make his own choice out of these dilemmas, he would only add, himself, that if there were no other difference between the cases, the manifest impossibility of redressing the one and the practicability of redressing the other was a sufficient answer to the objection. With respect to the towns burnt and other devastations of war, it was taught by the writers on the law of nations that they were to be numbered among the inevitable calamities of mankind. Still, however, a government owed them every alleviation which it could conveniently afford; but no authority could be found that puts on the same footing with those calamities such as proceed from a failure to fulfil the direct and express obligations of the public. The just claims barred by the act of limitation were, in his opinion, clearly entitled to redress. That act was highly objectionable. The public which was interested in shortening the term, undertook to decide that no claim, however just, should be admitted if not presented within nine months. The act made none of the exceptions usual in such acts, not even in favor of the most distant parts of the union. In many instances it had been absolutely impossible for the persons injured to know of the regulation. Some of these instances were within his own knowledge. To limit the duration of a law to a period within which it could not possibly be promulged, and then taking advantage of the impossibility, would be imitating the Roman tyrant, who posted up his edicts so high that they could not be read and then punished the people for not obeying them.

It had been said that if the purchased certificates were funded at the rate proposed, they would fall in the market and the holders be injured. It was pretty certain that the greater part, at least, would be gainers. He believed that the highest market rate, especially with the arrears of interest incorporated, well funded at 6 per cent would prevent every loss that could justify complaint.

But foreigners had become purchasers, and ought to be particularly respected. Foreigners, he remarked, had themselves made a difference between the value of the foreign and domestic debt; they would therefore the less complain of a difference made by the government here. It was his opinion that the terms stated in the proposition would yield a greater profit to the foreign purchasers than they could have got for their money advanced by them in any of the funds in Europe.

The proposition had been charged with robbing one set of men to pay another. If there were robbery in the case, it had been committed on the original creditors. But, to speak more accurately, as well as more moderately, the proposition would do no more than withhold a part from each of two creditors, where both were not to be paid the whole.

A member from New York had asked whether an original creditor, who had assigned his certificate, could in conscience accept a reimbursement in the manner proposed? He would not deny that assignments might have been made with such explanations, or under such circumstances, as would have that effect. But in general the assignments had been made with reference merely to the market value and the uncertainty of the steps that might be taken by the government. The bulk of the creditors had assigned under circumstances from which no scruple could arise. In all cases where a scruple existed, the benefit of the provision might be renounced. He would in turn ask the gentleman whether there was not more room to apprehend that the present holder, who had got his certificate of a distressed and meritorious fellow-citizen for one-eighth or one-tenth of its ultimate value, might not feel some remorse in retaining so unconscionable an advantage?

Similar propositions, it was said, had been made and rejected in the state legislatures. This was not fact. The propositions made in the state legislatures were not intended to do justice to the injured, but to seize a profit to the public.

But no petitions for redress had come from the sufferers. Was merit then to be the less regarded because it was modest? Perhaps, however, another explanation ought to be given. Many of the sufferers were poor and uninformed. Those of another description were so dispersed that their interests and efforts could not be brought together. The case of the purchasing holders was very different.

The constitutionality of the proposition had been drawn into question. He asked whether words could be devised that would place the new government more precisely in the same relation to the real creditors with the old? The power was the same; the obligation was the same: the means only were varied.

An objection had been drawn from the article prohibiting ex post facto laws. But ex post facto laws relate to criminal, not civil cases. The constitution itself requires this definition, by adding to a like restriction on the states, an express one against retrospective laws of a civil nature.

It had been said that foreigners had been led to purchase by their faith in the article of the constitution relating to the public debts. He would answer this objection by a single fact: foreigners had shewn by the market price in Europe that they trusted the nature of the foreign debt more under the old government than the nature of the domestic debt under the new government.

Objections to the measure had been drawn from its supposed tendency to impede public credit. He thought it, on the contrary, perfectly consistent with the establishment of public credit. It was in vain to say that government ought never to revise measures once decided. Great caution on this head ought, no doubt, to be observed; but there were situations in which, without some legislative interposition, the first principles of justice and the very ends of civil society would be frustrated. The gentlemen themselveshad been compelled to make exceptions to the general doctrine. They would probably make more before the business was at an end.

It had been urged that if government should interpose in the present case, an interposition would be authorized in any case whatever where the stock might fluctuate; the principle would apply as well to a fall of 60 or 70 per cent as to a fall of 600 or 700 per cent. He could not admit this inference. A distinction was essential between an extreme case and a case short of it. The line was difficult to be drawn; but it was no more incumbent on him than on his opponents to draw it. They themselves could not deny that a certain extremity of the evil would have justified the interposition. Suppose that the distress of the alienating creditors had been ten times as great as it was; that instead of 2, 3, or 4s. in the pound, they had received a farthing only in the pound; and that the certificates lay now in the hands of the purchasers in that state or even at a less value: was there a member who would rise up and say that the purchasers ought to be paid the entire nominal sum and the original sufferer be entitled to no indemnification whatever?

Gentlemen had triumphed in the want of a precedent to the measure. No government, it was said, had interposed to redress fluctuations in its public paper. But where was the government that had funded its debts under the circumstances of the American debt? If no government had done so, there could be no precedent either for or against the measure, because the occasion itself was unprecedented. And if no similar occasion had before existed in any country, the precedent to be set would at least be harmless, because no similar occasion would be likely to happen in this… .

The best source of confidence in a government was the apparent honesty of its views. The proposition on the table could not possibly be ascribed to any other motive than this, because the public was not to gain a farthing by it. The next source was an experienced punctuality in the payments due from the government. For this support to public credit, he relied on what had been experienced by a part of the foreign creditors; on the provision to be made for the residue; and on the punctuality which he flattered himself would be observed in all future payments of the domestic creditors. He was more apprehensive of injury to public credit from such modifications of the interest of the public debt as some gentlemen seemed to have in view. In these the public would be the gainer, and the plea of inability the more alarming; because it was so easy to be set up, so difficult to be disproved, and consequently for which the temptations would be so alluring.

The impracticability of the measure was the remaining ground on which it had been attacked. He did not deny that it would be attended with difficulties and that perfect justice would not be done: but these were not the questions. It was sufficient that a grievous injustice would be lessened, and that the difficulties might be surmounted. What he had in view was that, for the conveniency of claimants, some authority should be provided and properly distributed thro’ the union in order to investigate and ascertain the claims; and that for the security of the public the burden of proof should be thrown on the claimants. A scrutiny on this plan, aided by original settlements in the books of the army department, and the state commissioners, and other office-documents, would be a remedy at once for all the difficulties started with regard to fictitious names, certificates issued as money by commissaries and quarter-masters, due-bills, etc.

For some particular cases special provisions might be requisite. The case of loan-office certificates alienated at early periods, before they were much depreciated, fell under this description. Legacies might be another. He should have no objection to some special regulation as to the payments of debts in certificates to persons within the British lines, said to have been authorized by the laws of New York though he presumed few such payments had been made, and that of these few the greater part had by this time passed from the creditors into other hands. There might be a few other cases equally entitled to some particular attention in the details of the provision. As to the merchants who had compounded for their debts in certificates or persons who had exchanged bonds for them, it could not be doubted that the transactions had reference to the market value of the paper, and therefore had nothing peculiar in them.

The expense incident to such a plan of investigation ought to form no difficulty. It bears no proportion to the expense already incurred by commissioners, etc. for effecting a less proportion of justice. Rather than justice should not be done, the expense might be taken out of the portion to the original sufferers… .

thomas jefferson Memorandum on the Compromise of 1790

Madison’s proposal to discriminate between original and secondary holders was overwhelmingly defeated and the funding of the federal debt approved on much the terms that Hamilton had recommended. But, against a background of maneuvers in both branches of Congress over a permanent location for the seat of the federal government, the House then deadlocked on the question of federal assumption of the debts of the states, which was repeatedly defeated. Writing probably in 1792, Jefferson left the only first-person account of the bargain that apparently ensued. He surely misremembered some of the details, but no one doubts the main lines of his story.

The assumption of the state debts in 1790 was a supplementary measure in Hamilton’s fiscal system. When attempted in the House of Representatives it failed. This threw Hamilton himself and a number of members into deep dismay. Going to the President’s one day I met Hamilton as I approached the door. His look was sombre, haggard, and dejected beyond description. Even his dress uncouth and neglected. He asked to speak with me. We stood in the street near the door. He opened the subject of the assumption of the state debts, the necessity of it in the general fiscal arrangement and its indispensible necessity towards a preservation of the Union: and particularly of the New England states, who had made great expenditures during the war, on expeditions which tho’ of their own undertaking were for the common cause: that they considered the assumption of these by the Union so just, and its denial so palpably injurious, that they would make it a sine qua non of a continuance of the Union. That as to his own part, if he had not credit enough to carry such a measure as that, he could be of no use, and was determined to resign. He observed at the same time, that tho’ our particular business laid in separate departments, yet the administration and its success was a common concern, and that we should make common cause in supporting one another. He added his wish that I would interest my friends from the South, who were those most opposed to it. I answered that I had been so long absent from my country that I had lost a familiarity with its affairs, and being but lately returned had not yet got into the train of them, that the fiscal system being out of my department, I had not yet undertaken to consider and understand it, that the assumption had struck me in an unfavorable light, but still not having considered it sufficiently I had not concerned in it, but that I would revolve what he had urged in my mind. It was a real fact that the Eastern and Southern members (S. Carolina, however, was with the former) had got into the most extreme ill humor with one another. This broke out on every question with the most alarming heat, the bitterest animosities seemed to be engendered, and tho’ they met every day, little or nothing could be done from mutual distrust and antipathy. On considering the situation of things I thought the first step towards some conciliation of views would be to bring Mr. Madison and Colo. Hamilton to a friendly discussion of the subject. I immediately wrote to each to come and dine with me the next day, mentioning that we should be alone, that the object was to find some temperament for the present fever, and that I was persuaded that men of sound heads and honest views needed nothing more than explanation and mutual understanding to enable them to unite in some measures which might enable us to get along. They came. I opened the subject to them, acknowledged that my situation had not permitted me to understand it sufficiently, but encouraged them to consider the thing together. They did so. It ended in Mr. Madison’s acquiescence in a proposition that the question should be again brought before the House by way of amendment from the Senate, that tho’ he would not vote for it, nor entirely withdraw his opposition, yet he should not be strenuous, but leave it to its fate. It was observed, I forget by which of them, that as the pill would be a bitter one to the Southern states, something should be done to soothe them; that the removal of the seat of government to the Potomac was a just measure, and would probably be a popular one with them, and would be a proper one to follow the assumption. It was agreed to speak to Mr. White and Mr. Lee, whose districts lay on the Potomac and to refer to them to consider how far the interests of their particular districts might be a sufficient inducement to them to yield to the assumption. This was done. Lee came into it without hesitation. Mr. White had some qualms, but finally agreed. The measure came down by way of amendment from the Senate and was finally carried by the change of White’s and Lee’s votes. But the removal to Potomac could not be carried unless Pennsylvania could be engaged in it. This Hamilton took on himself, and chiefly, as I understood, through the agency of Robert Morris, obtained the vote of that state, on agreeing to an intermediate residence at Philadelphia. This is the real history of the assumption, about which many erroneous conjectures have been published. It was unjust, in itself oppressive to the states, and was acquiesced in merely from a fear of disunion, while our government was still in its most infant state. It enabled Hamilton so to strengthen himself by corrupt services to many that he could afterwards carry his bank scheme and every measure he proposed in defiance of all opposition; in fact it was a principal ground whereon was reared up that Speculating phalanx, in and out of Congress which has since been able to give laws and to change the political complexion of the government of the U.S.

Opposition Out of Doors

As Congress debated Hamilton’s proposals, Madison’s incoming correspondence suggested sharp and mounting opposition to the funding plan—from Virginia especially, but also from friends such as the Philadelphia physician Benjamin Rush. An occasional newspaper squib also publicly condemned the funding plan or the expense of the tedious debates in Congress.

Benjamin Rush to Madison 27 February 1790

… In reviewing the decision upon your motion, I feel disposed to wish that my name was blotted out from having contributed a single mite towards the American Revolution. We have effected a deliverance from the national injustice of Great Britain to be subjugated by a mighty Act of national injustice by the United States.

It is amusing to hear Gentlemen talk of the “public blessing” of a debt contracted to foreigners & a few American speculators of four or five millions of dollars a year. Nothing fundamentally unjust can ever produce happiness in its issue. It will lay the foundation of an aristocracy in our country. It will change the property of nine tenths of the freeholders of the States, and it will be a lasting monument of the efficacy of idleness, speculation, & fraud above industry, economy, & integrity in obtaining wealth & independence. Nor is this all. It will be a beacon to deter other nations & future generations from attempting to better their situations, for it clearly establishes this proposition, that revolutions, like party spirit, are the rage of many for the benefit of a few.

Walter Jones to Madison 25 March 1790

… [The complexion of public affairs] appears not quite satisfactory to the few of us here who think on public affairs; but whether we think justly or not is another question. I freely confess, for myself, no small abatement of ardor in the expectations I had formed of the New Government, because I apprehend that a certain description of men in power have vicious views of government; that they, with strong auxiliary numbers, have views equally vicious in finance; and that both are in combination with a predominating interest in a certain quarter of the union, which is in opposition to the great agricultural interest of the states at large… .

In Great Britain the interest of money is low; the commerce, wealth, & resources of the country astonishingly great—the infinite quantity & variety of art & labour that are hourly & momentarily at market invigorates circulation and probably makes a Guinea perform more uses in a week than it does here in six months. Yet the ruinous tendency of her national debt & its consequences has ever been maintained by the most impartial & enlightened writers & speakers on the subject. In these states every thing is proportionally unfavorable to the sustaining national debt. … With the balance of trade against us on the east, the drain of emigration on the west, the immense load of private and public debt due (and as the Secretary of the Treasury will have it) to be due to foreigners, together with the shock which between £20 and 30,000,000 of property has received by premature & impracticable steps towards the emancipation of slaves, I know not how the landed interest of the states will answer the additional demands of the system-mongers & fund jobbers who have become such fashionable subjects of newspaper panegyric. Indeed, Sir, unless I am deluded in the extreme, there are men & measures blended in the composition of the Government of the union that should put us much on our guard. I earnestly hope that every attempt to undermine the respectability of the State Governments may be defeated; for if experience should evince that the component parts of the union are too heterogeneous to be kept together, but by the artificial force & Influence of Government, those of the States would be potent instruments in effecting such a modification and reunion of parts, as would cure the mischiefs… .

I have ever considered the condition of society in these states to be sui generis. As the characteristic feature of the Scythians is termed pastoral, may we not call ours agricultural? And from the vast extent of territory, this characteristic promises to be of long duration. The general uniformity & simplicity of our interests, makes government, comparatively, an easy art; and the equality of our rights and rank is naturally allied to a republican form; if, therefore, some maritime parts of the union are calculated for the more complicated conditions of society (and to a great degree it is impossible they should be) they merit due attention but should never be held in competition with the great republican, agricultural interest of the continent at large. I should, therefore, ever oppose the introduction of those artificial modes of administration & influence in the executive departments of Government which are engendered in the inveterate corruption and complex interests & relations, internal & external, of the old European governments… .

Henry Lee to Madison 3 April 1790

… Every day adds new testimony of the growing ill will of the people here to the government. … [Patrick] Henry already is considered as a prophet; his predictions are daily verifying. His declaration with respect to the division of interest which would exist under the constitution & predominate in all the doings of the govt. already has been undeniably proved.

But we are committed & we cannot be relieved I fear only by disunion. To disunite is dreadful to my mind, but dreadful as it is, I consider it a lesser evil than union on the present conditions.

I had rather myself submit to all the hazards of war & risk the loss of everything dear to me in life than to live under the rule of a fixed insolent northern majority. At present this is the case, nor do I see any prospect of alteration or alleviation.

Change of the seat of govt. to the territorial center, direct taxation, & the abolition of gambling systems of finance might & would effect a material change. But these suggestions are vain & idle. No policy will be adopted by Congress which does not more or less tend to depress the south & exalt the north. I have heard it asserted that your vice president should say the southern people were formed by nature to subserve the convenience & interests of the north—or in plain words to be slaves to the north. Very soon will his assertion be thoroughly exemplified. How do you feel, what do you think, is your love for the constitution so ardent as to induce you to adhere to it tho it should produce ruin to your native country. I hope not, I believe not. However, I will be done, for it is disagreeable to utter unpleasant opinions. Yours always—

Edward Carrington to Madison 7 April 1790

I have seen the decision of the House of Representatives upon the Quaker Memorial [on the slave trade]. … The very circumstances of such a subject being taken up in Congress has given some alarm, and it might have been better that a debate of such a nature, which could not possibly be productive of any kind of effect, had never been entered into at all. … Notwithstanding the long debates there was little or no difference of opinion as to what must be the issue of the business. Why then were the people of the interested states to be alarmed in consequence of a fruitless discussion? … The Assumption of the State Debts remains now a subject of discontent. Upon two principles it creates serious complaint. It is by all Anti’s and many Fed’s considered as leading to the dreaded consolidation—and by all discriptions of men who think at all it is considered as iniquitous from the unequal situations of the states respecting their debts. Of the latter I am one. Having already written you pretty fully I will not add more here. Whether the constitution is yet so firmly on its legs that it cannot be shocked I will not undertake to decide. I am not apt to croak. Of this, however, I am certain; the adoption of this measure without giving to the states the benefit of their respective redeemed debts will [have] considerable effect in abridging the confidence of the people in it.

George Lee Turberville to Madison 7 April 1790

… I am not unacquainted personally with [the] Gentleman at the head of [the] Department of the Revenue & still less so with the powers of his mind—his acquirements, disposition, & character. I tremble at the thoughts of his being at the head of such an immense sum as 86 millions of dollars—and the annual revenue of the Union. The number of dependents on him necessary to manage the great Department of Revenue, the multitude who will be interested in the funds (in opposition too to the landed interest of the U.S.), all of whom will in some measure be dependent or at any rate attached to the principal officer of the revenue, I profess creates with me apprehensions that from the complicated nature of the subject I am at a loss to determine whether I ought to foster or to discourage.

I am nevertheless persuaded that the funding business founded upon loans will never answer in America. The example set by Great Britain can never be followed here until our country becomes as thickly populated, as commercial and as highly cultivated as G. Britain is… .

The idea of consolidating the debt of the states with that of the union is a very unpopular one & for that reason only ought to be laid aside. But I do not think it even political. The debts of Virga. are sinking fast. Every creditor appears satisfied—and the monied men are very fond of becoming adventurers & purchasing the state paper. Many have made their fortunes by it. Why in heaven then should Congress interfere with us? I hope and trust that part of the plan will at least be negatived.

Benjamin Rush to Madison 10 April 1790

I congratulate you upon the prospect of the funding system being delayed ’till the next session of Congress. I hope an election will intervene before you meet again. Should this be the case, I think it probable that no one of our members who has voted against your motion & in favor of the leading principles of Mr. Hamilton’s report will be reelected.

I have long deplored the temporary residence of Congress in New York. … I question whether more dishonorable influence has ever been used by a British minister (bribery excepted) to carry a measure than has [been] used to carry the report of the Secretary. This influence is not confined to nightly visits, promises, compromises, sacrifices, & threats in New York. It has extended one or two of its polluted streams to this city, the particulars of which you shall hear when I have the pleasure of seeing you on your way to Virginia… .

I have just committed to the press a small pamphlet entitled “Information to Europeans disposed to migrate to the United States” in which I have dwelt with peculiar pleasure upon the safety and agreeable prospects of our country under her present government. The establishment of the Secretary’s report can alone contradict the information I have given upon that subject. It will in seven years introduce among us all the corruptions of the British funding system. The principal part of the information is addressed to cultivators of the earth, mechanics, laborers, servants, & [the?] members of the learned professions. I shall b[eg] your acceptance of a copy of it as soon as it [is] published. It is addressed to a friend in Great Britain.

Boston Independent Chronicle 12 August 1790

Wanted

A number of Stock-Jobbers, Speculators, and Negotiators for the purpose of aiding and assisting certain members of the Robin-Hood Society in accomplishing their foreign contracts. As this fraternity are about to receive the reward of their seven-months’ services, many of them wish to dispose of their exhorbitant wages in such manner as will augment their property twofold during recess. As they began their speculations during session, they mean to continue them for the short time they adjourn to attend to their reelection; when this is accomplished it is expected they will return to Philadelphia and there spend the remainder of the year in promoting their own interest to the impoverishing of their constituents.

Virginia’s Remonstrance Against the Assumption of State Debts 16 December 1790

Though Madison and Jefferson believed that they had struck a necessary bargain, and one which rendered the details of the assumption fairer to Virginia, the alterations in the plan—even when combined with the decision that the seat of government would move to the Potomac—were not enough to reconcile other Virginia politicians. Issuing from a committee that included Henry Lee and Patrick Henry, the remonstrance of the state legislature provoked Alexander Hamilton to his earliest surviving denunciation of opposition to his plans.

The General Assembly of the Commonwealth of Virginia to the United States in Congress assembled, represent:

That it is with great concern they find themselves compelled, from a sense of duty, to call the attention of Congress to an act of their last session, entitled “An act making provision for the debt of the United States,” which the General Assembly conceives neither policy, justice, nor the Constitution warrants. Republican policy, in the opinion of your memorialists, could scarcely have suggested those clauses in the aforesaid act which limit the right of the United States in their redemption of the public debt. On the contrary, they discern a striking resemblance between this system and that 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, which, pervading every branch of the Government, bears down all opposition, and daily threatens the destruction of every thing that appertains to English liberty. The same causes produce the same effects.

In an agricultural country like this, therefore, to erect and concentrate and perpetuate a large moneyed interest is a measure which your memorialists apprehend must, in the course of human events, produce one or other of two evils: the prostration of agriculture at the feet of commerce, or a change in the present form of Federal Government fatal to the existence of American liberty.

The General Assembly pass by various other parts of the said act which they apprehend will have a dangerous and impolitic tendency and proceed to show the injustice of it as it applies to this Commonwealth. It pledges the faith of the United States for the payment of certain debts due by the several states in the Union, contracted by them during the late war.

A large proportion of the debt thus contracted by this state has been already redeemed by the collection of heavy taxes levied on its citizens, and measures have been taken for the gradual payment of the balance, so as to afford the most certain prospect of extinguishing the whole at a period not very distant. But, by the operation of the aforesaid act, a heavy debt, and consequently heavy taxes, will be entailed on the citizens of this Commonwealth, from which they never can be relieved by all the efforts of the General Assembly whilst any part of the debts contracted by any state in the American Union, and so assumed, shall remain unpaid; for it is with great anxiety your memorialists perceive that the said act, without the smallest necessity, is calculated to extort from the General Assembly the power of taxing their own constituents for the payment of their own debts in such a manner as would be best suited to their own ease and convenience.

Your memorialists cannot suppress their uneasiness at the discriminating preference which is given to the holders of the principal of the Continental debt over the holders of the principal of the state debts, in those instances where states have made ample provision for the annual payment of the interest and where, of course, there can be no interest to compound with the principal, which happens to be the situation of this Commonwealth.

The continental creditors have preferences in other respects which the General Assembly forbear to mention, satisfied that Congress must allow that policy, justice, and the principles of public credit abhor discrimination between fair creditors.

Your memorialists turn away from the impolicy and injustice of the said act and view it in another light, in which, to them, it appears still more odious and deformed.

During the whole discussion of the federal constitution by the convention of Virginia, your memorialists were taught to believe “that every power not granted, was retained;” under this impression, and upon this positive condition, declared in the instrument of ratification, the said Government was adopted by the people of this Commonwealth; but your memorialists can find no clause in the constitution authorizing Congress to assume debts of the states! As the guardians, then, of the rights and interests of their constituents; as sentinels placed by them over the ministers of the Federal Government, to shield it from their encroachments, or at least to sound the alarm when it is threatened with invasion; they can never reconcile it to their consciences silently to acquiesce in a measure which violates that hallowed maxim—a maxim, on the truth and sacredness of which, the Federal Government depended for its adoption in this Commonwealth. But this injudicious act not only deserves the censure of the General Assembly, because it is not warranted by the constitution of the United States, but because it is repugnant to an express provision of that constitution. This provision is “that all debts contracted, and engagements entered into, before the adoption of this constitution, shall be as valid against the United States, under this constitution, as under the Confederation;” which amounts to a constitutional ratification of the contracts respecting the state debts in the situation in which they existed under the Confederation; and, resorting to that standard, there can be no doubt that, in the present question, the rights of states, as contracting parties with the United States, must be considered as sacred.

The General Assembly of the Commonwealth of Virginia confide so fully in the justice and wisdom of Congress, upon the present occasion, as to hope that they will revise and amend the aforesaid act generally and repeal, in particular, so much of it as relates to the assumption of the State debts.

1790, December 23.

Agreed to by the Senate

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Funding and Assumption

alexander hamilton The First Report on Public Credit 14 January 1790

Debates in the House of Representatives on the First Report on Public Credit 9–18 February 1790

James Jackson (Ga.)

Roger Sherman (Conn.)

William Loughton Smith (S.C.)

James Jackson

Samuel Livermore (N.H.)

Thomas Scott

Roger Sherman

James Jackson

11 February 1790 James Madison (Va.)

Elias Boudinot (Mass.)

15 February 1790

Theodore Sedgwick (Mass.)

John Laurence (N.Y.)

William Loughton Smith (S.C.)

18 February 1790 James Madison

thomas jefferson Memorandum on the Compromise of 1790

Opposition Out of Doors

Benjamin Rush to Madison 27 February 1790

Walter Jones to Madison 25 March 1790

Henry Lee to Madison 3 April 1790

Edward Carrington to Madison 7 April 1790

George Lee Turberville to Madison 7 April 1790

Benjamin Rush to Madison 10 April 1790

Boston Independent Chronicle 12 August 1790

Wanted

Virginia’s Remonstrance Against the Assumption of State Debts 16 December 1790