1790: Hamilton, First Report on Public Credit
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… .