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Chapter V - A Nation in Debt - Wheeling and Dealing
A Nation in Debt - Wheeling and Dealing 1790
Once in office, Hamilton diligently studied the problems of the public debt and the government's credit. He discovered that the country's enormous war debts fell into three categories: debts owed by the United States to foreign governments and investors, mainly an $11 million debt to France; approximately $27 million owed to former soldiers, merchants and holders of revolutionary bonds, and debts of $25 million owed by state governments. Certainly no one disagreed that debts incurred in winning independence must be paid. However, the problem of state debts stirred up a hornet's nest of opposition. States which had already paid off most of their war debts - Virginia, Maryland, North Carolina and Georgia - considered outrageous any plan of the government to hold them responsible for debts incurred by other states, particularly if their citizens would be taxed to pay other states' debts. On the other hand, states such as Massachusetts, South Carolina and Connecticut which had large unpaid debts eagerly welcomed a system of national assumption.
In January 1790 Hamilton responded to the controversy in his "Report on Public Credit." In it he proposed that Congress assume outstanding state debts, combine these debts of over $21 million with national debts and issue new securities covering both the accumulated unpaid interest and the principle. He further suggested that holders of national or state debt certificates be given the option of collecting a portion of their payment in government-held western lands. Such a plan would simultaneously increase the financial power of the federal government while reducing the economic power of the states. It would also encourage wealthy merchants and speculators to have a stake in financing the expanding republic. The speculators, Hamilton argued, "paid what the commodity was worth in the market, and took the risks"; therefore, they should "recap the benefits." He further insisted as he had in 1781, that "a national debt, if it is not excessive, will be to us a great national blessing."
Of course not everyone viewed Hamilton's debt plan as a "national blessing." Madison, once Hamilton's ally on the issue of a powerful central government, broke ranks over the issues of national and state debts. While he agreed with Hamilton that debts must be paid, he was very disturbed by the overtones of sectionalism in Hamilton's plan. He feared that Northern speculators and "stock jobbers" would benefit tremendously, putting the bulk of the national debt ultimately into the hands of wealthy Northerners. Such a shift in financial power could conceivably disrupt the South's economy by undermining the slave-holding system.
The disagreement between Madison and Hamilton produced a political compromise. In return for Northern votes in favor of locating a permanent national capitol on the swampy, mosquito-infested Potomac River, Madison and his supporters pledged to seek enough votes from their Southern colleagues to pass the debt assumption bill. They also agreed that states with small debts would receive grants from the federal government to equalize the difference. Congress accepted Hamilton's assumption and funding plan in August of 1790. Philadelphia would become the new capital for ten years, after which the president would choose a site on the Potomac River.
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