Hamilton: Finance: Vindication of the Financing System



Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America’s first constitutional lawyers and the first United States Secretary of the Treasury.

Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America’s first constitutional lawyers and the first United States Secretary of the Treasury.

Alexander Hamilton: The Works of Alexander Hamilton, Volume 3


Finance: Vindication of the Financing System


number one

1791 (?)

It was to have been foreseen, that though the virtuous part of those who were opposed to the present Constitution of the United States, while in deliberation before the people, would yield to the evidence which experience would afford of its usefulness and safety, there were opponents of a certain character, who, as happens in all great political questions, would always remain incurably hostile to it; that in the course of its administration its greatest merits would be in the eyes of such men its greatest blemishes, its most brilliant successes to them occasions of bitter chagrin and envious detraction, its slightest mismanagements subjects of malignant exaggeration, its most trivial misfortunes the welcome topics of virulent accusation and insidious misrepresentation.

With some men the hardest thing to forgive is the demonstration of their errors,—the manifestation that they are not infallible. Mortified vanity is one of the most corroding emotions of the human mind; one of the most unextinguishable sources of animosity and hatred.

It was equally to have been foreseen, that personal disappointments would be likely to alienate from the government some individuals who had at first advocated its adoption, perhaps from motives not the most patriotic or commendable; that personal rivalships and competitions would throw others into an opposition to its measures, without much regard to their intrinsic merits or demerits; and that a third class would embrace the path of opposition as the supposed road to popularity and preferment, raising upon every colorable pretext the cry of danger to liberty, and endeavoring to disseminate among the people false terrors and ill-grounded alarms.

Phenomena like these have deformed the political horizon, and testify the depravity of mankind, in all countries and at all times.

It was likewise to have been expected that among the well-meaning friends of the government, there would be a part, competent to the proper management of the affairs of the Union, who, sensible from experience of the insufficiency of the former system, gave their assent to the substitute offered to their choice, rather from general impressions of the necessity of a change, than from an accurate view of the necessary compass of the authorities which ought to constitute it.

When they came to witness the exercise of those authorities upon a scale more comprehensive than they had contemplated, and to hear the incendiary comments of those who will ever be on the watch for pretexts to brand the proceedings of the government with imputations of usurpation and tyranny, and the factious and indiscreet clamors of those who, in and out of the Legislature, with too much levity, torture the Constitution into objections to measures which they deem inexpedient;—it was to have been expected, I say, that some such men might be carried away by transient anxieties and apprehensions, and might for a moment add weight to an opposition which could not fail to grow out of other causes, and the real objects of which they would abhor.

There is yet another class of men, who, in all the stages of our republican system, either from desperate circumstances, or irregular ambition, or a mixture of both, will labor incessantly to keep the government in a troubled and unsettled state, to sow disquietudes in the minds of the people, and to promote confusion and change. Every republic at all times has its Catilines and its Cæsars.

Men of this stamp, while in their hearts they scoff at the principles of liberty, while in their real characters they are arbitrary, persecuting, and intolerant, are in all their harangues and professions the most zealous; nay, if they are to be believed, the only friends to liberty. Mercenary and corrupt themselves, they are continually making a parade of their purity and disinterestedness, and heaping upon others charges of peculation and corruption. Extravagant and dissipated in their own affairs, they are always prating about public economy, and railing at the government for its pretended profusion. Conscious that as long as the confidence of the people shall be maintained in their tried and faithful servants, in men of real integrity and patriotism, their ambitious projects can never succeed, they leave no artifice unessayed, they spare no pains to destroy that confidence, and blacken the characters that stand in their way.

Convinced that as long as order and system in the public affairs can be maintained, their schemes can never be realized, they are constantly representing the means of that order and system as chains forged for the people. Themselves the only plotters and conspirators, they are for ever spreading tales of plots and conspiracies; always talking of the republican cause, and meaning nothing but the cause of themselves and their party; virtue and liberty constantly on their lips, fraud, usurpation, and tyranny in their hearts.

There is yet another class of opponents to the government and its administration, who are of too much consequence not to be mentioned: a sect of political doctors; a kind of Popes in government; standards of political orthodoxy, who brand with heresy all opinions but their own; men of sublimated imaginations and weak judgments; pretenders to profound knowledge, yet ignorant of the most useful of all sciences — the science of human nature; men who dignify themselves with the appellation of philosophers, yet are destitute of the first elements of true philosophy; lovers of paradoxes; men who maintain expressly that religion is not necessary to society, and very nearly that government itself is a nuisance; that priests and clergymen of all descriptions are worse than useless. Such men, the ridicule of any cause that they espouse, and the best witnesses to the goodness of that which they oppose, have no small share in the clamors which are raised, and in the dissatisfactions which are excited.

While the real object of these clamors, with the persons most active in propagating them, is opposition to the administration of it; while they are straining every nerve to render it odious, they are profuse in their professions of attachment to it. To oppose avowedly the work of the people would be too barefaced. It would not accord with that system of treacherous flattery, which is the usual engine of these pretended “friends,” but real betrayers, of the people.

Circumstances require that the mode of attack be changed. The government is to be good, if not excellent, but its administration is to be execrable,—detestable,—a mere sink of corruption; a deep-laid plan to overturn the republican system of the country.

Suspicions of the most flagitious prostitution and corruption in office, of improper connections with brokers and speculators to fleece the community, of the horrid depravity of promoting wars, and the shedding of human blood, for the sake of sharing collusively the emoluments of lucrative contracts, suspicions like these are, if possible, to be thrown upon men, the whole tenor of whose lives gives the lie to them; who, before they came into office, were never either land-jobbers, or stock-jobbers, or jobbers of any other kind; who can appeal to their fellow-citizens of every other party and description to attest that their reputations for probity are unsullied, that their conduct in all pecuniary concerns has been nicely correct and even exemplarily disinterested; who, it is notorious, have sacrificed and are sacrificing the interests of their families to their public zeal; who, whenever the necessity of resisting the machinations of the enemies of the public quiet will permit them to retire, will retire poorer than they came into office, and will have to resume under numerous disadvantages the pursuits which they before followed under every advantage. Shame, where is thy blush? — if detraction so malignant as this can affront the public ear. Integrity, where is thy shield? where thy reward?—if the poisonous breath of an unprincipled cabal can pollute thy good name which thou incessantly toiled to deserve.

People of America, can ye be deceived by arts like these? Will ye suffer yourselves to be cheated out of your confidence in men who deserve it most? Will ye be the dupes of hypocritical pretenders?

Think for yourselves. Look around you. Consult your own experience. If any of you have doubts, listen calmly and dispassionately to the arguments and facts which, in the course of the following numbers, shall be opposed to the suggestions which would persuade you that the administration of your government has been in the aggregate weak or wicked, or both.
number two

Of all the measures of the government, that which has been most bitterly inveighed against is the funding system, contained in the act making provision for the debt of the United States. As well for this reason, as on account of its superior importance, the objections which have been made to it are entitled to an examination in the first place.

It is a curious phenomenon in political history (not easy to be paralleled), that a measure which has elevated the credit of the country from a state of absolute prostration to a state of exalted pre-eminence, should bring upon the authors of it obloquy and reproach.

It is certainly what, in the ordinary course of human affairs, they could not have anticipated. They are not here chargeable with arrogance, if they indulged from it the hope of credit and applause; and if the clamors which have been raised have truly proceeded, as the clamorers assure us, from patriotic motives, it must be confessed that they have the additional merit of novelty and singularity.

There must be something original in the passions as well as in the ideas of the sect to which they are attributable. It will be hardly possible not to believe, that some mysterious work of political regeneration has begun to make its way in the world, and that all those who have not been the subjects of it are in a state of pitiable darkness and error.

The two first points which, in considering the funding system, present themselves to attention, are the existence and the composition of the debt funded.

A person who, unacquainted with the fact, should learn the history of our debt from the declamations with which certain newspapers are perpetually charged, would be led to suppose that it is the mere creature of the present government for the purpose of burthening the people with taxes, and producing an artificial and corrupt influence over them; he would, at least, take it for granted that it had been contracted in the pursuit of some wanton or vain project of ambition or glory; he would scarcely be able to conceive that every part of it was the relict of a war which had given independence and preserved liberty to the country; that the present government found it as it is, in point of magnitude (except as to the diminutions made by itself), and has done nothing more than to bring under a regular regimen and provision what was before a scattered and heterogeneous mass.

And yet this is the simple and exact state of the business. The whole of the debt embraced by the provisions of the funding system consisted of the unextinguished principal and arrears of interest of the debt which had been contracted by the United States in the course of the late war with Great Britain, and which remained uncancelled, and the principal and arrears of interest of the separate debts of the respective States contracted during the same period, which remained outstanding and unsatisfied, relating to services and supplies for carrying on the war. Nothing more was done by that system than to incorporate these two species of debt into the mass, and to make for the whole one general, comprehensive provision.

There is, therefore, no arithmetic, no logic, by which it can be shown that the funding system has augmented the aggregate debt of the country. The sum total is manifestly the same; though the parts which were before divided are now united.

There is, consequently, no color for an assertion that the system in question either created any new debt, or made any addition to the old.

And it follows that the collective burthen upon the people of the United States must have been as great without as with the union of the different portions and descriptions of the debt. The only difference can be, that without it that burthen would have been otherwise distributed, and would have fallen with unequal weight instead of being equally borne as it now is.

These conclusions which have been drawn respecting the non-increase of the debt proceed upon the presumption that every part of the public debt, as well that of the States individually as that of the United States, was to have been honestly paid.

If there is any fallacy in this supposition, the inferences may be erroneous, but the error would imply the disgrace of the United States, or parts of them—a disgrace from which every man of true honor and genuine patriotism will be happy to see them rescued.

When we hear the epithets, “vile matter,” “corrupt mass,” bestowed upon the public debt, and the owners of it indiscriminately maligned as the harpies and vultures of the community, there is ground to suspect that those who hold the language, though they may not dare to avow it, contemplate a more summary process for getting rid of debts than that of paying them. Charity itself cannot avoid concluding from the language and conduct of some men (and some of them of no inconsiderable importance), that in their vocabularies creditor and enemy are synonymous terms, and that they have a laudable antipathy against every man to whom they owe money, either as individuals or as members of the society.

It has been said that the sum of the debt to be ultimately provided for has been artificially increased by the plan for the settlement of accounts between the United States and individual States. This point will most properly be the subject of a distinct examination, as the act which settles the accounts is a distinct one from that which establishes the funding system. It will appear, upon examination, that there is no foundation for the assertion, and, moreover, that the plan which has been adopted by the present government for the settlement of the accounts is essentially a recapitulation of that which was adopted under the Confederation, and which established principles which were not only equitable in themselves, but could not have been reversed without an infraction of the public faith.
number three

My last number contained a concise and simple statement of facts tending to show that the public debt was neither created nor increased by the funding system, and, consequently, that it is not responsible either for the existence or the magnitude of the debt.

It will be proper next to examine the allegations which have been made of a contrary tendency.

In the first place, it is asserted that the debt is greater than it ought to be, because, from the state of depreciation in which the government found it, a much less provision for it than that which was made might have sufficed. A saving of nearly one half, it is said, might have been made by providing for it in the hands of alienees, at least at 8s. or 10s. in the pound, who, having come by it at a much less rate, would have been well compensated by such a provision.

To a man who entertains correct notions of public faith, and who feels as he ought to feel for the reputation and dignity of the country, it is mortifying to reflect that there are partisans enough of such a doctrine to render it worth the while to combat it. It is still more mortifying to know that in that class are comprehended some men who are in other respects sober-minded and upright, friends to order, and strenuous advocates for the rights of property.

In reasoning upon all subjects, it is necessary to take, as a point of departure, some principle in which reasonable and sound minds will agree. Without this there can be no argument, no conclusion, in moral or political more than in physical or mathematical disquisitions.

The principle which shall be assumed here is this, that the established rules of morality and justice are applicable to nations as well as to individuals; that the former as well as the latter are bound to keep their promises; to fulfil their engagements to respect the rights of property which others have acquired under contracts with them. Without this there is an end of all distinct ideas of right or wrong, justice or injustice, in relation to society or government. There can be no such thing as rights, no such thing as property or liberty; all the boasted advantages of a constitution of government vanish into air. Every thing must float on the variable and vague opinions of the governing party, of whomsoever composed.

To this it may be answered that the doctrine, as a general one, is true, but that there are certain great cases which operate as exceptions to the rule, and in which the public good may demand and justify a departure from it.

It shall not be denied that there are such cases; but as the admission of them is one of the most common as well as the most fruitful sources of error and abuse, it is of the greatest importance that just ideas should be formed of their true nature, foundation, and extent. To minds which are either depraved or feeble, or under the influence of any particular passion or prejudice, it is enough that cases are only attended with some extraordinary circumstances to induce their being considered as among the exceptions. Convenience is with them a substitute for necessity, and some temporary, partial advantage is an equivalent for a fundamental and permanent interest of society. We have too often seen in the United States examples of this species of levity. The treaties of the United States, the sacred rights of private property, have been too frequently sported with, from a too great facility in admitting exceptions to the maxims of public faith and the general rules of property. A desire to escape from this evil was a principal cause of the union which took place among good men to establish the national government; and it behoved its friends to have been particularly cautious how they set an example of equal relaxation in the practice of that very government.

The characteristics of the only admissible exceptions to the principle that has been assumed, are—1st. Necessity. 2d. There being some intrinsic and inherent quality in the thing which is to constitute the exception, contrary to the social order and to the permanent good of society.

Necessity is admitted in all moral reasoning as an exception to general rules. It is of two kinds, as applied to nations—where there is want of ability to perform a duty, and then it is involuntary; and where the general rule cannot be observed without some manifest and great national calamity.

If from extraordinary circumstances a nation is disabled from performing its stipulations, or its duty in any other respect, it is then excusable on the score of inability. But the inability must be a real, not a pretended, one; one that has been experimentally ascertained, or that can be demonstrated to the satisfaction of all honest and discerning men. And the deviation ought to be as small as possible; all that is practicable ought to be done.

A nation is alike excusable in certain extraordinary cases for not observing a right or performing a duty, if the one or the other would involve a manifest and great national calamity. But here, also, an extreme case is intended; the calamity to be avoided must not only be evident and considerable — it must be such an one as is like to prove fatal to the nation, as threatens its existence, or at least its permanent welfare.

War, for instance, is almost always a national calamity, of a serious kind; but it ought often to be encountered in protection even of a part of the community injured or annoyed; or in performance of the condition of a defensive alliance with some other nation.

But if such special circumstances exist in either case, that the going to war would eminently endanger the existence or permanent welfare of the nation, it may excusably be forborne.

Of the second class of exceptions, the case of certain feudal rights, which once oppressed all Europe, and still oppress too great a part of it, may serve as an example; rights which made absolute slaves of a part of the community, and rendered the condition of the greatest proportion of the remainder not much more eligible.

These rights, though involving that of property, being contrary to the social order, and to the permanent welfare of society, were justifiably abolished in the instances in which abolitions have taken place, and may be abolished in all the remaining vestiges.

Wherever, indeed, a right of property is infringed for the general good, if the nature of the case admits of compensation, it ought to be made; but if compensation be impracticable, that impracticability ought not to be an obstacle to a clearly essential reform.

In what has been said, the cases of exception have been laid down as broad as they ought to be. They are cases of extremity—where there is a palpable necessity—where some great and permanent national evil is to be avoided—where some great and permanent national good is to be obtained. It must not be to avoid a temporary burthen or inconvenience—to get rid of a particular, though a considerable evil, or to secure a partial advantage. A relaxation of this kind would tend to dissolve all social obligations—to render all rights precarious, and to introduce a general dissoluteness and corruption of morals.

A single glance will suffice to convince that the case of the debt of the United States was not one of those cases which could justify a clear infraction of the fundamental rules of good faith, and a clear invasion of rights of property acquired under the most unequivocal national stipulations.

If there was any doubt before, the real facility with which a provision for the debt has been made removes it; a provision which touches no internal source of revenue but the single article of distilled spirits, and lays upon that a very moderate duty.

But a history of the real state of the debt when it was taken up by the government will put the matter out of all doubt. This shall constitute the subject of my next number.
number four

The debt proper, or the original debt of the United States, in its primary sense, may be classed under four general heads: 1st, the old emissions of Continental money; 2d, the loan office debt, contracted for moneys lent to the government; 3d, the army debt, contracted for the pay and commutation of the army: 4th, the debt of the five great departments, as they are called in the resolution of Congress, being for services and supplies in the Marine Department, the Quartermaster’s, Commissary’s, Clothing, and Hospital Departments.

Emanations from these were the registered debt, so denominated from new kinds of certificates issued by the Register of the Treasury in lieu of the former evidences. Indents of interest being a species of paper payable to bearer, which, by different resolutions of Congress, were issued on account of arrears of interest on the old debt. The new emission money is not added to the enumeration, because it was issued upon funds of the respective States, with only a guaranty of the United States, and falls, perhaps, most properly, in the class of State debts.

Of this original debt, it appears by a statement of the Register of the Treasury, published Sept. 30, 1791,1 not less than $16,900,203 73 in its first concoction, belonged to citizens of the States from Pennsylvania to New Hampshire inclusively; the remaining belonging to States from Maryland to Georgia inclusively, in nearly the following proportions: to Maryland, $1,697,910 34; to Virginia, $1,024,104 26; to North Carolina, $28,994 75; to South Carolina, $299,109 88; to Georgia, $97,233 03. The reasons of this state of things are obvious. Until the year 1779 the principal theatre of the war had been in the States from Pennsylvania north; and after that period, to the close of it, the principal part of the enemy’s force remained stationary at New York, which obliged the keeping up in the same quarter large bodies of troops till the termination of the war.

The natural consequence of this state of things was, that a very large proportion of the means for carrying on the war—men, money, and other supplies—were drawn from the States comprehended in the first division. They indeed possessed greater comparative resources than the more southern States, and with only the same degree of zeal could furnish more to the common cause. Obvious causes always conspire to occasion larger aids to be drawn from the vicinity of the war than from more distant parts of the country, and the main dependence of the United States being credit, a large debt was created in the scene from which the principal supplies came.

The use of this statement of the original distribution of the debt will appear hereafter.

A leading character of every part of the debt is, that it was in its origin made alienable. It was payable to the holder, either in capacity of assignee or bearer, far the greatest part of the latter description. The contract, therefore, was, in its very issue, a contract between the government and the actual holder.

A considerable part of the debt was consequently alienated by the first proprietors at different periods, from its commencement down to the time of passing the funding act.

But this has been much exaggerated, both as to the quantity alienated and as to the rates of alienation. The declamations on the subject have constantly represented far the greatest part of the debt in the hands of alienees, and have taken the lowest price at which it ever was in the market as the common standard of the alienation. The changes have been rung upon two shillings and sixpence in the pound, in all the arguments which have advocated a violation of the rights of the alienees.

Neither the first nor the last supposition is true. As to the first point, namely, the quantity of the debt alienated, there are no documents by which it can be satisfactorily ascertained, which of course gives full scope to imagination.

But there is an important fact which affords strong evidence that the quantity has always been much less considerable than has been supposed.

In the year 1786 the State of New York passed a law permitting the holders of Continental securities to bring them in and receive in exchange for them State securities upon certain conditions, which were generally deemed for the advantage of the holders to accept. The same arrangement embraced an exchange of old State securities for new.

In the event of this exchange, which was completed by the 1st of May, 1787, it appeared that about two thirds2 of the debt remained in the hands of the original proprietors.

Alienations after this period….

It may be stated as a fact, that there always has prevailed in the States north of New York, a more firm confidence in an eventual provision for the debt than existed in that State; and it may be inferred that the alienation was still less in those States than in the State of New York.

In Jersey and Pennsylvania, it is probable that the alienations were not more considerable in their degree than in New York. In Maryland they may be supposed to have been still less, on account of that State having made a better provision for its debt than any other, and having included in it Continental securities in the hands of its own citizens by an exchange of certificates.

It is probable from information, though not certainly known, that a more considerable alienation in proportion had taken place in the States south of Maryland. But making all due allowance for this, and taking into the account that the principal part of the debt was originally owned from Pennsylvania north, the probability still is, that the progress of alienation has been much less rapid than has been conjectured. Nothing is more natural than a mistake on this point. The dealers in the debt in the principal cities appeared to be continually engaged in buying and selling large sums; and it has not been their fault generally, to underrate the extent of their dealings. Thence it came to be imagined that the whole debt, or the greatest part of it, was in the market; whereas a small sum comparatively was sufficient to satisfy all the appearances. Bandied incessantly from hand to hand, a few hundred thousand dollars appeared like as many millions.

The best inquiries on the subject will lead to an opinion that there never was, prior to the funding system, three millions of dollars of floating debt in all the great stock markets of the United States. And the whole sum which had been acquired by foreigners, was about ———. From all which it is very questionable whether one third of the debt in the hands of alienees at the time when Congress began to deliberate concerning a provision for it would not be an ample allowance.

With regard to the terms of alienation, they have varied from 20s. down to 2s. 6d. in the pound.

There are several considerable classes of alienees, who hold the debt at full or high values:

I. Those who advanced moneys or furnished supplies to public officers upon loan-office certificates, issued to those officers in their own names. An example of this exists in the cases of purchases made during the war by public officers. Warrants from the Treasury would frequently be drawn in their favor upon the commissioners of loans, who would often furnish loan-office certificates in their own names in payment of those warrants. For these certificates the officers would sometimes procure the current paper in exchange, and would transfer the certificates to those who advanced the money. In other cases they would pay for supplies in the certificates themselves, which they would in like manner transfer. This is a very extensive case.

II. Those whose money has been placed in the funds by trustees or agents, who took out certificates in their own names, and afterwards assigned them to the true proprietors.

An instance of this was mentioned in the debates in Congress on the subject of a discrimination between original and present holders, and can be ascertained by any one who will take the pains to inquire. It was that of a Mr. Caldwell, a respectable clergyman and zealous patriot in New Jersey, who acted for some time during the war in the capacity of deputy quartermaster. In that capacity he frequently had money to pay to individuals, which, at their desire, he would place in the loan-office for them, take certificates in his own name, and afterwards transfer them to the persons whose money he had deposited. There are likewise instances, not a few, of trustees and agents for absent persons and minors, who placed the moneys of those whom they represented in the loan-offices, took out certificates in their own names, and afterwards transferred them to the parties entitled.

III. Those who, by laws of particular States, were compelled to take certificates at the full value in payment of debts.

A law of the State of New York, passed in the year ———, obliged all persons who had resided within the British lines during the war to receive, in satisfaction of their debts from those who had been without the lines, certificates.

IV. Those who, at different periods, voluntarily received certificates in payment of debts. This, in some States, is a very extensive case. From the precarious situation in which all persons were placed by the Revolution, whose property was merely personal, it was no uncommon thing for creditors to receive from their debtors certificates in payment of debts; and this was almost always at high values.

Even since the peace, compromises between creditors and debtors, especially those whose fortunes had been injured by the war, in which certificates were received at full value.—Cætera desunt.

[1]This date and all the figures which follow are blank in the edition of 1850. I have filled them from the Register’s report, which I think must be the one referred to, of Sept. 30, 1791. (See American State Papers, “Finance,” vol. i., p. 149.)

[2]This as well as the two preceding dates is blank in the edition of 1850. The dates are filled from the laws of New York for 1786. The proportion of alienated debt I have calculated from the returns of the State Treasurer of New York.—American State Papers, “Finance,” i., p. 30. The “Alienations” since May, 1787, I have not been able to ascertain. This defence of the funding system was not apparently published, hence its incomplete state and the consequent blanks for figures.

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