The Public Debt and Taxes

The upturn in the economy, plus the new taxation powers of the government, suggested that the government might soon repay its wartime debt, amounting to more than $52 million owed to foreign and domestic creditors. But Hamilton had a different plan. He issued a Report on Public Credit in January 1790, recommending that the debt be funded—but not repaid immediately—at full value. This meant that old certificates of debt would be rolled over into new bonds, which would earn interest until they were retired several years later. There would still be a public debt, but it would be secure, giving its holders a direct financial stake in the new government. The bonds would circulate, injecting millions of dollars of new money into the economy. “A national debt if not excessive will be to us a national blessing; it will be a powerful cement of our union,” Hamilton wrote to a financier. Hamilton’s goal was to make the new country creditworthy, not debt-free.

Funding the debt in full was controversial because speculators had already bought up debt certificates cheaply, and Hamilton’s report touched off further speculation. Hamilton compounded controversy with his proposal to add to the federal debt another $25 million that some state governments still owed to individuals. During the war, states had obtained supplies by issuing IOUs to farmers, merchants, and moneylenders. Some states, such as Virginia and New York, had paid off these debts entirely. Others, such as Massachusetts, had partially paid them off through heavy taxation of the people. About half the states had made little headway. Hamilton called for the federal government to assume these state debts and combine them with the federal debt, in effect consolidating federal power over the states.

Congressman James Madison strenuously objected to putting windfall profits in the pockets of speculators. He instead proposed a complex scheme to pay both the original holders of the federal debt and the speculators, each at fair fractions of the face value. He also strongly objected to assumption of all the states’ debts. A large debt was dangerous, Madison warned, especially because it would lead to high taxation. Secretary of State Jefferson was also fearful of Hamilton’s proposals: “No man is more ardently intent to see the public debt soon and sacredly paid off than I am. This exactly marks the difference between Colonel Hamilton’s views and mine, that I would wish the debt paid tomorrow; he wishes it never to be paid, but always to be a thing where with to corrupt and manage the legislature.”

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VISUAL ACTIVITY 1790 Census Page This page summarizes the tally of the first federal census, data that determined representation in Congress and proportional taxation of the states. Notice the five classifications: free white males sixteen or older, the same under sixteen, free white females, “all other free persons,” and slaves. Separating white males at sixteen provided a rough measure of military strength. U.S. Census Bureau. READING THE IMAGE: Which northern states still had slaves? Which state had the largest population? Which had the largest white population? CONNECTIONS: Why did the census separate males from females? Free from enslaved? Who might “all other free persons” include? Since women, children, and “all other free persons” counted for purposes of apportionment, could it be said that those groups were represented in the new government?

A solution to this impasse arrived when Jefferson invited Hamilton and Madison to dinner. Over good food and wine, Hamilton secured the reluctant Madison’s promise to restrain his opposition. In return, Hamilton pledged to back efforts to locate the nation’s new capital city in the South, along the Potomac River, an outcome that was sure to please Virginians. In early July 1790, Congress voted for the Potomac site, and in late July Congress passed the debt package, assumption and all.