Introductory Note: Report Relative to a
Provision for the Support of Public Credit
[New York, January 9, 1790]
Sources for the ideas expressed by Hamilton in his Report Relative to a Provision for the Support of Public Credit are both varied and difficult to assess. Public credit, or the terms on which a state may borrow, had been discussed in Europe by philosophers, government officials, and political pamphleteers for almost a century before Hamilton drew up his famous Report. Many Americans had also given considerable thought to the problems involved in establishing a system of public credit. From the period of the Revolution to the presentation of the Report to Congress, public credit and finance had been the topic of numerous articles in American newspapers and periodicals. There was, moreover, substantial agreement among most of the correspondents from whom Hamilton elicited opinions on public finance; and the Secretary of the Treasury was not alone in his admiration of the credit institutions that had been established in England.
Of the many Europeans who have been said to influence Hamilton’s thinking on public finance, special mention should be made of Charles Montagu (later Lord Halifax). A Whig member of Parliament under William III and Chancellor of the Exchequer, he used his influence to support the institution of a public debt, the Bank of England, the excise on malt and liquors, and the first tontine in England. It has been suggested that Hamilton’s use of the pseudonym James Montague in an early letter on financial policy1 was an indication that he was aware of—and even in sympathy with—the ideas of the English statesman. This inference may or may not be farfetched, but it is supported by Hamilton’s praise of policies instituted by Montagu, and there can be no doubt that several of Hamilton’s American contemporaries were aware of Montagu’s views. The author of a short note in The American Museum in 1789, after pointing out the similarity between the current situation in the United States and that faced by Montagu, stated: “In this alarming crisis [in England], the eloquence and abilities of Mr. Montague … saved the nation.”2 A year later a memorial from the General Assembly of Virginia introduced its criticism of Hamilton’s funding program by pointing out “a striking resemblance between this system and that which was introduced at the Revolution [in England].”3
Precedents for some of the ideas expressed in the Report can also be found in the various plans that had been put forward in the decade preceding 1790 by French and British finance ministers to solve problems concerning their respective national debts. Such proposals were well known to most Americans interested in public finance. Hamilton’s suggestion of a tontine to be divided into six classes was probably a modified version of William Pitt’s plan. An article in the Gazette of the United States mentioned Pitt’s tontine,4 and William Bingham presumably gave Hamilton further information on the subject.5 Several passages in Jacques Necker’s speech at the opening of the States General in 1789 are similar to parts of Hamilton’s Report.6 Hamilton had referred to Necker on an earlier occasion,7 and copies of a pamphlet which included Necker’s speech were available in the United States before the close of 1789. Although on April 30, 1781, in a letter to Robert Morris, Hamilton had praised French finance in contrast to the “abuse of credit” practiced in England, he believed that the abuse had been possible only because of the strength of the credit institutions developed in England during the decade of the sixteen-nineties, and his criticism antedated the financial measures proposed by Pitt. Descriptions of British financial experience were available in most of the printed works on finance and in Parliamentary Debates.
David Hume and Thomas Hobbes have been frequently cited as the authors to whom Hamilton was most indebted.8 Before Hamilton served in the Continental Congress, he had studied Hume’s Political Discourses.9 The essay “On Public Credit” contained in this work expresses Hume’s fears concerning the growth and extent of the British debt and the impending bankruptcy to which he believed it would lead, but the section of the essay that was most often quoted during the seventeen-eighties states: “More men, therefore, with large stocks and incomes may naturally be suppos’d to continue in trade, where there are public debts: And this, it must be own’d, is of some advantage to commerce, by diminishing its profits, promoting circulation, and encouraging industry.”10
Hobbes made fulfillment of contract the third law of nature and “the Fountain and Original of Justice.”11 Although Hamilton was critical of Hobbs in a reference made before the Revolution,12 Hobbes’s discussion of largesse and contract bear a resemblance to Hamilton’s discussion of discrimination. In this connection, Hobbes wrote: “Whensoever a Man transfereth his Right or renounceth it, it is either in Consideration of some Right reciprocally transferred to himself, or for some other Good he hopeth for thereby. For it is a voluntary Act; and of the voluntary Acts of every Man, the Object is some Good to himself.… The mutual transferring of Right, is that which men call Contract … when a Covenant is made, then to break it is unjust. And the Definition of Injustice is no other than the not performance of Covenant. And whatsoever is not unjust, is just.”13
Montesquieu, who influenced the thinking of many of the Founding Fathers, shared Hume’s aversion to large public debts, but he also emphasized the importance of support for public credit. Security holders, according to Montesquieu, should not be taxed “as a breach in the public faith cannot be made on a certain number of subjects, without seeming to be made on all; … the state is obliged to give them a singular protection, that the part which is indebted may never have the least advantage over that which is the creditor.”14
One historian has called Malachy Postlethwayt’s Universal Dictionary “the most important document yet discovered showing background and immediate sources of some of Hamilton’s principal writings, especially his Reports.”15 During the Revolution Hamilton had used the Dictionary as an introduction to economic theory and practice. Under various headings in the Dictionary some of the major points in the Report are discussed. Postlethwayt’s emphasis on the importance of transfer of public securities is especially close to the view expressed in the Report. In an article in the Dictionary entitled “Action,” Postlethwayt wrote: “Such is the nature of public credit, that no body would lend their money to the support of the state, under the most pressing emergencies, unless they could have the privilege of buying and selling their property in the public funds, when their occasions required. ’Tis certain, therefore, that the greatest delicacy and tenderness is to be observed, in laying any restraints upon these transactions, lest the public credit should be thereby irrecoverably prejudiced.”16 Part of Postlethwayt’s article on “Bubbles” gives a similar emphasis. “The other species of bubbling,” Postlethwayt wrote, “arises from the nature of our national debts; for, if between eighty and ninety millions of money are so tied up, as to remain untransferrable, unnegotiable, and not to change hands, who could ever be induced to lend the government money upon the most pressing emergency, even in consideration of the largest interest? Though parliamentary security gives the real value to the national debt, or the public funds, they would be, like the miser’s treasure, useless to the possessor; or like the undiscovered riches of the earth, did not circulation and credit set a market price upon them.”17
Precedents for some of Hamilton’s ideas can also be found in Blackstone and Vatel. Blackstone’s Commentaries, which Hamilton studied when he was preparing for admission to the bar, states: “The only advantage, that can result to a nation from public debts, is the encrease of circulation by multiplying the cash of the Kingdom … always ready to be employed in any beneficial undertaking, by means of it’s transferrable quality.…”18 Vattel, one of the writers on natural law with whom Hamilton probably became familiar during the same period, states: “What [the sovereign] … borrows for the service of the state, the debts contracted in the administration of public affairs, are contracts of strict right, obligatory with respect to the state and the whole nation. Nothing can dispense with the discharging of these debts.”19
In addition to the influence which European writers may have had on Hamilton’s views, it has been suggested that he obtained some of the ideas contained in the Report from contemporaries in the United States. For example, Hamilton has been called “a product of the Robert and Gouverneur Morris school,”20 and to substantiate this assertion reference can be made to Robert Morris’s two letters to Congress in 1781 and 178221 and to Gouverneur Morris’s plan of American finances in 1789.22 But Hamilton earlier had expressed some of the views that he shared with these two men, and the differences between the proposals of the two Morrises and the contents of Hamilton’s Report are as striking as the similarities. At least three scholars have also pointed out the parallel between William Bingham’s letter of November 25, 1789, to Hamilton and some of the proposals in the Report.23 Although there are some points in Bingham’s letter which are similar to those in the Report, many of these points had been suggested by Hamilton before 1789, and the method for scaling down the debt proposed by Hamilton had been explicitly rejected by Bingham as “opposed to every principle of a sound and magnanimous Policy.”24
The fact that many of the views on finance included in the Report were put forward by Hamilton before they were stated by his contemporaries suggests that his intellectual debt to his associates in and out of Congress and to current periodical literature was not as large as has sometimes been supposed. Between 1779 and 1781 in correspondence with James Duane, Robert Morris, and others, as well as in published articles signed “The Continentalist,” Hamilton had discussed measures necessary for the support of public credit.25 During his service in Congress he further elaborated his views in his “Defense of Congress” and in an answer to Rhode Island’s objections to the impost.26
Although the experience under the Confederation was probably not a formative influence, the policies and failures of Congress served as a background of specific precedents. Funding, a national bank, and the establishment of a sinking fund had all been included among the various schemes proposed by Congress for the support of public credit. These institutions were to be financed by the sale of western lands, quotas from the states, foreign loans, and the impost. But either political or economic considerations rendered each of these devices ineffectual. The sale of western lands was impeded by the unequal effect of land cessions on various states, by the costs of surveying and protecting the land, and by the fear with which some states viewed the settlement of these lands. Quotas failed partly because of the strain which the costs of the Revolution had imposed on state finances and partly because many states believed that they had contributed more than their share to the cost of the war. Foreign loans were obtained with increasing difficulty after the Revolution because of the changes in the foreign and domestic situation of the lending nations, because of the uncertainty concerning repayment, and because of the growing tendency of foreign lenders to invest in the domestic debt of the United States. Although repeated attempts were made between 1783 and 1788 to gain the acquiescence of the states to a general impost, the different situations of various states respecting both foreign trade and domestic revenue prevented its general adoption.
During the three years preceding the presentation of the Report on Public Credit, many articles on public finance appeared in The American Museum and the Gazette of the United States. Hamilton was a charter subscriber to the former and undoubtedly read the latter. During this period an essay on some aspect of government finance and public credit was reprinted in almost every issue of The American Museum. Discussion was less frequent immediately after the ratification of the Constitution, but the topic regained importance during the second half of 1789. In the February, 1787, issue, “Tom Thought-full” described past contracts as “sacred things.”27 A reprint of Thomas Paine’s Common Sense, Part IV,28 was published in the March issue stating that a national debt would be a national bond and urging that public lands be used for discharge of the debt. In the same issue “an honest chearful citizen” discussed the resources which the United States could use to establish public credit and emphasized the increase in commerce and the decrease in taxes which would result.29 The April issue included the report of February 15, 1786, of the Committee of Finance of Congress; in May, Washington’s circular letter of 1783 was reprinted.30 The May issue also contained a discussion of discrimination between original and current holders of government obligations. One of the articles opposing discrimination, after discussing the benefits which would accrue to the nation if justice were done to public creditors, concluded that “instead of being considered as a curse, the Public Debt will become a Public Blessing.”31 More material appeared in June, including a reference to the law of Pennsylvania which had attempted to discriminate between original and current holders of army certificates.32 Between June, 1787, and July, 1789, few articles on finance were printed in The American Museum, but the August, 1789, issue revealed a renewed interest in public finance as a result of the failure of the Committee on Ways and Means to take up the question of debt service in connection with the revenues necessary for the current year.33
During the fall of 1789, Hamilton asked several people for information and opinions on various aspects of public finance.34 The replies to these requests undoubtedly were used by Hamilton in drawing up the Report. For example, in the course of the Report he mentions Samuel Osgood’s letter concerning postal revenues. He also refers to the ideas which “have been suggested to him” concerning the settlement of accounts between the states. Among such suggestions, which bear a close resemblance to the proposals contained in the Report, were those supplied by Oliver Wolcott, Jr. Some of the sources of revenue mentioned by James Madison and Stephen Higginson are the same as those discussed in the Report, and Hamilton’s opinions on discrimination in the Report closely resemble the ideas advanced by John Witherspoon in his letter to the Secretary of the Treasury. Finally, there are many similarities of expression between the Report and the letter which Hamilton received from William Bingham.
The attempt to assess the influence of the opinions of Hamilton’s contemporaries on the Report is made even more difficult by the fact that ideas were exchanged in conversations as well as in letters. Witherspoon and Bingham, for example, both closed their letters to Hamilton with the statement that they hoped that they would be able to converse with him more fully in person.35 William Duer, who according to John Adams had a very important influence on Hamilton’s Report,36 probably expressed his views in conversation; and members of the old Board of Treasury (also mentioned by Adams) may have spoken to Hamilton. William Constable wrote in December, 1789, that he had “tried” Hamilton on various aspects of debt provision.37 Despite the possibility of such conversations, the fact remains that before 1787 Hamilton had expressed in letters and articles many of the arguments used in the Report. Later opinions with which he came in contact may have been more valuable to him as corroboration for his own views or as an indication of opinions to which the Report should be addressed than as a source of ideas for the plan proposed.
When one turns to specific proposals made by the Report, it is possible to demonstrate that few of Hamilton’s ideas were altogether original. The assumption of state debts provides a case in point. This question had been considered by several Americans in the years immediately preceding Hamilton’s presentation of his Report, and it had been mentioned during the Constitutional Convention.38 On February 27, 1788, Samuel A. Otis39 had written to the Speaker of the Massachusetts House of Representatives: “I find it in contemplation to assume the State debts, and fund state and federal at 3%. What think you of such a project? Would it be just? And how would it affect Massachusetts? This or a Sponge I apprehend will be attempted at some period not far distant.”40 An amendment to the Constitution proposed by the North Carolina Ratifying Convention prohibited the Federal assumption of state debts or intervention in state provision for them.41 In the August, 1789, issue of The American Museum, an article proposed Federal provision for the state debts on the grounds that an unequal portion of the public debt was held by citizens of various states and “… such attachment to local interests might distress the tranquillity of the states by creating discontents and dissentions.”42 Another argument used in the same article was that under the Constitution the states had been deprived of those tariff revenues that had been used to support state securities, “… under the persuasion that they would be fully recompensed under the federal government.”43 An article in the November 21, 1789, issue of the Gazette of the United States also used the argument of the impost to support the necessity of assumption.44 Four days later an article in the Gazette proposed the assumption of state debts by the United States because these debts had been “incurred for them and in equity they ought to see … [them] funded.”45 On November 29, 1789, Oliver Wolcott, Jr., wrote to his father,46 “It will probably be also proposed to consolidate the debts of the Union, in the settlement of the state accounts. This measure though difficult, is I believe necessary, as the states will by excises or otherwise, defeat any general system of revenue which can be proposed, unless this shall be effected.”47 On the same day Wolcott wrote to Hamilton outlining a plan for the settlement of accounts and assumption that was similar in almost every respect to the plan suggested in the Report.48
Assumption could not be considered without reference to its effect on the settlement of accounts with the states. This problem hung like a cloud over every discussion of finances and current quotas from the period of the Revolution to the debate over Hamilton’s Report. During the Revolution Robert Morris had expressed his fear of the effect of the unsettled balances among the states.49 In 1783, Hamilton and Madison had taken part in the debate over settlement of accounts between the states.50 In April of the following year a Grand Committee on the National Debt gave a report which is in Thomas Jefferson’s writing. In answer to complaints of inequitable quotas, the Report notes that “almost every state thinks itself in advance” on its quota to the United States and that: “it has been the constant wish of Congress that these accounts should be settled, and the contributions of each be known and credited.”51
Under the Confederation various plans had been proposed for the settlement of accounts between the states and the Union. They differed in the extent to which credits would be allowed to the states for expenditures in their own defense and in the proof of expenditure which was required. They disagreed upon whether the unpaid quotas, apportioned expenses of the war, and state debts assumed should be debited in the final settlement. If the expenses of the war were to be charged as debits, what ratio of apportionment should be used? Land values, population estimates, and the basis for quotas of the requisitions of Congress were suggested. But land values, population estimates, and quotas had been different at different periods during the war and postwar era, and, whatever the basis chosen, the states which had been occupied or fought over for the longest period during the Revolution favored “abatements” to make allowance for the greater difficulties which they had experienced in supporting the war.52 Another suggestion emphasized the current financial capability of the states rather than the ability of the various states to contribute at the time the expenses were incurred.53
In 1787, an ordinance adopted by Congress gave wider latitude to claims for credits against the Union. This ordinance specified that “advances or disbursements … not sanctioned by the resolves of Congress or supported by regular vouchers” should be allowed, and it gave the Board of Commissioners power to “make such allowance for the same as they shall think consistent with the principles of general equity.”54 The states south of Maryland favored this ordinance, for their accounts had for the most part not been approved by Congress and they did not have adequate records of their appropriations.55 After this ordinance had been proposed to Congress, Madison wrote: “The settlement of the public accounts has long been pursued in various shapes, and with little prospect of success. The idea which has long been urged by some of us, seems now to be seriously embraced, of establishing a plenipotentiary tribunal for the final adjustment of the mutual claims on the great and simple principle of equity.”56 The North Carolina delegates wrote to their state’s General Assembly that the ordinance “will wind up the whole expenses of the War on principles perfectly equitable.”57 In more specific terms the Virginia delegates warned William Heth that Virginia should accede to the new plan “conceiving that a greater degree of Justice is attainable in an adjustment of the Accounts of Virginia against the United States in the present State of the business, than is to be expected in any later period, or by an agreement of other Commissioners than those now employed.”58 But to Massachusetts the ordinance appeared somewhat less than perfectly equitable. Samuel A. Otis wrote, “… I have a hint that the ordinance for appointing the three Commissioners is somehow so cooked that the Penobscott business although consolidated at £116,000, will be thrown out by the Board.… So true is it, in public and private concerns, that the free horse is ridden to death. The expenditures of the Board of War, the great disproportion of men we had in the field, the astonishing loss by old money, and want of alertness in bringing forward accounts, with regularity and in season will hang like a mill stone about the neck of Massachusetts for ages.”59
The ordinance adopted by Congress in 1787 and the plans of both Robert Morris in 1783 and Gouverneur Morris in 1789 would all have increased the total Federal debt by $80,000,000 to $90,000,000. These proposals avoided the problem of settling the ratio of apportionment of the costs of the war by expressing the state credits as a debt due from the Union to the states at six percent and debiting only payments from the Union or quotas remaining unpaid. Gouverneur Morris also suggested that the sinking fund be used to purchase the state securities on the market and that the states should then be debited with their nominal amount. Capitalization of the cost of the war as a debt due from the Union to the states would have increased the power of the states and thus would have strengthened the hydra which Hamilton believed had to be beheaded.60
Hamilton approached with caution the question of reversing part of the policy of the ordinance passed by Congress in 1787, for he knew that the principle of settlement of the accounts between the states would require “all the moderation and wisdom of the government.” The Report, nevertheless, differed in three major respects from the ordinance of 1787: The Federal Government rather than the states would disburse payment to state creditors; the remainder of quotas still due from the states would not be charged against the states; and the cost of the war would be apportioned as a debit against the states.
But the debts outstanding from a state to her own citizens could not be so easily written off. Although the amount of these debts was considered a credit for the state in the accounts between the states, several states had already encountered difficulty in servicing their debts. Under the Confederation the attempt to service the Massachusetts state debt and her assumed Federal debts on hard money principles had precipitated Shays’ Rebellion. The weight of a similar debt in South Carolina and recent crop failures in that state had left it unable to cover its current expenses without recourse to additional loans. Other states which had hoped to gain by the final settlement of accounts preferred to wait for that settlement before assumption was discussed.
As vexing as the questions of assumption and the settlement of the state accounts were the problems raised by the various proposals for discrimination between the original and subsequent holders of securities. In 1783, a circular to the states,61 an extract from which was used by Hamilton in his Report, opposed discrimination between original creditors and transferees. But the context of the argument over discrimination soon began to change, for between 1783 and 1789 a large part of the domestic debt was either absorbed into the state debts or serviced by the states,62 and public creditors turned increasingly to the state governments for payment of both state and Federal securities. While Pennsylvania was considering a funding act in 1785, Pelatiah Webster suggested a scheme of discrimination between original creditors and their assignees. “It is very certain,” Webster wrote, “and undoubtedly confessed an all sides, that our soldiers, when their services were over, and their accounts fairly adjusted, were entitled to the liquidating balances in their favor, in genuine money: this was in justice due them for their services, and if they were paid, no more than justice was done them; but if, instead of this they were paid nominally twenty shillings in a certificate … which was … no more than 2s. 6d.… it is plain they were paid but 2s. 6d. in the pound, and the remaining 17s. 6d. is still due to them.”63 Under Webster’s plan current holders were to receive the current market price, and the difference between the nominal value and the market value of the securities when issued was to be paid to the original creditors. The securities of current holders were to be purchased on the market by commissioners in charge of a sinking fund.
As the seventeen-eighties progressed, increasing numbers of Americans began to express their opinions on discrimination. For example, the May, 1787, issue of The American Museum includes articles both by those favoring discrimination and by those opposing it. One critic of discrimination in this issue was quoted as saying that discrimination “… if given the sanction of law would forever destroy all confidence in the faith and integrity of the public.”64 The June, 1787, issue of the same periodical mentioned the Pennsylvania law which contained provision for discrimination.65 According to Pelatiah Webster this provision applied only to final settlement certificates issued to the Army, and, in any case, it had been evaded to a considerable extent in practice by the method of proof required.66 John Witherspoon wrote to Hamilton in October, 1789: “We still have an idea meeting us in conversation and publication that a discrimination must be made between original Creditors and Speculators as they call them.… Discrimination is totally subversive of public credit.”67
Some opponents of discrimination used the analogy of a lottery to illustrate their criticism. Thus, William Bingham wrote: “The purchaser [of securities] … may be resembled to a Dealer in a Lottery, where there are Many Blanks to a Prize. Would it be just to contest the payment due to the fortunate Ticket because it had comparatively cost a Trifle.”68 Although Hamilton in his Report does not use the analogy suggested by Bingham, he does state that the chance which the certificate holder took was “a hazard which was far from inconsiderable, and which perhaps, turned, on little less than a revolution in the Government.” This problem was also considered by Hobbes when he wrote: “Also when a Prize is propounded to many, which is to be given to him only that winneth; or Money is thrown amongst many, to be enjoyed by them that catch it; though this be a Free-gift; yet so to win, or so to catch, is to merit, and to have it as due.… I merit not that the Giver should part with his Right; but that when he has parted with it, it should be mine, rather than anothers.”69
Discrimination was not the only device proposed by those wishing to mitigate the effects of depreciation and speculative transfer of securities, for it was also suggested that much the same results could be achieved by scaling down the debt’s principal or by reducing the interest on it. Because of past depreciation, transfer at reduced prices, and speculation, it was generally believed that the debt would not be paid at its nominal value. It had been proposed that three percent be paid on the Federal debts and the assumed debts of the states. Some believed that repudiation was a clear possibility. Even after the new government had been instituted, there were indications that creditors would willingly accept a scaled-down specie payment in lieu of an “ever widening circle of paper promises.”
The idea of scaling down the debt came from many quarters. Precedents were available in the financial history of Great Britain and France; and the matter was discussed in the Continental Congress, American periodicals, and letters addressed to Hamilton in October and November of 1789. As early as February, 1783, a delegate to Congress from Virginia “said that … no Civil Creditor would dare to put his claims on a level with those of the army, and insinuated that the speculations which had taken place in loan office certificates might lead to a revision of that subject on principles of equity.…”70 Stephen Higginson in his letter to Hamilton on November 11, 1789, warned against the payment of full interest in specie: “They cannot think it right for those, who have bought them up a 2/ to 3/ in the pound, to derive so great an income from them; and eventually to receive the full Sum of the principal in Specie.…”71 Higginson also wrote: “Though it were true that by imposts and excises, when exerted as far as our case will admit, and duly and exclusively collected by the Union, a sufficient Revenue may be raised to pay the interest on the public Debts including those of the several states, and to support the federal government; it is a very important question how far it should be applied to the first of those uses. There is nothing that would so much alarm, and rouse the feelings of the State governments and of their constituents, as a proposition, with an ability, to pay the full interest on public Securities in Specie.”72
In contrast to the ideas expressed by Higginson were those of William Bingham, Gouverneur Morris, and Robert Morris.73 All three were opposed in varying degrees to changes in the debt. Bingham, for example, believed that neither the principal nor interest of the debt should be reduced until the market rate of interest had been lowered; then, as in Britain, the offer to return the principal, available elsewhere at cheaper rates, would induce the creditors to make a reduction in their claims. In considering the opposing views expressed by such men as Higginson and Bingham, Hamilton faced a problem similar to that posed by assumption of state debts. He had, in short, to make sure that the reduction which was made necessary by revenue limitations and political considerations did not shake the belief of creditors—especially foreign lenders—in the ability of the new government to meet its obligations.
In his Report Hamilton proposed that the debt be scaled down by a reduction of the annual interest payments, and he advanced seven different plans for achieving that objective. Although the decision to scale down the debt apparently grew out of his belief that a reduction of the interest was necessary to bring service on the debt within the range of probable revenues, it should also be pointed out that there were precedents for some of the various plans which he suggested. Both France and England had attained the same ends by somewhat different methods. In France, refunding had been accompanied by an enforced change in the legal rate of interest for all public and private loans, while in England those holding public securities had been offered the alternative of a lower rate of interest or repayment of the principal. The problem had also been considered by various Americans. For example, an undated fragment in the Hamilton Papers, Library of Congress, of a computation in Philip Schuyler’s handwriting appears to give a calculation that is based on the same principle that Hamilton used in his third plan. As early as 1781, Hamilton himself had proposed that a schedule of annuities be incorporated in a plan for a national bank in the same fashion that annuities were used by the Bank of England.74 And the annuity plans, which Hamilton proposed in 1790, along with the added suggestion of a tontine of six classes, were probably adaptations of British precedents. In discussing the advantages of a tontine, the Gazette of the United States stated that William Pitt’s plan for a tontine was so favorable to the public that there was some doubt that the loan would be filled.75 The British plan set a limit upon the amount of the annuity which any survivor could receive; Hamilton’s plan provided for even greater security for the public by making the limit on additions to annuities the reversion of four-fifths of the annuities.
No claim of originality can be made for Hamilton’s proposals for a sinking fund. Although early in the eighteenth century a sinking fund had been established in England, it had been used not only to support public credit but as a source of emergency funds for current expenses. For almost a century European politicians and political theorists had considered the merits of a sinking fund as a method either for reducing a nation’s indebtedness or for supporting its public credit. Blackstone spoke of sinking funds as the “last resort of the nation” for reversing the trend toward increasing debt and eventual bankruptcy;76 and Montesquieu wrote: “When the Credit of the state is not entire, there is new reason for endeavoring to form a sinking fund, because this fund being once established, will soon procure the public confidence.”77 Richard Price, who had strongly advocated the establishment of an inviolable sinking fund in England, stated that a sinking fund of one million dollars per annum would pay off the entire debt of the United States in slightly more than twenty years.78 Necker had advocated the institution of a caisse d’amortissement in his address to the States General as a means of supporting public credit.79
In the years preceding the presentation of Hamilton’s Report to Congress, several Americans had discussed the desirability of a sinking fund. In 1778, Gouverneur Morris had proposed to Congress a sinking fund financed in part by postal revenues;80 and in 1781, Hamilton himself had estimated that a fund of approximately $1,200,000 per annum appropriated to the payment of the debt would be a “sufficient fund for the redemption of the debt within a period of thirty-five years.81 A report to Congress in 1786 stated: “The whole product [from sales of western lands] … is appropriated for the payment of the principal and interest of the national debt, and no part thereof can be diverted to other purposes.”82 Tench Coxe in a pamphlet circulated at the Constitutional Convention wrote: “The general impost … the sale of the lands and every other unnecessary article of public property … would put the sinking and funding of our debts within the power of all the states.”83 Between November, 1787, and October, 1789, several articles in The American Museum had discussed the theory and practice of sinking funds on both sides of the Atlantic.84
In any discussion of the origins of the Report’s proposals for a sinking fund, special mention should be made of the system established by William Pitt in 1786, which, it has been suggested, was a model for Hamilton’s plan85 and which was recommended to Hamilton in a letter from William Bingham.86 But other precedents and suggestions were available to Hamilton. His earlier advocacy of sinking funds antedates the system established by Pitt, and the employment of officials of cabinet rank as commissioners for a sinking fund was made more specific in Gouverneur Morris’s plan of 1789 than in Bingham’s letter.87
Hamilton’s proposals for scaled-down payments in specie rather than full payments in “paper promises” apparently satisfied the demands of most domestic creditors.88 But there still remained the question of the policy that should be pursued toward European creditors. In his Report, Hamilton noted that there was general agreement on the fact that the foreign debt already incurred would be paid according to contract. Madison presumably accepted this view, for in November, 1789, he wrote to Hamilton: “I take it to be the general expectation that the foreign part of the debt is to be put on the most satisfactory footing.…”89 An article in 1787 in The American Museum warned: “But in case of war who would lend us, if our neglecting seven years to pay the sum borrowed will justify our not paying at all.”90 In a similar vein an article in a 1789 issue stated: “It is problematical whether the United States could negotiate a loan at all on the present financial arrangement.”91
Although many Americans agreed that the United States should honor its obligations to foreigners, they did not necessarily endorse Hamilton’s proposals for new European loans. But Hamilton was insistent on this point, and he began his Report by emphasizing—as he had since 1780—that on occasion even the wealthiest nations of Europe had to resort to borrowing.92 Under the Confederation the difficulty in floating foreign loans had been due almost as much to the exorbitant rates of interest that could be obtained by speculation in the domestic debt as to the fear among Europeans that such loans would not be serviced or repaid. Jefferson had recognized the effect on foreign borrowing of foreign speculation in the domestic debt when he attempted to float a European loan in 1788.93 At that time purchase of the foreign loan would have yielded only slightly more than the stipulated five percent on the capital invested, while speculation in the domestic debt could have yielded almost twelve percent. In this connection it should be noted that Hamilton concluded his Report with a warning concerning the probable effects of foreign speculation in the domestic debt if measures were not taken to raise the value of domestic securities.
Those who were opposed to foreign loans emphasized the drain of specie that would be produced by payments to Europe and the possibility of foreign influence or intervention in domestic politics in case of default. Although Hamilton shared the fear of foreign intervention, he believed that the use of foreign specie would help to promote the economic independence of the United States. In his opinion profits derived from the investment of European funds in domestic manufacturing, commerce, and agriculture would more than compensate for the money paid out in interest to foreigners. This was a point to which he, of course, devoted considerable attention in his Report on Manufactures. These views were shared by other Americans, and in an article in The American Museum in August, 1789, the writer stated that after provision had been made for the payment of interest, “money will be attracted from abroad on terms of the usual interest, employed in commerce agriculture and manufacturing, will yield a profit far superior to the rate of interest, will aid in support of additional taxes, make friends and draw immigrants.”94 For his own part, Hamilton left no doubt concerning his opinion of the importance of foreign capital to the United States, for his proposals included requests for European loans amounting to $17,000,000, a sum larger than the total foreign debt outstanding in 1789 including principal and accrued interest.
The fact that Hamilton was not necessarily an innovator is illustrated by his revenue proposals, for he explicitly denied the originality of the plan proposed for raising the money needed to service the foreign and domestic debt. The writings and precedents on which he relied for formulating his views on assumption, discrimination, refunding, and the sinking fund also provided him with ideas for obtaining the funds that would be required to finance such programs. There were, of course, ample precedents in European history for a tariff, and the impost had been a subject of debate and controversy throughout most of the Confederation period. The excise, however, was a more controversial matter. Excise taxes first assumed importance in England under William III. Sir Robert Walpole had subsequently proposed a combination of impost and excise to prevent smuggling. In discussing the controversy raised by Walpole’s excise bill, Adam Smith wrote: “Faction, combined with the interest of smuggling merchants, raised so violent, though so unjust, a clamour against that bill, that the minister thought proper to drop it; and from a dread of exciting a clamour of the same kind, none of his successors have dared to resume the project.”95 Several Americans had also maintained that some method in addition to an impost was needed for raising sufficient amounts of revenue. In 1782, Robert Morris had suggested an excise, and at the end of the decade an article in The American Museum criticized the sole reliance on the impost as provided by the Revenue Act of 1789.96 In 1789 both Madison and Higginson in letters to Hamilton97 suggested that taxes other than the impost should be imposed before the states acquired a de facto right to levy such taxes.
If the controversies raised by Hamilton’s Report have at times tended to obscure the fact that he was not the first to propose many of the ideas which he advanced, the originality of his synthesis cannot be overemphasized. There are few state papers which carry implications for so many aspects of public policy and which at the same time contain such detailed provisions for the implementation of policy. The institutions suggested in the Report, the ideas upon which they were based, and even many of the phrases by which they were described were not always original. But phrases were sometimes put in a context with which their original authors would have found scant sympathy; ideas were sometimes taken from writers whose main emphasis was quite different from Hamilton’s; and the institutions that the Report proposed were integrated to form parts of a political and economic system that can only be described as uniquely Hamiltonian.
Report of the Secretary of the Treasury to the House of Representatives, Relative to a Provision for the Support of the Public Credit of the United States, in Conformity to a Resolution of the Twenty-First Day of September, 1789. Presented to the House on Thursday the 14th Day of January, 1790. Published by Order of the House of Representatives (New-York: Printed by Francis Childs and John Swaine, 1790).
2. The American Museum, VI (October, 1789), 294–95.
4. [New York] Gazette of the United States, December 2, 1789.
5. James O. Wettereau, “Letters from Two Business Men to Alexander Hamilton on Federal Fiscal Policy, November, 1789,” Journal of Economic and Business History, III (August, 1931), 667–72; Miller, Hamilton description begins John C. Miller, Alexander Hamilton, Portrait in Paradox (New York, 1959). description ends , 237, note.
6. Ouverture des Etats-Généraux.
8. Vernon L. Parrington, Main Currents in American Thought (New York, 1930), I, 298, 300; Mitchell, Hamilton description begins Broadus Mitchell, Alexander Hamilton, Youth to Maturity, 1775–1788 (New York, 1957). description ends , 385.
10. David Hume, Political Discourses description begins David Hume, Political Discourses (Edinburgh, printed by R. Fleming for A. Kincaid and A. Donaldson, 1752). description ends (Edinburgh, 1752), 128.
11. Hobbes, Moral and Political Works description begins The Moral and Political Works of Thomas Hobbes of Malmesbury. Never before collected together. To which is prefixed, The Author’s Life, Extracted from that said to be written by Himself, as also from the Supplement to the said Life by Dr. Blackbourne; and farther illustrated by the Editor, with Historical and Critical Remarks on his Writings and Opinions (London, 1750). description ends , 157.
13. Hobbes, Moral and Political Works description begins The Moral and Political Works of Thomas Hobbes of Malmesbury. Never before collected together. To which is prefixed, The Author’s Life, Extracted from that said to be written by Himself, as also from the Supplement to the said Life by Dr. Blackbourne; and farther illustrated by the Editor, with Historical and Critical Remarks on his Writings and Opinions (London, 1750). description ends , 153, 158.
14. Montesquieu, The Spirit of Laws description begins Charles Louis de Secondat, Baron de La Brede et de Montesquieu, The Spirit of Laws, trans. Mr. Nugent (3d ed.: 2 vols.; London: Printed for J. Nourse and P. Vaillant in the Strand, 1758). description ends , II, 100.
15. E. P. Panagopoulos, Alexander Hamilton’s Pay Book (Detroit, 1961), 6.
16. Postlethwayt, Universal Dictionary description begins Malachy Postlethwayt, The Universal Dictionary of Trade and Commerce, Translated from the French of the Celebrated Monsieur Savary, Inspector-General of the Manufactures for the King, at the Customhouse of Paris; With Large Additions and Improvements, Incorporated throughout the Whole Work; Which more particularly accomodate the same to the Trade and Navigation of these Kingdoms, And The Laws, Customs, and Usages, To which all Traders are subject. Second edition (London, Printed for John Knapton, in Ludgate-Street, 2 vols., 1757). description ends , I, 15.
17. Postlethwayt, Universal Dictionary description begins Malachy Postlethwayt, The Universal Dictionary of Trade and Commerce, Translated from the French of the Celebrated Monsieur Savary, Inspector-General of the Manufactures for the King, at the Customhouse of Paris; With Large Additions and Improvements, Incorporated throughout the Whole Work; Which more particularly accomodate the same to the Trade and Navigation of these Kingdoms, And The Laws, Customs, and Usages, To which all Traders are subject. Second edition (London, Printed for John Knapton, in Ludgate-Street, 2 vols., 1757). description ends , I, 385.
19. Emeric de Vattel, The Law of Nations; or Principles of the Law of Nature: applied to the conduct and affairs of Nations and Sovereigns. by M. de Vattel. A Work tending to Display the True Interest of Powers. Translated from the French (London, Printed for J. Coote, at the King’s Arms in Pater-Noster Row, 1759), Vol. II, Book II, Ch. XIV, Sec-tion 216, p. 200.
21. Sparks, Diplomatic Correspondence description begins Jared Sparks, ed., The Diplomatic Correspondence of the American Revolution (Boston and New York, 1829–1830). description ends , XI, 442–59; XII, 211–38.
23. Dorfman, The Economic Mind description begins Joseph Dorfman, The Economic Mind in American Civilization, 1605–1865 (New York, 1946). description ends , I, 287–89; James O. Wettereau, “Letters from Two Business Men to Alexander Hamilton on Federal Fiscal Policy, November, 1789,” Journal of Economic and Business History, III (August, 1931), 667–72; Miller, Hamilton description begins John C. Miller, Alexander Hamilton, Portrait in Paradox (New York, 1959). description ends , 237, note.
26. “Defense of Congress,” July, 1783; “Continental Congress. Report on a Letter from the Speaker of the Rhode Island Assembly,” December 16, 1782.
27. The American Museum, I (February, 1787), 114.
28. The American Museum, I (March, 1787), 180, 182.
29. The American Museum, I (March, 1787), 187–90.
30. The American Museum, I (April, 1787), 318; I (May, 1787), 387–97.
31. The American Museum, I (May, 1787), 417.
32. The American Museum, I (June, 1787), 488; Laws Enacted in the Second Sitting of the Ninth General Assembly of the Commonwealth of Pennsylvania, Which Commenced at Philadelphia, on the First day of February in the year of our Lord, one Thousand Seven Hundred and Eighty-Five (n.p., n.d.) Ch. CLXXXIII, Section xiv, 465.
33. The American Museum, VI (August, 1789), 93.
34. The letters which H received in reply to his request for information include: William Bingham to H, November 25, 1789; Stephen Higginson to H, November 11, 1789; James Madison to H, November 19, 1789; Samuel Osgood to H, November 28, 1789, and January 20, 1790; Benjamin Walker to H, September 15, 1789; John Witherspoon to H, October 26, 1789; Oliver Wolcott, Jr., to H, November 29, 1789.
36. Adams to Benjamin Rush, August 23, 1805 (cited in Manning J. Dauer, The Adams Federalists [Baltimore, 1953] 64, note 44).
38. Hunt and Scott, Debates description begins Gaillard Hunt and James Brown Scott, eds., The Debates in the Federal Convention of 1787 which Framed the Constitution of the United States of America. Reported by James Madison (New York, 1920). description ends , 421.
39. Otis was a member of the Continental Congress in 1787 and 1788.
40. Otis to James Warren, February 27, 1788 (Burnett, Letters description begins Edmund C. Burnett, ed., Letters of Members of the Continental Congress (Washington, 1921–1938). description ends , VIII, 703).
41. Louise Irby Trenholme, The Ratification of the Federal Constitution in North Carolina (New York, 1932), 238.
42. The American Museum, VI (August, 1789), 94.
43. The American Museum, VI (August, 1789), 97.
44. [New York] Gazette of the United States, November 21, 1789.
45. [New York] Gazette of the United States, November 25, 1789.
46. When this letter was written Oliver Wolcott, Sr., was lieutenant-governor of Connecticut.
47. George Gibbs, Memoirs of the Administrations of Washington and John Adams, edited from the Papers of Oliver Wolcott, Secretary of the Treasury (New York, 1846), I, 24–25.
49. Sparks, Diplomatic Correspondence description begins Jared Sparks, ed., The Diplomatic Correspondence of the American Revolution (Boston and New York, 1829–1830). description ends , XI, 442–59; XII, 9.
51. Papers of the Continental Congress, National Archives.
52. See for example H’s motion: “Continental Congress. Motion on Abatements for States in Possession of the Enemy,” February 17, 1783.
53. This attitude prevailed in the final settlement through the use of the ratio for direct taxes under the Constitution. See “An Act to provide more effectually for the settlement of the Accounts between the United States and the individual States (1 Stat. description begins The Public Statutes at Large of the United States of America (Boston, 1845). description ends [August 5, 1790], 178–82).
55. Ferguson, Power of the Purse description begins E. James Ferguson, The Power of the Purse (Chapel Hill, 1961). description ends , 207; and “Notes of Debates in the Continental Congress,” James Madison Papers, Library of Congress. In a note to the debates, Madison lists the attitudes of each state toward measures pending before Congress.
56. Madison to Jefferson, April 23, 1787 (Burnett, Letters description begins Edmund C. Burnett, ed., Letters of Members of the Continental Congress (Washington, 1921–1938). description ends , VIII, 589).
57. North Carolina Delegates to the North Carolina General Assembly, December 15, 1787 (Burnett, Letters description begins Edmund C. Burnett, ed., Letters of Members of the Continental Congress (Washington, 1921–1938). description ends , VIII, 689).
58. The Virginia Delegates to William Heth, April 20, 1788 (Burnett, Letters description begins Edmund C. Burnett, ed., Letters of Members of the Continental Congress (Washington, 1921–1938). description ends , VIII, 723). At this time Heth was serving as commissioner on the part of Virginia for the Illinois claim.
59. Otis to Nathan Dane, October 29, 1788 (Burnett, Letters description begins Edmund C. Burnett, ed., Letters of Members of the Continental Congress (Washington, 1921–1938). description ends , VIII, 811).
60. In 1787, Hamilton had said that if the new government were instituted, “It may then triumph altogether over the state governments and reduce them to an entire subordination, dividing the large states into smaller districts.… If this should not be the case, in the course of a few years, it is probable that the contests about the boundaries of power between the particular governments and the general government and the momentum of the larger states in such contests will produce a dissolution of the Union. This after all seems to be the most likely result” (“Conjectures About the New Constitution,” September 17–30, 1787).
63. Webster, Political Essays description begins Pelatiah Webster, Political Essays on the Nature and Operation of Money, Public Finances, and Other Subjects: Published during the American War, and continued up to the present year, 1791 (Philadelphia, 1791). description ends , 271–72. In this collection this essay is marked, “First published in Philadelphia, Jan. 10, 1785.”
64. The American Museum, I (May, 1787), 412.
65. The American Museum, I (June, 1787), 488.
66. Webster, Political Essays description begins Pelatiah Webster, Political Essays on the Nature and Operation of Money, Public Finances, and Other Subjects: Published during the American War, and continued up to the present year, 1791 (Philadelphia, 1791). description ends , 269–70, note.
69. Hobbes, Moral and Political Works description begins The Moral and Political Works of Thomas Hobbes of Malmesbury. Never before collected together. To which is prefixed, The Author’s Life, Extracted from that said to be written by Himself, as also from the Supplement to the said Life by Dr. Blackbourne; and farther illustrated by the Editor, with Historical and Critical Remarks on his Writings and Opinions (London, 1750). description ends , 154.
70. “Notes of Debates in the Continental Congress,” James Madison Papers, Library of Congress.
73. See Charles A. Beard, ed., The Journal of William Maclay, United States Senator from Pennsylvania, 1789–1791 (New York, 1927), 280; William Patterson’s notes on Senate debates, Bancroft Transcripts, MS Division, New York Public Library; Sparks, Life of Gouverneur Morris description begins Jared Sparks, The Life of Gouverneur Morris (Boston, 1832). description ends , III, 10–15, 17–19; Bingham to H, November 25, 1789.
75. [New York] Gazette of the United States, December 2, 1789.
77. Montesquieu, The Spirit of Laws description begins Charles Louis de Secondat, Baron de La Brede et de Montesquieu, The Spirit of Laws, trans. Mr. Nugent (3d ed.: 2 vols.; London: Printed for J. Nourse and P. Vaillant in the Strand, 1758). description ends , II, 100.
78. The American Museum, VI (October, 1789), 387.
79. Ouverture des Etats-Généraux description begins Ouverture des Etats-Généraux Faite à Versailles le 5 Mai 1789. Discours du Roi; Discours de M. Le Garde des Sceuax; Rapport de M. Le Directeur-Général des Finances, Fait par Ordre du Roi (A Dijon, de l’Imprimerie du Roi, 1789). description ends , 54–57.
83. Tench Coxe, An Enquiry into the Principles on which a Commercial System for the United States of America Should be Founded (Philadelphia, May 12, 1787), 49.
84. See, for example, The American Museum, II (November, 1787), 245; IV (November, 1788), 411.
85. Charles Franklin Dunbar, Economic Essays (New York, 1904), 82–89.
90. The American Museum, I (May, 1787), 420.
91. The American Museum, VI (August, 1789), 97.
94. The American Museum, VI (August, 1789), 94.
95. Smith, Wealth of Nations description begins Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, The Fourth Edition, with Additions in Two Volumes (Dublin, Printed for W. Colles, R. Moncrieffe, G. Burnet, W. Wilson, C. Jenkin, L. White, H. Whitestone, P. Byrne, J. Cash, W. McKenzie, 1785). description ends , II, 418.
96. See Robert Morris to the President of Congress, July 29, 1782 (Sparks, Diplomatic Correspondence description begins Jared Sparks, ed., The Diplomatic Correspondence of the American Revolution (Boston and New York, 1829–1830). description ends , XII, 230); The American Museum, VI (August, 1789), 96; “An Act for laying a Duty on Goods, Wares, and Merchandises imported into the United States,” (1 Stat. description begins The Public Statutes at Large of the United States of America (Boston, 1845). description ends 24–27 [July 4, 1789]).