Revolutionary War soldiers had been paid for their service
with paper IOUs whose postwar value plummeted in the 1780s
as it seemed increasingly unlikely that the Articles of Confederation
government would ever redeem them. Strapped for cash in the
hard economic times, many desperate veterans sold off their
notes to speculators - principally urban merchants well stocked
with hard coin - who snapped them up for as little as ten
cents on the dollar. These speculators well knew that plans
were afoot to strengthen the federal government, thus enhancing
its capacity to (among other things) pay its debts. Many were
themselves key participants in these initiatives, which came
to fruition with ratification of the Constitution.
Speculation in the debt accelerated with the establishment
of a new government, and again with Hamilton's appointment
as its Treasury Secretary, as he was determined to fund the
outstanding obligations - issue new notes to replace the old
- at full face value plus accumulated interest, handing a
massive windfall profit to those who'd bought on the cheap.
One of the biggest speculators was William Duer, Hamilton's
number two at the Treasury, who passed along to his cronies
(and foreign backers) what Chernow calls "the sort of
priceless insider gossip that moves markets". Another
market emerged in notes issued by the individual states, which
Hamilton intended to have the federal government assume. Amid
[Chernow again] an "atmosphere of contagious greed,"
speculators in the know dispatched agents to backwoods areas
to scoop up depreciated state paper from those out of the
Hamilton formally presented his Report on Public Credit to
Congress in 1790, precipitating a firestorm of opposition,
led by Jefferson and James Madison, precisely on the grounds
that his funding and assumption plan was not "fair".
Madison thought speculation in the debt was "wrong, radically
& morally & politically wrong." Jefferson believed
"speculators had made a trade of cozzening [notes] from
the holders by the most fraudulent practices," and that
"immense sums were thus filched from the poor and ignorant...."
Both urged splitting the windfall profits between current
and original holders.
Hamilton responded that veterans who had sold out were entitled
to nothing further, having shown insufficient faith in the
country's future, while speculators, having risked their capital,
should be rewarded accordingly. He knew full well that their
risk had been minimal (especially in the case of insiders),
and that many were [in Chernow's words] "mercenary scoundrels."
But Hamilton was dead set on rehabilitating the fledgling
country's battered credit rating, and regaining access to
local and foreign capital markets. He believed this required
guaranteeing "security of transfer" - the right
of those who bought government paper to all subsequent profit
Hamilton's position is a defensible one, especially if one
uses a Leninist moral calculus that privileges the systemic
over the individual, the long range over the short term, but
that doesn't mean his opponents' claims to superior "fairness"
can simply be ignored. Nor can his critics be dismissed out
of hand as financial pre-moderns, fearful of money and credit,
not least because their reservations were as much political
as economic. As Chernow notes, "Jefferson did not exaggerate
Hamilton's canny capacity to clothe political objectives in
technical garb. There were hidden agendas buried inside Hamilton's
economic program, agendas that he tended to share with high-level
colleagues but not always with the public."
Those who denounced Hamilton's funding and assumption proposals,
as well as his establishment of a national bank, feared he
was out to forge a class of "paper aristocrats"
- a financial elite, tightly linked to a powerful Treasury.
(As Adams argued, "paper wealth has been the source of
aristocracy in this country, as well as landed wealth, with
a vengeance.") And they were right. Hamilton's goal was
to grapple to government a phalanx of the new nation's wealthiest
citizens, by giving them a powerful stake in its success and
longevity. Again, an understandable strategy, but again, the
fear of Jefferson and many others - that the government-backed
rich might prove a menace to republican government - was equally
understandable and should be acknowledged.
Finally, the claim that Hamilton's financial program saved
the country from becoming a backward banana republic is untenable.
Yes, funding and assumption had important ramifications, particularly
in opening the way for new foreign loans, though their immediate
legacy was a mountain of debt that would soon have become
unsupportable had revenues not arrived. Revenues - the byproduct
of prosperity and economic growth - did arrive beginning in
the mid 1790s, increasing dramatically in the late '90s and
early 1800s. But the influx was the result, not of Hamiltonian
wizardry, but of the outbreak of the Napoleonic Wars in 1793,
which generated a massive European demand for neutral America's
grain, and of England's burgeoning industrialization, which
generated a massive demand for American (slave-produced) cotton.
Booming agricultural exports made growing imports possible,
and with them an abundant flow of tariff-generated funds to
the Treasury (customs duties constituted 94% of federal income
in 1795). Here and elsewhere, the exhibit misleads by focusing
too myopically on Hamilton's Life, and paying insufficient
attention to his Times.3
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