Editor’s Note: The following is excerpted with permission from James Madison, now available from Basic Books, a member of the Perseus Books Group. Copyright © 2011.
We look back at certain past moments as idylls of unity. They may feel that way even to the people involved in them: We have won, or we are about to begin; we are all pulling together. But politics never rests, even among friends and allies. Even when they agree, there are still slight shades of difference that may deepen over time. New or ignored questions arise on which they differ greatly. And there is always ambition. Washington was president, with the approval of everybody. But there would come a time when someone else would be president. Who would that be? The second tier could not all occupy the office together.
Washington’s team was no sooner assembled than it began to pull apart. The two causes were Alexander Hamilton and world politics.
The House had asked Hamilton, as soon as he stepped into his job, to come up with a plan for balancing the nation’s books. He responded in mid-January 1790, with the Report on Public Credit, 20,000 words with eleven appendices, which was read aloud to the House in one day. Madison wrote Jefferson at Monticello that it was “too voluminous” to be sent by mail.
Hamilton’s report addressed the new nation’s very real debt crisis. Although the United States was not quite a deadbeat nation — its creditworthiness on the bourses of Amsterdam and Antwerp, the financial nerve centers of the world, had risen since the ratification of the Constitution — it was still struggling to pay its Revolutionary War debts. Some states, particularly South Carolina and Massachusetts, were even worse off than the country as a whole (Massachusetts’s efforts to tax its way out of debt had driven its farmers to rebellion). Other states had addressed their debts by shifty means — North Carolina had simply written off the bulk of its debt; Rhode Island had been making ends meet by printing paper money.
Most American IOUs had changed hands since the war’s end — a problem that seemed, to many, moral, not economic. Everyone agreed that the country’s debts to its veterans were debts of honor. But was a merchant, who had accepted a soldier’s back-pay certificate at a discounted price, owed the same consideration? What about a speculator, who had bought the discounted certificate from the merchant, or directly from the soldier?
Hamilton proposed that the Treasury assume all government debts — the United States’ and those of the states — and pay them back at common rates, not discriminating between original holders and later purchasers. He supported assumption on the grounds of order: “collision,” “confusion,” and “interfering regulations” would result if the federal and state governments scrambled to settle their obligations separately but simultaneously. He opposed discrimination because investors would not tolerate it. Who in the future would ever pay a decent price for a U.S. bond if the new government began its life by picking and choosing whose debts it would honor, and whose it would shortchange? Hamilton knew, from experience as well as study, how investors thought and markets worked.
The Report on Credit caused a storm of speculation. If the United States was really about to pay what it owed, now was the time to snap up IOUs while they were still undervalued. Investors got busy. “I call not at a single house,” wrote Sen. William Maclay (Pa.) in his diary, “but traces of speculation in certificates appear.” Speculators ranged beyond the drawing rooms of New York into the hinterlands, where they trolled for clueless debt holders: “Two expresses with very large sums of money,” Maclay noted, were said to be “on their way for North Carolina.”
The report also caused a storm of criticism: Hamilton’s character, Maclay added, was “damn[ed] forever.” Hamilton had kept his own counsel during the weeks he devised his plan, but Maclay and others were convinced that heavy bettors had inside information. For their part, speculators tried to read Hamilton’s silences for clues.
Early in February Madison began unfolding his own views in the House. Hamilton’s old ally joined his critics. Madison backed discrimination, having heard the same tales of shyster speculators as Maclay: They were “exploring the interior and distant parts of the union,” he wrote Jefferson, “to take advantage of the ignorance of [original] holders.”