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.”
He revealed his views of assumption at the end of the month. “We must go much further” than Hamilton’s plan, Madison told the House. He proposed a form of super-assumption, arguing that states that had already paid off their debts be compensated for what they had done. In effect, their debts would be paid twice — once by the states themselves, then again by the federal government to the states.
Madison was giving moral answers to economic questions: All states had borne an equivalent share of the revolutionary struggle, so pay them all, but some individual debt holders had done less than others, so pay them less. Hamilton was giving moral answers, too, but his were drawn from the practices of commerce and banking as they had developed over time.
Discrimination, for all the passions it roused, was voted down at the end of February — enough congressmen shared Hamilton’s knowledge of the way the world worked, or had speculated in government paper themselves. But the debate on assumption, lengthened by Madison’s resistance, dragged on through the spring. Madison’s super-assumption proposal “hangs heavy on us,” Rep. Fisher Ames (Mass.) complained in March. “If he is a friend” of assumption, “he is more troublesome than a declared foe.”
But assumption was not the only game in Congress, and Madison and Hamilton were not the only players. Another question of equal importance arose as summer approached, and it seemed that both might be resolved together.
New York City had invested a lot of money in being the nation’s capital, hiring Pierre L’Enfant, the French engineer and architect, to redesign Federal Hall. But other localities wanted the privilege. Philadelphia, the former capital, was still the country’s largest city. George Washington wanted a site on the Potomac. Southerners might find it onerous to bring their slaves to a free city (Philadelphia) or a slave city with a Manumission Society (New York).
The liveliest account of what happened next is by Jefferson. On his way to the president’s house on Broadway one day, Jefferson ran into Hamilton, “somber, haggard and dejected.” “Even his dress [was] uncouth and neglected,” Jefferson wrote. If Congress did not pass assumption, Hamilton told Jefferson, he might as well resign. The secretary of state offered “to bring Mr. Madison and Col. Hamilton to a friendly discussion of the subject” at dinner at his lodgings on Maiden Lane (which was also Madison’s street). When the two guests arrived, Jefferson told them he did not understand the topic himself but “encouraged them to consider the thing together.”
The result of their considering was that Madison, while continuing to vote against Hamilton’s plan for assumption, would stop fighting it, thus allowing it to pass. In return, the capital would move to the Potomac, after a temporary relocation in Philadelphia (which Hamilton would use as bait to bring Pennsylvania’s congressional delegation into the bargain).
Neither Madison nor Hamilton ever described the dinner, and neither had Jefferson’s appetite for hoarding nuggets of anecdote and gossip. Jefferson wrote down this little nugget two years after the fact. One detail — Hamilton, the careful parvenu, being badly dressed — seems unlikely, and another — Jefferson, not understanding an important question — seems impossible. Washington’s preference for a Potomac site, certain to have been a factor in everyone’s calculations, is concealed. Jefferson also omitted to mention a key side arrangement: Hamilton pledged that Virginia would get a better deal on those of its war debts that were still unpaid. Yet, since events worked out as if Jefferson’s dinner-table deal had been struck — Congress voted to move the capital to Philadelphia, then to the Potomac, and Hamilton’s version of assumption squeaked through at last — something like it must have happened.
The fights over Hamilton’s first financial plans were momentous — the federal government took a step toward solvency and hideous D.C. summers — but they were politics as usual. Hamilton had won something, but so had Madison: Virginia was in a better position fiscally and, with the future capital in or near it, geographically. More fights were coming. In December 1790, Congress returned to Philadelphia, not to Independence Hall, but to the new county courthouse, renamed Congress Hall, next door. There Hamilton unfolded his next plan: a national bank, with a capital of $10 million.
There were a few banks in the United States already, including the Bank of New York, which Hamilton had helped set up a few years earlier, but their combined capital was only $2 million. Hamilton wanted a new bank to inject liquidity into a cash-starved economy and to draw Americans, both high rollers and ordinary people, more deeply into saving and investing. His Report on Public Credit had responded to an immediate problem. His proposal for a national bank was meant to push the country into a new financial world.
One-fifth of the money for the new bank would come from government deposits of customs duties and tax receipts; the rest would be supplied by selling shares to private investors. The constitutional justification for Hamilton’s bank came from Article I, Section 8, which gave Congress the power “to borrow Money on the credit of the United States.” When Congress needed to borrow, the bank would supply the loans.
Once again, Madison opposed him. He did not see the need for a bank, though his objections on this score were a bit hazy: The government, he said, could raise money from individuals and existing banks, and by collecting its taxes “a little in advance.”
He had a more powerful objection, however: Hamilton’s bank was unconstitutional. The power to borrow could not be construed into the power to charter a bank to make loans. Madison made an early argument for strict construction, attacking “the diffuse and ductile terms which had been found requisite to cover the stretch of power” in Hamilton’s bill.
There was an objection to Madison’s objection, and the bank’s supporters made it. Article I, Section 8, a long enumeration of Congress’s powers, included one last power: “to make all Laws which shall be necessary and proper” for executing everything that had gone before. The Federalist No. 44 had elaborated: “Whenever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power necessary for doing it, is included.” The author of No. 44, as it happened, was James Madison. In the debate over Hamilton’s bank, Rep. Elias Boudinot (N.J.) even quoted No. 44, assuming that it had been written by Hamilton.
Madison defended himself against himself. Hamilton’s bank was not a particular power necessary for accomplishing a general power but a stretch to a stretch to another stretch. “Mark the reasoning on which the validity of the bill depends. To borrow money is made the end and accumulation . . . of capital, implied as the means. The accumulation of capital . . . is then the end, and a bank implied as the means. The bank is then the end, and a charter of incorporation . . . implied as the means. If implications, thus remote and thus multiplied, can be linked together, a chain may be formed that will reach every object of legislation.”
Congress rejected Madison’s reasoning and passed a bank bill in February 1791. But there was another hurdle yet: the president’s veto. Washington had not yet exercised his veto power. Jefferson and Attorney General Edmund Randolph urged him to do it now. Washington talked the bank bill over with Madison, “listen[ing] favorably as I thought to my views,” and asking Madison to prepare a veto message. But he also asked Hamilton for his opinion, which Hamilton gave in a 15,000-word essay finished in an all-night session. At the end of February, Washington signed the bill.
This time Hamilton had gotten all he wanted, Madison and Jefferson nothing. Was this to be the shape of politics as usual in the new administration?
— Richard Brookhiser is a senior editor of National Review .