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214 PART 3 REVOLUTION AND REPUBLICAN CULTURE, 1754–1800

Hamilton’s system of public credit
(millions of dollars)
Debts Assets
$75.6 million in bonds sold mostly to the wealthy,
creating a permanent national debt
Total $42.4 + $21.5 + $11.7
debt
National war debt (redemption War debts Owed to Excise and
of Confederation securities) assumed foreigners other revenue
from states
$1.2 + $4.4 = $5.6 million gross revenue
Customs
revenue

$4.6 $1.0 Net revenue for government spending
Annual interest owed to bondholders on debt

FIGURE 7.1 Hamilton’s Fiscal Structure, 1792
As treasury secretary, Alexander Hamilton established a national debt by issuing government bonds and using
the proceeds to redeem Confederation securities and assume the war debts of the states. To pay the annual
interest due on the bonds, he used the revenue from excise taxes and customs duties. Hamilton deliberately
did not attempt to redeem the bonds because he wanted to tie the interests of the wealthy Americans who
owned them to the new national government.

give enormous profits to speculators, who had bought up depreciated securities.
For example, the Massachusetts firm of Burrell & Burrell had paid $600 for Con-
SKILLS & PROCESSES federation notes with a face value of $2,500; it stood to reap a profit of $1,900. Such
windfall gains offended a majority of Americans, who condemned the speculative
MAKING CONNECTIONS practices of capitalist financiers. Equally controversial was Hamilton’s proposal to pay
Why did Hamilton believe a national the Burrells and other note holders with new interest-bearing securities, thereby cre-
debt would strengthen the United ating a permanent national debt and tying the interests of wealthy creditors to the
States and help to ensure its survival?
survival of the new nation.
Patrick Henry condemned this plan “to erect, and concentrate, and perpetuate
a large monied interest” and warned that it would prove “fatal to the existence of
American liberty.” James Madison demanded that Congress recompense those who
originally owned Confederation securities: the thousands of shopkeepers, farmers,
and soldiers who had bought or accepted them during the dark days of the war. How-
ever, it would have been difficult to trace the original owners; moreover, nearly half
the members of the House of Representatives owned Confederation securities and
would profit personally from Hamilton’s plan. Melding practicality with self-interest,
the House rejected Madison’s suggestion.
Hamilton then proposed that the national government further enhance pub-
lic credit by assuming the war debts of the states. This assumption plan, costing $22
million, also favored well-to-do creditors such as Abigail Adams, who had bought
depreciated Massachusetts government bonds with a face value of $2,400 for only a
few hundred dollars and would reap a windfall profit. Still, Adams was a long-term
investor, not a speculator like Assistant Secretary of the Treasury William Duer.
Knowing Hamilton’s intentions in advance, Duer and his associates secretly bought
up $4.6 million of the war bonds of southern states at bargain rates. Congressional
critics condemned Duer’s speculation. They also pointed out that some states had
already paid off their war debts; in response, Hamilton promised to reimburse those
states. To win the votes of congressmen from Virginia and Maryland, the treasury
chief arranged another deal: he agreed that the permanent national capital would be
built along the Potomac River, where suspicious southerners could easily watch its
operations. Such astute bargaining gave Hamilton the votes he needed to enact his
redemption and assumption plans.
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