Alexander Hamilton - Ron Chernow (2005)

Chapter 15. VILLAINOUS BUSINESS

As Alexander Hamilton began to stitch together his grand plan for a vigorous central government, the executive branch was still tiny and embryonic. On his first day at Treasury, Hamilton likely wandered through a set of empty rooms; he soon installed an elegant mahogany desk with caryatids—female figures—carved into its spindly legs. He was to perform an amazing amount of work on that desktop. Hamilton employed no ghostwriters for his countless speeches, articles, and reports, and almost all of his letters have come down to posterity in his own hand.

As master of Mount Vernon, George Washington presided over a larger staff than he did as president. From the outset, Hamilton supervised the biggest department, which soon had thirty-nine employees, compared to five for State, generating instant fears that he was building a large bureaucracy as his personal power base. The pace at Treasury was positively torrid compared to that at War. “When [Henry] Knox arrived in New York City and took up his official duties,” notes biographer North Callahan, “he found little to do at first but become acquainted with his one secretary and one clerk, who at that time constituted the entire personnel of the War Department.”1 As the first treasury secretary, Hamilton had to devise rudimentary systems for bookkeeping, checking, and auditing, many of which endured for generations. Hamilton threw himself into the most mundane tasks, as if glorying in the managerial challenge. To pedestrians passing him in the street, the treasury secretary could seem an aloof, cerebral man, shut up inside his thoughts, seldom making eye contact with strangers. One New York newspaper joked that anyone hoping to be treasury secretary should “appear in the streets but seldom and then let him take care to look down on the pavement, as if lost in thought profound.”2

Few intervals of leisure relieved the work pressure of these first months. After Angelica left for England, Eliza and the children retreated to Albany, leaving Hamilton alone in New York, trapped beneath piles of work. “I am a solitary lost being without you all,” he wrote to Eliza, “and shall with increasing anxiety look forward to our reunion.”3 When Eliza returned later in the month, she and Alexander had the thrilling experience of going with George and Martha Washington to the John Street Theater to see Richard Brinsley Sheridan’s comedy The Critic. As the politicians entered, the orchestra struck up the “President’s March,” and the audience gave them a standing ovation. Eliza always remembered with amusement another time when a Miss McIvers showed up at one of Martha Washington’s receptions sporting an enormous headdress of ostrich feathers. When this fashion accessory caught fire from the chandelier, Major William Jackson, then an aide to the president, leaped to her side and extinguished the blaze by clapping the feathers between his hands.

Such outings were rare during Hamilton’s harried first days in office. He had to create a customs service on the spot, for customs duties were to be the main source of government revenue. During his second day in office, he issued a circular to all customs collectors, demanding exact figures of the duties accumulated in each state. When they sent back suspiciously low numbers, Hamilton, who knew something about smuggling from St. Croix, suspected that it must be rife along the eastern seaboard, leading him to the next logical step. “I have under consideration the business of establishing guard boats,” he told one correspondent in perhaps the first recorded allusion to what would turn into the Coast Guard.4

Hamilton’s appetite for information was bottomless. To his port wardens, he made minute inquiries about their lighthouses, beacons, and buoys. He asked customs collectors for ship manifests so he could ascertain the exact quantity and nature of cargo being exported. The whole statistical basis of government took shape under his command. In a significant decision, he decided that customs revenues could be paid not just in gold and silver but with notes from the Bank of New York and the Bank of North America, an innovation that began to steer the country away from use of coins and toward an efficient system of paper money.

Hamilton had always been punctual—“I hate procrastination in business,” he once said—and lost no time assembling a first-rate staff, imbued with a sense of public service.5 On the day he was nominated, five assistants, including auditor Oliver Wolcott, Jr., of Connecticut, were confirmed as well. When Samuel Meredith of Pennsylvania was appointed treasurer, the hard-driving secretary lectured him, “I need not observe to you how important it is that you should be on the ground as speedily as possible.”6

For his first assistant secretary, Hamilton picked his witty, elegant, vivacious friend William Duer, who had married Lord Stirling’s daughter, Lady Kitty. The choice of Duer was to have grievous consequences for Hamilton, for he was an inveterate speculator, and his later scandals besmirched Hamilton’s reputation. Duer had grown up in England and studied classics at Eton. After his father’s death, he worked as a teenager for the East India Company in Bengal, where the climate injured his health. After spending time on a family plantation in Antigua, he bought land in upstate New York, not far from the Schuyler property in Saratoga, and sold lumber to the British Navy. Because he had befriended Myles Cooper in England, Duer came to know Hamilton while he was still studying at King’s College.

The association with Duer became so supremely damaging to Hamilton that it later mystified many friends. But the two men were compatible in their political opinions and ebullient style, and Duer’s résumé amply qualified him for the job. While still in England, he had been an outspoken Whig who championed the colonists’ grievances and plumped for reforms to avert a revolt. During the Revolution, he supplied goods to the Continental Army, served in the Continental Congress, and attended the convention that drafted the New York State Constitution. He was smart enough that Hamilton had recruited him to write essays for The Federalist, only to reject his two submissions. At the time Hamilton picked him, Duer had just completed three years as secretary to the old Board of Treasury. In 1789, Hamilton cajoled him into staying on by creating the assistant secretary post expressly for him.

Unfortunately, William Duer suffered from a severe case of moral myopia and always found rather blurry the line between public service and private gain. That autumn, Hamilton was about to make decisions that would dramatically affect the value of outstanding government securities, so secrecy and integrity were obligatory among his colleagues. It later turned out that Duer had been assembling a huge stake in government securities for several years. Among other faults, the indiscreet Duer babbled to his cronies about Hamilton’s scheme for funding government debt—the sort of priceless insider gossip that moves markets. Just a week after Hamilton took office, Noah Webster sent to a speculator in Amsterdam secret details of the treasury secretary’s funding scheme, attributing them to “the outdoor talk of Col. Duer, the Vice-Secretary.”7 Senator William Maclay, a tireless if dyspeptic diarist, recorded rumors of congressmen speculating in state debt and said that “nobody doubts but all commotion originated from the Treasury. But the fault is laid on Duer.”8

Unfortunately, Duer’s actions fed unjust scuttlebutt that the new Treasury Department was a sink of corruption. In reality, as soon as he took office, Hamilton established high ethical standards and promulgated a policy that employees could not deal in government securities, setting a critical precedent for America’s civil service. Hamilton divested himself of any business investments that might create conflicts of interest. Even later, as a private citizen, he said that his own “scrupulousness” had prevented him from “being concerned in what is termed speculation.”9 This made his blindness to Duer’s shameless machinations the more bewildering. Hamilton was an extremely perceptive judge of character, and William Duer was one of the few cases in which his acute vision seems to have been blinkered.

Because Jefferson hadn’t yet arrived in New York to take up his duties as secretary of state, Hamilton wasn’t shy about acting as his surrogate. A British diplomat named Major George Beckwith, an aide to the governor-general of Canada, sounded out Philip Schuyler about an unofficial meeting with the new treasury secretary. Hamilton’s pro-British proclivities were well known. When Hamilton met secretly with Beckwith in October, they had to proceed cautiously, since Britain still lacked an official diplomatic presence in America. So the discussion qualified as unofficial, although Hamilton reassured Beckwith that his words reflected “the sentiments of the most enlightened men in this country. They are those of General Washington, I can confidently assure you, as well as of a great majority in the Senate.”10 For security reasons, Beckwith assigned Hamilton the code number “7” in reporting their talks back to London—a precaution that later led to preposterous charges that Hamilton was a British agent. In fact, Washington knew about some of these clandestine talks and received summaries from Hamilton.

In his wide-ranging chats with Beckwith, Hamilton touched upon the prospect of a commercial treaty with England and left little doubt about his sympathies: “I have always preferred a connection with you to that of any other country. We think in English and have a similarity of prejudices and of predilections.”11 He shared Beckwith’s chagrin over proposals that Madison had submitted to Congress to discriminate against British shipping. “The truth is,” Hamilton confided of Madison, “that although this gentleman is a clever man, he is very little acquainted with the world. That he is uncorrupted and incorruptible, I have not a doubt.”12

Hamilton’s projected vision of a commercial alliance between American and British commerce, far from being fawning, was laced with subtle threats and enticements. With his premonition of future American greatness, he made clear that Britain should reckon with American purchasing power: “I do think we are and shall be great consumers.”13 He foresaw that America, if now junior to Britain in status, would someday rival her as an economic power: “We are a young and growing empire with much enterprise and vigour, but undoubtedly are, and must be for years, rather an agricultural than a manufacturing people.”14 As a raw-materials producer, Hamilton noted, the United States currently formed a perfect fit with England, the manufacturing colossus. On the other hand, the northern states were making headway in manufacturing, and if Britain thwarted America, such threats to Britain’s dominance would grow apace. If spurned by England, the United States could also forge an alliance with France that would threaten British possessions in the West Indies.

Far from being a pro-British lackey, much less a high-level spy, Hamilton stubbornly defended U.S. interests at every turn. He was bargaining with Beckwith, not groveling. He insisted that the United States should be able to trade with the British West Indies. He wanted England to heed the peace treaty and relinquish its western forts in the Ohio River valley. The one place where Hamilton deviated from official policy was in applauding Britain’s refusal to hand over slaves who had defected during the Revolution. “To have given up these men to their masters, after the assurances of protection held out to them, was impossible,” Hamilton told Beckwith.15

At the end of their talk, Hamilton hinted that the United States would soon send an emissary to England to continue talks about the matters discussed. On October 7, Washington discussed such an appointment with Hamilton and Jay and accepted Hamilton’s suggestion that Gouverneur Morris go to England. Within weeks of his confirmation as treasury secretary, Hamilton had already staked out a position as the administration’s most influential figure on foreign policy.

That Hamilton had time to worry about foreign policy is a wonder. The meeting with Beckwith was a fleeting respite from the giant task that engrossed him that fall: the report on public credit that Congress wanted by January. He had to sum up America’s financial predicament and recommend corrective measures to deal with the enormous public debt left over from the Revolution. Hamilton solicited opinions, but his report was not the product of a committee. As with his fifty-one Federalist essays, he put in another sustained bout of solitary, herculean labor. Closeted in his study day after day, he scratched out a forty-thousand-word treatise—a short book—in slightly more than three months, performing all the complex mathematical calculations himself.

While other members of the revolutionary generation dreamed of an American Eden, Hamilton continued to ransack British and French history for ideas. He had inordinate admiration for Jacques Necker, the French finance minister who had argued that government borrowing could strengthen military prowess, but it was England that shone as Hamilton’s true lodestar in public finance. Back in the 1690s, the British had set up the Bank of England, enacted an excise tax on spirits, and funded its public debt—that is, pledged specific revenues to insure repayment of its debt. During the eighteenth century, it had vastly expanded that public debt. Far from weakening the country, it had produced manifold benefits. Public credit had enabled England to build up the Royal Navy, to prosecute wars around the world, to maintain a global commercial empire. At the same time, government bonds issued to pay for the debt galvanized the economy, since creditors could use them as collateral for loans. By imitating British practice, Hamilton did not intend to make America subservient to the former mother country, as critics claimed. His objective was to promote American prosperity and self-sufficiency and make the country ultimately less reliant on British capital. Hamilton wanted to use British methods to defeat Britain economically.

In preparing his report, Hamilton was eclectic in his sources. He had clearly plumbed David Hume’s Political Discourses, which admitted that public debt could vitalize business activity. Montesquieu had stressed that states should honor financial obligations, “as a breach in the public faith cannot be made on a certain number of subjects without seeming to be made on all.”16 Thomas Hobbes had emphasized the sacredness of contracts in transfers of securities, arguing that people entered into such transactions voluntarily and must accept all the consequences—a seemingly arcane point that shortly had explosive consequences for Hamilton’s career. During the Revolution, Hamilton had stuffed Malachy Postlethwayt’s Universal Dictionary of Trade and Commerce into his satchel, and now he used it once again. Postlethwayt stressed that no country could borrow money at attractive interest rates unless creditors could freely buy and sell its bonds: “Such is the nature of public credit, that nobody 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.”17 Inviolable property rights lay at the heart of the capitalist culture that Hamilton wished to enshrine in America.

As he toiled over the report, Hamilton queried several contemporaries, including John Witherspoon, the Princeton president who had rebuffed his request for accelerated study. Hamilton must have been amused by the educator’s deferential reply: “It is very flattering to me that you suppose I can render any assistance by advice in the important duties of your present station.”18 Aware that the American Revolution had produced a nation averse to taxes, Hamilton asked Madison, “What further taxes will be least unpopular?”19 At this point, Hamilton and Madison still shared a sense of political camaraderie. One lady remembered seeing them together that summer “turn and laugh and play with a monkey that was climbing in a neighbor’s yard.”20 But the letter that Madison now wrote to Hamilton gave the first preview of a fateful schism between them. Madison did not want a long-term government debt, fearing that such securities would fall into foreign hands: “As they have more money than the Americans and less productive ways of laying it out, they can and will pretty generally buy out the Americans.”21 When Madison registered this muted dissent, Hamilton had no idea that such differences of opinion were soon to demolish their friendship.

Had Hamilton stuck to dry financial matters, his Report on Public Credit would never have attained such historic renown. Instead, he presented a detailed blueprint of the government’s fiscal machinery, wrapped in a broad political and economic vision. From the opening pages, Hamilton reminded readers that the government’s debt was the “price of liberty” inherited from the Revolution and had special claims on the public purse.22 The states had balked at taxing citizens during a revolt against onerous taxes, and Congress had lacked the power to levy taxes, leaving borrowing as the only solution. The outstanding debt was now enormous: $54 million in national debt, coupled with $25 million in state debt, for a total of $79 million.

Hamilton argued that the security of liberty and property were inseparable and that governments should honor their debts because contracts formed the basis of public and private morality: “States, like individuals, who observe their engagements are respected and trusted, while the reverse is the fate of those who pursue an opposite conduct.”23 The proper handling of government debt would permit America to borrow at affordable interest rates and would also act as a tonic to the economy. Used as loan collateral, government bonds could function as money—and it was the scarcity of money, Hamilton observed, that had crippled the economy and resulted in severe deflation in the value of land. America was a young country rich in opportunity. It lacked only liquid capital, and government debt could supply that gaping deficiency.

The secret of managing government debt was to fund it properly by setting aside revenues at regular intervals to service interest and pay off principal. Hamilton refuted charges that his funding scheme would feed speculation. Quite the contrary: if investors knew for sure that government bonds would be paid off, the prices would not fluctuate wildly, depriving speculators of opportunities to exploit. What mattered was that people trusted the government to make good on repayment: “In nothing are appearances of greater moment than in whatever regards credit. Opinion is the soul of it and this is affected by appearances as well as realities.”24 Hamilton intuited that public relations and confidence building were to be the special burdens of every future treasury secretary.

How exactly the debt should be funded was to be the most inflammatory political issue. During the Revolution, many affluent citizens had invested in bonds, and many war veterans had been paid with IOUs that then plummeted in price under the confederation. In many cases, these upright patriots, either needing cash or convinced they would never be repaid, had sold their securities to speculators for as little as fifteen cents on the dollar. Under the influence of his funding scheme, with government repayment guaranteed, Hamilton expected these bonds to soar from their depressed levels and regain their full face value.

This pleasing prospect, however, presented a political quandary. If the bonds appreciated, should speculators pocket the windfall? Or should the money go to the original holders—many of them brave soldiers—who had sold their depressed government paper years earlier? The answer to this perplexing question, Hamilton knew, would define the future character of American capital markets. Doubtless taking a deep breath, he wrote that “after the most mature reflection” about whether to reward original holders and punish current speculators, he had decided against this approach as “ruinous to public credit.”25 The problem was partly that such “discrimination” in favor of former debt holders was unworkable. The government would have to track them down, ascertain their sale prices, then trace all intermediate investors who had held the debt before it was bought by the current owners—an administrative nightmare.

Hamilton could have left it at that, ducking the political issue and taking refuge in technical jargon. Instead, he shifted the terms of the debate. He said that the first holders were not simply noble victims, nor were the current buyers simply predatory speculators. The original investors had gotten cash when they wanted it and had shown little faith in the country’s future. Speculators, meanwhile, had hazarded their money and should be rewarded for the risk. In this manner, Hamilton stole the moral high ground from opponents and established the legal and moral basis for securities trading in America: the notion that securities are freely transferable and that buyers assume all rights to profit or loss in transactions. The knowledge that government could not interfere retroactively with a financial transaction was so vital, Hamilton thought, as to outweigh any short-term expediency. To establish the concept of the “security of transfer,” Hamilton was willing, if necessary, to reward mercenary scoundrels and penalize patriotic citizens. With this huge gamble, Hamilton laid the foundations for America’s future financial preeminence.

As his report progressed, Hamilton tiptoed through a field seeded thickly with deadly political traps. The next incendiary issue was that some debt was owed by the thirteen states, some by the federal government. Hamilton decided to consolidate all the debt into a single form: federal debt. He wrote, “The Secretary, after mature reflection on this point, entertains a full conviction that an assumption of the debts of the particular states by the union and a like provision for them as for those of the union will be a measure of sound policy and substantial justice.”26 The repercussions of this decision were as pervasive as anything Alexander Hamilton ever did to fortify the U.S. government.

Why was this assumption of state debts by the federal government so crucial? For starters, it would be more efficient, since there would be one overarching scheme for settling debt instead of many small, competing schemes. It also reflected a profound political logic. Hamilton knew that bondholders would feel a stake in preserving any government that owed them money. If the federal government, not the states, was owed the money, creditors would shift their main allegiance to the central government. Hamilton’s interest was not in enriching creditors or cultivating the privileged class so much as in insuring the government’s stability and survival. Walter Lippmann later said of Hamilton, “He used the rich for a purpose that was greater than their riches.”27 On the other hand, he was naïve in thinking that the rich would always have a broader sense of public duty and would somehow be devoid of self-interest, instead of being captives to an even larger set of interests.

There was a further advantage to the assumption of state debt. The Constitution had granted the federal government an exclusive right to collect import duties. If states had to pay off debts, too, they might contest that monopoly and try to skim off money from their import duties, re-creating the chaos under the Articles of Confederation. Under his scheme, Hamilton believed, the states would lose incentive to compete with the federal government for major revenue sources.

Hamilton now had to decide whether state debt should be paid off at the original interest rates. He knew this would be impossible to accomplish without stiff taxes, which might precipitate a rebellion or impoverish the country. He also did not want to give too bountiful a reward to speculators who had rounded up state debt at cheap prices from small investors. So he decided that foreign debt, which bore interest rates of only 4 or 5 percent, was to be paid in full. Domestic debt, with a 6 percent interest rate, posed a greater dilemma.

To relieve financial pressure on the government, Hamilton decided on a partial repudiation of the domestic debt, though he certainly did not phrase it that way. He gambled that creditors would accept lower interest rates in exchange for rock-solid securities that could not be redeemed by the government if interest rates fell (in modern parlance, noncallable bonds). To entice domestic creditors, he offered a long list of voluntary options, only some of which were enacted. They could receive, for instance, part of their payment at the original 6 percent interest rate and part in western land, enabling them to participate in the appreciation of frontier property. Or they could take payment at a lower interest rate but stretched over a longer period. To enhance such choices, investors would be paid quarterly, not annually. Most significantly, creditors would be paid with taxes pledged for that express purpose. Hamilton’s supporters praised the byzantine brilliance of this program; for his foes, it smacked of impenetrable mumbo jumbo, designed to hoodwink the public.

To make good on payments, Hamilton knew he would have to raise a substantial loan abroad and boost domestic taxes beyond the import duties now at his disposal. He proposed taxes on wines and spirits distilled within the United States as well as on tea and coffee. Of these first “sin taxes,” the secretary observed that the products taxed are “all of them in reality luxuries, the greatest part of them foreign luxuries; some of them, in the excess in which they are used, pernicious luxuries.”28 Such taxation might dampen consumption and reduce revenues, Hamilton acknowledged, but he doubted this would happen, because “luxuries of every kind lay the strongest hold on the attachments of mankind, which, especially when confirmed by habit, are not easily alienated from them.”29

In the report’s final section, Hamilton reiterated that a well-funded debt would be a “national blessing” that would protect American prosperity. He feared this statement would be misconstrued as a call for a perpetual public debt—and that is exactly what happened. For the rest of his life, he was to express dismay at what he saw as a deliberate distortion of his views. His opponents, he claimed, neglected a critical passage of his report in which he wrote that he “ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States that the creation of debt should always be accompanied with the means of extinguishment.” The secretary regarded this “as the true secret for rendering public credit immortal.”30 Three years later, Hamilton testily reminded the public that he had advocated extinguishing the debt “in the very first communication” which he “ever made on the subject of the public debt, in that very report which contains the expressions [now] tortured into an advocation [sic] of the doctrine that public debts are public blessings.”31 Indeed, in Hamilton’s writings his warnings about oppressive debt vastly outnumber his paeans to public debt as a source of liquid capital. Five years after his first report, still fuming, he warned that progressive accumulation of debt “is perhaps the NATURAL DISEASE of all Governments. And it is not easy to conceive anything more likely than this to lead to great and convulsive revolutions of Empire.”32

To make sure the debt was extinguished over time, Hamilton proposed the creation of a sinking fund, financed by post-office revenues and manned by the government’s chief officers. (A sinking fund is a repository, set up apart from the general budget, for revenues to pay off debt.) It would sequester revenues from the sudden whims of grasping politicians who might want to raid the Treasury for short-term gain. The sinking fund would retire about 5 percent of the debt each year until it was paid off. Because outstanding bonds currently traded below their original face value, such purchases would benefit the government as the securities rose in price. Thus, the government would profit from rising prices alongside private investors. Hamilton concluded, “In the opinion of the Secretary…it ought to be the policy of the government to raise the value of stock to its true standard as fast as possible.”33 Little did he know how quickly he was to succeed or how much trouble this success was to bring in its wake.

Even as Hamilton compiled this magnum opus, the prices of government securities streaked upward in anticipation of its publication, the psychological effect being even more pronounced than Hamilton had expected. For the treasury secretary, it was a stunning affirmation of confidence in the new government. Interest rates were tumbling and faith in American credit was being restored.

The exact contents of Hamilton’s report remained a mystery until mid-January. When Congress convened, so-called jobbers—or wealthy dealers in securities—swarmed around Federal Hall and buttonholed members, trying to ferret out details of Hamilton’s program. Speculators could reap huge profits if they divined Hamilton’s intentions correctly, and at New York dinner parties they hung on his every word. Many rich merchants had already posted agents to backwoods areas of the south to scoop up depreciated state debt that would become more valuable if the federal government assumed the debt. Amid this atmosphere of contagious greed, Hamilton deflected attempts to pry loose information from him. In November, his Virginia friend Henry Lee wrote to inquire if Hamilton could divulge any information about his plan. Lee said that he hoped his request was not improper. In response, Hamilton was the very model of a scrupulous treasury secretary:

I am sure you are sincere when you say you would not subject me to an impropriety. Nor do I know that there would be any in my answering your queries. But you remember the saying with regard to Caesar’s wife. [That she should be beyond suspicion.] I think the spirit of it applicable to every man concerned in the administration of the finances of a country. With respect to the conduct of such men, suspicion is ever eagle-eyed and the most innocent things are apt to be misinterpreted.34

On the eve of filing his report, Hamilton succumbed to jitters. “Tomorrow I open the budget and you may imagine that today I am very busy and not a little anxious,” he wrote to Angelica, who soon began to send him financial treatises from London bookshops.35 Skittish and high-strung, Hamilton knew that his proposals would spark frenzied debate and that legislative foes were sharpening their knives. When he informed Congress that he was ready to deliver his report, a controversy flared over whether he should do so in person or on paper. So great was the residual fear of executive encroachment on the legislature that Hamilton was not allowed to present his text in person, so the fifty-one-page pamphlet was read aloud to the House of Representatives on January 14. It was so lengthy that, by the end, many representatives sat there in stupefied silence.

Much later, Daniel Webster rhapsodized about Hamilton’s report as follows: “The fabled birth of Minerva from the brain of Jove was hardly more sudden or more perfect than the financial system of the United States as it burst forth from the conception of Alexander Hamilton.”36 This was the long view of history and of many contemporaries, but detractors were immediately vocal. They were befuddled by the complexity of Hamilton’s plan and its array of options for creditors. Opponents sensed that he was moving too fast, on too many fronts, for them to grasp all his intentions. He had devised his economic machinery so cunningly that its cogs and wheels meshed perfectly together. One could not tamper with the parts without destroying the whole. Hamilton later said of this ingenious structure, “Credit is an entire thing. Every part of it has the nicest sympathy with every other part. Wound one limb and the whole tree shrinks and decays.”37

Perhaps the most settled prejudice Hamilton had to combat was a visceral sense that any program even faintly resembling British practice was pernicious. It was not just that a large funded debt seemed reminiscent of England’s. It was also the fear that Hamilton was switching the power balance in government, tilting it from the House of Representatives, the “people’s” branch, to the executive branch. Senator William Maclay recorded his horror at Hamilton’s program: “He recommends indiscriminate funding and in the style of a British minister has sent down his bill.”38 Beyond this assertion of Treasury power, critics feared outright corruption of legislators by the executive. Maclay and others suspected that several congressmen dabbled in government securities. This “villainous business,” Maclay concluded, will “damn the character of Hamilton as a minister forever.”39 The myth of Alexander Hamilton as the American Mephistopheles was being born. Maclay saw New York financiers as satanic henchmen in collusion with Hamilton to foster “the most abandoned system of speculation ever broached in our country.”40

Hamilton denied that congressmen were speculating in government securities. “As far as I know, there is not a member of the legislature who can properly be called a stock-jobber or a paper dealer,” he assured Washington. Of those who did own such securities, most had held them since the war, and Hamilton saw nothing wrong with this: “It is a strange perversion of ideas…that men should be deemed corrupt and criminal for becoming proprietors in the funds of their country. Yet I believe the number of members of Congress very small who have ever been considerably proprietors in the funds.”41

Maclay scoffed at such claims and saw Congress in an unholy league with New York speculators: “The whole town almost has been busy at it and, of course, all engaged in influencing the measures of Congress. Nor have the members [of Congress] themselves kept their hands clean from this dirty work…. [H]enceforth we may consider speculation as a congressional employment.”42 Maclay was sincere in his misgivings and yet, like many of Hamilton’s naysayers, basically ignorant of finance. When the sinking fund began buying up government debt later in the year, Maclay descried a plot to line the pockets of speculators. He didn’t seem to realize that such market operations reduced debt and drove down interest rates, benefiting the entire economy. Maclay and other critics were correct that the Hamiltonian system didn’t necessarily reward the just or the virtuous, yet they missed the larger social benefits that accrued to society.

Hamilton’s Report on Public Credit had an electrifying effect. Securities began to change hands with a speed never before seen in America. Robert R. Livingston observed that the speculative craze “invaded all ranks of people,” even infecting hardened antifederalists such as George Clinton and Melancton Smith.43 Staggered by this rampant speculation, Congressman James Jackson dubbed the perpetrators “rapacious wolves seeking whom they may devour.”44 Jackson stood up on the House floor in late January to protest the “spirit of havoc, speculation, and ruin” that had followed Hamilton’s report and charged that many speculators had profited from advance knowledge of it. He alleged that three vessels loaded with speculators had departed from New York within the past fortnight, bound for the south to sweep up state debt from unsuspecting investors who had not yet heard about Hamilton’s program. “My soul arises indignant at the avaricious and immoral turpitude which so vile a conduct displays,” he thundered.45

Another critic, Benjamin Rush of Philadelphia, exhibited the often untutored indignation that greeted Hamilton’s plan. Making the exaggerated claim that Congress was now “legislating for British subjects,” Rush objected not just to public debt but to all debt as harmful to society. “Let us not overvalue public credit,” he warned. “It is to nations what private credit and loan offices are to individuals. It begets debt, extravagance, vice, and bankruptcy…. I sicken every time I contemplate the European vices that the Secretary’s gambling report will necessarily introduce into our infant republic.”46

Compounding Hamilton’s problems was that his report crystallized latent divisions between north and south. There was a popular conception (to Hamilton, a gross misconception) that the original holders of government paper were disproportionately from the south and that the current owners who had “swindled” them were from the north. Hamilton denied that any such regional transfer took place, contending that the debt was now concentrated in northern hands only because much of the war had been fought there and more northern soldiers had received debt certificates. Still, the impression persisted that crooked northern merchants were hoodwinking virtuous southern farmers. It didn’t help that many New Yorkers in Hamilton’s own social circle—James Duane, Gouverneur Morris, William Duer, Rufus King—had accumulated sizable positions in government debt. Philip Schuyler alone had a sixty-seven-thousand-dollar stake and was reportedly so alarmed by Senate diatribes against Hamilton’s plan that his hair stood “on end as if the Indians had fired at him.”47 And it didn’t seem to occur to Hamilton that legislators, like Caesar’s wife, should also be beyond suspicion. From the controversy over his funding scheme, we can date the onset of that abiding rural fear of big-city financiers that came to permeate American politics.

Hamilton knew that many current creditors who would profit from his measures were less than angelic. His vision, however, was fixed on America’s future, not the partisan bickering of the moment. He was laying the groundwork for a great nation. “The general rules of property, and all those general rules which form the links of society, frequently involve in their ordinary operation particular hardships and injuries,” he told Washington. “Yet the public order and the general happiness require a steady conformity to them. It is perhaps always better that partial evils should be submitted to than that principles should be violated.”48

On February 8, 1790, the House of Representatives began to debate Hamilton’s Report on Public Credit, which monopolized most of the second session of the First Congress. Maclay’s diary tells us that the edgy Hamilton had started lobbying a week earlier, flitting from one member to the next: “Mr. Hamilton is very uneasy, as far as I can learn, about his funding system. He was here early to wait on the Speaker and I believe spent most of his time in running from place to place among the members.”49 Many congressmen experienced Hamilton’s influence as an unrelenting pressure. To mental vigor, he added organizational bustle. A day after the House debate began, Maclay got a visit from another early Hamilton mentor, the theologian Dr. John Rodgers, who expounded Hamilton’s system “as if he had been in the pulpit…. The [Society of the] Cincinnati is another of [Hamilton’s] machines and the whole city of New York.”50 Before long, the disgruntled Maclay berated Hamilton’s “tools” and “gladiators” for badgering him without remorse.51 Americans had rejected a parliamentary system on the British model, forbidding executive officers from sitting in the legislature, but Hamilton’s ubiquitous presence in Congress seemed to violate that understanding.

In fashioning his program, Hamilton had counted on loyal backing from James Madison, now a Virginia congressman. Ever since his inaugural address, President Washington had consulted regularly with Madison on matters ranging from etiquette to the selection of ambassadors. By dint of his seminal role at the Constitutional Convention, his Bill of Rights, and his work on The Federalist Papers, Madison was the most influential congressman.

If Hamilton thought Madison would support his plans, he was rudely undeceived on February 11, 1790, when the Virginian made a speech attacking the funding scheme. Madison was prepared to allow current holders of government debt to profit from past appreciation of their government securities. But as to future appreciation resulting from Hamilton’s program, he wanted that windfall to go to the original holders, no matter how long ago they had sold off their securities. For Madison, these original holders had not surrendered faith in government, as Hamilton alleged, but had merely sold in desperation. He thought that blameless patriots were being victimized, and it disturbed his sense of justice that speculators were buying up debt from ignorant country folk. Madison saw a betrayal of the American Revolution in the making.

Hamilton was flabbergasted. He had laid out all the practical problems that made such “discrimination” unworkable, especially the missing documents that would be needed to trace original holders. And Madison’s proposal would damage the invaluable principle that buyers of securities should reap all future dividends and profits. In Hamilton’s view, government interference with this right amounted to confiscation of private property. Madison’s arguments had a strong sentimental appeal to patriotic veterans, while Hamilton’s contained a core of hardheaded practicality.

As the debate dragged on, the Federal Hall galleries filled with speculators wagering on the outcome, and tension built as a vote approached on Madison’s proposal. On February 20, Abigail Adams told her sister that she was to attend the great debate on discrimination: “It is thought that tomorrow will be the decisive day with respect to that question…. On this occasion I am going for the first time to the House.”52 Hamilton had marshaled his forces effectively, whereas Madison had proven clumsy and inflexible. Madison’s “pride seems of that kind which repels all communication,” a disappointed Maclay wrote on February 22. “The obstinacy of this man has ruined the opposition” to Hamilton’s plan.53 That day, the House defeated Madison’s motion by a thirty-six to thirteen vote. But in an ominous sign for Hamilton, nine of the thirteen dissenting votes came from Virginia, the most populous state.

Madison was beginning to drift away from Hamilton. Although he claimed that he objected only to parts of Hamilton’s program, he admitted privately to more fundamental grievances, telling one correspondent, “I go on the principle that a public debt is a public curse.”54 Whereas the “Publius” team of Hamilton, Madison, and Jay had seen the supreme threat to liberty coming at the state level, Madison now began to direct his criticism at federal power lodged in the capable hands of the treasury secretary. John Adams, among others, seemed disillusioned with Madison as a legislator. “Mr. Madison is a studious scholar,” the vice president told a friend in April, “but his reputation as a man of abilities is a creature of French puffs. Some of the worst measures, some of the most stupid motions, stand on record to his infamy.”55

For Hamilton, Madison’s apostasy was a painful personal betrayal. One of Hamilton’s supporters, minister-cum-speculator Manasseh Cutler, told a friend that Hamilton regarded Madison’s opposition to his plan as “a perfidious desertion of the principles which [Madison] was solemnly pledged to defend.”56 This falling-out was to be more than personal, for the rift between Hamilton and Madison precipitated the start of the two-party system in America. The funding debate shattered the short-lived political consensus that had ushered in the new government. For the next five years, the political spectrum in America was defined by whether people endorsed or opposed Alexander Hamilton’s programs.

Even as Madison flailed at Hamilton’s funding scheme, a seemingly unrelated drama was being enacted in Congress over the slavery issue. Quakers from New York and Pennsylvania had submitted a petition to abolish the slave trade, while the Pennsylvania Society for Promoting the Abolition of Slavery, led by eighty-four-year-old Benjamin Franklin, filed a more aggressive petition to abolish slavery itself. On this sensitive issue, southern delegates flamed up in righteous anger. Aedanus Burke of South Carolina accused the Quakers of “blowing the trumpet of sedition” and asked that the galleries be cleared of spectators whose ears might be defiled by such heresy.57 James Jackson of Georgia said that the Bible itself had approved slavery. The vehemence of southern legislators made plain that, on this issue, they would brook no compromise. William Loughton Smith of South Carolina reminded fellow legislators that southern states had ratified the Constitution on the proviso that it would not interfere with slavery. Any attempt to renege on this pledge would threaten the survival of the union.

This fracas was more than a footnote in the country’s early history. Slavery was gradually fading away in many parts of the north, but with each passing year it became more deeply embedded in the southern economy. As Fisher Ames of Massachusetts complained to a friend of southern indignation, “Language low, indecent, and profane has been used…. The Southern gentry have been guided by their hottempers and stubborn prejudices and pride in regard to Southern importance and negro slavery.”58

The abolitionist petitions were referred to a House committee. When this group reported back in March, it cited the twenty-year grace period for the slave trade adopted by the Constitutional Convention, meaning that Congress lacked authority to eliminate the slave trade before 1808, much less to emancipate the slaves. Whether from reluctant pragmatism or outright cowardice, abolition was now officially dead. After the House committee report, Madison, who had just masterminded the Bill of Rights, told Edmund Randolph that the south should bury the slavery issue with benign neglect. “The true policy of the Southern members,” he wrote approvingly, “was to let the affair proceed with as little noise as possible.”59 Madison was torn between intellectual sympathy for abolitionism and fear of irate southern reactions. Whether or not he was more motivated by a desire to save the union than to preserve slavery, his views would increasingly be colored by personal and regional self-interest as he curried favor with his Virginia constituents.

Tabling the slavery issue had been a precondition of union in 1787 and now again in 1790. Though a passionate slavery critic, Hamilton knew that this inflammatory issue could wreck the union. He couldn’t be both the supreme nationalist and the supreme abolitionist. He certainly couldn’t push through his controversial funding program if he stirred up the slavery question, which was probably a futile battle anyway. So this man of infinite opinions grew mute on that all-important matter, though he may have taken a secret swipe at slaveholders the following year. Historian Philip Marsh has argued that Hamilton, using the pen name “Civis” in a newspaper piece of February 23, 1791, penned the following telling sarcasm to Madison and Jefferson: “As to the negroes, you must be tender upon that subject…. Who talk most about liberty and equality…? Is it not those who hold the bill of rights in one hand and a whip for affrighted slaves in the other?”60 If Hamilton wrote this, he was updating a gibe by the English radical Thomas Day, who had written in 1776, “If there be an object truly ridiculous in nature, it is an American patriot, signing resolutions of independence with the one hand and with the other brandishing a whip over his affrighted slaves.”61

The bipartisan decision to shelve the slavery issue had profound repercussions for Hamilton’s economic measures, for it spared the southern economy from criticism. In the 1790s, America’s critical energies were trained exclusively on the northern economy and the financial and manufacturing system devised by Hamilton. This became immediately apparent in the heated debate over his funding system, which allowed southern slaveholders to proclaim that northern financiers were the evil ones and that slaveholders were the virtuous populists, upright men of the soil. It was testimony to the political genius of Thomas Jefferson and James Madison that they diverted attention from the grisly realities of southern slavery by casting a lurid spotlight on Hamilton’s system as the paramount embodiment of evil. They inveighed against the concentrated wealth of northern merchants when southern slave plantations clearly represented the most heinous form of concentrated wealth. Throughout the 1790s, planters posed as the tribunes of small farmers and denounced the depravity of stocks, bonds, banks, and manufacturing—the whole wicked apparatus of Hamiltonian capitalism.

When Congress returned to Hamilton’s Report on Public Credit in March, after debating the abolitionist petitions, many southerners seemed more outraged over the powers that Hamilton planned to give the federal government. If the treasury secretary welded the states into a strong union through his assumption plan, might not that strengthen the federal power to meddle with slavery? And did it therefore not behoove the south to resist Hamilton’s plan and shore up states’ rights? The extent of southern ire that spring was shown dramatically in the erratic behavior of Aedanus Burke. Burke had a shock of thick, white hair, a long, pointed nose, and a piercing gaze that expressed his fiery nature. That spring, he found himself in a political bind because he supported Hamilton’s assumption program even though many of his southern constituents opposed it.

To reclaim his political reputation, Burke pounced on a clever diversionary tactic. On March 31, 1790, he launched a tirade in the House against the July 4 eulogy that Hamilton had pronounced on General Nathanael Greene nine months earlier. From that speech, he plucked the line in which Hamilton referred to the militias as “the mimickry of soldiership.” Burke found this reference insulting and countered that many southern militiamen had “sacrificed their lives at the holy altar of liberty. Their graves are to be seen scattered over our glades and woodlands, they are now no more.”62 Then casting his eyes on the visitors’ gallery—since it was packed with pretty ladies, he supposed Hamilton sat among them—he blasted the treasury secretary in language that crossed the boundaries of political decorum: “In the face of this Assembly and in the presence of this gallery…I give the lie to Col. Hamilton.”63 This blatant affront was so shocking that congressmen interrupted Burke’s outburst with loud calls for order.

Their main reason for alarm was that Burke, in branding Hamilton a liar, had violated his personal sense of honor. Like many contemporary politicians, Hamilton still inhabited two worlds: the modern world of constitutional law and the old feudal order based on honor and dignity. Unless retracted, any direct challenge to one’s honor had to be settled outside the legal realm on the field of honor—the dueling ground. Senator William Maclay, who had stopped by the House to eavesdrop on the debate, noted in his diary “a violent personal attack on Hamilton by Judge Burke of South Carolina, which the men of the blade say must produce a duel.”64

Some observers didn’t take seriously Burke’s insulting behavior. William Loughton Smith contended that Burke’s “mode of speaking and his roughness only excite laughter.”65 Hamilton, however, wasn’t laughing. Some members of the legislature did not yet know his irrepressible pugnacity or how fiercely he guarded his reputation. Fisher Ames observed that no man, “not the Roman Cato himself, was more inflexible on every point that touched, or only seemed to touch, integrity and honour” than Hamilton.66 When Smith discussed the imbroglio with him, Hamilton drew a distinction between criticism of his policies and his person: “He said he should at all times disregard any observations applied to his public station as Secretary of the Treasury, but that this was not to be passed over.”67 Smith also noted that Burke was “amazingly intimate” with Governor George Clinton and reportedly courting one of his daughters. “Clinton hates Hamilton mortally and has probably set on Burke,” he conjectured.68

The very next day, Hamilton sent off a short, heated letter to Burke. He claimed that the quote from the eulogy had been taken out of context and that the full sentence claimed that General Greene was “embarrassed by small fugitive bodies of volunteer militia, the mimickry of soldiership.” He had made a statement not about the South Carolina militia, but about irregular volunteers in the north: “Having thus, Sir, stated the matter in its true light, it remains for you to judge what conduct, in consequence of the explanation, will be proper on your part.”69

Before the day was out, Burke replied to Hamilton in a manner that ratcheted up the pressure. In a letter designed for consumption back home, Burke lauded the bravery of the southern militias. He knew that he had to explain why he had waited nine months to broadcast his charges. To have done so at the time, he told Hamilton, “would have been downright madness,” given Hamilton’s popularity.70 In the charged political atmosphere of the moment, the dispute now festered, and factions formed around the principals. “The town is much agitated about a duel between Burke and Hamilton,” Maclay reported. “So many people concerned in the business may really make the fools fight.”71

A party of six congressmen arbitrated an end to the dispute by securing two letters: one from Hamilton in which he insisted that he meant no dishonor to the southern militias, and a second from Burke in which he accepted this statement and apologized to Hamilton. It was all artfully orchestrated according to the unspoken rules of “affairs of honor.” The uproar backfired on Burke, who found himself demoted in influence.

The affair wasn’t altogether a victory for Hamilton. In his memorial speech for General Greene, he had taken gratuitous swipes at southern soldiers and had not paid sufficient attention to the pieties of democratic politics. Burke made him feel the sting of public opinion; it wasn’t the last time Hamilton paid a price for needless indiscretion. The contretemps again demonstrated that beneath his invincible facade, Hamilton was still the hypersensitive boy from the West Indies. His combativeness was always more than just political calculation, for he brooded obsessively about slights to his honor. This supreme rationalist, who feared the passions of the mob more than any other founder, was himself a man of deep and often ungovernable emotions.