Term Paper on "National Debt Jefferson vs. Hamilton"

Term Paper 9 pages (2374 words) Sources: 0

[EXCERPT] . . . .

Macro Vision of Jefferson vs. Hamilton

The debate and sparring that took place in the 1790s between the Federalists and the anti-Federalists had a huge impact on the progression of American history. Alexander Hamilton led the Federalists, and he had married into the wealthy Schuyler family, representing the urban mercantile interests of the seaports; the anti-Federalists, led by Thomas Jefferson, was the mouthpiece for the rural and southern interests. The debate between Hamilton and Jefferson concerned the power of the federal government vs. that of the states' governments, with the Federalists favoring the former and the anti-Federalists advocating states' rights.

Hamilton sought a strong central government acting in the interests of commerce and industry. He brought to public life a love of efficiency, order and organization. In response to the call of the House of Representatives for a plan for the "adequate support of public credit," he laid down and supported principles not only of the public economy, but of effective government.

Hamilton pointed out that America must have credit for industrial development, commercial activity and the operations of government. It must also have the complete faith and support of the people. There were many who wished to repudiate the national debt or pay only part of it. Hamilton, however insisted upon full payment and also upon a plan by which the federal government took over the unpaid debts of the states incurred during the Revolution."

Hamilton also created a Bank of the United States, with the ability to establish branches in different parts of the country. Hamilton also sponsored a national mint, and debated in favor of tariffs, using an iteration of an "infant industry" argument: that limited protection of new firms can help sponsor the acceleration of competitive national industries. These economic and international relations strategies -- placing the credit of the federal government on a firm foundation and giving it all the revenues it needed -- increased commerce and industry, and created a solid corps of businessmen who stood firmly behind the fledgling United States government.

Jefferson, on the other hand, famously argued for a decentralized agrarian republic - in other words, states' rights. Jefferson agreed with the necessity of the power of a strong central government in foreign relations, but he did not want it overbearing in other respects. Hamilton's great aim was more efficient organization, whereas Jefferson once said "I am not a friend to a very energetic government." Hamilton was in constant fear of blatant anarchy and argued for order; Jefferson, in stark contrast, feared tyranny - most definitely influenced by the French Revolution's motives -- and constantly argued for freedom.

Indeed, the fledgling United States was in dire need of both disparate influences. It was to the nation's benefit that it had both Hamilton and Jefferson and could, in time, fuse and reconcile their philosophies. "One clash between them, which occurred shortly after Jefferson took office as secretary of state, led to a new and profoundly important interpretation of the Constitution. When Hamilton introduced his bill to establish a national bank, Jefferson objected. Speaking for those who believed in states' rights, Jefferson argued that the Constitution expressly enumerates all the powers belonging to the federal government and reserves all other powers to the states. Nowhere was it empowered to set up a bank."

Hamilton argued that because of the incredible amount of necessary detail, a huge body of powers had to be intimated by the general clauses of the United States Constitution, and one of these authorized Congress to "make all laws which shall be necessary and proper" for carrying out other powers specifically granted. Indeed, the Constitution authorized the national government to levy and collect taxes, pay debts and borrow money and the national bank, according to Hamilton, would directly assist in executing these functions efficiently. Congress, therefore, was allowed, under its implied powers, to create such a bank and its itinerant powers, according to Alexander Hamilton. Washington and the Congress accepted Hamilton's view -- and an incredibly important critical precedent for an expansive interpretation of the federal government's authority.

General History of National Debt During Hamilton's and Jefferson's Times

The national debt found its inception during the Revolutionary War. Within a week of the Battle of Bunker Hill in 1775, the Continental Congress, following several colonial precedents, allowed the issue of $2 million of bills of credit known as Continentals to finance the war. According to Sylla's research, "By the end of 1779, $241.6 million of Continentals had been authorized. U.S. loan certificates, foreign loans, state-issued bills of credit, and other evidences of public debt completed the stock of borrowing for the Revolution. The worst inflation in U.S. history resulted from the overissue of Continentals, and the bills became nearly valueless by 1780. The other evidences of revolutionary debt also depreciated greatly in value. After the war, starting in 1782, Congress authorized commissioners to travel around the country to examine claims against Congress and the Continental army and revalue them in terms of hard money. The revalued debt amounted to some $27 million."

According to Sylla, under the old Articles of Confederation, the United States Congress simply enjoyed no independent power to raise revenue. Simultaneously, the individual states, with debts to reckon with of their own, were understandably and predictably hesitant to respond to Congress' repeated requisitions for increased federal revenue.

Consequently, interest payments in the 1780s were met by issuing certificates of interest indebtedness. According to Sylla's research, "The Constitution of 1787 solved the revenue problem by giving the new federal government the power to tax, but by the beginning of 1790 the indebtedness of the United States, including arrears of interest, had increased to $13.2 million of foreign debt and $40.7 million of domestic debt, while state governments had outstanding debts of $18.3 million. In 1789, as the new government under the Constitution was being organized, the market priced the existing evidences of debt at only fifteen to thirty cents on the dollar because of uncertainties about if, how, and when they would be repaid." Quite simply and anachronistically put, the new United States had a poor credit rating.

In January 1790, Alexander Hamilton, chosen as the first American secretary of the treasury, submitted his Report on the Public Credit to the fledgling United States Congress. Hamilton called for funding nearly all the government's obligations, including the state debts, into long-term federal securities payable in specie -- in other words, hard money.

After much argument in Congress and beyond, 1790 saw the adoption of Hamilton's debt proposals. According to Sylla, "The foreign debt was fully funded, as was most of the domestic debt, although interest payments were deferred on part of the latter and another portion carried interest rates below the market rate. Only the depreciated Continental bills, nearly valueless, were funded at less than face value; one hundred dollars of Continentals were accepted as payment for one dollar of the new bonds. The most controversial part of Hamilton's plan, because some states had paid off the bulk of their debts while others had not, was the assumption of remaining state debts by the federal government."

To build support among Thomas Jefferson and his followers for the plan, Hamilton and the Federalists compromised to locate the future capital of the nation on the banks of the Potomac.

Hamilton's refunding plan was actually very generous to the United States' creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789 with new federal bonds that soon rose toward par. Hamilton justified such generosity by arguing in his report to Congress that his plan would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy.

And truly, history, arguably, proved Hamilton correct. The American government was nearly bankrupt in the 1780s; in 1803 it had no trouble borrowing $11.25 million on short notice, mostly from foreign subscribers, to finance the Louisiana Purchase, which essentially doubled the size of the nation. According to Sylla's research, "By that time nearly 60% of the national debt had been purchased by foreigners, who in effect lent money to Americans in return for the government's promises to repay them in the future. Within the United States, debt owners could sell their federal securities for money or use them as collateral for bank loans. In retrospect, Hamilton's plan was a political and economic masterstroke for the new Republic."

Daniel Webster later commented, Hamilton "touched the dead corpse of the public credit, and it sprung upon its feet."

The later history of the national debt is traceable through an examination of the expansion and contraction of the debt/GNP ratio. Indeed, a national debt of $75 million in 1791, when Hamilton's funding plan was implemented, may seem miniscule by modern standards, but it added up to about 40% of the gross national product then, and a debt/GNP ratio that high was not again in U.S. history… READ MORE

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