Here is a quick, one-sentence quiz: what was the first major American political crisis after the implementation of the Constitution? Here’s a hint: it destroyed the relationship between Alexander Hamilton and James Madison, who had collaborated on the Federalist Papers and helped to secure the ratification of the Constitution. Here’s another hint: it involved a lot of people who were upset about the way that wealthy financiers—about one percent of the population—pursued huge profits at the expense of the other ninety-nine percent.
Give up? Well, here’s the story:
In 1789, the new American government had a debt of about $54 million, most of which was contracted to finance the Revolutionary War. Alexander Hamilton, the new Treasury Secretary, spent his first months in office devising a plan to pay this debt off. Everyone agreed that the debt to foreign countries—$12 million dollars, mainly to France and Holland—had to be paid in full. The trickier part of the debt involved the $42 million in government bonds that had been issued to American citizens, largely in payment for military or other service. Hamilton proposed that the holders of these bonds be paid the full value, plus interest, of the bonds that they held.
The problem was that most of the hardworking soldiers and suppliers who originally accepted the bonds had since sold them to speculators, often for pennies on the dollar. Madison, who was one of the most influential members of the House of Representatives, felt that it was unfair to allow speculators to reap huge profits simply because they had the money to buy up the bonds when they were cheap. He proposed an alternative plan that would require the government to seek out the original holders of the bonds and give them a share of the profits. “Madison sought no total reduction in the payments due from the government,” explains his biographer Ralph Ketchum. “Rather, he proposed a redistribution of the payments, to benefit those who had suffered from the government’s earlier defaults, and to scale down the profits of the speculators who had gathered the depreciated certificates.”[i]
The House of Representatives overwhelmingly agreed with Hamilton, who felt that redistributing the income from the bonds would be injurious to the credit of the United States. Madison’s proposal was defeated on February 22, 1790, by a resounding vote of 36-13. Thomas Jefferson was en route from Monticello when the vote was taken, but when he arrived in New York City a week later, he quickly became incensed at what his Treasury colleague had done. This controversy, as he later wrote in his “Anas,” set him on a course of opposition to Hamilton’s financial programs for the rest of his time in the Cabinet:
It is well known that, during the war, the greatest difficulty we encountered was the want of money or means, to pay our soldiers who fought, or our farmers, manufacturers & merchants who furnished the necessary supplies of food & clothing for them. After the expedient of paper money had exhausted itself, certificates of debt were given to the individual creditors, with assurance of payment, so soon as the U. S. should be able. But the distresses of these people often obliged them to part with these for the half, the fifth, and even a tenth of their value; and Speculators had made a trade of cozening them from the holders, by the most fraudulent practices and persuasions that they would never be paid. In the bill for funding & paying these, Hamilton made no difference between the original holders, & the fraudulent purchasers of this paper. . . . Immense sums were thus filched from the poor & ignorant, and fortunes accumulated by those who had themselves been poor enough before. Men thus enriched by the dexterity of a leader, would follow of course the chief who was leading them to fortune, and become the zealous instruments of all his enterprises.[ii]
The debt-payment debate drew the battle lines that would define the next generation of American politics. Hamilton stood firmly on the side of the investors, and of the undeniable market principle that a thing belongs to whoever purchased it. No good American capitalist today would suggest anything else.
Madison and Jefferson, on the other hand, insisted that the government not help the rich get richer at the expense of the poor. And they didn't particularly care what Adam Smith, or Ludwig Von Mises, thought about the matter.