What Would Alexander Hamilton Do About Debt? Side With Creditors

Should the government help debtors?Imagine yourself a Massachusetts minuteman during the American Revolution. The state government promised you fair payment for your military service when you enlisted.

 

You starved, bled and froze through several cold winters for your new country. But on payday, you didn't get paid in currency. All you got was a war bond, just an IOU from the state. Out of patriotism, you accepted the bond, although it was worthless for feeding your family at home.

 

An investor from Boston tells you, “I will give you $100 in gold for that $600 state bond.” You're desperate, so you sell. The speculator stands to make a 500% profit while you go back to the front lines.

 

By the end of the Revolution, such speculators had acquired most of the bonds from the soldiers and other citizens who held them. Shoemakers, tailors and gunsmiths accepted bonds to outfit soldiers. When the maturation date arrived, the speculators expected full payment. The state was compelled to raise taxes to pay off the war debt.

 

You, the original bondholder, lost money, while the investors would be paid handsomely with your taxes, which you could barely afford. The ex-soldiers cried foul.

 

The bankers "sacrificed nothing"

 

“We did the bleeding and the dying against the British, not the bankers," was their cry. "The bankers sacrificed nothing in the fight for independence! It’s wrong to let them make a fortune by exploiting our desperation. If the state raises our taxes to make the rich richer, then we will fight back just as we fought the British.”

 

Enter Alexander Hamilton. Now a rising national figure and one of the brilliant minds who would soon draft the Constitution, he claimed the bonds must be honored at full value to whoever held them.  The soldiers freely chose to sell their bonds. It did not matter how the investor acquired that bond, only that the bond was a legally binding contract.

 

Besides, if the bonds were not honored, no one would ever buy them again in a national emergency. A bond is a sacred trust, Hamilton concluded, while pondering a series of new sales taxes to pay them off.

 

Thomas Jefferson, always a proponent of rebellion, sided with the ex-soldiers.

 

The upper class "can afford to pay for US independence"

 

Jefferson saw no difference between pre-war British taxation and the tax increases now proposed. He perceived that once again a far-away elite was imposing cruel taxes on poorer Americans. Jefferson proposed simply passing legislation to nullify the bonds. The wealthy speculators could afford to take a hit. The loss of their investment would be their contribution to independence, Jefferson reasoned.

 

Whose concept of the general welfare, Hamilton's or Jefferson's, is the right one? Let's consider both sides.

 

At the same time, the ex-soldiers who sold off their war bonds were being hauled into court by private creditors. Many had borrowed goods from their local general stores to start farms when they returned from the war but falling crop prices were killing them.

 

When import-export companies in Boston that were leveraged by European manufacturers in a large credit chain, demanded repayment from local stores, the stores had to call in their loans from farmers. Many such farmers were foreclosed upon and had their meager assets seized to pay off creditors.

 

This sad state of affairs started Shays' Rebellion, which you may have heard of. The irony was that desperate ex-Revolutionary War soldiers took up arms against the very government that they had just fought to create. Shays' Rebellion was suppressed by the state of Massachusetts but it frightened Americans in every state, even George Washington, into giving the federal government more power.

 

The History Doctor asserts that this event, which culminated in the U.S. capital being moved to Washington D.C., reveals a great deal about America today.

 

Bringing southerners closer

 

In the end, Jefferson and Hamilton cut a deal. Jefferson conceded that southern states like Virginia, who had paid off their own war bonds, would help New England states such as Massachusetts pay off theirs.

 

This assumption of state debt meant that any debts states had to their citizens would now be taken over by the new national government and its Treasury Department. State debt, the war bonds, would be nationalized. Holders of state bonds would be issued federal bonds instead that would be paid at full face value.

 

In return, New York resident Hamilton agreed that the new national capital, then in New York City, would be moved closer to the South, somewhere in Virginia, where southerners would have greater access to it. And so was born the city of Washington, D.C.

 

Today's debt dilemmas are similar

 

Perhaps the thorniest question today is should troubled banks have been given federal bailouts during the housing crisis of 2008? And if troubled banks are bailed out, why not extend help to individual debtors?

Other issues where the rights of creditors slam up against the needs of debtors:

  • Should banks be forced by Congress to give mortgage extensions for hurricane survivors while they got back on their feet? 
  • To bring down the national debt, Donald Trump once proposed plans to give investors a "haircut," that is, to refuse full payment on Treasury bills to those holding them.
  • Since the financial crash, many students with education debt are having trouble paying. Should they get debt relief such as deferred payments? Former presidential candidate Bernie Sanders claims it's a sensible way to help young citizens starting their careers, while others predict an implosion of the system if that happens.
  • Should Congress pass debt extension laws for soldiers returning from Iraq or Afghanistan, exempting them from foreclosures if they get behind in home mortgage payments?

 

Alexander Hamilton and Thomas Jefferson are relevant again. You can see there are good arguments on both sides and there is a great deal at stake. This question has never been fully resolved, and probably never will be.

 

History is like a ferris wheel. Your bench goes up and around, but returns to where it started. The politics of debt brought burning questions about the national interest to Americans in the 1780s, and here we are again.

 

If you'd like to read more posts from The History Dr and find out when he'll be speaking near you, please sign up for weekly updates on this page. Wishing you a life free of crushing debt!