Module 2

Hamilton Launches His Economic System: Cracks Appear in the Federalist Tribe Consensus

(First) Report on Public Credit

Everybody knows Hamilton created the National Bank. But before the national bank had to come resolution of the national debt and creating the nation’s credit, debt and currency systems. The bank was the instrument that implemented and managed these systems. The first step was to establish the outlines of our new national financial system. The Bank would prove, in the Federalist Congress at least, as the logical successor of the financial system–its approval was vastly easier–though as we shall see, not without its complications–once the essentials of the new financial system had been hammered out. Calling for the installation of an early capitalist financial system to replace a late-medieval/early modern mercantilist British-derived financial system proved more politically and culturally disruptive than approving a national bank–which was simply hated and fundamentally distrusted by many. The Public Credit Report dove head-first onto the chasm and the rocks below discussed in our earlier Populist–State Bank, paper money, and debt payment and foreclosure–and directly redefined the power of states and the federal government. It also opened the old wounds of unpaid veterans, speculators who misleadingly or not acquired the discounted debt of investors and citizens, and then used public dollars to pay off hugely discounted debt obligations at higher rates.

The Report directly addressed how the new national government proposed to manage the debt it inherited from the Revolutionary War and Articles of Confederation. The debt included that amassed by the national government and related debt issued unevenly by the states (South Carolina, Massachusetts, and Pennsylvania for example were heavy borrowers, others less so). The stove of Shays Rebellion was still hot, and passions on debt had not subsided one bit.Hamilton estimated the total debt obligations was about $79 million (probably well over a billion dollars equivalence in current valuation). The number was astronomical in 1790–it defied most people’s understanding it was so large. Moreover, with only three commercial banks in existence in the USA, very few, especially few of the most educated Americans, understood how a financial system worked, and what it was supposed to do.

Simply put, from Hamilton’s perspective (and reality) unless the old debt was handled in such a fashion as to inspire confidence and governmental capacity, any issuance of new debt (for war/national defense, simple payment of its expenses and salaries, not to mention projects such as infrastructure) was impossible. The 1790 U.S. government was effectively bankrupt, and unless the new financial system solved the bankruptcy, no new financial system would be possible. The heart of the Hamilton’s (First) Report on Public Credit was to address this core issue. The solution proposed by Hamilton, copied from the Robert Morris’s Bank of North America escapade, and enhanced with importing institutions and practices utilized in the United Kingdom, had the practical effect, and was perceived as, of extending the British system of “early capitalist” finance to the new Republic. Britain, the reader might remember, was who we fought against during the eight year-long Revolutionary War.

Like Morris, the Secretary of the Treasury emphasized the need for an alliance between government and men of wealth in order to cement the union, bolster public credit, provide increased capital funds for [economic] development both from foreign and domestic sources … Envisioning a wide promotional role for government, he wished it to encourage the development of a balanced and self-sufficient economy [i.e. agriculture, manufacturing, finance, trade], and held that the ‘improvement of the communications [internal improvements] between the different parts of the country is an object well worthy of the national purse’ [99] Bruchey, p. 109.

One interesting difference between Morris and Hamilton, reflecting an important divergence among the Federalist Tribe which was to assume a greater importance in the debate surrounding Henry Clay’s 1820 American System, was the perceived zero-sum relationship between the development and fostering of manufactures and internal improvements and western migration/settlement. Morris, a land speculator who amassed large expanses of western land for settlement made possible by subdivision/parcel resale and internal improvements to permit easy access to the interior and transportation for goods and services to and from new urban centers (a view embraced by Washington as well}, Hamilton saw such migration as inhibiting the development of manufacture by diverting excess population westward, and thereby raising the cost of labor in the East. Hamilton view the sale of public lands, not as a means to finance internal improvements, but solely to raise revenues for the national government [99] Bruchey, p.109.

 

Of particular emphasis Hamilton resuscitated Morris’s earlier Bank of North America aspiration/goal. Back in 1782, as Superintendent of Finance in the Articles government, Morris had issued a report, very similar to that constructed by Hamilton in 1789. In that earlier report Morris asserted that properly structured “public credit“{which the reader should appreciate was the term used for public debt) could render an “advantage peculiar to domestic loans, that they give stability to the Government by combing together the interests of moneyed men for its support, and consequently in this Country a domestic debt, would greatly contribute to that Union” [99] Stuart Bruchey, the Roots of American Economic Growth, 1607-1861 (Harper Torchbooks, 1965), pp. 105-6., which might be summed up as striving to bind together the wealth and propertied segments of America to identify and work with as a partner, to the new national (and state) governments. Hamilton, who in association with Morris at that time, apparently agreed. To Hamilton the best way to solve the bankruptcy issue was to insure the willing participation of those who had the financial resources necessary to repay the old debt and purchase new debt.

That perspective, I have argued in past modules triggered a serious and sustained reaction from Pennsylvania western populists, and from Anti-Federalists. Hamilton, closely associated with the Bank of New York, he was a founder, as we shall see, took few steps to protect bondholders against speculation, consequently opening himself up to attack from those inflamed by past, and fearing of future, excess speculation and  unfair advantage. Much will be made in subsequent historical commentary that opposition to Hamilton was a reaction to an imposition of “capitalist economics”, which it most certainly was, by those who identified with pre-capitalist economics and values, which it also was. But the inference such opposition was anti-capitalist, determined to maintain a previous (and now obsolete economy) is, in my opinion, one bridge too far. T

The issue can be restated that much of Hamilton’s opposition wanted forms of capitalist economics which were more favorable to them, to workingmen, Jefferson’s so-called yeoman farmers, and western hinterland settlers. Their reaction was to a perception, not unreasonable, that both Morris and Hamilton’s Public Credit system constituted redistribution from non-elites to the wealthy elite–that the Federalist Tribe housed more than a goodly share of the latter, it invited what eventually evolved into partisan conflict. The most effective opposition to Hamilton’s Plan arose from Virginia Tidewater, southern states (except South Carolina), and western hinterlands. A second qualification, alluded to in regards to the “Assumption” issue was a divergence over to what extent the national government should dominated states and state-level participation in Public Credit. Much of the Bank opposition was not opposition to a bank, but what kind of bank, and on what level of the political system. Opposition to the Public Credit legislation was against speculation and the perception that a redistribution of wealth was from non-elites to elites–which in fact was a non unreasonable perception given the goals and implementation associated with the Hamiltonian version of Public Credit.

Whether or not one accepts with comfort a capitalist Public Credit system administered and largely regulated at the state level does not justify a position that such opposition was rejecting early American capitalism in its entirety. Jefferson, and his Virginia colleagues may have not liked banks, they truly personally hated them, but that did not stop them from creating a State of Virginia Bank in 1792, after the National Bank legislation had been approved. Twenty years later, they also supported the recharter of the Second National Bank. That the outcome of this struggle to define just what capitalism was to be in the new Early Republic, a struggle which hugely affected the foundations on which national, state and local economic development rested, consumed both national and state policy system for the next seventy years, traces its durability less to the imposition of a banking system, than to the Public Credit (debt/credit/currency) system which is the topic of this module. The Public Credit system proposed by Hamilton and the Federalist Tribe drove a wedge between wealthy political and economic elites and the non-wealthy , non-elite masses. That wedge, and that struggle continues to this very day, and serves as the basis for a dual approach to American Economic Development, between Mainstream institutional/corporate-based ED, and people-focused community development (contrast, EDA revolving loan fund—or UDAG– with the Community Reinvestment Act and one can sense how this has evolved since 1790..

Having identified the “wedge” of Public Credit that was splitting asunder the Early Republic body politic, some defense of the wedge’s functionality, if not necessity is appropriate. However, viewed by Populists, Anti-Federalists, southerners, and westerners the nation in 1789-90 was effectively bankrupt, in debt up to its ears from its Revolutionary War effort and the actions of the Articles of Confederation. Hamilton did not create the problem he was trying to fix. In the early years of the French Revolution, the French alternative, repudiation of debt, was a horror to the moneyed classes, the holder of debt. The implications of repudiation lay in the future–and they were not good.

What seemed obvious at the time was the United Kingdom, well along in the process of creating the British Empire (Lord Cornwallis, loser at Yorktown, had been reassigned to India and his efforts brought India into the British imperial system). The British financial system, and its industrializing economy were the cutting edge of world finance, urbanization, and manufacturing/trade. To copy their system, whether or not one had bitter memories, was sensible. France was in chaos at the time, economic and political–and deeply in debt as well. It was not a very good role model for the new nation, despite the range of favorable feelings held by most Americans. Most critically, we lacked sufficient domestic capital for investment and lending. Our commercial banking system was rudimentary, and there was no escaping the reality that foreign capital was the only effective source of investment capital. Foreign nations expected to be paid back and confidence in America’s willingness and capacity to pay back any loan was fundamental. An uncoordinated set of thirteen state banks, issuing unsupported paper currency did not invite serious investment. The principal sources of federal revenue in Hamilton’s economic plan were customs duties, tariffs, land sales–and a tax on whisky (an excise tax), which as we shall see poured oil on the Public Credit fire.

As to Hamilton’s desire to forge a common bond with the American moneyed classes to provide an effective and durable foundation for its future financial system was also logical, and Hamilton did not create the zero-sum polarization on that issue–what he did do was by being insensitive to it aggravated it considerably, and set in motion a long-term resistance to that imposed financial system. Hamilton was perceived not as merely pandering to the wealthy classes, but actively allowing them to redistribute what little wealth the working and middle class had to these wealthy classes–and despicable speculators, whose excesses were almost totally ignored were almost glorified as agents of national unity. That in the immature policy systems of state and local governments, each trying to forge their own experiment in democratic governance, the chasm this issue opened up at state and local levels persisted easily over the next seventy years, as both state and local governments institutionalized their geographies/economic bases to accommodate and participate in the financial and economic system now being introduced at the national level.

Speculation

The hornet’s nest ruptured by Hamilton’s First Public Credit Report was that the injection of these noble and heuristic intentions was incorporated in how the federal debt was to be repaid. Dispersed in the hands of probably thousands of speculators, original holders, and frankly God knows who else, For the better part of a decade or more much of this debt had circulated among any number of holders, and given that its repayment was always unlikely, the value of the original note was horrendously discounted, selling for pennies on the dollar, and varying from state to state and through time. Hamilton proposed the federal government purchase the outstanding debt at rates close to the original face value of the debt note–despite the discount, and despite whatever the then-current holder of the bond had paid. This was far from hidden to the public; the average American, certainly every veteran, knew that this scheme created an enormous windfall.

That, as I have discussed earlier, this windfall accrued to many already wealthy who had systematically acquired holdings in these discounted notes (Washington, Adams, and Morris were only a few that had done so on a serious basis), and the other class of holders, opportunistic speculators using loans from whoever, including the commercial banks, were grabbing these notes up massively while the legislation was debated. Those in the hinterlands, where reporting of the legislation was infrequent and inaccurate, probably were hurt the most. The legislation rose to the top of the national agenda in no time at all, and the name to which it was given provides insight into how it was perceived. The gap between whatever had been paid for the bond note, and what Hamilton was willing to pay for its purchase was “discrimination”. By discrimination meant instead of paying full value to the current bondholders as Hamilton intended the federal plan should be modified to “discriminate” against them by paying only what the current bondholder had actually paid. that This was viewed, probably by majority of the population as redistribution to the wealthy from the lower classes.

How can it be right that the poor and perhaps Bleeding Soldiers which sold his Notes of one hundred pounds for Ten should now be obliged to Swett {sweat] Even Blood to pay the Ninety he was Cheated out of by some Viliane [villain], who in the war was afrad [afraid] to Turn out and Stand a Mark for the Enemy to shoot at” [88] Speaker at a Maine public meeting quoted in Bordewich, p. 186.

Hamilton was not oblivious of any of this, to him it was the cost of resolving the public debt issue–and he saw it as the best means to ensure the partnership with the moneyed classes, and to promote a shared interest in becoming involved in future necessary bond issuance. He cleverly mitigated some of the windfall, by requiring those from whom he purchased such outstanding debt, to rollover that money into new debt that he issued-debt that would pay a reduced interest rate. That provided revenues to the national government for future expenses and projects, at reduced interest rates–and took away at least some of the windfall. He also proposed creation of a “sinking fund” in which on an annual basis a proportion of federal revenues would be placed to repay the new bond issuance. In time, the outstanding bonds were be paid off. There were “if-comes” galore in Hamilton’s plan: (1) would it grow the economy and allow the debt to be paid off; (2) would the sale of the bonds be sufficient to satisfy federal expenses.

The inclusion of state debt into this initiative compounded the legislative proposal immensely, while at the same time offering some political leverage with which he could negotiate for votes to approve the overall legislation. Not all states had issued equivalent volume of state debt, and several had paid much of it off, and thereby could not participate in Hamilton’s program. Other states, however, conversely teetered on the brink of bankruptcy (Massachusetts), and had imposed or were on the threshold of imposing huge tax increases. Hamilton was shrewdly tipping over yet another hornet’s nest, primarily because he felt that by picking up the state debt, he would bind them more closely to the national government–and make them less resistant, and more willing to see benefit in national programs and policies. Debt was his strategy to overcome the crippling decentralization the national government had inherited from the Articles. The net effect of all this, in his mind was …

The national debt could then become a commodity that could profitably be bought and sold in the financial marketplace. Creditors would support national stability, in their own self-interest, while the shared debt would help bind the states more closely together, and at the same time create an alliance with the banks that would make possible dynamic economic growth for all. Debt would, in effect, become a substitute for money. In turn, the nation’s economy could be stimulated because more capital would be circulating to invest in manufacturing, commerce, and agriculture. [[66] Bordewich, p. 185.

This legislation, now Washington’s economic plan, put Hamilton squarely in the anti-Populist, Anti-Federalist camp, and dragged a dispirited and fragmented Federalist Tribe into a fight it poorly understood, and whose financial interests were deeply conflicted. While this debate was ongoing, I might further offer that there was a perceived possible alternative: the ongoing French Revolution was in process of simply repudiating the Ancien Regime’s past debt. The Ambassador to France, now Secretary of State, Thomas Jefferson had watched the progress of that Revolution from its first day. Who said nation-building institutionalization was going to be easy? Is it any surprise that the fissures and legacies that institutionalization created would massively affect the future path of a policy area, economic development, that was built on and worked with those”imposed” institutions and practices? The other alternative was to raise taxes to purchase the debt.

The reality, however, for many middle class and Federalist Tribe devotees was that they had little idea about this “thing” called economics, no real experience with it, and in general “lost in the labyrinth of Finance“. One Connecticut Congressman who supported Hamilton’s bill wrote: Finance is of a nature so complicated that to comprehend it requires more real physical skill and mathematical knowledge than I am possessed of. We have been so little accustomed to system, and have lived so long at loose, we are scared out of our wits at the sight of a long finaneering [sic] report [88] Bordewich, p. 187.

Thank the Lord contemporary education has solved that problem.

Anyway, the “simplicity” of Hamilton’s plan invited rumors, misunderstandings, and sadly ample opportunity for further speculation, particularly of those unaware of what the plan really meant.. Federalist Dr. Benjamin Rush Rush wrote Madison that “I [Rush] sicken every time I contemplate the European Vices that the Secretary’s {Hamilton} gambling report will necessarily introduce into our infant republic“.  He further commented that speculators “will rank hereafter with the slavery of the Africans by our southern states, and with the ravages committed by Great Britain upon property & Life in America during the late war”. That Hamilton was installing a mirror image of the British fiscal system was not lost on either the elites or the masses. Congressmen such as James Jackson from western Georgia complained to packed galleries that speculators “as rapacious as wolves had swarmed out of New York to sweep up securities from unsuspecting citizens. My soul rises indigent at the avaricious and immoral turpitude which so vile a conduct displays”  That these fears became reality over the next year will be discussed shortly. As he spoke Assistant Secretary of the Treasury William Duer “like many insiders, was buying as many securities as he could on the sly, while [North Carolina Congressional Representative] … Hugh Williamson was writing to a friend back home urging him to buy up all you can“. [88] Bordewich, p. 188.

Now was the time for all good defenders of the Federalist Tribe to rise to the occasion and counter the Anti-Federalist, semi populist outrage. Several, such as Massachusetts Fisher Ames did, but it may not have helped to have Robert Morris as an ally on this issue. Federalists, although in the majority were confused, personally unsure of the mechanics behind Hamilton’s plan, and well-aware the fear of a new burst of speculation, with a potential “bubble-like” effect on the pricing of bonds when they reached the financial markets, all combined to throw the Plan into a never-ending limbo of debate which intensified, consumed more time, and seemingly was without end. After nearly a month, on February 11, the waited-for position of James Madison, Washington’s unofficial spokesperson, was made public. In what was to be the opening lines in the first act in a “Broadway play” whose last act was the creation of the Democratic-Republican Party, Madison attacked Hamilton’s Plan–and minced no words doing it. The Washington Administration was caught unaware, and discovered his profound opposition to the Plan only when he spoke it in Congress.

In fact, Madison had not been in New York while most of the debate had been happening. He was late coming back from the session interlude because he could not travel due to extreme hemorrhoids. To quote Bordewich’s excellent summary of his comments, Madison declared that he …

had never been a proselyte to the doctrine that public debts are public benefits. He considered them, on the contrary, “as evils which ought to be removed as fast as honor and justice would permit“. He rejected the entire foundation of Hamilton’s plan, and the belief that debt could, and should be, exploited as a tool of activist government. “A Public Debt is a Public curse, and in a Representative Government, a greater [curse] than in any other. … He wholeheartedly embraced discrimination, {in particular calling out the] “sufferings of the military part of the creditors“, [and added there was] “something radically immoral” about stripping the value of the securities from “the gallant earners of them“… he strongly suspected that many of the securities had been acquired fraudulently…[in any case] the difference between the face value and the current market price [should] be paid by the government. [88] Bordewich, p. 191-2

With a friend such as this who needs enemies?

Madison’s speech shocked many a Federalist, and they circled their wagons, and seemingly felt betrayed by Madison. Fisher Adams mused … “if he is a friend, he is more troublesome than a declared foe. He is so much a Virginian; so afraid the mob will cry out“; Massachusetts Sedgwick “wondered if Madison had become a convert to anti-federalism” [88] Bordewich, p. 208.

“Business-oriented Federalists now decided that Madison, whatever his virtues as a thinker, knew little about finance. Clear in his remarks was Madison’s rejection of a Plan that reflected the “Secretary’s affection for the British system” that would lead to the creation of a new aristocracy of money” which was only a subtly-veiled attack on them [88] Bordewich, p. 193 The debate on the Public Credit Report stopped abruptly, leaving the proposal in a limbo. Other matters, including yet another appearance of a horde of Quaker abolitionists logically demanding the ability of slavery that raged through February 22, when the Public Credit matter returned to the agenda–and a decisive 36-13 vote, the House rejected Madison and discrimination. Pivoting from the discrimination issue, the House commence debate on the “assumption” of state debt by the federal government. At that point, North Carolina, having only recently approved its entry into the Union, boosting the South’s aggregate strength to equal that of the North–with the new arrivals being a cluster of Anti-Federalists. Debate on state assumption fragmented the Federalists, some states had paid their debt off, others were deeply in debt. Washington, as he had thus far, remained on the sidelines, leaving Hamilton to shoulder the burden.

Opinion on assumption seemed fairly evenly divided. Opposition would come mainly from Virginia, Maryland … and North Carolina which had all paid off their debts. Pennsylvania, Massachusetts, Connecticut and South Carolina were strongly for it, along with elements from New York, New Hampshire and New Jersey … which stood to benefit the most … the strongest support for assumption came from business-oriented New Yorkers and New Englanders… By early March assumption appeared to have strong support in the Senate, but at best only a tenuous majority in the House.[88] Bordewich, p. 210-12

But no where was the opposition to assumption, and the advocacy of discrimination most intense than in Virginia. Madison, under the most severe pressure from Anti-Federalist Patrick Henry, then Governor of Virginia had probably been forced into a more aggressive public role on that issue than he wanted. Washington felt this pressure as well. Writing to Virginians at the time Washington observed “It seems to be that [Virginia] to be more irritable, sour and discontented than it is in any other state in the Union” [97] Thomas Fleming, the Great Divide (Da Capo Press, 2015), p. 89. Washington may well have been on the margins of the debate–but he was not aloof or neglectful of it. Nor at this critical juncture was his position ambivalent. His behind-the-scenes support of Hamilton and the Public Credit legislation was widely supposed at the time. Few viewed it likely that Hamilton had wandered too far from Washington’s policy pasture.

On March 21st fresh from France and Monticello) Thomas Jefferson made his appearance in the cast of characters to assume his duties as Secretary of State.

That and still another intensive, and horribly divisive series of debates on slavery consumed the Congress. That debate froze southern Federalists into a more hardened anti-North policy bias that almost immediately permeated into the Public Credit “assumption” issue. Madison returned to the attack–he was against assumption–and the tenuous majority, for the entire Hamilton Plan, not just assumption, began to waver. By late March, no one felt confident which way the matter would go. “The debate ground on through week after rainy week” The same arguments were rehashed over and over… Beneath these by-now familiar arguments, lay half-sub-merged, like a treacherous reef,the insistent claims of states’ rights, which would continue to challenge the supremacy of the Federalist vision for the states for the next seventy years.“. On April 12, assumption was defeated in the House by a margin of two votes. [88] Bordewich, p. 225-6

the Residency Act Reenters the Play

At least two dynamics consumed Congressional debate by April 1790: above all stalemate and paralysis, and reality that sectionalism was at least as important as Federalist/Anti Federalist. While state delegations in the House were far from monolithic, the Senate state de;legation was more Federalist and Anti-Federalist in terms of the prism by which it viewed how to represent state constituencies. The new arrival was stalemate and paralysis. All of this impacted on Robert Morris’s end-of-session Residence Act that now languished in committee waiting to be finished off by adding the details of how the federal government would use state land and financing to build federal buildings on federal land. Madison’s last minute trick had achieved its desired end. By the time the second session got going, and was enveloped in debate on Hamilton’s Public Credit, Indian affairs, and of course the by-now old reliable what to do about slavery, the Residency Act establishing a Pennsylvania suburb as the national capitol was just one more piece of legislation caught in the policy swamp. It appears nothing had really been settled and the location for the national capitol was still up for grabs. All the tavern negotiations recommenced, and backroom plans and deals abounded galore. Like a greased pig Morris’s deal had somehow slipped away.

Because it slipped away did not mean anyone else had the votes. They didn’t. Morris himself moved on, pushing for Trenton New Jersey (where he had political and economic interests–and which was viewed as tied economically to Philadelphia). Part of Morris’s problem was still Maclay who was instinctively resistant to Morris’s deal-making. By April, the Residence Act had bifurcated into two separate deals: the permanent location, and the temporary location [88] Bordewich, pp. 227-33. to be used until the new permanent city was built [in the deal-making periods as long as ten years were contemplated for the temporary location–which ironically is about what it turned out to be]. Philadelphia and New York City were the main contenders for the temporary capital in several deals, including Morris’s Trenton proposal. By the time June rolled around, even Morris realized that Pennsylvania had lost whatever momentum it had for the permanent seat of government, and had to fight hard to acquire even temporary status [88] Bordewich, p.238.

The House approved in May to move to Philadelphia in the next session of the First Congress, and that was envisioned as making it, if not the permanent capital, at least the temporary one. The Senate, however, in three separate votes, tied at 12-12, and each time Vice-President Adams voted against Philadelphia. In the midst of all these deals, a flu epidemic struck the Congress and even Washington, and Jefferson. In those days a flu was serious business, people were laid up for considerable periods of time and a wrong turn could prove fatal. That meant unpredictable voting, and a general inability to gather any policy-making momentum. The Public Credit Act was also caught up in an extended period of Congressional policy/legislation slowdown. All that was complicated further by the arrival of new delegations, first, as mentioned previously, North Carolina, and now Rhode Island. In the deadlocked House and Senate, just a few new members upset any deal in process. In this chaotic period, the only substantial piece of legislation that emerged was our nation’s first copyright act–which shall be further discussed in the next module.

By the time Washington recovered from his bout with the flu, his impatience with deadlock, and in particular with Residence Act chaos was becoming apparent. He had stood mostly silent in the background of everything thus far, mostly working with Madison, who, the reader remembers was an active member of the Patowmack project cabal. The Public Credit quarrel had complicated that relationship considerably, and it seemed to Washington that Congressional policy-making, for his hot button project, and for important legislation like the Public Credit Act would, if acted upon at all, would be decided for reasons and motivations that were if nothing else unpredictable. He wrote to his son-in-law, David Stuart (who also owned considerable quantities of land congruent with the Patowmack project and would play a serious role in the future saga)

The questions of Assumption–Residence–and other matters have been agitated with a warmth and intemperance, with prolixity [long windiness] & threats which it is to be feared has lessened the dignity of that body. [BUT] Can it be otherwise in a country so extensive, so diversified in its interests? And will not these different interests naturally produce in an assembly of Representatives who are to legislate for, and to assimilate & reconcile them to the general welfare, long, warm and animated debates? Most undoubtedly. The misfortune is that the enemies of the Government [the Federal Union]–always more active than its friends, and always on the watch to give it a stroke [blow]–neglect no opportunity to aim one. [88] Bordewich, p. 237.

Each section felt the stalemate and paralysis differently. New England with no dog in the game, focused on the Assumption (rejecting Discrimination), for example. Southerners strongly behind Discrimination, wanted the Potomac site for the national capital. Pennsylvanians feared New York, and were fragmented on Assumption/Discrimination. New combinations of deals showed up nearly every day, generating insecurity and an increasing willingness to find the deal which could be carried across the goal line. In this atmosphere, it was Hamilton who through a Deputy Secretary of Treasury (Pennsylvanian Trench Coxe) approached our distressed Senator Maclay. Coxe proposed trading Pennsylvania’s votes for Assumption, for votes that Hamilton could generate to give Philadelphia the votes it needed for the Residence Act. Maclay rejected it contemptuously–he would make no deal. Hamilton responded by meeting “on a long walk on Battery Park” with his old mentor, Robert Morris, hawking the same deal, with the added New York City became the temporary capital. Morris approached Maclay who was still skeptical but Hamilton, it soon became apparent could not deliver his votes to the deal. A day later, Morris got a proposition from none other than Thomas Jefferson offering Philadelphia the temporary seat in return for for the permanent Patowmack site. Although intensely opposed to Assumption (a big deal for Morris, of course), Jefferson pledged support for that issue in exchange. Madison at the same time, approached the Massachusetts delegation–hot for Assumption–with the same deal. So the deal was Assumption for the permanent national capital.

The federal capital, no matter where it was located, has always proved to be a cesspool of leaks and rumors–and in seconds it seems Morris heard about Madison’s approach–seeing it as a rival to that he got from Jefferson. Jefferson was seen as Hamilton’s shill, and whatever Morris felt, the larger Pennsylvania delegation lost no love on Hamilton. According to Bordewich they preferred dealing with the southerners (Madison) who were more likely to keep their word. [88] Bordewich, pp. 242-3. It is at this point that the now famous “chance” meeting of Jefferson and Hamilton happened on the street outside of Washington’s house. Hamilton in considerable distress laid it on thick to Jefferson to help out and try to make a deal for Assumption, which in his mind was imploding. Jefferson countered with a meeting with Madison for a “friendly discussion”. Why not dinner at his house the next evening (June 20)? The meeting the next night (which Thomas Fleming insists also included Henry Knox, Secretary of War and Washington’s informal liaison) produced the deal of the century.

It was not merely a quid pro quo: Assumption votes for Residence Act. These were our Founding Fathers after all. The success, even viability, of their Federal Republic seemed at stake. Even if hating Hamilton’s plan, and hating even more Assumption, the two southerners perceived that an agreement to end the de facto national bankruptcy had to be devised. To them providing a few votes on Assumption (Madison never voted for Assumption, ever) would cement the installation of a national finance, credit and debt system, then it had to be. They also realized they needed Pennsylvania votes to make it work, so Philadelphia became the temporary capital. All sides also realized that the inability to devise a location for its capital, was seen by almost everybody, especially friendly and unfriendly countries whose investment dollars were needed, or who would see the new nation as so fragmented to be vulnerable for conquest or manipulation threatened the viability of the Federal Union as well, just in a different way. So the Residence Act became the sop, or the justification, for southern participation. Hamilton tossed in an increased assumption of Virginia’s debt in his amended Public Credit bill.

After a few days to of close the loop and negotiated with the parties (New Englanders, Delaware, and Robert Morris (who somehow recruited Maclay), and Madison found a couple of Virginians (including Bland, Alexandria’s Representative who went along “with a revulsion of the stomach almost convulsive’) and Maryland’s Charles Carroll who was an insider to the Patowmack project) to make sure everyone was on board, the matter was brought to both Houses for action. The New Yorkers fought back with several days of debate, and our old friend Senator Maclay yet again broke from Morris, calling the deal “a species of robbery“. approved the Residence Act, the Senate on July 1 (14-12) and the House on first on July 9 (31-29). Washington signed it on July 16th. The Assumption bill was approved by the Senate on July 16, and the Senate  House July 26 (34-28). [88] Bordewich, p. 246-8. For Hamilton, the pathway to his national bank had been cleared, and the nation had a new capital, and Washington and his Virginians now had a rejuvenated Patowmack project. Virginia had a chunk of its debt picked up by the Feds, and Morris/Pennsylvania became the temporary capital–starting with the very next session of the First Congress. I bet the reader never “saw such” sausages being made as this one. And now it enters into the history of American economic development. For your own curiosity, see how this is described in your child’s or college textbook.

In any case, don’t get your hopes up that this sausage-like policy-making is over. We will in the next module move onto the politics associated with the National Bank, which followed seven moths later (February, 1791). As to the evolution of the Residence Act, well, that will enter into the National Bank deliberations, and the actual activities associated with the national City-Building of Washington D.C. will be discussed in a following module.