"As, on the one hand, the necessity for borrowing in particular emergencies cannot be doubted, so, on the other, it is equally evident that to be able to borrow upon good terms, it is essential that the credit of a nation should be well established. For, when the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all the loans it has occasion to make. Nor does the evil end here; the same disadvantage must be sustained upon whatever is to be bought on terms of future payment. From this constant necessity of borrowing and buying dear, it is easy to conceive how immensely the expenses of a nation, in the course of time, will be augmented by an unsound state of the public credit."
Taking up the demonstration how closely the public credit is linked with the fortune of the individual, Hamilton points out that public securities are a part of the medium of exchange, that sound credit will extend trade by preventing the export of money, and that agriculture and manufactures will be promoted because "more capital can be commanded to be employed in both," and that the interest of money will be lowered.
Hamilton took up and punctured in his report several fallacies regarding the treatment of the debt which had obtained lodgment in the public mind and threatened to influence the action of Congress. One of these was that a distinction should be made between those holders of the debt to whom it was originally issued and those who had acquired it by purchase. As the latter holders had bought the debt in some cases at a mere fraction of its face value and for speculative purposes, the specious argument was made that they were entitled in the settlement with the government only to what they had paid the original holders. Hamilton set himself to dissipate this prejudice by showing that the man who had been willing to purchase the public debt might be quite as patriotic as the man who had parted with it for a price. He suggested that if the debt was thus purchased in the confidence that it would rise to par, the act was a proof of the patriotism of the purchaser, and it would be a sorry return for this confidence to make it a reason for discrimination against him.
But much more important from the public point of view, he pointed out, was the sanctity of contracts guaranteed by the new Constitution, and absolutely required to give a stable character to the securities of the government. If the government were to discriminate between the original holders of the debt and other holders, he made it clear that a degree of discredit would be cast on all the obligations of the United States, no matter in whose hands they were found, which would tend to defeat the end and aim of all his measures,—the restoration of public credit. Upon this point he said:—
"The nature of the contract, in its origin, is, that the public will pay the sum expressed in the security, to the first holder or his assignee. The intent in making the security assignable is, that the proprietor may be able to make use of his property, by selling it for as much as it may be worth in the market, and that the buyer may be safe in the purchase.
"Every buyer, therefore, stands exactly in the place of the seller, has the same right with him to the identical sum expressed in the security, and having acquired that right, by fair purchase, and in conformity to the original agreement and intention of the government, his claim cannot be disputed without manifest injustice.
"The impolicy of a discrimination results from two considerations: one, that it proceeds upon a principle destructive of that quality of the public debt, or the stock of the nation, which is essential to its capacity for answering the purposes of money, that is, the security of transfer; the other, that, as well on this account as because it includes a breach of faith, it renders property in the funds less valuable, consequently induces lenders to demand a higher premium for what they lend, and produces every other inconvenience of a bad state of public credit."
One of the most serious obstacles which confronted Hamilton in carrying out his financial policy was the opposition to the assumption by the new federal government of the debts of the several states incurred in the prosecution of the war. The states which had been remiss in paying their quota for the general expenses and those which had not been called upon to pay much for local defense did not see why a burden should be imposed upon them, even in equitable proportion with the other states, for the purpose of relieving those states which had been prompt with their payments or had been compelled to spend freely for the protection of their own boundaries and people. This prejudice Hamilton faced with the same clear vision and resolute purpose as that against providing for the debt of the Union. He set forth at the outset that if these debts were to be paid at all, whether by the states or by the Union, "it will follow that no greater revenues will be required, whether that provision be made wholly by the United States, or partly by the states separately." He pointed out that the control of the entire matter by the federal government would secure uniformity of treatment for the public creditors, would prevent competition between the Union and the states for the sources of the revenue, which otherwise might cause collision and confusion, and would secure a distribution of taxation more just to industry in all the states. The assumption of the state debts, moreover, he insisted was vital to the credit of the Union. Upon this head, and upon the equity of charging to the Union of the states the debts which had been incurred for the benefit of all, Hamilton observed:—
"Should the state creditors stand upon a less eligible footing than the others, it is unnatural to expect they would see with pleasure a provision for them. The influence which their dissatisfaction might have could not but operate injuriously, both for the creditors and the credit of the United States. Hence it is even the interest of the creditors of the Union, that those of the individual states should be comprehended in a general provision. Any attempt to secure to the former either exclusive or peculiar advantages would materially hazard their interests. Neither would it be just that one class of the public creditors should be more favored than the other. The objects for which both descriptions of the debt were contracted are in the main the same. Indeed, a great part of the particular debts of the states has arisen from assumptions by them on account of the Union. And it is most equitable, that there should be the same measure of retribution for all.