Signature of Treasury Secretary
Albert Gallatin.
which they had neither the wi[s]dom to
plan nor the spirit to adopt.”
Gallatin’s views on debt and democracy
could not have been more different. He
and other Republicans thought Hamil-
ton’s funded debt endangered freedom
and republican government. That belief
rested on interlocking economic and
political foundations.
The economic foundation for the belief
was the orthodox liberal premise—elabo-
rated by Adam Smith and others—that
government spending on everything
except public improvements consumes a
nation’s investment capital. As long as a
government could spend no more than
the people were willing to pay in taxes,
there was a salutary natural limit on this
consumption. Credit made that limit flex-
ible. But the British funding system that
Hamilton had adopted practically demol-
ished the natural limit. It allowed the
government to borrow far more than the
people were willing to pay in taxes because
the people had to pay only enough to
cover the annual interest. It prevented the
people from understanding how much
money the government actually was
spending, and that ignorance allowed the
government to go deeper and deeper into
debt. The federal government already used
about 70% of its revenues to pay interest
on its debt, and the taxes needed to do
that shifted more and more capital from
ordinary people into the hands of wealthy
creditors. Until the government freed it
revenues from this burden, it could not
afford to do much of anything without
borrowing even more.
That economic analysis supported the
Republicans’ political critique of funded
debt. Hamilton had argued that the public
debt would strengthen national govern-
ment because the public creditors’ self-
interest would lead them to support the
federal regime. The Republicans accepted
that prediction, but they thought it was a
malediction. True republican government
required the participation of the people,
and Republicans thought the people could
participate more effectively in state and
local governments where they were more
directly represented. Consolidating power
in a distant federal government shifted
political control from the people into the
hands of wealthy and designing men who
ultimately would corrupt the government.
Embedded in the Republicans’ eco-
nomic and political thinking were more
visceral beliefs about debt and democ-
racy. Like Adam Smith and other liberal
political economists of the time, Repub-
licans thought about public debt in the
same way they thought about private
debt. They believed that the failure to
pay it would bring ruin. And that notion
22 FINANCIAL HISTORY | Fall 2018 | www.MoAF.org
interlocked with an equally visceral belief
about democracy. A republican govern-
ment gave sovereignty to the people, but
true popular sovereignty depended on the
people’s independence—their freedom to
act in their own best interests. Economic
arrangements that made voters depen-
dent on others—creditors, landlords or
employers—compromised their indepen-
dence. Public debt compromised the gov-
ernment’s independence in the same way.
A government beholden to its creditors
was not truly under popular control. Its
people were not wholly free. True freedom
depended on frugal government uncor-
rupted by debt.
Republicans believed that public
debt jeopardized not only freedom, but
peace. Montesquieu, Rosseau and other
Enlightenment thinkers had maintained
that monarchies were more warlike than
republics because they could shift the
physical and economic burdens of war
to their subjects. Republics were inher-
ently peaceful because the people who
bore the awful burdens of war would
avoid armed conflict. Were all nations to
become republics, destructive wars would
end and universal peace would usher in an
era of unparalleled prosperity. Hamilton
dismissed this vision as a utopian dream.
The best way to avoid war, he had written
in The Federalist, was to prepare for it.