Nowadays, the conservative media inundate us with warnings about debt from the Founding Fathers, and it's true that some of them like Jefferson -- himself an inveterate, often near-bankrupt debtor -- did moralize on the subject. However, Alexander Hamilton, an idol of the conservative movement, was the architect of the country's first national debt, insisting that "if it is not excessive, [it] will be to us a national blessing."
As the first Secretary of the Treasury, Hamilton's goal was to transform the former 13 colonies, which today we would call an underdeveloped land, into a country that someday would rival Great Britain. This, he knew, required liquid capital (resources not tied up in land or other less mobile forms of wealth), which could then be invested in sometimes highly speculative and risky enterprises. Floating a national debt, he felt sure, would attract capital from well-positioned merchants at home and abroad, especially in England.
However, for most ordinary people living under the new government, debt aroused anger. To begin with, there were all those veterans of the Revolutionary War and all the farmers who had supplied the revolutionary army with food and been paid in notoriously worthless "continentals" -- the currency issued by the Continental Congress -- or equally valueless state currencies.
As rumors of the formation of a new national government spread, speculators roamed the countryside buying up this paper money at a penny on the dollar, on the assumption that the debts they represented would be redeemed at face value. In fact, that is just what Hamilton's national debt would do, making these "sunshine patriots" quite rich, while leaving the yeomanry impoverished.
Outrage echoed across the country even before Hamilton's plan got adopted. Jefferson denounced the currency speculators as loathsome creatures and had this to say about debt in general: "The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating." He and others denounced the speculators as squadrons of counter-revolutionary "moneycrats" who would use their power and wealth to undo the democratic accomplishments of the revolution.
In contrast, Hamilton saw them as a disinterested monied elite upon whom the country's economic well-being depended, while dismissing the criticisms of the Jeffersonians as the ravings of Jacobin levelers. Soon enough, political warfare over the debt turned founding fathers into fratricidal brothers.
Hamilton's plan worked -- sometimes too well. Wealthy speculators in land like Robert Morris, or in the building of docks, wharves, and other projects tied to trade, or in the national debt itself -- something William Duer and grandees like him specialized in -- seized the moment. Often enough, however, they over-reached and found themselves, like the yeomen farmers and soldiers, in default to their creditors.
Duer's attempts to corner the market in the bonds issued by the new federal government and in the stock of the country's first National Bank represented one of the earliest instances of insider trading. They also proved a lurid example of how speculation could go disastrously wrong. When the scheme collapsed, it caused the country's first Wall Street panic and a local depression that spread through New England, ruining "shopkeepers, widows, orphans, butchers... gardeners, market women, and even the noted Bawd Mrs. McCarty."
A mob chased Duer through the streets of New York and might have hanged or disemboweled him had he not been rescued by the city sheriff, who sent him to the safety of debtor's prison. John Pintard, part of the same scheme, fled to Newark, New Jersey, before being caught and jailed as well.
Sending the Duers and Pintards of the new republic off to debtors' prison was not, however, quite what Hamilton had in mind. And leaving them rotting there was hardly going to foster the "enterprising spirit" that would, in the treasury secretary's estimation, turn the country into the Great Britain of the next century. Bankruptcy, on the other hand, ensured that the overextended could start again and keep the machinery of commercial transactions lubricated. Hence, the Bankruptcy Act of 1800.
If, however, you were not a major player, debt functioned differently. Shouldered by the hoi polloi, it functioned as a mechanism for funneling wealth into the mercantile-financial hothouses where American capitalism was being incubated.
No wonder debt excited such violent political emotions. Even before the Constitution was adopted, farmers in western Massachusetts, indebted to Boston bankers and merchants and in danger of losing their ancestral homes in the economic hard times of the 1780s, rose in armed rebellion. In those years, the number of lawsuits for unpaid debt doubled and tripled, farms were seized, and their owners sent off to jail. Incensed, farmers led by a former revolutionary soldier, Daniel Shays, closed local courts by force and liberated debtors from prisons. Similar but smaller uprisings erupted in Maine, Connecticut, New York, and Pennsylvania, while in New Hampshire and Vermont irate farmers surrounded government offices.
Shays' Rebellion of 1786 alarmed the country's elites. They depicted the unruly yeomen as "brutes" and their houses as "sties." They were frightened as well by state governments like Rhode Island's that were more open to popular influence, declared debt moratoria, and issued paper currencies to help farmers and others pay off their debts. These developments signaled the need for a stronger central government fully capable of suppressing future debtor insurgencies.
Federal authority established at the Constitutional Convention allowed for that, but the unrest continued. Shays' Rebellion was but part one of a trilogy of uprisings that continued into the 1790s. The Whiskey Rebellion of 1794 was the most serious. An excise tax ("whiskey tax") meant to generate revenue to back up the national debt threatened the livelihoods of farmers in western Pennsylvania who used whiskey as a "currency" in a barter economy. President Washington sent in troops, many of them Revolutionary War veterans, with Hamilton at their head to put down the rebels.
Debt Servitude and Primitive Accumulation
Debt would continue to play a vital role in national and local political affairs throughout the nineteenth century, functioning as a form of capital accumulation in the financial sector, and often sinking pre-capitalist forms of life in the process.