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Upon a share in the second, . . . . . . . . .8.65

Upon a share in the third, ......... 9.00

Upon a share in the fourth, ......... 9.65

Upon a share in the fifth, ......... 10.70

Upon a share in the sixth, ......... 12.80

The annuities of those who die to be equally divided among the survivors,
until four-fifths shall be dead, when the principle of survivorship shall cease, and
each annuitant thenceforth enjoy his dividend as a several annuity during the life
upon which it shall depend.^

No action was taken by Congress upon this ill-advised scheme;
but it is important to observe that its details appear to have been
adjusted upon the plan of the English tontine of 1789, which had
been brought out by Mr. Pitt a few months before the date of
Hamilton's report.^ The classification of subscribers is the same
in the two, differing from either of the other English tontines and
from the Irish and French as well.^ In short, it appears that, in

^ "State Papers, Finance," i. 21.

2 On June 10, 1789. See "Parliamentary Plistory," xxviii. 161.

^ The English tontine of 1789 was under the act of 29 George III., c. 41. A pay-
ment appears to have been made to one survivor in the fiscal year 1887-1888, according to
"Finance Accounts" (in Pari. Doc, 1888), p. 42.

The annuities p-oposed by Hamilton were somewhat higher for classes four, five, and
six than those in tbi English scheme. This change was probably made because the
terms of the English tontine were found not to be sufficiently attractive, so that the sub-
scription was not filled. See for this and other English and Irish tontines, " Report on
Public Income and Expenditure" (Pari. Doc, 1869), ii. 571 ; for the French cases,
Leroy-lkaulieu, "Science des Finances," ii. 288 [ist ed.].


his uncertainty as to the kind of investments which would prove
acceptable in the United States, Hamilton here grasped at the
freshest expedient brought to him by his foreign advices, commit-
ting himself to a proposition which shows little of the business-like
calculation found in most of his recommendations to Congress.

It was no doubt a common belief among Hamilton's opponents
that, in shaping these propositions, he had devised a scheme which
threatened the country with a perpetual debt. This, it was charged,
was the natural result of a weak deference to English precedent
and of political theories of English origin, which looked to the
strengthening of the central government by all possible influences,
whether pure or mercenary.^ That the concentration of debt and
of revenue under federal authority would give instant support to
the general policy of Hamilton and his party there was no pre-
tence of denying, and it was perhaps natural that the opposition
should believe that a debt which was used to strengthen the gov-
ernment at the outset would be treated as one of its permanent
buttresses. The magnitude of the funding operation tended to
confirm this idea. That Hamilton's opponents had no definite
counter-proposition 2 appears to have been due in great measure
to the belief sometimes expressed, and sometimes tacitly operative,
that the debt weighing upon the general and state governments
together was too great to be dealt with. To fund the debts of the
Confederation at their face, without any attempt at scaling them
down, and to assume a great mass of debts incurred by the states
for the common defence, was to bind a formidable burden upon
a government which was then collecting an independent revenue
for the first time.^ What chance of ultimate redemption can there

^ Jciferson, in his letter to Washington, September 9, 1792, says that Hamilton
"wishes it [the debt] never to be paid, but always to be a thing wherewith to corrupt
and manage the legislature." Jefferson's " Works," iii. 464. And twenty-five years
later, writing the introduction to his " Anas," he says in a famous passage that Hamil-
ton's financial system " had two objects : ist, as a puzzle, to exclude popular understand-
ing and inquiry ; 2nd, as a machine for the corruption of the legislature." Ibid., ix. 91.

■^ As an example of the suggestions made by individuals may be cited Maclay's
advice, to establish a revenue sufficient " to discharge a reasonable interest, proportionate
to the market price of the public debt, until the whole is extinguished I^y the western
sales." " Debates in the First Senate," p. 259. Maclay's idea of " a reasonable interest "
appears, from p. 171, to have been three per cent.

* Gallatin, in his " Sketch of the Finances" (1796), treats the ability of the govern-
ment to carry this weight as something still to be proved. The objections to the assump-


be, to what else than a permanent and probably increasing national
debt can such a scheme be expected to lead ? was the anxious
inquiry of men whom we have no right to charge with mere polit-
ical hostility to Hamilton or with indifference to the national
honor. A few years settled all such questions. The changed
relations of the whole commercial world brought such an increase
of national wealth as no man could have foreseen in 1790; and,
by the irony of fate, it was Hamilton's opponents who reaped the

Hamilton's answer to all such apprehensions and the effective
justification of his policy are to be found in his habitually sanguine
estimate of what might be expected from the growth of the
country. In 1781 he wrote to Morris that, if the United States
should succeed in the war, their population would double in thirty
years, and they would be out of debt in twenty.^ In his " Report
on Public Credit," he thought that no country would be able
to borrow from foreigners upon better terms than the United
States, " because none can perhaps afford so good security." ^ He
made his calculations, as we have seen, on an early fall in the
rate of interest to be paid by the government. And he wished to
hasten the rise of the national securities which he foresaw, in order
that, if they should pass into the hands of foreigners, it might be
for full value. ^ His optimism was, after all, the truest wisdom ;
and it explains and justifies the boldness with which he fixed the
scale of his funding system. In his view, the debt which was to
be funded, so far from being a perpetual burden, would fall easily
within the resources of the rising nation ; and, as it turned out,
a still more confident policy might have succeeded.

The legislation which he advised or procured was strictly con-
sistent with this expectation of future growth. Threatening as
his propositions appeared to his opponents, few men would now
dispute the statement that he undertook to cast the debt in such
form as to keep its redemption fairly within the control of the

tion of state debts, he says, rest chiefly on the increase of the general debt and the
difficulty of commanding all the resources of the country. " Give the Union that com-
mand, prove that its ability of paying the principal of the debt is not impaired by having
assumed the state debts, and the measure will stand almost justified." " Writings of
Gallatin," iii. 165.

1 " Works " (Lodge's edition), iii. 124.

2 "State Papers, Finance," i. 20. ^ Thiii., p. 25.


government, making the securities redeemable either at pleasure
or at such a rate as might be supposed to correspond to the ability
of a prosperous country. A quarter of a century ago the promise
of a sinking fund of one per cent per annum appeared to Congress
and to the public to be sufficient.^ Less than twenty years ago
a large part of the national debt was made irredeemable for thirty
years ; and a period even longer was favored by men who were
under no suspicion of favoring perpetual debt. With a scheme
far removed then from perpetuity, as judged by recent standards,
Hamilton undertook also to provide the machinery for carrying on
systematic redemption even before the resources needed for the
purpose could be counted on with certainty. So far, then, as the
terms of his legislation are concerned, or those of the measures
proposed by him, but not accepted by Congress, the charges made
by his opponents appear to be without real foundation.

It must be admitted, however, that Hamilton, when urging the
funding of the debt, sometimes used language which might well
expose him to the charge of desiring its permanence and the sus-
picion of aiming at its establishment on something like the Eng-
lish model. He saw plainly that the revival of industry could
only be accomplished by the aid of a sound mercantile credit,
and that for the growth of this the establishment and regular
operation of public credit were necessary. He saw the advantage
which must accrue to the community when the resources of indi-
viduals locked up in claims upon the government should become
mobile, by being converted into negotiable securities having a
recognized standing in the market. And he held the opinion,
often expressed since his time, that under some conditions a
diffused domestic debt may be a bond of union. In urging his
plans, then, he set forth in strong terms these advantages to be
gained from the funding system. He sometimes fell little short of
declaring a funded debt to be a real increase of capital, although
he did in fact make the distinction between an absolute increase of
capital — which, he says, a funded debt is not — and a tendency to
increase real wealth by increasing activity.^ In his letter to Morris

^ The operation of the sinking-fund provision of 1862 is of course much slackened
by the construction which calls for one per cent., not of the original debt, but of the
balance remaining unpaid at the beginning of the fiscal year.

'^ On this subject, see his " Report on Manufactures," in " State Papers, Finance,"
i. 132.



in 1781 he had declared that a "national debt, if it is not exces-
sive, will be to us a national blessing. It will be a powerful
cement of the Union." ^ And in his " Report on Public Credit "
he uses the same expression.^ On this occasion, however, an
explanation follows, which shows us his real thought. " Persuaded
as the Secretary is that the proper funding of the present debt will
render il a national blessing, yet he is so far from acceding to the
position, in the latitude in which it is sometimes laid down, that
public debts are pubHc benefits, a position inviting to prodigality
and liable to dangerous abuse, that he ardently wishes to see it
incorporated, as a fundamental maxim, in the system of public
credit of the United States, that the creation of debt should always
be accompanied with the means of extinguishment." This decla-
ration, not standing alone, but repeated on other occasions,^ places
his opinion as to national debts on consistent and easily de-
fensible grounds. How far it fell in with the English practice
of the day can best be seen when we consider the measures which
Hamilton took to secure the regular payment of the debt the
United States funded by the act of 1790.

Coming, then, to the second of Hamilton's leading measures,
the establishment of a sinking fund for the national debt, we find
an expedient unmistakably adopted from English legislation, —
so clearly derived from that source, in fact, that it would not call
for discussion here if the meaning of the English precedent had
not sometimes been lost sight of, and the key to Hamilton's action
therefore lost. Without doubt, Hamilton in this matter followed
Mr. Pitt.* What, then, was the scheme of Pitt .'' This question

1 "Works" (Lodge's edition), iii. 124.

2 " State Papers, Finance," i. 24. Jefferson fastened upon this famous phrase, and
in his letter to Eppes, November 6, 1813, remarks that at "the time we were funding our
national debts we heard much about 'a public debt being a public blessing'; that the
stock representing it was a creation of active capital for the aliment of commerce, manu-
factures, and agriculture. This paradox was well adapted to the minds of believers in
dreams, and the gulls of that sort entered bona fide into it." Jefferson's " Works," vi. 239.

'See CFpecially his "Report on Public Credit" of January, 1795, "State Papers,
Finance," i. 331, 332.

* A committee consisting of Hamilton, Madison, and Fitzsimons reported to Con-
gress a resolution, December 16, 1782, declaring that any excess of funds granted by the
states for the support of the debt should be inviolably appropriated as a sinking fund for
the payment of the principal. Journal of Congress, viii. 38. Whether Hamilton was
the author of the resolution or not, it docs not conflict with the above statement of his
indebtedness to Pitt.


is not to be answered by referring to the English sinking fund,
such as it became under later legislation in the years from which
most of the current impressions about it date. We must go back
to Mr. Pitt's sinking fund act of 1786, that being the legislation
actually before Hamilton when he adopted his policy, and not yet
modified even by Pitt's act of 1792, when the act of Congress of
that year gave to our system its more formal organization.

Having a sufficient surplus of revenue in 1786, and, as was then
believed, the prospect of a long peace, Mr. Pitt carried through
Parliament an act^ appropriating ;^2 50,000 quarterly to be ex-
pended in the purchase of government securities, and providing
that the interest on securities purchased should also be so expended,
all under the direction of a board of commissioners of high rank,
the accumulation to continue until such time as the commissioners
should hold securities yielding a clear income of four millions,
beyond which point, distant by calculation about twenty-eight
years, the interest on further purchases should be stopped, and
its amount made available for the relief of taxpayers. This sink-
ing fund of one million per annum, it is to be observed, was by the
terms of the act applicable to "the present public debt," of which
the estimated capital was a little over ^{^238,000,000. After all,
however, Mr. Pitt looked to excess of income over expenditure as
the means of payment ; and the dazzling results of compound
interest, often drawn from Dr. Price's popular calculations,^ were
only significant of the rate at which a given surplus might be
made to act, and not indicative of any new power of extinguish-
ment. Forced in 1792 to meet the possibility of extraordinary
expenditures which might require fresh loans, Mr. Pitt carried
through an additional act,^ providing that every future loan should

1 26 George IIL, c. 31,

2 Dr. Price's " Appeal to the Public on the Subject of the National Debt " was
published in 1772, and had been followed by other pamphlets on the same subject before
1786, when Mr. Pitt accepted his authority. Dr. Price was favorably known in the United
States ; for in 1778 Congress invited him to come to this country and take charge of the
finances. " Diplomatic Correspondence of the Revolution," iii. 64. And as by the
edition of his "Observations on Reversionary Payments" in 1783 he had thrown new
light on the subject of life annuities, it is a little singular that Hamilton passes him by in
silence, using the old tables of Halley for his calculations on annuities. " American
State Papers, Finance," i. 32.

3 32 George III., c. 55. For a review of Mr. Pitt's legislation on this subject, see
Mr. Huskisson's speech of March 25, 18 13, Mansard's " Parliamentary Debates," xxv. 287.


be accompanied by fresh taxation sufficient to meet its interest and
to provide a sinking fund of one per cent per annum for its capi-
tal, so that it might be extinguished in thirty or forty years,^ accord-
ing to the rate at which purchases could be made for that purpose.
The act of 1792, however, merely carried out the plain intent of
the act of 1786, that every funded debt should have the means pro-
vided for the steady extinguishment of its principal. The machin-
ery of the acts, the establishment of a board of commissioners to
apply the income of the fund for this purpose and to invest the
interest earned upon its accumulations, was a device for holding
Parliament to the policy which it had undertaken ; and the high
rank of the commissioners was relied upon as a protection against
legislative tampering. Under all the legislation down to 1802^
Mr. Pitt's sinking-fund system, stripped of its formalities, was as
nearly as possible that which states and corporations not infre-
quently adopt in our own day. It was not illusory in its financial
provisions, nor even in its dependence on the chances of war or
peace. It did rest, however, upon a complete illusion as to the
possibility of holding Parliament permanently to the system — as
to the possibility, that is, of binding the debtor by a compact made
with himself.'"^

This political defect of Mr. Pitt's measure was not disclosed,
however, during Hamilton's administration. Especially in the
years 1 789-1 792, the English exchequer was working on a peace

1 Ricardo says " under the most unfavorable circumstances in forty-five years."
" Works," p. 524. -^ 42 George III., c. 71.

2 In Ricardo's hard-headed " Essay on the Funding System " he declares that " it
will not . . . admit of a doubt that, if Mr. Pitt's sinking fund, as established in 1792,
had been always fairly acted upon, — if, for every loan, in addition to the war taxes, the
interest and a one per cent sinking fund had been invariably supplied by annual taxes, —
we should have made rapid progress in the extinction of debt." " Works," p. 531. But
" Mr. Pitt flattered himself most strangely. . . . With the knowledge of Parliament
which he had, it is surprising that he should have relied so firmly on the resistance which
the House of Commons would offer to any plan of ministers for violating the sinking
fund." Ibid., p. 543. In its actual operation under later legislation, Ricardo thought the
sinking fund had increased debt rather than diminished it, and so concludes "that no
securities can be given by ministers that the sinking fund shall be faithfully devoted to
the payment of debt, and without such securities we should be much better without such
a fund." Ibid., p. 545.

For Lord Stanhope's attempt to make the sinking fund a part of a fresh contract
with the fund-holders, see the debate in tiie House of Lords, May 22, 1786. " Hansard,"
xxvi. 17.



footing, and the sinking fund was therefore the last new thing in
finance and full of promise, when Hamilton organized his financial
system, and adopted, as a fundamental maxim, " that the creation of
debt should always be accompanied with the means of extinguish-
ment." The application of this maxim made it essential that with
the funding of the debt should be joined some plan for finally sink-
ing the principal. In his " Report on Public Credit," then, Hamil-
ton proposed the establishment of a Board of Commissioners,
composed, like Pitt's, of high officers of state,^ in whom should be
vested the control of a fund, to be applied to the purchase or pay-
ment of debt, and to continue so vested until the whole of the debt
should be discharged ; and he also proposed the contraction of a
new loan by the commissioners, its proceeds to be applicable chiefly
to the payment of matured foreign debt and to the purchase of public
securities below par, it being, in his opinion, an important object
both to raise the value of the public stock in the market and to
secure for the government the profits of such a reinvestment.
Waiving the proposition for a new loan and its application, it is
clear that Hamilton had in mind the estabUshment of an organized
sinking fund. The embarrassment was in finding the means for
feeding it, in the untried resources of the new government. He
proposed to devote for this purpose the net produce of the post-
office, to an amount not exceeding one million dollars, to be used
in purchases, and so to serve as a nucleus for a growing fund.
Congress, however, besides a general appropriation of the pro-
ceeds of Western lands for sinking the existing debts of the United
States,^ preferred to use for this purpose the surplus of revenue
which might remain at the end of the year 1790, owing its exist-
ence to the funding of interest on the domestic debt of the United
States to that date.^ This appropriation was not perfected by any

1 Pitt's commissioners, under the act of 1786, were the Speaker of the House of
Commons, the Chancellor of the Exchequer, the Master of the Rolls, the Accountant-
General of the Court of Chancery, the Governor and the Deputy Governor of the Bank
of England. Hamilton proposed as commissioners the President of the Senate, the
Speaker of the House of Representatives, the Chief Justice, the Secretary of the
Treasury, and the Attorney-General. Congress, by the act of August 12, 1790, § 2,
added the Secretary of State, and struck out the Speaker of the House. " Statutes at
Large," i. 186.

2 Act of August 4, 1790, § 22, " Statutes at Large," i. 144.

^ This surplus is reported, February i, 1793, to have amounted to ^1,374,656.
"State Papers, Finance," i. 219.


provision for the investment of the interest accruing on stock pur-
chased by the commissioners, so that the act of 1790 for the reduc-
tion of the public debt went no farther than the mere estabhshment
of a commission, not provided with any permanent resource what-
ever.i Hence the necessity for the recommendations made by
Hamilton in his report of January 23, 1792, when, evidently in pur-
suance of his original conception, he advised that the interest on
so much debt as might at any time have been purchased or paid by
the commissioners should itself be appropriated for further pay-
ments or purchases. " It will deserve the consideration of the legis-
lature," he added, " whether this fund ought not to be so vested as
to acquire the nature and quality of a proprietary trust, incapable of
being diverted without a violation of the principles and sanctions
of property."^ The act which carried out this recommendation as to
the investment of interest accruing on previous purchases,^ although
it does not use the term " sinking fund," in fact created such a
fund for the then existing debt of the United States, on precisely
the model of Pitt's sinking fund of 1786 ; * and it must be added that,
although the act of 1795 and Gallatin's act of 1802 differed from
this model in form, they both in fact depended for their efficacy
upon the same essential principle, — the compounding of interest
by the investment of interest accruing on purchases already made.
We have seen that Pitt in 1786 relied imprudently on the good
resolutions of future Parliaments. Hamilton, by the peculiar form
which had been given to a large part of the debt of the United
States, was enabled to secure a much more solid safeguard for the
uninterrupted working of his sinking fund. The six per cent
debt of the United States had been made reimbursable by pay-
ments not exceeding eight dollars upon a hundred in any one year
for both principal and interest. The act of 1792 had contemplated
the redemption of this stock when the whole annual income of the
sinking fund should have reached two per cent of the whole
amount of the stock outstanding, and had declared the interest

1 See act of August 12, 1790, "Statutes at Large," i. 186.

* " State Papers, Finance," i. 148.

' Act of May 8, 1792, §§ 6, 7, " Statutes at Large," i. 282.

* The term "sinking fund" does not appear in the legislation until the act of
March 3, 1795. The commissioners, however, in their journal, appear to have called
themselves "Commissioners of the Sinking Fund of the United States" as early as
August, 1791. "State Papers, Finance," i. 235.


accruing on stock held in the sinking fund to be " appropriated
and pledged firmly and inviolably " for this purpose. But, in his
elaborate report of January, 1795,^ Hamilton, dealing with larger
revenues and brighter prospects, recommended an addition to the
income of the sinking fund of so much of the proceeds of duties
on imports and tonnage and of excise as would suffice to begin at
once the redemption of the six per cents bearing a present inter-
est; and so much of the same revenues as, with the dividends
accruing to the government from the United States Bank, would
complete the payment for the bank stock and enable the redemp-

Online LibraryCharles Franklin DunbarEconomic essays → online text (page 10 of 40)