Definition
During the Revolution, the government paid soldiers and suppliers with certificates, IOUs that speculators later bought from many holders for a fraction of their face value. In January 1790, Treasury Secretary Alexander Hamilton proposed exchanging every certificate for new federal bonds at its full face value, paid to whoever held it, with federal taxes to cover the interest. He argued that the debt was the price of liberty, and he wanted good credit for the new government and a stake in its success for wealthy creditors. James Madison proposed sharing the payment with the soldiers who had sold their certificates, but he lost in the House.
Why it matters on the AP exam
Funding at par is the part of Hamilton's program that tests the trade-off between public credit and fairness. Paying current holders in full gave the United States good credit and tied wealthy bondholders to the new government, but critics said it rewarded speculators instead of the veterans who had sold their certificates at a loss. Madison's break with Hamilton over the vote, after they had written The Federalist together, was an early step toward the split that produced the first parties. It also contrasts with the Confederation period, when a Congress that could not tax let its certificates sink far below face value.
In the sources
“It was the price of liberty. The faith of America has been repeatedly pledged for it.”
Connections
- Assumption of state debts: the companion measure that took over the states' war debts
- First Bank of the United States: the national bank that Hamilton proposed to manage the government's finances
- Whiskey Rebellion: resistance to the excise tax that helped pay the debt
- Articles of Confederation: a Congress that could not tax had let its certificates lose most of their value