Transcript

One of the most important and controversial issues facing the new American Republic under the new presidential administration of George Washington was what to do about the large state debts that had been incurred by the states during the Revolutionary War. They tried to pay for the war, but didn’t have any money to do so, and so they went into debt.

After the war the question was, “Should those debts be repaid and how should they be repaid?” It became even more complicated because some of the states had already been paying off their debts while others had not been very aggressive in paying off their debts. And so there was tension amongst the states between those that had been fulfilling their obligations, their indebtedness, and those that didn’t seem to be paying off their debts as readily as other states. That led to a ferocious conflict within the Washington administration between Thomas Jefferson and Alexander Hamilton over the issue of state debts.

Hamilton wanted to assume the indebtedness of the states. That is, he wanted the national government to take responsibility for paying off the state debts. Thomas Jefferson and others in the Southern Colonies were reluctant to do that for several reasons. They feared the growing power of the federal government. They also feared the thought that some of the southern states that had already been paying off their debts would be disadvantaged by this policy.

Ultimately, they came to a compromise whereby the federal government assumed the state debts and, to assuage Thomas Jefferson, Hamilton and others agreed that the national capitol would be in Washington DC, the District of Columbia, just on the border of Northern Virginia.

Why was that so important? Alexander Hamilton, as the Secretary of the Treasury, wanted the federal government to demonstrate its strength and credibility by taking on debt so that it could convince the people who had money (called creditors) to have faith and conviction in the new national government. Thomas Jefferson and others feared that if the federal government took on all of this debt, it might ultimately become too powerful vis-ˆ-vis the states. Again, this is the issue of states’ rights versus national power.

Ultimately over time, Alexander Hamilton proved to be correct. By assuming the states’ debts, the states were relieved of a burden that many of them could not satisfy. This also enabled the federal government to begin developing a centralized national economic policy that has produced much of the prosperity that has distinguished the United States from virtually every other nation.

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