Federal Government Assumes State Debt

A View of Wall Street and City Hall in New York

The federal government agreed to redeem the debts of individual states. Debt assumption was supported by Hamilton, but opposed by Madison, who said it rewarded speculators. It was also opposed by a number of key states, such as Virginia, who had repaid all their debts.

In order to put the new Federal government on sound footing, Hamilton felt it necessary to redeem the debt issued by nation before the federal government had begun. He proposed that the federal government take over all of the prior national debt, which totaled $52 million. In addition, Hamilton suggested that the United States also repay the states' debts, which totaled $25 million.

There were substantial objections to Hamilton's proposals. First, Madison and many others claimed that federal repayment of debts would only help the speculators, since much of the original debt had been sold to them below par. An example of that were Continental soldiers who instead of being paid for their service received IOU's. Speculators then would come and offer them 25 cents for each dollar of debt. Madison suggested that the debt be paid in full only to those who had originally issued the debt and that speculators be paid only 50% of face value. Second, many of the Southern states opposed the repayment of states' debts, since they had already repaid their own debts.

A compromise was reached when Hamilton agreed to support the movement of the nation's capital from Philadelphia, which was considered a Northern city, to Washington, D.C., a southern location on the border of Virginia. In return key Southern politician supported Hamilton's debt plan.