Before word spread, members of Congress secretly scooped up thousands of the bonds from unsuspecting farmers and war veterans, paying pennies on the dollar.
What followed set the stage for how Congress would respond to public outrage over such conflicts of interest for the next 200 years.
In response to the scandal, lawmakers prohibited Hamilton and future Treasury secretaries from buying or selling government bonds while in office.
But members of Congress did not extend the ban to themselves, a pattern that persists to this day.
“Congress has no problem imposing rules on others. We have a more difficult time doing it for ourselves,” said former representative Brian Baird (D-Wash.), who in 2006 co-authored the original Stock Act that called for greater financial disclosure about lawmakers’ stock trades.
In its ethics rules, Congress presents a twofold argument for why it creates different rules for itself than it does for federal judges and the executive branch officials.
First, Congress views itself as a “citizen legislature.” As such, lawmakers think their investment portfolios should mirror those of their constituents: The farm belt is best represented by farmers, who should serve on agriculture committees. Oil-rich states are best represented by oilmen, who should serve on energy committees.
The second argument for the disparate rules is that members of Congress are elected officials, while other federal workers are not. If voters think a lawmaker is too deeply conflicted, they can vote him or her out of office.
Congressional ethics experts say this logic is outdated.
“The problem now is Congress has become much more specialized. The chairman of the banking committee, for example, represents not just his state, but all of us,” said Dennis Thompson, an expert on congressional ethics and a public policy professor at Harvard University. “But unless I live in that congressman’s state, I don’t get the chance to vote him out.”
The modern conflict-of-interest laws came in response to the Watergate scandal, prompting Congress to pass the 1978 Ethics in Government Act.
Again, the rules were far stricter for the executive branch than for Congress. The act created the public financial disclosure form, requiring members of Congress, their staffs and those in the executive branch to annually disclose most of their assets but reveal their dollar value only in broad ranges.
Congress determined that, from these forms, voters could evaluate a member’s conflicts.
However, the forms were put to a different use for executive branch officials.
Officials in the newly established Office of Government Ethics began using the forms to identify potential financial conflicts.
Federal employees — particularly presidential appointees — are routinely ordered to divest themselves of holdings that pose a potential conflict. They are also ordered to refrain from making any new investments in industries that they oversee and can influence. For example, in 2006, Henry M. Paulson had to divest himself of $500 million in Goldman Sachs stock before his appointment as Treasury secretary from Congress.