I will not disagree that Jefferson is referring to the Sedition Acts (also consider his response via the Virginia & Kentucky Resolutions). But he was also talking about a whole lot more than just the suppression of free speech. I'll include a little bit more of his speech, and leave it to you to decide whether he refers to just "speech", or to a change in the compostion of the government. He's also trying to prevent a revolution.
During the contest of opinion through which we have passed the animation of discussions and of exertions has sometimes worn an aspect which might impose on strangers unused to think freely and to speak and to write what they think; ... And let us reflect that, having banished from our land that religious intolerance under which mankind so long bled and suffered, we have yet gained little if we countenance a political intolerance as despotic, as wicked, and capable of as bitter and bloody persecutions. During the throes and convulsions of the ancient world, during the agonizing spasms of infuriated man, seeking through blood and slaughter his long-lost liberty, it was not wonderful that the agitation of the billows should reach even this distant and peaceful shore; that this should be more felt and feared by some and less by others, and should divide opinions as to measures of safety. But every difference of opinion is not a difference of principle. We have called by different names brethren of the same principle. We are all Republicans, we are all Federalists. If there be any among us who would wish to dissolve this Union or to change its republican form, let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it. I know, indeed, that some honest men fear that a republican government can not be strong, that this Government is not strong enough; but would the honest patriot, in the full tide of successful experiment, abandon a government which has so far kept us free and firm on the theoretic and visionary fear that this Government, the world's best hope, may by possibility want energy to preserve itself?
After all, he's willing to let not just secessionists but also those who would change the "republican form" of the union stand undisturbed. It would be very hard for them to change the republican form of the union when Jefferson had the Presidency and his party controlled Congress, and if they seriously tried to impose a non-republican regime, Jefferson would surely oppose that.
To really understand what is meant by a "republican form" of government, allow the words of the James Madison to enlighten us:
If we resort for a criterion to the different principles on which different forms of government are established, we may define a republic to be, or at least may bestow that name on, a government which derives all its powers directly or indirectly from the great body of the people, and is administered by persons holding their offices during pleasure, for a limited period, or during good behavior.
PUBLIUS (James Madison), Federalist No. 39
Simple enough it seems, but the anti-Federalists had issues with that limited definition. They aslo wanted to verify the scope of the "republic". I'll allow Madison to explain it himself:
``But it was not sufficient,'' say the adversaries of the proposed Constitution, ``for the convention to adhere to the republican form. They ought, with equal care, to have preserved the FEDERAL form, which regards the Union as a CONFEDERACY of sovereign states; instead of which, they have framed a NATIONAL government, which regards the Union as a CONSOLIDATION of the States.'' And it is asked by what authority this bold and radical innovation was undertaken? The handle which has been made of this objection requires that it should be examined with some precision.
[I]t appears, on one hand, that the Constitution is to be founded on the assent and ratification of the people of America, given by deputies elected for the special purpose; but, on the other, that this assent and ratification is to be given by the people, not as individuals composing one entire nation, but as composing the distinct and independent States to which they respectively belong. It is to be the assent and ratification of the several States, derived from the supreme authority in each State, the authority of the people themselves. The act, therefore, establishing the Constitution, will not be a NATIONAL, but a FEDERAL act.
That it will be a federal and not a national act, as these terms are understood by the objectors; the act of the people, as forming so many independent States, not as forming one aggregate nation, is obvious from this single consideration, that it is to result neither from the decision of a MAJORITY of the people of the Union, nor from that of a MAJORITY of the States. ... Each State, in ratifying the Constitution, is considered as a sovereign body, independent of all others, and only to be bound by its own voluntary act.
PUBLIUS (James Madison), Federalist No. 39
It's an interesting read. This is what Jefferson is referring to - the retention of states rights. The Kentucy & Virginia Resolutions were in answer to the Alien & Sedition Acts, and in the Resolutions Jefferson took care to reiterate the concept of nullification/secession as a resort against the powers exercised by the federal government in violation of the Constitution. So when Jefferson is stating that those who "wish to dissolve this Union or to change its republican form, let them stand undisturbed", he means just that. That they do have the right to "free speech", and they have the right to try to change it (via amendments), employ nullification, or to leave if they don't like it. It wasn't worth destroying the union to preserve it.
Yes, they can stand undisturbed because only a moron would suggest that the Union be dissolved.
Walt
The proposed Constitution, therefore, is, in strictness, neither a national nor a federal Constitution, but a composition of both. In its foundation it is federal, not national; in the sources from which the ordinary powers of the government are drawn, it is partly federal and partly national; in the operation of these powers, it is national, not federal; in the extent of them, again, it is federal, not national; and, finally, in the authoritative mode of introducing amendments, it is neither wholly federal nor wholly national.
I defer to those who have more time and expertise to say just what it means and how it fits in with Madison's later views and the views of the other founders.
We both agree that Jefferson was affirming his belief in free speech and his unwillingness to jail people over differences of opinion*. Was he doing more than that? Was he saying that his opponents could nullify the laws Congress passed or leave the union if they didn't like his policies? I don't know and can't say with any certainty what he was thinking.
In Jefferson's heart was the conviction that he himself would never do anything to threaten or abridge the Constitution, and that his opponents would, if they were allowed to. Therefore, while he might be denounced verbally, he would not give his opponents legitimate grounds for rebellion or secession or nullification as he understood them. Jefferson would not be the first statesman or politician to view the world in this way. This was the source of his great conviction and passion. His opponents would use the word hypocrisy.
Indeed, he did have an ace up his sleeve: a state might threaten to leave if the federal government were too oppressive, but would not do so if it were not repressive enough. Since he viewed the hard-core Federalists as tyrannical and his own party as libertarian, could he have expected that the threat of secession that he had used against the Federalists could be used against his own administration?
Did Jefferson forsee that his opponents would view him as a tyrant? They did during the Embargo crisis. Did he imagine that the ideas he had promoted against the Federalists could be used against himself? How did he react when they were?
In any event Jefferson was more of a friend to ideas of nullification and secession than many of our other Founding Fathers. I'm going to read more about him and I'd appreciate feedback from others.
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*It should be noted that his appeal was to more moderate and independent voters. "We are all federalists. We are all republicans." But not "Federalists," since he still believed hid more convinced opponents were enemies of republicanism and a danger to the Constitution and the republic.