It has been well observed, that to coerce the States is one of the maddest projects that was ever devised. A failure of compliance will never be confined to a single State. This being the case, can we suppose it wise to hazard a civil war? Suppose Massachusetts or any large State should refuse, and Congress should attempt to compel them, would not they have influence to procure assistance, especially from those States which are in the same situation as themselves? What picture does this present to our view? A complying State at war with a non-complying State; Congress marching the troops of one State into the bosom of another; this State collecting auxiliaries, and forming, perhaps, a majority against its federal head. Here is a nation at war with itself! Can any reasonable man be well disposed towards a Government which makes war and carnage the only means of supporting itself -- a Government that can exist only by the sword? Every such war must involve the innocent with the guilty. This single consideration should be sufficient to dispose every peaceable citizen against such a Government.
Your quote is from a speech Hamilton gave at the New York State ratifying convention in Poughkeepsie. Let's look at more of what he says:
A complying State at war with a non-complying State; Congress marching the troops of one State into the bosom of another; this State collecting auxiliaries and forming perhaps a majority against its federal head. Here is a nation at war with itself! A government that can exist only by the sword! Every such war must involve the innocent with the guilty. This single consideration should be sufficient to dispose every peaceable citizen against such a government.
But can we believe that one State will ever suffer itself to be used as an instrument of coercion? It is a dream. It is impossible. We are brought to this dilemma: Either a federal standing army is to enforce the requisitions, or the federal treasury is left without supplies, and the government without support. What is the cure for this great evil? Nothing but to enable the national laws to operate on individuals, in the same manner as those of the States do. This is the true reasoning upon the subject. Gentlemen appear to acknowledge its force, and yet, while they yield to the principle, they seem to fear its application to this government.
Well, we had a federal army to enforce the laws in 1861. Lincoln was never as much of a Hamiltonian as his modern detractors claim, but it's safe to say that in 1861, Hamilton, like Madison, would have been if not exactly a Lincolnian, then at least against the rebellion.
You can find Hamilton's argument, its context, and conclusions further developed in Federalist No. 16.