Hamilton’s Financial System
Meanwhile, during George Washington’s presidency, political trouble was already brewing. Washington’s cabinet choices reflected continuing tension between politicians who wanted and who feared a powerful national government. The vice president was John Adams, and Washington chose Alexander Hamilton (Figure 7) to be his secretary of the treasury. Both men wanted an active government that would promote prosperity by supporting American industry. However, Washington chose Thomas Jefferson to be his secretary of state, and Jefferson was committed to restricting federal power and preserving an economy based on agriculture. From almost the beginning, Washington struggled to reconcile the “Federalist” and “Republican” (or Democratic-Republican) factions within his own administration.
Alexander Hamilton believed that self-interest was the “most powerful incentive of human actions.” Self-interest drove humans to accumulate property, and that effort created commerce and industry. According to Hamilton, government had important roles to play in this process. First, the state should protect private property from theft. Second, according to Hamilton, the state should use human “passions” and “make them subservient to the public good.” In other words, a wise government would harness its citizens’ desire for property so that both private individuals and the state would benefit.
Hamilton, like many of his contemporary statesmen, did not believe the state should ensure an equal distribution of property. Inequality was “the great & fundamental distinction in Society,” and Hamilton saw no reason to change this reality. Instead, Hamilton wanted to tie the economic interests of wealthy Americans, or “monied men,” to the federal government’s financial health. If the rich needed the government, then they would direct their energies to making sure it remained solvent.
Hamilton, therefore, believed that the federal government must be “a Repository of the Rights of the wealthy.” As the nation’s first secretary of the treasury, he proposed an ambitious financial plan to achieve that.
The first part of Hamilton’s plan involved federal “assumption” of state debts, which were mostly left over from the Revolutionary War. The federal government would assume responsibility for the states’ unpaid debts, which totaled about $25 million. Second, Hamilton wanted Congress to create a bank — a Bank of the United States.
The goal of these proposals was to link federal power and the country’s economic vitality. Under the assumption proposal, the states’ creditors (people who owned state bonds or promissory notes) would turn their old notes in to the Treasury and receive new federal notes of the same face value. Hamilton foresaw that these bonds would circulate like money, acting as “an engine of business, and instrument of industry and commerce.” This part of his plan, however, was controversial for two reasons.
First, many taxpayers objected to paying the full face value on old notes, which had fallen in market value. Often the current holders had purchased them from the original creditors for pennies on the dollar. To pay them at full face value, therefore, would mean rewarding speculators at taxpayer expense. Hamilton countered that government debts must be honored in full, or else citizens would lose all trust in the government. Second, many southerners objected that they had already paid their outstanding state debts, so federal assumption would mean forcing them to pay again for the debts of New Englanders. Nevertheless, President Washington and Congress both accepted Hamilton’s argument. By the end of 1794, 98 percent of the country’s domestic debt had been converted into new federal bonds.
Hamilton’s plan for a Bank of the United States, similarly, won congressional approval despite strong opposition. Thomas Jefferson and other Republicans argued that the plan was unconstitutional; the Constitution did not authorize Congress to create a bank. Hamilton, however, argued that the bank was not only constitutional but also important for the country’s prosperity. The Bank of the United States would fulfill several needs. It would act as a convenient depository for federal funds. It would print paper banknotes backed by specie (gold or silver). Its agents would also help control inflation by periodically taking state bank notes to their banks of origin and demanding specie in exchange, limiting the amount of notes the state banks printed. Furthermore, it would give wealthy people a vested interest in the federal government’s finances. The government would control just twenty percent of the bank’s stock; the other eighty percent would be owned by private investors. Thus, an “intimate connexion” between the government and wealthy men would benefit both, and this connection would promote American commerce.
In 1791, therefore, Congress approved a twenty-year charter for the Bank of the United States. The bank’s stocks, together with federal bonds, created over $70 million in new financial instruments. These spurred the formation of securities markets, which allowed the federal government to borrow more money and underwrote the rapid spread of state-charted banks and other private business corporations in the 1790s. For Federalists, this was one of the major purposes of the federal government. For opponents who wanted a more limited role for industry, however, or who lived on the frontier and lacked access to capital, Hamilton’s system seemed to reinforce class boundaries and give the rich inordinate power over the federal government.
Hamilton’s plan, furthermore, had another highly controversial element. In order to pay what it owed on the new bonds, the federal government needed reliable sources of tax revenue. In 1791, Hamilton proposed a federal excise tax on the production, sale, and consumption of a number of goods, including whiskey. (3)
The Whiskey Rebellion and Jay’s Treaty
Grain was the most valuable cash crop for many American farmers. In the West, selling grain to a local distillery for alcohol production was typically more profitable than shipping it over the Appalachians to eastern markets. Hamilton’s whiskey tax thus placed a special burden on western farmers. It seemed to divide the young republic in half — geographically between the East and West, economically between merchants and farmers, and culturally between cities and the countryside.
In western Pennsylvania in the fall of 1791, sixteen men, disguised in women’s clothes, assaulted a tax collector named Robert Johnson. They tarred and feathered him, and the local deputy marshals seeking justice met similar fates. They were robbed and beaten, whipped and flogged, tarred and feathered, and tied up and left for dead. The rebel farmers also adopted other protest methods from the Revolution and Shays’ Rebellion, writing local petitions and erecting liberty poles. For the next two years, tax collections in the region dwindled.
Then, in July 1794, groups of armed farmers attacked federal marshals and tax collectors, burning down at least two tax collectors’ homes. At the end of the month, an armed force of about 7,000, led by the radical attorney David Bradford, robbed the U.S. mail and gathered about eight miles east of Pittsburgh. President Washington responded quickly.
First, Washington dispatched a committee of three distinguished Pennsylvanians to meet with the rebels and try to bring about a peaceful resolution. Meanwhile, he gathered an army of thirteen thousand militiamen in Carlisle, Pennsylvania. On September 19, Washington became the only sitting president to lead troops in the field, though he quickly turned over the army to the command of Henry Lee, a Revolutionary hero and the current governor of Virginia.
As the federal army moved westward, the farmers scattered. Hoping to make a dramatic display of federal authority, Alexander Hamilton oversaw the arrest and trial of a number of rebels. Many were released due to lack of evidence, and most of those who remained, including two men sentenced to death for treason, were soon pardoned by the president. The Whiskey Rebellion had shown that the federal government was capable of quelling internal unrest. But it also had demonstrated that some citizens, especially poor westerners, viewed it as their enemy.
Around the same time, another national issue also aroused fierce protest. Along with his vision of a strong national financial system, Hamilton also had a vision of an America busily engaged in foreign trade. In his mind, that meant pursuing a friendly relationship with one nation in particular: Great Britain.
America’s relationship with Britain since the end of the Revolution had been tense, partly because of warfare between the British and French. Their naval war threatened American shipping. Most obvious and galling to American citizens was the “impressment” of seized American sailors into Britain’s powerful navy, which made American trade risky and expensive — not to mention humiliating. Nevertheless, President Washington was conscious of American weakness and was determined not to take sides. In April 1793, he officially declared that the United States would remain neutral. With his blessing, Hamilton’s political ally John Jay (Figure 9), who was currently serving as chief justice of the Supreme Court, sailed to London to negotiate a treaty that would satisfy both Britain and the United States.
Jefferson and Madison strongly opposed these negotiations. They mistrusted Britain and wanted America to favor France instead. The French had recently overthrown their own monarchy, and Republicans thought the United States should be glad to have the friendship of a new revolutionary state. They also suspected that a treaty with Britain would favor northern merchants and manufacturers over the agricultural South.
In November 1794, despite their misgivings, John Jay signed a “treaty of amity, commerce, and navigation” with the British. Jay’s Treaty, as it was commonly called, required Britain to abandon its military positions in the Northwest Territory (especially Fort Detroit, Fort Mackinac, and Fort Niagara) by 1796. Britain also agreed to compensate American merchants for their losses. The United States, in return, agreed to treat Britain as its most prized trade partner, which meant tacitly supporting Britain in its current conflict with France. Unfortunately, Jay had failed to secure an end to impressment.
For Federalists, this treaty was a significant accomplishment. Jay’s Treaty gave the United States, a relatively weak power, the ability to stay officially neutral in European wars, and it preserved American prosperity by protecting trade. For Jefferson’s Republicans, however, the treaty was proof of Federalist treachery. The Federalists had sided with a monarchy against a republic, and they had submitted to British influence in American affairs without even ending impressment. In Congress, debate over the treaty transformed the Federalists and Republicans from temporary factions into two distinct (though still loosely organized) political parties. (3)