Unit Seven: The Federalist
Era
How do we Fund and Run a
Government?
National Debt
• At the beginning of Washington’s
administration he and Congress had to deal
with a new nation that was bankrupt (without
money) and in debt.
• The A.O.C. had accumulated a very large debt
during its tenure due to its lack of power to tax
the states and collect money.
• The new government needed a way to collect
some form of tax revenue to be able to run the
government, rebuild its credit (ability to borrow
money) status, and an economic plan on how
to run the nation.
Hamilton’s Plan
•
As Secretary of the Treasury Alexander Hamilton
developed a financial plan based around four
main principles:
1. Fund the National debt and assume the debts
of the states. (to build credit and tie the states
to the new government)
2. Establish a national bank. (tie the wealthy to
the new government)
3. Pass a national excise tax (tax on a specific
good).
4. Enact a Revenue tariff. (a way to fund the
government and protect American industry
from cheaper imported goods)
Funding the Government
• The first economic measure passed by
Congress was the Tariff of 1789 which
placed a revenue tariff on most imported
goods. (this was to be the major source of
income for the government for many
years).
• The Southern Planters though accused it
of being a Protective tariff, aiding the
northern industrialists and hurting them.
Hamilton’s Reports
• The new government needed to know its
financial status, so they commissioned
Hamilton to survey the nations economy
and report back to Congress.
• Hamilton came back with five reports to
Congress: Report on the Public Credit,
Report on Tariffs, Report on a National
Bank, Report on the establishment of a
Mint, and Report on Manufactures
Report on the Public Credit
• In 1790 Hamilton gave the Report on the
Public Credit that gave an overview of the
new government’s financial status.
• The new government was in debt not only
to its own citizens (mostly the wealthy), but
also to foreign powers.
• Hamilton's plan was four fold to reissue
government bonds, assume debts of
states, establish a revenue tariff, and
establish a national excise tax.
Report on the Public Credit
• During the Revolutionary war the
government had issued bonds (certificates
representing the money borrowed) to all its
creditors promising to repay later.
• After the war because the value of the
bonds began to drop, people called
speculators (purchase something in the
hope that it will make them a profit later)
began to buy all the bonds up from the
mass of people selling them.
Report on the Public Credit
• Hamilton’s plan was simple, to reissue the bonds
at a higher interest rate, but they would have a
longer term for cash payment. (this would give
the government a longer time to pay off its
debts.
• The other part of the report was for the National
government to assume the debts of the states,
to concentrate all debt in one entity.
• The report also established the need for a tariff
to raise money and protect American industry,
and the founding of an excise tax on whiskey.
Capitalism
• Hamilton also in the report wanted to base the
American economy on the system of Capitalism
(economic system where the means of
production are owned by private citizens for the
means of making profit [money made by the
selling of a good or service]).
• The first capitalist system used by America was
a free-market/enterprise system (government
does not intervene allowing demand and supply
to guide itself on the market [place where goods
are traded], also known as laissez-faire [hands
off gov.]).
Capitalism
• The idea of capitalism
was founded by Adam
Smith in his book
Wealth of Nations.
• In his book he said that
that there was an
“invisible hand” that guided the
relationship between buyers and sellers,
so an intervention from a governmental
body was not needed.
Report on a National Bank
• The next major report was the Report on a
National Bank on the founding of a Bank of the
United States (B.U.S.).
• The BUS was to be a joint effort between the
citizens and the government (1/5 owned by the
government and 4/5 by private investors).
• The BUS would serve as the financial agency of
the government collecting taxes, repository
(safe) of the government’s cash, and issue
paper money called bank notes.
• The BUS would also lend money to
businessmen for the needed capital to start or
expand business and the businessmen would
give a security (something given as promise of
repayment).
How to interrupt the Constitution
• The BUS came before Congress in the form of the
bank bill which developed into a debate over the
interruption of the Constitution and the power given
to Congress.
• The Constitution can be interrupted two ways: 1.)
Strict (word for word), or 2.) broad/loose ( reading
between the lines, assuming).
• Hamilton said Congress had the power to create a
BUS due to the Necessary and Proper Clause of
the Constitution (it states that Congress has the
power to make any laws necessary and proper to
the running of the country).
How to interrupt the Constitution
• The Necessary and Proper Clause is also
known as the Elastic Clause because it has
allowed Congress to grow the Federal
bureaucracy (federal agencies) and its power.
• The issue over the interpretation of the
Constitution and the power of the Federal
government led to the development of the
first two political parties in America.
• These first two parties were the DemocraticRepublicans and the Federalist Party.
Development of Political Parties
• The Democratic-Republicans were followers of
Thomas Jefferson and believed in a limited
national government, state’s rights, and a
federation style government.
• The Federalists were followers of Alexander
Hamilton and believed in a strong national
government and a union style government.
• A political party is a group of voters who agree
on issues (called their platform) and agree to
vote together for their candidates.
• This led to the two-party system of political
parties we have today.
Report on a Mint
• The next major report was the Report on a Mint
for the founding of a Mint (place where money is
made) to make the monetary system more
stable and efficient.
• Hamilton suggested that silver, gold, and
banknotes be used as legal tender to settle all
debts.
• Hamilton also wanted the system to be based on
the decimal system. (1,5,10,50,100 or.1, .5, .10,
.25)
• The Mint Act led to the founding of the first
Federal Mint in Pennsylvania that issued fiat
(paper money) that could be traded in for specie
(hard money i.e.. gold or silver).
Report on Manufactures
• The last of Hamilton’s reports was the
Report on Manufactures stating the need
for a protective tariff, government
bounties, and the extension of roads and
canals to aid in the movement of goods.
• These issues were not addressed by
Congress because the improvement of the
land (such as roads) was seen as a state
matter and not a federal matter. (later this
will change due to the idea of intrastate
and interstate commerce)
Election of 1792
• As Washington’s first term in office came to
an end he wished to retire and go home, but
was persuaded to run again for office.
• Once again Washington received a
unanimous re-election by the electoral
college and Adams was chosen to be Vice
President.
• Washington though was constantly having to
deal with the issue of holding together his
cabinet of rivals for the betterment of the
nation.
Domestic Issues
• During Washington’s two terms in office he
had to deal with two pressing domestic
issues (concerns of the nation at home):
– 1.) The Whisky Rebellion
– 2.) Indian uprisings
• Both of these issues had to be dealt with
carefully because they would set the
precedent for further responses by the
Federal government.
The Whiskey Rebellion
• The Whiskey Rebellion grew out of a response
of frontier farmers (mainly in Pennsylvania) over
the Federal excise tax on whiskey.
• The frontier farmers had no way to transport
their wheat to market and make profit, so they
would turn it into whiskey allowing them to
transport it further distances and making more
money (because a mule could carry more worth
of whiskey than wheat).
• In some of these frontier areas like Kentucky,
whiskey was even used as currency.
The Whiskey Rebellion
• The frontier farmers believing they were
being mistreated led by David Bradford
and James Marshall attacked and
threatened tax collectors (even riding them
out of town after tar and feathering them).
• In response and under the urging of
Hamilton, Washington sent a militia of
15,000 men under the command of
General Henry “light horse Harry” Lee to
subdue the rioters near Pittsburgh, but
when they got there most of the protests
had died down or had stopped altogether.
The Whiskey Rebellion
• Washington said if it was not stopped, “we
can bid adieu to all government in this
country except for mob and club
government.”