HAMILTON'S VISION OF AMERICA
The tariff and tonnage duties, linked as they were to other issues,
marked but the beginning of the effort to get the country on a sound
fiscal basis. In finance, with all its broad implications for policy in
general, it was thirty-four-year-old Alexander Hamilton who seized the
initiative. The first secretary of the treasury was a protégé of the
president, a younger man who had been Washington's aide during four
years of the Revolution. Born out of wedlock on a Caribbean island and
deserted by a ne'er-do-well father, Hamilton was left an orphan at thirteen by the death of his mother. With the help of friends and relatives,
he found his way at seventeen to New York, attended King's College
(later Columbia University), entered the revolutionary agitations as
speaker and pamphleteer, and joined the army, where he came to the
attention of the commander. George Washington was an essential to
me," Hamilton wrote later, after the president's death. He studied law,
passed the bar examination, established a legal practice in New York,
and became a self-made aristocrat, serving as collector of revenues and
member of the Confederation Congress. An early convert to nationalism, he had a major role in promoting the Constitutional Convention.
Hamilton had been a hero of the siege of Yorktown, and he remained
forever after a frustrated military genius, hungry for greater glory on the
field of battle.
Shrewd, energetic, and determined, Hamilton was also quick to take
offense and reluctant to forgive, impatient with critics and intolerant of
error. When Jefferson once told him that he considered Francis Bacon,
Isaac Newton, and John Locke the three greatest men who ever lived.
Hamilton quickly countered: "The greatest man that ever lived was
Julius Caesar," Hamilton indeed had Caesar's limitless ambition. As he
recognized at age fourteen. "To confess my weakness, my ambition is
prevalent."
In a series of classic reports submitted to Congress in the two years
from January 1790 to December 1791, Hamilton outlined his program
for government finances and the economic development of the United
States. The reports were soon adopted, with some alterations in detail
but little in substance. The last of the series, the Report on Manufactures, outlined a program of protective tariffs and other governmental
supports of business. This .eventually would become government policy, despite much brave talk of free enterprise and free trade.
Hamilton submitted the first and most
important of his reports to the House of Representatives in January 1790
at the invitation of that body. This First Report on the Public Credit, as it
has since been called, made two key recommendations: first, funding of
the federal debt at face value, which meant that those citizens holding
government bonds could exchange them for new interest-bearing bonds;
and second, the federal government's assumption of state debts from the
Revolution to the amount of $21 million. The funding scheme was
controversial because many farmers and soldiers in immediate need of
money had sold their securities for a fraction of their value to
speculators who were eager to buy them up after reading Hamilton's
First Report. These common folk argued that they should be reimbursed
for their losses; otherwise, the speculators would gain a windfall from
the new government's funding of bonds at face value. Hamilton sternly
resisted such pleas. The speculators, he argued, had "paid what the
commodity was worth in the market, and took the risks." Therefore, they
should reap the benefits. In fact, Hamilton insisted, the government
should do all it could to win over the financial community because it
represented the bedrock of a successful nation.
The report provided the material for lengthy debates before its substance was adopted in August. Then in short order came three more
reports: a Second Report on Public Credit, which included a proposal for
an excise tax on distilled spirits to aid in raising revenue to cover the
nation's debts (Hamilton meant this tax also to establish the precedent
of an excise tax, and to rebuke elements that had been least friendly to
his program). Another report recommended a national bank, a revival of
the Robert Morris idea that had led to the Bank of North America. The
secretary proposed a national mint-which was established in 1792.
Finally, in December 1791, as the culmination of his basic reports, the
Report on Manufactures proposed an extensive program of government
aid and encouragement to the development of manufacturing enterprises.
Each of Hamilton's reports excited vigorous discussion and disagreement. His program was substantially the one Robert Morris had urged
upon the Confederation a decade before, and which Hamilton had
~ ESTABLISHING THE PUBLIC CREDIT
strongly endorsed at the time. "A national debt," he had written Morris
in 1781, "if it is not excessive, will be to us a national blessing; it will be
a powerful cement of our union. It will also create a necessity for keeping up taxation to a degree which without being oppressive, will be a
spur to industry." Payment of the national debt, in short, would be not
only a point of national honor and sound finance, ensuring the country's
credit for the future; it would also be an occasion to assert a national
taxing power and thus instill respect for the authority of the national
government. Not least, the plan would win the new government the
support of wealthy, influential creditors.
It was on this point, however, that
Madison, who had been Hamilton's close ally in the movement for a
stronger government, broke with him for the second time (their first
break had been over tonnage duties), and as in the first case the difference here had ominous overtones of sectionalism. Madison did not
question that the debt should be paid; he was troubled, however, that
speculators and "stock-jobbers" would become the chief beneficiaries.
That the far greater portion of the debt was held north of the MasonDixon line further troubled him. Madison, whom Hamilton had expected
to take the lead for his program in the House, therefore advanced an
alternative plan to give a larger share to the first owners than to the later
speculators. "Let it be a liberal one in favor of the present holders,"
Madison conceded. "Let them have the highest price which has
prevailed in the market; and let the residue belong to the original
sufferers." Madison's opposition touched off a vigorous debate, but
Hamilton carried his point by a margin of three to one when the house
brought it to a vote.
Madison’s opposition to the assumption of state debts got more support, however, and set up a division more clearly along sectional lines.
The southern states, with the exception of South Carolina, had whittled
clown their debts. New England, with the largest unpaid debts, stood to
be the greatest beneficiary of the assumption plan. Rather than see
Virginia victimized, Madison held out an alternative. Why not, he suggested, have the government assume state debts as they stood in 1783 at
the conclusion of the peace? Debates on this point deadlocked the
whole question of debt funding and assumption through much of 1790.
The stalemate finally ended when Hamilton accosted Thomas Jefferson on the steps of the president's home and suggested a compromise.
The next evening, at a dinner arranged by Jefferson, Hamilton and
Madison reached an understanding. In return for northern votes in favor
of locating the permanent capital on the Potomac, Madison pleddged to
seek enough southern votes to pass the assumption, with the further
arrangement that those states with smaller debts would get in
SECTIONAL DIFFERENCES EMERGE
effect outright grants from the federal government to equalize the difference. With these arrangements, enough votes were secured to carry
Hamilton's funding and assumption schemes. The capital would be
moved to Philadelphia for ten years, after which time it would be settled
at a Federal City on the Potomac, the site to be chosen by the president.
In August 1790 Congress finally passed the legislation for Hamilton's
plan.
By this vast program of funding and assumption, ~
Hamilton had called up from nowhere, as if by magic, a great sum of
capital. As he put it in his original report, a national debt "answers most of
the purposes of money." Transfers of government bonds, once the debt was
properly funded, would be "equivalent to payments in specie." This feature
of the program was especially important in a country that had, from the first
settlements, suffered a shortage of hard money. Having established the
public credit, Hamilton moved on to a related measure essential to his
vision of national greatness. He called for a national bank, which by
issuance of bank notes (paper money) might provide a uniform currency.
Government bonds held by the bank would back up the value of its new
bank notes, needed as a medium of exchange because of the chronic
shortage of specie. The national bank, chartered by Congress, would remain
under governmental surveillance, but private investors would supply fourfifths of the $10 million capital and name twenty of the twenty-five
directors; the government would pro~ A NATIONAL BANK
The first Bank of the United States in Philadelphia. Proposed by
Hamilton, the bank opened in 1 i91.
vide the other fifth of the capital and name five directors. Government
bonds would be received in payment for three-fourths of the stock in the
bank, and the other fourth would be payable in gold and silver.
The bank, Hamilton explained, would serve many purposes. Its notes
would become a stable currency, uniform in value because redeemable
in gold and silver upon demand. Moreover, the bank would provide a
source of capital for loans to fund the development of business and
commerce. Bonds, which might otherwise be stowed away in safes,
would instead become the basis for a productive capital by backing up
bank notes available for loan at low rates of interest, the "natural effect"
of which would be "to increase trade and industry." What is more, the
existence of the bank would serve certain housekeeping needs of the
government: a safe place to keep its funds, a source of "pecuniary aids"
in sudden emergencies, and the ready transfer of funds to and from
branch offices through bookkeeping entries rather than shipment of
metals.
Once again Madison rose to lead the opposition, arguing that he could
find no basis in the Constitution for such a bank. He himself had
proposed in the Constitutional Convention a grant of power to charter
corporations, but no specific provisions had been adopted. That was
enough to raise in President Washington's mind serious doubts as to the
constitutionality of the measure, which Congress passed fairly quickly
over Madison's objections. Before signing the bill into law, therefore,
the president sought the advice of his cabinet and found there an equal
division of opinion. The result was the first great and fundamental
debate on constitutional interpretation. Should there be a strict or a
broad construction of the document? Were the powers of Congress only
those explicitly stated or were others implied? The argument turned
chiefly on Article I, Section 8, which authorized Congress to "make all
laws which shall be necessary and proper for carrying into execution the
foregoing Powers."
Such language left room for disagreement and led to a confrontation
between Jefferson, with whom Attorney-General Edmund Randolph
agreed, and Hamilton, who had the support of Secretary of War Henry
Knox. Jefferson pointed to the Tenth Amendment, which reserved to the
states and the people powers not delegated to Congress. "To take a
single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no
longer susceptible of any definition." A bank might be a convenient aid
to Congress in collecting taxes and regulating the currency, but it was
not, as Article I, Section 8, specified, necessary.
Hamilton had not expected the constitutionality of the bank to become
a divisive issue. His original report had neglected the point, but he was
prepared to meet his opponents on their own ground. In a long
report to the president, Hamilton insisted that the power to charter corporations was included in the sovereignty of any government, whether or
not expressly stated. The word "necessary," he explained, often meant no
more than "needful, requisite, incidental, useful, or conducive to." And
in a classic summary, he expressed his criterion on constitutionality:
"This criterion is the end, to which the measure relates as a mean. If the
end be' clearly comprehended within any of the specified powers,
collecting taxes and regulating the currency, and if the measure have an
obvious relation to that end, and is not forbidden by any particular
provision of the Constitution, it may safely be deemed to come within
the compass of the national authority."
The president, influenced by the fact that the matter came within the
jurisdiction of the secretary of the treasury, accepted Hamilton's argument and signed the bill. In doing so, he had indeed, in Jefferson's words,
opened up "a boundless field of power," which in coming years would
lead to a further broadening of implied powers with the approval of the
Supreme Court. Under John Marshall the Court would eventually adopt
Hamilton's words almost verbatim. On July 4, 1791, the bank's stock was
put up for sale and in what seemed to Jefferson a "delirium of
speculation" sold out within a few hours, with hundreds of buyers turned
away. It cost the government itself nothing until later, for its subscription
of $2 million was immediately returned by the bank in a loan of the same
amount, with ten years for repayment.
*
ENCOURAGING MANUFACTURES Hamilton's imagination and his ambitions for the new country were as yet unexhausted. In the last of his great
reports, the Report on Manufactures, he set in place the capstone of his
design: the active encouragement of manufacturing to provide
productive uses for the new capital created by his funding, assumption,
and banking schemes. Hamilton believed that several advantages would
flow from the development of manufactures: the diversification of labor
in a country given over too much to farming; greater use of machinery;
paid work for those not ordinarily employed outside the home, such as
women and children; the promotion of immigration; a greater scope for
the diversity of talents in business; more ample and various opportunities
for entreprenurial activity; and a better domestic market for agricultural
products.
To secure his ends Hamilton proposed to use the means to which other
countries had resorted, and which he summarized: protective tariffs on
foreign goods, or in Hamilton's words, "protecting duties," which in
some cases might be put so high as to deter imports altogether; restraints
on the export of raw materials; bounties and premiums to encourage
certain industries; tariff exemptions for the raw materials needed for
American manufacturing, or "drawbacks" (rebates) to man-
moved between these regions than across the Atlantic, thus strengthening the Union: "every thing tending to establish substantial and permanent order in the affairs of a Country. to increase the total mass of
industry and opulence, is ultimately beneficial to every part of it."
Largely owing to the skillful Hamilton, the
Treasury Department, which employed half or more of the civil servants
at the time, largely as customs agents, was established on a basis of
integrity and efficiency. The department began to retire the Revolutionary War debt, and a "Continental" became worth something after all
(if only at a ratio of 100 to 1 in payments to the government), the credit
of the government was secure, government securities sold at par, and
foreign capital began to flow in once again. Prosperity, so elusive in the
1780s, began to flourish once again, although President Washington
cautioned against attributing "to the Government what is due only to the
goodness of Providence."
Yet suspicions lingered that Hamilton's program was designed to
promote his personal interest. There is, however, no evidence that
Hamilton benefited personally in any way from his program, although
Assistant Treasury Secretary William Duer, unbeknownst to Hamilton,
did leak word of the funding and assumption message to favored friends
in time for them to reap a speculative harvest from the rise in values.
Duer himself later became involved in deals that landed him in prison.
Hamilton was inclined toward a truly nationalist outlook, and he
focused his energies on the rising power of commercial capitalism. In
fact, he would have favored a much stronger central government,
including a federal veto on state action; even a constitutional monarchy
if that had been practicable. Hamilton believed that throughout history a
minority of the strong dominated the weak. There was always a ruling
group, perhaps military or aristocratic, and Hamilton had the foresight to
see now the rising power of commercial capitalism. He was in many
ways a classic Whig who, like Britain's ruling oligarchy of the
eighteenth century, favored government by the rich and well-born. The
mass of the people, he once said, "are turbulent and changing; they
seldom judge or determine right." And once, under the influence of
strong drink, he went further: "Your people, sir, is a great beast!"
Aligning the government closely to the social elite, Hamilton believed,
promoted good government and guarded the public order against the
potential turbulence that always haunted him.
Hamilton's achievement, however, was to tie more closely to the government those who were already on its side-and to overlook, or even
antagonize, those who had their doubts. Hamilton never understood or
appreciated the people of the small villages and farms, the people of the
frontier. They were foreign to his world, despite his own humble
HAMILTON'S ACHIEVEMENT
Hamilton's Report on Manufactures proposed tariffs on foreign products
to encourage American manufacturing and innovation, as represented by this
mechanized grain elevator patented by a Delaware resident in 1795.
ufacturers where duties had been levied for revenue or other purposes;
encouragements to inventions and discoveries; regulations for the
inspection of commodities; and finally, the encouragement of internal
improvements in transportation, including the development of roads,
canals, and navigable streams.
Some of Hamilton's tariff proposals were enacted in 1792. Otherwise
the program was filed away-but not forgotten. It became an arsenal of
arguments for the advocates of manufactures in years to come, in Europe
as well as in America. A summary can hardly do justice to a complex
state paper that anticipated and sought to demolish all counterarguments,
among them the ominous question that kept arising with Hamilton's
schemes, "ideas of a contrariety of interests between the northern and
southern regions of the Union," which he found "in the Main as
unfounded as they are mischievous." If, as seemed likely, the northern
and middle states should become the chief scenes of manufacturing, they
would create robust markets for agricultural products, some of which the
southern states were peculiarly qualified to produce. North and South
would both benefit, he argued, as more commerce
beginnings in the Caribbean islands. Along with the Planters of the
South, common folk would be at best only indirect beneficiaries of his
programs. Below the Potomac the Hamiltonian vision excited little
enthusiasm except in South Carolina, which had a large state debt to be
assumed and a concentration of mercantile interests at Charleston. There
were, in short, a vast number of people who were drawn into opposition
to Hamilton's new engines of power. In part they were southern, in part
backcountry, and in part a politically motivated faction opposing
Hamilton in New York.