Empire of Liberty: A History of the Early Republic, 1789-1815
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So Hamilton’s proposal for a national bank was bold and novel. He recommended that Congress grant a twenty-year charter to a corporation to be called the Bank of the United States (BUS). This central bank would be capitalized at $10 million, which was far more than all the specie, that is, gold and silver, in the country. One-fifth of the capital was to be provided by the government itself; the rest of the Bank’s stock was to be sold to private investors, who could pay for up to three-fourths of the shares with government securities and the remaining one-fourth in gold or silver. This Bank of the United States, like its model the Bank of England, would be the only bank chartered by the national government. For fear of diluting its strength Hamilton actually opposed establishing branches of the Bank in states outside of Pennsylvania, though by 1805 eight branches had been created. Some Federalists hoped that the Bank of the United States would sooner or later absorb the state banks and monopolize all banking in the country.8 Even if this proved impossible, the BUS would facilitate the payment of federal taxes and import duties, loan money to the United States, serve as the government’s sole depository and fiscal agent, and act as a central control on the state banks, of which there were only four in 1791.9 But most important, the Bank of the United States would create paper money.
The BUS would issue its notes as loans to private citizens, and these notes would become the principal circulating medium of money for a society that lacked an adequate supply of gold and silver coin. Above all, Hamilton wanted a paper money that would hold its value in relation to this specie. By being assured that the federal government would accept the Bank’s notes at face value in payment of all taxes, holders of the notes would be less likely to redeem them for gold or silver coin—the only real money that most people in the eighteenth century trusted. The notes would pass from hand to hand without depreciating, even though a fraction of their worth was available in specie at any one time. Although many American leaders continued to believe, as John Adams did, that “every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults, represents nothing, and is therefore a cheat upon somebody,” these multiplying bank notes quickly broadened the foundation of the nation’s economy.10
Yet it is important to emphasize that Hamilton’s Bank would make money available only to large merchants and others who wanted short-term loans, ninety days or less. Most banks, including the BUS, as yet did not want to get involved in making long-term mortgage loans to farmers; to do so would tie up money for too long a time, as the Bank waited for the land-based loans to be paid back. But that would soon change, for most farmers and entrepreneurs needed long-term credit. In spite of opposition from Hamilton and the BUS, these farmers and entrepreneurs soon pressured their states to create state banks, many of them, that eventually gave them the credit they wanted. Hamilton’s insensitivity to the entrepreneurial needs of these ordinary farmers and small businessmen suggests how little he and other Federalists appreciated the real sources of the capitalist future of America.
On January 28, 1791, Hamilton submitted his recommendations for establishing a national mint to Congress, where they met little opposition. America had been long plagued by a bewildering variety of foreign coins—English shillings, Spanish pistareens, French sous, and even German carolins—and had none of its own. Hamilton and others were convinced that a national coinage would make for a greater sense of nationhood. His report therefore had little that was original; indeed, much of it, especially the proposal for a decimal system, was borrowed from Jefferson.
Hamilton’s final report on manufactures, completed in December 1791, laid out what a century later looked like prescient plans for industrializing the United States. Some historians have described this as his most creative and powerful proposal. But others have been less excited; some have even gone so far as to suggest that, unlike his interest in the other parts of his financial program, his heart was never really in manufacturing. He certainly took his time in writing it. As early as January 1790 the House of Representatives had directed Hamilton to “prepare a proper plan . . . for the encouragement and promotion of such manufactories as will tend to render the United States independent of other nations for essential, particularly for military, supplies.”11 Nearly two years later he completed it, with considerable help from Tench Coxe of Pennsylvania, whom Hamilton had appointed assistant secretary of the treasury in May 1790.
The delay did not signify Hamilton’s lack of concern for manufacturing. Quite the contrary. His report went well beyond the House’s directive. In a long essay, twice as long as the other reports, he set forth the need for the new country to develop manufacturing, not just to meet military requirements but also to create a more diversified and prosperous economy that would be more self-reliant and less dependent on European supplies. The report further elaborated his grand vision of a powerful, integrated, and wealthy war-making nation that would be the equal of any in Europe, including Great Britain.
This vision of what the United States might become was inevitably related to the Federalists’ ideas of political economy. Initially, they wanted America to move as quickly as possible into the final stage of commercial and industrial development. If the United States continued to rely exclusively on agriculture as it had in the past, it would remain a rude and stagnant society. As a New England Federalist put it in 1789, “an agricultural nation which exports its raw materials, and imports its manufactures” could be neither “opulent” nor “powerful.”12
American farmers produced more farm goods than they could use themselves. If Americans were to have reliable markets for their agricultural surplus, the Federalists thought, the country needed to develop modern commercial and manufacturing sectors and create a more balanced economy with a domestic market for its farm produce. Since the nation existed in an uncertain world, dominated by mercantilist powers, it could not rely on stable markets abroad for its farm surpluses. With the mercantilist powers able to cut back on their demand for American agricultural goods at will or find other sources, American farmers would always be faced with inadequate and fluctuating buyers of their produce. Yet America’s consumers still wanted European, especially British, conveniences and manufactured goods. If the United States did not make these goods, then Americans would continue to import them, which in turn would create an adverse balance of trade. Since this lopsided trade had been the problem with America’s economy in the colonial period, the mercantile-minded Federalists wanted to move what they took to be the underdeveloped American nation into commercial modernity.
Thus many Federalists hoped to use government to encourage domestic industry and manufacturing, not just of a household sort but large-scale manufacturing as well. They thought that such home industries might draw farm workers into manufacturing. Then these workers would become a market for America’s agricultural surpluses, and the farmers in turn would buy their manufactured goods from American industrialists. By creating extensive domestic markets in this way, America would eventually become independent of Europe.
In his first annual message to Congress, in January 1790, President Washington had urged the promoting of manufacturing, the importing of “new and useful inventions from abroad,” and the encouraging of “the exertions of skill and genius in producing them at home.” The safety and interest of a free people, he had warned, required the promoting of “such manufactories, as to tend to render them independent on others, for essential, particularly for military supplies.”13 If the United States could not supply its own wants and needs, especially those having to do with war-making, then it would never, the Federalists believed, become a powerful, integrated, and independent fiscal-military state capable of confronting the European nations as equals.
But in 1791 Hamilton knew that realizing this vision would take time, three or four decades at least. Meanwhile, there were more pressing needs. Consequently, to fulfill the long-term development of manufacturing Hamilton made only some modest recommendations: some moderate prot
ective tariffs for infant industries, bounties for the establishment of new manufacturing, prizes to encourage inventions, and exemptions from duties of some raw materials imported from abroad.
The report imaginatively contested much conventional wisdom by suggesting that domestic commerce, that is, Americans trading with one another, might be as valuable to the prosperity of the country as international commerce. Yet in the end Hamilton tempered his boldness. His promotion of manufacturing was limited to the development of new industries, not to the protection of established industries threatened by more efficient foreign competition. At the same time, he offered no help or capital for small artisans and for household manufacturing. His tariff proposals were not actually protective; they were for revenue, and because the price of foreign manufactures had declined, he believed that additional duties would not seriously affect consumer prices. He did not like protective tariffs, preferring bounties, or direct governmental payments to businesses, which he believed were “the best” and “most efficacious means of encouraging manufactures.”14 Such bounties tended in fact to benefit articles exported rather than those manufactured for home consumption.
So even in his encouragement of manufacturing he never lost sight of the importance of the large merchant community engaged in overseas trade. Whatever measures he suggested for aiding American manufacturing posed no danger to the businesses of merchants importing British manufactures or to the revenues those imports provided for his fiscal program. Since his entire fiscal program depended on the customs duties flowing from a large overseas commerce, Hamilton was reluctant to weaken that overseas commerce for the sake of developing domestic commerce.15
In fact, Hamilton in writing his report on manufactures seems to have been thinking mostly of drumming up support for his and Coxe’s Society for Establishing Useful Manufactures (SEUM)—an incorporated stockissuing community in Paterson, New Jersey, that would be a model factory town for future American industrialization. He and Coxe hoped to get some of the moneyed men and large merchants who were investing heavily in the new federal public securities to place some of their capital in SEUM and thus moderate the excessive speculation in the national debt that was taking place.16
Hamilton was so wedded to a hierarchical view of society that he could only imagine industrial investment and development coming from the top down. Thus he was incapable of foreseeing that the actual source of America’s manufacturing would come from below, from the ambitions, productivity, and investments of thousands upon thousands of middling artisans and craftsmen who eventually became America’s businessmen. Hamilton’s historical reputation as the prophet of America’s industrial greatness therefore seems somewhat exaggerated. He certainly wanted a powerful and glorious nation, but he was no more capable of accurately foretelling the future than the other American leaders.
At the same time, however, there is no doubt that Hamilton and his program laid the basis for the supremacy of the national government over the states. By the middle of the 1790s the total tax revenue raised by the federal government was a bit more than $6 million, which was more than ten times the total tax revenue ($500,000) that all the states combined raised from direct taxation, still the states’ major source of tax revenue. Expenditures were equally lopsided: while all the states’ expenditures in the early 1790s totaled only a little more than $1 million a year, the federal government’s expenditures in 1795 were $7.5 million. Finally, in terms of money borrowed by the governments, the national government overwhelmed the states. While the combined public debt of the states in 1796 was less than $4 million, the federal government’s debt amounted to more than $80 million. The new national government might not have yet won the trust or the loyalties of the American people, but it certainly had come to dominate their pocketbooks.17
AS ENTHUSIASTICALLY AS HAMILTON celebrated the commercial prosperity of the United States, his goal was as much political as economic. Hamilton wanted people to feel the presence of the new national government. As he had said in Federalist No. 27, the more the government “enters into those objects which touch the most active springs of the human heart, the greater will be the probability that it will conciliate the respect and attachment of the community.” A government that was “continually at a distance and out of mind” could never engage the feelings of its citizens. Like all the Revolutionaries, Hamilton was preoccupied with finding adhesives to bind people together; but unlike Jefferson, Paine, and other liberals, he counted on the government as the main source of cohesion.
The dream of Hamilton, Washington, and the other Federalists of a strong, consolidated, and prosperous national polity was not the disinterested adjudicatory state that Madison had envisioned but an illustrious, European-type state that would rival the great powers of Europe. “Our national government,” Hamilton admitted, was presently “in its infancy,” but eventually the United States would become the equal of the European monarchies on their own terms—terms that, as Washington said, were “characteristic of wise and powerful Nations.”18 This meant a strong central bureaucratic government directing the economy and reaching to all parts of a united and integrated nation and possessing a powerful army and navy that commanded the respect of the whole world.
Building this monarchical republic would not be easy. The Federalists knew that the people were emotionally attached to their states, whose histories went back a century or more. They would have to somehow redirect their loyalties to the Union. Consolidating a country that was still largely rural and thinly populated added to their difficulties. In 1790 only five American cities had populations over 10,000: Philadelphia, New York, Boston, Charleston, and Baltimore. The most populous state, Virginia, with nearly 700,000 people, had no large cities. Norfolk with about 7,000 was the biggest; the new state capital, Richmond, had 3,700. North Carolina had no town with a population of more than two thousand. Lexington, Kentucky, was the largest town in the West, and it had only 834 inhabitants in 1790.
Bringing all these scattered people together, making a unified nation out of disparate sections, states, and communities without relying on idealistic republican attachments—this was the preoccupation of Washington and the Federalists, and it explains much of what he as president and the other Federalists did during the 1790s.
Instead of virtue and the natural sociability of people, Hamilton, Washington, and other Federalists saw only the ordinary individual’s selfish pursuit of his own private interests and happiness. Social stability therefore required the harnessing of this self-interest. And this could best be done by appealing principally to the self-interest of the gentry and would-be gentry at the top of the society, including all those rich moneyed interests who lived off of unearned income.
Although Hamilton’s financial program was designed with these moneyed interests in mind, it was never intended for their exclusive benefit. They would no doubt prosper from it, but that would be incidental to his larger economic and political plans. In addition to bringing prosperity to the whole country, Hamilton hoped that his new economic and fiscal measures would tie moneyed men and other influential individuals to the new central government. Hamilton may have believed that he and Washington and a few others were capable of disinterested judgment, but he knew that most people were not, and he intended to build the Federalist program on this realistic assessment of human nature.
Hamilton and most other Federalists were strongly committed to the traditional view of society as a hierarchy of degrees and ranks with people held together by vertical ties, and they believed that America would naturally move in that direction as soon as the disorder generated by the Revolution had subsided. Distinctions of status, rights of precedence, patron-client relations, and the duties owed by all to those above them—from the child’s duty to a parent to the citizen’s duty to the government—very much dominated Federalist thinking. Hamilton, for example, believed that “mechanics and manufacturers will always be inclined, with few exceptions, to give their votes to merchants, in prefere
nce to persons of their own professions or trades. . . . They know that the merchant is their natural patron and friend.”19 The Federalists were good republicans, in that they believed in election as the source of political leadership, but they also believed that election ought to result in government by patrons and by the wise and virtuous, in other words, by men like themselves.
The Revolution may have been about liberty, but by 1790 most Federalists believed that Americans were free of British control and should not have to think about liberty so exclusively and passionately anymore. Besides, the Federalists said, true liberty was reason and order, not licentiousness. Popular passions unleashed by the Revolution, they believed, had to be restrained. In the enthusiasm of the 1770s and 1780s too many Americans, it was said, had allowed talk of freedom and equality to go to their heads; they had run wild and had violated the hierarchical order that made all civilized society possible.
Although many Federalists were reluctant to voice their ideas about society publicly, most of them believed that the “distinctions of rank and condition in life” were natural and inevitable. “There must be,” declared Boston minister and noted geographer Jedidiah Morse, “rulers and subjects, masters and servants, rich and poor. The human body is not perfect without all its members, some of which are more honourable than others; so it is with the body politic.”20 Some were born to rule, others were born to serve. That some were born to be “Philosophers, Legislators, and Statesmen,” while others were “intended for working with their hands” was a common theme of conservatives everywhere. Talent should be allowed to rise, but once risen it should be respected by those beneath it. The ideal harmonious society was one that recognized “the necessity of subordination,” one in which everyone found his proper place and did not try to attain a rank for which he was unsuited. What the Federalists wanted for America, in the opinion of critics, was “the European condition of society.”21