The Federalists’ Domestic Program

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The Federalists’ Domestic Program

National Debt. On 14 January 1790 Secretary of the Treasury Alexander Hamilton submitted his First Report on Public Credit to Congress. Hamilton advised that the federal government should assume the state debts of about $25 million, add the amount to the nation’s foreign debt of nearly $12 million and domestic debt of almost $42 million, and “fund,” or redeem, the combined debt with new interest-bearing securities. Current holders of the depreciated Continental securities would exchange them for new securities, whose principal and interest would be guaranteed by a percentage of the national revenue. Hamilton’s plan contained important principles that guided his bold agenda for the United States. Hamilton believed that a prosperous nation was a commercial nation like Great Britain, and he also believed that men were motivated by self-interest. He wanted to create a permanent national debt that would tie American merchants to their government as it did in Britain. If merchants knew that they would receive regular interest on government securities and that they could use the securities in business transactions, their self-interest would motivate them to support the new federal government and expand their businesses for the benefit of themselves and the nation. James Madison saw in Hamilton’s program a calculated plan to create a government that catered to the interests of merchants, manufacturers, and speculators over the interests of honest farmers and taxpayers. Madison believed that there was “something radically immoral” about allowing current holders of Continental securities, who were often speculators, to receive new ones at face value. He thought that current holders should be paid the highest market value, with the rest going to the original holders. Madison also believed that the assumption of state debts was unfair to states such as Virginia that had paid off their obligations. Congress approved the assumption bill on 26 July and the funding bill on 4 August after a compromise in which northern congressmen agreed to a site on the Potomac River as the future United States capital in exchange for Madison and Thomas Jefferson’s promise to gain southern votes for the bills.

The National Bank. On 14 December 1790 Hamilton submitted a Second Report on Public Credit calling for the establishment of a national bank to serve as a depository for government funds and issue banknotes to private citizens. The federal government would accept the banknotes at face value for the payment of taxes, ensuring that the holders of the notes would not cash them in for scarce gold and silver but instead use them as circulating currency in business transactions. The U.S. government would own one-fourth of the bank’s stock, and the rest would be held by private individuals who could purchase their shares with government securities up to three-fourths of the stock’s value. The securities issued under Hamilton’s funding and assumption plan and the notes issued by the Bank of the United States would provide a stable circulating currency to encourage business expansion among merchants and tie these “friends of government” closer to the federal government. Congress passed the bank bill, but James Madison’s strong opposition on the grounds that the Constitution did not give Congress the explicit authority to incorporate a bank concerned President George Washington enough that he asked his cabinet members to submit written opinions on the bank’s constitutionality. Secretary of State Jefferson and Attorney General Edmund Randolph endorsed Madison’s argument for what became known as a strict construction of the Constitution. In opposition, Secretary of the Treasury Hamilton defended a loose, or broad, construction of the Constitution. He interpreted Article I, Section 8 granting Congress the power to “make all laws which shall be necessary and proper” to execute its explicit powers to mean that a national bank was a constitutional means to allow Congress to carry out its enumerated powers of collecting taxes and tariff revenue, regulating commerce, and providing “for the common defense and general welfare of the United States.” On 25 February 1791 President Washington signed the bill creating the First Bank of the United States, but debate over a national bank contributed to the development of political parties.

Report on Manufactures. Hamilton submitted his most ambitious ideas in his Report on Manufactures on 5 December 1791. He advocated a comprehensive program of protective tariffs on imported manufactured goods, exemptions from duties on raw materials necessary for American manufacturing, and government support for the encouragement of new industries and laborsaving machinery. Hamilton’s report was a criticism of Madison and Jefferson’s dream that Americans could remain a nation of farmers in a world ruled by free trade. The reality was that European nations benefited by exporting their manufactured goods to the United States while restricting America’s agricultural shipments abroad. Hamilton believed that a more realistic future for the United States depended on its development as a commercial and industrial society, in which domestic manufacturing would unite the North and South. Southern farmers were not happy about their projected role of supplying raw materials to northern merchants, manufacturers, and shipowners, believing that it duplicated their dependent position under the British colonial economy. Madison attacked Hamilton’s program in a series of anonymous essays in the National Gazette, condemning the Federalists for “substituting the motive of private interest in place of public duty.” By granting subsidies to privileged manufacturers, the federal government would be “accommodating its measures to the avidity of a part of the nation instead of the benefit of the whole.…” In the end it was not the objections of Madison, Jefferson, or southern farmers that doomed the Report on Manufactures; it was the lack of interest among members of the commercial class who were more attracted to investments in shipping, land speculation, banks, turnpikes, and canal companies. Congress incorporated some of Hamilton’s tariff proposals in the Tariff of 1792 but never implemented the rest of the program.

Whiskey Rebellion. On 3 March 1791, at Alexander Hamilton’s suggestion, Congress passed an excise, or internal, tax on whiskey to supplement the national revenue. Farmers in western Pennsylvania objected almost immediately. The barrier of the Appalachian Mountains and Spain’s closing of the Mississippi River to American trade compelled farmers to convert their crops of rye and corn into whiskey. Liquor was also a form of currency in a region short of hard money and banknotes. Sporadic protests occurred between 1791 and 1793, but a more organized rebellion began in July 1794. By then western Pennsylvania’s farmers were convinced that the federal government had consistently neglected them. The government had failed miserably at protecting frontier settlers from Indian attack in the neighboring Northwest Territory and at expelling the British from their military posts. Absentee speculators owned large tracts of western land but were not burdened with heavy property taxes. Hamilton’s financial program clearly favored eastern merchants and land speculators over landless frontier farmers. Some of the disaffected farmers reacted by organizing local “Democratic Societies,” which were connected to the emerging Democratic-Republican Party and its support for the French Revolution. In the summer of 1794 the “Whiskey Rebels” defended their liberty and property by stopping excise officers from collecting the whiskey tax, interfering with federal judicial proceedings, and threatening to attack Pittsburgh. In September, President Washington, accompanied by the architect of the excise tax, Secretary of the Treasury Hamilton, led nearly thirteen thousand militiamen into western Pennsylvania, but most of the rebels had already dispersed. The president pardoned two rebels who were convicted of high treason, and the outcome of the Whiskey Rebellion seemed to be a victory for “a government of laws.” However, the uprising also made western Pennsylvania a Democratic-Republican stronghold.