A people which had in 1787 been indifferent or hostile to roads, banks, funded debt, and nationality, had become in 1815 habituated to ideas and machinery of the sort on a grand scale.
—Henry Adams1
The time: Early evening, December 16, 1773. The place: Boston, Massachusetts. Two hundred men dressed as Indians board three British ships in Boston Harbor and dump their contents—tons of tea from the British East India Company—into the water. By doing so, these American Sons of Liberty do more than reject a particular tax to which they objected—the tax on tea, which had recently been lowered to mollify the American colonists. They also reject the asserted power of the British Parliament to levy any taxes on the colonies in North America without their consent.
“It was now evening,” recalled George R. T. Hewes in 1833, “and I immediately dressed myself in the costume of an Indian, equipped with a small hatchet, which I and my associates denominated the tomahawk, with which, and a club, after having painted my face and hands with coal dust in the shop of a blacksmith, I repaired to Griffin’s wharf, where the ships lay that contained the tea. When I first appeared in the street, after being thus disguised, I fell in with many who were dressed, equipped and painted as I was, and who fell in with me, and marched in order to the place of our destination.” The protesters boarded the three ships and spent three hours smashing chests of tea and tossing them overboard. “We were surrounded by British armed ships,” Hewes recollected, “but no attempt was made to resist us.”2
The British government responded to the Boston Tea Party in 1774 with repressive measures, the Coercive or Intolerable Acts. When the British navy closed the port of Boston until the British East India Company was repaid, the colonists organized the Continental Congress. The conflict escalated until the first battles at Lexington and Concord near Boston on April 19, 1775, began the American War of Independence. As the citizens of the new United States would soon discover, political independence did not immediately translate into effective economic independence from Great Britain.
“IN SUBSERVIENCE TO THE COMMERCE OF GREAT BRITAIN”
In the beginning, there was no American economy, only the British imperial economy. The plantations, or colonies, in North America were intended to help the British Empire in its rivalry with the other major powers of Europe. In the centuries before it unilaterally began to adopt free trade in 1846, Britain, like other European states, practiced mercantilism, a policy that treated the economy as an instrument of state power. Mercantilist policies included subsidies and preferential tax treatment for favored industries and their raw material inputs, efforts to obtain surpluses in precious metals like gold and silver and in high-value-added exports, and the conquest or founding of colonies whose inhabitants would provide markets and raw materials for the mother country. In his 1684 treatise England’s Treasure by Foreign Trade, the mercantilist theorist Thomas Mun wrote: “The ordinary means therefore to increase our wealth and treasure is by Foreign Trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value.”3 The king in 1721 told Parliament that “it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material.”4
No philosopher influenced the American Revolution more than the seventeenth-century English political thinker John Locke. Thomas Jefferson’s Declaration of Independence is practically a paraphrase of Locke’s writings on natural rights and liberty. In economics, Locke was a mercantilist, not a libertarian. In his Letter Concerning Toleration, Locke says that “the pravity of Mankind . . . obliges Men to enter into Society with one another, that by mutual Assistance, and joint Force, they may secure unto each other their Properties in the things that contribute to the Comfort and Happiness of this Life . . . But forasmuch as Men thus entering into Societies, . . . may nevertheless be deprived of them, either by the Rapine and Fraud of their Fellow-Citizens, or by the Hostile Violence of Foreigners; the remedy of this Evil consists in Arms, Riches, and Multitude of Citizens; the Remedy of the other in Laws.”5 For Locke, as for other early-modern mercantilists, military power, economic growth, and population growth were mutually reinforcing, and all three enhanced the ability of the state to defend its people in an anarchic world. In a journal entry in 1674, Locke wrote: “The chief end of trade is riches and power, which beget each other. Riches consists in plenty of moveables, that will yield a price to foreigners, and are not likely to be consumed at home, but especially in plenty of gold and silver. Power consists in numbers of men, and ability to maintain them. Trade conduces to both these by increasing your stock and your people, and they each other.”6
The policy of mercantilism that Britain shared with other European empires included a division of labor in which British manufacturers sold finished products to a captive market of consumers in the American colonies, Ireland, and India, which in return exported raw materials and food to the British Isles. In 1721, the British Board of Trade told the king: “Having no manufactories of their own, their . . . situation will make them always dependent on Great Britain.”7 The British parliamentarian Edmund Burke, who sympathized with the American colonists, summarized the policy: “These colonies were evidently founded in subservience to the commerce of Great Britain . . . On the same idea it was contrived that they should send all their products to us raw, and in their first state; and that they should take every thing from us in the last stage of manufacture.”8 Adam Smith made a similar observation in The Wealth of Nations, which was published in 1776, the same year in which the American colonies that would form the United States declared their independence: “The liberality of England, however, towards the trade of her colonies has been confined chiefly to what concerns the market for their produce, either in its rude state, or in what may be called the very first stage of manufacture. The more advanced or more refined manufactures even of the colony produce, the merchants and manufactures of Great Britain choose to reserve to themselves, and have prevailed upon the legislature to prevent their establishment in the colonies, sometimes by high duties, and sometimes by absolute prohibitions.”
Beginning in the seventeenth century, England (which became Great Britain with the 1707 Act of Union with Scotland) sought to prevent the development of colonial manufacturing that might compete with British manufacturing by a variety of methods. The Navigation Acts, passed in 1651, 1660, and 1663, required all English trade to be carried in English ships with majority-English crews. All items in “enumerated” categories going to or from the American colonies had to be unloaded in Britain, taxed, and then reexported. The colonists were permitted to buy only British goods or goods that had been reexported from Britain.
The imperial government outlawed American exports that competed with British manufactured goods. For example, the 1699 Woolens Act forbade the sale of woolen cloth outside of the place where it was woven.9 This destroyed the Irish woolen industry and prevented the emergence of one in the American colonies. In 1732, Britain similarly destroyed an emerging beaver-hat industry in the colonies by outlawing the export of hats to other colonies or foreign countries.10 When Parliament lifted a ban on exports of pig iron and bar iron from the colonies in 1750, it outlawed further development of the industry. But the colonists ignored the prohibition and by 1775 the annual production of iron in the colonies, most of it for domestic consumption, was roughly the same as in Britain, despite the smaller colonial population.11
Even as it banned manufactured exports from the American colonies to Britain or other parts of the empire, the imperial government encouraged the export of raw materials from the colonies to Britain. Import duties on wood and hemp from the American colonies to Britain were abolished. The colonists also received bounties, or subsidies, for exporting raw materials. Timber from the abundant forests of North America was particularly important. The purpose of regulation was to create a buyer’s market in raw materials and a seller’s market in manufactured goods for British industry.12
Hindering the transfer of technology from Britain to America was another British mercantilist technique. In 1719, Britain banned the emigration of skilled workers in industries including steel, iron, brass, watchmaking, and wool. The law punished suborning, or recruitment, of skilled workers for employment abroad with fines or imprisonment. Skilled immigrants who did not return to Britain within six months of being warned by a British official faced the confiscation of their goods and property and the withdrawal of their citizenship.13 Britain followed its ban on the emigration of skilled workers with a ban on the export of wool and silk technology in 1750. In 1781 and 1785, the act was enlarged into a comprehensive ban on machinery of all kinds. The ban on skilled emigrants was repealed only in 1825, while the ban on technology exports lasted until 1842.14
Evaluated in terms of its goal of fostering domestic manufacturing at the expense of other countries, Britain’s mercantilist system was a great success. Between the reign of the Tudors and the nineteenth century, Britain’s state-sponsored program of economic development turned the island nation first into a commercial and financial powerhouse and then into the first superpower of the machine age. But Britain’s imperial trade laws thwarted American manufacturers and frustrated American merchants, who frequently smuggled goods from other colonies and countries. The government also antagonized the colonists after the Seven Years’ War (French and Indian War) of 1756 to 1763, when it attempted to ban white settlement of large areas of the trans-Appalachian West, in order to avert conflict with the Indians. This enraged land-hungry Anglo-American frontiersmen as well as rich American colonials like George Washington who owned vast tracts of western land. These economic conflicts, along with struggles over power and status, helped to ignite the American War of Independence from 1775 to 1783.
FUNDING FATHERS
In the folklore of American patriotism, a collection of brave yeoman farmers along with a few urban tradesmen and gentry leaders like George Washington overthrew the mighty British Empire after the United States declared its independence on July 4, 1776. This story is doubly misleading. It is embarrassing for Americans to admit that the United States owed its independence to the intervention of France—in particular, to the French navy, which bottled up General Cornwallis’s army at Yorktown, Virginia, permitting joint American and French forces to defeat it. It is even more embarrassing for Americans influenced by Jeffersonian populism to admit that the American cause might have failed, but for the skill of three financiers—an English immigrant, a Polish Jewish immigrant, and a rich American snob.
The English immigrant, Robert Morris, is unknown to most Americans, but his ability to muster and direct money was as critical as the military skills of General Washington and America’s French allies. Born in Liverpool in 1734, Morris immigrated to the North American colonies with his father, an agent for a Liverpool tobacco importer. After his father was killed in 1750 in a freak cannon accident, Morris served as a clerk for Charles Willing in Philadelphia. Following Willing’s death in 1754, Morris went into business with Willing’s son Thomas. Their partnership, Willing and Morris, became the largest mercantile firm in Philadelphia and Morris grew rich from the West Indian trade.
As a member of the Continental Congress, Morris thought that the Declaration of Independence was premature but threw himself into supporting the war. Morris retired from Congress in 1778, then served in the Pennsylvania Assembly in 1778–1779 and 1780–1781. He was appointed superintendent of finance in February 1781 and served until 1784, a year after Britain recognized America’s independence.
Immediately after being appointed superintendent of finance, Morris created the Philadelphia-based Bank of North America, modeled on the Bank of England, headed by his partner, Thomas Willing, and chartered by Congress and also, because of doubts about congressional authority, by Pennsylvania. His proposal for a 5 percent tariff on imports to fund the government failed because of opposition from a single state, Rhode Island, which took advantage of the requirement of unanimity of states. Morris lent his own money to the government and used his own credit to raise other loans, issuing promissory notes which, depending on their terms, were known as “Long Bobs” or “Short Bobs.”
Morris benefited from the assistance of Gouverneur Morris. Unrelated to Robert Morris, Gouverneur Morris was from a family of aristocratic New York landowners; his brother served in the British army and his mother was a Loyalist. He combined a caustic tongue with a habit of adulterous affairs, in one of which he is said to have lost his leg in the course of escaping from a tryst (officially the cause was a street accident). He thought little of ordinary people, whom he described as “reptiles,” but served the cause of independence in Congress, where he mobilized for support for Washington’s army at Valley Forge, and then as assistant to Robert Morris. After the war, he served at the Constitutional Convention, where he spoke more than any other delegate, wrote the Preamble, and edited the Constitution. Later he replaced Jefferson as America’s minister to France, in time to witness the French Revolution, of which, unlike Jefferson, he disapproved.
As superintendent of finance, Robert Morris also drew on the talents of Haym Salomon, a Polish Jew fluent in eight languages who immigrated to the American colonies in the early 1770s. On behalf of the Patriot cause, Salomon spied on Hessian mercenaries while supplying them with goods. Arrested, he escaped, reportedly by bribing a Hessian guard. Having lost a small fortune in British-occupied New York, Salomon retained his international contacts and his reputation, which permitted him to sell $200,000 worth of government bonds on the basis of his personal credit. On behalf of Morris, Salomon arranged loans with the French government and also served as the paymaster for French forces in America. Afflicted with tuberculosis following his imprisonment by British forces, Salomon died in 1785. A statue of George Washington on Wacker Drive in Chicago is flanked by statues of Robert Morris and Haym Salomon, whose “genius and unselfish devotion” were praised in 1941 by President Franklin Delano Roosevelt.15
Morris argued for aligning the interests of the rich with those of the government, by means of institutions like the Bank of North America and a funded debt, because doing so would “give stability to government, by combining together the Interests of moneyed men for its support.”16 With respect to the creation of a new market in US public securities as a result of funding the debt, Morris wrote: “Even if it were possible to prevent Speculation, it is precisely the thing which ought not to be prevented; because he who wants money to commence, pursue, or extend his business, is more benefited by selling stock of any kind, than he could be by the rise of it at a future Period; Every man being able to judge better of his own business and situation, than the Government can for him.”17
Morris practiced what he preached: “I shall continue to discharge my duty faithfully to the Public, and pursue my Private Fortune by all such honorable and fair means as the times will admit of.”18 Morris invested in a fleet of privateers that harassed British shipping and provided him with prizes that he could add to his wealth. A French envoy in Philadelphia observed in his diary that Morris “is, in fact, so accustomed to the success of his privateers, that when he is observed on a Sunday to be more serious than usual, the conclusion is, that no prize has arrived in the preceding week.”19 Morris wanted the nation’s permanent capital to be located on the Delaware River at Trenton, New Jersey, where he owned land.20
In addition to the effect of the deeply rooted distrust of rich big-city bankers in American political culture, particularly those who are foreign-born, Morris’s unhappy later career may explain his absence from the American pantheon. Morris served as a Pennsylvania delegate to the Constitutional Convention and later as a US senator from Pennsylvania. In 1790, Morris bought two million acres in New York State and quickly sold it to a group of British investors, Pulteney Associates.21 In another transaction, in December 1792, he sold 1.5 million acres in upstate New York and his son in Amsterdam, acting as his agent, sold another 1.8 million to a group of Dutch investors who formed the Holland Land Company.22 Having invested in millions of acres of land in New York, Pennsylvania, Georgia, South Carolina, and Virginia, as well as the District of Columbia, Morris, unable to pay his debts, ended up in jail for three and a half years until the nation’s first bankruptcy law came into effect. He died in 1806. Morris’s longtime friend and business partner, Thomas Willing, outlived him and was nominated unsuccessfully to lead the second Bank of the United States.
BUILDING A NATIONAL ECONOMY
When Britain formally recognized the independence of the United States in 1783, the new country, under the Articles of Confederation, ratified by the states in 1781, was more of a loose alliance than a nation-state. The federal government lacked the power to raise revenue and depended on voluntary contributions from the state governments.
The War of Independence had left both the federal government and the state governments with large debts. There was no national currency and only a single bank, the small Bank of North America in Philadelphia, which began operations in 1782. Money took the form either of state-printed paper or specie, in the form of gold and silver, including foreign coins.
In addition to the debt of the US government, each state had debts from the war. Virginia and some other southern states paid down their debts. Rhode Island resorted to inflation. In 1786, when Massachusetts imposed taxes to pay for its debt, settlers in the western backcountry took up arms and rebelled. Several were killed and a thousand arrested by the time the so-called Regulators or Shaysites, who followed Daniel Shays and others, were defeated.
Shays’s Rebellion underlined the weakness of the federal government under the Articles of Confederation. Congress had to approve the use of weapons in the Springfield, Massachusetts, armory, but it had been out of session when the crisis arose. The incident convinced many Americans that the United States needed a stronger government. Among them was George Washington, then living in retirement at his estate in Virginia, Mount Vernon. He wrote, “Let us have a government by which our lives, liberty and properties will be secured, or let us know the worst at once.”23
In the summer of 1787, Washington presided over the Constitutional Convention at Philadelphia. After the new, stronger federal constitution was ratified by the states, Washington became the first president elected under the new system. To help in the consolidation of the nation’s finances, he turned to Alexander Hamilton.
THE MASTERMIND
“The bastard brat of a Scotch peddler” was the description of Hamilton by his rival John Adams, the second president of the United States. Hamilton was born in 1757 on the British West Indian island of Nevis to Rachel Faucett Lavien and the son of a Scots laird, James Hamilton, who deserted his family when Hamilton was a boy. He was orphaned a few years later when his mother died. A merchant who noticed his abilities arranged for him to study at King’s College (present-day Columbia University) in 1772. When the American Revolution began, he joined the New York militia and his abilities brought him to the notice of Washington, who made him one of his staff officers. Following the war, in which he distinguished himself not only by his logistical abilities but also by a raid on British forces at Yorktown, he married into the wealthy Schuyler family of New York and became a champion of a more centralized government, organizing and writing a majority of the Federalist Papers, which were used in the campaign for ratification of the new federal constitution.
In a 1780 letter to the New York revolutionary leader James Duane, the young Hamilton, then serving as an aide on General Washington’s staff, proposed a constitutional convention to remedy the weaknesses of the existing confederation. His proposals included “complete sovereignty” of the federal government over the states, the authority of the federal government to tax citizens directly, a permanent military, a national bank, and “great officers of state—a secretary for foreign affairs—a President of War—a President of Marine—a Financier.” Hamilton suggested that Morris would make an excellent “Financier.”24 Hamilton wrote to Morris, with his own plan for a bank. According to legend, when George Washington, on being elected president, asked Morris to serve as the first Treasury secretary of the United States, Morris declined and recommended Hamilton.
As the secretary of the Treasury, the largest and most important federal agency, Hamilton proved worthy of the responsibility. He submitted a series of great state papers, of which the most important were the Report on Public Credit (January 14, 1790), the report calling for the establishment of the Bank of the United States (December 14, 1790), the report calling for the establishment of a national mint and a bimetallic dollar standard (January 28, 1791), and the Report on Manufactures (December 5, 1791). Congress acted on most of his recommendations. In only a few years, he laid the solid foundation for America’s future prosperity.
FROM COLBERT TO HAMILTON
Hamilton’s self-education prepared him well for the task of building a nation out of a miscellany of former colonies. While serving during the Revolutionary War on Washington’s staff, Hamilton studied what was then known as political economy rather than economics, reading David Hume and Adam Smith, among others. Scattered through his army pay book are notes quoting or summarizing a two-volume book by the British author Malachy Postlethwayt, published in London between 1751 and 1755:
The universal dictionary of trade and commerce; translated, from the French of the celebrated Monsieur Savary, Inspector-General of the manufactures for the King, at the custom-house of Paris: with large improvements, incorporated throught the whole work; which more particularly accommodated the same to the trade and navigation of the kingdoms, and the laws, customs, and usages, to which all traders are subject.
Postlethwayt’s book was a translation and adaptation of the Dictionnaire universel de commerce, written by Jacques Savary des Bruslons, completed by his brother Philemon-Louis Savary and published in Paris in 1723 before being translated into other languages. Jacques Savary was the inspector general of the manufactures for the king at the Custom House in Paris. He was the sixth son of Jacques Savary, a member of an elite merchant family, who had been one of the architects of French economic policy under the great French statesman Jean-Baptiste Colbert.
Colbert served as France’s minister of finance from 1665 until his death in 1683. A brilliant, hardworking public servant, Colbert presided over a program to modernize the French economy and strengthen the state. He created the French merchant marine, imposed quality standards on French producers to make their products more attractive, and promoted infrastructure projects like roads and canals, including the important Canal du Midi. Colbert used protective tariffs and other methods to promote French infant industries. He fostered the French glass industry by banning Venetian glass imports. Another method was the use of state-owned enterprises, like the royal Gobelin tapestry factories. Similar techniques were employed by Britain before the 1840s, and would later be used by the Americans and Germans in the nineteenth century and even later by Japan and China.
At Colbert’s request, Jacques Savary codified French commercial practice in 1673, in what became known as the Code Savary. In addition, Savary wrote a book called The Perfect Merchant, which was published in 1675 and translated into German, Italian, Dutch, and English. The universal dictionary of commerce that his two sons published, and that Postlethwayt translated into English, built upon his work for Colbert. By way of the Savary family and Postlethwayt, the economic nation-building of Alexander Hamilton was influenced by the economic nation-building of Jean-Baptiste Colbert.
Britain as well as France provided Hamilton with a model for state-sponsored economic modernization. Such a system was established under British prime minister Robert Walpole in the early eighteenth century. In 1721, British commercial law was reformed to promote manufacturing by raising tariffs on foreign manufactured goods, eliminating export duties on most British manufactured goods, lowering or eliminating tariffs on raw materials used by British manufacturers, and providing subsidies to British export industries like silk and gunpowder.25 The same era witnessed the founding of the Bank of England (1694), a model for the first Bank of the United States. Only after Britain over several centuries had successfully used protectionism, subsidies, and mercantilist trade policies to develop competitive industries did it take the risk of liberalizing trade.
FUNDING THE DEBT
One of Hamilton’s first decisions as secretary of the Treasury was to ask Congress to establish America’s creditworthiness in the eyes of American and foreign creditors by taking over the debt of the states. Opposition to Hamilton’s funding plan was concentrated in the South. Virginia and several other southern states had paid their wartime debts and objected to being taxed to pay down the debts of other states. In addition, much of the debt had ended up in the hands of northeastern speculators, whose agents had traveled through rural areas buying debt instruments at a fraction of their face value.
James Madison’s proposal to divide the payment between the original holders of the debt and those who had purchased it was unworkable. Hamilton was right to insist that a fluid market in securities meant that the government had to treat all holders of debt equally.
In June 1790, Hamilton was leaving George Washington’s temporary home in New York when he encountered Thomas Jefferson, who had arrived for an appointment with the president. Jefferson later described the Treasury secretary as “somber, haggard and dejected beyond comparison.” Jefferson invited Hamilton to dine with him and Madison at Jefferson’s home on June 20. Legend has it that the Virginians promised Hamilton they would support his funding scheme if Hamilton delivered the support of northerners for a capital on the Potomac. The truth is more complicated. Such a deal had been in the works for some time, and Hamilton knew that Washington favored a site for the capital near his Mount Vernon plantation. In any event, a few days later Congress narrowly passed Hamilton’s assumption system by a single vote. Congress subsequently chose the Potomac site for the federal capital and Jefferson was the first president to serve his full term there.
As Hamilton carried out his plan, the miscellany of federal and state securities were replaced by three new bond issues with a par value of $64 million. By law the debt was funded, that is, federal revenues were dedicated first to paying interest on the debt. Dutch bankers cooperated with Hamilton in managing the debt held by Europeans. Hamilton also increased a sinking fund. Justified by the need to pay down debt in the future, in fact this permitted him to perform what would later be called “open market operations” to stabilize the economy.
The New York Gazette on April 2, 1792, used nautical terminology to describe federal bonds:
THE Six-per Cent, a first rate, belonging to the fleet commanded by Admiral hamilton, notwithstanding several hard contrary gales, and a strong lee current setting out of the Hudson and Delaware is still working to windward; and bids fair to gain her destined port.
The Three per Cent, a frigate belonging to the above mentioned fleet, in sailing through Speculation Straights, received a land flaw, which threw her on her beam ends—She has, however, since righted, and is pursuing her voyage.26
Hamilton was confident that economic growth would permit the United States to pay down the consolidated federal and state debts. He told his friend and mentor Robert Morris: “Speaking within moderate bounds, our population will be doubled in thirty years; there will be a confluence of emigration from all parts of the world, our commerce will have a proportionate progress and of course our wealth and capacity for revenue. It will be a matter of choice if we are not out of debt in twenty years, without at all encumbering the people.”27
FEDERAL TAXES
To pay for the debt and federal government operations, Congress followed Hamilton’s advice and passed a general 9 percent tariff that President Washington signed into law on July 4, 1789. The government initially relied on loans until revenues from the tariff could be built up.
The tariff was supplemented by excise taxes, including a tax on whiskey passed by Congress in 1791. Resistance to its collection by frontier settlers in Pennsylvania escalated until 1794, when hundreds of armed men attacked the home of a federal tax inspector. Mobilizing the militia, President Washington mounted the saddle again, preparing to lead troops in person to suppress the rebellion. But in light of this show of force, the protests collapsed, and the small number of arrested men were pardoned.
While the excise tax was regressive, as a whole Hamilton’s scheme for funding the state debts was more progressive than debt payments by the individual states would have been. For example, the state of Massachusetts alone had planned to pay its debt by raising more than $1 million a year in new taxes. In contrast, the interest on the consolidated national debt of $75.6 million required only $4.6 million from the entire United States, with another million going to the operating expenses of the federal government. And whereas states’ repaying their debt would have relied heavily on property taxes or poll taxes, the federal government raised revenue mainly from tariffs paid primarily by the affluent. If the rich disproportionately benefited from federal assumption of state debt, they also disproportionately paid the costs and spared ordinary Americans the taxes that the states otherwise might have imposed.28
THE BANK OF THE UNITED STATES
On February 25, 1791, Congress chartered the Bank of the United States for twenty years. While Secretary of State Thomas Jefferson and Attorney General Edmund Randolph argued that the bank was unconstitutional, on the grounds that the Constitution did not give the federal government the power to charter corporations, Hamilton persuaded President Washington to sign the legislation with his argument that the Constitution implicitly gave the federal government the power to carry out its responsibilities.29
Hamilton viewed banking as a necessary utility: “Public utility is more truly the object of public banks than private profit.”30 Hamilton’s models were the Dutch and British financial systems, the most sophisticated in the world.31 The bank acted as the fiscal agent of the new federal government, making federal payments and holding federal revenues as deposits. The institution was designed so that the federal government owned 20 percent of the bank, while the other 80 percent was owned by investors. The bank’s capital—$10 million in the form of 25,000 shares at $400 each—made it larger than all of the other American banks in 1791 combined.32 With branches in several major cities, the bank helped to catalyze the formation of private banks throughout the country.33 The sale of federal securities and shares of the bank created a stock market in the young United States. In New York and Philadelphia, individuals formed securities-trading clubs that developed over time into stock exchanges.
THE REPORT ON THE MINT
Another part of Hamilton’s system was his January 28, 1791, report on the establishment of a mint and a bimetallic dollar standard. The goal of bimetallism was to encourage the use of paper money, convertible into gold and silver at fixed rates.
The division of currency by the decimal system as an alternative to Britain’s confusing system of pounds, shillings, and pence, a reform suggested by Robert Morris, was endorsed by Jefferson in his Notes on the Establishment of a Money Unit, and of a Coinage for the United States.34 In 1785, Congress ordained that the dollar would be the standard unit of currency. In 1786, Congress followed Jefferson’s recommendations for fifty-cent, ten-cent (called a “dime,” from Latin), five-cent, and one-cent coins, but instead of a twenty-cent coin authorized the quarter.
The term “dollar” was borrowed from Spain. In addition to using bills of credit, the colonists increased the amount of coin in circulation by obtaining Spanish dollars by means of trade, much of it illegal under the British Empire’s laws, with the West Indies and Europe. In the sixteenth century, in what is now the Czech Republic, a count who owned silver mines near the town of Joachimsthal minted coins called “thalers,” from “thal,” the German word for “valley.” The Hapsburg Empire, which then controlled the Spanish territories, turned gold and silver from Spain’s mines in the New World into thalers, which became “dollars” in English. Spanish dollars were cut or “clipped” into halves, quarters, and eighths, also called “pieces of eight” or “bits.” From that the slang phrase for a quarter is derived: “two bits.”
During the colonial period, one method that the British government had used to discourage the growth of manufacturing in the colonies that might compete with British manufacturing had been to limit the supply of specie, or money in the form of coins. Britain’s mercantilist policy was thwarted to some degree by colonists who used bills of credit as the primary medium of exchange. From this practice arises the term “dollar bill” as distinct from “pound note.”35
THE REPORT ON MANUFACTURES
On January 15, 1790, the House asked the Treasury to report on plans for encouraging American manufactures. Hamilton delivered the Report on Manufactures to Congress on December 5, 1791.
To draft the report, Hamilton turned to an assistant at the Treasury, Tench Coxe. At the age of twenty in 1775, Coxe had joined the United Company of Philadelphia for Promoting American Manufactures, also known as the American Manufactory.36 On May 11, three days before delegates began to deliberate on a new federal constitution in Philadelphia, Coxe had given a talk to some of the delegates at the home of Benjamin Franklin on the need for government to promote manufacturing in the United States.
After five drafts, the final Report on Manufactures weakened many of Coxe’s recommendations, but still made a strong case for government promotion of industry in the United States. In the report, Hamilton rejected the view of Adam Smith and the French Physiocrats that “manufactures without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require.”37 Hamilton dropped Coxe’s proposal for tariffs to protect infant industries. A high-tariff regime would have threatened his plans for using revenues from British-American trade to fund the federal debt and federal government operations. In the final version, Hamilton argued for the superiority of bounties (subsidies) over tariffs. In Federalist 35, Hamilton had argued that protective tariffs “render other classes of the community tributary, in an improper degree, to the manufacturing classes, to whom they give a premature monopoly of the market.”38
Hamilton also addressed the objection to the policy of promoting infant industry “from its supposed tendency to give a monopoly . . . to particular classes at the expense of the rest of the community, who, it is affirmed, would be able to procure the requisite supplies of manufactured articles on better terms from foreigners, than from our own Citizens.” Acknowledging that prices could increase, Hamilton argued that in successful infant industries they would decline over time: “When a domestic manufacture has attained to perfection, and has engaged in the prosecution of a competent number of Persons, it invariably becomes cheaper. . . . The internal competition, which takes place, soon does away every thing like Monopoly, and by degrees reduces the price of the Article to the minimum of a reasonable profit on the Capital employed.”39
KNOWLEDGE TRANSFER: SKILLED IMMIGRANTS AND INTELLECTUAL PROPERTY
Hamilton supported Coxe’s proposals for encouraging skilled immigration, proposing that the federal government fund a board that would import both foreign workers and foreign technology. In 1787, in his capacity as secretary of the Pennsylvania Society for the Encouragement of Manufactures and the Useful Arts, Coxe had provided support for a British emigrant, Andrew Mitchell, to return to Britain and pirate textile technology, a scheme that failed when Mitchell was discovered and forced to flee to Copenhagen.40 Thomas Digges smuggled nearly two dozen British textile workers to the United States, including some hired by Hamilton. In another case, an English weaver named George Parkinson was granted a US patent on textile technology in 1791; later he went on to work for the government-sponsored manufacturing center sponsored by Hamilton, the Society for Establishing Useful Manufactures (SUM). Secretary of State Thomas Jefferson, in charge of patent policy, arranged for the patent and helped arrange the emigration of Parkinson’s family but did not help Parkinson directly in order to avoid violating British law.41 Parkinson went into partnership with Coxe, then Hamilton’s assistant at the Treasury, and Hamilton had the US Treasury subsidize Parkinson’s living expenses.42 Jefferson opposed Hamilton’s policy of promoting skilled immigration, because of his prejudice against urban mechanics and factory workers. He wrote that such “ephemeral and pseudo-citizens” should be treated “as we do persons infected with disease.”43
In addition to recommending policies to encourage manufacturing and the immigration of skilled labor, Hamilton sought to promote American industrialization directly. When he failed to persuade Congress to support the SUM, he and allies obtained a charter for the company from the state of New Jersey and founded the city of Paterson. As explained in chapter 1, following initial failures, Paterson became one of the most important centers of American manufacturing until the second half of the twentieth century.
The British government was alarmed by the Report on Manufactures and SUM. George Hammond, the British minister in Philadelphia, urged the British government “To prevent the emigration and exportation of machines necessary to the different branches of manufactures.”44 British agents in the newly independent United States worked to stymie American manufacturing development. In 1787, Phineas Bond, the British consul in Philadelphia, bought four carding and spinning machines that had been smuggled into the United States and sent them back to Britain.45 Bond kept his superiors in London informed about American theft of British technology and called for enforcement of laws “against seducing manufacturers and conveying away implements of manufacturing.”46
The contradiction between the promotion of theft of intellectual property from Britain and Europe and the patenting of technology, much of it stolen, by the US government bothered Secretary of State Thomas Jefferson and Attorney General Edmund Randolph. President Washington shared their concerns, opposing the establishment of a textile mill in Virginia that used stolen British technology because “it certainly would not carry an aspect very favorable to the dignity of the United States for the President in a clandestine manner to entice the subjects of another Nation to violate its Laws.”47
While Hamilton did not challenge British restrictions on American commerce, in order to avoid jeopardizing the British-American trade on which the federal tariff depended, his manufacturing program directly challenged British industrial supremacy. Hamilton envisioned the United States not as a complementary resource-exporting economic colony of Britain but as a rival industrial nation—a “New England” indeed.
Hamilton was accused by many contemporaries and later historians of being an Anglophile. In fact, his complete program, if it had been carried out, would have used revenues from the federal tariff on British-American trade in order to subsidize American industries capable of catching up and competing with British industries. In the nineteenth century, US industrialization was accelerated by the protective tariffs that Coxe rather than Hamilton favored. But the result was similar. While tariffs kept out British manufactured imports, private British investors in American railroads and factories played a major role in financing the development of the American industrial base that eventually surpassed Britain’s own.
WILLIAM DUER AND THE PANIC OF 1792
Hamilton’s rational scheme for sound finance was undermined by speculative irrationality that gave rise to the panic of 1792. At the center of the crisis was William Duer, the British-born son of a West Indian planter who served in the Continental Congress, grew rich as a supplier during the Revolutionary War, and married into New York high society when he wed Catherine Alexander in a ceremony in which George Washington gave away the bride. Duer worked briefly for Hamilton in the new Treasury Department before quitting to trade on inside information, without Hamilton’s knowledge or approval. He walked away unscathed from the Scioto scandal, a land scheme in the Ohio River valley that left a company bankrupt along with many of its investors, and secretly went into business with a land speculator named William Macomb and a number of rich New Yorkers. They formed the Six Percent Club, a group that sought to corner 6 percent federal bonds and other securities. Duer’s group speculated in Bank of New York stock and announced the formation of a “Million Bank.” Spreading rumors that it would merge with the Bank of the United States and the Bank of New York, in January 1791 the conspirators sold shares of the Million Bank at high prices, planning to cash out at the top of the market they had manipulated. But a rival faction of speculators led by the rich Livingston family, by driving down the price of Bank of New York stock, forced Duer into bankruptcy and, when he could not pay his many creditors, a run on the banks began.
On January 18, 1792, Hamilton wrote to the cashier of the Bank of New York, William Seton: “I have learnt with infinite pain the circumstance of a new Bank having started up in your City. Its effects cannot but be in every view pernicious. These extravagant sallies of speculation do injury to the Government and to the whole system of public Credit, by disgusting all sober Citizens and giving a wild air to everything. . . . I sincerely hope that the Bank of New York will listen to no coalition with this newly engendered Monster.”48 Interestingly, years later, Hamilton used the same phrase in noting that his enemy Aaron Burr, who would kill him in a duel in 1804, “by a trick established a Bank, a perfect monster in its principles; but a very convenient instrument of profit & influence.”49
After Duer wrote a note informing him of his default, Hamilton replied on March 14: “Act with fortitude and honor.”50 Duer was thrown into a debtors’ prison, which was surrounded by mobs of those whom he had defrauded. Hamilton obtained a temporary reprieve for him but Duer returned to prison and died there in disgrace. Hamilton’s crisis management ended the panic by April, and there would not be another financial panic in the United States until 1819.
On May 17, 1792, two dozen brokers gathered under a buttonwood tree at 68 Wall Street in lower Manhattan to found an association to make and enforce rules to discourage unethical speculators like William Duer. Their club became the New York Stock Exchange.51
“WE ARE ALL FEDERALISTS, WE ARE ALL REPUBLICANS”
“We are all Federalists, we are all Republicans,” Thomas Jefferson declared in his first inaugural address, after his election in “the revolution of 1800.” Jefferson would serve two terms and be succeeded by James Madison, who also served two terms. During the Washington administration, Jefferson and Madison had opposed most of the elements of Hamilton’s program for national economic development. Once they had to govern the country, they quickly learned how practical the Hamiltonian system was and reconsidered some of their Republican objections to the Federalist policies of Jefferson’s predecessors, George Washington and John Adams.
For most of the period from 1800 to 1815, Britain and France were engaged in a world war that stretched from the steppes of Russia to North America. The weakness of the young American republic was demonstrated again and again. The British and French navies impressed, or drafted, American sailors, over the objections of the US government. Britain’s orders in council, which established a blockade of French-dominated Europe, and Napoleon’s Continental System, which sought to make his domain independent of Britain, disrupted American commerce. But when Jefferson and Congress sought to pressure the warring great powers with a US embargo on foreign trade, nicknamed the O-Grab-Me by its critics, the result was a disastrous contraction of the American economy, widespread smuggling, and sentiment for secession in mercantile New England. The War of 1812 that followed was an even greater disaster. The attempt by the United States to conquer British Canada failed. The British burned Washington, DC. Only the belated victory of Andrew Jackson at the Battle of New Orleans, which took place after peace negotiations had begun, prevented the war from being a completely humiliating experience.
American manufacturers had been helped, however, by the decline in trade during the embargo and the war. When a flood of British imports following the war, beginning in 1816, threatened to destroy many of the nascent manufacturing businesses, Congress passed the first truly protective tariffs—of 30 percent on iron and 25 percent on woolens and cotton. Because these were seen as reducing America’s dependence on Britain, they were supported by Anglophobic southerners like John C. Calhoun and Andrew Jackson. In April 1810, Jefferson’s Treasury secretary Albert Gallatin, influenced by Hamilton’s former aide Tench Coxe, a political opportunist who never wavered in his support for American industry, published his own report on manufactures, recommending moderate increases in protective duties.52 Ironically it was the Jeffersonians, out of hostility to Britain, who were more willing to use tariffs to protect industry than had been Hamilton, who had preferred bounties, or subsidies, in order not to disrupt British-American trade. Together with Gallatin’s ambitious plan for a nationwide canal system and Jefferson’s recommendation of a constitutional amendment to permit the federal government to fund internal improvements, Gallatin’s report on manufactures showed that the Jeffersonians had accepted the major elements of Hamilton’s program for state-sponsored national economic development.
In 1782, in Notes on the State of Virginia, Jefferson had written: “The political economists of Europe have established it as a principle that every state should endeavor to manufacture for itself; and this principle, like many others, we transfer to America, without calculating the difference of circumstance which should often produce a difference of result. In Europe the lands are either cultivated, or locked up against the cultivator. Manufacture must therefore be resorted to of necessity, not of choice, to support the surplus of their people. But we have an immensity of land courting the industry of the husbandman . . . while we have land to labor, then, let us never wish to see our citizens occupied at a workbench.”53 And in 1812 he set forth a vision of manufacturing limited to households on farms: “We have reduced the large and expensive machinery for most things to the compass of a private family, and every family of any size is now getting machines on a small scale for their household purposes.”54
Jefferson’s bias against the commercial Northeast endured. In 1816, from his retirement, he expressed his hope that the industrializing Northeast peacefully withdraw from the Union, leaving the states “which are for peace and agriculture.” He wrote: “I have no hesitation in saying let us separate.” The alternative, he thought, was the corruption of American society by “the mimicry of an Amsterdam, a Hamburgh, or a city of London.”55 But in the same year Jefferson told one correspondent: “You tell me I am quoted by those who wish to continue our dependence on England for manufactures. There was a time when I might have been so quoted with more candor, but within the thirty years which has since elapsed, how circumstances have changed! . . . He, therefore, who is now against domestic manufacture, must be for reducing either to dependence on that foreign nation [Britain], or to be clothed in skins, and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that manufactures are now as necessary to our independence as to our comfort.”56
Madison, too, was won over to Hamiltonian infant-industry protectionism. During the debate about the “tariff of abominations” in 1828, the “Father of the Constitution” wrote several public letters insisting that the Constitution gave Congress the power to levy tariffs and defending the use of tariffs to protect American manufacturing against foreign competition and policies to encourage skilled immigration. Madison gave six reasons why the United States should pursue a policy of import-substitution protectionism: “1. The Theory of ‘Let us alone,’ supposes that all nations concur in a perfect freedom of commercial intercourse. . . . But this golden age of free trade has not yet arrived. . . . 2. The Theory supposes moreover a perpetual peace, not less chimerical, it is to be feared, than a universal freedom of commerce. . . . 3. It is an opinion in which all must agree, that no nation ought to be unnecessarily dependent on others for the munitions of public defence, or for the materials essential to a naval force, where the nation has a maritime frontier or a foreign commerce to protect. . . . 4. There are cases where a nation may be so far advanced in the pre-requisites for a particular branch of manufactures, that this, if once brought into existence, would support itself; and yet, unless aided in its nascent and infant state by public encouragement and a confidence in public protection, might remain, if not altogether, for a long time unattempted, or attempted without success. . . . 5. Should it happen, as has been suspected, to be an object, though not of a foreign Government itself, of its great manufacturing capitalists, to strangle in the cradle the infant manufactures of an extensive customer or an anticipated rival, it would surely, in such a case, be incumbent on the suffering party so far to make an exception to the ‘let alone’ policy as to parry the evil by opposite regulations of its foreign commerce. . . . 6. It is a common objection to the public encouragement of particular branches of industry, that it calls of labourers from other branches found to be more profitable, and the objection is, in general, a weighty one. But it loses that character in proportion to the effect of the encouragement in attracting skilful labourers from abroad.”57
Earlier, in 1811, Jefferson had written to another friend, praising the tariff as a source of revenue as well as a stimulus to infant industries: “We are all the more reconciled to the tax on importations, because it falls exclusively on the rich, and with the equal partitions of intestate’s estates, constitutes the best agrarian law. In fact, the poor man in this country who uses nothing but what is made within his own farm or family, or within the United States, pays not a farthing of tax to the general government, but on his salt; and should we go into that manufacture as we ought to do, he will not pay one cent. Our revenues once liberated by the discharge of the public debt, and its surplus applied to canals, roads, schools, etc., the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spare a cent from his earnings.”58
Federal support for internal improvements was another measure that Jefferson and his allies came to support, if only with qualifications. In 1803, Jefferson signed a law that permitted the federal government to use 2 percent of the money from the sale of federal land in Ohio on roads and other forms of transportation within Ohio or leading to it. The National Road grew out of this legislation. Then in his second inaugural address in 1805, Jefferson called for a constitutional amendment to allow any federal surplus once the debt was paid off to be divided “by a just partition among the states” and to “be applied, in time of peace, to rivers, canals, roads, arts, manufactures, education, and other great objects within each state.” On April 6, 1808, Jefferson’s Treasury secretary, Albert Gallatin, published a comprehensive report on roads and canals. While public construction was a possibility, Gallatin preferred government loans to private companies or government purchases of their stock.
Jefferson told the American diplomat Joel Barlow: “The time is fast approaching when the United States, if no foreign disputes should induce an extraordinary expenditure of money, will be out of debt. From that time forward, the greater part of their public revenue may, and probably will be, applied to public improvements of various kinds, such as facilitating the intercourse through all parts of their dominion by roads, bridges, and canals; such as making more exact surveys and forming maps and charts of the interior country, and of the coasts, bays, harbors, perfecting the system of lights, buoys, and other nautical aids; such as encouraging new branches of industry, so far as may be advantageous to the public, either by offering premiums for discoveries, or by purchasing from their proprietors such inventions as shall appear to be of immediate and general utility, and rendering them free to the citizens at large; such as exploring the remaining parts of the wilderness of our continent, both within and without our own jurisdiction.”59
Even the Bank of the United States, which the Republican faction of Jefferson and Madison had denounced in the 1790s, came to be viewed as a necessity. The Jeffersonians who dominated Congress had refused to renew the bank’s twenty-year charter when it expired in 1811. But the financial difficulties of the federal government during the War of 1812 convinced a number of War Hawks, including the young Henry Clay, that a national bank was necessary. Congress chartered a second Bank of the United States in 1816 and the law was signed by President Madison, who had opposed Hamilton’s original proposal in 1791.
By the 1820s, a consensus on the need for infant-industry protection, internal improvements, and a national bank had coalesced. But the consensus would not survive. Soon Hamilton’s vision of government-sponsored national economic development would be defeated, with results for the shape of the American economy that would last into the twenty-first century.