B005HFI0X2 EBOK (5 page)

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