Authors: Michael Lind
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.”
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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.”
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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.
All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.
—Adam Smith, 1776
1
O
f the ten Americans whose wealth at their deaths was the greatest, as a percentage of the GDP of the United States, three died before 1850—the third wealthiest, John Jacob Astor (1763–1848), the fourth, Stephen Girard (1750–1831), and the tenth, Stephen Van Rensselaer III (1764–1839).
2
They owed their status not to the fact that they were particularly rich by modern standards, but to the fact that the American economy of their time was so small and poor.
It was not until the mid-nineteenth century that growth angled sharply upward in Britain, the United States, Western Europe, and other industrializing societies. Since the industrial era began, industrial countries have enjoyed average real growth of 1.5 to 2 percent a year, a growth rate roughly ten times greater than the negligible growth rate that existed in preindustrial societies.
3
The phenomenon of high, sustained economic growth is recent, following millennia of economic stagnation and, in some places, periods of regression. According to one calculation, the hourly wages of real construction workers in Britain were approximately the same from AD 1200 to the 1860s.
4
In a premodern biomass economy, most energy came from firewood and human and animal muscle, supplemented sometimes by windmills and water mills. The majority of people in agrarian societies had to till the soil to feed themselves and the small upper classes. The self-sufficient village or plantation economies of the farm laborers who made up most of the population were divorced from interregional and international trade. Long-distance trade consisted almost entirely of trinkets and drugs that the landlords and courtiers of one country exchanged with the landlords and courtiers of another—gold and silver and silk, tobacco, coffee, opium, and tea. In the premodern economy, any growth in luxury trade meant greater exploitation of the peasant farmers who were taxed by the landlords to finance their purchases. Today’s historians who write cheerfully about the “flourishing commerce” of Asia in the Middle Ages or early modern Europe and the Americas overlook the suffering of the exploited laborers who obtained or produced the mostly frivolous and unnecessary goods that were the objects of international trade: Chinese workers in porcelain and silk sweatshops, South American Indian silver miners, Bengali and Turkish poppy growers, and Indian and white fur trappers and traders in North America. Among these were the slaves of the Americas, North and South. Between 1700 and 1820, the number of Africans transported to the Western Hemisphere was roughly five times greater than the number of Europeans.
Manufacturing, too, was different in the preindustrial world. It did not mean the use of machinery to produce low-cost goods. The peasants and the poor were clothed, shod, and equipped with goods they made at home or purchased from village craftsmen. Premodern factories specialized in luxury goods that were consumed by the local aristocrats or sold to the foreign rich.
The workers in these sweatshops were among the most miserable of the poor. Frequently they were children of peasant or serf families who could not be supported by their starving parents in countries suffering from famine and overpopulation. Working seven days a week in dark premodern factories was almost as miserable as laboring in mines or galleys. In Britain, the acts of enclosure, which privatized land formerly held in common by village farmers, had contributed to the creation of an urban proletariat with no alternatives except destitution, which could be employed for subsistence wages in manufacturing.
The term “corporation” also had a different meaning in preindustrial Europe and America. Most corporations were government-chartered monopolies, created for a single purpose. Many of these were utilities, like bridges or canals or roads. Some were imperial agencies that functioned as quasi governments overseas, like the Dutch East India Company, the British East India Company, and the Virginia Company, which founded the first enduring British settlement in North America at Jamestown, Virginia, in 1607. The shareholders of these government-backed monopolies were usually well-connected aristocrats or wealthy businessmen who grew rich from tolls or other exactions.
The American Revolution promised freedom from the premodern institutions of monarchy and aristocracy to most Americans. But the promise of the liberation of most Americans from various forms of premodern economic subjugation, as a result of science and technological progress, would have to wait until the industrial revolution came to the New World from the Old.
AN ECONOMY BUILT ON WATER AND WIND
The first American economy was built on water and wind.
During the colonial period, most of the important cities and towns in the future United States had grown up along the fall line, where the rolling Piedmont plateau that stretches eastward from the foothills of the Appalachian Mountain chain drops down to the Atlantic coastal plain. Here, in the rivers that drained eastward from the mountains to the ocean, rapids or waterfalls prevented sailing ships from traveling farther upriver. Here cargo had to be unloaded for overland portage, and falls provided waterpower for mills. The cities of the fall line included Trenton, New Jersey; Philadelphia, Pennsylvania; Baltimore, Maryland; Georgetown, Maryland (later a part of Washington, DC); Richmond, Virginia; Fayetteville, North Carolina; Columbia, South Carolina; and Augusta, Georgia.
Most of the US population was clustered near the seacoast. Coastal trade among the states was less expensive than overland trade. In order to create a US merchant marine that could be mobilized to support the navy in wartime, Congress protected the American shipbuilding and cabotage (intranational shipping) industry. The second law passed by Congress after the adoption of the federal constitution in 1789 required US flag ships to be built in American shipyards and imposed discriminatory duties on foreign ships in US ports. The Navigation Act of 1817 outlawed waterborne transportation of goods between two points in the United States by foreign vessels, reserving internal shipping for American ships. This protectionist measure had the support of no less an authority than Adam Smith, who in
The Wealth of Nations
endorsed the British Navigation Acts that required all trade to and from Britain to be carried in British ships: “The act of navigation is not favourable to foreign commerce, or to the growth of that opulence which can arise from it. . . . As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”
5
The Allegheny and Appalachian Mountains separated the Atlantic seaboard from the Northwest Territory that would be carved into Illinois, Indiana, Michigan, Ohio, Wisconsin, and part of Minnesota. The expense and hardships of overland travel made movement to the territory difficult for settlers and hindered the ability of the future Midwest to trade crops, timber, and minerals for goods from the East and overseas. Roads in the early American republic, including those built and operated by turnpike companies chartered by state governments, were crude and sometimes impassable. Before the evolution of steam-powered locomotives, the infrastructure projects that could best promote freight and passenger transportation were canals.
“LITTLE SHORT OF MADNESS”—THE ERIE CANAL
By far the most successful was the Erie Canal. In 1808, Jefferson told a New York assemblyman that the idea of a canal between the Hudson River and Lake Erie was “little short of madness.”
6
New York City mayor and later New York governor DeWitt Clinton and Gouverneur Morris, who chaired the New York State board of canal commissioners, met with President Madison and obtained his and Treasury Secretary Gallatin’s support for the Erie Canal. Gallatin even proposed to use money from a land grant in Indiana to pay for it.
7
But Congress rejected federal aid.
Undeterred, New York built the canal on its own. Alexander Hamilton’s father-in-law, General Philip Schuyler, a New York senator, helped to create the Western Inland Lock Navigation Company to build a precursor to the canal and joined the lobbying effort to have the state build it. In 1817, Clinton persuaded the New York State legislature to authorize $7 million to build the canal. Half of the bonds for the Erie Canal were purchased by foreigners.
8
The work was begun in 1817 and finished in only eight years. On October 26, 1825, Governor Clinton departed from Buffalo on a canal boat named the
Seneca Chief
. The
Seneca Chief
was accompanied by a canal boat called
Noah’s Ark
, which carried, not two of each kind of animal, but symbols of the West: fish, birds including two eagles, a beaver, a bear, and two Seneca Indian boys. Cannons fired in a relay, bringing the news of Clinton’s departure in two hours to New York City.
In Rochester, the captain of a boat called the
Young Lion of the West
took part with a member of the procession in a catechism:
“Who comes there?”
“Your brothers from the West on the waters of the Great Lakes.”
“By what means have they been diverted so far from their natural course?”
“Through the channel of the great Erie Canal.”
“By whose authority and by whom was a work of such magnitude accomplished?”
“By the authority and by the enterprise of the people of the State of New York.”
9
It took nine days for Clinton and his entourage to arrive at New York. Waiting there with the crowds were President John Quincy Adams, former presidents John Adams, Jefferson, Madison, and Monroe, and the marquis de Lafayette, who was visiting the United States.
Towed by eight steamboats, the canal boats arrived in New York Harbor on November 4, 1825. The steamboat
Washington
towed the
Seneca Chief
to Sandy Hook, where New York Harbor meets the Atlantic Ocean. Imitating the ceremonial marriage of Venice with the sea enacted by the doge, or elected chief magistrate, Clinton enacted the “marriage of the waters.” He poured water from Lake Erie into the Atlantic, then mixed waters from eleven major foreign rivers, including the Rhine and the Amazon, with the mingled water of the Great Lakes and the Atlantic. In a subsequent ceremony on November 25, water from the Atlantic was poured into Lake Erie.
The 363-mile canal, with 83 locks and 18 aqueduct crossings over other bodies of water, ascended nearly six hundred feet from the Hudson River to Lake Erie. The Erie Canal facilitated passenger travel between the East Coast and the Great Lakes. Streams of pioneer families on canal boats traveled to new homes in the growing Midwest. It may be presumed they were less fastidious than the British visitors who wrote about the experience of canal-boat travel in America. Frances Trollope thought that American women settling into the confined spaces “look like hedgehogs, with every quill raised.”
10
Another British traveler, Harriet Martineau, complained: “The heat and noise, the known vicinity of a compressed crowd, lying packed like herrings in a barrel, the bumping against the sides of the locks, and the hissing of water therein like an inundation, starting one from sleep; these things are disagreeable.”
11
The contribution of the Erie Canal to low-cost freight transportation was profound. By dramatically reducing the costs of long-distance shipping, the canal permitted farms in the Midwest to supply the Atlantic seaboard. Following the completion of the canal, the cost of shipping a ton of wheat from Buffalo to New York City dropped from one hundred dollars to ten dollars.
12
In 1829, 3,640 bushels of wheat traveled along the canal from Buffalo. In 1841, the number had grown to one million.
13
One consequence was the decline of wheat growing in New England under competitive pressure from the Midwest, to which many New Englanders migrated.
The Erie Canal enabled Manhattan to defeat its rivals Boston, New Orleans, and Baltimore for primacy as the leading American port. Beginning in 1790, when it had 33,000 inhabitants, New York increased its population by more than 50 percent each decade until 1860, when it had 800,000 residents. DeWitt Clinton’s vision of the future of Manhattan was fulfilled: “The city will, in the course of time, become the granary of the world, the emporium of commerce, the seat of manufactures, the focus of great moneyed operations. And before the revolution of a century, the whole island of Manhattan, covered with inhabitants and replenished with a dense population, will constitute one vast city.”
14
CANAL MANIA
Even before construction began on the Erie Canal, Albert Gallatin, Jefferson’s Treasury secretary, published an ambitious plan for a nationwide system of canals. Although the Gallatin plan was never enacted, many of the canals he proposed were built by individual state and local governments, in the era of canal building from 1815 to the 1840s.
15
The success of the Erie Canal inspired other states to emulate New York in the 1820s and 1830s. Pennsylvania paid for its own “Portage and Canal System” from Philadelphia to Pittsburgh and the Miami Canal linked Cincinnati to Lake Erie. But the government of Virginia failed to complete the Chesapeake and Ohio (C&O) Canal, which ended at Cumberland in Maryland, and the James River Canal, which ended more than one hundred miles from the Ohio River.
Convict labor was sometimes used in canal construction and in the South some slaveowners rented out slaves. Much of the labor in every region was supplied by poor Irish immigrants, many of them indentured servants. Tools were primitive—wheelbarrows, shovels, and dangerous blasting powder. Irish laborers used the phrase “sprig of Shillelagh,” a term for a club, to describe an endless screw machine that used a cable to snap trees so that they could be uprooted. As they built the Erie Canal, workers sang a ballad: