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Economy in The Federalists

The Economic Challenges of Independence

The economic problems facing the United States in 1789 were indeed daunting. For starters, the arrival of peace in 1783 had also brought recession. During the war, many Americans had found prosperity supplying goods to the three armies—American, British, and French—marching across the continent. But now, with the fighting over and the armies withdrawn, they faced a sharp reduction in demand. More important in the long term, the British had decided to play commercial hardball by receiving American goods only on an as-needed basis. Among the American industries hit hardest were the shipyards of New England; their annual production fell by 80%. New England merchants and New York and Pennsylvania farmers also faced hard times, as the British closed their West Indian ports to American trade. Supplying these islands, and their 500,000 slaves, with provisions like fish, salt, and wheat had been of critical economic importance to the northern mainland states. In addition, western migrants faced an equally serious economic threat; Spain, which owned vast territories in the interior of the continent, was denying Americans access to the Mississippi River. If unable to ship goods down the Mississippi, western farmers would be denied their only practical route to eastern and foreign markets. Moreover, political separation had not dampened Americans' craving for British manufactured goods. But with American exports restricted, the United States soon racked up huge trade deficits. Completing the gloomy economic picture, the United States and many of the individual states had large, seemingly unmanageable debts. Unless these were paid down or refinanced, confidence in the new government and the government's ability to borrow in the future would be jeopardized.

Hamiltonian Finance

In the face of these economic problems, Alexander Hamilton, first Secretary of the Treasury, developed a package of proposals designed to restore the public credit and boost the American economy. The centerpiece of the plan was the decision to refund the national debt. He would not immediately pay off the $40 million that had been borrowed by the Continental Congress during the war. Instead, he would swap old securities (bonds, field warrants, and other forms of government IOUs) for new securities. He also proposed that the federal government assume the debts of the states; new federal government securities would be exchanged for the old state securities. For holders of the old securities, either national or state, the key feature of the new plan was that their securities would be honored at full face value. In the years since these securities were first issued, many people had lost confidence in the government's ability to ever repay them. Consequently, their market value had declined, and many holders of these securities had sold them to others for less than their face value. (By the mid 1780s, government securities often sold for as little as 15¢ on the dollar.) But Hamilton pledged to refund everything at full value, assuring a hefty payoff for many who had gambled on these securities eventually recovering their worth.

For Hamilton, an equally important feature of these new bonds was that they carried no maturation date. The government promised to pay the interest annually, usually 4-6%, but would not commit to a certain payoff date. Hamilton's logic was more political than economic; he envisioned these bonds circulating permanently as a safe form of investment for Americans. If a holder wanted his cash, he could sell the bond to someone else. The original holder would be satisfied and the bond would pass to another person now invested in government securities—and now also interested in ensuring that the government was stable and adequately empowered to make its annual interest payments. In this way, America's debt would actually become a source of strength rather than a burden—a "national blessing," as Hamilton said, joining the private interests of American investors to the public need for a strong and stable federal government.13

The Whiskey Tax...

To make this all work, Hamilton also needed a source of revenue, a reliable source of cash so that the government could annually make the interest payments on its securities. The complex income tax system we rely on today was unheard of in the eighteenth century. Instead, governments depended on a variety of property, poll, trade, and excise taxes. Of all these, a tariff—or tax on imported goods—was the easiest to collect, so Hamilton built one into his economic plan. However, a revenue system based on tariffs would have a disproportionate impact on the coastal communities most dependent upon international trade. Hamilton wanted to distribute the tax nationally and, in the process, assert the power of the new government over all corners of the nation, so import taxes were coupled with a tax on whiskey.

To modern observers a tax on whiskey may seem a curious choice. Why not tax land or impose a more general sales tax? In the eighteenth century, in frontier areas like western Pennsylvania, whiskey was a logical and regular target for taxation. The principal agricultural products of these regions were various types of grain. Grain grew easily, but was difficult to transport to market. A farmer could either haul it all the way to the (still Spanish-controlled) Mississippi, or he could take it over the Appalachian Mountains—a challenge equally difficult and costly. The solution to this transportation problem was distillation. By distilling grain into whiskey, back-country farmers produced a more easily transported and more profit-intensive product.

As a result, virtually everyone in the back country produced whiskey; the liquor was so common that it took on the role of currency. In a region where bank notes and specie (hard money like gold or silver coins) were difficult to come by, products were bought and sold by the jug; no other product was so universally produced or possessed. To Hamilton, anxious to spread the tax burden and assert federal authority, it made perfect sense to tax whiskey's production.

This was also a controversial choice. Back-country farmers were not wealthy people and the new tax was a huge burden. Farmers complained that they were taxed on the capacity of their stills, not their actual production. And any violation meant a court date in distant Philadelphia—for some, a 300-mile trip. Most important, farmers argued that there were fairer ways to raise the necessary revenue. They suggested, as an alternative to the whiskey tax, a tax on undeveloped property—all the land owned by eastern speculators. This land, sitting idle while its wealthy owners waited for property values to rise, pushed up local land costs. Consequently, almost one-third of the local population was landless. But a tax on undeveloped or idle land would create a negative incentive for speculators to sell their land, putting more land on the market and lowering the price for the local farmers. To the back-country farmer, this sort of tax made perfect sense. It would give the government the money it needed and make more land available to the common people that the republic was suppose to serve. Why, then, did the government insist on taxing the poor farmers? Why were their voices ignored? What sort of government would allow wealthy speculators to profit while common toilers struggled?

...Becomes the Whiskey Rebellion

For three years following the passage of the whiskey tax in 1791, Hamilton tried without consistent success to collect it. His agents in the back-country were harassed, burned in effigy, and on occasion, tarred and feathered. Farmers who paid the tax were treated just as harshly; their stills were "fixed"—blown to bits by gunfire—by "Tom the Tinker," Pennsylvania's own back-country Zorro.14 President Washington urged restraint, as did state officials anxious to resolve their back-country problems without federal intervention. But in 1794, Hamilton decided to ratchet up enforcement. He published a list of 75 tax evaders that would be brought to justice, thereby setting off the Whiskey Rebellion.

Hamilton claimed that the list represented the most egregious offenders, but these just happened to include many of the most vocal critics of the tax, many of them officers of local Democratic Societies. Hamilton's targeting of these persons struck just about everyone as political—an attempt to use the powers of government to silence outspoken critics of the administration. In reaction, tax resisters throughout western Pennsylvania formed into militias and marched on the local courts, which had recently been handed the task of enforcement. The most violent protest occurred in Allegheny County in July 1794, when 500 people surrounded the home of John Neville, the regional tax inspector, and exchanged gunfire with the federal troops sent to protect him. Neville's house was burned to the ground, but two tax-resisting militiamen were killed and the farmers' sense of injustice grew stronger.

For the next two weeks, tax resisters rallied and planned. By now, the language of the American Revolution was being routinely invoked. Cries of unjust taxation and government oppression, "malicious merchants," and "aristocratic factions" carried whiskey rebels back in time to 1776. Even the image of King George III was summoned in declaring the policies and styles of the Washington administration better suited to "the court of a despot" than a republican president. And on 1 August, all of this came to a climax: 7,000 tax resisters paraded through the streets of Pittsburgh in a dramatic display of unity.15

Federal Authority Is Asserted...

By now, Washington had finally come around to Hamilton's way of thinking; in the face of popular insurrection, federal authority had to be asserted. These protestors were defying an act of Congress: they had threatened a government official and fired upon federal troops. A force of 15,000 was thus assembled and, with great fanfare, dispatched to the west. Alexander Hamilton and "Light Horse" Harry Lee, the Revolutionary War hero, were placed in command. George Washington himself donned his uniform and sword and briefly rode alongside.

After all the puff and bluster, the end to the crisis was anticlimactic. By the time the government force reached western Pennsylvania, the local militias had disbanded. About twenty persons were arrested and two were convicted of treason, only to be pardoned soon after. But most of the leaders had gone into hiding and could not be found, and most of the farmers were all too ready to pledge loyalty to the government—especially once the government army began paying top prices in hard money for food and, of course, whiskey.

But the Political Order Evolves

While the whiskey crisis may have passed with more of a whimper than a bang, the episode was important on more than one level. While many applauded Washington and his decisive yet restrained use of force, others saw in these events evidence of governmental corruption. For men like Thomas Jefferson and James Madison, the government's reaction to the Whiskey Rebellion offered evidence of Hamilton's excessive influence in the administration, and a disturbing use of government power to crush the legitimate concerns of common people.

On another level, the episode revealed that the political structures so carefully crafted at the Constitutional Convention needed fine tuning. For starters, the militant reaction of Pennsylvania's farmers revealed that western interests were not being properly addressed by eastern-dominated governments. The back-country settlers' complaints about taxes joined a longer list of grievances including poor protection against Indians and British troops, and land policies that favored eastern speculators.

More subtly, but in the long run, more important, the episode revealed that there was a problem surrounding the issue of representation. Part of the problem was structural; the scale of representation was too large. The Constitution had fixed congressional representation at one seat per 30,000 constituents. How could an individual's needs be heard? How could one person actually influence the House of Representatives—the people's legislative chamber—with this scale of representation?

More subtly, what exactly did things like "popular sovereignty" and "representation" mean? Were the people always sovereign? Did they possess political authority 365 days a year, or were they empowered only on election day? Did they transfer their authority to their representatives only to reclaim it the next election day? If their representatives failed to advance or protect their interests, what options did they possess? Could they legitimately reclaim their authority and individually, or as a community, seek redress?

As these questions were debated at town meetings and among political leaders in the months that followed, sympathizers of the whiskey rebels and supporters of President Washington took positions at opposite ends of the spectrum. While backers of the farmers argued that the people retained the authority to take action where government officials could not or would not do the right thing, Washington argued that public order required that duly elected officials be deferred to in all matters of governance. Recalling the similarly disruptive effect of Genet's visit, he criticized the role of Democratic Societies in recent events. These "self-created" societies, organizations outside the properly constituted governmental agencies stirred up by "combinations of men, who careless of consequences... have disseminated... suspicions, jealousies, and accusations, of the whole government" were most to blame for recent disturbances.16

But somewhere in between absolute popular sovereignty and a traditional politics of deference, others struggled to work out a political solution to this problem of representation. There needed to be some sort of conduit for popular feeling and political activism, some sort of organization separate from the agencies of government, that could collect popular opinion and act on its behalf. James Madison tiptoed around the issue by suggesting that given the "good sense and patriotism" of the people, they could be trusted to form groups to voice their opinions. But the German Republican Society of Philadelphia made the case more forcefully. Government's power could only be checked by "a display of power equal to itself." Citizens acting individually could never sway government officials, but "the voice of many strikes them with awe."17 What Madison gently, and the German Republican Society more bluntly, were getting at was the need for political parties—the sort of permanent, extra-governmental political organizations that Washington and many others dreaded, but which we now take for granted as fundamental to democracy.

In the Whiskey Rebellion, Washington was able, once again, to impose order in a manner consistent with his vision of the nation's needs. But within this immediate victory, a more dynamic, less orderly, and more democratic political infrastructure continued to unfold.

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