Part 4

"As I was going to the President's one day, I met him (Hamilton) in the street. He walked me backwards and forwards before the President's door for half an hour. He painted pathetically the temper into which the legislature had been wrought; the disgust of those who were called the creditor states: the danger of the _secession_ of their members, and the separation of the states. He observed that the members of the administration ought to act in concert; that though this question was not of my department, yet a common duty should make it a common concern; that the President was the centre on which all administrative questions ultimately rested, and that all of us should rally around him, and support, with joint efforts, measures approved by him; and that the question having been lost by a small majority only, it was probable that an appeal from me to the judgment and discretion of some of my friends might effect a change in the vote, and the machine of government, now suspended, might be again set into motion. I told him that I was really a stranger to the whole subject; that not having yet informed myself of the system of finance adopted, I knew not how far this was a necessary sequence; that undoubtedly, if its rejection endangered a dissolution of our Union at this incipient stage, I should deem that the most unfortunate of all consequences, to avert which all partial and temporary evils should be yielded. I proposed to him, however, to dine with me the next day, and I would invite another friend or two, bring them into conference together, and I thought it impossible that reasonable men, consulting together coolly, could fail, by some mutual sacrifices of opinion, to form a compromise which was to save the Union. The discussion took place. I could take no part in it but an exhortatory one, because I was a stranger to the circumstances which should govern it. But it was finally agreed, that whatever importance had been attached to the rejection of this proposition, the preservation of the Union and of concord among the states was more important, and that, therefore, it would be better that the vote of rejection should be rescinded, to effect which some members should change their votes. But it was observed that this pill would be peculiarly bitter to the Southern States, and that some concomitant measure should be adopted to sweeten it a little to them. There had been projects to fix the seat of government either at Philadelphia or at Georgetown on the Potomac; and it was thought that by giving it to Philadelphia for ten years, and to Georgetown permanently afterwards, this might, as an anodyne, calm in some degree the ferment which might be excited by the other measure alone. Some two of the Potomac members (White and Lee, but White with a revulsion of stomach almost convulsive) agreed to change their votes, and Hamilton undertook to carry the other point. In doing this, the influence he had established over the eastern members, with the agency of Robert Morris with those of the Middle States, effected his side of the engagement."

Hamilton had little of the state pride which influenced the men of Massachusetts, New York, Virginia, or of any other state who had grown up on the soil won by their English ancestors by their blood or the sweat of their brows. To him the question of the location of the capital seemed insignificant in comparison with the foundation of the Union upon the rock of a comprehensive financial policy. It is significant of the commanding influence which the young secretary had acquired, and the well-knit party which was gathering around him, that he had no difficulty in carrying his part of the programme for seating the capital eventually on the banks of the Potomac. The bill to remove the capital was passed on July 9, 1790, by a majority of three, and the assumption of the state debts was carried soon after. The form of the assumption differed somewhat from the proposal of Hamilton, but it accomplished the result at which he aimed. A specific sum, $21,500,000, was assumed by the government and distributed among the states in set proportions. The project passed the Senate July 22, by a vote of 14 to 12, and the House on July 24, by a vote of 34 to 28. A great step was thus taken in the consolidation of the Union, and notice was given to the world that the United States proposed to pay their debts and fulfill with scrupulous honor their financial obligations.

V

STRENGTHENING THE BONDS OF UNION

The funding of the debt was only one of several parts of the policy of Hamilton for putting the new government upon a solvent and firm basis. The session of Congress which began in December, 1790, witnessed the presentation of his report in favor of a national bank. This report, like that on the debt, showed careful study of the subject in its theoretical as well as practical aspects. Hamilton referred in opening to the successful operation of public banks in Italy, Germany, Holland, England, and France. He then went on to point out some of their specific advantages in concentrating capital and permitting the easy transfer of credit. He declared that such a bank would afford "greater facility to the government, in obtaining pecuniary aid, especially in sudden emergencies." It would also facilitate the payment of taxes, by enabling tax-payers to borrow from the bank and by the aid which it would give in the transfer of funds. He did not shrink from declaring that the country would benefit if foreigners invested in the bank shares, since this would bring so much additional capital into the United States. Hamilton then pointed out the vital distinction between government paper issues and bank paper. He laid down thus the fundamental principle of a well-regulated bank-note currency:--

"Among other material differences between a paper currency, issued by the mere authority of government, and one issued by a bank, payable in coin, is this: That, in the first case, there is no standard to which an appeal can be made, as to the quantity which will only satisfy, or which will surcharge the circulation: in the last, that standard results from the demand. If more should be issued than is necessary, it will return upon the bank. Its emissions, as elsewhere intimated, must always be in a compound ratio to the fund and the demand: whence it is evident, that there is a limitation in the nature of the thing; while the discretion of the government is the only measure of the extent of the emissions, by its own authority."

The bank which Hamilton proposed was private in its ownership, but the United States were to pledge themselves not to authorize any similar institution during its continuance. The capital of the bank was not to exceed $10,000,000, for which the President of the United States might subscribe $2,000,000 on behalf of the government. It was further provided that three fourths of the amount of each share might be paid in the public debt instead of gold and silver.

It was the purpose of Hamilton not merely to create a useful financial institution, in which the government would be able to keep its deposits, but to weld the monetary system of the country into an harmonious whole. The result of this, which he foresaw and intended, was to bind the property-owning classes to the interests of the new government. The effect was much the same as the creation of the Bank of England by the loan of its capital to the government, which bound the moneyed classes firmly to King William, through the knowledge that the debt and the solvency of the bank depended on the perpetuation of his government and the exclusion of the Stuart Pretender. The tendency of Hamilton's project was clearly seen by Jefferson and other democratic leaders, and did not fail to arouse their hostility. It was not long before they promptly took sides against the national bank. Jefferson wrote regarding the meetings of the cabinet at this time that "Hamilton and myself were daily pitted in the cabinet like two cocks."

There was something deeper involved, from the standpoint of Jefferson, than the mere question of bringing the moneyed class to the side of the government. The latter object was sufficiently distasteful to him, but the extension of the powers granted by the Constitution beyond those which were directly enumerated in the document involved a question of public policy and constitutional law which afforded the basis for the creation of two great national parties. The Constitution did not anywhere grant in terms to the government the power to establish a national bank. Even Hamilton did not pretend to put his finger on the specific authority for his new project. He advanced a doctrine which was eagerly embraced by the party which was growing up around him, but which was as resolutely opposed by the other party. This was the doctrine of the implied powers granted to the new government by the Constitution. It is doubtful whether the Constitution would have been ratified by Virginia and other states if this doctrine had been set forth and defended in the state conventions by the friends of the Constitution. This by no means implies that the policy and doctrine of Hamilton were not wise and far-sighted. Hamilton had definite aims before him, and it was his legitimate mission to educate public sentiment up to the point of accepting those aims and of granting him the means for carrying them out.

The doctrine of the "implied powers" rested upon the theory that unless they were directly prohibited by the Constitution, all powers were granted to the government by implication which were found necessary and proper for carrying out the powers specifically granted. Jefferson came to believe, if he did not believe at the outset, that the government was one of delegated powers which were strictly limited to those enumerated in the Constitution. The doctrine of Hamilton, from this point of view, was revolutionary. It meant the conversion of a government holding limited delegations of power from the people and the states into a government having supreme power, capable of taking an infinite variety of measures whenever Congress, in the exercise of its discretion, believed that such measures would contribute to the well-being of the Union. The state governments, coming closer to the people than the federal government, were most directly threatened by this assumption of power, and it was as the champions of state rights as well as democratic ideas that Jefferson and his friends took their ground as the advocates of the strict construction of the Constitution.

It is not surprising, therefore, that the proposal to create the Bank of the United States called forth in Congress prolonged and heated debates. But the policy of Hamilton had been so far successful in restoring the public credit that he carried the project for the national bank through both houses, and it was laid before the President for his approval. Washington had watched with interest the struggle in the two houses, and was somewhat impressed by the weight of the argument against the constitutional power of Congress to establish the bank. The cabinet was divided. Jefferson and Randolph were against the constitutionality of the bill. Hamilton and Knox were in favor of it. Washington asked each of them to give him in writing the reasons for his opinion. He weighed them carefully and then affixed his signature to the bill (February 25, 1791). The new project realized all the benefits which Hamilton expected. Washington, in his tour of the Southern States in the spring of 1791, found the sentiment for union strengthening and the country recovering from the prostration of the era of bad money and political uncertainty which had followed the Revolution. He declared in a letter written after his return:

"Our public credit stands on that ground, which, three years ago, it would have been madness to have foretold. The astonishing rapidity with which the newly instituted bank was filled, gives an unexampled proof of the resources of our countrymen and their confidence in public measures. On the first day of opening the subscription, the whole number of shares (twenty thousand) were taken up in one hour, and application made for upwards of four thousand shares more than were granted by the institution, besides many others that were coming in from various quarters."

How much was likely to be done by a national bank to bind together the commercial interests of different sections of the country can hardly be appreciated to-day. At that time there were only four banks in the country; none of these was ten years old, and their combined capital was only $1,950,000. The Bank of the United States was authorized to establish offices of discount and deposit in all the states and to distribute parts of its capital among eight branches in the chief cities of the country. It was the drafts of these branches upon each other, and their means for reducing to a uniform and reasonable rate the cost of transferring funds, which contributed to knit all parts of the country together in commercial matters and so strengthened the bond of political union. The bank did not make regular reports to the Treasury Department, but its success is indicated by a special report communicated to Congress by Secretary Gallatin (January 24, 1811), which showed resources of $24,183,046. The average annual dividends paid upon the stock up to March, 1809, were over eight per cent.

So invaluable were the operations of the Bank of the United States to the public treasury that Jefferson himself when President came to its support. His support was perhaps never very hearty, and was due to Albert Gallatin, his Secretary of the Treasury, whose foresight and ability give him a rank next to Hamilton among the able men who have presided over the national finances. Gallatin made a strong report in 1809, recommending that the charter of the bank be renewed upon its expiration in 1811, with an increase of capital and wider powers. A new charter was voted in the House, but the bill was not acted on in the Senate, and before the next session the opposition of the state bankers had rallied sufficient strength to defeat the recharter. The second United States Bank was authorized in 1816, under the administration of Madison and with his approval, but its career was terminated in 1836, as the result of the political hostility of President Jackson.

It was not until after the grant of this second charter that the question of the power of Congress to establish a bank came directly before the Supreme Court in 1819. At the head of this court sat John Marshall, who next to Hamilton, perhaps, did more than any other man to strengthen and extend the powers of the general government. The jealousy of the state banks had led the State of Maryland to impose a discriminating tax on the Bank of the United States. If the right to levy such a tax had been admitted, the Bank would have been completely at the mercy of the states, and one of the chief purposes of its creation would have been defeated. In order to sustain the right of the bank to exemption from taxation, it was necessary to prove that it was a constitutional instrument of federal power. Hence the question of the power of Congress to create such a corporation came directly before the court.

Hamilton found the power to create a bank partly in the preamble to the Constitution, which declares that the people of the United States have adopted it in order to "promote the general welfare," but more particularly in that concluding phrase of the clause defining the powers of Congress, which declares that that body shall have authority "to make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States or in any department or officer thereof." Marshall, in the series of great decisions by which he strengthened the power of the Union, often made use of these provisions to justify his reasoning. In one of the most famous of these decisions (McCulloch _vs._ Maryland), he sustained the constitutionality of the bank as an instrument of federal power and denied the right of the states to levy upon its property. He declared that the power to tax involved the power to destroy, and that if the federal government had not the power to withdraw its creations from discriminating legislation by the states, the latter might tax the mail or the mints, the papers of the custom-houses, or the forms of judicial process.

The view of Hamilton regarding the power of the federal government to create a bank was thus sustained in emphatic terms by the highest court in the land. It was partly his policy in providing for the bank and demonstrating its usefulness, with his other measures to develop the powers of the central government, which made possible the decisions of Marshall. If the question of the right to incorporate a bank could have been brought before the court at the beginning, before the institution had proved its value, and if men like Jefferson and Madison had been upon the bench, there is at least room for doubt whether a decision would have been rendered in favor of a power which is not granted directly to the government by the Constitution. But by the resolute executive policy of Hamilton and the broad judicial constructions of Marshall, the functions of the new government were extended to all those great objects necessary to create a vigorous and united nation.

The many other measures of Hamilton were directed by the same singleness of purpose to strengthen the hands of the government and consolidate the Union. The report on the mint followed the previous reports of Jefferson in recommending the adoption of the dollar as the unit of value. Hamilton observed that "upon the whole, it seems to be most advisable, as has been observed, not to attach the unit exclusively to either of the metals; because this cannot be done effectually, without destroying the office and character of one of them as money, and reducing it to the situation of a mere merchandise." He believed, however, that care should be taken to regulate the proportion between the metals with an eye to their average commercial value. He pointed out the danger of undervaluing either metal, and the inevitable result, in case of a difference of ratio in two countries, "if other things were equal, that the greatest part of the gold would be collected in one, and the greatest part of the silver in the other."

This discussion of the subject took place at a time when monetary principles were not very well fixed, when the standard and the state of the currency had hardly been settled on an orderly basis in any country, and when the means of transportation for the precious metals were much slower and less efficient than under modern conditions, and the cost was much greater. Hamilton endeavored to find the true commercial relation between gold and silver as a basis for the coinage values, in the hope that this would not change sufficiently to upset a bimetallic system founded upon such a basis. He was not a victim of the delusion that government can arbitrarily give value by law to money, but declared, "There can hardly be a better rule in any country for the legal, than the market proportion; if this can be supposed to have been produced by the free and steady course of commercial principles."

The report on manufactures and the bill providing for an excise were parts of the project of Hamilton for building up a vigorous and self-supporting nation. The report on manufactures was not presented to Congress until the beginning of the long session at the close of 1791, and was not carried out in legislation. It consisted chiefly of an argument for the encouragement of young industries in an undeveloped country. Hamilton strongly favored the diversification of the industries of the country between agriculture and various forms of manufacture, because he believed it would contribute to the solidity of the industrial system and to the financial independence of the United States. His conception of the best method for promoting American industries differed materially, however, from more recent developments of the protective system. He recommended bounties and premiums in many cases in preference to protectionist customs duties, in order to avoid the rise in the price of articles to the consumer which often results from such duties. The customs duties which he proposed, moreover, ranged only from seven and a half to fifteen per cent., and the latter rate was to be levied on only a few articles.

The country was not yet ripe for extensive industrial enterprises. The manufactures then existing were chiefly for supplying local needs, the factory system had not been introduced, and the capital had not been accumulated for the creation of large establishments. The country needed many foreign manufactured articles to put it upon the highroad to industrial development, and it was at a much later period that the manufacturing interests acquired the power which enabled them to increase the scale of duties. When this time came, they turned to the arsenal of Hamilton's report for weapons in support of the policy of diversifying industries; but they used these weapons in behalf of a scale of duties which was not recommended by him and they ignored his arguments for premiums and bounties for the protection of the consumer against excessive prices.

Whether Hamilton would have favored the policy of protection in its later developments, it is useless to inquire. It is idle to claim for any thinker of the past that he anticipated all future discoveries and reasoning in the fields of politics or economics. It is not necessary, in order to give a statesman a high place in history, to worship blindly all that he did or said or to make such deeds and words an authority for later generations. What can be said of Hamilton without reasonable ground of denial is that he did not recommend in any of his writings the high scale of duties advocated by some protectionists in recent years. On the contrary, he urged a scale of duties which would be treated by the protectionist of to-day as below even the level of a "tariff for revenue only." That his ideas were far from extreme is indicated by the project which he drew up in 1794 for a reciprocity treaty with Great Britain, which proposed to limit American import duties on the leading textiles and manufactured articles of metal to ten per cent. of their value. He even criticised Jefferson's message of 1801 for recommending the repeal of the internal revenue taxes, upon the ground that the duties on imports were high and that if any taxes were to be repealed, they should be those which weighed on commerce and navigation.