Chapter 3

THE RESTORATION OF PUBLIC CREDIT

"The people have been ripened by misfortune for the reception of a good government," Washington wrote to Jefferson, in the midsummer of 1788. "They are emerging from the gulf of dissipation and debt into which they had precipitated themselves at the close of the war. Economy and industry are evidently gaining ground." There is, indeed, abundant evidence that thrift and enterprise were steadily banishing hard times. The task of establishing the new government was made incomparably easier by the confidence inspired by returning prosperity.

Already West India commerce had resumed very nearly its old volume. Both France and Spain had made concessions to vessels which came to the island ports laden with American produce. The Dutch and the Danish islands had always been kept open to American trade; and evidence is not wanting that the needs of British West India planters were stronger than their respect for orders in council. At all events, by hook or crook, American farm products and lumber found their way to British planters as well as to their French competitors. But something more than the resumption of the West India traffic was needed to restore prosperity. Necessity drove American sea captains to longer voyages and larger ventures. American vessels found their way in increasing numbers through the Baltic to Russia, and around Cape Horn to the Pacific ports, to China, and to the East Indies. One of the pioneers of this traffic to the Far East was Captain Robert Gray, of Boston, who, in his ship, the Columbia, doubled the Cape of Good Hope and completed the first American voyage around the world.

While hardy seamen were seeking new markets, American ingenuity was trying to reproduce the machinery which was coming into use in England for the manufacture of textiles. In the year 1789, Pennsylvania was manufacturing cotton cloths, hats, and "all articles in leather," while Massachusetts was making cordage, duck, and glass. "The number of shoes made in one town, and nails in another, is incredible," wrote Washington. When Hamilton made his famous report on manufactures two years later, he described some seventeen industries which had already attained considerable proficiency, though nearly all of these were carried on in the household.

The dawn of the 4th of March was saluted by the guns at the Battery in New York and by the ringing of church bells. This day was to witness the inauguration of the new Government. Delusive expectation! The dilatory habits of a decade were not so readily unlearned. To the amusement of ill-wishers, barely a score of Congressmen appeared in the city; and the carpenters were still at work remodeling the old City Hall into a fitting habitation for the new Federal Congress. It was not until the 30th that enough Representatives were in attendance to make up a quorum and to permit the House to organize. Another week passed before the Senate could organize.

On the 6th of April, the Senate summoned the House to attend the counting of the electoral votes. It then appeared that George Washington had received the highest number (69) and John Adams the next highest (34). This happy result had not been achieved without some concerted action among the Federalist leaders. The great personal influence of Washington was needed, indeed, to give dignity to the new office. While messengers were hastening to inform Washington and Adams of their election, the members of Congress had ample opportunities to look each other over. If they were not well known to each other, they were at least conspicuous in their respective communities. Nearly every man had held public office under his State Government and a large proportion had sat in the state conventions which had ratified the Constitution. Over two thirds of the Representatives counted themselves Federalist, or at least friends of the new Constitution.

[Map: Distribution of Population 1790 (Indian Tribes beyond the settled area)]

On the 30th of April, the Senate and House in joint session received the President-elect. With simple ceremonies as befitted the occasion, the inauguration of our first President was consummated. Stepping from the Senate chamber upon the balcony, Washington looked out upon the crowds which thronged Wall Street. The Chancellor of New York administered the oath, the populace shouted, "Long live George Washington, President of the United States!" and then the President withdrew to deliver his inaugural address.

When the minutes of the Senate were read next day an incident occurred, which, trivial as it seems, was indicative of a spirit that may be truly characterized as American. The President's address was referred to as "His most gracious Speech." In a moment the doughty Maclay, of Pennsylvania, sprang to his feet with a vigorous protest. These were words which savored of kingly authority and which were odious to the people. He moved that they be struck out. Vice-President John Adams remonstrated mildly; he saw no objection to borrowing the practices of a government under which we had lived so long and happily. Senator Maclay was on his feet at once with the declaration that the sentiments of the people had undergone a change adverse to royal government. Such a phrase on the minutes of the Senate would immediately be represented as "the first rung of the ladder in the ascent to royalty." Maclay had his way and the offensive phrase was erased. Much the same republican spirit appeared in the debate on titles. The Senate would have preferred to address the President as "His Highness, the President of the United States and Protector of their Liberties"; but the House insisted on having the plain title, "President of the United States."

Even before the inauguration, the House of Representatives had entered upon its first tariff debate, for an immediate revenue was needed if the wheels of government were to move. Madison was ready with a scheme of customs duties patterned very largely after the ill-fated project of 1783. On all sides it was agreed that taxes should be external rather than internal, upon foreign rather than domestic commerce. Madison advocated duties upon "articles of requisition likely to occasion the least difficulty," such as spirituous liquors, molasses, wines, tea, coffee, cocoa, pepper, and sugar. But almost at once the idea was broached that indirect aid should be given to certain industries. The clash of opposing sectional interests appears even in this first debate. In the end Madison's simple revenue measure was set aside. Specific duties were levied on more than thirty articles, and _ad valorem_ duties ranging from five to fifteen per cent on all others. Revenue was still the main object, but protective duties were deliberately grafted upon the bill. Tonnage dues were fixed in a separate act, while still another act laid the foundations of our national fiscal administration. In every State, side by side with local officials, yet independent of state control, there were to be collectors, surveyors of ports, inspectors, weighers, gaugers, measurers,--in short, so many living witnesses to the existence of a self-sufficient central government.

When Congress addressed itself to the work of establishing the executive departments, questions of constitutional interpretation thrust themselves into the foreground. Experience under the Confederation proved the need of at least the three departments of foreign affairs, war, and treasury. Bills to establish these departments were at once framed and favorably considered, but exception was taken to the provisions making the heads of these departments, who were appointed by the President and Senate, removable by the President alone. It was finally agreed to assume that the President had the power to remove from office. The act was therefore made to read, "Whenever said principal officer shall be removed by the President." In this wise, by legislative construction, the Constitution was expanded at many points in the early years of the new Government.

The bill to establish the Treasury Department was drawn in accordance with the ideas of Hamilton, for it was expected that he would be the first incumbent of the office. It may have been his well-known partiality for British institutions that caused the House to mistrust the phrase which made it the duty of the Secretary "to digest and report plans for the improvement and management of the revenue, and the support of the public credit." "If we authorize him to prepare and report plans," argued Tucker, of Virginia, voicing that fear of executive authority which was then instinctive, "it will create an interference of the executive with the legislative powers; it will abridge the particular privilege of this House.... How can business originate in this House, if we have it reported to us by the Minister of Finance?" The House was not minded to make Alexander Hamilton a Chancellor of the Exchequer. The bill was amended to read, "digest and prepare." Subsequently the House showed unmistakably its determination to assume direction of the national revenues and expenditures.

One of the first concerns of Congress was to give substance to the colorless statement of the Constitution that there should be one supreme court and such inferior courts as Congress should ordain and establish. On the day following its organization, while the House was grappling with the question of revenue, the Senate appointed a committee to bring in a bill to establish the federal courts. The chairman of this committee was Oliver Ellsworth, of Connecticut, who had sat on the bench of the Court of Appeals under the Confederation and who had been an influential member of the Federal Convention. The bill reported by the committee was substantially his work. It provided for a supreme court bench of six judges--a chief justice and five associates; for thirteen district courts, each with a single judge; and for three circuit courts, each of which was to consist of two justices of the Supreme Court and a district judge. Lengthy provisions in the act carefully delimited the jurisdiction of these courts, and laid down the modes of procedure and practice in them. Of great importance was the twenty-fifth section, which provided for taking cases on appeal to the Supreme Court from the lower federal and state courts. The words of the act, by a fair implication, would seem to confer upon the Supreme Court the power to review the decision of a state court holding an act of the United States unconstitutional. It would seem to follow logically that the Supreme Court might do also directly what it might do indirectly--declare an act of Congress void by reason of its repugnance to the Constitution. Ellsworth, at least, held that in the discharge of their ordinary duties, the judges of the federal courts would have the right to pronounce acts of Congress void when they stood in conflict with the Constitution. Attempts were made, in the course of the debate on the Judiciary Act, to strip the federal courts of all jurisdiction except in admiralty and maritime cases. Many members of Congress agreed with Maclay in thinking that the Judiciary Act was calculated to draw all law business into the federal courts. "The Constitution is meant to swallow all the state constitutions, by degrees," averred the worthy Senator from Pennsylvania; "and this [bill] to swallow, by degrees, all the state judiciaries."

The wisdom of the new President appeared in his appointments to office. Concerned solely with the fate of the federal experiment, he sought consistently the support of those who would add weight to the new Government, and who were Federalists in politics. Not only personal fitness but sectional interests had to be taken into consideration. Washington was solicitous to draw "the first characters of the union" into the judiciary, particularly those who had served in the state courts and commanded public confidence. His choice for Chief Justice fell upon John Jay. Rutledge, of South Carolina, Wilson, of Pennsylvania, Cushing, of Massachusetts, Harrison, of Maryland, and Blair, of Virginia, were first named as Associate Justices. Washington chose his chief advisers also from different sections. Thomas Jefferson was invited to become Secretary of State--a post which he accepted somewhat reluctantly. Hamilton did not have to be urged to take the headship of the Treasury. Knox was given the superintendence of a military establishment which then numbered only a few hundred men. Edmund Randolph was appointed Attorney-General.

Before Congress adjourned in the fall, it adopted and sent to the States for ratification twelve amendments to the new Constitution. There were those who thought this action precipitate. Why tinker with a constitution which had hardly been tried? To all such Madison replied cogently that the amendments which his committee reported did not alter the framework of the instrument, but added only certain safeguards to individual rights. The lack of a declaration of rights had been deplored in every convention and had cost the support of many respectable people. Moreover, two communities had not yet "thrown themselves into the bosom of the Confederacy." The wisdom of this course was attested by the prompt ratification of ten of the twelve proposed amendments.

On November 21, 1789, North Carolina ratified the Constitution, leaving Rhode Island to a position of hazardous isolation. Congress was considering a bill to cut off the commercial privileges of the State, by putting her on the footing of a foreign nation, when news came that a convention at Newport had ratified the Constitution by the narrow margin of two votes. In the following year the number of States was increased by the admission of Vermont. The admission of Kentucky followed in 1792; and Congress paved the way for the entrance of other States into the Union by organizing the Southwest Territory out of Western lands ceded by the three southernmost States. The expansion of the United States had begun, bringing with it unforeseen problems.

The severest labors of Congress began in the second session, when the new Secretary of the Treasury presented his first report on public credit. Shortly after the Convention of 1787, Hamilton had expressed his belief that one of the great dangers which threatened American society was "the depredations which the democratic spirit is apt to make on property." Distrusting the political capacity of the people, whom in private he called "a great beast," he believed that the new Government would succeed or fail in just the proportion that it enlisted the support of the influential and wealthy classes. He set himself deliberately to the task of identifying the interests of the propertied classes with those of the Government.

It was a sorry state in which Hamilton found the national finances. The foreign debt, including principal and arrears of interest, amounted to $11,710,000. The domestic debt, much more difficult to determine, was not less than $42,414,000, about one third of which was made up of arrears of interest. The debts of the individual States, principal and interest, were estimated at about $25,000,000. These were heavy burdens for the shoulders of a young Government whose fiscal powers were as yet untested. But the shoulders had to be fitted to the burden, if public credit was to be restored.

In this first report on public credit, January 9, 1790, Hamilton analyzed the financial situation with masterly clearness and set forth his plans for the adjustment of the national debt. The determination of Congress to make adequate provision for the support of the public credit was justified in his mind by every consideration. A country like the United States, possessed of little active wealth, must borrow in emergencies; to borrow on good terms, it must establish its credit; and to maintain its credit, it must faithfully observe its contracts. But over and above these considerations, dictated by expediency, were "immutable principles of moral obligation." Moreover, the national debt was no ordinary obligation: it was "the price of liberty." On all sides, it was agreed that the debt contracted abroad should be provided for in the precise terms of the contracts.

It was only in regard to the domestic debt that differences of opinion were likely to arise. The notes representing this debt were of all sorts and kinds. Much of it had changed hands and all of it had depreciated in value. Some of it still circulated as a monetary medium. The vital question was: how were the present holders to be paid? At the face value of the paper, or at the price for which it had been purchased? Hamilton argued firmly against any discrimination, both because it was a breach of contract and because it was a violation of the rights of a fair buyer.

When this part of Hamilton's plan came before Congress in concrete form, it gave rise to the bitterest debate which had been heard. That it would give opportunity for immoderate speculation was plain enough; yet every alternative which aimed to do justice by both the original and the present holder was confessedly inadequate, when a certificate of indebtedness, for example, had passed through several hands without record.

No sooner was Hamilton's proposal made than a wild scramble began for the possession of the hitherto worthless government paper. "Couriers and relay horses by land, and swift sailing pilot boats by sea, were flying in all directions," wrote Jefferson. "Active partners and agents were associated and employed in every state, town, and country neighborhood, and this paper was bought up at 5/ and even as low as 2/ in the pound, before the holder knew Congress had already provided for its redemption at par. Immense fortunes were thus filched from the poor and ignorant, and fortunes accumulated by those who had themselves been poor enough before."

[Map: Vote on Assumption July 24, 1790]

The second part of the scheme outlined in Hamilton's first report aroused even more bitter opposition. With a fine audacity he proposed the assumption of state debts. It is difficult to believe that Hamilton was perfectly ingenuous in stating his reasons for this move. He apprehended, he said, that the States would be hampered in satisfying their creditors because they had surrendered one important source of revenue to the central Government, duties on imports. In resorting to other means, the States might pass conflicting measures which would oppose industry. Besides, the debts had been incurred in the cause of Union and should be borne by all. But deeper than these reasons was probably a political motive. Hamilton had no local attachments. A thoroughgoing nationalist, he saw in the claims of the States to autonomy only so many obstacles in the path of national unity. "To cement more closely the Union of States" by creating a solidarity of financial interests, was, indeed, the basal principle of his fiscal plans.

The wrath of Congressmen from States like Virginia, which had already discharged most of their debts, knew no bounds. After they had practiced thrift and met their obligations, should they, forsooth, now aid their less provident sisters? The chief opponents of assumption came from the South, and the chief advocates from the North. South Carolina and New Hampshire parted company with their neighbors, the one because it had a large debt and the other because it had not. Pennsylvania was divided on this question. For a time the opposition was too strong to be overcome. On May 25, 1790, an adverse vote seemed to seal the fate of "Miss Assumption," as the wits of the day called this measure. Just at this juncture the question of the location of the future capital, which had been debated inconclusively during the first session, was revived. Here again the North was arrayed against the South. Should the capital be located on the Potomac, as Maryland and the Southern States wished, or somewhere in Pennsylvania? New York was now out of the question, and since Pennsylvania would not support assumption, the New England States rather spitefully opposed the claims of Philadelphia.

Here was a situation which called for the _finesse_ of the politician. Might not votes for one project be traded for the other? Would the Virginia representatives abandon their opposition to assumption for the sake of locating the capital on the banks of the Potomac? It was at this juncture that Hamilton sought out Jefferson, whose influence over the Congressmen from Virginia was very considerable, and laid the project before him. With a readiness which he afterward regretted, Jefferson fell in with the scheme, and invited Hamilton and certain Virginia Representatives to dine at his table. In this comfortable fashion, over their wine, these gentlemen reached an amicable agreement. Such is Jefferson's account, but the matter could not have been quite so simple, for other Representatives than those from Virginia changed their votes and so contributed to the final settlement of the controversy. Nor is Jefferson quite ingenuous when he afterward described himself as duped by Hamilton, for he had not shown himself averse to assumption at any time. Be this as it may, Congress voted to assume the debts of the States, and to remove the seat of government from Philadelphia after ten years to a district ten miles square on the Potomac, which Washington was to select.

The need of further revenue was now imperative. As Hamilton said in his second report on the public credit, the duties on imported articles had reached a point which might not be exceeded "without contravening the sense of the body of the merchants." When Congress met for its third session in December, 1790, Hamilton boldly urged what was perhaps as unpopular a tax as he could have proposed--a duty on distilled spirits. To most Americans an excise was not only an internal tax, but as Jefferson said, "an infernal one." It was bound to fall with heavy weight upon the people of the interior who turned much of their corn and rye into whiskey, for more convenient transportation over the mountains to Eastern markets. But despite strenuous opposition the excise was voted. It was, as a member of Congress expressed it, like "drinking down the national debt."

In this same report of December 13, 1790, Hamilton advocated the establishment of a national bank. Such an institution, he believed, would increase the amount of active capital in the country and at the same time serve the Government as a fiscal agent in obtaining loans and in collecting taxes. Opposition to this project gathered rapidly and was encouraged by the Secretary of State. The debates in Congress touched upon the monopolistic tendency of such a banking institution and its constitutionality, rather than upon its intrinsic merits and demerits. The bill was carried by substantial majorities in February, 1791, and sent to the President for his approval.

Washington was so beset with doubts as to the constitutionality of the bank bill that he asked his secretaries and the Attorney-General to express their opinions. Jefferson argued that the power to incorporate a bank was not given by the Constitution to Congress, for it was not among the enumerated powers and it was not a power which belonged to any of the enumerated powers as indispensably necessary to their exercise. Hamilton deprecated this attempt to confine the general Government either to powers expressly granted or to powers absolutely necessary to carry out the enumerated powers. There was another class, he contended, which might be termed "resulting" powers. If the end to be gained by a measure was comprehended within the specified powers, and the measure was obviously a means to that end and not forbidden by the Constitution, then it was clearly within the compass of the national authority. Washington finally yielded to Hamilton's persuasions, and signed the bill.

The charter of the bank fixed the capital stock at ten million dollars, of which the Government was to subscribe one fifth; the rest was open to public subscription. Three fourths of the public subscriptions might be paid in bonds of the Government. The notes issued by the bank were made receivable for all payments to the United States. The bank was to be the repository of the government funds. Its management was committed to a board of twenty-five directors chosen annually, who could establish branch banks as they deemed advisable. The charter was to run for twenty years.

The stock of the bank was not only subscribed at once, but soon sold at a premium which invited the wildest sort of speculation in Philadelphia, New York, and Boston. Stock-jobbing became a mania. "The coffee house is in an eternal buzz with the gamblers," Madison wrote from the seat of government. Sinister aspects of this speculative craze soon began to appear. "Of all the shameful circumstances of this business," said Madison, "it is among the greatest to see the members of the Legislature who were most active in pushing this job openly grasping its emoluments." It was reported that Schuyler, Hamilton's father-in-law, was to head the board of directors.

As the wide reach of Hamilton's financial policy became clear, men like Madison, whose sympathies had hitherto been enlisted on the side of more efficient government, had grave misgivings. When the Secretary of the Treasury intimated in his report on manufactures that Congress might promote the general welfare by appropriating money in any way it chose, Madison definitely parted company with his former collaborator, holding that by such an interpretation of the Constitution "the Government is no longer a limited one possessing enumerated powers, but an indefinite one, subject to particular restrictions." Jefferson had already expressed himself in a similar way apropos of the bank bill. The suspicions which the Secretary of State entertained of his brilliant colleague were deep-seated. Hamilton's well-known preference for the British Constitution and his disposition to convert his secretaryship into a sort of chief ministerial office confirmed Jefferson's distrust. Had he and Madison been alone in their suspicions, their misgivings would not be worth recording; but they voiced the sentiments of an increasing number of men who disliked the consolidating tendencies of the new Government.

Moreover, the aristocratic tone of Washington and his _entourage_ gave deep offense. Both by disposition and by calculation the President cultivated a certain official etiquette. His receptions were formal to the point of frigidity. He received his visitors "with a dignified bow, while his hands were so disposed as to indicate that the salutation was not to be accompanied with shaking hands." His figure clad in black velvet was most impressive. His hair was powdered and gathered in a large silk bag. His hands were dressed in yellow gloves, and he carried a cocked hat adorned with a black feather, while at his side hung a sword in a scabbard of white polished leather. To ardent republicans these trappings were so many manifestations of monarchical leanings. Hamilton's suggestion that coins should bear the head of the President under whom they were minted, was additional evidence to suspicious minds that the group of men who had the President's ear were monarchists at heart.

Before the First Congress adjourned, the nucleus of a new party was at hand and its fundamental tenet roughly foreshadowed: namely, opposition to the increase of the powers of the Federal Government through the use of implied powers and at the expense of the State Governments. The appearance of the first number of the _National Gazette_ under the editorship of Philip Freneau was a sign that the further conduct of the Administration would be subjected to searching criticism. Freneau succeeded admirably in voicing the opinions of the nascent party. The columns of the _National Gazette_ had much to say about "aristocratic juntos," "ministerial systems," and "the control of the government by a wealthy body of capitalists and public creditors," whose interests were in opposition to those of the people. When Hamilton's paper, the _United States Gazette_, attempted to stigmatize the opposition as essentially Anti-Federalist, Freneau replied that only those men were true friends of the Union who adhered to a limited and republican form of government and who were ready to resist the efforts which had been made "to substitute, in the room of our equal republic, a baneful monarchy." By posing as the only stanch supporters of republicanism, the opposition secured a great tactical advantage. To call one's self emphatically a Republican was to cast aspersions upon the republicanism of one's opponents.

As yet, however, there existed only tendencies toward parties and not clearly defined political groups. The voting in the early sessions of Congress was far from consistent. The members gave little indication that they regarded themselves as adherents of parties whose fortunes depended on preserving an unbroken alignment for or against the Government. How little coherence the opposition possessed was apparent when Giles, of Virginia, presented a resolution censuring Hamilton for his management of the Treasury. Despite the unpopularity of Hamilton and the general distrust of his policy in Republican circles, the opposition could muster only seven votes in favor of the resolution, in the closing hours of the Second Congress.

The presidential election of 1792, therefore, was not properly a contest between parties. When Washington consented reluctantly to serve a second term, his unopposed reëlection was assured. The Republicans expressed their opposition only by supporting for Vice-President, George Clinton, of New York, whose Anti-Federalism was well known, instead of John Adams, of Massachusetts. The congressional elections of this year resulted in the choice of men whose leanings were rather Republican than Federalist.

BIBLIOGRAPHICAL NOTE

Besides the works of Hildreth and of McMaster, there are several compendious histories which treat of the beginnings of the new government. Among these are James Schouler, _History of the United States under the Constitution_ (7 vols., 1880-1913), and E. M. Avery, _History of the United States and its People from their Earliest Records to the Present Time_ (7 vols., 1904- ). The events of the Administrations of Washington and Adams are narrated by J. S. Bassett, _The Federalist System_ (in _The American Nation_, vol. 11, 1906). Among the special studies of importance are D. R. Dewey, _Financial History of the United States_ (1903); C. R. Fish, _The Civil Service and the Patronage_ (1905); H. B. Learned, _The President's Cabinet_ (1912); and W. W. Willoughby, _The Supreme Court of the United States_ (1890). There are many biographies of the Federalist leaders. Among the best are W. C. Ford, _George Washington_ (2 vols., 1900); W. G. Sumner, _Alexander Hamilton_ (1890); F. S. Oliver, _Alexander Hamilton; an Essay on American Union_ (1907); J. T. Morse, _John Adams_ (1885); W. G. Brown, _Life of Oliver Ellsworth_ (1905). Of contemporary writings none will give a more intimate view of politics than Senator William Maclay's _Journal_ (1890). William Sullivan, _Familiar Letters on Public Characters_ (1834), gives some lively sketches of notable figures, but he writes with a strong Federalist bias.