4.1: Alexander Hamilton: The First Bank of the United States and the Whiskey Rebellion

Borrowing a host of ideas from his elder financier Robert Morris, Alexander Hamilton would accept the position of Secretary of the Treasury and metaphorically hit the ground running.  He issued four reports on the state of the American economy with accompanying suggestions on how to fix these issues, with two of these solutions being internal excise taxes, meaning a tax on something specific, and the creation of the First Bank of the United States.  One revealed deep dissension between North and South, while the other would reveal fissures between East and West.  On this episode of History: Beyond the Textbook, the first in which we examine Divisions during America’s Federalist Era, we’ll explore the First Bank of the United States and the Whiskey Rebellion through the eyes of Alexander Hamilton.

Key People

Alexander Hamilton

Thomas Jefferson

James Madison

George Washington

Key Events/Ideas

First Bank of the United States

Whiskey Rebellion

Implied powers

"Necessary and Proper" Clause

We're back for Season Four of History: Beyond the Textbook! This season will focus on the stories of individuals who shaped "America's Federalist Era" in the years roughly 1789-1800. The first six episodes will release every Tuesday from October 28-December 2, while the second six episodes will be released every Tuesday from February 17-March 24. Catch up on Season One, "America's Colonial Era," Season Two, "America's Revolution," and Season Three, "America's Crucial Years," wherever you listen to your podcasts!

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Transcript

Welcome back, or welcome aboard, to History: Beyond the Textbook.  THank you for sticking with us, or joining us, during our hiatus following season 3.  This season, Season Four, is subtitled “America’s Federalist Era” because it covers the time frame 1789-1800…the years in which two Federalists held the office of President of the United States.  Yes, we are officially at the point where the United States as we know it has been established, so we have ‘presidents.”  We also continue our two rules about the subjects of each episode: no episodes covering the life of someone while they are president, and no episodes in which we repeat a focus on any one individual.  This means that we won’t have any episodes on George Washington or John Adams this season because that would violate both rules: they serve as presidents during this season, and we already devoted an episode to each of them in previous seasons.  Four main categories will serve as the themes for our 12-episode season, but we’ll cover the first two in the first six episodes of the season: Division, specifically political ones that develop between Federalists and their Republican foes, and the Frontier, which is generally in the West with one potential exception. As always, if you find yourself enjoying what you hear, tell a friend about us and please subscribe if you haven’t already.  And with this in mind, let’s get on with Season Four...

His was a mind that bordered on “brilliant,” and he exhibited a work ethic to match it.  Alexander Hamilton was one of many whose life personified what we now call “The American Dream:” he was an immigrant to the American Colonies, attended King’s College in New York City, became swept up in the American Revolution by serving as an aide to General Washington, cemented his glory with a daring charge as Yorktown. Served as a Congressman in the Confederation Congress…alright, we get it.  The man did a lot of things in his young adult life, and we haven’t even addressed his contributions to ratification of the Constitution.  Our focus is on Alexander Hamilton the financial wizard, and though this isn’t meant to be at the expense of his other contributions, we’ll keep our eye on the prize in this episode.  Borrowing a host of ideas from his elder financier Robert Morris, Hamilton would accept the position of Secretary of the Treasury and metaphorically hit the ground running.  Really, he went all out, issuing four reports on the state of the American economy with accompanying suggestions on how to fix these issues.  Two of these issues stand out to us: internal excise taxes, meaning a tax on something specific, and the creation of the First Bank of the United States.  One revealed deep dissension between North and South, while the other would reveal fissures between East and West.  On this episode of History: Beyond the Textbook, the first in which we examine Divisions during America’s Federalist Era, we’ll explore the First Bank of the United States and the Whiskey Rebellion through the eyes of Alexander Hamilton.

Act I: Four Reports

Once he was named as Washington’s Secretary of the Treasury, Alexander Hamilton wasted little time in getting down to business. He was considered the right man for the job to such a degree that the House of Representatives actually dissolved their own Ways and Means Committee, which was created to address financial concerns, and declared that they would defer to Hamilton on financial matters.  Officially, Hamilton issued four separate reports to Congress on the state of the U.S. economy with accompanying solutions to each issue.  For example, his first was the 40,000-word Report on Public Credit…you heard that correctly, 40,000 words.  This would be the report in which Hamilton proposed that the national government assume the $25 million state debts left over from the American Revolution; it would be rolled over into the $42 million in national debts to become nearly an $80 million national debt.  This debt was to be…permanent.  Small, but permanent, because Hamilton judged that a continual debt on which the U.S. made regular interest payments would demonstrate our reliability with money, thus paving the way for us to secure loans when necessary.  Hamilton even stated that “A national debt, if not excessive, will be to us a national blessing.”  He also thought it would strengthen the position of the federal government relative to the states because it would entice creditors to flock to the national government, not state governments, with their money.  There were numerous objections to this plan, but favoring the federal government at the expense of the states is what really incited the opposition, led by Thomas Jefferson and James Madison.  This resistance led to a six-month stalemate resulting in the Dinner Table Bargain in 1790…the one where James Hemmings served a delicious meal, where Congressman Madison backed off of his opposition in exchange for a national capital in the South.  However, a tax passed in the wake of this first report, as well as his proposal in his Second Report, merit our further attention.

Act II: Financial Background

Of course, before we address the First Bank and the tax that led to the Whiskey Rebellion, as well as the geographic divisions wrought by these events, we’ll dive into the background of their architect: Alexander Hamilton.

If you’re familiar with the musical Hamilton!, you know that the first song is pretty much a summary of his life until his emigration to America, while the rest of Act One consists of his Revolutionary life; Act Two summarizes his political life leading up to his unfortunate demise.  It would take way more than this episode to do justice to all that Alexander Hamilton accomplished in American history, so we’ll keep our focus on how his background led him to become economically astute.

Alexander Hamilton was born on Nevis, a relatively small island in the Caribbean that had the distinction of being visited by the first settlers of Jamestown en route to their final destination in the Chesapeake Bay.  His date of birth…has actually been a matter of debate, as some sources suggest he was born in 1755, while others maintain the date to be 1757…but we’ll go with 1755 since a court of law determined his age to be 13 in 1768 based on the testimony of his uncle.  His Scottish father left the family when Alexander was ten, and the fact that his parents were never married was a point that his political enemies would emphasize at various points in his life.  His mother, Rachel, moved him and his brother to St. Croix, which is currently the largest of the U.S Virgin Islands, in 1765.  This move was logical because his mother had extended family still living on the island, and it’s also where the teenage Hamilton would get his first taste of the life of a merchant because his mom ran a store on the first floor of the building in which they lived.  However, her death from yellow fever in 1768, a disease which Hamilton also contracted, but survived, left him orphaned since his father was no longer involved in his upbringing.  Yet, instead of dropping off the map, Alexander Hamilton took the opportunity to educate himself in the ways of the increasingly interconnected globe; or, in this case, the interconnected burgeoning British Empire.  He served as a clerk at Beekman and Cruger, and business that dealt in a vast array of imports and exports.  Bookkeeping, inventory, conversion of currency…every conceivable task that accompanied a business that dealt with global trade was handled by the young man, and he was a keen study in the world of global economics.  His chance to actually see some of that world arrived when a hurricane annihilated St. Croix in late August 1772, just two short years following Boston’s Bloody Massacre.  Hamilton wrote a letter to his father in which he vividly painted a picture of the hurricane and its destruction; this letter caused local businessmen to recognize the talent inherent in this 17-year old, and they took up a collection to send him to mainland North America for a formal education. 

The idea behind Hamilton’s exodus was that it would be temporary: once educated, the college graduate would presumably return home with the skills he acquired to benefit the people of St. Croix.  This never happened; Hamilton earned his ticket out of the Caribbean and never returned.  He attended King’s College in New York City, today’s Columbia University, where he may of may not have actually met fellow student Aaron Burr.  He became swept up in the revolutionary zeal that claimed the attention of so many young men, even sharpening the written skills he acquired as a boy when he engaged in a series of written spats with a New York Loyalist.  Two months following the publication of Thomas Paine’s Common Sense, Hamilton was commissioned as the Captain in an artillery company and would participate in the defense of New York when the British invaded in summer 1776. By January 1777, following the Continental Army’s successes at Trenton and Princeton, Washington personally asked Hamilton to serve as one of his aides-de-camp, and he would spend the bulk of the war using his pen to handle Washington’s correspondence save for his heroic assault on Redoubt Number 10 near the end of the siege of Yorktown.  A true hero of the Revolution, Hamilton would spend the years following the war engaged in enterprises that fell on the economic side of things.  Sure, he would attend the Philadelphia Convention where he would more or less defer to his “political elders” in terms of judgment, and he would also author 51 of the 85 Federalist essays designed to convince his fellow New Yorkers on the necessity of the results of said Philadelphia Convention, but this is the money-man we’re talking about, so that’s where we’ll keep our focus.  He would grow frustrated with the inability of the Confederation Congress to levy taxes or really do anything economic in his time as a representative, founded the Bank of New York, and was one of the few who attended the Annapolis Convention in an attempt to solve America’s early trading woes.  He wasn’t entirely satisfied with the new Constitution, but was more than eager to take up his post as Secretary of the Treasury when offered by his mentor, George Washington.

Act III: The Bank of the United States

In Hamilton’s second economic report that he submitted to Congress in December 1790, he outlined his plans for what became the First Bank of the United States.  This is our first taste of how Hamilton’s outsized ideas would divide the nation…in this case, North and South.

Well-read as he was, Hamilton based his idea off the Bank of England, as well as a similar bank in Amsterdam; he even kept a copy of the charter of the Bank of England on his desk as he outlined his own proposal. To him, what made his central bank ideal was its structure as essentially a private bank with Congressional oversight: the bank was to be 20% publicly owned, and 80% privately owned.  The central government would thus be a stakeholder in the bank with the power to vote for the directors who sat on its board, while a majority of the private interests would be paid out in government securities, weaving the two together.  Banking alone was an issue that aroused serious suspicion given the assumed secretive nature of the industry.  It was no secret that the agrarian interests of the plantation elite, who also happened to own large numbers of slaves, dominated the American South, and they had no interest in allowing the nefarious “stockjobbers,” to borrow a phrase oft-used by Thomas Jefferson, from running the country.  Hamilton completely understood these fears, and though he felt they were unfounded, he set about easing them in his report.  Bear in mind that, Madison aside, Hamilton was probably the most well-prepared man in any debate, so he was extensive and thorough in conducting his research that would support a National Bank.  He claimed that if the precious metals of a nation were securely held in a bank, then this wealth could be used to provide credit for said nation, and this could subsequently be used to increase the money supply.  On this same note, he held that a central bank could print paper money that could be exchanged for coins: that is, each piece of currency would be backed up by gold and silver, ensuring that there would be value to the money and preventing a return to the bartering that was occurring in southern and western regions of the nation.  This National Bank was one of the first cornerstones of Hamilton’s plan to not only bring stability and confidence to America’s financial sector, but also to catch up to European nations who held a sizeable head start in such matters.

However, those who opposed banks in general, such as Thomas Jefferson and James Madison, smelled a rat.  Of those who held 80% of the private stock, wouldn’t most of them be concentrated in the North?  And the individuals who were most qualified, and would thus be selected, to serve on the Board of Directors…wouldn’t they also be concentrated in the North, where commerce and banking were in their adolescent stages of development?  This proposal appeared to be an institution that would push the national economy in the direction of merchants and moneymen instead of the yeoman farmers so beloved to Jefferson and men of his ilk.  Many of Hamilton’s justifications for the Bank also didn’t pass their muster: he claimed it would be easier to collect taxes with a National Bank, it would provide more power to the National Government, and was authorized under the “Necessary and Proper” clause of the U.S. Constitution.  This argument was especially distressing to Jefferson and Madison: Article I, Section 8 of that document provided “delegated” powers to Congress, meaning that it spelled out precisely what Congress was allowed to do, like collect taxes and establish postal roads.  Hamilton was utilizing Paragraph 18 of that Section, which claimed that Congress could “make all Laws which shall be necessary and proper for carrying into Execution the foregoing powers,” meaning the delegated powers.  At least, that’s how Hamilton viewed it, and he made this a cornerstone of his argument for a National Bank: Jefferson and Madison were aghast at this interpretation, believing that since Congress was not authorized to operate a bank, then it was simply unconstitutional to do so.  The vote in favor of Hamilton’s Bank passed the Senate on an overwhelming voice vote, and even though Madison tried his hardest to prevent its passage, it passed the House of Representatives, in which he was serving, 39-20.  Clearly the collaborators on The Federalist Papers were going their separate ideological ways, and it was now up to President Washington to either sign it into law…or veto the proposal.

Throughout his first term, Washington accepted the council of the Father of the Constitution on a vast array of political matters despite Madison’s lack of Cabinet-level position.  When it came to the Bank, he would compose two messages for the consideration of His Excellency: the first focused on the aforementioned unconstitutionality of the Bank.  It wasn’t a delegated power of Congress, so it should be checked by the Chief Executive in the form of a veto.  In his second message, he emphasized the unfairness of a Bank that would appear to favor the few at the hands of the many: in short, the Bank would demonstrate the willingness of the federal government to enhance a privileged few stockholders and bankers at the expense of the ordinary citizenry.  Accounts indicated that Washington might actually veto the bill…until he asked Hamilton for his assessment of the Bank.  Among the Cabinet, Hamilton exercised outsized influence on Washington, and its widely believed that two factors played into this.  As his aide-de-camp through much of the Revolution, Hamilton acted as his counsel and right-hand man in many a stressful situation, and such experiences cemented a bond between the two.  Additionally, the other Cabinet offices were War and State, two departments in which Washington had some experience; with regard to finance, he was virtually clueless and thus had to trust his expert in the field, which he did with eagerness.  Hamilton’s defense focused on the “necessary and proper” clause, and he even stated, “It is not denied that there are implied as well as express powers and that the former are as effectually delegated as the latter.”  He reasoned that the Bank would make it easier for Congress to fulfill four of its delegated responsibilities: borrowing money, regulating interstate commerce, collecting taxes, and maintaining an army and navy. In the end, the arguments of the well-researched Treasury Secretary persuaded Washington, and he signed the Bank into existence with a 20-year charter in late February 1791.  It was a win for Hamilton, a win for commerce, and a win for the emerging faction that would keep the same name they had claimed in the ratification debate: Federalists.  It also revealed the continuing divide between the geographic North and South within the young nation, but the division between East and West would also rear its ugly head into focus.  

Act IV: Rebellion over Whiskey

The “Whiskey Rebellion” is one of those events that always piques the interest of students, as if they didn’t correctly hear me state that a rebellion in this nation nearly broke out over whiskey. It most certainly did, and was centered around a proposal from Hamilton’s First Report on Public Credit: an excise tax, or a tax on a specific good or service.  Since direct taxation was still a highly unpopular idea, and the national government needed revenue, Hamilton proposed a tax on spirits given their popularity at the time.  Just as the Bank revealed divisions between North and South, this tax and the subsequent protest surrounding it would widen the divide between East and West...or more appropriately, urban and rural America.  This proposed tax, which passed both chambers of Congress and even had the blessing of James Madison, was despised in rural America because distilled spirits were so much a part of the culture that they were like currency.  And that’s not fancy hyperbole: Hamilton’s National Bank notwithstanding, banking as a practice was virtually nonexistent in western regions, and hard currency was subsequently always in short supply.  What was in abundance was corn, and this corn was often distilled into whiskey for easier transportation, delicious consumption, and often, a surrogate currency.  Cultural importance of whiskey and other spirits aside, westerners hated being dictated to by who they considered to be eastern elites, especially ones that wouldn’t be hit as hard by this tax, and they were distressed by the fact that exactly none of their representatives voted in favor of this tax…yet here they were, stuck paying it...or were they?  From the start, many outright refused to pay the tax, or harassed the inspectors who were tasked with registering the stills that converted the corn into whiskey.  One was even tarred and feathered, providing the appearance that these protestors saw themselves as the heirs of the famed Sons of Liberty.  General unrest would be the order of the day for several years, but Hamilton was unmoved by the distress along the frontier: hard choices needed to be made, and since all other options were considered unviable, these men would have to pay up for the good of the nation.

But let’s not kid ourselves…this is called the “Whiskey Rebellion” for a reason, and that reason is that it eventually involved a bit of violence.  The protestors in western Pennsylvania in particular had previously engaged in a mass meeting wherein they declared that those charged with collecting the taxes would be treated with the “contempt they deserve,” but by summer 1794, that contempt was levied at their brethren as those who adhered to the tax saw their stills destroyed by their more militant neighbors.  They also harassed Colonel John Neville, the Revolutionary veteran charged with serving tax delinquents with papers; 500 protesters, who we could accurately call rebels at this point, surrounded and fired shots into his house for over an hour while they simultaneously torched his property.  These same men kidnapped the district’s federal marshal and only released him when he claimed that he would no longer go after those who refused to pay the whiskey tax.  By early August, 6,000 of these “Whiskey Rebels” descended on what was called Braddock’s field outside of Pittsburgh…named after Washington’s arrogant commander who met his fate in the region during the French and Indian War.  It was no secret that their goal was to seize Pittsburgh, and a three-man delegation was sent to try and prevent further violence from occurring, something that nobody really wanted.  The end result was that one member of the commission, lawyer Hugh Brackenridge, convinced the rebels to simply march through the city to demonstrate that they were not a threat and meant no harm to its inhabitants.  It didn’t hurt that distilled beverages were placed on the other side of the city to provide incentive for these men to march straight on through.

While the crisis was somewhat averted, the actions against Neville’s property, the general treatment of tax collectors, and the rhetoric of the rebels, not to mention their sizeable numbers, were alarming to the Secretary of the Treasury.  In a move that is consistent with his actions dating back to his teenage years, he wrote a series of essays under the pseudonym “Tully” to express his fears that the real goal of the Whiskey Rebels was not just the elimination of a singular excise tax, but the overthrow of the new national government.  He advocated for the use of force to ensure that this law would be upheld, believing that a strong military presence would ensure that violent protests against federal law would not be tolerated.  By early September 1794, Washington ended up agreeing with his Secretary of the Treasury, claiming that “If the laws are to be trampled upon with impunity…there is an end put at one stroke to republican government.”  He called up the militia of several states and began to ride west with…Alexander Hamilton.  Hamilton was chomping at the bit for a bit more military glory, and he received his chance since Henry Knox was in Maine at the time.  This is technically the only time in American history when a sitting President led troops into the field, although Washington only made half of the journey; once they reached Carlisle and he reviewed several thousand troops, he decided to return to Philadelphia and allowed Hamilton to take charge of the 12,000 soldiers en route to the field.  Hamilton would interrogate the principal participants and took no part in combat, mainly because the federal government’s overwhelming show of force resulted in the dispersal of the rebels.  Hamilton’s leadership of the troops led to renewed criticisms of his seemingly outsized role in the administration, with Thomas Jefferson going so far as to directly criticize President Washington, who had been somewhat untouchable up to this point.  Long-term, it demonstrated that the President, who enforces the laws, would be willing to use actual force to make sure that Congressional laws were followed and respected, with varying degrees of comfort with this precedent.  For Hamilton, who required an escort back to Philadelphia, it was essentially his last ride: he informed His Excellency of his intention to step down as Treasury Secretary in January 1795.  He will remain highly influential among his fellow Federalists for the next decade, but he’ll factor into the rest of the season enough that we don’t need to bog ourselves down with the details here.  It’s enough to understand that Hamilton’s economic program, which included the National Bank and an internal excise tax, laid the foundation for what became American capitalism, and also sped up the division that America was heading, be it North vs. South, East vs. West, or urban vs. rural.

Next week, we’ll continue our focus on “Division” by exploring the event that really intensified the split between Federalists and the emerging Republicans: the French Revolution, and the resulting American Proclamation of Neutrality that accompanied the increasingly violent nature of that event?  Our subject: a man beloved by Hamilton, his rival Jefferson, and even George Washington: Marquis de Lafayette.