Unit Seven: The Federalist Era

1. Unit Seven: The Federalist Era How do we Fund and Run a Government?

2. National Debt • At the beginning of Washington’s administration he and Congress had to deal with a new nation that was bankrupt (without money) and in debt. • The A.O.C. had accumulated a very large debt during its tenure due to its lack of power to tax the states and collect money. • The new government needed a way to collect some form of tax revenue to be able to run the government, rebuild its credit (ability to borrow money) status, and an economic plan on how to run the nation.

3. Hamilton’s Plan • As Secretary of the Treasury Alexander Hamilton developed a financial plan based around four main principles: • Fund the National debt and assume the debts of the states. (to build credit and tie the states to the new government) • Establish a national bank. (tie the wealthy to the new government) • Pass a national excise tax (tax on a specific good). • Enact a Revenue tariff. (a way to fund the government and protect American industry from cheaper imported goods)

4. Funding the Government • The first economic measure passed by Congress was the Tariff of 1789 which placed a revenue tariff on most imported goods. (this was to be the major source of income for the government for many years). • The Southern Planters though accused it of being a Protective tariff, aiding the northern industrialists and hurting them.

5. Hamilton’s Reports • The new government needed to know its financial status, so they commissioned Hamilton to survey the nations economy and report back to Congress. • Hamilton came back with five reports to Congress: Report on the Public Credit, Report on Tariffs, Report on a National Bank, Report on the establishment of a Mint, and Report on Manufactures

6. Report on the Public Credit • In 1790 Hamilton gave the Report on the Public Credit that gave an overview of the new government’s financial status. • The new government was in debt not only to its own citizens (mostly the wealthy), but also to foreign powers. • Hamilton's plan was four fold to reissue government bonds, assume debts of states, establish a revenue tariff, and establish a national excise tax.

7. Report on the Public Credit • During the Revolutionary war the government had issued bonds (certificates representing the money borrowed) to all its creditors promising to repay later. • After the war because the value of the bonds began to drop, people called speculators (purchase something in the hope that it will make them a profit later) began to buy all the bonds up from the mass of people selling them.

8. Report on the Public Credit • Hamilton’s plan was simple, to reissue the bonds at a higher interest rate, but they would have a longer term for cash payment. (this would give the government a longer time to pay off its debts. • The other part of the report was for the National government to assume the debts of the states, to concentrate all debt in one entity. • The report also established the need for a tariff to raise money and protect American industry, and the founding of an excise tax on whiskey.

9. Capitalism • Hamilton also in the report wanted to base the American economy on the system of Capitalism (economic system where the means of production are owned by private citizens for the means of making profit [money made by the selling of a good or service]). • The first capitalist system used by America was a free-market/enterprise system (government does not intervene allowing demand and supply to guide itself on the market [place where goods are traded], also known as laissez-faire [hands off gov.]).

10. Capitalism • The idea of capitalism was founded by Adam Smith in his book Wealth of Nations. • In his book he said that that there was an “invisible hand” that guided the relationship between buyers and sellers, so an intervention from a governmental body was not needed.

11. Report on a National Bank • The next major report was the Report on a National Bank on the founding of a Bank of the United States (B.U.S.). • The BUS was to be a joint effort between the citizens and the government (1/5 owned by the government and 4/5 by private investors). • The BUS would serve as the financial agency of the government collecting taxes, repository (safe) of the government’s cash, and issue paper money called bank notes. • The BUS would also lend money to businessmen for the needed capital to start or expand business and the businessmen would give a security (something given as promise of repayment).

12. How to interrupt the Constitution • The BUS came before Congress in the form of the bank bill which developed into a debate over the interruption of the Constitution and the power given to Congress. • The Constitution can be interrupted two ways: 1.) Strict (word for word), or 2.) broad/loose ( reading between the lines, assuming). • Hamilton said Congress had the power to create a BUS due to the Necessary and Proper Clause of the Constitution (it states that Congress has the power to make any laws necessary and proper to the running of the country).

13. How to interrupt the Constitution • The Necessary and Proper Clause is also known as the Elastic Clause because it has allowed Congress to grow the Federal bureaucracy (federal agencies) and its power. • The issue over the interpretation of the Constitution and the power of the Federal government led to the development of the first two political parties in America. • These first two parties were the Democratic-Republicans and the Federalist Party.

14. Development of Political Parties • The Democratic-Republicans were followers of Thomas Jefferson and believed in a limited national government, state’s rights, and a federation style government. • The Federalists were followers of Alexander Hamilton and believed in a strong national government and a union style government. • A political party is a group of voters who agree on issues (called their platform) and agree to vote together for their candidates. • This led to the two-party system of political parties we have today.

15. Report on a Mint • The next major report was the Report on a Mint for the founding of a Mint (place where money is made) to make the monetary system more stable and efficient. • Hamilton suggested that silver, gold, and banknotes be used as legal tender to settle all debts. • Hamilton also wanted the system to be based on the decimal system. (1,5,10,50,100 or.1, .5, .10, .25) • The Mint Act led to the founding of the first Federal Mint in Pennsylvania that issued fiat (paper money) that could be traded in for specie (hard money i.e.. gold or silver).

16. Report on Manufactures • The last of Hamilton’s reports was the Report on Manufactures stating the need for a protective tariff, government bounties, and the extension of roads and canals to aid in the movement of goods. • These issues were not addressed by Congress because the improvement of the land (such as roads) was seen as a state matter and not a federal matter. (later this will change due to the idea of intrastate and interstate commerce)

17. Election of 1792 • As Washington’s first term in office came to an end he wished to retire and go home, but was persuaded to run again for office. • Once again Washington received a unanimous re-election by the electoral college and Adams was chosen to be Vice President. • Washington though was constantly having to deal with the issue of holding together his cabinet of rivals for the betterment of the nation.

18. Domestic Issues • During Washington’s two terms in office he had to deal with two pressing domestic issues (concerns of the nation at home): • 1.) The Whisky Rebellion • 2.) Indian uprisings • Both of these issues had to be dealt with carefully because they would set the precedent for further responses by the Federal government.

19. The Whiskey Rebellion • The Whiskey Rebellion grew out of a response of frontier farmers (mainly in Pennsylvania) over the Federal excise tax on whiskey. • The frontier farmers had no way to transport their wheat to market and make profit, so they would turn it into whiskey allowing them to transport it further distances and making more money (because a mule could carry more worth of whiskey than wheat). • In some of these frontier areas like Kentucky, whiskey was even used as currency.

20. The Whiskey Rebellion • The frontier farmers believing they were being mistreated led by David Bradford and James Marshall attacked and threatened tax collectors (even riding them out of town after tar and feathering them). • In response and under the urging of Hamilton, Washington sent a militia of 15,000 men under the command of General Henry “light horse Harry” Lee to subdue the rioters near Pittsburgh, but when they got there most of the protests had died down or had stopped altogether.

21. The Whiskey Rebellion • Washington said if it was not stopped, “we can bid adieu to all government in this country except for mob and club government.”