After the new United States Congress completed its first task of creating a Bill of Rights, it turned its attention to the issue of financing the new government. President George Washington appointed Alexander Hamilton as the Treasury Secretary, and Hamilton took it upon himself to develop an economic structure for the United States that would give the public confidence in the government’s financial affairs.

As he formulated his plan, Hamilton used a loose interpretation of the Constitution, believing that what the Constitution did not specifically forbid, it allowed. He also believed that a strong central government was critical to encourage commerce and industry and to prevent chaos within America’s borders. This perspective shaped his fiscal plan.

Hamilton’s proposal, titled “The First Report on the Public Credit,” declared that the federal government would assume the debts of the individual states. Each of the thirteen states had amassed significant debt as they fought for freedom from Britain. Hamilton believed that assuming these debts would not only give the public confidence in the federal government, but would also emotionally bind them to the government out of a sense of loyalty and gratitude. Adopting the states’ debts would cost the federal government around $21.5 million, an awesome sum at that time. Several southern states had already paid off their debts and would receive no direct benefit from the assumption of debts, so Hamilton’s plan offered to put a new national capital in the south. This capital would eventually become Washington, D.C.

The second element of Hamilton’s plan was to assume the Confederation’s debts at par, which meant that interest would be included when the debt was paid—a monstrous sum of more than $54 million. Hamilton wanted to assume the states’ and the Confederation’s debts because he felt a national debt would give the citizens unity and a sense of respect for the government.

A third key element in Hamilton’s financial strategy was to establish a national bank. Hamilton modeled his national bank after the Bank of England, which provided a strong federal institution that printed and circulated paper money, while giving the government a repository for excess funds. Hamilton believed that a national bank was necessary to implement the Constitution’s decree that the government collect taxes, pay debts, and regulate trade. Hamilton felt that this need fulfilled the Constitutional clause that stated what was “necessary and proper” could be accomplished by the government. This clause was also known as the “elastic clause.”

Although Hamilton was considered a financial wizard and many trusted him to finance the new government, he was not without opposition. His most outspoken critic was Thomas Jefferson, who was serving in President Washington’s Cabinet as Secretary of State. Jefferson strictly interpreted the Constitution and believed in a decentralized government that should exist primarily to protect man’s natural rights to life, liberty, and property.

In contrast to Hamilton’s proposal, Jefferson felt that the states should hold greater authority than the federal government, since the states were closer to the people and were less likely to abuse their authority. Furthermore, his strict interpretation of the Constitution—believing that what was not specifically written was forbidden—led him to believe that Hamilton’s proposal of a national bank exceeded federal authority.

Both Jefferson’s and Hamilton’s political views represented public opinion. What began as a personal dispute between the two men evolved into the formation of primitive political parties. Jeffersonians shared the belief in a strict interpretation of the Constitution, while Hamiltonians accepted a broad interpretation.

President George Washington, however, remained safely neutral in the dispute between his two staff members. He asked Hamilton and Jefferson to prepare arguments regarding Hamilton’s proposed U.S. bank based on their differing interpretations of the Constitution. After hearing both arguments, Congress and Washington favored Hamilton’s plan, and the Bank of the United States became a reality in 1791.

By this time, Hamilton had already developed several duties and excise taxes that the new national bank could collect. Congress had passed a Hamilton-recommended tariff of around eight percent on dutiable imports in 1789 and a domestic excise tax—a tax levied on the manufacture, sale, or consumption of goods—in 1791. An unforeseen result of this tax was the Whiskey Rebellion in 1794. Hamilton included whiskey, a commodity produced primarily by western farmers, in his tax. The plan levied a seven cent per gallon tax on whiskey, much to the dismay of distillers. For people in the backcountry, whiskey was not a luxury but a trade necessity and a form of currency; even preachers were paid with distilled whiskey.

Seeing their livelihood threatened by Hamilton’s excise tax, the whiskey producers rebelled. Peaceful protests eventually turned violent with the distillers tarring and feathering revenue collectors. When President Washington heard about the rebellion, Hamilton urged him to take action and he sent an army of over thirteen thousand men to end the uprising.

When the soldiers arrived in the backcountry of Western Pennsylvania, they were surprised to learn that the “rebellion” had been drastically blown out of proportion. The angry distillers were overwhelmed and quickly dispersed, and only three lives were lost in this battle. Public perception of this event was divided, and this division strengthened the emerging political parties. Hamiltonians—known also as Federalists—supported Hamilton’s financial plans and Washington’s actions to stop the Whiskey Rebellion, while Jeffersonians, who were becoming known as the Democratic-Republicans, argued that the government had used excessive and unnecessary force.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education