The Federalist Administrations - RR144H16
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This morning we shall deal with the Federalist Administrations. The Federalist Administrations of course, covered the first 12 years of the republic, the two administrations of George Washington and the one administration of John Adams. Now in a sense, Washington was not strictly a Federalist. Washington was trying to represent both parties, and keep the country from falling into purely partisan politics. As a result in his administration he worked to insure the presence in his cabinet, and in his council, of both parties. The two parties of the day were first the Federalists, and second the Democratic Republicans. Now that seems a little strange to us because today Democrats and Republicans are two different parties. But at that time, the term Democratic Republicans characterized the second party.
The Federalists were led by John Adams, and Alexander Hamilton. The Democratic Republicans were led by Thomas Jefferson. The New nation as it began under George Washington had some very serious problems. It started off virtually bankrupt. Because there had been a long war, great expenses, further debts incurred during the years after the war, during the articles of confederation, the new government thus had very little credit, and began under a cloud, as virtually bankrupt.
The man who solved this problem was Alexander Hamilton. Now Hamilton is a very curious kind of man, and his [picture in the minds of historians is a rather strange one. You can find both liberals and conservatives who regard Hamilton as a villain, as the bad man in early American History, who gave us a terrible start. You can also find Liberals and Conservatives who regard Hamilton as the very great man in American History. It is very easy to criticize Hamilton, and very easy also to praise him, He was a very brilliant person. He was also a very tactless person, not an easy person to get along with. [00:03:42]
He rose to prominence very early, he was an officer...
He rose to prominence very early, he was an officer in the War of Independence while still in his teens, very close to a Washington, very much trusted, brilliant thinker, and as a result one of Hamilton’s problems because he had gotten ahead so rapidly, and because his brilliance was recognized so early, was that he tended to be a tactless person, very easily alienating people, very easily stomping on the toes of people he should befriend. As a result one of the disaster of the Federalist party which helped lead it to defeat, and enabled the Democratic Republicans after some years to come into power, and to smash the federalist party permanently, was precisely the quarrel between John Adams and Hamilton. Neither Adams nor Hamilton’s were the most diplomatic of people, but perhaps Hamilton in some respects less so.
Now having said this we must pay our respect to Hamilton, a very great man. One of the first things that Hamilton did was to insist that the United States had to pay all debts, all the debts incurred, both public and private, both domestic and foreign, during the War of Independence, and thereafter. As a result, this immediately gave the United States an international position of some respect. Not only did Hamilton say that all federal debts were to be paid, but he insisted that all state debts were to be paid, and the federal government would assume them.
Now this again was something that was entirely unnecessary, in that the federal government was not responsible for the state debts. Washington today is not responsible for the debts of Virginia. There is no way in which Virginia can run up a huge bond of indebtedness or any kind of indebtedness, and then expect the federal government to step in and do anything about it. But Hamilton insisted, and established it as a Federal policy, that all these debts were to be paid, and the Federal government assumed these debts. This of course was a remarkable beginning for a new nation to make. It immediately gave us a position of some respect. [00:07:04]
Now how were these debts to be paid? First of all Hamilton...
Now how were these debts to be paid? First of all Hamilton proposed, by customs and duties on imports. Anything purchased abroad had to pay some kind of duty or tax when it came into this country. And this money was to be used in paying the debts. Then certain domestic goods, things manufactured in the United States had to pay an excise tax. And of course one of the things he immediately imposed a tax on was distilled liquor. And this led to the whiskey rebellion, as some of the farmers who were making whiskey resented bitterly the heavy tax that was placed upon whiskey. Then third, Hamilton proposed that the sale of federal lands, the public lands, lands held in the west be used to accumulate funds to pay debts. You must remember the idea that you could go west, just get land for nothing at all, was not true. The western lands that had been ceded to the United States by the British, and later purchased by the Louisiana Purchase, were not free lands. If you moved out there to start all over again you had to purchase that land from the federal government.
Now the proceeds from these public land sales was used to pay off the national debt. So, the first policy of Hamilton was, to make the United States a responsible nation, wherever public debt was involved. The Second policy of course, is the one which has been very controversial. I shall try to give you, both Hamilton’s side of it, and a critic of it.
Hamilton’s second great policy was to create the Bank of the United States. A bank chartered by the United States with vast powers, as a kind of agency of the federal government, something like the federal reserve bank has become in modern times, though the federal reserve bank has far greater powers than the first bank of the United States had. Nevertheless, the Bank of the Unites States was created in 1791, with power to issue bank notes, that is, paper money. The weakness of the Constitution was, that while the Constitution forbade and strictly speaking this is still the case, forbade the Federal government from using anything but gold and silver as legal tender, and forbade the states from using anything but gold and silver as legal tender. [00:10:55]
And required Congress to issue only coins, to coin...
And required Congress to issue only coins, to coin money in other words, not to print it. It did not forbid the banks from doing this. In other words, banks were given the right to print paper money. Now this was an inflationary measure. However, it must be at the same time, recognized that while the banks could print paper money, they could not make it legal tender. So that, if someone tried to pass you, a bank note, in payment of a debt, you could refuse it. So there was always a possibility of a repudiation.
Now practically what happened was this. Supposing a bank, the Bank of the United States, or some state bank in Virginia, that had been chartered by the State of Virginia, issued some 5 dollar bills. Printed up a vast amount of them. And let us say you went to that bank and borrowed say, 5,000 dollars to start a business. And of course in those days $5,000 was a huge fortune. Now, these $5 bank notes would not be legal tender. Anyone you dealt with could refuse to take them. Well supposing I had these bank notes, and I wanted to build a store. You’re a contractor, and you want to build it for me because you want business. What would you do?
You knew that I didn’t have any gold or silver to speak of to pay for that, so you would say: “Alright, I will build it for you.” Perhaps it was going to cost say, $4,000; and you had borrowed $5,000; so you would have money to get supplies and the like. What you would do would be to raise your price on me, to take the paper money. You would raise the price say, by two percent. What you were doing was saying in effect: “Because you are giving me paper money that is not legal tender, and is going to depreciate, I am discounting the value by %2.” Now when you turned around as a contractor and paid off your workers and your suppliers with this, They were probably glad to get the work, but when they turned around and used that money it would be discounted %2 you see. [00:14:41]
Sometimes less, sometimes more depending how good the...
Sometimes less, sometimes more depending how good the bank was. So that after a while these $5 bills might be circulating, and they would be only good for about $2.50 in gold, in purchasing power as compared to gold.
Now Hamilton knew that this was going to happen when he started this. But his policy was this; “We need to start business rolling in this country, and in particular to stimulate manufacturing. So we will charter this Bank of the United States, in order to provide a large capital,” The bank was in Philadelphia, “So that manufacturers throughout the United States can apply to the Bank of the United States for money to set up factories, shops where they can start manufacturing things. Maybe it can be a garment industry, textile mills. Or it could be a ship building industry. In any case the purpose of the Bank of the United States was to provide funds for manufacturing.”
In a sense this was an artificial stimulus to manufacturing. On the other hand it had this advantage, it did get industry rolling in the United States. There was a boom because there was a tremendous influx of money. By chartering the bank, and enabling it to issue so many millions of dollars in paper, it mean that there were so many millions of dollars to get industry rolling in the United States. [00:16:50]
However, the creation of paper money is inflationary...
However, the creation of paper money is inflationary. Whenever there is the power to create paper money, either on the part of the banks, or to create credit on the basis of fractional reserve, or on the part of the state or federal government, then you have an inflation of the money supply. You created money out of nothing as it were. You give industry a shot in the arm. But it is an artificial shot, and the result is you have the boom and bust cycle, you have inflation and recession, or inflation and depression.
Now all the depressions the United States has had as well as all of the inflations have been a product of the issuance of paper money. Having said that we should then say, the inflationary boom and bust cycles of the last century and up until about World War I, were all short. Your inflationary cycle was not as great, and your bust was a lot shorter. Why?
Because the kind of inflating that was done was done by banks who did not have the power to inflate as much as the federal government. And therefore whether it was the Bank of the United States or the various State banks, that is, Banks chartered by the states, the depressions that would result were usually a few weeks or a few months.
Now what would happen to create the bust? Well, after a while as this $5 bill got to be worth about $2, or about a $1.50 or something like that, you would take it back to the bank, because it would be time you figured to try and get something for it. Now the bank had promised to pay, but the bank was hoping that nobody would start trying to collect all at once. But after the depreciation would begin to be a little rapid and business was slowing down a bit because it had been given an artificial shot in the arm, more than the natural working of the economy permitted. [00:19:40]
Business would slow down...
Business would slow down. You see, If tomorrow I gave everyone here $50, to buy books from Dave Thoburn, Dave Thoburn’s business would take a tremendous burst. It would really boom, for a while. You might take a week or a month or 6 months, to spend that money for books as you encountered a book that would be of interest to you and decided to order it, but for a while it would give him a tremendous burst, and he might have to hire somebody extra in order to keep up with the business.
But at the end of that time, that business would end. Because all of you would have spent the money I gave you. What would happen then? Well there would be a severe cut back in his business. He might have expanded during that time, He would have had to if he hired an extra person, and anyone he supplied would have similarly have thought, “Well, the book business is booming.” But suddenly there would be a severe fall back. And the result would be, that he would have to pull in his horns as far as his expenditures were concerned, because suddenly there was a radical drop. And his drop would affect many others. [00:21:19]
Well this is precisely what happened...
Well this is precisely what happened. Moreover, when too many people came to these banks to demand gold and silver, the bank which might have issued say $10,000,000 in paper dollars, and have 1 million or 2 or three million in gold, would suddenly find it was wiped out. And it would have to close its doors.
And so it was, that trouble ensued from these bank creations of paper money. The result was that the bank of the United State began to be under stack. The Democratic Republicans attacked it, but unfortunately when they came into power they continued it.
You know, politician’s--- It’s bad if someone else is doing it, but if you can do it is alright. It’s bad if somebody else is bugging, but if you can bug it’s wonderful. It all depends who is doing it.
So the Democratic Republicans were all in favor of this, when they got into power. They did not do anything more than to a limited degree, and then only temporarily, to alter this tendency. Now does anyone know the president who a generation later wiped out the second bank of the United States? The first bank, its charter ran out so they had to renew it. And then, a president came who opposed this who said we have to get back to a hard money situation. Gold and Silver. On the economic side one of the greatest presidents we’ve ever had. Can anyone tell me who this was?
What president wiped out the second bank of the United States? I’m sure you have ad this in your U.S. History class. Yes. Good for you! Andrew Jackson. Jackson campaigned on this issue. He fought hard, and he wiped out the bank because he was determined to put the money situation on a sound basis. We will come too that at a later date. But Jackson was the American who saw the weakness of this whole thing, fought it tooth and nail. [00:24:15]
Then the third thing that Jackson--- or rather, Hamilton...
Then the third thing that Jackson--- or rather, Hamilton did, was to see to it that as quickly as possible gold and silver coins were minted. Then, fourth, Hamilton worked to institute a protective tariff. Now again this is not conservative economics. But, Hamilton having worked to create the bank, which could create money, in order to start industry was determined to help these young manufacturing industries to get off the ground, so he established a protective tariff In order to prevent foreign competition from hurting them.
Well of course this created a great deal of trouble, and immediately there was a hue and a cry against the tariff from some parts of the country. And the Tariff was damned from one end of that sector of the country to the other as a fearful evil. Now here again what part of the country opposed the protective Tariff? Yes? The South. Why did the South oppose the protective Tariff?
No, they were not manufacturing at all in those days… Yes. You see, the South was the area not of manufacturing, but of consumers, producers of raw materials and consumers. Now whenever you have a tariff, you protect the producer and you penalize the consumer. Whenever you say the Japanese goods for example have to pass a high protective tariff in order to come into this country, you are saying, we are going to protect, say, the textile mills in New England and in the South where there are some now, but, we are going to penalize 2 hundred million Americans every time they are going to buy some yardage, every time they are going to buy some clothing. So a protective tariff protects a minority of workers and manufacturers, and penalizes all the consumers. [00:27:08]
As a result, the south as the area that was not made...
As a result, the south as the area that was not made of either workers or manufacturers, but was an area of consumers, and producers of raw materials, was very bitter about the tariff. And it denounced it as a fearful sin against the American people.
Now at this point let us contrast the Federalists and the Democratic Republicans, their basic positions and policies. The Federalists were drawn mostly from merchants, bankers, manufacturers, and the owners of large estates, both in the North and the South. The Federalists were primarily pro-business. Then second, the Federalists were strong in the cities, and in the tide-water plantations of the South. Third, the Federalists had a broad interpretation of the Constitution, a loose one. And it was their desire to make possible a strong central government. They tried to develop the doctrine of implied powers in the constitution. One thing after another that the Federalists did, the Democratic Republicans called unconstitutional. The Bank of the United States for example, there was a tremendous hue and cry about it being unconstitutional. Washington was more or less afraid that it was, but he finally rather reluctantly sided with Hamilton, because he felt something has to be done to get the country going.
Then, next, fourth, the Federalists were pro-British. Now this may seem strange, coming immediately after the War of Independence. But even at the peace treaty, some of the British and the American negotiators, the meeting was held in France, began to side one with the other, as against France. And the British agents or diplomats at the treaty told some of the Americans out-right: “Look. Don’t try to be too French. Your future is basically with us.” Now the Federalists knew that the attitude of Britain toward the new country was one of contempt. And until the War of 1812, which we will come to next week, the British regarded the United States really as a country that was not around very long, and was not likely to stay around very long. Their attitude towards it was one of, well: “It’s beneath our dignity to regard them with any respect.” They violated again and again the terms of the treaty, they refused to evacuate some of the places in the mid-west or in the Great Lakes area, that in the peace treaty they had ceded to the United States. So that in one point after another the British were guilty not only of contempt of the United States, but of violating the terms of the peace treaty. [00:31:28]
You can see it made it a very unpopular policy for...
You can see it made it a very unpopular policy for the Federalists to be pro-British. After all the attitude of the man in the street was: “Why in the world should we be friendly to the very power that we were fighting with recently? True it’s our mother country, true some of us have relatives there, but the fact remains that they were bitterly unfair to us during the war and after the war, they have mistreated us, abused us, taken advantage of us at every turn. Now, does anyone know why in spite of that, the Federalists were pro-British? Can you think of a reason if you were a practical politician, you would in those circumstances take a pro-British position?
No guesses? Yes. Trade! Very good, you are doing beautifully, you’ve come up with two excellent answers. Exactly. Now the British navy ruled the seas. The ability of the French to carry on trade was not as good. So from the practical standpoint of having better markets say for the cotton of the south, and better markets for any of their manufacturing, and a better supply of goods at better prices from Britain than anywhere else, the Federalists figured: “Well, we’ll have to swallow our pride and do practical thing. We are a young country. We need the trade that we can have with Britain. And if we side with France it’s not going to help us any with Britain, they still aren’t going to side with us on any of these points of difficulty. So since it isn’t going to make much difference one way or another, we might as well be friendly.” [00:33:57]
Now a little later, in Jefferson’s administration when...
Now a little later, in Jefferson’s administration when an embargo was put on trade during the Napoleonic wars with both Britain and France, but because France had an embargo on it by Britain it was primarily an embargo on Britain. What happened? It wasn’t Britain that was hurt, it was the United States. So at that point Jefferson was not very practical. The Democratic Republicans however in their policy were first of all pro-farm. The small town, the farmers, the mechanics, the shop keepers were the ones who favored the Democratic Republicans.
The Democratic Republican policy was: “We want this to be a nation of farmers, not of manufacturers and business men.” You know the irony of the fact is that today the Democrats look back to Jefferson, who would’ve been radically opposed to everything they favor. Whereas the policy of the Democrats since Franklin Delano Roosevelt has in some respects been a pro-Hamiltonian policy. So, to me one of the most amusing things has been the annual Jefferson banquets that the Democrats have been putting on, they should honor Hamilton, because in favoring the kind of policy they have, pro-business and pro-labor in the respect of protective tariffs, and such things, they have been essentially Hamiltonian. Then second the areas of strength of the Democratic Republicans was naturally the farm areas of the north and the frontier areas of the south. [00:36:02]
The very fact that the Democratic Republicans favored...
The very fact that the Democratic Republicans favored the farm element, and the small town element, put them in a position of power. The Federalists were doomed. When the majority of the country is made up of farmers, over 50 percent of the people in those days were farmers, and a sizeable number of the others are small town people, and the cities are very few and have only a small percentage of the total population, naturally the party that is in the favor of the farmers is going to triumph. And so, it was inescapable that sooner or later the Democratic Republicans would carry the country.
Then third, the Democratic Republicans favored a strict interpretation of the Constitution, and limited powers. And fourth, the Democratic Republicans insisted that we had to be friendly to France. And they were ready to be friendly to France through thick or thin. They were ready to be friendly to France when it became a revolutionary government, with the French Revolution, and the Revolutionary regime took advantage of this. In the XYZ affair they were as insulting to the Jefferson Administration as it was possible for a government to be. But on principle, they were insistent upon being friendly. It’s a sad fact that if you are friendly to someone in politics they feel that they can take advantage of you. And sometimes if you act unfriendly you get more, just as in politics today, sometimes we give the most foreign aid to the countries that are the most insolent and hostile to us.
Now the Federalist policy was 3-fold. First of all it was a policy of neutrality. Europe was now at war. First it was the French Revolution, and then it was France. So that during these years from the early years of Washington, through the administration of Madison, there was a war incessantly in Europe, with virtually all of Europe involved. The policy of the United States under the Federalists was, “We must be Neutral, even though as far as trade is concerned our policy is pro-British, as far as politics are concerned we cannot favor either one or the other.” [00:39:28]
The Democratic Republicans were for getting involved...
The Democratic Republicans were for getting involved, on the side of France. Then second, the policy of the Federalist regime was to lean over backwards where the British were concerned, and to negotiate and file protests, and to try endlessly to settle the British violations of the peace treaty. They were determined that they were not going to allow their patience to be exhausted; they could not afford another war.
They did believe that by continued insistence, plus the advantage of trade working in their favor they might ultimately get the British to settle in their favor. Then third, in order to avoid problems, because of the Revolution in Europe, The Federalist regime passed the alien and sedition acts, and the naturalization act. They were afraid of some of the new immigrants, and so they said naturalization had to take 14 years, much longer than it had previously been. Now naturalization or citizenship can be acquired in 5 years. But for a time they set it up to fourteen years, because they felt that too many of the immigrants that had come over would have pro-British, pro-French, or pro-German sentiments, and would involve them too much in European politics.
Then second the Alien and Sedition acts were passed in order to enable the administration to deal with what they felt was subversion in the United States, and there was a great deal of it. And also to deport any aliens they felt were working as subversives. Now it is true that there were some injustices perpetrated by the Alien and Sedition acts. But it is also true that when they passed these laws a couple boatloads of people left the country right away. Yes? Oh, alright. Just a minute more on the Alien and Sedition Acts. [00:42:14]
One of the problems of course that did necessitate...
One of the problems of course that did necessitate the Alien and Sedition Acts was that with the revolution the revolutionary regime in France felt that it would be very important to try and capture the United States either to make a revolutionary regime, or one that would work with them. As a result they flooded the United States with agents and with money. And they were buying up officials, they were buying up newspapers and individuals, and were doing a very great deal in order to subvert this country. Perhaps never in the history of the United States was there a higher percentage of subversion than in this period. Thus while the Alien and Sedition acts were perhaps rather extreme, and there were some real injustices perpetrated, nonetheless there was a very real crisis. However, it did make the Federalist regime very unpopular. It smacked too much of dictatorial policies. And as a result the Alien and Sedition act under Adams helped sink the Federalists in the next election. [00:43:43]