Government and the Economy

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GOVERNMENT AND THE ECONOMY

During the early Republic, both the federal and state governments played a large role in structuring the American economy. Following independence, the United States struggled to replace the British mercantilist system of closed markets, bounties, and limited development with a framework that emphasized economic growth and yet insured stability as well. Paramount to this goal was a preservation of individual liberty and property. Policymakers in the early Republic thus struggled to devise government institutions that would allow entrepreneurial activity to flourish while insuring that republican virtue still held sway in the Republic.

The period from 1789 to 1815 saw the establishment of many permanent institutions that would continue to structure the nation's political and economic framework for most of the nineteenth century. There were two competing philosophies as to the proper role of government in economic growth. On the one hand, the Federalists, led by Alexander Hamilton (1755–1804), championed a strong central state and attempted to enact policies that would use the power of the federal government to encourage the development of agriculture, commerce, and manufacturing. An oppositional ideology, espoused by Thomas Jefferson (1743–1826) and the Democratic Republicans, emphasized the role of government in the economy no less than the Federalists but stressed the participation of state, not federal, officials in growth. Republicans also tended to look westward into the interior of North America for the nation's future economic growth, whereas Federalists highlighted the commercial potential of the Atlantic world. Despite these contradictory tendencies, both parties influenced the shape and character of the federal government's role in the economy for years to come.

creating a national economy

The Federalist-Republican debates had their origins in the earliest years of the United States. One of the biggest drawbacks of the Articles of Confederation was its creation of a decentralized economy in the United States. From 1781 to 1789 states had the power to set duties against the imports of other states, coin their own currency, set their own bankruptcy laws, and levy taxes all by themselves. The Constitution of 1787 remedied this problem by shifting the authority to regulate interstate commerce, protect patents and copyrights, set tariff rates, establish bankruptcy policy, coin currency and set monetary policy, and establish postal services to the new federal Congress. The Constitution was intentionally vague on the issue of slavery, but a compromise struck during the Constitutional Convention insured that the flow of slaves from Africa and the West Indies would remain unimpeded until 1808. The first few sessions of Congress, therefore, established many of the hallmarks of American political economy, for better and for worse. The Tariff Act of 1789, for example, passed easily and immediately established federal duties on certain goods, which would serve as the main revenue-raising device for the federal government for much of the nineteenth century. An excise tax on whiskey, on the other hand, provoked farmers in western Pennsylvania to rebellion in 1794. Regardless of the reception, the Constitution put federal authorities in charge of the basic foundations of the American economy and established the parameters of a national market.

As the first treasurer of the United States, Alexander Hamilton made a significant imprint upon the political economy of the early Republic, and particularly in establishing an activist role for the new federal government in promoting growth. In his Report on the Public Credit (1790), Hamilton recommended that the new government establish financial stability by assuming all of the outstanding national and state debts from the American Revolution. Rather than discount the value of bonds, paper money, and other government issues, Hamilton recommended that the federal government pay face value for the $80 million, in debt, which was about 40 percent of the nation's gross national product in 1790. Doing so, he argued, would legitimize the United States not only in the eyes of its internal creditors, but also in international markets. Hamilton and his Federalist followers believed in the power of a centralized federal state to encourage economic growth and promote international trade. The Federalists openly admired Great Britain's emergent industrial economy and hoped that the United States would one day develop a strong manufacturing sector of its own.

With this goal in mind, Secretary Hamilton recommended the creation of a national bank in order to establish a reliable national currency and to mobilize large amounts of capital for development loans. The bank would be chartered by Congress for a specified number of years; would collect, hold, and pay out government receipts; would hold the new federal bonds and oversee their payment; would be empowered by Congress to issue currency; and would be backed by the government bonds. The proponents of the Bank argued that it should be capitalized at $10 million and that one-fifth of the capital would be provided by the federal government, which would also appoint one-fifth of its directors. Notes of the Bank of the United States would be used for all debts to the United States. The idea was to have the Bank serve the capital needs of both the new federal government and private investors. When the bank opened up for business in July 1791, Americans subscribed about $8 million in the first hour, thus filling the private requirement. The following year, branches opened up in New York, Boston, Baltimore, and Charleston, and in 1805 there were branches in Norfolk, Washington, Savannah, and New Orleans. The first Bank of the United States thus became a centerpiece institution for the Federalist strategy of using the power of government to promote capital formation in the young nation.

The next phase of Hamilton's vision of American political economy was not, however, realized so successfully by the federal government. In December 1792 Hamilton released his Report on Manufactures, in which he advocated federal subsidies for manufactures wherever possible, directly through bounties and indirectly through taxes. Although the Federalists achieved many of their plans for a strong federal government, they were unable to involve it directly in the process of encouraging manufactures. Instead, states assumed the leadership role in encouraging growth in the manufacturing and transportation sectors, mainly through the creation of corporations.

the republicans look west

A change in federal economic policymaking came with the ascendance of the Republicans, led by Thomas Jefferson of Virginia, to the presidency in 1801. Jefferson and his followers are often misrepresented as promoting a nation of farmers only, but their vision of America's future included a commercial and manufacturing community as well. In order to provide this threefold opportunity, especially as it related to land usage, Republicans favored westward expansion and the development of domestic industries rather than an emphasis upon the Atlantic trade. This vision led to the Louisiana Purchase (1803), in which the United States acquired about 800,000 square miles for $15 million—roughly 3.5¢ per acre—from France. Jeffersonians also liberalized the sale of federal lands, which had already been established on rather easy terms by the Land Act of 1796. In 1804 they reduced the minimum tract for purchase by individuals to 160 acres, kept the price at about two dollars an acre, and offered a discount for cash purchases.

The Republican tendency to focus on domestic production rather than international trade pushed the federal government into new avenues of economic promotion. For example, Albert Gallatin (1761–1849), Jefferson's secretary of the Treasury, recommended that the federal government oversee the improvement of rivers that would create an inland water navigation from Massachusetts to North Carolina, building roads to cross the Appalachian Mountains and constructing canals that would link the seaboard with inland cities such as Detroit, St. Louis, and New Orleans. He estimated that this network would cost approximately $16.6 million to build and recommended an additional $3.4 million for smaller local improvements across the United States. Gallatin's plan never came to fruition, and the federal government played a limited role in transportation policy. Nonetheless, the expansionist land policy continued as the federal government sent a host of surveyors to explore the western territories of the United States and continued to sell public lands on easy terms. In 1820 the minimum price fell to $1.25 an acre, and in 1832 the minimum tract size was sliced again to forty acres.

a limited federal role

The political tussle between Federalists and Republicans came to a close in 1815, but not before their debate over the proper role of the government in the economy became well engrained within the nation's political culture. The federal government remained active in economic affairs, but its role was always controversial and contested. The financial difficulties during the War of 1812 (1812–1815), for instance, led Congress to charter the Second Bank of the United States in 1816. The Second Bank succeeded in stabilizing the nation's financial system, but longstanding reservations about the concentration of power and wealth resulted in Andrew Jackson's famous campaign to "slay" the "monster Bank" in the 1830s. When New York State officials opened the 250-mile-long Erie Canal in 1825, they demonstrated the important role of government involvement in transportation projects. But throughout the antebellum period it was state governments, not federal officials, who aggressively pursued these types of projects.

bibliography

Ben-Atar, Doron S. The Origins of Jeffersonian Commercial Policy and Diplomacy. New York: St. Martin's Press, 1993.

Larson, John Lauritz. Internal Improvement: National Public Works and the Promise of Popular Government in the Early United States. Chapel Hill: University of North Carolina Press, 2001.

McCoy, Drew R. The Elusive Republic: Political Economy in Jeffersonian America. Chapel Hill: University of North Carolina Press, 1980.

Nelson, John R., Jr. Liberty and Property: Political Economy and Policymaking in the New Nation, 1789–1812. Baltimore: Johns Hopkins University Press, 1987.

Nettels, Curtis. The Emergence of a National Economy, 1775–1815. New York: Holt, Rinehart, and Winston, 1962.

Sean Patrick Adams

Encyclopedia of the New American Nation