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The Early Commercial Republic, 1789-1815

After the Constitution was ratified, a new government was elected and took office in 1789. The administration of President George Washington adopted many economic policies that helped to develop the new nation. Alexander Hamilton, Washington’s Secretary of the Treasury, proposed a program of federal economic promotion. He would secure the republic’s credit by establishing a fund to pay interest on the national debt, and to take over the debts of the states remaining from the Revolutionary War. He proposed that Congress incorporate a national bank and raise revenue to protect American industries from foreign competition by a tariff. He would develop the nation’s commerce through “internal improvements” of roads and canals. He sought to maximize American trade with Great Britain, for a large part of the postwar economic depression derived from exclusion from the imperial trade.

These Federalist policies provoked the opposition of Thomas Jefferson, James Madison, and their followers in the “Democratic Republican” party. Predominantly southern and western, these men favored an agrarian economy composed of small, independent landowners. They suspected that Hamilton’s policies would create an urban, northeastern aristocracy of bankers and speculators, beholden to the British. They accused Hamilton of trying to recreate the corrupt political economy associated with Robert Walpole in eighteenth-century Britain. They believed that Hamilton’s policies went beyond the power of Congress under the Constitution, which they interpreted narrowly – especially the Necessary and Proper Clause at the end of the list of Congress’s enumerated powers.

They grudgingly accepted the treaty that John Jay had negotiated in 1794 to expand trade with Great Britain, which they regarded as pro-British when it passed the Senate by a single vote. The first tariff (a tax on imports to make American products more competitive) under Hamilton’s plan was only mildly protective, and Congress did not adopt Hamilton’s internal improvements scheme. When the Republicans won control of the government in the election of 1800, they left the Bank of the United States alone until its charter expired in 1811. At the same time, they largely left the Federalist judiciary, led by Chief Justice John Marshall, unmolested. Particularly in the nationalistic period after the War of 1812, the Marshall Court imposed important limits on state interference in property rights.

The first quarter-century of the republic were prosperous years. The Constitution provided an extensive free-trade domestic market, and Americans were able to engage in profitable foreign trade. The nation’s population grew from under four million in 1790 to nearly ten million in 1820, and it doubled in area by the Louisiana Purchase of 1803. Per-capita income levels recovered from postwar lows. The European powers were almost constantly at war with one another after the French Revolution broke out in 1789. These wars divided Americans, as Federalists generally opposed the French and supported Great Britain while the Jeffersonian Republicans favored France. Both parties tried to remain neutral, claiming rights under the law of nations to trade with both sides. The Federalists prepared for war against France, and they passed measures against French partisans in the U. S. (which included the notorious Alien and Sedition Acts of 1798), but remained at peace. As George Washington put it in his Farewell Address of 1796, “The great rule of conduct for us in regard to foreign nations is in extending our commercial relations, to have with them as little political connection as possible”(George Washington, “Farewell Address,” September 17, 1796).

His successor, John Adams, resisted popular and partisan clamor for what he knew would be a costly war with France. Jefferson and Madison were reluctant to prepare for war, and they hoped that the belligerents’ dependence on American commerce could compel them to respect our neutral rights. Congress went to the extreme of cutting off all American exports to foreign countries in the Embargo Act of 1807. President Jefferson proposed enforced this act vigorously, even attempting to prosecute smugglers for treason. The courts held that Congress could embargo trade, but that violation of the embargo was not treason. James Madison continued Jefferson’s polices in his own presidency leading to the War of 1812 against Great Britain. Fortunately for the U.S., British exhaustion by 1815 led them to make generous peace terms that confirmed American independence.

The war also taught the Republicans that the nation needed more national institutions for self-defense-they began to call for what they used to fear as Federalist “consolidation.” Its lack of a national bank made financing the war difficult. We were at war with our principal supplier of manufactured products, England. New England had previously relied on foreign trade and opposed tariff protection of domestic industry. The embargo forced it to adopt manufacturing and it became a tariff advocate. The American military suffered from a decentralized militia-based model and lack of internal transportation routes. Thus the war brought about a revival of Hamiltonian national mercantilism-the belief that the federal government should actively shape the development of the economy-among the Republicans, now known as the National Republicans. Led by Henry Clay in Congress and John Quincy Adams as president, they pressed for what Clay called the “American System” of protective tariffs in contrast to the “English System” of free trade. President Madison came around to accept the constitutionality of a national bank, but drew the line at internal improvements.

The Federalists under Alexander Hamilton began the debate over the proper role of the federal government in the national economy. That issue, especially the policies concerning tariffs, banks, and internal improvements, was at the center of American politics well into the twentieth century. Before the Civil War, the decentralized principles of the Jeffersonians and Jacksonians predominated, but the centralizing tendency of the Federalists and Whigs would prevail after the Civil War.

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