Empire of Liberty: A History of the Early Republic, 1789-1815 (52 page)

Opposition to the Bank of the United States came from two principal sources: from Southern agrarians like Jefferson who never understood banks and hated them, and from the entrepreneurial interests of the state banks who did not like their paper-issuing abilities restrained in any way. In 1792 Jefferson was so angry at Hamilton that he told Madison that the federal government’s chartering of the BUS, which it had no right to do, was “an act of
treason
” against the states, and anyone who tried to “act under colour of the authority of a foreign legislature” (that is, the federal Congress) and issue and pass notes ought to be “adjudged guilty of high treason and suffer death accordingly, by the judgment of the state courts.” Obviously this was one of those times that Madison was referring to when he said that Jefferson, like other “men of great genius,” had a habit of “expressing in strong and round terms, impressions of the moment.” Jefferson never really accepted the idea of a bank (“a source of poison and corruption”) or the paper it issued. Such paper, he said, was designed “to enrich swindlers at the expense of the honest and industrious part of the
nation.” He could not comprehend how “legerdemain tricks upon paper can produce as solid wealth or hard labor in the earth. It is vain for common sense to urge that
nothing
can produce but
nothing
.”
⁵⁴

But the more important enemies of the BUS were the state banks. By regularly redeeming the outstanding notes of the state banks, the BUS had checked their ability to issue notes too far in excess of what they could cover with specie, that is, their reserves; and this had become a deep source of anger. In addition, the state banks resented the monopolistic position the BUS had in holding the national government’s deposits and condemned it for being Federalist and British-dominated. Jefferson agreed. If they had to exist, then, as he told Gallatin in 1803, he was “decidedly in favor of making all the banks republican by sharing [the federal government’s] deposits amongst them in proportion to the dispositions they show,” by which he meant their loyalty to the Republican cause.
⁵⁵
When the twenty-year charter of Hamilton’s BUS was about to expire in 1811, it was not surprising that these state banks were determined that it would not be renewed.

Despite the opposition of President Jefferson and later President Madison to the BUS, Gallatin, who knew something about banks and had created in 1793 a state bank for Pennsylvania modeled on the BUS, urged that the Bank of the United States be issued a new charter. He knew that the issue was tricky, that the Virginia Republicans regarded the Bank as a British bank, and he worried that the question might become “blended with or affected by . . . extraneous political considerations.” As early as 1808 the Bank applied for renewal of its charter, and Gallatin earnestly supported the application, offering to enlarge the number of stockholders so as to include fewer foreigners. Congress delayed dealing with the issue until 1811. By this time the radical Republican press was excoriating Gallatin for showing “alarming symptoms in the English style.”
⁵⁶
Despite Gallatin’s enthusiastic backing of a new charter for the BUS, the Congress by the closest of votes denied the re-chartering, and the state banks had their victory and the national government’s deposits. Gallatin warned
that the switch to the state banks would be “attended with much individual, and probably with no inconsiderable public injury,” and questioned “why an untried system should be substituted to one under which the treasury business had so long been conducted with perfect security,” but all to no avail.
⁵⁷

Although Gallatin later blamed the defeat more on the Republican ideologues than on pressure from the state banks, the result was that the federal government distributed its patronage among twenty-one state banks and thus effectively diluted its authority to control either the society or the economy.

With the demise of the BUS, America suddenly went wild in creating new banks. Seventy-one banks, including the BUS, had been created in the two decades between 1790 and 1811. In the next five years 175 additional state-chartered banks were established. These banks, unlike the original Bank of North America or the BUS, were not just sources of credit for government, not just commercial banks, handling short-term credit for merchants, but banks for all the different economic interests of the society that wanted easy, long-term credit—mechanics and farmers as well as governments and merchants. In 1792 the Massachusetts legislature had required the second state bank it created to lend at least 20 percent of its funds to citizens living outside of the city of Boston in order that the bank “shall wholly and exclusively regard the agricultural interest.”
⁵⁸
The state charter setting up the Farmers and Mechanics Bank of Philadelphia in 1809 had stipulated that a majority of the directors be “farmers, mechanics, and manufacturers actually employed in their respective professions.” Many new charters had similar requirements.
⁵⁹

And these banks were to be located not merely in the large urban centers such as Philadelphia or Boston but also in such outlying areas as Westerly, Rhode Island, where a new bank established in 1800, called Washington Trust, justified itself by declaring that existing state banks in Providence, Newport, and Bristol were “too remote or too confined in their operations to diffuse their benefits so generally to the country as could be wished.” By 1818 the tiny state of Rhode Island, one of the most
commercially advanced in the nation, had twenty-seven banks. In 1813 the Pennsylvania legislature in a single bill authorized incorporation of twenty-five new banks. After the governor vetoed this bill, the legislature in 1814 passed over the governor’s veto another bill incorporating forty-one banks. As early as 1793 John Swanwick of Philadelphia had envisioned banks sprouting up in all the provincial towns of the state. “Their number will be so far multiplied,” he told the Pennsylvania legislature, “that it will be no longer a favor to obtain discounts.” By the end of the second decade of the nineteenth century it seemed to one observer that nearly every village in the country had a bank; wherever there was a church, a tavern, and a blacksmith, one could usually find a bank as well. By 1818 Kentucky had forty-three new banks, two of them in towns that had fewer than one hundred inhabitants.
⁶⁰

It was the proliferation of these state-chartered banks and their issuing of notes that enabled the states to have paper money after all—despite the Constitution’s prohibition in Article I, Section 10 against the states themselves issuing bills of credit.
⁶¹
Indeed, since, unlike today, the federal government did not issue any paper money, without these increasing bank notes (that is, credit) the society could never have commercialized as rapidly as it did. By 1815 over two hundred banks had deposits and note liabilities of about $90 million backed by only $17 million of specie.
⁶²
In 1808 the Farmers’ Exchange Bank of Gloucester (now Glocester), Rhode Island, emitted over $600,000 in paper; it had, however, only $86. 45 in specie to support these notes. This was too much, even for Rhode Island, which had a notorious reputation for excessive paper emissions or loose credit; and in 1809 the state legislature closed the bank, making it the first bank to fail in United States history.
⁶³

The American economy floated on paper. “The circulation of our country,” Senator James Lloyd of Massachusetts declared in 1811, “is at present emphatically a paper circulation; very little specie passes in exchange between individuals.” With this extraordinary multiplication of banks, entrepreneurial farmers in the backcountry had the money and
the sources of credit they had long desired, and the agrarian unrest that had troubled the rural areas in the aftermath of the Revolution tended to subside. Indeed, Americans had created a modern financial system that was the equal of any in the world. According to two economic historians, the United States in the early nineteenth century became “history’s most successful emerging market, attracting the capital of investors in older nations seeking higher returns.”
⁶⁴

R
EPUBLICANIZING THE BANKING SYSTEM
may have become important to Jefferson, but shrinking the debt was far more crucial: it went to the heart of the Republicans’ conception of government. Precisely because Hamilton had regarded the permanent federal debt as a principal source of support for the national government, Jefferson and the Republicans were determined to pay it off—and quickly. More important, they regarded the ability of governments to borrow money as the major means by which nations carried on war, something they wished to avoid. In 1798 Jefferson actually thought of amending the Constitution by “taking from the federal government the power of borrowing.” He knew “that to pay all proper expences within the year would, in case of war, be hard on us.” But the alternative was worse, “ten wars instead of one. For wars would be reduced in that proportion.”
⁶⁵
But in 1801 he knew such a proposal would be controversial, and the same end could be accomplished by severe economy.
⁶⁶
Each year of his presidency he habitually called for further reductions in the debt. If the public debt were not extinguished, he warned Gallatin in 1809, “we shall be committed to the English career of debt, corruption and rottenness, closing with revolution. The discharge of the debt, therefore, is vital to the destinies of our government.”
⁶⁷

By 1810, even with the $15 million in cash and claims spent on the Louisiana Purchase, the Republicans had reduced the federal debt to half of the $80 million it had been when they took office. Jefferson was obsessed with the power of debt. It was not only a matter of preventing a present generation from burdening its descendants or of reducing the wherewithal of waging war. He also wanted to destroy what he considered
an insidious and dangerous instrument of political influence. Eliminating the public debt was part of his ultimate desire to create an entirely new kind of government, one without privilege or patronage.

Perhaps nothing illustrates Jefferson’s radical conception of government better than his problems with patronage. In the radical Whig-country view of politics, patronage—appointing people to office and creating clients—was corruption. Jefferson believed that Hamilton, like all the eighteenth-century English ministers of the crown, had built support for his program by essentially buying people off—giving them offices or other favors. When Jefferson assumed the presidency in 1801, he was determined to do things differently, to create a republican government that was free of corruption.

The problem was that not all Republicans took his assault on patronage as seriously as he did. Many of them, alarmed by his suggestion in his inaugural address that “we are all republicans, we are all federalists,” thought that he might not thoroughly oust the enemy. Some were reluctant to join a government in which they might have few sources of influence. With the slashing reductions contemplated for the navy, for example, Jefferson had to go to his fifth choice before he got Robert Smith of Maryland to serve as secretary of the navy. Jefferson tried to assure his colleagues that the conciliatory words in his inaugural address referred only to the large body of Federalists, not their leaders. But the Republicans wanted more than just a few officers removed. “Elective government would then be contemptible indeed,” declared William Duane’s
Aurora
, “if a change of a few superior individuals, without regard to the virtues or integrity of subordinate agents, were to be the only consequences.”
⁶⁸

Jefferson felt beleaguered by this sort of pressure. “It is the business of removal and appointment,” Jefferson grumbled to John Dickinson in June 1801, “which presents the serious difficulties. All others compared with these, are as nothing.” Time and again the president found himself caught between his conscientious determination to avoid anything resembling Hamilton’s corruption and the pressing demands of his fellow Republicans that he give them the offices they deserved. In his reply to a group of New Haven merchants in July 1801 he suggested the Republicans were owed at least “a proportionate share in the direction of the public affairs,” by which he seems to have meant about one-half the offices. His Republican colleagues, however, interpreted the phrase to mean something closer to three-quarters, and this became the rule. The
Federalists were furious and castigated the president for being “the head of a party & not of the nation.” No wonder that Jefferson complained that the removal and appointment of officeholders was the heaviest burden of his presidency.
⁶⁹

Of course, once the Federalists were replaced by Republicans, there was no further need for the Republicans to compromise on this issue of patronage, and removals from office for political reasons came to an end. Under Jefferson and his Republican successors, James Madison, James Monroe, and John Quincy Adams, the holders of federal government appointments became a permanent officialdom of men grown old in their positions.

Still, many Republican congressmen remained eager to isolate themselves from all executive influence in their desire to prevent the Congress from becoming “a corrupt, servile, dependent and contemptible body” like the British House of Commons. With Jefferson himself being “averse to giving contracts of any kind to members of the Legislature,” Congress in 1808 explicitly forbade this practice in order to maintain, as one Virginia congressman put it, “the purity of the Representative body.”
⁷⁰
Despite this legislative isolation, however, Jefferson was able personally to direct Congress and the Republican party to an extraordinary degree. He used a combination of his initial patronage and some improvised forms of political influence—in particular his use of confidential legislative agents and his weekday legislative dinner parties with congressmen, usually eight in number with no women present.