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tion of the deferred six per cents to begin in 1802. These recom-
mendations, with others strengthening the organization of the
sinking fund, were adopted by Congress. The appropriation of
the revenues and resources in question was made permanent
" until the whole of the present debt of the United States " should
be reimbursed ; " and the faith of the United States is hereby
pledged that the income or funds aforesaid shall inviolably remain,
and be appropriated and vested as aforesaid, to be applied to the
said reimbursement and redemption in manner aforesaid until the
same shall be fully and completely effected." ^ Under these
provisions, the redemption of the six per cent stock began from
January i, 1795, by a series of payments fixed at eight per cent
per annum for principal and interest ; and the stock was thus con-
verted from an ordinary six per cent of indefinite duration " into
an annuity of eight per cent per annum for a period of somewhat
less than twenty-four years." Hamilton, in proposing this devo-
tion of revenue to the redemption of debt, had intended to make
the arrangement a contract with creditors, not to be violated.
" The intent is to secure, by all the sanctions of which the subject
is susceptible, an inviolable application of the fund, according to
its destination. No expedients more powerful can be devised for
this purpose than to clothe it with the character oi private property
and to engage absolutely the faith of the government by making
the application of it to the object 3. part of the contract with the
creditors^ ^ Wolcott, Hamilton's successor, in his communication

^ " State Papers, Finance," i. 320.

* Act of March 3, 1795, § 9, " Statutes at Large," i. 435.

^ " State Papers, finance," i. 332. A little farther on is a plain allusion to the diver-
sion of the English sinking fund from its purpose prior to the act of 1786.



88 ESSAYS

to the House, January 26, 1796,^ observed that, "as the injunc-
tions of the law upon the commissioners of the sinking fund are
unconditional, and as permanent funds have been vested and
appropriated, it is conceived that a successive reimbursement
annually of the debt before mentioned has become an irrevocable
stipulation with the creditors." Gallatin also recognized a pledge
of the public faith in this action ; and the change made in the
sinking fund legislation by his advice in 1802^ carefully saved all
rights of creditors under previous acts, and he and his successors
therefore continued, in war as well as in peace, the reimbursement
undertaken in 1795.^

The idea, then, which Hamilton had in common with Pitt, and
of which Pitt's action was the practical illustration, was to couple
with every debt the means for its extinguishment,* to be applied
to that purpose, whatever the condition of the Treasury otherwise.
This could not prevent debt from accumulating, if expenditure was
excessive ; but it insured the good credit of the loans to which the
plan was applied, and the system, if adhered to, tended to keep
constantly before the legislature the necessity of having a stated
revenue above ordinary expenses. The application of this idea to
an existing debt Hamilton was able to provide for more effectively
than Pitt, owing to the peculiar form given to the obligations of
the United States ; but in neither case did it prove to be possible
to guarantee sufficient provision for such fresh expenditure or debt
as the legislative will might insist upon. Less than justice has
usually been done to the common sense of both of these great
statesmen. There is nothing to show that either of them in adopt-
ing his system had any delusion as to the impossibility of paying
debt without money, or any notion that compound interest could

^ " State Papers, Finance," i. p. 381.

2 Act of April 29, 1802, "Statutes at Large," ii. 167. See especially §§ 3, 7.

2 For the rate at which stated payments of eight per cent per annum extinguished
the capital as well as defrayed the interest, see the table given by Wolcott, " State
Papers, Finance," i. 405 ; compare also the act of April 28, 1796, § I. Inspection of
the table shows the application of the compound interest. Obviously, Gallatin's system
of devoting a fixed sum for interest and redemption of principal together, thus increasing
the payment of principal as the sum required for interest diminished, was an application
of the same method to the whole debt instead of to a particular part thereof.

* Hamilton's "Report on Public Credit" of 1795 gives in a foot-note a significant
reference to this provision of the English act of 1792. See "State Papers, Finance,"
i- 33'-



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 89

be made to supply the place of an adequate revenue or even to
conceal its absence. Pitt, at the time when Hamilton took him as
his example, had a surplus ; and Hamilton hoped for one, and
upon good grounds. Apply this surplus effectively to present
debt, and then contract no more without at the same time making
provision from new sources for its interest and ultimate payment,
— this was the system on which both proceeded. In the one case
the system was swamped by the gigantic wars of the French
Revolution ; in the other it was made useless by the astonishing
growth of national revenue ; but in neither case, under the con-
ditions and for the purposes of the time, was it the pure folly
which it is often represented to have been.

The third point in Hamilton's financial system which we have
to consider here is the establishment of a Bank of the United
States. This measure was referred to by Hamilton in his " Report
on Public Credit " as a part of his scheme not then fully matured,
and was presented in form in December, 1790, under a resolution
of the House adopted in the previous August, calling upon the
Secretary to report " such further provisions as may, in his opinion,
be necessary for establishing the public credit." In stating the
advantages to be gained from a bank he dwelt especially on the
influence of a bank in quickening and virtually increasing the pro-
ductive capital of the country and its utility as a financial agency
of the government. It was then not far from eleven years since
the probable date of his draft of a letter to Morris ^ urging the
establishment of a Bank of the United States by the Confederation,
and not far from ten years since his letters to Duane, Sears, and
again to Morris, discussing and enforcing a similar proposition.
The claim of priority in the conception of a national bank, which
has been rested on these letters, is hardly a valuable one. The
letters were written at the moment when the continental paper had

1 The draft of a letter to Morris, Hamilton's "Works" (Lodge's edition), iii. 61, is
inserted in the earlier edition of the " Works," i. 116, as if written between December,
1779, and March 17, 1780. A few important blanks are left in it to be filled later, and
the manuscript is said to be otherwise defective. It seems not to have been referred to
in subsequent correspondence between Hamilton and Morris, and may then perhaps be
the draft of an intended letter, never sent, but interesting as showing the state of Hamil-
ton's opinions on the subject when he was twenty-three years old. If sent, the letter
was intended to be anonymous, as appears from its last paragraph.



90 ESSAYS

become practically worthless, and Congress was at its wits' end.
The schemes proposed by Hamilton were perhaps no wilder than
were offered by others, but he would have been slow in 1790 to
recognize their affinity with the maturely deliberated proposition
of that year. It is enough to say that the second and more care-
fully elaborated of the letters to Morris^ proposes a bank, the
stock of which, to the extent of at least one-third, might be paid
for in landed security, the notes of 20s. and upward to bear inter-
est, and the places of redemption to be in the interior, making
"applications for payment of bank-notes less convenient."^
Among the advantages of the scheme, besides the loans to be
made to Congress, was the familiar attraction of all land-bank
schemes, that proprietors could have the use of their land and also
the use of a cash representative of its value.^

The earlier schemes, however, mark the length of time for
which Hamilton's mind had been busied with the idea of securing
financial reUef from a great banking institution of some sort ; * and
his letters show his interest in the working of the great European
banks. Of these there was but one which could be an available
model. The French Caisse d'Escompte was embarrassed by its
close connection with the government, hardly tried to conceal the
real inconvertibility of its paper, and was fast approaching ruin.
The Bank of Amsterdam, still in good credit, was organized upon
a plan adapted only for an opulent community, rich in specie, and
indifferent to the use of bank credit in its usual forms. There
remained the Bank of England, a successful institution, strengthen-
ing private enterprise, aiding the government,^ and regulating cur-
rency upon a sound basis. Without presenting this formally as

1 April 30, 1781, Hamilton's "Works" (Lorlge's edition), iii. 82.

2 Ibid., p. 118. 3 ii)ij^^ p, 107.

* The constitution of the Bank of New York, adopted March 15, 1784, given by
Domett, " History of the Bank of New York," p. 11, was written by Hamilton, but con-
tains little except the formal provisions necessary for determining the duties and respon-
sibilities of officers, rights of stockholders, and other details incident to the organization
of a moneyed institution. The act of incorporation {Ibid., p. 122), passed March 21,
1791, contains, however, a series of provisions relating to the banking powers of the
corporation, which f(jllow closely even the phraseology of the act passed by Congress a
month before, estaJjlishing the Bank of the United States.

^ In 1781, Hamilton, writing to Morris, and referring to the Bank of England, says,
" 'Tis by this alone she [England] now menaces our independence." " Works " (Lodge's
edition), iii. loi.



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 91

an example,^ he shaped his own proposition according to the lines
of the Bank of England, with the changes which the circumstances
of the United States required.

The primary question as to the connection of the government
with the proposed bank is argued and settled by Hamilton in his
report in accordance with the English precedent and directly
against the other European cases. He concludes in favor of an
institution in private hands and under private direction, and to be
influenced as little as possible by public necessity. "The keen,
steady, and, as it were, magnetic sense of their own interest as
proprietors, in the direction of a bank, pointing invariably to its
true pole, the prosperity of the institution, is the only security
that can always be relied upon for a careful and prudent adminis-
tration." No profit to be gained by the state from banking could
in his mind be set against this advantage. The state might be an
owner of stock, though not of a principal part of it, and ought to
exercise a supervision for the good of the community ; but he
admitted no real departure from the theory of the Bank of Eng-
land as an essentially private establishment employed as a public
agent. This independence of the executive he secured by forbid-
ding loans of serious amount for the use of the government, unless
specially authorized by law, as was done by the Bank of England
charter until the passage of Mr. Pitt's act in 1793.^ As for the
holding of public securities as an investment of the capital of the
bank, Hamilton was establishing his bank in the presence of a debt
already contracted, instead of using it as a means of borrowing, as
the Bank of England had been used. It was enough for his pur-
pose, then, to allow three-fourths of the stock to be paid for by
transfer of public securities, these to be held until the needs of the
bank might require their sale.

It has been remarked already that for Hamilton's purposes a
bank was needed of a different kind from the Bank of Amsterdam.
A bank of discount, deposit, and issue was required for the trans-
action of general business, public and private. In the summary

^ The Bank of England is not mentioned in the " Report on a National Bank," ex-
cept in a passage near the beginning, where Hamilton says that public banks have suc-
cessively obtained in Italy, Germany, Holland, England, and France, as well as in the
United States. The omission appears to be studied.

^ 23 George III., c. 32. See McLeod, "Theory and Practice of Banking," i. 445.



92



ESSAYS



of his plan given in his report, Hamilton makes a brief statement
as to the powers of the proposed bank as follows : —

VII. The company may sell or demise its lands and tenements, or may sell
the whole or any part of the public debt, whereof its stock shall consist, but shall
trade in nothing except bills of exchange, gold and silver bullion, or in the sale
of goods pledged for money lent, nor shall take more than at the rate of six per
centum per annum upon its loans or discounts.

The bill offered in the Senate was drawn by Hamilton and,
with few changes, became a law, and we there find this important
provision amplified in terms which may fairly be set side by side
with a similar provision in the Bank of England Act of 1694.

{Act of Febrtcary 25, 1791.] {_Act of ^ Will, and Mary, c. 20.]

The said corporation may sell any § xxvii. [That the corporation shall

part of the public debt whereof its stock not deal in Goods, Wares, or Merchan-

shall be composed, but shall not be at dise.] § xxviii. Provided, That noth-

liberty to purchase any public debt ing herein contained shall in any ways

whatsoever ; nor shall directly or in- be construed to hinder the said Corpora-

directly deal or trade in anything, ex- tion from dealing in Bills of Exchange,

cept bills of exchange, gold or silver or in buying or selling Bullion, Gold or

bullion, or in the sale of goods really Silver, or in selling any Goods, Wares,

and truly pledged for money lent and or Merchandise whatsoever, which shall

not redeemed in due time ; or of goods really and bona fide be left or deposited

which shall be the produce of its lands. with the said Corporation for Money

Neither shall the said corporation take lent and advanced thereon, and which

more than at the rate of six per centum shall not be redeemed at the Time

per annum, for or upon its loans or dis- agreed on, or within three Months after,

counts. or from selling such Goods as shall or

may be the Produce of Lands purchased
by the said Corporation.

Other passages also might be cited to show that the framer of
the act incorporating the Bank of the United States had the Eng-
lish acts open before him ; but, after all, the important fact is that
in both there was the same purpose of establishing a private com-
pany with general banking powers, to cooperate with the Treas-
ury. The limits and safeguards thrown around the use of these
powers were few in both cases, with differences mainly to be
accounted for by differing conditions. In each, the redemption of
notes in specie was required ; and the amount of the issue was
limited in the charter of the Bank of England by forbidding debts
in excess of the capital, and in the charter of the Bank of the



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 93

United States by forbidding the debts exclusive of deposits to
exceed the capital. The prohibition of investment in real estate
was inserted by Hamilton,^ and with good reason, considering the
condition of the United States at that date.

Closing here the present examination of Hamilton's system, it
must be added, in order to avoid misconception, that it is in the
grouping of these measures so as to make a consistent scheme for
the accomplishment of a definite purpose that we find Hamilton's
best title to rank as a great financial statesman. He had the
insight and cheerful resolution which enabled him to see and draw
out the still latent strength of the new country, the knowledge of
the world necessary for bringing together the best of tried expedi-
ents, and the breadth of conception required for shaping a system
which should make growth rapid and burdens lighter, by the
creation of public and private credit. No statesman could have a
greater task set for him, and political science can hardly have in
store any greater triumph than this apphcation of the experience
of other men and other nations. Details may be criticised, and
yet as a whole his measures meet the real test of financial sound-
ness, representing in their great features the best that could be
done under the conditions then existing. And in this as in other
parts of our political system his impress was lasting. " The results,
legislative and administrative," says the biographer of his greatest
successor, " were stupendous and can never be repeated. A gov-
ernment is organized once for all, and until that of the United
States fairly goes to pieces no man can do more than alter or
improve the work accomplished by Hamilton and his party."

^ Hamilton's letter to Church, March 10, 1784, condemns Chancellor Livingston's
scheme of a land bank, and shows that Hamilton had then outgrown the ideas expressed
in his letter to Morris in 1781. See Hamilton's "Works" (J. C. Hamilton's edition),
i. 414.



THE DIRECT TAX OF 1861I

The direct tax laid by the act of Congress of August 5, 1861,
was the fifth levy which has been made under the provisions of
the Constitution, requiring that " representation and direct taxes
shall be apportioned among the several states . . . according to
their respective numbers." There would be little risk in predict-
ing that this will also be the last resort to a method of taxation
which the framers of the Constitution thought important enough
to hold a place in one of the difificult compromises embodied in that
instrument. The insufficiency of the method for revenue purposes,
the confusion which has arisen as to the meaning and incidence
of a direct tax under the Constitution, the extraordinary inequali-
ties which grew out of the circumstances under which the last levy
was made, and the really insoluble questions raised as to the effect
which refunding the tax would have in mitigating or aggravating
those inequalities, make it altogether probable that, in any future
stress of fortune, relief for the Treasury will be sought anywhere
else rather than in a resort to this discredited source.

The phrase " direct taxation " appears to have been introduced
in the Convention of 1787 by Gouverneur Morris, on July 12,^
when he made the motion, which was carried, " that direct taxation
ought to be proportioned to representation." The Convention, per-
haps, had no clear opinion as to the precise meaning of the words
here used;^ but it is plain that Morris had in mind some well-
marked distinction between direct and indirect taxes. He had
proposed at first simply that " taxation shall be in proportion to

^ Quarterly Journal of Economics, 1v\-^^ 1889.

2 The use of the same expression in what purports to be the draft of a Constitution
offered by Mr. Pinckney, May 29, need not be considered, in view of the plainly garbled
text of that document. Elliot, "Debates," v. 130, 578.

3 Thus, on August 20, when the report of the Committee of Detail was under dis-
cussion, " Mr. Kinf; asked what was the precise meaning of direct taxation. No one
answered." " Madison's Debates," in Elliot, v. 451.

94



THE DIRECT TAX OF 1861 95

representation." To this it was objected that, although just, this
plan might be embarrassing and " might drive the legislature to
the plan of requisitions " ; and Morris thereupon, admitting that
objections were possible, " supposed they would be removed by
restraining the rule to direct taxation. With regard to indirect
taxes on exports and imports and on consumption, the rule would
be inapplicable." Wilson also saw no way of carrying Morris's
plan into execution, " unless restrained to direct taxation " ; and
Morris then modified his motion, with the result that the phrase
" direct taxes " passed into the Constitution.^ It is clear that in
Morris's understanding, and in Wilson's as well, none but direct
taxes could be levied by an apportionment among the states, the
others named requiring to be laid by a general rate.

From what source, then, did Morris and Wilson derive this
classification, which set down as direct certain taxes having this
convenient characteristic of being readily apportioned among the
states .'' The answer to this question is, no doubt, to be found in
Hamilton's suggestion that the writings of the French economists
of the eighteenth century were the source.^ The doctrine that
agriculture is the only productive employment, and that the net
product from land, to be found in the hands of the landowner, is
the only fund from which taxation can draw without impoverishing
society, led them habitually to class taxes as direct, when laid im-
mediately upon the landowner, and as indirect, when laid upon
somebody else, but in their opinion destined to be borne ultimately
by the landowner. This distinction between direct and indirect
taxation, resting upon the supposed method of incidence upon
a single class of persons, is fully developed and used by Quesnay,
Mercier de la Riviere, Dupont de Nemours, and Turgot. It was
a necessary result of their reasoning, became familiar in all the
discussions of the school in France, and, we can hardly doubt, was
carried to the knowledge of readers in political science in other
countries, during the short-lived preeminence of the Physiocrats.^

^ Elliot, V. 302.

2 See his brief as counsel for the United States in the Carriage Tax case, Hylton v.
United States, Hamilton's " W^orks," vii. 845.

^ Adam Smith did not adopt their use of direct and indirect, because he rejected
the reasoning on which it rested ; and he does not appear to have formally classified
taxes under these heads upon any other principle, although he occasionally uses the
terms " direct," " directly," and their opposites, with a near approach to their modern use.



96 ESSAYS

As for the kind of taxes to be classed as direct, there was not
complete agreement. Necessarily, taxes upon land or its returns
were set down as direct taxes, and so, too, taxes upon commodities,
or consumption, were called indirect. Taxes upon persons, how-
ever, do not appear to be regarded by Quesnay, Dupont de Ne-
mours, or Mercier de la Riviere as direct. The writer last named,
after saying that the fund for taxation is in the hands of the land-
owner, and that to draw from it otherwise than directly is a sub-
version of the natural order of society, lays down the principle that
" la forme de I'impot est indirecte lorsqu'il est etabli ou sur les
personnes-memes ou sur les choses commerciables." ^ In Turgot's
writings, however, we find taxes upon persons occasionally classed
as direct. Thus, in his " Plan d'un Memoire sur les Imposi-
tions,"^ he says of the forms of taxation : —

II n'y en a que trois possibles : —

La directe sur les fonds.

La directe sur les personnes, qui devient un imp6t sur I'exploitation.

L'iniposition indirecte, ou sur les consommations.

And in the fragment which we have of his " Comparaison de
ITmpot sur le Revenu des Proprietaires et de ITmpot sur les Con-
sommations," ^ a memoir prepared for the use of Franklin, a careful
analysis of the same purport is made, although the point of formal
classification is not reached. Of all writers upon economics in
1787,* Turgot was perhaps the one most likely to have the ear of
American readers ; and, of Americans, Gouverneur Morris and
James Wilson were as likely as any to give him their attention.
The former had already formed that familiar acquaintance with
French literature and politics which made possible his singular
career in Paris a few years later, and Wilson had been from 1779
to 1783 accredited as advocate-general of the French nation in the
United States. There was, then, an easy and a probable French

1 " L'Ordre Naturel des Societc-s Politiques," in Daire's " Physiocrates," p. 474. For
Quesnay's use of the terms in question, see Daire, i. 83, 127; and for Dupont de
Nemours', ibid., ii. 354-358.

2 Daire, i. 394 ; and see also 396.
' Daire, i. 409.

* Dupont de Nemours published his " Memoires sur la Vie ct les Ouvrages de M,
Turgot" (i6mo, 2 parts, pp. 156 and 216) in Philadelphia and Paris, in 1782, the year



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