Nineteenth-century America was the closest thing to capitalism—a system in which government is limited to protecting individual rights—that has ever existed. There was no welfare state, no central bank, no fiat money, no deficit spending to speak of, no income tax for most of the century, and no federal regulatory agencies or antitrust laws until the end of the century. Consequently, total (federal, state, and local) government spending averaged a mere 3.26 percent of Gross Domestic Product (GDP).1 The Constitution’s protection of individual rights and limitation on the power of government gave rise to an economy in which individuals were free to pursue their own interests, to start new businesses, and to create as much wealth as their ability and ambition allowed. This near laissez-faire politico-economic system led to the freest, most innovative, and wealthiest nation in history.
Since the beginning of the 20th century, however, capitalism and freedom have been undermined by an explosion in the size and power of government: Total government spending has increased from 6.61 percent of GDP in 1907 to a projected 45.19 percent of GDP in 2009;2 the dollar has lost more than 95 percent of its value due to the Federal Reserve’s inflationary policies; top marginal income tax rates have been as high as 94 percent; entitlement programs now constitute more than half of the federal budget; and businesses are hampered and hog-tied by more than eighty thousand pages of regulations in the Federal Register.
What happened? How did America shift from a predominantly free-market economy to a heavily regulated mixed economy; from capitalism to welfare state; from limited government to big government? This article will survey the progression of laws, acts, programs, and interventions that brought America to its present state—and show their economic impact. Let us begin our survey by taking a closer look at the state of the country in the 19th century.
America’s Former Free Market
The Constitution established the political framework necessary for a free market. It provided for the protection of private property (the Fifth Amendment) including intellectual property (Article I, Section 8), the enforcement of private contracts (Article 1, Section 10), and the establishment of sound (gold or silver)3 money (Article I, Sections 8 and 10). It prohibited the states from erecting trade barriers (Article I, Section 9), thereby establishing the whole nation as one large free-trade zone. It permitted direct taxes such as the income tax only if apportioned among the states on the basis of population (Article 1, Sections 2 and 9), which made them very difficult to levy.4 Finally, it specificallyenumerated and therefore limited Congress’s powers (Article I, Section 8), severely constraining the government’s power to intervene in the marketplace.
Federal regulatory agencies dictating how goods could be produced and traded did not exist. Rather than being forced to accept the questionable judgments of agencies such as the FDA, FTC, and USDA, participants in the marketplace were governed by the free-market principle of caveat emptor (let the buyer beware). As historian Larry Schweikart points out:
merchants stood ready to provide customers with as much information as they desired. . . . In contrast to the modern view of consumers as incompetent to judge the quality or safety of a product, caveat emptor treated consumers with respect, assuming that a person could spot shoddy workmanship. Along with caveat emptor went clear laws permitting suits for damage incurred by flawed goods.5
To be sure, 19th-century America was not a fully free market. Besides the temporary suspension of the gold standard and the income tax levied during the Civil War, the major exceptions to the free market in the 19th century were tariffs, national banking, and subsidies for “internal improvements” such as canals and railroads. These exceptions, however, were limited in scope and were accompanied by considerable debate about whether they should exist at all. Alexander Hamilton, Henry Clay, and Abraham Lincoln supported such interventions; Thomas Jefferson, Andrew Jackson, and John Tyler generally opposed them. These interventions (except for tariffs) were, as Jefferson, Jackson, and Tyler pointed out, unconstitutional. But history shows that they were also impractical. Tariffs were initially implemented, beginning with the Tariff Act of 1789, as a source of revenue—the main source in the 19th century—for the federal government. Pressure from northern manufacturers, however, to implement tariffs for purposes of protection led to the “Tariff of Abominations” (1828), which was scaled back by 1833 due to heavy opposition from the South. Tariff rates then remained relatively low—about 15 percent—until the Civil War. By 1864, average tariff rates had risen to 47.09 percent for protectionist reasons and remained elevated for the remainder of the century.6
As to national banking, the Second Bank of the United States’ charter expired in 1836, thereby paving the way for the free banking era—which lasted until a national bank was reinstituted during the Civil War. By virtually every measure of bank health, this free banking era was the soundest in American history. In terms of capital adequacy, asset quality, liquidity, profitability, and prudent management, national banking proved to be inferior to free banking.7
223 years ago today, “The Dreadful Night” occurred in Western Pennsylvania, after an uprising called The Whiskey Rebellion.
The United States was brand new. Soldiers who had fought for independence from Great Britain found themselves on opposite sides of a skirmish. Some were having their rights violated practically before the ink was dry on the Bill of Rights. Other Veterans of the Revolution were doing the oppressing at Alexander Hamilton’s behest.
The Whiskey Rebellion saw farmers stand up to an unfair tax handed down by the federal government, and the government responded with the force of a monarchy. It may have all sprung from Alexander Hamilton’s desire for glory. Or Hamilton, the first Secretary of Treasury, may have had other motives for setting the precedent of force which still lives on today.
It all started after the Revolution, in 1791, when the federal government was in debt, and had no official money. The notes they paid to soldiers were worth fractions of what was promised, but many had no choice but to accept the funds and go home in order to try to survive.
But the soldiers were not the only ones who needed to be paid after the war. There were a number of rich investors and bankers who had provided the capital needed to win the Revolution. They too were awaiting repayment.
Alexander Hamilton had a better relationship with these financiers than with the soldiers. Hamilton was one of the leading banking figures of the time. He proposed a tax which would have two purposes. The tax would raise the revenue necessary to pay back the wealthy financiers of the Revolution. But the tax would also bring under the jurisdiction of the federal government a group of pioneers living in rural western Pennsylvania. The tax was to be levied on the production of whiskey, and not just at a commercial level. Everyone who made whiskey owed the tax. This would be the first federal tax on domestic goods.
This was a problem for the people of western Pennsylvania. Most people in this area used whiskey as a currency. Whatever surplus grain a family had would be converted into whiskey in order to preserve it. Whiskey would still have the calories of grain and was drank by almost everyone. It could be used for preserving and making some medicines.
Whiskey didn’t spoil, was widely used, and easy to transport. This made it an ideal currency. No need for banks, no need for paper money the worth of which can be manipulated. These people had tangible goods with intrinsic value absent of government mandate.
But Alexander Hamilton and the federal government insisted that the tax on whiskey be paid in coin.
For western Pennsylvanians, this amounted to an income tax. But even worse, now they had to find a way to convert their whiskey into coin. They had no use for coin since they used whiskey as a currency. But now the federal government would require them to use more time and effort just to pay the tax.
But it gets worse. Producers of whiskey were given a choice. They could pay a flat tax or pay a per gallon price. For commercial distillers who produced a lot of whiskey, the flat rate was cheaper than the per gallon rate. But for individuals, the per gallon rate was cheaper.
This was a political reward that Hamilton gave to commercial whiskey distillers in the area. They would now have the cheapest whiskey available since the flat tax worked out to a lower per gallon rate than home-distillers were forced to pay.
Hamilton did this to gain a foothold of support in the area (his enforcer was a large scale distiller) and to convert the economy of western Pennsylvania away from a whiskey-based currency. The sooner everyone was brought under the jurisdiction of the federal government, the sooner the government could raise money to pay for spending.
The tax destroyed the way of life for your average rural Pennsylvanian. First, they were singled out for a tax that most city dwellers would not be affected by. Next, they were forced to find a way to earn coin in order to pay the tax. Then, the tax made their whiskey more expensive compared to commercial distillers. This meant it was harder to sell, making it harder to convert the whiskey into coin to pay the tax.
Many people from this area moved out west to avoid the intricacies of society and government. Some were veterans of the Revolution. They would not accept this tax.
They were outraged that this tax was levied against them while the Northwest Indian War was going badly for the U.S. making the area unsafe. Seeing the tax as an advantage to grain growers (who owed no tax) and big distillers in the east (who owed a flat rate) also fueled western Pennsylvanian’s anti-federal sentiment.
They decided that if this was the way the new country was to treat its people, they wanted no part in it. They refused to pay the tax and served vigilante justice to tax collectors and other sympathizers of the federal government. They reacted similarly to how the United States reacted to unfair British taxes which sparked the Revolution.
By 1794 the climax of the situation unfolded. A U.S. Marshall was sent to the area and a showdown ensued. Some rebels were shot in a skirmish and their leader, a veteran of the Revolution, was killed. The tax collector and U.S. Marshall were captured only to later escape, and the fury of western Pennsylvanians peaked.
There was talk among the rebels that they should secede from the United States and form their own country. The plan that emerged was a watered down version of protest in which the rebels would march through Pittsburgh nonviolently. This was meant to send a message that they would not back down against what they saw as Hamilton’s attempts to pay back the wealthy by taxing the ordinary citizen.
President George Washington decided it was time to send in the army. A commission he sent to western Pennsylvania returned and recommended using the military to enforce the tax laws, and restore order.
By October 1794 Washington was seeing troops off, and heading back east, much to the dismay of some moderate locals including Congressman William Findley. He saw Washington as a fair president who just wanted to do what was right. Alexander Hamilton was the real force behind the army heading west, according to Findley, who was included on Hamilton’s list of possible rebels to be arrested.
Hamilton went with the army of nearly 20,000 as a civilian adviser. He was instructed by Washington to maintain the utmost discipline among the troops. As they advanced toward their target in western Pennsylvania, Hamilton was to prevent any breach of law by the troops, such as pillaging the countryside.
Officers harshly punished any soldier caught stealing, but the soldiers were doing so because of the lack of rations and clothing. Hamilton decided to solve this by making the theft of these goods legal. According to William Hogeland in his book The Whiskey Rebellion:
The quartermaster corps, [Hamilton] announced, would impress civilian property along the way. Now families watched helplessly as bayonet-wielding soldiers–no longer freelancing thieves but officials, authorized by the president–commandeered hard-won winter supplies of grain, meat, firewood, and blankets on behalf of the government of the United States. A steady, freezing rain meant the arrival of winter. Families whose sustenance was carted away faced grim months ahead (218).
Once the army and Hamilton finally arrived at the target county in western Pennsylvania, they contonued their oppression. They did not care much to follow the due process laid out in the Bill of Rights in new Constitution, despite Hamilton’s assurances to the President.
Many residents had signed oaths of support for the U.S. government. By signing, they risked local vigilante justice. But the U.S. promised that they would be pardoned as punishment was served to the region for failing to pay the new tax, and leading an insurrection against officials of the federal government.
These oaths were ignored and many who had signed them were arrested by Hamilton and the army anyway. A month earlier the first arrests of a few rebels had been made, prompting the most guilty among the rebels to flee. Anyone left in western Pennsylvania had minimal roles in the insurrection, and had certainly not led it. The most violent rebels, who had committed the worst acts against government officials, had already fled.
“The Dreadful Night” began in the middle of the night on November 13, 1794. Hamilton had created three lists of people: those who were not to be arrested, those who would be arrested, and those who were to be brought in as witnesses for questioning. The first list was not provided to the generals. Hamilton gave them the authority to arrest anyone they suspected of having participated in the rebellion, aided the rebels, raised liberty poles, or robbed the mail. He also authorized the troops to arrest local officials who failed to suppress the insurrection. The officers and soldiers who were passed these orders were delighted to finally have some excitement and authority on this trip west.
One particularly unstable officer named White was put in control of the 40 prisoners which Hamilton thought would give the most valuable intelligence on the whole situation. These prisoners “were brought to a dark log structure” where they were tied up and seated on the muddy floor, and guarded by soldiers instructed to keep the prisoners away from the warmth of the fire. The tavern keeper was told he would be killed if any prisoners received food, and thus for more than two days the sadistic officer in charge:
…starved and dehydrated his shivering, exhausted captives, steadily cursing and castigating them, glorying in their helplessness and describing their imminent hanging. Even White’s troops became concerned about the captives who seemed barely alive (222).
The prisoners were then marched 12 miles in bad weather to be held in another jail, still without being charged with any crime. Following interrogation, most of them were eventually released without any criminal proceedings. This was unsurprising since most of those arrested were indeed innocent.
The arrests and brutality went on for several days throughout western Pennsylvania. This served as a reminder to all residents not to speak out against the federal government. Hamilton made it clear to the presiding judge that regardless of innocence, a good number of detainees would need to be marched back to Philadelphia in order to give the impression that the federal government had accomplished its goal, and put down a violent, unjustified rebellion. The judge held a number of rebels for trial even with what he considered lack of evidence, fearing that the army would revolt if too many prisoners were let go.
The prisoners that remained in custody were marched back to Philadelphia with great show in order to create the illusion of glory. It was essentially a photo op for Hamilton and Washington, who could now say, see, look what we did, look at the problems we solved. The prisoners were paraded on Christmas Day 1794 before 20,000 Philadelphians.
It was a disappointing show to the spectators who knowing that thousands of rebels had marched against the government, were surprised to see only twenty prisoners. Twelve cases went to trial, and two rebels were convicted. The rest weren’t released until 1796. They were left to find their way home if they could afford it. The whiskey tax remained hard to collect until it was repealed in 1801 by President Thomas Jefferson.
From the beginning of this country, the federal government has not been very good at abiding by the Constitution. Clearly, the due process rights of most of the “rebels” arrested were violated. Also violated were the rights of the farmers whose food and property was confiscated along the way in order to supply the army.
Cruel and unusual punishment was used on the prisoners, prior to them even being charged. What a precedent to set at the birth of a “free” country. They tore up the Bill of Rights before the ink had time to set.
With Hamilton’s broad presence in the foundation of the country’s banking and finances, is it any wonder that his vision has led us to where we are today? The government still uses taxes to give some businesses an advantage. The government still levies taxes which are meant to change the way citizens live their lives.
But remember that the government still found it hard to enforce and collect the whiskey tax. And today we can arrange our lives in a similar fashion, and make it difficult for the government to collect their unfair taxes. Let the spirit of rebellion inspire you.