Jefferson, Hamilton, Washington, Whiskey Rebellion, French Revolution, New French-British War and Proclamation of Neutrality

Posted by PITHOCRATES - August 23rd, 2012

Politics 101

America’s First Tax was a 25% Excise Tax on American Whiskey made from Corn

Thomas Jefferson held a dinner party where he, Alexander Hamilton and James Madison met to resolve some issues.  Hamilton was stressed out.  He was facing strong opposition for his assumption plan.  Secretary of the Treasury Hamilton wanted to assume all the states’ debts and lump them into the federal debt.  To get the nation’s finances in order.  Establish good credit.  And raise revenue for the new nation.  The Virginians, Jefferson and Madison, offered their assistance if Hamilton would give them the nation’s capital.  Hamilton got his assumption.  And the Virginians got the nation’s new capital on the Potomac River.  Across from Virginia.  Where they could keep a close eye on the nation’s business.  And everyone lived happily ever after.

Well, not exactly.  There was already growing discontent across the land.  Hamilton understood business and commerce.  And banking.  Farmers don’t like bankers.  Or commerce.  Or business.  Many in the south and on the frontier worked the land.  As yeoman farmers.  Families working small farms that they owned.  They believed, as Jefferson believed, that the most honorable work in America was farming.  And that America’s future was the growth of farming.  Small farms.  Owned by families working the land.  Yeoman farmers.  Proud.  Pure.  And wholly American.  This despite Jefferson being a member of the slave-owning planter elite.  Who indulged in little physical labor.

So the south and the frontier were no Hamilton supporters.  They didn’t like his high finance ideas for the new nation.  And they especially didn’t like his whiskey tax.  A tax of 25% on western corn products.  Which you made whiskey from.  The new American alcoholic beverage of choice after they eschewed beer.  The beverage of choice before the rebellion.  When they were all content British citizens.  But an excise tax on corn products was little different from the excise taxes that caused the colonies to rebel against Great Britain in the first place.  Sure, there was one subtle difference this time.  The whiskey tax was taxation with representation.  And, technically speaking, legal.  But on corn?  The new tax seemed to fall unfairly on the West.  Which had a corn economy.  And used the whiskey they made from it for money.  So these frontier people were not just going to sit idly by and take this new taxation without a fight.

The Washington Administration took Decisive Action in Suppressing the Whiskey Rebellion

This first tax was to help finance Hamilton’s assumption.  But it was more important than the revenue it would raise.  The whiskey tax was a matter of principle.  It was probably poor policy.  And probably not the smartest thing to do.  Picking a fight with the toughest and most fiercely independent people in the country.  Frontier people.  Who lived off the land without any of the city comforts enjoyed back east.  But the tax was the law.  And the first test of the new nation.  If the government retreated in the face of opposition to a law passed by Congress their experiment in self-government would fail.  For as unpleasant as taxation was it was the reason they formed a new nation in 1787.  To levy taxes so they could pay their past debt.  And their current bills.  So President Washington and Hamilton hunkered down on the tax.

And the riots came.  The Whiskey Rebellion.  Around Pittsburg.  Kentucky (aka bourbon country).  The backcountry of the Carolinas.  And elsewhere.  They refused to pay the tax.  And attacked the tax collecting apparatus.  Even the courts.  It was war.  The spirit of ’76 was alive again.  Protesting a distant central power trying to impose a tax on them.  Washington offered amnesty if they just dispersed and went home.  They refused.  So Washington raised an army of some 13,000 strong.  Larger than any army he commanded during the Revolutionary War.  And led the army west with Hamilton to meet the insurrection.  The first and only time a sitting president led an army.  As the army approached resistance melted away.  So Washington handed command over to Henry “Lighthorse Harry” Lee (a Revolutionary War veteran and hero) and returned to the capital in Philadelphia.  Hamilton remained with the army.  As the army arrived the insurrection collapsed.  The army caught some rebels and tried them.  And two received death sentences.  Who Washington later pardoned.

Score one for the rule of law.  Washington was pleased with the outcome.  Hamilton, too.  They took decisive action to subdue an insurrection.  The people in general were happy that they restored peace.  And that the country didn’t collapse into anarchy.  All in all a win-win for the people and the government.  Almost.  Not everyone saw it in this light.  Some saw a king leading an army against his own people.  A professional army.  Little different from British redcoats.  Or Oliver Cromwell’s New Model Army a century or so earlier.  A professional standing army squashing those who disagreed with the government.  And Jefferson did not like it.  Nor did a lot of those in the south.  Or on the frontier.

President Washington issued a Proclamation of Neutrality in the New War between Great Britain and France

Seeing Hamilton ride at the head of an army only reinforced Jefferson’s opinion of him.  A power-hungry, British-loving puppet master.  And the puppet was President Washington.  The dislike between Hamilton and Jefferson turned into outright hostility.  They had two different visions of America.  And these two visions were mutually exclusive.  Cabinet meetings became insufferable as Hamilton and Jefferson constantly fought.  And the French Revolution didn’t help matters any.  The radical Jefferson supported the radical French.  Who he knew and sat with in the Jacobin clubs while he was in France.  Jefferson was all for overthrowing monarchies.  So when the French and British declared war on each other it was a no brainer who to support for Jefferson.  Vive la France!

Of course there was only one problem with that position.  About 75% of U.S. exports went to Great Britain.  Even more of her imports (approximately 90%) came from Great Britain.  And then there was the Royal Navy (RN).  Who still ruled the high seas.  And all the international trade routes.  In addition to the RN there was the British Army.  Who still occupied forts on the American western frontier.  And who were still in contact with their Indian allies from the Revolutionary War.  Couple this with the fact that the U.S. had no comparable army or navy.  And was already having trouble on the frontier with the Indians (from the influx of settlers into the western territories).  So siding with France against Britain was not the smart move.  Yes, the French were instrumental in helping the Americans achieve their independence from Great Britain.  But America was a country emerging from 8 years of war that just had to suppress a tax rebellion over a sin tax.  She did not have the wealth to enter a European war.  Besides, the Americans were supported by the monarch (King Louis XVI) the French were overthrowing.  Which complicated matters.

Washington and Hamilton saw things differently than Jefferson.  More like realists than the idealist Jefferson.  The Revolution was over.  The British and Americans were no longer enemies.  But important trade partners.  That shared a common British past.  Of laws and traditions firmly established in what was once British America.  So Washington issued his Proclamation of Neutrality (1793).  They would support neither in this European war.  Which infuriated the French.  And Jefferson.  For though they were neutral it was clear that their neutrality would favor the British.  As well as Hamilton.  And it did.  But it also favored America’s best interests.  For another long war would have probably bankrupted the nation.  And perhaps resulted with her partitioned among the European nations.  For the French Revolution lasted for a decade.  And the Napoleonic Wars it begot lasted another 11 years.  Which let us not forget the French lost.  In large part due to the Royal Navy.  And Great Britain’s wealth generated by her international trade.  Something the Americans could not have altered had she entered the war on France’s side.  A wise foreign policy call by President Washington (and yet another time he saved his country).  But it was one that tore his administration apart.  Firmly establishing the opposition party.  With Jefferson at its head.  With but one purpose.  To destroy Hamilton.  And to lead the nation away from where Hamilton was taking it.

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LESSONS LEARNED #4 “Wealth ain’t money; money ain’t wealth.” –Old Pithy

Posted by PITHOCRATES - March 11th, 2010

WEALTH COMES FROM human capital.  People making things or doing something.  And it’s what they make or do that has value.  They trade these valuable things and services for other valuable things and services.  The more complex and diverse these good and services got, though, the more difficult it got to trade them.  Money came into use.  Instead of trading directly, you could trade for money.  Later, you could take that money and trade (i.e., shop) for what you wanted.  Money was not the end; it was the means to an end.  Trade.

This is important.  It’s the goods and services that are valuable.  Not the money.  We don’t want money; we want the goods and services that money will buy. 

The producers of these things and services are wealth creators.  Those who don’t produce things or services are wealth consumers.  Farmers, craftsmen, truck drivers, entrepreneurs, etc., are wealth producers.  Thieves, the lazy, government, etc., are wealth consumers.

THE DECLINE OF the Roman Empire began in the third century.  With a military flung across the known world and a bloated government bureaucracy, she was engaged in some serious deficit spending.  The government was trying to expand the purchasing power of her money.  They just weren’t collecting enough in taxes.  And the tax rates were pretty close to confiscatory.  I mean, they taxed so much that there just wasn’t anything left to tax.

The silver denarius was the main money used by the Romans.  When first introduced, it was approximately 95% silver.  They kept debasing it until it contained less than 1% silver.  With less precious metal (silver) in each coin, they were able to make more coins.  But this did not create more wealth.  The wealth producers weren’t producing more wealth.  With more money chasing the same amount of goods, prices soared.  And the value of the silver denarius plummeted.

The silver denarius became worthless.  No one wanted to exchange their goods and serviced for it.  The Romans wouldn’t even accept it for tax payments.  And it was their own coin!  If you had gold, you paid with gold, for gold was still gold.  Precious and scarce.  Unlike the silver denarius.  If you didn’t have gold, then you paid ‘in kind’.  You gave the government some of the valuable things you created with your human capital. 

Having destroyed their medium of exchange, they cut out the ‘middleman’.  Instead of collecting tax coins to buy those things of value the empire needed, they collected those things of value directly.  The efficiencies gained by the use of money were lost.  And, well, we see why this Roman period has the word ‘decline’ in its title.

IN THE VERY beginning of the United States, everything was brand new.  The federal government.  The federal budget.  And the federal debt.  Well, the debt itself wasn’t brand new.  It was the states’ Revolutionary War debts assumed by the federal government.  And to help pay off this now federal debt the new nation introduced its first ‘sin’ tax.  On whiskey.  Well, sort of.  It was placed on the producers, not the consumers of whiskey.

This reminded many Americans of Parliament’s taxes on the colonists.  Taxation without representation they had cried then and rebelled.  Americans don’t like taxes.  Who does?  So they would rebel once again.  The only problem was that it was different now.  It was taxation WITH representation.  It was a tax levied by the new American government, not by British Parliament.

But they rebelled despite this difference.  We call it the Whiskey Rebellion.  Because it was, well, I guess that goes without saying.  With memories of Shays’ Rebellion (poor farmers in Massachusetts rebelling against debt they couldn’t pay off and high taxes) still fresh in their memory, government moved swiftly to put this rebellion down.  And they did.

Farmers in Western Pennsylvania said that the tax wasn’t ‘fair’.  But why?  Didn’t it only tax whiskey?  And wasn’t limiting whiskey consumption a good thing?  Well, the problem was the lack of money to facilitate trade.  And the lack of roads.  The farmers in western Pennsylvania (grain farmers) had good farmland.  And good crops.  What they didn’t have was a good way to sell those crops.  Not as grain, at least.

What can you make from grain that is ‘valuable’ and easier to transport than grain?  You guessed it.  Whiskey.   And this is why it was not ‘fair’.  Farmers converted excess grain (something of value) into whiskey (something of greater value).  Whiskey was more portable than grain.  Smaller amounts of it equaled the value of larger amounts of the raw grain.  Whiskey was more durable than grain (it aged, grain rotted).  It took farming PLUS distillation to make whiskey so whiskey was scarcer than grain.  So they used whiskey to trade for things of value they wanted.  It was a medium of exchange.  Because there was little money available, those farmers used whiskey as money. 

It wasn’t a ‘sin’ tax to the famers.  It was a tax on their money.  It was, therefore, a tax on everything they purchased with that money.  It was a national sales tax.  Or a national value-added tax (VAT).  That only they were paying.

ANYTHING THAT HAS the attributes (scarce, divisible, stores value, etc.) of money can be money.  It’s that thing that helps facilitate trade between the wealth producers.  It’s a medium of exchange.  It allows people with human capital to produce more goods and services.   And that’s what it’s all about.  The goods and services.  It’s what we want.  Not the money.  We want the house, car, TVs, cell phones, etc.  We’d rather have those things than the money.  It’s why we trade the money for them.  We trade our human capital for money.  Then trade the money for the stuff we want.  Goods and services created by other wealth-creators using their human capital.

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