The Washington Administration – It’s the Economy, Stupid

US Capitol

George Washington had one of the most eventful administrations of any president, largely due to the fact that he was the first. Washington had to establish all the procedures, protocols, and precedents. This made his every action, every decision an important example that would be followed by succeeding presidents.

He also had to establish our nation’s first foreign policy, first economic policy, and first government. The United States had none of these things when he took office. The job he did ranks him as one of the greatest, if not the greatest, president ever.

Washington had a long military and political career before becoming our first president. (For more on his earlier military career, see: George Washington, British Officer) His experience as a member of the Continental Congress, and then as commanding general of our armies during the Revolutionary War, had brought him into contact with all the leaders of the colonies. He knew exactly what he wanted in the new government officials, and who to select to meet his high standards.

Cabinet System. Not only did Washington appoint the first cabinet, he actually created the cabinet system. According to the Constitution, the Senate was supposed to act as senior statesmen advising the president. When Washington first went to the Senate for such advice, he was disappointed and infuriated to find it just as political a body as the House of Representatives. After all, they were all looking to being re-elected.

Washington instead started turning to the heads of the executive departments, all of who owed their loyalty (and their positions) to Washington. He could count of these leaders for advice and loyalty, without worrying (too much) about their own agendas. This became the Cabinet, and Washington’s was probably the best that ever served.

The first secretary of state was the amazingly able Thomas Jefferson, who became the third president, and today is rated as one of the very best. The first Secretary of the Treasury was the brilliant Alexander Hamilton. Hamilton took a completely broke government and made it financially sound. By the end of the Washington Administration, thanks largely to Hamilton, our economy was strong and our government able to support itself and function effectively. The first attorney general was Edmund Randolph, who later succeeded Jefferson as secretary of state, and the first secretary of war was the able Henry Knox, hero of the Revolutionary War.

Washington faced a number of problems almost immediately upon taking office. The most pressing problem was the terrible state of the economy, which was the reason leaders had called for the Constitutional Convention. Alexander Hamilton proposed a brilliant program that put the government on sound financial footing, and strengthened the American economy.

Hamilton’s Economic Program. Hamilton’s economic programs had five main provisions.

1. Bank of the United States. Probably the most controversial of Hamilton’s recommendations, a national bank would be established to hold the federal government’s funds. This bank would be owned in part by private investors, and the federal monies would be available for the bank’s use. This would enable wealthy investors, and only those wealthy investors, to make a profit by using the tax monies paid by all citizens. This led to serious opposition by the anti-Federalists (later becoming the Democratic-Republicans).

It was in defense of the Bank of the United States that Hamilton penned the Implied Powers Doctrine. Article I, Section 8, Clause 18 of the Constitution gave the Congress power to pass any laws “necessary and proper” to carry out the expressed powers given to the Congress. Hamilton said that Congress had the expressed and exclusive power to “coin money and regulate the value thereof” which required a national bank. The bank was both necessary and proper to create.

In the end, a compromise was reached. The Democratic-Republicans approved the bank and other parts of Hamilton’s plan in exchange for the new capital being located in the South. The current District of Columbia was selected as the location, with the agreement that the government would move there within ten years. John Adams moved into the (unfinished) White House on the evening of November 1, 1800 in order to meet this official deadline.

2. Federal Assumption of State Debts. Many states amassed significant war debts during the Revolutionary War. Hamilton proposed that the federal government assume these debts, as they were really national debts. Southern states, who had largely paid off their debts (since the war was fought mostly in the North, the Northern states had larger debts), were not fond of this, as they would continue to pay taxes to retire debts for Northern states that had already been paid off for Southern own states. This, too, was part of the compromise that located the new capital in the South.

3. Honoring Foreign Debts. As a new government, the United States could quite legally refute pre-war debts to foreign nations. Hamilton suggested that we acknowledge these debts, and honor them. In agreeing to pay off these debts when we didn’t have to, we would establish excellent credit in Europe, which we desperately needed. We gained in credit much more than we lost in debt payments.

4. Redeeming Bonds at Full Face Value. During the war, many people bought war bonds to help the government pay for the war. After the war, when the economy was so chaotic, many small farmers and businessmen were forced to sell their bonds at a fraction of the face value to wealthy speculators. Some claimed that the speculators should not be rewarded while those patriotic people who stood by their country when things were going badly were not rewarded. Hamilton maintained that we had to honor the bonds regardless of who now held them for the same reason we honored our foreign debts. It was necessary to establish the good credit of the United States with its own citizens. Otherwise, in the next crisis, no one would buy bonds.

5. Lastly, Hamilton proposed a high, protective tariff as well as excise taxes (taxes on goods made inside the country, such as liquor). This would protect young industries from more efficient foreign competition, and bring in much needed money to the federal government.

The result of Hamilton’s program was quick and positive. The nation’s economy improved dramatically, and the new government had the money to carry out its programs. But not everything else in Washington’s term went as well.

In the next article, we will look at some of the serious problems Washington faced, including being caught in the middle of a war between England and France.