Presidency of George Washington - Economic Policy

Economic Policy

With the ratification of the Constitution, the United States had severe financial problems. There were both domestic and foreign debts from the war, and the issue of how to raise revenue for government was hotly debated. Washington was not a member of any political party, and hoped that they would not be formed. His closest advisors, however, became divided into two factions, setting the framework for political parties. Secretary of Treasury Alexander Hamilton, who had bold plans to establish the national credit and build a financially powerful nation, formed the basis of the Federalist Party. Secretary of State Thomas Jefferson, and James Madison organized a faction in Congress to oppose Hamilton. This became the Jeffersonian Republican party by 1795. Hamilton prevailed on almost all major points, largely due to Washington's similar intentions.

Hamilton's first proposals were for the United States to assume the war debts of the states incurred during the Revolutionary War and for the creation of a national bank. Hamilton believed that a national bank would make loans, handle government funds, issue financial notes, provide national currency, and overall considerably help the national government to accurately and efficiently govern financially. Hamilton laid plans for governmental financing via tariffs on imported goods, and a tax on liquor. Much of the revenue collected would be used to pay off the large Revolutionary War debt.

Hamilton proposed support for new factories because he believed industry would grow the economy but he failed to secure appropriate legislation.

Jefferson and future President James Madison stood against most of Hamilton's proposals. Jefferson and Madison did not like the idea of a central bank, believing it would be used by the federal government to dispense corrupt patronage and that it was not explicitly mentioned in the Constitution. Jefferson feared that cities like London and Paris would overpower the industry, and strongly opposed industrialization. He idealized the yeoman farmer who could think independently, as opposed to the city worker who would do what his bosses ordered.

Washington intended to remain neutral in the argument between Jefferson and Hamilton but favored the federalist approach and eventually used executive power to pursue federalist policies. Jefferson and Madison eventually brokered a deal with Hamilton that required him to use his influence to place the permanent capital on the Potomac River, while Jefferson and Madison would encourage their friends to back Hamilton's assumption plan. In the end, Hamilton's assumption, together with his proposals for funding the debt, passed legislative opposition and became law. Thus, in 1791, was created the First Bank of the United States. Along with Hamilton's plan, the United States Mint and the Revenue-Marine were established. The Revenue-Marine's responsibility was to enforce tariffs and all other maritime laws. Later, the Revenue-Marine would become the United States Coast Guard.

Though Washington had served as the bulwark for much of the fighting between Hamilton and Jefferson, by the midpoint of his first term, cooperation between the two men had disappeared. Washington's administration had split into two rival factions: one headed by Jefferson, which would later become the Democratic-Republican Party, and the Federalist faction headed by Hamilton. They disagreed on virtually all aspects of domestic and foreign policy, and much of Washington's time was spent in solving disputes between them.