The Treasury Reports

Why Public Credit Matters

Communicated to the House of Representatives, January 14, 1790. Treasury Department, January 9, 1790.

The Secretary of the Treasury, as directed by the House of Representatives in its resolution of September 21 last, has spent the recess of Congress working out a proper plan for the support of the public credit: the government's ability to borrow, which rests on lenders trusting it to pay. He has given the task all the attention owed to the authority of the House and to the size of the subject.

In carrying out this duty he has felt, and not a little, the anxieties that come naturally from a fair idea of how hard the task is, from good reason to doubt whether he is qualified to carry it off, and from a deep and solemn conviction of how much hangs on the truth stated in the resolution that set him to work: "That an adequate provision for the support of the public credit is a matter of high importance to the honor and prosperity of the United States."

He hopes earnestly that his efforts, which are well meant, will be of real use to the nation. With the greatest respect for the better judgment of the House, he now submits what his inquiries and reflections have produced, and asks the House to read it generously.

In the Secretary's opinion, the House was wise to give that proposition its explicit backing. Anyone will applaud the decision who thinks seriously about the following plain and undeniable truths and follows them to where they obviously lead.

That emergencies are bound to arise in the affairs of nations when they will have to borrow.

That in times of public danger, and especially of foreign war, loans turn out to be an indispensable resource, even for the wealthiest nations.

And that in a country like this one, which has little active wealth, or, to put it another way, little money capital, the need for that resource in such emergencies must be all the more urgent.

On the one hand, then, there's no doubting that a nation will need to borrow in particular emergencies. On the other, it's just as plain that to borrow on good terms, a nation's credit has to be well established.

When a country's credit is at all in question, it always ends up paying an extravagant premium, in one form or another, on every loan it needs to take out. Nor does the damage stop there. It pays the same penalty on whatever it buys on credit, to be paid for later.

Since a nation is constantly having to borrow, and to buy, at these inflated prices, it's easy to see how enormously an unsound public credit will swell its expenses over time.

The harms that follow from neglecting the rules that keep public credit sound run through every part of the social and economic order, and they justify the concern the House has shown on this point. To try to list them all would be an unfair demand on its time and patience.

Still, the Secretary sees those harms so clearly that, in his judgment, a great deal hangs on keeping those rules at this critical moment: the prosperity of the citizens of the United States, one by one and all together; their relief from the financial troubles they now labor under; their character as a people; the cause of good government.

If keeping up the public credit really matters this much, the next question is obvious: how is it to be done? The ready answer is: by good faith, by keeping contracts and keeping them on time. States, like individuals, who honor their commitments are respected and trusted, and those who behave otherwise meet the opposite fate.

Every breach of the public's commitments, whether by choice or by necessity, damages public credit to some degree. When the necessity is real, the government can only soften the harm by taking scrupulous care to carry the breach no further than the necessity absolutely demands, and, where the case allows, by showing a sincere intention to make it good as soon as circumstances permit. Even with every possible softening, though, credit is bound to suffer, and plenty of harm will follow. That's why it matters so much, when what looks like a necessity presses on a government, that it examine closely whether the necessity is real, and make quite sure there's no way out of it, before giving in. Nobody can safely claim that there have never been, or never will be, occasions when breaking the public faith in this way is unavoidable. But there's every reason to believe such occasions arise far less often than past examples suggest. Most often they're either pretended, out of carelessness or lack of nerve, or imagined, out of lack of knowledge. Ways have often been found to accomplish, with good faith intact, what was once done by violating it. The people who most commonly lend to a nation are, generally speaking, intelligent men, and there are striking examples to show that when a frank and fair appeal is made to them, they understand their real interest too well to refuse whatever adjustments to their claims a genuine necessity may call for.

Political advantage gives the strongest reasons for keeping the good faith on which public credit rests. But there are still weightier reasons that insist on it.

Some arguments for it rest on the unchanging principles of moral obligation. And the more a mind is inclined to see, in the order of Providence, a close connection between public virtue and public happiness, the more it will recoil from violating those principles.

The nature of the debt of the United States makes this point stronger still. It was the price of liberty. The faith of America has been pledged for it again and again, and with a solemnity that gives the obligation special force. It's true, and regrettable, that the pledge hasn't been kept so far. The pressures of the war, combined with inexperience in matters of finance, led to outright breaches, and the years since have been one long record of failing to pay, of default by doing nothing. But the regret is lessened by two facts. For the last seven years the government of the Union made a sincere and steady effort to restore the national credit by doing justice to the nation's creditors. And the obstacles of a defective constitution, which defeated that honorable effort, are now gone.¹

The former government showed that it meant well. Now a new one has been set up with the power to call out the resources of the community, and expectations have risen to match. People generally believe, accordingly, that the credit of the United States will soon be set on the firm foundation of an effective provision for the existing debt.

You can see what this belief has done at home in the rapid rise in the market value of the public securities. From January to November they rose thirty-three and a third percent, and since then they've risen another fifty percent. The news from abroad reports equally favorable effects on our national credit and standing.

It deserves particular notice that, here at home, the best-informed friends of good government are the ones whose expectations run highest.

To justify their confidence and keep it; to raise the growing respect in which the American name is held; to answer the demands of justice; to bring land back to its proper value; to give new resources to farming and to trade alike; to bind the union of the States more closely together; to make them more secure against foreign attack; to set public order on the foundation of an honest and generous policy: these are the great and priceless ends to be won by a proper and adequate provision, now, for the support of public credit.

General considerations like these invite us to make that provision, and so do others of a more particular kind. It will bring important advantages to every class of the community, and remove disadvantages that are no less important.

How the public creditors will gain, as the part of their property that consists of the public debt rises in value, needs no explaining.

But this leads to a further result, less obvious though no less real, that concerns every other citizen too. It's a well-known fact that in countries where the national debt is properly funded, meaning that specific revenues are set aside to pay its interest regularly, and where people have settled confidence in it, the debt does most of the work of money. Transfers of stock, as the government's bonds or the debt itself are called, are as good there as payments in specie, that is, in hard money: gold and silver coin. Put another way, in the main dealings of business, stock passes for cash. In all likelihood the same thing would happen here under the same conditions.

The benefits of this are many and obvious.

First, trade grows, because there's more capital to carry it on, and because the merchant can afford to trade on smaller profits. His stock earns him interest from the government while it lies idle, and also serves him as money when his business calls for it.

Second, farming and manufacturing are encouraged too, for the same reason: more capital can be raised to put into both. And the merchant, whose enterprise in foreign trade is what gives them activity and room to grow, has greater means for that enterprise.

Third, interest rates will fall, since the rate of interest always moves with the quantity of money and how quickly it circulates. Government and private people alike will be able to borrow on easier and cheaper terms.

Together these effects will give fresh support to labor, to industry and to every kind of skilled craft. But a public debt does these good things only once it's well funded and has gained a sufficient and stable value. Until then it tends to do the opposite. Unfunded, it swings in value and is insecure, which makes it a mere commodity, and a risky one. As such, it's only a thing for occasional, one-off speculation, and all the money that goes into it is so much drawn off from the more useful channels of circulation. The debt itself offers nothing to take that money's place. In fact, then, one serious drawback of an unfunded debt is that it makes money scarcer.

This distinction has had little or no attention, but it's of the greatest importance. It raises a question that touches every part of the community directly, and the question is this: will the public debt, through a provision made for it on sound principles, be turned into a substitute for money? Or, by being left as it is, or provided for in a way that wounds those principles and destroys confidence, will it be allowed to go on being what it is now, a ruinous drain of our cash away from the channels of productive industry?

Of all the effects of such an arrangement, the one least considered, though it deserves the closest attention, is what funding the public debt on sound principles would do for land. The present depreciated value of that kind of property is a serious calamity. In most of the States the value of farmland has fallen since the Revolution by between twenty-five and fifty percent. In the states farther south it has fallen further still. In fact, if the reports constantly arriving from that part of the country are to be believed, land there will fetch no price that isn't close to giving it away. This fall in the value of land ought to be put down, in large part, to the scarcity of money. It follows that whatever increases the money capital of the country must raise that value in proportion. Experience in Great Britain has shown, beyond any doubt, how a funded debt helps in this respect.

Landowners would not only gain from this rise in the value of their property, and from quicker and better sales when they needed to sell. The need to sell at all would itself be much reduced. Since the same cause would make loans easier to get, there's reason to think that those landowners who are in debt could borrow to pay off their more pressing creditors.

No one should expect, however, that the advantages funding the public debt is likely to bring would come all at once. It might take some time to bring the value of stock up to its natural level, and to give it the settled confidence it needs to serve as money. Still, the recent rapid rise of the public securities gives reason to expect that stock will reach that point a good deal faster than anyone could have foreseen. And since its value will be climbing in the meantime, it's fair to conclude that it will serve many of the purposes in view from the very start. In particular, it seems likely that creditors who aren't themselves in need will soon be ready to take it, at its going price, in payment of debts.

No Discrimination, and the States' Debts

We've now looked briefly at the reasons for making proper provision for the public debt. The next question is what kind of provision it ought to be, and that needs some preliminary discussion.

Everyone agrees that the part of the debt contracted abroad, the foreign debt, ought to be provided for exactly as the contracts for it require. Whatever argument there is will turn essentially on the domestic debt, the part contracted at home. It's a pity that opinion is not as unanimous on this part as on the other.

The Secretary respects the opinions of every part of the community too much to have missed one that has more than once appeared in the newspapers and comes up now and then in conversation. It raises this question: ought there to be a discrimination between the original holders of the public securities and those who now own them by purchase, paying the first holders more than the people who later bought from them? Its advocates would provide in full for the original holders' securities at their face value, but argue that the buyers should receive no more than what the securities cost them, plus interest. Sometimes it is also suggested that the difference be made up to the first owner.

In favor of this scheme, it is said to be unreasonable to pay twenty shillings in the pound, the full face value, to a man who paid only three or four for it. And, it's added, it would be hard to make the first owner's misfortune worse. He probably parted with his property at so great a loss because he had to, and now he'd be obliged to help pay the profit of the man who speculated on his distress.

The Secretary has thought the force of this argument over with the greatest care, and he rejects the doctrine it contains as unjust and bad policy alike, as doing real harm even to the original holders of public securities, and as ruinous to public credit.

It is unjust, first of all, because it breaks a contract: it violates the rights of a fair purchaser.

From the beginning, the contract has been that the public will pay the sum written on the security to the first holder or to whoever he assigns it to. The security was made transferable for a purpose: so that its owner could make use of his property by selling it for whatever it would fetch in the market, and so that the buyer could buy it safely.

Every buyer, then, stands exactly in the seller's place. He has the same right the seller had, to the identical sum written on the security. He got that right by a fair purchase, in keeping with the original agreement and intention of the Government, and his claim can't be disputed without plain injustice.

He counts as a fair purchaser for this reason: whatever necessity the seller was under was caused by the Government, which failed to provide properly for its debts. The buyer had no part in that, and he ought not to suffer for it. He can't even be charged with taking unfair advantage. He paid what the thing was worth in the market, and he took on himself the risk of ever being repaid. He gave a fair equivalent, then, and he ought to reap the reward of his risk. And it was no small risk: it turned, perhaps, on nothing less than a revolution in government.

Nobody can deny that the people who sold their securities out of necessity have a hard case. But whatever complaint of injury or claim to redress they have, it lies against the Government alone. They have nothing to hold against the people who relieved their necessity by paying them the going price for their property. More than that, they are bound, by implication, to help repay those very people. They knew that under the terms of their own contract the public was bound to pay whoever they transferred their title to the sums promised to themselves, and that as citizens of the United States they would have to bear their share of the cost. When they sold, they silently undertook to do exactly that. Even if they had a choice, they couldn't honestly or in good faith refuse to do it without the consent of the people they sold to.

Then, too, though many of the original holders sold out of necessity, it doesn't follow that all of them did. Some, we may well suppose, sold because they had no confidence that the debt would ever be provided for, or because some profitable speculation tempted them. How are these different classes to be told apart? How can anyone establish, in any given case, that the money the original holder got for his security did him less good than holding on to it until now, to take advantage of the provision about to be made? How can anyone know whether the buyer, if he had put his money to some other use, wouldn't be better off than by spending it on securities, even if he now receives their full amount? And if neither of these things can be known, how can anyone decide whether a discrimination, quite apart from the breach of contract, would do real injury to the buyers, or whether, if it included compensation to the first owners, it would hand them an advantage they had no fair claim to?

We can easily imagine, too, that there are cases where people, pressed by immediate need, sold the securities the public had given them and soon afterward bought others to make up for their first loss. Are they to be stripped of the protection they tried to secure by such a prudent arrangement?

Look closely and questions of this sort multiply without end. They show that a discrimination would be unjust even on the finest calculations of fairness, setting the obligation of contract aside altogether.

The difficulty of working out the details of such a plan, one with even the appearance of fairness, would also prove immense. It's doubtful that it could be overcome at all, and the plan would be so full of absurd as well as unfair results that it would disgust even the people proposing it.

To see how arbitrarily it would work, take just one example. Suppose two men, two years ago, each bought securities at three shillings in the pound. One of them kept what he bought until the discrimination took effect. The other sold his within the past month, at nine shillings. The first man, who had shown the more confidence in the Government, would receive only three shillings in the pound, and interest. The second, who had shown less, would get nine shillings in the pound for what cost him the same money, and the man who bought from him, standing in his place, would be entitled to the same rate.

The bad policy of a discrimination comes from two things. First, it acts on a principle that destroys the very quality that lets the public debt, the nation's stock, serve the purposes of money: the security of transfer. Second, partly for that reason and partly because it breaks faith, it makes property in the public funds less valuable. That makes lenders demand a higher premium for what they lend, and it brings on every other inconvenience of a bad state of public credit.

It's obvious at first sight that stock can work as money only because it can be transferred, and that this depends on the buyer feeling completely secure, and firmly persuaded that no distinction can ever, in any circumstances, be made between him and the original owner.

A single precedent for breaching this fundamental principle would put at risk an advantage to the community that no temporary saving could begin to match.

It's just as easy to see that the same cause would lower the value of stock in the hands of the first holder as well as everyone else. Whatever a would-be buyer was willing to pay for it would depend on two things together: the profit it gave him now, and the chance that the profit would last. If he thought there was any risk to the second, he'd figure that risk into his calculation. Either he wouldn't buy at all, or he'd buy only at a correspondingly lower price.

Anyone about to lend to the Government would demand compensation for this loss in the value of stock. On top of the actual difference between the face value and the market value, he'd add something for the chance of a further fall, which in a shaky state of public credit always has to be counted in. Every compensation of this sort, plainly, would be a dead loss to the Government.

In explaining why a discrimination is bad policy, we've also shown how it would hurt those who still hold the securities they received from the Government. Nothing needs adding on that score, except that it shows the injustice of the measure in a further and important light. It would not only strip the present owners by purchase of rights they acquired with the public faith behind them; it would also lower the value of the property of the original holders who never sold. Nor is there any need to add to what has already been said about the deadly effect the principle of discrimination would have on public credit.

But there's still one more angle from which it looks perhaps even more objectionable than from either of the others. It would contradict an express provision of the Constitution of the United States. That provision says that "all debts contracted and engagements entered into before the adoption of that Constitution, shall be as valid against the United States under it as under the Confederation." This amounts to a constitutional ratification of the contracts for the debt as they stood under the Confederation. And by that standard there can be no doubt that buyers and original holders have to be treated as having equal rights. In disposing so completely of the principle of discrimination, the Secretary is glad to reflect that he is only defending what the Government of the Union has already sanctioned, formally and expressly, in these emphatic terms. Congress, in its circular to the States of April 26, 1783, said:

"The remaining class of creditors is made up partly of those of our fellow citizens who originally lent the public the use of their money, or who have since shown the most confidence in their country by taking transfers from the lenders, and partly of those whose property has been either advanced or taken for the public service. To weigh the merits of these several kinds of creditors against one another would be a task as unnecessary as it is invidious. If the voice of humanity pleads more loudly for some than for others, the voice of policy, no less than of justice, pleads for all. A wise nation will never let those who relieve its wants, or who rely most on its faith, its firmness and its resources when either is in doubt, come out the losers by it."²

Having concluded that no discrimination can properly be made between the different classes of creditors of the United States, the Secretary goes on to ask whether a difference ought to be allowed to remain between them and another class of public creditors: those of the individual States. After careful reflection, he is fully convinced that an assumption of the States' debts, the Union taking them over and providing for them just as it provides for its own, will be a measure of sound policy and real justice.

In his opinion it would do a great deal to give the national finances an orderly, stable and satisfactory arrangement. Grant, as we must, that provision has to be made one way or another for the whole debt. It follows that no greater revenue will be needed whether the United States makes all of that provision, or the United States makes part and the States separately make the rest.

The main question, then, has to be this: can the provision be made more conveniently and effectively by one general plan, coming from one authority, than by different plans coming from different authorities? In the first case there can be no competition for resources; in the second there must be. Unless both sides took the greatest care, that competition could produce conflicting regulations, and from them collision and confusion. Particular branches of industry might also be crushed by it. The really productive sources of revenue aren't many. Either one side must take them over entirely, which might weaken the other side's provisions, or both must tax the same things in different ways, which might pile more on them than they could properly bear. And even if that didn't happen, the caution needed to avoid it would keep the revenue from getting the full benefit of each source. The danger of overlap and excess would tend to impose restraints that would get in the way of fully commanding the most convenient resources, and would force a turn to others, less suitable in themselves and less agreeable to the community.

The difficulty of commanding the public resources effectively, if the debt were provided for separately, shows up in another and perhaps more striking light. Different States, for local reasons, would naturally turn sometimes to different sources, and sometimes to the same sources in different degrees, to raise the funds they needed. It's easy to see how this variety would affect the total revenue of the country. On this supposition, goods that yielded a full return in some States would yield nothing, or too little, in others. The public revenue would not get the full benefit of those goods from the State regulations, and the shortfall couldn't be made good by the regulations of the Union either. The national Constitution provides that "all duties, imposts, and excises shall be uniform throughout the United States." Now the General Government, as a matter of policy, would have to take account of any duty already laid on an article, even in a single State. It would be forced either to lay no further tax at all on that article, where it was already taxed as high as was proper, or to limit itself to the difference between the existing rate and what the article could reasonably bear. In this way a single State's having got to an article first would tend to stop or cut down the Union's taxes on it. And since a great many articles might end up in this position through the differing arrangements of the various States, the plan of separate provisions would plainly be likely to shrink the country's total revenue very considerably.

If all the public creditors are paid from one source, with an even hand, their interest will be the same. Having the same interests, they'll unite in supporting the Government's financial arrangements, which can also be made more conveniently where there's no competition. All of this together will make the revenue laws easier and more satisfactory to carry out.

If, on the other hand, there are separate provisions, there will be separate interests pulling different ways. The unity and agreement among the creditors that matter so much, under every government, to their own security and to public credit won't merely be missing; they're likely to give way to mutual jealousy and opposition. For that reason the systems that the States and the Union adopt for their respective debts will be in danger of working against each other.

There are several reasons to think the State creditors would end up worse off than the creditors of the Union if the State debts are not assumed nationally. Two are enough to mention. One is that a principal branch of revenue, the duties on imports, belongs to the Union alone. The other is that a State is always held back in taxing articles of consumption, because it has no power to extend the same rule to the other States, and because duties laid in one State alone tend to injure its own industry and trade. If the State creditors stood on a worse footing than the others, it would be unnatural to expect them to be pleased by the provision made for the others. The influence of their discontent could only do harm, both to the creditors and to the credit of the United States. It's actually in the interest of the Union's own creditors, then, that those of the individual States be included in one general provision. Any attempt to secure the Union's creditors exclusive or special advantages would seriously endanger their interests. Nor would it be just to favor one class of public creditors over the other. Both kinds of debt were contracted, in the main, for the same purposes. Indeed, a great part of the States' own debts arose from obligations they took on for the Union. It's only fair that everyone be repaid in the same measure.

There is, however, one objection to assuming the State debts that deserves particular notice. It may be thought that assumption would make a fair settlement of accounts between the States and the United States harder to reach.

The principles of that settlement, whenever they come to be discussed, will call for all the moderation and wisdom the Government has. In the Secretary's opinion, discussing them now, before more is known, would be premature. All he would think advisable for the present, on this point, is that the amount of the debts assumed and provided for be charged to the States concerned, to await a final arrangement. As the creditors' assignees, the United States would have an indisputable right to do this. But since the House might be glad to have before it some plan for settling the accounts between the Union and its members, one that would be fair even with the State debts assumed, the Secretary will offer here the thoughts on the subject that have occurred to him or been suggested to him, and that seem to him best suited to that end.

Let each State be charged with all the money advanced to it from the treasury of the United States, converted to its specie value at the time of each advance, with interest at six percent.

Let it also be charged with the specie value of all its securities that are assumed, with the interest on them up to the time when the United States begins paying the interest.

Let it be credited with all money paid and goods supplied to the United States, and with all its other expenses during the war, for the general defense or for its own, whether the United States authorized them or not; all of it converted to specie value, and bearing interest at six percent from the various dates when each payment, advance and expense was made.

And let all sums of continental money, the paper money Congress issued during the war, now sitting in the various State treasuries and paid into the treasury of the United States, be credited at their specie value.

Once the accounts are drawn up on these principles, there can be little doubt that every State would turn out to have a balance in its favor against the United States.

To equalize what the States have contributed, let each then be charged with its share of the total of those balances, by some fair ratio to be worked out for the purpose.

If their contributions turned out to have been out of proportion, the result of this adjustment would be that some States would be creditors of the Union and some debtors. In that case, since it would be less trouble for the United States to pay balances to particular States than to collect them, it might be possible to arrange things by a second step. The amount owed by the debtor States would be transferred to the credit of the creditor States, using the same ratio as the first apportionment. That would wipe out the balances owed by the debtor States and increase those owed to the creditor States, and the United States would provide for these at a reasonable interest, but they would not be transferable. Whether this second step is advisable has to depend on knowing how the first one comes out. If the inequalities were too great, the arrangement might be unworkable without increasing the debt of the United States too much. But that isn't likely. It's worth adding that even if the second step, on the principle of apportionment, didn't get things exactly to the point aimed at, it might come close enough to spare the Union, essentially, the trouble of having large balances to collect from any of the States.

The whole arrangement would be overseen by commissioners, with authority to decide on grounds of fairness and the final word. How the plan would work is shown in Schedule A.

Its general principle seems fair. It's hard to think of any good reason why the cost of defending one part of the country in a common war shouldn't be a common charge, just as much as costs incurred expressly for the general defense. The defense of each part is the defense of the whole. And unless all the expenses are thrown into one common pool, the States most exposed to the ravages of the war will tend to have heavier burdens added to the calamities they've already suffered. The plan seems open to no objection that doesn't apply to every other plan that aims at a final settlement of accounts. The difficulty of fixing a ratio is common to all of them. It will probably have to be sought either in the proportions of the requisitions, the sums Congress asked of each State during the war, or in the decision of commissioners given full power. The rule the Constitution lays down for representation and direct taxes would plainly not fit the situation of the parties during the period in question. The existing debt of the United States is left out of the reckoning, as it should be, because it will be provided for out of a general fund.

The only preliminary question left concerns the division of the debt into principal and interest. It's well known that the unpaid interest is large compared with the principal. Paying it off at once is plainly impossible, and the question is what ought to be done with it.

There is good reason to think that many people are more favorably impressed by the claim of the principal than by the claim of the interest, at least far enough to believe that a lesser provision might do for the interest.

To the Secretary, though, this opinion doesn't seem well founded. His study of the subject has brought him to the conclusion that the unpaid interest has a claim at least equal to the principal's.

The liquidated debt, the part already settled at a stated sum, falls into two main classes when traced to its origin: one arising from loans, the other from services performed and goods supplied. The part arising from loans was at first made payable at fixed dates, which passed long ago. The lenders were given an early choice: either take their money back when those dates arrived, or leave it at interest until the total of continental bills in circulation should fall to no more than the amount in circulation at the time of each loan. In the sense the contract meant, that never happened, and the presumption is that the creditors preferred leaving their money at interest indefinitely to getting it back in a currency that had lost value and was still losing it.

The other parts were mostly for things that ought to have been paid for on the spot, when the services were performed or the supplies delivered, and they came with no contract for interest.

But by various acts of the Government and its officers, with the creditors' agreement, these parts of the debt have been turned into a capital sum bearing interest at six percent a year, with no fixed date for repayment. Part of the Loan Office debt, the money lent through Congress's loan offices during the war, has been exchanged for new securities on those terms, and the whole of it seems to have taken on that character once the dates set for repayment ran out. If this view is right, the capital of the debt of the United States may be thought of as an annuity, a fixed yearly payment, at six percent a year, which the Government may redeem whenever it chooses by paying off the principal. For it seems a clear principle that when a government contracts a debt payable with interest, and no exact time is set or understood for repaying the capital, that time is purely at the government's discretion. It's free to suit its own convenience, provided it pays the interest punctually.

Accordingly, as long as the United States paid the interest on its debt as it fell due, its creditors would have no right to demand the principal. With the unpaid interest, though, the case is different. That's due now, and the people it's owed to have a right to demand immediate payment. Saying it would be impossible to pay doesn't change the nature of the right. Nor can the plea of impossibility honorably be stretched further than to justify proposing a new contract, one that exchanges that right for an equivalent. And the equivalent has to be a real and fair one. What fair equivalent can there be for keeping someone's money, except a reasonable interest? And what can the standard of that interest be, except the market rate, or the rate the Government pays in ordinary cases?

On this view of the matter, which seems the accurate and true one, it follows that the unpaid interest is entitled to the same provision as the principal of the debt.

The upshot of this discussion is that there ought to be no discrimination between the original holders of the debt and its present owners by purchase; that the Union ought to assume the State debts; and that the unpaid interest ought to be provided for on an equal footing with the principal.

The next question, on the way to deciding what a proper provision should be, concerns the amount of the debt and the present rates of interest.

The Debt, and the Loans Proposed for It

The debt of the Union divides into two parts, the foreign and the domestic.

The foreign debt, as stated in Schedule B, comes to the following.

Principal, $10,070,307.00, bearing interest partly at 4 percent and partly at 5 percent.

Arrears of interest to the end of December 1789, $1,640,071.62.

Together, $11,710,378.62.

The domestic debt can be divided into its liquidated and unliquidated parts, and each into principal and interest.

The principal of the liquidated part, as stated in Schedule C, $27,383,917.74, bearing interest at 6 percent.

The arrears of interest on it, as stated in Schedule D, to the end of 1790, $13,030,168.20.

Together, $40,414,085.94.

This includes everything that has been paid in indents, the certificates issued in place of interest, except what has come back into the Treasury of the United States. In the Secretary's opinion they can't be regarded as anything but interest due.

The unliquidated part of the domestic debt consists chiefly of the continental bills of credit, the old continental money. Its amount isn't known exactly, but it may be estimated at $2,000,000.00.

These several sums make up the whole of the debt of the United States, $54,124,464.56 in all. The debt of the individual states isn't as well known. Schedule E shows how far it has been established by the returns made under the House's orders of September 21 last. Those returns don't cover all the states, though, and the rest has to be estimated from less reliable information. The Secretary nonetheless thinks the total may safely be put at $25,000,000.00, principal and interest. The states' debts now bear, in general, the same rate of interest as the domestic debt of the Union.

Suppose the arrears of interest are to be provided for on the same terms as the principal. Then the yearly interest payable, at the existing rates, on the entire mass of the public debt would be as follows.

On the foreign debt, computing the interest on the principal as it stands, and allowing 4 percent on the arrears of interest, $542,599.66.

On the domestic debt, including that of the states, $4,044,845.15.

Together, $4,587,444.81.

Now comes the important question. Can the United States, without ignoring the prudent considerations that ought never to be overlooked, make a provision large enough to fund the whole debt at the rates of interest it now bears, on top of what the ordinary business of government will need?

The Secretary won't say that such a provision would be beyond the country's means. He's clearly of the opinion, though, that making it would require stretching taxation to a degree, and onto objects, that the true interest of the public creditors themselves forbids. It's to be hoped, then, and even expected, that the creditors will cheerfully agree to fair and reasonable changes in their claims, changes that will help the Government reach an arrangement that is solid, lasting and satisfactory to the community. Every discerning mind will see how much that last quality matters. No plan, however attractive it looked, could really deserve confidence without it.

It mustn't be forgotten that emergencies may arise before long that call for resources far beyond what's now thought enough for the ordinary business of government. And if the country's powers were exhausted, or even strained, in providing for the public debt, people could rely less on that provision being held sacred. But while the Secretary gives these considerations their full weight, he doesn't lose sight of the basic principles of good faith. Those principles require every practicable effort to keep the Government's engagements scrupulously. They require that no change in its creditors' rights be attempted without their voluntary consent, and that the consent be voluntary in fact as well as in name. It follows that every proposal for a change ought to take the form of an appeal to the creditors' reason and their interest, never to their necessities. For that, a fair equivalent has to be offered for whatever they're asked to give up, and unquestionable security for the rest. Without it, no change could be made consistently with the credit and honor of the nation.

It remains to see what can be proposed along these lines.

It has been pointed out that the principal of the debt of the Union is to be viewed as an annuity at 6 percent a year, which the Government may redeem whenever it pleases by paying off the principal. Nobody will insist that the arrears of interest be treated more favorably than that. The same description applies, in general, to the debts of the individual states.

On this view of the matter, the United States would be free to take advantage of any fall in the market rate of interest to reduce the rate on the debt.

That feature of the debt favors the public and works against the creditor, and it may make it easier to arrange a reduction of interest on the basis of a fair equivalent.

Probabilities are always a rational ground for a contract. The Secretary believes there's good reason to expect that, if effective measures are taken to establish public credit, the rate at which the Government borrows in the United States will very soon fall at least as low as 5 percent, and that within twenty years it will sink lower still, probably to 4. Two main causes are likely to bring this about. One is the low rate of interest in Europe. The other is the increase in the nation's moneyed capital that funding the public debt will produce.

In several parts of Europe, 3 to 4 percent is thought good interest. In some places even less is, and the rate is falling, since the growing plenty of money keeps pushing it down. It's reasonable to suppose that no country will be able to borrow from foreigners on better terms than the United States, because perhaps none can offer such good security. Our situation exposes us less than any other nation's to the accidents that are the chief causes of expense. Our burdens are smaller in proportion to our real means, even if those means can't yet be brought into action so readily. And our growth in resources, given how young the country is and how immense its unsettled territory, must outstrip any other nation's. These advantages have already caught the attention of the moneylenders of Europe, the Dutch in particular, and the better they're understood, the more weight they'll carry. As large a share of Europe's cash as we may need will therefore be, in a sense, on our market for the Government's use. That will naturally bring the rate of interest down: not, of course, to the level of the places that send their money abroad, but to something much nearer it than our present rate.³

How funding the debt tends to lower interest has already been explained. The rate can hardly fail to be substantially affected by the increase in the nation's moneyed capital that the proper funding of seventy million dollars would bring. And the likelihood of a fall in interest is confirmed by facts from before the Revolution. It's well known that in some of the states money could easily be borrowed on good security at 5 percent, and not seldom at less.

The best informed of the public creditors will be the quickest to see the justice of this view, and the fairness of the use about to be made of it. Acting on it, the Secretary will take it as a probability strong enough to calculate on, for the Government and its creditors alike, that the interest of money in the United States will fall to 5 percent in five years and to 4 percent in twenty. His own opinion is rather that the fall may be faster and greater. But he prefers a middle estimate, as the most likely to win the creditors' agreement, and as fairer in itself, since it rests on probabilities that may err on one side as easily as on the other.

With this said, the Secretary submits to the House that it would be advisable to propose a loan to the full amount of the debt, the debts of the particular states as well as that of the Union, on the following terms.

First. For every hundred dollars subscribed, payable in the debt (interest as well as principal), the subscriber is to be entitled, at his option, to any one of the following.

He may have two-thirds funded at an annuity, or yearly interest, of 6 percent, redeemable whenever the Government pleases by paying off the principal, and receive the other third in lands in the Western territory, at the rate of twenty cents an acre.⁴

Or he may have the whole sum funded at an annuity, or yearly interest, of 4 percent, which can't be paid off faster than five dollars a year, principal and interest together, and receive, as compensation for the reduction of interest, fifteen dollars and eighty cents payable in lands, as in the first case.

Or he may have sixty-six dollars and two-thirds of a dollar funded at once at an annuity, or yearly interest, of 6 percent, which can't be paid off faster than four dollars and two-thirds of a dollar a year, principal and interest together, and have twenty-six dollars and eighty-eight cents more funded at the end of ten years, at the same interest and on the same terms of redemption.

Or he may have an annuity for the rest of a life, on condition that the person lives to a given age, not less than ten years off, with interest computed at 4 percent.

Or he may have an annuity for the rest of a life, on condition that the younger of two persons survives the elder, with interest computed in this case also at 4 percent.

In addition to this loan, which is payable wholly in the debt, the Secretary would propose that another be opened for ten million dollars, on the following plan.

For every hundred dollars subscribed, payable half in hard money and half in the debt (principal as well as interest), the subscriber is to be entitled to an annuity, or yearly interest, of 5 percent, which can't be paid off faster than six dollars a year, principal and interest together.

How these different plans work, and the principles behind them, may now need explaining.

The first is simply a proposal to pay one-third of the debt in land and fund the other two-thirds at the existing rate of interest, on the same terms of redemption it's subject to now.

There's no guesswork here, no calculation of probabilities. The creditor is offered the advantage of turning his unpaid interest into principal. In return he's asked to help the Government make an effective provision for what he's owed by accepting a third of it in land, at a fair valuation.

The usual price at which the Western lands have been sold so far has been a dollar an acre in public securities. But when the main purchases were made, those securities were worth less than three shillings in the pound on the market, under fifteen cents on the dollar. The nominal price, then, wouldn't be the right standard under present circumstances. Nor would the exact value in hard money paid at the time be a fair rule. The payments were to be made in installments, and the securities were extremely low when the purchases were made, so the buyers must be presumed to have counted on a moderate rise.

Twenty cents an acre therefore seems to strike a fair balance between the two considerations, the value at the time and the likelihood of an increase.

Under this plan, it will be understood, the public keeps the advantage of using any fall in the market rate of interest to reduce the rate on the debt. That's perfectly fair, since the creditor isn't asked for any present sacrifice, either in the amount of the principal or in the rate of interest.

What the public gains by the measure is the payment of a third of the debt in land.

The second plan rests on the supposition that interest will fall to 5 percent in five years, and to 4 in fifteen more. The creditor's capital stays whole, but bears only 4 percent. He has to be compensated, then, for interest of 2 percent a year for five years, and of 1 percent a year for fifteen years beginning five years from now. The present value of these two sums, or annuities, computed strictly on that supposition, is $15.792, a fraction less than the sum proposed.

What the public gains by the measure here is a rate of interest more within reach of a convenient provision, and paying the compensation in land.

What the creditor gains is, first, the convenience he gives the public; then a high probability of a full equivalent; and even a chance of profit, should interest fall sooner or further than the calculation supposes. If it fell to 5 percent in less than five years, or below 5 before the additional fifteen years were out, or below 4 before the debt was paid off, the creditor would in each case make a clear profit. Since his capital stays whole, its value will rise with every fall in the rate of interest.

The third plan rests on the same supposition of a step-by-step fall in interest, and on that supposition offers the creditor an equivalent. One hundred dollars bearing interest at 6 percent for five years, then at 5 percent for fifteen years, and at 4 percent from then on (these being the successive market rates), is worth the same as a capital of $122.510725 bearing 4 percent. Converted into a capital bearing a fixed 6 percent, that is worth $81.6738166.

The difference between sixty-six dollars and two-thirds of a dollar (the sum to be funded at once) and this last sum is $15.0172, which at 6 percent a year grows by the end of ten years to $26.8755: the sum to be funded when that period ends. It has to be admitted, though, that this calculation makes no allowance for the principle of redemption the plan itself contains. On that principle, the equivalent in a 6 percent capital would be, strictly calculated, $87.50766.

Two considerations, however, lead the Secretary to think that the sum he proposes would work out more fairly than this one. First, the United States may not be in a position to use its reserved right of redemption for some time. Second, on the part to be funded at the end of ten years, the principle of redemption is suspended during that period, and the full 6 percent interest keeps compounding at that rate; for the last five of those years, on the supposition, that will be above the market rate.

The equivalent in this plan comes from fixing the rate of interest higher than the market rate is expected to stay, allowing the debt to be paid off only gradually, in a set proportion, and so preventing the Government from taking advantage of any fall of interest below the stipulated rate.

For example, the capital proposed, $81.67, taken as a perpetual annuity bearing 6 percent interest, would be worth a little more than ninety-eight dollars when the market rate was 5 percent. When the market rate was 4 percent, it would be worth $122.51.

Since the proposed capital is subject to gradual redemption, its value in each case would obviously be somewhat less. Still, this shows how a smaller capital at a fixed rate of interest can be a fair equivalent for a larger one at a rate liable to change and to fall.

The creditors who don't think much of property in Western lands will presumably prefer this last way of reshaping the debt. The Secretary sincerely affirms that, in his opinion, it's likely to prove every bit as beneficial to the creditor as a provision for his debt on its present terms.

In neither case is the Government meant to be obliged to redeem in the proportion specified. The aim is to secure it the right to do so, and avoid the inconvenience of a debt that runs forever.

The fourth and fifth plans drop the supposition on which the two before them rest, and offer only 4 percent throughout.

The reason is that, since payment is put off, compound interest will pile up against the public in the meantime. Without very careful management, that would turn to the public's harm, and putting off the burden would be all too likely to breed slackness in the interval. Since the measure's purpose is a temporary convenience, it could only be advisable at a moderate rate of interest.

As for individuals, 4 percent will be inducement enough. Allowing for the usual delays and accidents, there's no way of lending money privately that would serve as well as a provision for the future.

A hundred dollars paid in on the life of a person eleven years old would produce the following annuity, in dollars and thousandths.

Beginning at twenty-one, $10.346.

Beginning at thirty-one, $18.803.

Beginning at forty-one, $37.286.

Beginning at fifty-one, $78.580.

The same sum paid in on the chance that the younger of two persons survives the elder, one of them being twenty-five and the other thirty, would produce, if the younger survived, an annuity for the rest of life of $23.556.

These examples make it easy to see what these deferred annuities offer: a way to secure a comfortable provision for the evening of life, or for wives who outlive their husbands.

The sixth plan also gives up the supposition on which the second and third are built. It offers a higher rate of interest, on similar terms of redemption, in return for payment of half the loan in hard money. The plan is highly advantageous to creditors who can make that payment. Meanwhile the hard money itself could be used to buy up the debt on terms that would fully make up to the public for the higher interest.

For the figures, see Schedule F and the table in Schedule G.

It's quite likely that foreign holders of the domestic debt will welcome this as a desirable arrangement.

As an additional measure, and by way of experiment, the Secretary would propose a loan on the principle of a tontine. A tontine is a pooled annuity: its members each draw a yearly payment for life, and as members die their shares pass to the survivors. This one is to consist of six classes, made up of persons of the following ages.

First class, those of 20 years and under.

Second class, those over 20 and not over 30.

Third class, those over 30 and not over 40.

Fourth class, those over 40 and not over 50.

Fifth class, those over 50 and not over 60.

Sixth class, those over 60.

Each share is to be two hundred dollars, and the number of shares in each class is to be unlimited. People will be free to subscribe on their own lives or on the lives of others they name.

The annuity on a share is to be as follows.

In the first class, $8.40.

In the second class, $8.65.

In the third class, $9.00.

In the fourth class, $9.65.

In the fifth class, $10.70.

In the sixth class, $12.80.

The annuities of those who die are to be divided equally among the survivors until four-fifths are dead. At that point the principle of survivorship stops, and each annuitant from then on draws his dividend as a separate annuity, for as long as the life it depends on lasts.

See the table in Schedule H.

These annuities are calculated on the healthiest life in each class, at a rate of interest of 4 percent, with some deductions in the public's favor. To the advantages these terms offer, ending the right of survivorship once four-fifths of the annuitants have died will be no small addition.

What the subscriber gains is a decent interest on his money from the start, secured for life, with the prospect of its growing steadily, and even of a large profit for those whose luck it is to outlive their fellows.

It will have been noticed that in all the proposed loans the Secretary has meant to put the interest on the same footing as the principal. The interest on the debt of the United States he'd compute to the end of the present year; that on the debt of the particular states, to the end of 1791. The reason for the difference will be seen later.

To keep money circulating properly, it will be best to pay the interest on the debt quarterly. This rule will also benefit the public creditors. Paying them earlier in effect gives them a higher rate of interest, which may properly be counted in the compensation to be made to them. Six percent a year paid this way will really be worth $6.135, computing the market interest at the same rate.

The Secretary thinks it wise to offer a variety of proposals, all of them consistent with the public interest. In his opinion, it's of the greatest importance that the debt, with the creditors' consent, be remolded into a shape that brings the nation's spending level with its income. Until that's done, the finances of the United States will never look as they should. Arrears of interest, piling up without end, will stand as an endless monument either to inability or to bad faith, and will keep doing harm to public credit. In nothing do appearances matter more than in anything to do with credit. Opinion is the soul of it, and opinion is affected by appearances as well as by realities. Giving the creditors a choice among a number of plans makes the intended change more likely to succeed. Different temperaments will be swayed by different views of the subject.

But while the Secretary would try to change the form of the debt through new loans, to make an adequate provision for it more feasible, he wouldn't think it right to seek the creditors' agreement by working on their necessities.

Hence whatever surplus of revenue might remain, after paying the interest on the new loans and meeting the needs of ordinary government, ought to be divided among those creditors, if any, who choose not to subscribe to them. While the proposals are still pending, though, a temporary appropriation for this purpose will be the wisest course, and the sum has to be limited to 4 percent, since the revenues will be calculated to produce only that proportion of the entire debt.

For the success of the proposals, the Secretary relies on the soundness of the reasons behind them; on the fairness of the equivalent offered in each case; on the creditors' clear sight of their own true interest; and on their willingness to ease the Government's arrangements and make them satisfactory to the community.

What remains of the task is to look at the means of providing for the debt in the reshaped form proposed.

The Funds: Wine, Spirits, Tea and Coffee, and a Sinking Fund

On this point the Secretary begins with a premise. In his opinion, the funds to be set up ought for now to be confined to the existing debt of the United States. There are two reasons. One is that it will be most convenient to raise the revenue step by step. The other is that the assumption he has in view needs the consent of the state creditors. That consent can be counted on with great confidence, since it's so plainly in their interest to give it. But until it's actually given, making real provision for their debt would be premature. It wouldn't be proper to lay taxes for an object that depends on such a contingency.

All that ought to be done about it now is to put the matter in proper train for a later provision. For that purpose the Secretary will, in the course of this report, submit the proposals that seem advisable to him.

The Secretary now turns to the funds that will be needed.

It has been stated that the debt of the United States is made up as follows.

The foreign debt, with arrears of interest: $11,710,378.62.

The domestic debt, with arrears of interest computed to the end of 1790: $42,414,085.94.

Together: $54,124,464.56.

The interest on the domestic debt is computed to the end of this year because the work of putting any plan into effect will take up the whole year.

The yearly interest is as follows.

On the foreign debt, as already stated: $542,599.66.

On the domestic debt, at four percent: $1,696,563.43.

Together: $2,239,163.09.

To pay the interest on the foreign debt, then, and four percent on the whole of the domestic debt, principal and interest together forming a new capital, will take a yearly income of $2,239,163.09. In the Secretary's opinion, that is the sum that ought to be provided now, on top of what the ordinary running of the government requires.

It's true that the rate of interest offered under the third plan is more than four percent on the whole debt, and that the annuities on the tontine will also come to more than four percent on whatever sums are subscribed. Still, four percent on the whole will be enough. Under the third plan, actual payment on part of the debt is postponed; the debt can be profitably reduced by buying it up; and the deferred annuities, by their nature, won't come due until later.

As for the installments due on the principal of the foreign debt, the Secretary believes they ought to be paid with new loans raised abroad. Even if funds could conveniently be spared from other needs to pay them, the United States could hardly stand, at this moment, the drain of cash that paying them would probably cause.

But to the sum needed for the interest we must add a provision for the ordinary running of the government. The Secretary estimates this at six hundred thousand dollars. With the interest, that makes two million, eight hundred and thirty-nine thousand, one hundred and sixty-three dollars and nine cents.

In the Secretary's opinion, this sum can be raised from the present duties on imports and tonnage, together with additional duties on wines, spirits (including those distilled within the United States), teas and coffee, which can be added without the least harm to trade or to agriculture. (See Schedule I.)

The Secretary thinks it will be sound policy to carry the duties on goods of this kind as high as a safe collection allows. That will lessen the need to turn to direct taxes, and the need to pile up duties where they'd be harder on trade, or on goods that ought rather to be counted among the necessities of life.

That these goods can bear high duties better than most others is hardly open to question. Every one of them is really a luxury. Most of them are foreign luxuries; some of them, in the excess in which they're consumed, are harmful luxuries. And there's perhaps not one of them that isn't consumed in such quantities as to be fairly called a source of national extravagance and impoverishment. The drinking of hard liquor in particular, no doubt very largely because it's cheap, is carried to an extreme that is much to be regretted, for the health and morals of the community as well as for its economy.

If higher duties should lead people to consume less of these goods, the effect would be desirable in every way. The money saved would leave people more comfortably off and help the balance of trade. Insofar as the drop fell on distilled spirits, it would encourage people to drink cider and beer instead, which would benefit agriculture and open a new and productive source of revenue.

It isn't likely, however, that consumption would fall far enough to defeat the gain to the revenue that raising the duties is meant to bring. Experience shows that luxuries of every kind take the strongest hold on people's affections, and those affections, especially once habit has confirmed them, aren't easily turned away.

The same fact gives the merchant some assurance that substantial duties on such goods aren't likely to hurt him. The goods will usually fetch a price that rises in proportion. The main things to watch, from his point of view, are that the terms of payment are arranged so as not to require inconvenient advances of money, and that the method of collection is secure.

There are other reasons, too, for carrying the duties on these goods as far as they'll bear. Since they're so widely consumed, they're bound to be very productive; and they're among the hardest of all goods to smuggle.

With so many motives for making the best use of the resource these goods offer, the essential question is this: how can the duties on them be collected most effectively?

For those that come from abroad, a duty on importation recommends itself for two main reasons. First, it catches the goods the moment they enter the country, so collection is concentrated at one point and to that extent simplified. Second, it avoids any possibility of the regulations of the United States clashing with those of the individual states.

But a duty whose safeguards end once the goods are landed, which is essentially how the present system works, couldn't safely be raised as high as is now proposed.

Under that system, evading the duty depends, so to speak, on a single risk. Getting the goods ashore without the customs officers catching you is almost the only difficulty. After that, there's no real fear of being pursued. And wherever the reward matches the risk, too many people will be found willing to run it. The result is fraud on the revenue on a large scale, and the harshest penal laws, every time they've been tried, have proved no guard against it.

The only device yet discovered for reconciling high duties with a safe collection is a second inspection, inside the country.

If the goods are followed from the moment they're imported into the hands of the dealers who sell them, the risk of being caught goes up so sharply that comparatively few will dare to run it. In fact, every dealer who isn't himself the fraudulent importer then becomes a kind of sentry watching him.

In the Secretary's opinion, introducing a system built on this principle, in one form or another, is essential if any attempt to make the revenues of the United States equal to their needs, their safety, their prosperity and their honor is to succeed.

It's no less essential to the interest of the honest, fair trader. It might even be added that every individual citizen, besides his share in the general welfare, has a particular interest of his own in it. Smuggling always has one of two effects, and sometimes both. Either the smuggler undersells the fair trader, as he can afford to by saving the duty, and so in effect makes the trader bear the cost; or he sells at the higher price the duty has created, and cheats everyone who buys from him of his share of what the public ought to receive. For plainly the loss falls in the end on the citizens, who must be charged other taxes to make up the shortfall and supply the wants of the State.

The Secretary won't presume that the plan he is about to submit to the House is the best that could be devised. But of all the plans of equal effectiveness that have occurred to him, it is the one that seems freest from objections. He admits, too, that it could be strengthened by further safeguards for the revenue, which he didn't think it wise to add. The main outlines of the plan aren't original. But it's no bad recommendation of a plan that it has been tried, and has worked.

The Secretary accordingly proposes the following.

That the duties already laid on wines, distilled spirits, teas and coffee cease after the last day of May next, and that the following duties be laid in their place:

On every gallon of Madeira wine of the London Particular grade, thirty-five cents.

On every gallon of other Madeira wine, thirty cents.

On every gallon of sherry, twenty-five cents.

On every gallon of other wine, twenty cents.

On every gallon of distilled spirits more than ten percent below proof, according to Dicas' hydrometer (an instrument for measuring the strength of spirits), twenty cents.

On every gallon of those spirits more than five and not more than ten percent below proof, according to the same hydrometer, twenty-one cents.

On every gallon of those spirits at proof, or not more than five percent below proof, according to the same hydrometer, twenty-two cents.

On every gallon of those spirits above proof, but not more than twenty percent above, according to the same hydrometer, twenty-five cents.

On every gallon of those spirits more than twenty and not more than forty percent above proof, according to the same hydrometer, thirty cents.

On every gallon of those spirits more than forty percent above proof, according to the same hydrometer, forty cents.

On every pound of Hyson tea, forty cents.

On every pound of other green tea, twenty-four cents.

On every pound of Souchong and other black teas, except Bohea, twenty cents.

On every pound of Bohea tea, twelve cents.

On every pound of coffee, five cents.

That on spirits distilled within the United States from molasses, sugar or other foreign materials, the following be paid:

On every gallon of those spirits more than ten percent below proof, according to Dicas' hydrometer, eleven cents.

On every gallon of those spirits more than five and not more than ten percent below proof, according to the same hydrometer, twelve cents.

On every gallon of those spirits at proof, or not more than five percent below proof, according to the same hydrometer, thirteen cents.

On every gallon of those spirits above proof, but not more than twenty percent above, according to the same hydrometer, fifteen cents.

On every gallon of those spirits more than twenty and not more than forty percent above proof, according to the same hydrometer, twenty cents.

On every gallon of those spirits more than forty percent above proof, according to the same hydrometer, thirty cents.

That on spirits distilled within the United States, in any city, town or village, from materials grown or produced in the United States, the following be paid:

On every gallon of those spirits more than ten percent below proof, according to Dicas' hydrometer, nine cents.

On every gallon of those spirits more than five and not more than ten percent below proof, according to the same hydrometer, ten cents.

On every gallon of those spirits at proof, or not more than five percent below proof, according to the same hydrometer, eleven cents.

On every gallon of those spirits above proof, but not more than twenty percent above, according to the same hydrometer, thirteen cents.

On every gallon of those spirits more than twenty and not more than forty percent above proof, according to the same hydrometer, seventeen cents.

On every gallon of those spirits more than forty percent above proof, according to the same hydrometer, twenty-five cents.

That on every still used to distill spirits from materials grown or produced in the United States, anywhere other than in a city, town or village, there be paid a yearly sum of sixty cents for every gallon, English wine measure, of the still's capacity, including its head.

The Secretary doesn't divide the duties on teas into different classes, as the import act of the last session did, because that division rests on considerations of commercial policy, not of revenue. It's enough for him to note that the rates given above are proposed with reference to the lowest class.

The Secretary doesn't think he could give an accurate idea of the plan he has in mind for collecting these duties in any way as effective as drafting a bill for the purpose. He respectfully asks leave, therefore, to refer the House to the draft bill on distilled spirits annexed to this report, which comes with notes in the margin to explain some of its parts more fully.

The Secretary's intention would be to collect the duty on wines on exactly the same plan as the duty on imported spirits.

As for teas and coffee, however, the Secretary is inclined to think it will be wise to leave out the officers' ordinary right to visit and inspect the places where those goods are kept, at least until experience shows it would be proper to go further. The other safeguards, even without this one, will give considerable security, though not complete security.

The House will not fail to notice that in this plan the Secretary has taken the most scrupulous care to protect the citizens it will directly affect from every kind of injury through the misconduct of the officers employed. There are strong safeguards against the officers abusing their authority. They can be prosecuted as criminals for any abuse they commit, and they can be sued for damages by individuals for any harm their actions or their neglect may cause. More than that: even where goods are seized with probable cause, if the goods are then cleared, the owners are to be compensated out of the public treasury for any injury to their property, and even for its being held.

Indeed, the Secretary has been so anxious to avoid every appearance of hardship that he has even included payment to the dealers for the part they play in helping the revenue.

All these safeguards show a spirit of moderation and justice on the part of the government. Consider, too, that the object of the proposed system is to establish public credit firmly; that the character, security and prosperity of the nation depend on that; that advantages important in every light may be expected from it; that it will act directly on an enlightened class of citizens, warmly devoted to good government and to a liberal and broad-minded policy; and that the virtuous among them have a special interest in helping to restrain illegal trade. Taken together, these give the soundest grounds for confidence that the plan, if it is a good one in itself, will meet with the cheerful and prompt agreement of the community.

The Secretary estimates the net yield of the duties proposed in this report at about one million, seven hundred and three thousand, four hundred dollars, according to the estimate in Schedule K. If that is near the truth, it will, together with the likely yield of the duties on imports and tonnage, make up the sum required.

But it will readily occur to the House that in a field so little explored there must be considerable uncertainty in the figures. For that reason it will be prudent to have a backup resource for the first year in which the interest falls due, so that there can be no chance of disappointing the public creditors before there is an opportunity to make up any shortfall the experiment reveals. This will accordingly be attended to.

The next thing to consider is how the funds already provided, and still to be provided, should be applied.

On this head, the Secretary would propose that the duties on distilled spirits be applied first of all to paying the interest on the foreign debt.

That, after six hundred thousand dollars a year is reserved out of the rest of those duties for the ordinary running of the government, the surplus, together with the yield of the other duties, be applied to paying the interest on the new loan, by an appropriation lasting as long as the debt itself.

And that, if any part of the debt is left unsubscribed, the excess revenue be divided among the creditors who hold that part, as a temporary arrangement, but limited to four percent.

It can hardly have gone unnoticed that the Secretary has so far said nothing about the Post Office. The reason is that he means to apply the revenue from it to a sinking fund: money set aside to buy back and retire the debt. The Postmaster General's opinion is that, properly arranged, its immediate yield would probably be not less than one hundred thousand dollars. And by its nature, if it's well managed, it is bound to grow, and is likely to become a considerable fund. The Postmaster General is now preparing a plan that will form the basis of a proposal for reorganizing the service. The Secretary asks leave to reserve this, and some other points on the subject referred to him, for a future report.⁵

The Secretary is convinced that the proper funding of the present debt will make it a national blessing. Yet he is far from accepting the doctrine, in the sweeping form in which it is sometimes laid down, that "public debts are public benefits." That doctrine invites extravagance and is open to dangerous abuse. On the contrary, he earnestly wishes to see it built into the system of public credit of the United States as a fundamental maxim that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal. And he believes it is hard to imagine a situation in which the maxim couldn't be kept. At the very least, he sincerely hopes the United States will try, and will begin their measures for establishing credit by keeping it.

With this in mind, the Secretary proposes that the net yield of the Post Office, up to a sum not exceeding one million dollars, be placed in trust with a board of commissioners: the Vice President of the United States, or the President of the Senate, the Speaker of the House of Representatives, the Chief Justice, the Secretary of the Treasury and the Attorney General of the United States, whoever holds those offices at the time. They, or any three of them, are to apply it to paying off the existing public debt, either by buying stock in the market or by payments on the principal, as seems most advisable to them, consistently with the public's engagements. The trust is to continue until the whole of the debt has been paid.

As a further means of reducing the debt, and for other purposes to be mentioned, the Secretary would also propose that the same commissioners be authorized, with the approval of the President of the United States, to borrow on their credit a sum not exceeding twelve million dollars, to be applied as follows.

First, to paying the interest and installments on the foreign debt to the end of the present year, which will take 3,491,932 dollars and 46 cents.

Second, to making up any shortfall that may occur in the yield of the funds provided for paying the interest on the domestic debt.

Third, to changing the form of the part of the foreign debt that bears interest at five percent. The Secretary believes that for this purpose a new loan at a lower interest can be combined with other measures. What remains of this part of the debt, after paying the installments that fall due in the course of 1790, will be 3,888,888 dollars and 81 cents.

Fourth, to buying up the public debt at its market price while that price stays below its true value. In the Secretary's opinion, this would be highly dishonorable to the government if it came before a provision for funding the debt; once that provision had been made, it would be entirely unobjectionable. Its effect would favor the public creditors, since it would tend to raise the value of the stock, and the whole difference between the true value and the price actually paid would be clear gain to the public. Suppose the capital borrowed for this purpose had to be borrowed abroad, so that interest on it went to foreigners. In the Secretary's judgment, that would be no good objection to the measure. The saving from the operation would itself be enough to make up for it, and the use of that capital, in a country placed as this one is, would more than repay it. Besides, if the government doesn't undertake this operation, the drawback the objection points to will happen anyway, in another and worse form. As long as the debt stays below its proper value, it will be a target for foreign speculators. They'll not only collect the interest on what they buy and send it abroad, just as in the case of the loan, but also pocket the further profit of the difference in value. If the government competes with them, it will take part of that profit for itself, and it will also shrink the scale of foreign buying and cut into its extra profit. That competition will speed the rise of the stock, and whatever higher price this forces foreigners to pay for what they buy is so much clear saving to the nation. In the Secretary's opinion, and contrary to an idea that has its supporters, it ought to be the government's policy to raise the stock to its true value as fast as possible. Once it gets there, foreign speculation, which until then must be considered harmful except insofar as it helps bring the stock to that point, will become beneficial. Foreign money invested here, in our agriculture, commerce and manufactures, will produce far more for us than the income the foreigners draw from it.

The Secretary intends this money to be applied through a national bank, for which, with the permission of the House, he will submit a plan in the course of the session.

Last of all, the Secretary now offers for the consideration of the House his ideas about the steps that ought to be taken, in the present session, toward the assumption of the state debts.

In brief, they are that the two Houses, with the approval of the President, adopt concurrent resolutions declaring in substance as follows.

That the United States do assume, and will, at the first session in the year 1791, provide for, on the same terms as the present debt of the United States, all such parts of the debts of the several states, or of any of them, as are subscribed, before the first day of January 1791, toward a loan to the United States on the principles of whichever of the plans they adopt for re-lending their present debt.

Provided that the provision so to be made is suspended, for the debt of any state that has exchanged securities of the United States for securities of its own, until all of those securities have either been exchanged back or surrendered to the United States.

And provided also that the interest on the debt assumed is computed to the end of 1791, and that the interest to be paid by the United States begins on the first day of January 1792.

That the amount of each state's debt so assumed and provided for be charged to that state in its account with the United States, on the same principles on which it is lent to the United States.

That subscriptions for loans of those debts be opened at the same times and places, and under the same regulations, as are laid down for the debt of the United States.

The Secretary has now covered everything he set out to include in this report. For the most part he has left out details, partly so as not to tire the attention of the House, and partly because more time would have been welcome even to work out the general principles of the plan. If those principles prove right, the particular adjustments will readily suggest themselves as the work goes forward.

In pursuing this subject, the Secretary has been guided, first, by the thought that his duty, under the very terms of the House's resolution, obliged him to propose what seemed to him an adequate provision for the support of public credit, fitted at the same time to the real circumstances of the United States. Second, he has been guided by the reflection that measures that won't stand up to later, unbiased examination can bring neither credit to the man who proposes them nor, what matters far more, honor or advantage to the public.

The Secretary is deeply impressed, with a full and considered conviction, that establishing public credit on the basis of a satisfactory provision for the public debt is, in the present circumstances of this country, the one thing most needed for relief from the troubles of individuals and of the nation, and that without it those troubles are likely to press still harder on the community. He can't help, therefore, cherishing an anxious wish that the combined wisdom of the legislature may produce an effective plan for that purpose during the present session.

He is fully convinced that it matters greatly that the necessary provision not be delayed any further. It will give a better impression of the country's good faith, and it will bring the creditors relief sooner, and both of these count for a great deal with public credit. But there's a further reason. The advantages to the community of raising the stock to its natural value as quickly as possible will be incomparably greater than any that could come from its staying below that level. No profit the government could make by buying in the market, on any practicable scale, would make up for the loss the country would suffer from foreigners buying at a low price. And, not to repeat the point at length, government buying, to be honorable, ought to come after a provision has been made. Delay would spread doubt, and doubt would sink the price of the stock. Since the low price would be too great a temptation for foreign speculators to pass up, millions would probably be lost to the United States.

All which is humbly submitted.

Alexander Hamilton, Secretary of the Treasury.

What a Bank Is For

Communicated to the House of Representatives, December 14, 1790. Treasury Department, December 13, 1790.

On the ninth of August last, the House of Representatives ordered the Secretary of the Treasury to prepare, and report on this day, whatever further provision he thought necessary for establishing the public credit. In obedience to that order, the Secretary respectfully reports further as follows.

He is convinced, as he suggests in the report presented along with this one, that a national bank is an institution of the first importance to the successful management of the nation's finances, and that it would be of the greatest use in everything connected with supporting the public credit. That conviction has led him to work out a plan for such an institution, on a scale that will earn it the public's confidence and make it likely to meet the public's needs.

Before going into the details of the plan, he asks the House's patience for some preliminary reflections that arise naturally out of the subject, and which he hopes won't be thought either useless or out of place. Public opinion is the final judge of every measure of government. Out of deference to it, then, it can hardly seem improper to send any new proposal out into the world with explanations, even when the people it is addressed to, knowing more than most, wouldn't need them.

It's a well-known fact that public banks have been welcomed and supported by the leading and most enlightened commercial nations. One after another they have taken root in Italy, Germany, Holland, England and France, as well as in the United States. And there is one circumstance that can't help carrying considerable weight with anyone who judges fairly what such banks tend to do: after centuries of experience, nobody in the countries where they have been established longest questions their usefulness at all. Theorists and men of business agree on it.

Wherever banks have been tried, trade and industry have owed them important help, and governments have been under the deepest obligations to them, again and again, in dangerous and desperate emergencies. Our own government has received help from the banks established among us, both at some of the most critical moments of the late war and since the peace, and it could not have done without that help.⁶

With this double evidence before us, you might expect opinion to be perfectly united in favor of banks. Yet doubts have been raised, and suspicions and prejudices have spread. Experience is clearing them away every day, at least where the effects of banks are best known, but there are still people who haven't entirely given them up. A full and accurate treatment of the subject would turn a report into a treatise. There are, however, certain aspects of it that can be laid out briefly, and that may help to give a fair impression of its merits. That will mean weighing the advantages of such institutions against their disadvantages, real or supposed.

Among the principal advantages of a bank are the following.

First: it increases the active, or productive, capital of a country. Gold and silver, when they serve only as instruments of exchange, passing from hand to hand as things are bought and sold, have been called "dead stock," and not unfairly. But deposit them in a bank, to become the basis of a paper circulation, and they come to life. The paper takes their character and their place as the sign, or representative, of value, and the gold and silver themselves acquire an active and productive quality. Put this way, in general terms, the idea sounds rather subtle and abstract. A few particulars will make it plain and concrete.

Take a merchant who keeps money in his strongbox, waiting for a good chance to use it. Plainly that money produces nothing until the chance comes. But suppose that instead of locking it up, he deposits it in a bank, or invests it in the bank's stock. Then it earns a profit in the meantime, and he shares in that profit or not, depending on whether he has chosen to be a depositor or an owner. When a promising venture turns up and he wants to seize it, all he has to do is withdraw his money, if he's a depositor; if he's an owner, he can get a loan from the bank, or sell his shares, which is seldom or never difficult while the bank's affairs are going well. His money, deposited or invested in this way, becomes a fund on which he and others can borrow a much larger sum.

For it's a well-established fact that a bank in good credit can keep in circulation a far greater sum than the gold and silver it actually holds as capital. How great the excess can be seems impossible to fix, though it has been guessed at two or three to one. The bank gets this power in several ways.

1st. A large share of the bank notes it issues, the paper money a bank puts out and promises to redeem in coin on demand, pass from hand to hand as cash and stay out in circulation indefinitely. They do so because every holder is confident that he can turn them into gold and silver at any moment.

2nd. Banks lend chiefly by discounting: they advance money on a merchant's promissory note and take the interest off in advance. Every loan a bank makes starts out as a credit given to the borrower on the bank's books, a sum the bank stands ready to pay him, in its own notes or in gold and silver, whichever he chooses. In a great many cases, though, nothing is actually paid out in either. The borrower often transfers his credit by a check or order to someone he owes money to. That person, just as often, is happy to take a similar credit in his turn, because he's satisfied that he can turn it into cash whenever he likes, or pass it on to someone else as good as cash. In this way the credit keeps moving, doing the work of money at every stage, until it is finally cancelled against the account of someone who owes the bank an equal or greater sum. Large sums are lent and repaid like this, often through many hands, without a single coin changing hands.

3rd. Besides its own capital, a bank always holds a large quantity of gold and silver that people have placed there, partly to keep it safe and partly for the convenience of an institution that is itself a kind of general convenience. These deposits matter enormously to a bank's operations. They can be drawn out at any moment, of course. But experience shows that this money changes owners far more often than it changes place, and that what is drawn out is generally replaced so quickly that the bank can count on its deposits as a working fund. Together with its capital, that fund lets it extend its loans and meet every demand for coin, whether the demand comes from those loans or from its notes coming back to be redeemed.

These circumstances explain how a bank comes to be able to circulate more than the coin it actually holds as capital. That ability has to grow gradually, though, and confidence has to be firmly established first. The confidence can rest on the most rational grounds, because the excess will always be backed by good security of one kind or another. Every well-run bank insists on such security before it will lend either its money or its credit. And where there is an additional capital besides the coin (as there will be in the plan submitted below), and the two together set a limit the bank's obligations may never exceed, the security can be regarded as complete by every rule of reasonable caution.

The same circumstances show that it is one of the properties of banks to increase a country's active capital. The whole of it comes to this. While a man waits for a chance to use his money, depositing it in the bank for safekeeping or investing it in the bank's stock puts it to work meeting other people's needs, without putting it out of his own reach when his chance comes. It earns him an extra profit, out of what others pay for the use of his money at a time when he couldn't use it himself, and it keeps the money itself constantly in motion. In the endless ups and downs and rivalries of commerce, there's no danger that the demand for it will ever let up, or that the money will lie idle in the bank's vaults for a moment. This additional use given to money, together with a bank's power to lend and circulate more than its stock in coin, amounts, for every purpose of trade and industry, to an absolute increase of capital. Purchases and undertakings in general can be carried on with any given sum of bank paper or bank credit just as well as with the same sum in gold and silver. By enlarging the whole mass of industrious and commercial enterprise in this way, banks become nurseries of national wealth: a result as convincingly proved by experience as it is clearly deduced in theory.

Second: it makes it easier for the government to raise money, especially in sudden emergencies. This is another advantage of public banks, and an undisputed one; as already noted, we have seen striking examples of it ourselves. The reason is obvious. A bank gathers the capital of a great many individuals to one point and puts it under one direction. The sum formed in this way is, in a certain sense, magnified by the credit attached to it. It is always ready and can be set in motion at once to help the government. And quite apart from any regard for the public safety and welfare, the bank's own interest in giving that help is a sure guarantee that it will go as far in obliging the government as prudence could wish. There is, in the nature of things, as will be explained more fully elsewhere, a close connection of interest between a nation's government and its bank.

Third: it makes taxes easier to pay. It does this in two ways. The first is that people who are in a position to use the bank can borrow from it to pay what the government asks of them promptly. Those living where such banks exist have felt this help clearly in paying the duties laid so far. This benefit, though widespread, isn't universal. The second way, which benefits everyone, is by increasing the quantity of money in circulation, the money passing from hand to hand in the ordinary business of the country, and by making it circulate faster.

We have already seen how a bank increases the quantity. The faster circulation may need some explaining. When payments have to be made between two places that do business with each other, and there happen to be no private bills of exchange on the market (merchants' written orders to pay a sum at the other place) and no bank notes accepted in both places, then coin has to be shipped. That means trouble, delay, expense and risk. If, on the other hand, there are bank notes good in both places, they can be sent by post, or by any other quick and convenient means, and they do the job. In the to and fro of demand they often come back soon afterward to the place they were first sent from. Shipping the metal back and forth is avoided, and a more convenient and faster means of payment takes its place. Nor is that all. Instead of being taken out of service while it shuttles from place to place, the metal stays at work, serving the ordinary circulation, which consequently suffers neither shrinkage nor stagnation. These are further causes of what, in practical terms, for the purposes of business, can be called a greater plenty of money. And plainly, whatever increases the quantity of money in circulation makes it easier for every hardworking member of the community to get the share of it he needs, and leaves him better able to pay his taxes as well as to meet his other wants.

Even where the bank's paper doesn't circulate everywhere, it must have the same effect, though to a lesser degree. Whatever pours more money into the channels of circulation in one region naturally helps keep the streams fuller everywhere else. This last point both illustrates the claim that banks make taxes easier to pay and shows how useful they are to every kind of business in which money plays a part.

To go on listing the advantages of banks would be to try the House's patience too far, especially since any others one might name follow readily from those already given. It's time to review their disadvantages, real or supposed. The most serious charges brought against banks are these.

That they increase usury, the lending of money at interest above the rate the law allows.

That they discourage other kinds of lending.

That they tempt people to overtrade.

That they help ignorant adventurers, who disturb the natural and beneficial course of trade.

That they give bankrupt and dishonest traders a false credit, which lets them keep up false appearances and widen their frauds.

And lastly, that they tend to drive gold and silver out of the country.

There is good reason to believe that a close and fair look at these charges will show that either they have no foundation at all, or, so far as the evils they point to have actually occurred, those evils came from other causes, or partial or temporary ones, and aren't part of the nature and lasting tendency of such institutions, or they are more than outweighed by advantages on the other side. We'll take the charges in the order in which they've been stated, beginning with the first.

The Objections to Banks Answered

That banks serve to increase usury.

It's a fact, and one that shouldn't be denied, that the way of doing business which bank operations require has, among us, in particular cases, led to usury. Banks insist on punctual payment; they have to. And that insistence has sometimes forced people who had ventured beyond both their capital and their credit to get money at any price, which means going to the usurers for help.

But experience and practice gradually cure this evil. Traders who must be punctual with the bank fall into a general habit of punctuality, and that habit by itself more than makes up for any occasional harm the same necessity may have done in the way just described. As far as traders depend on one another for money, then, they can count on what's owed them with more certainty. They run proportionally less risk of the disappointments that might drive them to anything as ruinous as borrowing at usury. And the damage usury does, once a few people have been seen to suffer it, naturally makes everyone but the desperate very careful never to be caught in it.

One of the costs of borrowing at usury, and not the least, is that a man who is known, or even strongly suspected, to have done it loses his credit with the bank itself.

The directors of a bank, too, may be tempted while the institution is young to go further in lending than strict prudence would allow, to build up its business and its popularity. But they naturally grow more careful as its affairs become better established, and as experience shows them the evils of lending too easily. They pay closer attention to the situation and conduct of the people they deal with. They watch their dealings and pursuits more narrowly. They ration the credit they give to those whose soundness is doubtful, and refuse it to those whose course is plainly reckless. In a word, the bank's own interest, in the ordinary course of practice and from the very nature of things, will make it the bank's policy to help the careful and hardworking, to withhold credit from the rash and the wasteful, and to discourage usurious lenders and usurious borrowers alike.

There is one leading consideration which shows that banks tend to cut down usury rather than encourage it. It has to do with their power to increase the quantity of money and to speed up its circulation. Usury plainly rises or falls with the proportion between the demand for loans and the amount of money in the market available to be lent. Whatever increases the quantity of money and quickens its movement, whether in the shape of paper or of coin, helps bring the supply closer to the demand, and must therefore tend to check the growth of usury.

But bank lending, it's claimed, gets in the way of other kinds of lending. By confining the chance to borrow to one particular class, it leaves the rest of the community worse off, and so more exposed to the extortions of the usurers. The profits on bank stock run higher than the legal rate of interest, the argument goes, and so people with money would rather invest it in bank shares than lend it out at that rate. They have further reasons too: they can get at their capital more quickly, and they receive their returns more often and more exactly, with no trouble or worry about collecting them. This is the second of the charges listed.

The fact this charge rests on can't be admitted without several qualifications, especially as things stand in this country.

First. The great bulk of a bank's stock will consist of the funds of men in trade here at home and of foreigners with money to invest. The first couldn't afford to put their capital out of reach in loans for long periods, on mortgages or personal security. The second wouldn't be willing to expose their money to the accidents, delays and complications of that kind of lending in a distant country.

Secondly. There will always be a considerable share of the people who are, properly speaking, a country's moneylenders who, from the caution that usually marks men of that sort, will prefer to put their funds into mortgages on real estate rather than into bank stock, which they tend to regard as a less certain security.

These considerations go a good way toward narrowing the factual ground of the objection. But there's a more satisfying answer to it. The effect it supposes, so far as it exists at all, is temporary. In its general and permanent working, the bank does the reverse.

The capital of every public bank will, of course, be fixed within a definite limit. It's the business of a prudent legislature to set that limit at the right point. It mustn't be too small for the demand that the course of business may create, or for the security the public ought to have that the bank's paper is sound. But it must still be within the means of the community, so that the subscriptions can be filled without difficulty. Once that's done, the supposed effect necessarily stops. There's no more room for investing any additional capital. Shares may change hands, of course, one person selling and another buying; but the money the buyer takes out of the common pool to pay for them, the seller receives and puts back into it. It follows that whatever surplus money builds up in the future must take its natural course, and lending at interest must go on as if there were no such institution.

In fact it must flow in a fuller stream. The bank provides an extra supply for borrowers within its own immediate reach. That leaves a larger supply for borrowers everywhere else. As the bank's circulation spreads, the total stock of money available to meet the total demand grows with it. The result is that money becomes easier to get for every purpose.

One more point deserves mention. Insofar as citizens of other countries invest in the bank, there's a positive increase in the gold and silver of this country. True, a rent is drawn back out of it every half year, in the dividends on their stock. But since this rent comes from the use our own citizens make of that capital, the profits of that use probably more than replace it. Part of it, too, is likely to be turned, in the course of trade, into the products of our own country. It may even, in some cases, encourage immigration to a country where citizenship is as easy to acquire as it is valuable and important. This view of the matter answers an objection drawn from the same circumstance, namely the income foreigners will receive from the part of the stock they own, which has been described as tending to drain the country of its gold and silver coin. That objection seems to overlook both the original investment of the capital and its constant use afterwards.

That banks tempt people into overtrading is the third of the objections listed. This must mean that by giving extra support to commercial enterprise, they sometimes lead the merchant to venture beyond the prudent or healthy point. But merely stating the charge shows that what it complains of is an occasional harm attached to a general good. Credit of every kind (and only as one kind of credit can bank lending have the effect supposed) must be open, in varying degrees, to the same drawback. The same is true even of gold and silver when there's plenty of them in circulation. But would it be wise, on that account, to run down the precious metals, to root out credit, or to outlaw the means of that spirit of enterprise which is the mainspring of trade and a principal source of national wealth, just because it now and then runs to excesses, overtrading among them?

If the abuses of a useful thing are to be the grounds for condemning it, there's hardly a source of public prosperity that won't soon be shut down. In every case the evil has to be weighed against the good. In this case the weighing comes out like this: the new and greater energy that commercial enterprise draws from the help of banks is a source of general profit and advantage that far outweighs the partial harms, the overtrading of a few individuals at particular times, or of larger numbers at particular moments.

The fourth and fifth charges can be taken together. They concern the help banks sometimes give to unskillful adventurers and to dishonest traders. These charges, too, have some foundation, though far less than has been claimed, and they're further examples of partial harms bound up with wider benefits that outweigh them.

Giving false credit to the wrong people is one of those evils that experience, guided by self-interest, quickly corrects. The bank itself stands in such danger of losing by it that it has the strongest possible reason to be on its guard. It may be hurt directly by the defaults of the people it gave credit to, and in the end also by the failures of others whom their frauds or their bankruptcies have ruined.

Nor is a bank likely to fall into this error for lack of information. The directors are mostly chosen from among the traders themselves, and they can be expected to know, individually and accurately, the characters and circumstances of the men in that line of business. On top of that they have, to help their judgment, each person's own record of dealings with the bank, which in most cases is a good sign of how he stands. The tricks and dodges that men in desperate or failing circumstances are forced into, to keep up the appearance the bank's rules require and to hold their network of connections together, are so many warning signs, and not hard to read, of what awaits them. That's why it isn't unusual for banks to be the first to discover that such people are unsound, and, by cutting off their credit, to announce to the public that they don't deserve any.

If banks, in spite of every precaution, are sometimes tricked into giving false credit to people of this kind, more often they enable honest, hardworking men with little or perhaps no capital to start and carry on a business, to their own advantage and the community's. They also help merchants of real capital and credit who meet with chance and unforeseen shocks, which without such help might ruin them and others with them, to stand up against their misfortunes and finally to restore their affairs. These are no small points in praise of the usefulness of banks.

But the last and heaviest charge is still to be examined: that banks tend to banish the gold and silver of the country.

The force of this objection rests on their being an engine of paper credit, which, by providing a substitute for the metals, is supposed to encourage their export. If it has any foundation at all, it lies not against banks in particular but against every kind of paper credit.

The most common answer given to it is that the effect supposed matters little or not at all. It makes no difference, this answer says, what serves the purpose of money, paper or gold and silver; the effect of either on industry is the same; and the real wealth of a nation is measured not by how much of the precious metals it holds but by the quantity of what its labor and industry produce.

This answer has some substance, though it isn't entirely satisfying. It's certainly true that a full circulation, aided by a proper and well-regulated paper credit, can so enliven industry that it more than makes up for the loss of part of a nation's gold and silver, if the price of avoiding that loss would be a thin or inadequate circulation.

But a lasting increase or decrease of the precious metals in a country can hardly ever be a matter of indifference. Gold and silver are the commodity accepted in exchange for every other, and that makes them a form of wealth of the most effective kind. And as the money of the whole world, they matter greatly to the state, which needs enough of them to meet any demands that the protection of its interests abroad may create.

The objection seems open to another and more decisive answer, one that disputes the fact itself. A nation with no mines of its own has to get the precious metals from others, generally in exchange for the products of its labor and industry. The amount it will hold will therefore, in the ordinary course of things, be governed by whether its balance of trade is favorable or unfavorable: that is, by the proportion between what it can supply to foreigners and what it needs from them, between the value of its exports and the value of its imports. Hence the state of its agriculture and manufactures, the quantity and quality of its labor and industry, must in the main decide whether its gold and silver increase or decrease.

If that's true, the conclusion seems to be that well-designed banks favor an increase in the precious metals. It has been shown that they enlarge, in several ways, the active capital of a country. It's this capital that creates employment, that sets labor and industry moving and makes them grow. Every addition to it helps set more of both in motion, and so tends to create more of what both produce. By providing more goods for export, it contributes to a favorable balance of trade, and therefore to the arrival and increase of gold and silver.

This conclusion seems to be drawn from solid premises. There are, however, objections to be made to it.

It may be said that because bank paper provides a substitute for coin, it weakens the strict need for the metals as a medium of circulation, a need that, when the balance of trade runs the wrong way, might in some degree hold back their export. And it may be added that, for the same reason and in the same situation, bank paper would delay the thrifty and frugal changes in people's way of living that a scarcity of money tends to produce, and that might be needed to correct the unfavorable balance.

There may be some truth in both of these observations. But they seem to be the kind of thing that makes exceptions to the general conclusion rather than overturning it. A situation in which the bare needs of circulation could be expected to resist, with any real effect, the pressing demand for coin that an unfavorable balance of trade may create is an extreme case. And a situation in which a community's way of living has grown too expensive for its means, and needs to be corrected by distress or necessity, is perhaps one that rarely arises except from extraordinary and accidental causes. A national revolution is an example: it unsettles all the established habits of a people, and inflames their appetite for extravagance with the illusion of an imaginary wealth, bred by the constant multiplication of a currency that keeps losing its value, or by some similar cause. There's good reason to believe that where the laws are wise and well enforced, and property and contracts are kept inviolable, a people's spending will, in the ordinary course of things, match its means.

Keeping industry going probably does more, in every case, to correct an unfavorable balance of trade than any cutbacks that families or individuals could realistically make in their spending. And letting industry stagnate would probably do more to prolong the unfavorable balance than any such savings would do to shorten it. Stagnation is the natural result of an inadequate medium of exchange, and without the help of bank circulation it would be severely felt in the cases supposed.

It's also worth noticing that a bank's circulation always depends jointly on the fund behind it and on the demand for it, and that the fund itself is reduced when the metals are exported. There's no danger, then, of the circulation being overstocked, as there is with paper issued whenever the government pleases. Nor is there any danger of its keeping the effects of an unfavorable balance from being felt enough to bring about the reforms just mentioned, as far as circumstances require and permit.

Nothing could be less reliable than the comparisons people have drawn between different countries to illustrate the claim we're considering. How much gold and silver one country holds compared with another depends on an endless variety of facts and combinations, and all of them would have to be known before anyone could judge whether the presence or absence of paper currency has anything to do with the difference. There's the quantity and value of what each country's labor and industry produce, compared with what it needs; the nature of its establishments abroad; the kind of wars it usually fights; its relations with the countries that originally own the metals; the privileges it enjoys in their trade. These and a number of other circumstances all have to be taken into account. They make the inquiry far too complex to justify any reliance on the vague, general guesses that have so far been ventured on the point.

In the discussion so far, the objection has been treated as applying to the permanent expulsion and loss of the metals. Their temporary export for particular purposes hasn't been considered. That, it must be admitted, banks do make easier, since they can supply the metals' place. But their usefulness shows nowhere more clearly than in exactly these cases. They enable the government to pay its foreign debts and to meet any emergency the community's affairs abroad may have produced. They enable the merchant to keep up his credit, on which the prosperity of trade depends, when special circumstances prevent him from making his payments in other ways. They also enable him to carry out ventures that in the end tend to increase the very kind of wealth in question. Gold and silver can often, plainly, be spent buying goods abroad which, in a roundabout trade, replace the original fund with a considerable addition. It doesn't follow, then, from the ease banks give to temporary export, that institutions so friendly to trade and industry are, in their general tendency, hostile to the increase of the precious metals.

These several views of the subject seem enough to give a full conviction of the usefulness of banks, and to show that they are of great importance, not only to the management of the public finances but to the whole economic system of the nation.

Many people's judgment of banks has no doubt been confused by misreading appearances that should have been put down to other causes. The general destruction of personal property during the late war naturally produced, on the one hand, a great demand for money, and on the other, far too little money to meet it. Some unwise laws that grew out of the public distress made matters worse, by undermining confidence and causing part of the country's already inadequate supply of money to be locked away. There were the wasteful habits many people picked up during the war, which after the peace plunged them into spending beyond their incomes. There were the swarms of adventurers without capital, and often without knowledge, who rushed into trade at that time and had to make any sacrifice to keep up a passing credit. There were the considerable sums tied up in speculation on the public debt, which, being still unsettled, couldn't itself serve as a substitute for money. All these circumstances together inevitably led to usurious borrowing. They produced most of the trouble, and they were the true causes of most of the appearances that some people, where banks had been set up, have wrongly blamed on the banks. It's a mistake they could easily have avoided by looking at places where there were no banks, and where the same evils could have been seen, even worse than where those institutions existed.⁷

These evils have either ended or been greatly reduced. Their more complete disappearance can be expected from several sources. There is the added security for property that the Constitution of the United States happily provides, a circumstance of enormous weight for both public and private prosperity. There is the foreign capital that this security will attract, to be put to work on projects and ventures for which the state of this country opens a wide and inviting field. There is the solidity and stability the public debt is fast acquiring, in fact as well as in opinion at home and abroad. There is the increase of capital that this, together with the payment of interest every quarter, will provide. And there is the fuller circulation that a well-designed national bank is likely to create.

The establishment of banks in this country seems to be recommended by reasons of a special kind. Before the Revolution, circulation was carried on to a great extent by paper money issued by the several colonial governments. In Pennsylvania alone there was nearly a million and a half dollars of it. That support can now be said to be gone. And it's generally believed that for some time past there hasn't been enough circulating money. How far that shortage is real and how far imaginary can't be proved. But there are circumstances and appearances, taking the country as a whole, that lend support to the belief that it's real.⁸

The circumstances are, besides the fact just mentioned about the paper money, the vast tracts of uncultivated land and the backward state of manufactures. Settling that land, while it promises a rich return in the resources it will create in the future, reduces or holds back the active wealth of the country in the meantime. It draws off part of the circulating money and puts it in a more idle state. It also pulls into its own channels a share of the labor and industry that would otherwise go into producing goods for foreign trade, and that, by helping toward a favorable balance, would help bring gold and silver into the country. In the early years of a new settlement, the settlers not only produce no surplus for export; they consume part of what other people's labor produces. The same cause keeps manufactures from advancing, or lets them advance only slowly. And whatever some theories may say to the contrary, there's a good deal to make one suspect that the precious metals will never be plentiful in any country that has neither mines nor a variety of manufactures. They've sometimes been got by the sword; but the modern way of making war has done away with that resource, and it's one the United States, it is to be hoped, will never be inclined to rely on.

The appearances referred to are these. First, barter is more common in the more inland districts of the country, though it has been gradually declining for some time. Second, it's generally harder to sell improved real estate at a fair price; that difficulty has also lessened lately, but it's still seriously felt in various parts of the Union. The difficulty of getting money, which has been a general complaint, isn't added to the list, because it's the complaint of every age, and one in which the imagination has always had far too much room for it to be appealed to as evidence.

If the belief in such a shortage is at all well founded, and some help to circulation is desirable, it remains to ask what kind of help it should be.

The National Constitution wisely forbids the individual states to issue paper money on the government's authority, and the Government of the United States ought not to disregard the spirit of that prohibition. Paper issued under the general government's authority might have some advantages that state issues lack, and be free of some of the disadvantages they carry. Even so, paper money of this kind is so open to abuse, and, one can even say, so certain to be abused, that the government will show its wisdom by never trusting itself with so tempting and dangerous a resource. In quiet times it might do no harm; it might even, perhaps, be managed so as to do some good. But in great and testing emergencies it is almost morally certain to become harmful. Printing paper is so much easier than laying taxes that a government in the habit of issuing paper money would hardly ever fail, in such an emergency, to go too far with it, to avoid as much as possible the other resource, which is less likely to make it popular at the moment. Even if it weren't carried so far as to become a complete bubble, it would at least probably be stretched to the point of producing an inflated and artificial state of things, incompatible with the regular and prosperous working of the economy.

Among the other important differences between a paper currency issued on the government's bare authority and one issued by a bank and payable in coin, there is this. In the first case there is no standard to appeal to, for telling how much will just meet the needs of circulation and how much will overload it. In the second, that standard comes from the demand. If the bank issues more than is needed, the surplus will come back to it, to be turned into coin. Its issues, as was said earlier, must always depend jointly on its fund and on the demand. Clearly, then, there's a limit in the very nature of the thing, whereas the only measure of how much paper a government issues on its own authority is the government's own discretion.

This consideration further shows the danger of paper money of that sort, and the preference that bank paper deserves.

The payment of the interest on the public debt at thirteen different places is a weighty reason, special to our present situation, for wanting a bank circulation. Without a paper money in general use that is as good as gold and silver, a considerable part of the country's coin will always have to be withdrawn from circulation and left to pile up ahead of each payment day. And every time a payment day comes round, the metals will in several cases actually have to be carried, at both expense and risk, from the places where they naturally and properly collect to distant ones. This necessity will be felt as a real injury to the trade of some of the states, and it will cause the treasury no small difficulty in its operations there. It will also obstruct the transfers between different parts of the Union by means of treasury bills, which have already been a valuable convenience to trade in general.

Why a New Bank, and on What Principles

Let's take it, then, from what has been said, that a national bank is a desirable institution. Two questions now arise. Is there no such institution already in existence, with a claim to that character, that makes another one unnecessary or improper? And if there is none, on what principles ought one to be established?

There are at present three banks in the United States: the Bank of North America, in the city of Philadelphia; the Bank of New York, in the city of New York; and the Bank of Massachusetts, in the town of Boston. Of the three, the first is the only one that has ever had a direct relation to the Government of the United States.

The Bank of North America began with a resolution of Congress of May 26, 1781, based on a proposal by the Superintendent of Finance. It was put into effect afterwards by an ordinance of the following December 31, entitled "An ordinance to incorporate the subscribers to the Bank of North America."⁹

The help this institution gave the United States during the rest of the war was of vital importance, and its conduct toward them since the peace has done nothing to weaken its claim on their support and goodwill. To that extent its claim to be the national bank deserves respect. But there are circumstances that tell against it, and considerations that point to the wisdom of an establishment built on different principles.

The directors of this bank, acting for its stockholders, have since accepted a new charter from the State of Pennsylvania and operated under it. That charter differs materially from the original one, and it narrows the institution's foundation so much that it can no longer serve as an adequate base for the wide purposes of a national bank.

The ordinance of Congress set the limit on the bank's capital at ten million dollars. Pennsylvania's last charter confines it to two million. The questions naturally arise whether two charters so differently framed don't flatly contradict each other, and whether accepting the one shouldn't be treated as, in effect, surrendering the other. Perhaps, though, it's neither advisable nor necessary to try to settle them.

Nothing in the acts of Congress implies that the institution they concern has an exclusive right, except during the war. Nothing, therefore, prevents establishing another, if the public good requires it. It may be remarked in passing, however, that in the general opinion of the citizens of the United States, the Bank of North America has come to occupy the place of a bank of Pennsylvania only. That is a strong argument for a new institution, or for a renewal of the old one, to restore it to the position it originally held in the eyes of the United States.

But although the ordinance of Congress grants no exclusive privileges, it might be argued that the Government of the United States, as a matter of fairness and good faith, ought not to set up a rival or competing institution to the injury of the one already there, especially since this one, by its services, has well-founded claims to protection and consideration.

Within proper bounds, the justice of that observation ought to be admitted. A new establishment of this kind shouldn't be made without strong and genuine reasons of public good. And in the way it's done, every facility should be offered for merging the old bank with the new, on terms that harm neither party. But there's no ground for holding that where the government has made no condition restricting its authority, it ought to restrict that authority voluntarily, out of regard for the interests of one particular institution, when the interests of the State dictate a different course. That's all the more true given what has since happened to the Bank of North America.

We come now to the reasons for a new arrangement. The first that presents itself is the ambiguous position, to say the least, in which the Bank of North America has put itself by accepting its last charter. If that has made it merely the bank of one particular State, liable to be dissolved when fourteen years are up (the term to which that State's act has limited it), it would be neither fitting nor wise to accept it as the equivalent of a bank of the United States.

The restriction on its capital, which on the same supposition can't be raised above two million dollars, is also a conclusive reason for a different establishment. A capital that small promises neither the help the government needs nor the security the community needs. It may serve very well for local business, but it's an inadequate foundation for a circulation of notes as wide as the United States, taking in the whole of their revenues and touching every person into whose hands the paper may come.

And inadequate as such a capital would be for the essential ends of a national bank, it's liable to become more inadequate still because of a principle in the Bank of North America's constitution, found in its old charter and its new one alike. That principle leaves any increase in the actual capital (now far below the permitted limit) to the discretion of the directors or stockholders. It's only natural to expect that the attraction of a rising share price and large dividends will make the interested parties reluctant to enlarge the capital, since they'll tend to fear it would shrink their profits. Through this arrangement, the interest and convenience of the public, individually as well as collectively, are made more subordinate than they ought to be to the interest, real or imagined, of the stockholders. It's true that unless the stockholders' interest is consulted, there can be no bank at all, at least not in the sense in which institutions of this kind, worthy of confidence, can be established in this country. But it doesn't follow that their interest alone is to be consulted, or even that it ought to come first. The real object of public banks is public usefulness, more than private profit. And it's the business of government to frame them on such principles that private profit comes in a sufficient degree to give people good reason to invest, while public usefulness is not made its servant. To achieve this, a principal concern should be to give free scope to building an ample capital: to fix the limits judged safe and convenient, and then to leave no discretion either to stop short of them or to go beyond them. The lack of this precaution in setting up the Bank of North America is a further and an important reason for wanting a bank constituted differently.

At first sight one might suppose there's nothing to fear here. A bank's profits will be in proportion to the extent of its business, and for that reason any necessary increase of capital won't hurt the stockholders' interest; why, then, would they be unwilling to make one? But in matters of this kind most men prefer the certainties they enjoy to probabilities that depend on untried experiments, especially when those experiments promise rather that they won't be harmed than that they'll be helped.

Under the influence of this principle, and out of a wish to raise its profits, the directors of a bank will be more likely to overstretch its resources in trying to meet the extra demands that the course of business may bring than to open new subscriptions for shares, which might risk lowering the profits and even, for a time, the price of the stock.

Banks are among the best means of lowering the rate of interest in a country. But to have this effect, their capital must be fully equal to all the demands of business, and large enough to dispel any idea that the loans they make are in any degree favors. That idea very readily attends the stingy handing out of a cramped fund. In this, as in every other case, plenty of the commodity ought to bring a moderate price.

Another argument for changing the establishment is that the constitution of the Bank of North America lacks any principle of rotation, any rule that its directors must periodically give up their seats. Hardly one of the reasons that tell against such a principle in the constitution of a country applies to the constitution of a bank, while there are strong reasons for it in the case of a bank that don't apply to a country. The knowledge gained from experience is the only consideration common to both that argues against rotating the directing officers of a bank.

But the objects of governing a nation and of governing a bank are so widely different that this consideration loses most of its force where a bank is concerned. Almost every important question in legislation calls, if it is to be decided rightly, for a broad and accurate knowledge of the affairs of the State, and for habits of thought seldom acquired except through long familiarity with public business. Running a bank, on the other hand, is governed by a few simple, fixed rules, which aren't hard for any man of judgment to apply, especially one schooled in the principles of trade. In general, it's an endless repetition of the same details.

Still, even so, the value of experience isn't to be dismissed. Room should be left for official knowledge to be passed on in a regular way, and for that purpose the head of the board ought to be exempt from rotation. With that exception, and with the information the subordinate officers can supply, there can be no danger of ill effects from a lack of experience or knowledge, particularly since the periodic retirement ought never to reach all the directors at once.

The argument for rotation is this: by lessening the danger that the directors will combine to make the institution serve party purposes, or to favor some particular set of men, it will make the public's confidence firmer, steadier and more complete.

Consider who elects the directors of a bank. It isn't the great body of the community, where different views will naturally prevail at different times. It's a small, select class of men, among whom it's far easier to keep up a steady attachment to the same people and the same aims. And the directors are in a position to win that class over directly, by obliging its most influential members. Put those facts together and it's easy to see that, without rotation, changes on the board will rarely happen except as a concession the directors themselves think it wise to make to public opinion.

When an institution of this kind is run continually by the same people, it will never fail to stir up distrust and discontent, whether or not their conduct gives cause. The secrecy its business requires leaves the imagination unlimited room to suppose that something is wrong, or may be. That unavoidable mystery is a solid reason for writing into a bank's constitution a requirement that the men in charge must change. Since neither the body of the stockholders nor the public at large can be allowed to watch the directors' internal management, it's reasonable that both should have the check on their conduct, and the security against a one-sided or harmful system taking hold, that the certainty of periodic change will provide. Besides, a bank's credit is so delicate that everything that can strengthen confidence and ward off suspicion, without hurting its operations, ought to be carefully sought out when it is founded.

A further reason for a change is the improper rule governing the right to vote for directors under the plan on which the Bank of North America was first constituted: one vote for each share. Then there is the absence of any rule at all in the last charter, unless its silence on the point means that every stockholder is to have one equal vote, which would be a rule at the opposite extreme and no less mistaken. It matters that a rule be fixed on this subject, since it's one of the things that ought not to be left to discretion. It matters just as much, therefore, that the rule be the right one.

One vote per share makes it too easy for a few leading stockholders to combine and monopolize the bank's power and benefits. An equal vote for every stockholder, however large or small his stake in the institution, doesn't give large stockholders the weight they reasonably ought to have, and which, perhaps, their own security and the bank's require. A sensible middle course is to be preferred. Recognizing this, the corporation of the Bank of North America has adopted a by-law that plainly aims at such a middle course. But here a further thought arises: a majority like the one that passed this by-law can repeal it at any moment.

The last reason to be mentioned is the lack of precautions against foreign influence working its way into the management of the bank. It seems hardly consistent with due caution to let anyone but citizens be eligible as directors of a national bank, or to let foreigners living abroad influence the choice of directors through the votes of their proxies. If the Bank of North America were to be merged into the plan, however, it might be necessary to soften this principle so as to leave unimpaired the rights of the foreigners who now hold shares of its stock, though without the power of passing that privilege on to other foreigners.

It must be remembered that such a bank is not merely a matter of private property, but a political machine of the greatest importance to the State.

There are other changes from the constitution of the Bank of North America, of no small importance, that seem desirable but aren't large enough to need discussion here in advance. They will be seen in the plan to be submitted below.

Even if the objections stated to the constitution of the Bank of North America are accepted as well founded, they take nothing away from the merit of its main design, or of the services the bank has rendered, or of the benefits it has produced. Creating such an institution when it was created was a wise measure. Its usefulness has been amply proved by its results; American independence owes it a great deal. And it's quite conceivable that the circumstances of the moment made unwise the very features that a revision, made with a view to permanence, now shows to be desirable.

The order of the subject leads next to an inquiry into the principles on which a national bank ought to be organized.

The situation of the United States naturally prompts a wish that the institution could take a form with a number of branches. But various considerations argue against pursuing the idea. The complexity of such a plan would tend to raise doubts that might discourage people from venturing into it. And while a safe and orderly administration of it isn't to be given up as hopeless, it can't be shown in advance so clearly as to remove those doubts, or to justify the government in adopting the idea as its first experiment. The most that seems advisable on this point is a provision that may lead to branches later, if experience shows their usefulness more clearly and satisfies those in charge that they can be adopted safely. They would certainly have some advantages, both special and important. Besides serving the public more widely, they would lessen the danger of a run on the bank.

The argument against them is that each branch would have to be under a separate, though subordinate, board, and a considerable latitude of discretion would necessarily have to be entrusted to it. And since the property of the whole institution would be liable for the obligations of each part, that property, and the bank's credit with it, would be staked on the prudence of the directors of every part. Mismanagement at any one branch might risk serious disorder in the whole.

Another wish, prompted by the particular situation of the country, is that the bank could be set up to serve directly as a lender to the owners of land. But this wish, too, gives way before the difficulty of carrying it out. Land by itself is an unsuitable fund to back a bank's circulation. If notes issued on it weren't payable in coin, on demand or at short notice, they would amount to nothing more than a repeat of the paper money issues that the general voice has now rejected. If the notes are to be payable in coin, the land must first be turned into coin by sale or mortgage. The difficulty of mortgaging it is the very thing that creates the wish for some other resource; and selling it in a sudden emergency couldn't be done except at sacrifices that would make the cure worse than the disease. Nor is the idea of making the fund partly coin and partly land free of obstacles. These two kinds of property don't, for the most part, come together in the same hands. Will the man of money agree to a partnership with the landholder in which the landholder shares in the profits made by the money? The money, plainly, will be the agent, the actual cause of the profits; the land can be regarded only as additional security. It's not hard to foresee that a union on such terms won't readily be formed. And if the landholders are to raise the money by selling or mortgaging part of their land, they can do that just as well when the bank's capital consists wholly of money as when it is made up of money and land together.

Getting loans for the landholders is the great thing wanted. But suppose the other difficulties overcome and a fund created, partly of coin and partly of land. Even then, the benefit hoped for could be had only if the bank advanced the landholders its notes for all or part of the value of the land they had subscribed to its capital. If the advance were small, the relief intended wouldn't be given. If it were large, the sheer quantity of notes issued would breed distrust; and if they were accepted at all, they would probably come straight back to the bank for payment. The bank, once its coin was exhausted, might then be forced to turn its land into money at any price it could get, to the irreparable injury of the owners.

Considerations of public advantage suggest a further wish: that the bank could be established on principles that would make its profits go directly to the benefit of the State. Many who speak of a national bank have this in mind, but the idea seems open to insuperable objections. If an institution of this kind is to command full confidence, it appears to be an essential part of its structure that it be under private, not public, direction: under the guidance of individual interest, not of public policy. Public policy would be suspected of being too easily swayed by public necessity, and in certain emergencies, under a weak or overconfident administration, it really would be. The suspicion of this would most likely be a canker, continually eating away at the vitals of the bank's credit, and most likely to prove fatal in exactly the situations in which the public good would require that credit to be at its soundest and strongest. If the bank's credit were at the disposal of the government, it would indeed be little short of a miracle if, over a long stretch of time, there were no calamitous abuse of it. It's true that the government's real interest would be not to abuse it; its true policy would be to husband and cherish that credit with the most guarded care, as a priceless treasure. But what government ever uniformly consulted its true interests in opposition to the temptations of momentary exigencies? What nation was ever blessed with a constant succession of upright and wise administrators?

The keen, steady and, so to speak, magnetic sense the directors of a bank have of their own interest as its owners, pointing always to its true pole, the prosperity of the institution, is the only security that can always be relied on for careful and prudent management. It is therefore the only foundation on which an enlightened, unqualified and lasting confidence can be expected to be built and kept up.

The examples of the banks established in several cities of Europe, Amsterdam, Hamburg and others, may seem to tell against this position. Without exact knowledge of all the peculiarities of their constitutions, it's hard to say how far they do. The Bank of Amsterdam, however, the one we know best, is under the direction of the city rather than of the national government. It is run by particular magistrates of the city, not by officers of the republic. It is also a bank of deposit, not of loans or circulation, and therefore less open to abuse, as well as less useful.

Its general business is receiving money for safekeeping. If the money isn't called for within a certain time, it becomes part of the bank's capital and can't be reclaimed. But the depositor is given a credit for it on the bank's books, and since that credit can be transferred, it serves every purpose of money.

With the directors being magistrates of the city, and the stockholders in general its most influential citizens, it's clear that the principle of private interest must prevail in managing the bank. And it's equally clear that, given the nature of its business, that principle matters less to it than to an institution designed to serve the public and private persons through direct loans and a paper circulation.

As far as the bank's aid within proper limits is concerned, a good government has nothing more to wish for than it will always have, even with the management in private hands. Since a properly constituted bank must depend on the government's pleasure for the renewal of its charter from time to time, it isn't likely to be inclined to make itself, by its conduct, unworthy of public support. The government, too, in managing its finances, is in a position to return benefits to the bank no less important than those the bank gives the government, and the bank's benefits, besides, always come with an immediate and adequate payment. Apart from these more particular considerations, the natural weight and influence of a government will always go a long way toward getting its wishes met. And since the board will usually be made up of some of the most discreet, respectable and well-informed citizens, it can hardly ever be difficult to make them feel the force of the reasons that ought to spur them on.

It doesn't follow from what has been said that the State may not hold part of a bank's stock, and so share in its profits. It follows only that the State ought not to want any share in its direction, and therefore ought not to own the whole of the stock, or the principal part of it. For if the bulk of the property belonged to the public while the direction lay in private hands, that would be to entrust the interests of the State to people with no interest, or not enough interest, in managing them properly.

There is one thing, however, that the government owes to itself and to the community, or at least to all that part of it which holds no stock. It ought to reserve to itself the right to find out, as often as necessary, the condition of the bank, while disclaiming any pretension to control it. This right is an article in the original constitution of the Bank of North America, and the case for it rests on the clearest reasons. If the paper of a bank is to be allowed to work its way into all the revenues and receipts of a country, or even to be tolerated as a substitute for gold and silver in all the dealings of business, then on either view it becomes a national concern of the first importance. That being so, ordinary prudence requires that the government have the means of making sure, whenever it sees fit, that so delicate a trust is being carried out faithfully and carefully. A right of this kind isn't only desirable from the government's point of view. It ought to be just as welcome to everyone concerned in the institution, as one more ground for public and private confidence, and as a thing that can only threaten practices that imply mismanagement. The presumption must always be that the people entrusted with exercising this right on the government's behalf won't be lacking in the discretion it may call for. At the least, granting that presumption can't be thought too great a return of confidence for the very large share of it that the government is required to place in the bank.

The Plan of the Bank

Setting aside, then, ideas that may be attractive or even desirable but are neither practical nor safe, the Secretary respectfully submits the following plan for the constitution of a national bank to the consideration of the House.

1. The capital stock of the bank will not exceed ten million dollars, divided into twenty-five thousand shares of four hundred dollars each. To raise that sum, subscriptions will open on the first Monday of next April and stay open until the whole amount has been subscribed. Public and corporate bodies may subscribe as well as individuals.

2. Each share will be paid for one-fourth in gold and silver coin and three-fourths in that part of the public debt which, under the loan proposed by the act making provision for the debt of the United States, will be bearing interest of six percent a year at the time of payment.

3. The sums subscribed will be paid in four equal installments, coin and debt alike, six calendar months apart, the first at the time of subscription. A subscriber who fails to make any later payment loses the benefit of any dividend earned before that payment fell due, and of any dividend earned while it remains unpaid.

4. The subscribers to the bank and their successors will be made a corporation, and will remain one until the part of the bank's stock that consists of the public debt has been finally paid off.

5. The corporation may hold real and personal property worth no more than fifteen million dollars in all, its capital, or original stock, included. The only land and buildings it may hold are those it needs for its own immediate use; those genuinely mortgaged to it as security; those made over to it in settlement of debts contracted in the ordinary course of its business; and those it buys at sales held under court judgments obtained for such debts.

6. The total debts of the company, whether by bond, bill or any other contract (money owed to depositors excepted), must never exceed the amount of its capital stock. If they do, the directors under whose management the excess occurs will be personally liable for it, out of their own private means. Any director who voted against it may clear himself of this liability by giving immediate notice of the fact, and of his dissent, to the President of the United States, and to the stockholders at a general meeting, which the president of the bank must call at the dissenters' request.

7. The company may sell its lands and buildings or leave them by will, and may sell all or any part of the public debt of which its stock consists. It may not trade in anything except bills of exchange, gold and silver bullion, and goods pledged to it for money lent and sold to recover the loan. It may not charge more than six percent a year on its loans or discounts.

8. The bank may not lend more than fifty thousand dollars for the use, or on the account, of the government of the United States or of any one state, nor lend anything to any foreign prince or state, unless a law of the United States has authorized it beforehand.

9. Shares in the bank may be transferred under whatever rules the company sets up for the purpose.

10. The affairs of the bank will be managed by twenty-five directors, one of whom will be the president. Every year, on the first Monday of January, the stockholders will elect the directors by plurality vote, to serve for a year. At their first meeting after each election the directors will choose one of their number as president.

11. Each stockholder's votes will depend on the number of shares he holds, on this scale: one vote for one share, and no more than one for two; one vote more for every two shares above two, up to ten; one more for every four shares above ten, up to thirty; one more for every six shares above thirty, up to sixty; one more for every eight shares above sixty, up to one hundred; and one more for every ten shares above one hundred. But no person, partnership or public body may cast more than thirty votes. After the first election, no share will carry a vote unless it has been held for three calendar months before election day. Stockholders who actually live in the United States, and no others, may vote in the elections by proxy.

12. No more than three-fourths of the directors in office, not counting the president, may be re-elected for the following year. But a director who is president at the time of an election may always be re-elected.

13. Only a stockholder who is a citizen of the United States may be a director.

14. Sixty or more stockholders who together own two hundred shares or more may at any time call a general meeting of the stockholders on the business of the bank. They must give at least six weeks' notice in two public newspapers of the city where the bank is kept, and the notice must state the purpose of the meeting.

15. If a director dies, resigns, leaves the United States or is removed by the stockholders, his place may be filled by a new election for the rest of the year.

16. No director will be paid for his services unless the stockholders have voted the payment at a general meeting. The stockholders will give the president whatever compensation seems reasonable to them for the extra time he spends at the bank.

17. Seven directors, at least, are needed to make up a board for doing business.

18. Before taking up his duties, every cashier or treasurer must give a bond, with two or more sureties satisfactory to the directors, for at least twenty thousand dollars, as a guarantee of his good conduct.

19. Every half year, the bank will pay out as dividends as much of its profits as the directors think advisable. And once every three years the directors will lay before the stockholders at a general meeting, for their information, an exact and detailed statement of the debts that have gone unpaid, after the original term of credit ran out, for three times the length of that term, and of the surplus of profit, if any, left after losses and dividends are deducted.

20. The bank's bills and notes that were made payable on demand in gold and silver coin, or have since become so payable, will be accepted in all payments to the United States.

21. The head of the Treasury Department will be furnished, as often as he asks but not more than once a week, with statements of the bank's capital stock, the debts owed to it, the money deposited in it, its notes in circulation and its cash on hand. He will have the right to inspect those general accounts in the bank's books that bear on these statements. This must not be taken to imply any right to inspect the account of any private person with the bank.

22. No similar institution will be set up by any future act of the United States while the one proposed here continues.

23. The directors may open branch offices wherever they see fit within the United States, for discounts and deposits only, on the same terms and in the same manner as at the bank itself. They may put the management of those offices, and the making of their discounts, in the hands either of agents they appoint specially, or of persons chosen by the stockholders who live where the office is, under whatever agreements and regulations the directors think proper, so long as these are not contrary to law or to the constitution of the bank.

24. Finally, the President of the United States will be authorized to subscribe to the stock of the company on behalf of the United States, up to two million dollars, to be paid out of money borrowed under either of two acts, "An act making provision for the debt of the United States" and "An act making provision for the reduction of the public debt." The government will at the same time borrow an equal sum from the bank, to be used for the purposes for which that money was raised, and repaid within ten years in equal yearly installments, or sooner, or in larger amounts, as the government thinks fit.¹⁰

The reasons for these provisions have mostly been given already, and the rest will mostly suggest themselves from the nature of the provisions. Whatever still needs saying can be said in a few words.

The one feature that really needs explaining is the inclusion of part of the public debt in the bank's capital. Its chief purpose is to make possible a capital big enough to support a wide circulation of notes, and to stand as adequate security for them. As noted earlier, the original plan of the Bank of North America called for a capital of ten million dollars, and that's certainly not too broad a foundation for the extensive business a national bank is meant to do. But collecting a sum like that in gold and silver, in this country, into a single vault can be called impossible without a moment's hesitation. Hence the need for a supplement, and the public debt offers one ready to hand.

This part of the fund will always be available to back up the coin. It'll find buyers more and more readily, and so it can be turned into coin quickly if the bank should ever need it in an emergency. That quality, of being promptly convertible into coin, makes it the equal of coin itself, the indispensable agent of bank circulation. It also sets it apart from a fund in land, which would generally take far longer to sell, and could only be sold at a heavy loss. The quarterly receipts of interest on the debt will, besides, be a real addition to the bank's stock of coin in the intervals before they're paid out in the half-yearly dividends. And the objection to combining land with coin, that the two aren't generally owned by the same people, doesn't apply to the debt. There will always be plenty of it in the hands of the moneyed and trading classes.

The debt in the capital has a side effect: it lets the bank extend its business and so enlarge its profits. But it will also bring in, directly, a yearly revenue of six percent paid by the government, which will go into the half-yearly dividends the stockholders receive.

Consider the present price of the public debt. Then consider how turning it into bank stock, joined to a fund of coin, would very probably speed its rise to its proper value. It's easy to see that the operation gives those who subscribe a very considerable advantage at the start. And since that rise would lift the price of the whole mass of the debt, it gives a proportional benefit to all the public creditors, and, in a sense already pointed out more than once, to the community at large.

One important fact shows how well suited the public debt is to be a bank's fund, and may settle any doubts on the point: the Bank of England, when it was first set up, rested entirely on that foundation. The subscribers to a loan of one million two hundred thousand pounds sterling to the government were incorporated as a bank, and the debt created by the loan, with its interest, was the bank's sole fund. Every later increase in its capital, which now stands at between eleven and twelve million pounds sterling, has been of the same kind.¹¹

Limiting the bank's right to run up debts to the amount of its capital is an important precaution. The constitution of the Bank of North America doesn't contain it. While a bank's fund consists entirely of coin, a rule like this would be inconvenient; with a fund made up as is now proposed, it wouldn't be inconvenient at all. The Bank of England has the restriction, and as a source of security it's worth copying. The penalty there for exceeding the limit is that each stockholder is liable for the excess in proportion to his share in the bank. Since the directors owe their places to the stockholders' choice, making the stockholders answerable this way doesn't seem unreasonable. On the other hand, it might be thought hard on those who voted against that choice. And there are many people among us whom it might discourage from taking any part in the institution. These reasons led the Secretary to place the liability on the directors who break the limit.

The ban on loans to the United States or to any particular state beyond the moderate sum named, or to any foreign power, will stand as a barrier against encroachments by the Executive, and against combinations that would threaten the safety of the Union or run against its policy.

The cap on the rate of interest is needed because different rates prevail in different parts of the Union, and since the bank's business may reach across the whole of it, some rule seems necessary. It's an open question whether the cap ought to be five percent instead of the six proposed. We may safely assume that the lower rate would yield an ample dividend, perhaps as large as the higher one, because of the growth in business it would bring. The natural effect of low interest is to increase trade and industry, since every kind of undertaking can then be carried on at greater advantage. That much is generally admitted. But you have to have analyzed the subject in all its connections to grasp how far the effect reaches. Such an analysis can't fail to convince an intelligent mind that a difference of one percent in the rate at which money can be borrowed is often enough to change the condition of a whole country or town substantially for the better.

Anything, then, that tends to lower the rate of interest deserves the special care of legislators. Laws that force the legal rate far below the market level aren't to be recommended, because they can't achieve what they aim at. But whatever tends to bring the rate down without doing violence to the natural course of things ought to be noticed and pursued. Banks are among the best means to that end, and a moderate rate on their discounts is an essential part of it. Nor does this seem to clash with the banks' own interest, taken on a broad and long view.

The most obvious ideas, however, tend to carry more weight than ones that depend on complicated and remote connections. There would be a danger, then, that the people whose money must make up the bank's stock would doubt whether the profits would be enough, if the rate on loans and discounts were set below what they're used to, and that they might be unwilling to join the plan on that account. There is, it's true, one consideration that ought to protect against this danger, at least among men actively engaged in trade. The loans they could get for their business at a low rate would more than make up for any difference in the dividend, even supposing it did shrink somewhat. But on the whole, the risk that the mass of moneyed men will reason the other way is a powerful argument against trying the experiment. The banks of this kind already in existence add to the difficulty of trying it. Time and reflection, with a large capital, may by themselves lead to the result we want.

The last point that needs a word of explanation is the power proposed for the President to subscribe two million dollars on the public's behalf. Its main purpose is to enlarge the bank's fund of coin and let it expand its business sooner. It's true that the government would be borrowing with one hand what it lends with the other. But the money borrowed will be paid out gradually, and bank notes can be put into circulation in place of the gold and silver. Besides, part of the sum borrowed is to be repaid every year, which will in the end amount to a real investment of that much coin. On top of the reasons for this measure that come from the government's general interest in widening the bank's usefulness, there's a more particular one: insofar as the dividend on the stock exceeds the interest paid on the loan, the public makes a clear profit.

The Secretary asks leave to close with one general observation. If the Bank of North America comes forward with proposals for grafting onto itself the features the Legislature finds necessary for the proper scope and safety of a national bank, there are, in his judgment, strong reasons for making the change as easy as is reasonable. That institution has real claims to a friendly hearing, from its original connection with the government of the United States and from the services it has rendered, provided the people with an interest in it are willing, for their part, to put it on a footing that satisfies the government and is equal to the purposes of a bank of the United States. And its cooperation would speed up the achievement of the great object considerably, while the rivalry that might otherwise arise could prove, in a variety of ways, as unpleasant as it was harmful. The incorporation or union proposed here could be carried out in different ways, under an act of the United States, if the Bank of North America wishes it, on terms the government thinks fit.

All which is humbly submitted.

Alexander Hamilton, Secretary of the Treasury.

The Case Against Manufactures

The Secretary of the Treasury, as directed by the House of Representatives on January 15, 1790, has turned his attention to the subject of manufactures as early as his other duties allowed, and in particular to the means of promoting those that will make the United States independent of foreign nations for military and other essential supplies. He respectfully submits the following report.

Not long ago it was a very open question whether the United States ought to encourage manufactures. Today the case seems to be pretty generally accepted. The troubles that have hampered our foreign trade have set people thinking seriously about the need to widen our trade at home. Foreign markets hem in the sale of our farm surplus with restrictive regulations, while the surplus itself keeps growing, and that has bred an earnest wish to create a bigger demand for it here. Meanwhile manufacturing ventures in some valuable lines have succeeded completely, and younger, less developed attempts in others show promising signs. Together these justify the hope that the obstacles to this kind of industry are less formidable than people feared. They also suggest that if this industry keeps growing, it can fairly easily make up in full for whatever we lose, or may yet lose, in foreign markets, and give the nation new resources besides, the kind that make it safer and more independent.

There are still, however, respectable people who hold opinions unfriendly to encouraging manufactures. Their arguments, in substance, run as follows.

"In every country," say those who hold these opinions, "agriculture is the most useful and productive work human beings can do. That's true generally, if not universally, and it applies with special force to the United States, with its immense tracts of fertile land still uninhabited and unimproved. There is no better use for capital and labor than turning this vast wilderness into working farms. Nothing else does as much for the country's population, its strength and its real wealth.

"To try to speed up the growth of manufactures with special favors from the government is, in fact, to try to force the natural current of industry, by power and contrivance, out of a more useful channel and into a less useful one. Anything that tends that way must be unwise. Indeed, it can hardly ever be wise for a government to try to steer the work of its citizens at all. Left to itself, and guided by the sharp eyes of private interest, industry will find its own way, without fail, to the most profitable employment, and it's through that employment that the public prosperity is best served. Leaving industry alone is therefore, in almost every case, the soundest policy as well as the simplest.

"And the United States has more than the reasons that apply to every nation. Its own very particular situation all but dictates this policy, and with a force there's no arguing with. Its population is small for its territory. People are constantly drawn away from the settled parts of the country to the unsettled ones. A craftsman can easily trade his more dependent position for the more independent life of a farmer. These causes, and others like them, combine to produce a scarcity of hands for manufacturing and high wages generally, and they must go on producing them for a long time to come. Add a shortage of money capital, and the prospect of competing successfully with the manufactures of Europe has to be called little short of hopeless. Large-scale manufacturing only grows out of a population that is overflowing, or at least full. Until this country has the one, it's useless to hope for the other.

"Suppose that, against the natural course of things, certain industries could be given an unseasonable, premature start by heavy duties, prohibitions, bounties paid out of the treasury or other forced measures. That would only sacrifice the interests of the community to those of particular classes. Besides misdirecting labor, it would hand a virtual monopoly to the people employed in those industries, and the higher prices that inevitably follow every monopoly would have to be paid by everyone else. It's far better for those people to work the land, and for us to buy, with what the land produces, the goods that foreigners can supply us better made and on better terms."

This line of reasoning rests on facts and principles that certainly have a respectable claim to be heard. If it had guided the conduct of nations more often than it has, there's reason to think it might have carried them to prosperity and greatness faster than the maxims they actually followed, which ran too far the other way. Most general theories, however, admit of numerous exceptions, and there are few political theories, if any, that don't mix a good deal of error in with the truths they teach.

To judge accurately how far this one deserves the same charge, we have to look carefully at the considerations that argue for manufactures, and that seem to recommend encouraging them specially and actively in certain cases and within certain reasonable limits.

It should be granted at once that farming has, in its own nature, a strong claim to first place among all kinds of industry. It is the primary and most certain source of a nation's supply. It is the immediate and chief source of human food. It is the principal source of the materials that keep every other kind of labor fed. And it is the way of life most favorable to the freedom and independence of the human mind, and perhaps the one most favorable to the increase of the human race.

But that it deserves anything like an exclusive preference, in any country, should be granted only with great caution. That it is even more productive than every other branch of industry needs more evidence than has yet been offered. Its real interests are precious and important, and that is no exaggeration; the Secretary believes it can be shown convincingly that the proper encouragement of manufactures will advance those interests rather than injure them. He believes, too, that the case for such encouragement, taken in general, rests on the strongest and most persuasive reasons of national policy.

It has been claimed that agriculture is not only the most productive kind of industry but the only productive kind. Neither half of that claim, however, has been proved by any careful account of facts and figures, and the general arguments offered for it are more subtle and paradoxical than solid or convincing.

The arguments for its being the only productive kind go like this.

Labor spent on farming produces enough to replace all the necessary costs of the business and to support the people employed in it. On top of that, besides the ordinary profit on the farmer's stock, or capital, it yields a net surplus, or rent, for the owner of the land. The labor of craftsmen does no more than replace the stock that employs them (the fund that supplies their materials, tools and wages) and yield the ordinary profit on that stock. It yields nothing equivalent to the rent of land, and it adds nothing to the total value of the whole annual produce of the country's land and labor. Whatever value it adds to the part of the land's produce that is worked up into manufactured goods is cancelled by the value of another part of that produce, which the manufacturers themselves eat and use up. The classes of craftsmen, therefore, can add anything at all to the society's income only by thrift and saving, never because their labor actually produces anything.

To this it has been answered as follows.

1. "Since it is admitted that manufacturing labor reproduces a value equal to what is spent or used up in carrying it on, and keeps the original stock, or capital, in existence, it ought on that ground alone to escape being called wholly unproductive. Grant, as alleged, that what the craftsmen and manufacturers consume of the produce of the soil exactly equals the value their labor adds to the materials they work on. It still wouldn't follow that they add nothing to the society's income, or to the total value of the annual produce of its land and labor. Say that in a given period their consumption amounted to a certain sum, and the added value of the goods they made in the same period to a like sum. Then the total of consumption and production in that period would be the two sums together, and therefore double the value of the farm produce consumed. And even if the value the craftsmen add were never to exceed the value of the farm produce they consume, there would still be, at every moment, thanks to their labor, a greater value of goods in the market than there would be without it."

2. "The claim that craftsmen can add to a society's income only by thrift is true in no sense that doesn't apply just as well to farmers. The same can be said of every one of these classes: what each earns by its labor and sets aside for its own support is not, in the ordinary way, more than that support. It follows that the wealth or capital of the community can grow, in any of them (apart from cases of unusual dexterity or skill), only from the savings of the more frugal and thrifty."

3. "The annual produce of a country's land and labor can be increased in only two ways: by some improvement in the productive powers of the useful labor already at work in it, or by some increase in the quantity of that labor. As to the first, the work of craftsmen can be divided up and simplified further than the work of farmers, and it is therefore capable of proportionally greater improvement in its productive powers, whether that comes from added skill or from ingenious machinery. On this score, then, labor on the land can claim no advantage over labor in manufactures. As to the second, an increase in the quantity of useful labor depends essentially, leaving accidents aside, on an increase of capital. And that in turn depends on savings made out of the incomes of those who supply or manage the capital employed at any time, whether in agriculture, in manufactures or in anything else."¹²

But while the claim that farm labor is the only productive kind has been denied and refuted in this way, the claim that it is the more productive kind has been conceded without hesitation. Because this concession bears heavily on the principles of public administration, the grounds it rests on deserve a separate and careful look.

One of the arguments for it may fairly be called both quaint and superficial. It comes to this: in what the soil produces, nature works alongside man, and the result of their joint labor must be greater than the result of man's labor alone.¹³

That doesn't necessarily follow at all. It's quite conceivable that man's labor alone, spent on work that needs great skill and art to bring it to perfection, could produce more value than the labor of nature and man together, spent on simpler tasks and objects. And when you remember how far manufacturing calls in nature's own forces, harnessed in the mechanical powers, to do its work, the argument loses even the look of plausibility.

It might also be pointed out, on the other side, that farm labor is largely seasonal and occasional. It depends on the time of year and is subject to many long interruptions, while the labor in many manufactures is steady and regular, going on all year round and in some cases by night as well as by day. There are probably also more cases of slackness among farmers than among craftsmen. A farmer blessed with unusually fertile land, or some other lucky circumstance, can often make a living even while farming fairly carelessly; a craftsman will have a hard time doing the same without working about as hard as everyone else in his trade. And if we may also take it as a fact that manufacturing opens a wider field for ingenuity than farming does, it wouldn't be a stretch to guess that manufacturing labor, being at once more constant, more uniform and more ingenious, will also turn out to be more productive.

No great weight is meant to rest on observations of this kind, though. They are offered only to balance others of the same sort. Considerations so vague and general, and so abstract, can teach us little on a question like this.

Another argument, and apparently the principal one, offered for the superior productiveness of farm labor turns on the claim that labor in manufactures yields nothing equivalent to the rent of land: nothing like the "net surplus," as it's called, that goes to the owner of the soil.

But this distinction, important as it has been thought, seems to be one of words rather than of substance.

It's easy to see that on a farm the return is split into two parts and given two names: the ordinary profit on the farmer's stock, and rent to the landlord. In a manufactory, the same return is joined together under one general name: the ordinary profit on the stock of the undertaker, the man who runs the business. That formal, verbal division is the whole difference between the two cases. What has been overlooked is that land is itself a stock, a capital, advanced or lent by its owner to the occupant or tenant. The rent the owner receives is simply the ordinary profit on a certain stock in land, managed not by himself but by someone he lends or lets it to; and that tenant, for his part, puts in a second capital to stock and improve the land, and receives the usual profit on it. The landlord's rent and the farmer's profit, then, are nothing more than the ordinary profits of two capitals, belonging to two different people and joined in working one farm. In just the same way, the surplus a manufactory yields after paying the costs of running it is the ordinary profit of one or more capitals engaged in it. One or more, because in fact the very arrangement we see on the farm sometimes happens in a manufactory too. One person supplies part of the capital, or lends part of the money it runs on, and another runs it, adding his own capital. Out of the surplus left after expenses, interest is paid to the lender for his share of the capital, and that corresponds exactly to the rent paid to the landlord. The rest of the surplus is the profit of the undertaker, or manufacturer, and corresponds to what is called the ordinary profit on the farmer's stock. Together they make up the ordinary profits of two capitals employed in a manufactory, just as, on the farm, the landlord's rent and the farmer's income make up the ordinary profits of two capitals employed in working the land.

The rent that goes to the owner of the land, then, far from proving that farming alone is productive, as has been argued, doesn't even prove that it is more productive. The question is still whether a given capital, spent on buying and improving a piece of land, leaves a greater or a smaller surplus after expenses than the same capital spent on running a manufactory. Or whether a given capital and a given amount of labor, employed one way, produce a greater or smaller total value than the same capital and the same labor employed the other way. Or, more exactly perhaps, which of the two businesses, agriculture or manufactures, yields the greater product when you measure it against the capital and the labor it takes, both together.

Neither question is easy to answer. Each involves many complicated details and depends on an exact knowledge of the things being compared. As far as anyone knows, the comparison has never yet been made on enough data, properly established and analyzed. To make it now with satisfying precision would take more preliminary inquiry than there has yet been time or opportunity for.

Some attempts have been made, however, to gather the necessary information, and they have tended to cast doubt on the hypothesis under examination rather than to confirm it. In fairness, they have covered too little ground, and are too imperfect, to justify a firm conclusion either way; they lead to likely guesses rather than certain proofs. What they make probable is that there are various branches of manufacturing in which a given capital will yield a greater total product, and a considerably greater net product, than the same capital put into buying and improving land. They also make it probable that there are some branches in which both the gross and the net product will exceed farming's, measured against capital and labor together. It's on this last point, though, that there seems to be most room for doubt. It's far easier to conclude, in general, that capital in manufacturing yields a greater net product than capital in agriculture.

These remarks aren't meant to argue that manufacturing is more productive than farming. They're meant rather to show that the opposite hasn't been established, and that the general arguments brought to prove it are unsatisfying. It follows that the supposed superior productiveness of tillage should stop no one from listening to any solid reasons for encouraging manufactures that may otherwise be found, out of a fear that such encouragement might draw labor from a more profitable employment into a less profitable one. Very probably, if the matter were worked out fully and accurately, on facts and figures, it would turn out that there is no real difference between the overall productiveness of the one kind of industry and the other. And whether to encourage either of them, in any given case, ought then to be decided on grounds that have nothing to do with any such comparison.

II. Without claiming that manufacturing is the more productive, it may still help us judge what policy to follow toward encouraging it if we look at the subject from some further angles. These will confirm that this kind of industry has been wrongly described as unproductive in itself, and they will show something more: that establishing and spreading manufactures makes the total mass of useful, productive labor in a community greater than it would otherwise be. To make this case, it may be necessary to go briefly back over some points already touched on.

To say that the manufacturer's labor is unproductive because he consumes as much farm produce as the value he adds to his raw materials is no better founded than to say that the farmer's labor, which supplies the manufacturer with those materials, is unproductive because he consumes an equal value of manufactured goods. Each hands the other a certain share of what his labor produces, and each uses up a corresponding share of what the other's labor produces. Meanwhile two citizens are being supported instead of one; the State has two members instead of one; and together they consume twice the value of what the land produces.

If, instead of a farmer and a craftsman, there were a farmer only, he would have to spend part of his labor making clothing and the other articles he would otherwise buy from the craftsman, if there were one. He would naturally have less labor left for his farm, and would get proportionally less from it. In that state of things, the whole production, in food, raw materials and manufactured goods together, would certainly be worth no more than what would be produced in food and raw materials alone if there were a craftsman as well as a farmer.

Now suppose there are both a craftsman and a farmer. The farmer is left free to give himself entirely to his farm. More food and raw materials will be produced: at least as much, as already noted, as the whole of the food, raw materials and manufactured goods produced in the other case. Meanwhile the craftsman goes on making manufactured goods, enough not only to repay the farmer, in those goods, for the food and materials he got from him, but also to supply himself with goods of the same kind for his own use. There would be two quantities, two values, in existence instead of one, and income and consumption would be double in the one case what they would be in the other. Or suppose, in place of both these cases, two farmers and no craftsman, each spending part of his labor on the land and part on making manufactured goods. Then the share of both men's labor spent on the land would produce only as much food and raw material as one man's whole labor spent there would produce, and the share of both spent on manufactures would produce only as many manufactured goods as one man's whole labor spent that way would produce. Hence the produce of the two farmers would be no greater than the produce of the farmer and the craftsman. And hence it follows that the craftsman's labor is as positively productive as the farmer's, and adds as positively to the society's income.

The craftsman's labor gives back to the farmer the portion of the farmer's own labor that goes into producing the goods he trades with the craftsman, labor he would otherwise have had to spend making manufactured things himself. And while the craftsman, by doing this, lets the farmer enlarge his farming, part of whose produce the craftsman buys for his own use, he also supplies himself with the manufactured articles he needs. He does more still. Besides this equivalent he gives for the farm labor he consumes, and this supply of manufactured goods for his own use, he produces a further surplus, which pays for the use of the capital advanced, by himself or by someone else, to carry on the business. This is the ordinary profit on the stock employed in the manufactory, and it is in every sense as real an addition to the society's income as the rent of land.

The produce of the craftsman's labor, then, can be seen as made up of three parts: one that buys from the farmer the food he lives on and the materials he works with; one that supplies him with the manufactured necessities of life; and a third that is the profit on the stock employed. The last two parts seem to have been overlooked by the system that paints manufacturing industry as barren and unproductive.

Throughout these illustrations, equal quantities of the farmer's and the craftsman's labor have been treated as producing equal values. That isn't meant as a claim of any exact equality. It's simply a way of putting things, adopted for the sake of simplicity and clarity. Whether the farmer's labor produces somewhat more or somewhat less than the craftsman's doesn't matter to the main thrust of the argument, which so far has aimed only at showing that each of them makes a positive addition to the total produce and income of the society.

It is now time to go a step further, and to list the principal circumstances from which we may conclude that manufacturing establishments not only make a positive addition to the society's produce and income, but make them substantially greater than they could possibly be without such establishments. These circumstances are the following.

1. The division of labor.

2. A wider use of machinery.

3. Additional employment for classes of the community not ordinarily engaged in such work.

4. The encouragement of immigration from foreign countries.

5. Greater scope for the variety of talents and temperaments that make people different from one another.

6. A larger and more varied field for enterprise.

7. The creation, in some cases, of a new demand for the surplus produce of the soil, and in all cases of a more certain and steady one.

Each of these circumstances has a considerable effect on the total mass of industrious effort in a community. Together they lend it a force and effect that are not easy to imagine. A few remarks on each, in the order given, may help to explain their importance.

Seven Ways Manufactures Add to a Nation's Wealth

1. The Division of Labor

It has rightly been said that there is hardly anything more important in a nation's economy than a proper division of labor. When occupations are separated, each one is carried to a far higher pitch of perfection than it could ever reach if they were all mixed together. This comes mainly from three causes.

First, the greater skill and dexterity that come naturally from giving constant, undivided attention to a single task. These qualities must grow as the tasks are separated and simplified and as the attention given to each grows steadier, and they must shrink as the tasks grow more complicated and the attention is pulled among more of them.

Second, the saving of time that would otherwise be lost in switching often from one operation to another of a different kind. That loss depends on several things: the switch itself; putting away in order the tools, machines and materials used in the job being left; the preparations needed to begin the next one; the break in the momentum a worker's mind builds up while it's absorbed in one particular operation; and the distractions, hesitations and reluctance that come with passing from one kind of work to another.

Third, a wider use of machinery. A man busy with a single task will be better able, and more naturally inclined, to put his imagination to work devising ways to ease and shorten his labor than a man who's juggling a variety of separate and unlike operations. Besides, in many cases making machines becomes a distinct trade of its own, and the craftsman who follows it enjoys all the advantages just listed for improving his particular art. Both ways, the invention and use of machinery spread.

From these causes combined, the mere separation of the farmer's occupation from the craftsman's increases the productive powers of labor, and with them the total mass of a country's produce, or income. On this single view of the subject, then, it's clear how much craftsmen and manufacturers do to increase a nation's productive industry.

2. Machinery

This point was partly anticipated above, but it needs to be set in one or two further lights.

The use of machinery is a very important item in the whole mass of a nation's industry. It's an artificial force brought in to help the natural force of man. For every purpose of labor, it amounts to more hands, an addition of strength, and one that comes without the cost of feeding the laborer. May we not fairly conclude, then, that the occupations giving the widest scope to this helper add the most to the general stock of industrious effort, and so to the general product of industry?

We'll take it for granted, and leave its truth to anyone's observation, that manufacturing lends itself to machinery to a greater degree than farming does. If that's so, a community that buys the goods it needs from other countries instead of making them itself loses the whole of that difference. Replacing domestic manufactures with foreign ones hands over to foreign nations the advantages of using machinery in just the ways it can be used most usefully and to the greatest extent.

The cotton mill invented in England within the last twenty years is a striking illustration of this general proposition. Thanks to it, all the different processes of spinning cotton are performed by machines, driven by water and tended chiefly by women and children, and by fewer people in all than the ordinary way of spinning requires. It's also a great advantage that the mill can keep running conveniently through the night as well as the day. The tremendous effect of such a machine is easy to imagine. It's essentially to this invention that we owe the immense progress Great Britain has made, so suddenly, in the various kinds of cotton goods.

3. Employment for Those Not Otherwise Employed

This is not the least valuable of the ways in which manufacturing establishments add to a nation's general stock of industry and production. Where they flourish, they employ more than the people who work in them regularly. They also offer occasional and extra work to industrious individuals and families who are willing to spend the spare time left by the slack periods in their usual occupations on work on the side, as a way of adding to what they earn or what they can enjoy. The farmer himself finds a new source of profit and support in the increased industry of his wife and daughters, drawn out and spurred on by the demands of the nearby manufactories.

Besides this advantage of occasional work for classes with other occupations, there's another of a related kind and with a similar effect: the employment of people who would otherwise be idle, and in many cases a burden on the community, because a bent of temper or habit, a bodily weakness or some other cause leaves them disinclined or unfit for the hard work of the countryside. It is worth particular notice that, in general, women and children are rendered more useful, and the latter more early useful, by manufacturing establishments than they would otherwise be. Of the people employed in the cotton manufactories of Great Britain, it's estimated that nearly four-sevenths are women and children, most of them children, and many of them of a tender age.

It appears, then, to be one of the qualities of manufactures, and no small one, that wherever they flourish they call out a greater quantity of industry, even from the same number of people, than there would be if no such establishments existed.

4. Immigration

People are reluctant to leave one line of work and way of making a living for another unless some very obvious and immediate advantage invites them to. Many who would move from one country to another if they could expect to carry on, more profitably, the trades they were brought up in will often not be tempted to move by the hope of doing better in some other way. Think of the manufacturers of Europe. They're offered powerful inducements: a better price for their goods or their labor; cheaper food and raw materials; freedom from most of the taxes, burdens and restrictions they put up with in the Old World; more personal independence and standing under a fairer government; and, far more precious than mere religious toleration, a perfect equality of religious rights. Such people would probably flock from Europe to the United States to follow their own trades and professions, if they once understood the advantages they'd enjoy here and were given some assurance of encouragement and employment. They will be very hard to persuade to uproot themselves in order to become farmers.

If it's true, then, that it is in the interest of the United States to open every possible road to immigration, this is a weighty argument for encouraging manufactures, which, for the reasons just given, will do more than anything to multiply the inducements to come.

Here we see an important resource. It can enlarge the population, and with it the useful and productive labor of the country. It can also carry on manufactures without drawing off any of the hands who might otherwise turn to farming, and can even make agriculture whole for any who do happen to be drawn away from it. Many people whom the prospect of manufacturing work would persuade to emigrate would later give in to the temptations this country, with its particular situation, holds out to farming. And while agriculture would gain many striking and unmixed advantages from the growth of manufactures in other respects, it's an open question whether it would gain or lose in the number of people employed in it.

5. Scope for Every Kind of Talent

This is a far more powerful means of increasing the fund of national industry than it may seem at first sight. It's a sound observation that minds of the strongest and most active powers, in their proper sphere, sink below the average and work to no effect when they're confined to pursuits that don't suit them. It follows that the results of human effort can be immensely increased by giving it more kinds of work to do. When every different kind of industry is found in a community, each person can find his own element and bring the whole vigor of his nature into play, and the community gets the services of each of its members in the way each can serve it best.

People often remark that there's a peculiar aptitude for mechanical improvements in the genius of the people of this country. If there's anything in that remark, it would be a strong reason for giving that kind of talent room to work by spreading manufactures.

6. A Wider Field for Enterprise

This, too, matters more in the general scale of national effort than a quick look might suggest, and its effects are not altogether unlike those of the circumstance just discussed. To nourish and stimulate the activity of the human mind by multiplying the objects of enterprise is not the least of the means by which a nation's wealth can be promoted. Even things that aren't positively useful in themselves sometimes become useful because they provoke people to exert themselves. Every new field opened to the busy nature of man, where it can rouse itself and act, adds a new energy to the general stock of effort.

The spirit of enterprise, useful and fruitful as it is, must shrink or expand with the simplicity or the variety of the occupations and products found in a society. It must be smaller in a nation of farmers alone than in a nation of farmers and merchants, and smaller in a nation of farmers and merchants than in a nation of farmers, craftsmen and merchants.

7. A Steadier Demand for the Farmer's Surplus

This circumstance creates, in some cases, a new demand for the surplus produce of the soil, and secures, in all cases, a more certain and steady one. It is among the most important of those listed. It's one of the main ways in which establishing manufactures adds to a country's produce, or income, and it bears immediately and directly on the prosperity of agriculture.

The farmer's efforts will be steady or fluctuating, vigorous or feeble, according as the markets he depends on for selling the surplus of his labor are steady or fluctuating, adequate or inadequate. And in the ordinary course of things that surplus will be larger or smaller in the same proportion.

For selling it, a home market is far better than a foreign one, because by the nature of things it's far more reliable.

It's a primary aim of national policy everywhere to be able to feed a nation from its own soil, and manufacturing nations try, as far as circumstances allow, to get the raw materials for their own manufactures from the same source.

Driven by the spirit of monopoly, this inclination is sometimes carried to an unwise extreme. People don't always seem to remember that nations with neither mines nor manufactures can get the manufactured goods they need only by trading away the products of their soil. If the nations best able to supply them with those goods are unwilling to let that trade run its proper course, they must of necessity make every possible effort to manufacture for themselves. The result is that the manufacturing nations cut down the natural advantages of their own situation because they're unwilling to let the agricultural countries enjoy the advantages of theirs, and sacrifice the interests of a trade that benefits both sides to the vain project of selling everything and buying nothing.

But it's also a consequence of this policy that the foreign demand for the products of agricultural countries is, to a great degree, chancy and occasional rather than certain and constant. How far the demand for some of the staple goods of the United States may have suffered harmful interruptions from that cause must be left to the judgment of the people who carry on the country's trade. But it can safely be said that such interruptions are at times felt very awkwardly, and that cases fairly often arise in which markets are so narrowed and restricted that the demand falls far short of the supply.

Quite apart from the artificial obstacles this policy creates, there are natural causes that make the foreign demand for the surplus of agricultural nations a shaky thing to rely on. Differences of season in the consuming countries make immense differences in what their own soil produces from year to year, and so in how much they need from abroad. A plentiful harvest in the consuming countries, especially if a similar one comes at the same time in the supplying countries, naturally produces a glut in the supplying countries' markets.

Consider how fast and how far the spread of new settlements in the United States must increase the surplus produce of the soil. Weigh seriously the tendency of the system that prevails among most of the trading nations of Europe. Then, however much we may count on natural forces to counteract the effects of an artificial policy, there seem to be strong reasons to regard the foreign demand for that surplus as too uncertain to rely on, and to want a substitute for it in a large home market. To secure such a market there's no other means than to promote manufacturing establishments. Manufacturers, who make up the most numerous class after the farmers, are for that very reason the chief consumers of the farmers' surplus.

This idea of a large home market for the surplus produce of the soil is of the first importance. Of all things, it does the most to keep agriculture flourishing. If manufactories drew off some of the hands who would otherwise be farming, they might possibly leave a smaller quantity of land under cultivation. But by tending to secure a more certain demand for the surplus produce of the soil, they would at the same time make the land that was cultivated better improved and more productive. And while their influence would better the condition of each individual farmer, the total mass of farm production would probably increase. That total depends at least as much on how well the land is improved as on the number of acres under cultivation, and probably more.

It deserves particular notice that multiplying manufactories not only provides a market for the goods a country has been used to producing in abundance. It also creates a demand for goods that were either unknown before or produced in insignificant quantities. The depths as well as the surface of the earth are ransacked for things that used to be neglected. Animals, plants and minerals take on a usefulness and value that no one had explored before.

The considerations above seem enough to establish, as general propositions, that it is in the interest of nations to diversify the occupations of the individuals who make them up; and that establishing manufactures is fitted not only to increase the general stock of useful and productive labor, but even to improve the state of agriculture in particular, and certainly to advance the interests of the people engaged in it. There are other views of the subject still to be taken later on, which, it's believed, will confirm these conclusions.

III. Before we go on to discuss further the objections to encouraging manufactures that were stated at the outset, it will be useful to see what can be said, from the particular situation of the United States, against the conclusions that seem to follow from what has been offered so far.

It may be said, and the point carries real weight, that a nation with large tracts of empty, fertile land might well find it in its own interest, and agriculture's, to shift part of its population from farming to manufactures if it were also cut off from foreign trade. But it doesn't follow that the same holds for a nation that has such empty, fertile land and also has ample chance to buy from abroad, on good terms, all the goods its people need. Being able to do that at least secures the great advantage of a division of labor. It leaves the farmer free to give himself entirely to working his land, and lets him buy with its products the manufactured goods he needs or enjoys. And granted that in settled countries diversifying industry does increase the productive powers of labor and add to income and capital, it's hardly conceivable that anything could be of such solid and lasting advantage to an uncultivated and unpeopled country as turning its wilderness into cultivated and inhabited districts. If income should be smaller in the meantime, capital must be greater in the end.

To these observations, the following seems a satisfactory answer.

First, if a system of perfect freedom for industry and trade were the prevailing system among nations, the arguments that discourage a country in the position of the United States from eagerly pursuing manufactures would no doubt have great force. It isn't denied that, with few exceptions, they might be allowed to serve as a rule of national conduct. In that state of things each country would have the full benefit of its own particular advantages to make up for its shortcomings or disadvantages. If one nation could supply manufactured goods on better terms than another, the other might find ample compensation in a superior ability to supply the produce of the soil. And a free exchange, to the benefit of both, of the goods each could supply on the best terms might go on between them, keeping the industry of each in full vigor. The circumstances already mentioned, and others to be set out later, make it probable that purely agricultural nations would not reach the same degree of wealth, in proportion to their numbers, as nations that combined manufactures with agriculture. Even so, the steady improvement of the former's lands might in the end make up for their lesser wealth in the meantime. And in a case where the opposing considerations are fairly evenly balanced, the choice ought perhaps always to fall on leaving industry to its own discretion.

But that system is far from describing the general policy of nations. The prevailing policy has been governed by the opposite spirit. The result is that the United States is, to a certain extent, in the position of a country cut off from foreign trade. We can, it's true, easily get from abroad the manufactured goods we want. But we meet numerous and very damaging obstacles to the sale and export of our own goods. Nor is this true of one foreign nation only. The regulations of several countries we trade with most heavily throw serious obstructions in the way of the principal staples of the United States.

In such a state of things the United States can't trade with Europe on equal terms, and the lack of reciprocity would make the country the victim of any system that led it to confine its aims to agriculture and stay out of manufactures. A constant and growing need on our part for the goods of Europe, and only a partial and occasional demand for our own goods in return, couldn't fail to leave us impoverished compared with the wealth our political and natural advantages entitle us to aim at.

Remarks of this kind aren't made in a spirit of complaint. It's for the nations whose regulations are meant to judge for themselves whether, by aiming at too much, they don't lose more than they gain. It's for the United States to consider by what means it can make itself least dependent on the schemes, right or wrong, of foreign policy.

It's no small consolation that the very measures that have hampered our trade have already hurried on improvements at home, which on the whole have bettered our affairs. To diversify and extend those improvements is the surest and safest way to make up for any inconvenience that those or similar measures tend to cause. If Europe won't take the products of our soil on terms consistent with our interest, the natural remedy is to reduce, as fast as possible, our need for hers.

Second, turning the wilderness into cultivated land is certainly a point of great importance in the political calculations of the United States. But the degree to which encouraging manufactures might possibly slow it down doesn't appear to outweigh the powerful reasons for giving that encouragement.

An observation made earlier bears heavily on this question. Suppose it can't be denied that the interests even of agriculture may be advanced more by having the occupied lands of a State well cultivated than by having a greater quantity occupied but much worse cultivated. Suppose too that manufactories, for the reasons given, must be admitted to promote a steadier and more vigorous cultivation of the occupied lands than there would be without them. It will follow that they're capable of making up to a country for slower progress in new settlement, and may increase both the capital value and the income of its lands, even if they reduce the number of acres under the plow.

But it by no means follows that the extension of manufactures would slow the progress of new settlement. The wish to be an independent owner of land rests on such strong principles in the human heart that, where the chance of becoming one is as great as it is in the United States, only a small proportion of those whose situations would otherwise lead them to it would be drawn off toward manufactures instead. And it's highly probable, as already suggested, that the foreigners who arrive, drawn over at first by the prospect of manufacturing work and later abandoning it for farming, would more than make up for any of our own citizens who happened to be drawn away from it.

The remaining objections to a particular encouragement of manufactures in the United States now need to be examined.

One of these turns on the proposition that industry, left to itself, will naturally find its way to the most useful and profitable employment. From this it's inferred that manufactures will grow up without the help of government as soon and as fast as the natural state of things and the interest of the community require. Against the soundness of this hypothesis, taken in the full breadth of its terms, very strong reasons can be offered. They have to do with the strong influence of habit and of the spirit of imitation; the fear of failure in untried ventures; the built-in difficulties that come with the first attempts to compete with those who have already brought a business to perfection; and the bounties, premiums and other artificial encouragements with which foreign nations back the efforts of their own citizens in the branches where they're to be rivaled.

Experience teaches that people are often so governed by what they're used to seeing and doing that the simplest and most obvious improvement in the most ordinary occupation is taken up with hesitation and reluctance, and only by slow degrees. A community long used to other pursuits may be expected to make the move to new ones on its own with proportionally greater difficulty. When the old occupations stopped yielding a profit enough to support the people who followed them, or when there was no work in them at all because there were too many hands, changes would follow. But those changes would probably come later than the interest of either individuals or society would warrant. In many cases they wouldn't happen at all, so long as sticking to the old ways still guaranteed a bare living, even though a move to more profitable work might be possible. To bring about the desirable changes as early as is advisable may therefore require the encouragement and patronage of government.

The fear of failing in new attempts is perhaps a more serious obstacle. Some temperaments are drawn by the mere novelty of an undertaking, but they aren't always the ones best fitted to make it succeed. Success needs the confidence of cautious, shrewd capitalists, citizens and foreigners alike. And to give people of that kind confidence, they must be made to see, in any project that's new (and for that reason alone, if no other, risky), the prospect of enough backing and support from the Government to overcome the obstacles that are inseparable from first experiments.

The head start enjoyed by nations that got into a branch of industry first and have perfected it is a more formidable obstacle than either of these to bringing the same branch into a country where it didn't exist before. For the new establishments of one country to compete on equal terms, in both quality and price, with the long-matured establishments of another is in most cases impossible. The gap in one or the other, or in both, must be so wide as to rule out successful rivalry without the extraordinary aid and protection of government.

But the greatest obstacle of all to carrying on successfully a new branch of industry in a country where it was unknown before lies, wherever they apply, in the bounties, premiums and other aids that the nations where the businesses to be copied are already established grant in a variety of cases. It's well known (and particular examples will be cited in the course of this report) that certain nations pay bounties on the export of particular goods so that their own workers can undersell and drive out every competitor in the countries the goods are sent to. The men who start a new manufacture, then, have to contend not only with the natural disadvantages of a new undertaking but with the gifts and rewards other governments hand out. If they're to contend with success, the intervention and aid of their own government are indispensable.

It's believed that the people in a particular line of business in one country have at times combined to defeat the first efforts to introduce it into another, by making temporary sacrifices, perhaps repaid by extraordinary compensation from their own government, and such combinations aren't to be dismissed as improbable. The existence, or the promise, of aid from the government of the country where the business is being introduced may be essential to steel the venturers against the dread of such combinations: to defeat their effects if they're formed, and to keep them from being formed at all, by showing that they must in the end prove fruitless.

Whatever reason there may be to expect that a people's industry, directed by private interest, will find out the most beneficial employment for itself on equal terms, there's none for relying on it to struggle against the force of unequal terms. Nor can it be relied on to overcome by itself all the accidental barriers to successful competition that may have been put up, whether by the advantages naturally gained from practice and from holding the ground first, or by those that spring from positive regulations and an artificial policy. This general reflection alone might be enough to answer the objection under examination, quite apart from the weighty considerations urged in detail above.

Scarce Hands, Dear Labor, Little Capital

The next objections to pursuing manufactures in the United States claim that success here is simply impossible, and they give three reasons for it: a scarcity of hands, the dearness of labor, and a lack of capital.

The first two are, to a certain extent, real, and within proper limits they ought to be admitted as obstacles to manufacturing enterprise in this country. But various considerations weaken their force. They give good reason to be confident that neither is enough to stop many very useful and extensive manufactories from being carried on at a profit.

Take the scarcity of hands first. The fact itself needs no small qualification when it's applied to certain parts of the United States. There are large districts that can be considered pretty fully peopled. In spite of a constant drain of people leaving for distant settlements, they're thickly sprinkled with flourishing and growing towns. If these districts haven't yet reached the point where the complaint of scarce hands stops, they aren't far from it, and they're approaching it fast. And since they offer perhaps fewer attractions to farming than some other parts of the Union, they show a correspondingly stronger pull toward other kinds of industry. In these districts you can already see a good deal of readiness for manufacturing establishments.

There are also circumstances, already mentioned for another purpose, that substantially reduce the effect of a scarcity of hands everywhere. The first is the great use that can be made of women and children, a point on which a very telling and instructive fact was cited earlier. The second is the vast reach that recent improvements have given to machines, which put fire and water to work in place of human hands and have enormously reduced the need for manual labor. The third is the employment of people ordinarily busy in other occupations, during their seasons or hours of leisure. Besides getting more labor out of the same number of people, and so enlarging the general stock of labor, as was remarked earlier, this can also be counted as a way of making up for scarce hands. Last comes the attraction of immigrants from abroad.

Anyone who looks carefully at the makeup of our towns will see how far this last resource can be relied on. They contain a large proportion of ingenious and valuable workmen, in all sorts of arts and trades, who left Europe and, by doing so, improved their own condition and added to the industry and wealth of the United States. It's a natural inference from our experience so far that, as soon as the United States shows that it's seriously going into manufactures, and as soon as skilled workers abroad come to see that the state of things here offers a moral certainty of work and encouragement, European workmen will move here in numbers large enough to make the plan succeed. How, indeed, could it happen any other way, given the many powerful inducements this country's situation offers, appealing as they do to so many strong passions and feelings, and to so many interests, general and particular?

We can say, then, that for the hands to carry on manufactures we will to a large extent draw on a foreign stock, keeping our own people for working our lands and manning our ships, as far as character and circumstance incline them. It's worth noticing, too, that the objection drawn from the scarcity of hands applies just as well to trade and shipping. Yet both are flourishing without any noticeable hindrance from that cause.

As for the dearness of labor (the second obstacle alleged), it comes mainly from two things: the one just discussed, the scarcity of hands, and the size of profits.

In so far as dear labor is a result of scarce hands, it's eased by everything already offered as reducing that shortage. It's certain, too, that the gap in wages between some of the most manufacturing parts of Europe and a large part of the United States isn't nearly as great as people commonly imagine. The gap is also much smaller for craftsmen and factory workers than for laborers in the country. A careful comparison shows a great deal of exaggeration on this score. And whatever gap really does exist matters less and less the more use can be made of machinery.

To illustrate that last idea, suppose that in two countries the difference in the price of the hand labor needed to make a given article is 10. Now suppose some mechanical power is brought into both countries, doing half the necessary labor and leaving only half to be done by hand. Clearly the difference between the two countries in the cost of making the article, as far as that cost depends on the price of labor, will drop from 10 to 5 as a result.

This point deserves the most particular attention. It hugely weakens one of the objections most strongly pressed against the success of manufactures in the United States.

Getting every machine known anywhere in Europe needs only proper arrangements and due care. We already know how several of the most important of them work. In most cases they can be built here on nearly equal terms. And for those that run on water, we can even claim some advantage, from the unusual variety and greater cheapness of good mill sites, which many parts of the United States have in abundance.

In so far as dear labor results from large profits in a line of business, it's no obstacle to that business's success at all. The man who runs it can afford to pay the price.

There's good reason to conclude that people running manufactures in this country can, right now, afford to pay their workmen higher wages than similar workmen get in Europe. The prices of foreign goods in American markets, which will set the prices of homemade ones for a long time to come, can be seen as made up of the following ingredients: the first cost of the materials, including any taxes paid on them where the goods are made; the cost of land, buildings, machinery and tools; the wages of the people employed in the manufactory; the profits on the capital, or stock, employed; the commissions of agents who buy the goods where they're made; the cost of shipping them to the United States, including insurance and other incidental charges; the taxes or duties, if any, and the official fees paid on their export; and the taxes or duties and official fees paid on their import.

On the first item, the cost of materials, the advantage on the whole is already with the United States. And that advantage is bound to grow as a sure and extensive demand at home leads landowners to give more of their attention to producing those materials. In any comparison on this point, we shouldn't overlook the fact that some of the principal manufacturing countries of Europe depend far more on foreign supplies for their materials than the United States would. We can supply ourselves with a greater abundance, and a greater variety, of the materials needed.

On the second item, the cost of land, buildings, machinery and tools, we can assume at least an equality, since advantages on some points will balance temporary disadvantages on others. On the third item, wages, the comparison certainly goes against the United States, though, as already observed, not nearly as far as is commonly supposed.

The fourth item, profits, applies equally to the foreign and the domestic manufacture. It's really more a result than an item to be compared.

All the remaining items, however, apply to the foreign manufacture alone. They are, in the strictest sense, extras: a sum of additional charges on foreign goods that can't be put at less than 15 to 30 percent of their cost at the manufactory.

This sum of extra charges can confidently be counted as more than enough to offset the real difference in the price of labor. It's satisfactory proof that manufactures can prosper in the United States in spite of that difference.

Then there's the general claim, tied to scarce hands and dear labor, that large-scale manufacturing can only grow out of an overflowing or full population. It's enough to answer, in general, that the facts have been otherwise. Several nations were not in the condition said to be essential to success at times when they had already brought a whole range of manufactures to maturity.

The supposed lack of capital for carrying on manufactures in the United States is the vaguest of all the objections usually raised against them.

It's very hard to say anything precise about the real amount of a country's money capital, and harder still to say how it compares with all the things that invite capital to be employed. It's no easier to say how far the effect of any given quantity of money, as capital (that is, as a medium for circulating a nation's industry and property), may be increased by the very fact that new objects of employment set it moving faster. That effect, like the momentum of a falling body, can fairly be pictured as depending on mass and velocity together. It seems pretty certain that a given sum of money, in a place where the quick impulses of commercial activity were barely felt, would look inadequate to circulate as much industry and property as it would in a place where those impulses were felt in full.

It isn't obvious why the same objection couldn't be made just as well against foreign commerce as against manufactures, since our immense tracts of land, occupied and unoccupied, could obviously employ more capital than is actually put into them. The United States certainly offers a vast field for the profitable employment of capital. But it doesn't follow that enough funds won't be found, one way or another, to carry on successfully any kind of industry that's likely to prove really beneficial.

The following considerations should put to rest any anxiety about a lack of capital.

The introduction of banks, as has been shown on another occasion, tends powerfully to enlarge the active capital of a country. As experience shows how useful these institutions are, they're multiplying in the United States. They'll probably be set up wherever they can exist to advantage, and wherever they can be supported, if they're managed prudently, they'll add new energy to every kind of money transaction.¹⁴

The aid of foreign capital can safely be counted on, and counted on for a good deal. We've long felt its help in our foreign commerce, and it has begun to make itself felt in various other ways. It has put life not only into our public funds but into our agriculture and other improvements at home. In a few cases it has already reached even our manufactures.

It's a well-known fact that some parts of Europe have more capital than they have profitable uses for at home. The large loans they continually make to foreign governments are one proof of it among others. It's equally certain that the capital of other parts of Europe could find more profitable employment in the United States than at home. There are weighty reasons for preferring to employ capital at home, even at a lower profit, rather than invest it abroad for a greater gain. But those reasons are overruled either by a lack of employment at home or by a very substantial difference in profit, and both causes are working to move foreign capital to the United States. Various opportunities in this country certainly offer advantages that would be hard to match elsewhere. And with the increasingly favorable opinion people abroad are forming of our government, the attractions will grow stronger and stronger. That opinion will prove a rich mine of prosperity to the country if the progress of our affairs confirms and strengthens it. To secure this advantage, little more is needed now than to foster industry and to keep order and peace, at home and abroad.

There may well be people inclined to look with a jealous eye on the arrival of foreign capital, as if it were a way of robbing our own citizens of the profits of our own industry. But there could perhaps never be a more unreasonable jealousy. Foreign capital shouldn't be seen as a rival. It should be seen as a most valuable helper, one that sets in motion more productive labor and more useful enterprise than could exist without it. At the very least it's clear that in a country placed as the United States is, with an infinite fund of resources still to be developed, every penny of foreign capital laid out in improvements at home, and in industrious establishments of a lasting kind, is a precious acquisition.

And whatever first attracts foreign capital, once it's here it can be steered toward any useful purpose we like. There's no surer way to keep it among us than to widen the range of things it can usefully be employed in. Even if it came in purely to speculate in the public funds, it can afterward be made to serve the interests of agriculture, commerce and manufactures.

Nor should drawing in foreign capital for the direct purpose of manufacturing be thought a fantasy. There are already examples of it, as was noted elsewhere, and if the inclination is cultivated, the examples can hardly fail to multiply. There are also cases of another kind that strengthen the expectation. Projects to improve the country's communications, by cutting canals, clearing obstructions from rivers and building bridges, have received very substantial help from the same source.

When the manufacturing capitalist of Europe considers the many important advantages pointed out in the course of this report, he can't help seeing very powerful reasons to move himself and his capital to the United States. One very interesting peculiarity of our situation is sure to strike him as an important factor in his calculations. The growing population and steady improvement of the United States guarantee a continually rising demand at home for the goods he'll produce, a demand no outside accident or upheaval can touch.

There are circumstances strong enough to justify a good deal of reliance on foreign capital in reaching the goal in view. But it's satisfying to have good grounds for confidence that there are resources at home that are equal to it by themselves. As it happens, there's a kind of capital actually existing in the United States that removes all anxiety about a lack of capital. This is the funded debt.¹⁵

The effect of a funded debt as a kind of capital was noted on an earlier occasion. But the weight being put on it here seems to call for a fuller explanation, and the Secretary will accordingly attempt one.

Public funds serve as capital because of how highly men of money usually regard them, and therefore because of how easily and quickly they can be turned into money. Since they can be converted into money so promptly, a transfer of stock is, in a great many cases, as good as a payment in coin. And where the person being paid doesn't happen to want a transfer of stock, the person paying never has any trouble finding a buyer for his stock elsewhere, who'll give him the coin he needs in exchange for it.

Hence, when the public funds are in a sound and settled state, a man who holds a sum in them can take up any business opportunity that comes along with as much confidence as if he held an equal sum in coin.

That public funds work as capital in this way is too obvious to deny. The objection to the idea that they add to the capital of the community is a different one: that they cause the destruction of some other capital of an equal amount.

The only capital they can be supposed to destroy must consist of two things: the annual revenue applied to paying interest on the debt and gradually paying off the principal, and the amount of coin used in circulating the funds, that is, in carrying out the various sales and transfers they pass through.

But the following seems to be the true and accurate view of the matter.

First, the annual revenue needed to pay interest and pay off principal. A definite proportion will make the reasoning clearer. Let's suppose, then, that the annual revenue to be applied, matching the terms of the 6 percent stock of the United States, is at the rate of eight in a hundred: six, to begin with, for interest and two for principal.

To this point, it's clear that the capital destroyed would stand to the capital created in no greater proportion than 8 to 100. A sum of $8 would be withdrawn from the total mass of other capitals to be paid to the public creditor, while he'd be holding a sum of $100, ready to apply to any purpose or to put into any enterprise that looked worthwhile to him. Here, then, the increase of capital, the excess of what is produced over what is destroyed, comes to $92.

It may be objected to this conclusion that the $8 is to be withdrawn every year until the whole hundred is paid off. From that it might be inferred that in time a capital will be destroyed equal to the one first created.

But it's nevertheless true that through the whole interval, from the creation of the $100 of capital until it's been reduced to a sum no greater than the annual revenue set aside to pay it off, there'll be more active capital in existence than if no debt had been contracted. The sum drawn from other capitals in any one year won't exceed $8. But at every moment during the whole period there'll be a sum equal to whatever part of the principal is still unpaid, in somebody's hands, employed or ready to be employed in some profitable undertaking. There will, therefore, always be more capital available for employment than capital taken out of employment. The excess for the first year has been put at $92. It'll shrink every year, but there'll always be an excess until the principal of the debt is brought down to the level of the yearly payment that redeems it: in the case assumed here as an example, to $8.

The reality of this excess becomes plain if we suppose, as often happens, that a citizen of a foreign country brings $100 into the United States to buy an equal amount of the public debt. Here is an outright increase of $100 in the mass of circulating coin. At the end of a year the foreigner is assumed to draw back $8, for his principal and interest, but he still leaves $92 of his original deposit in circulation. In the same way, at the end of the second year he leaves $84, drawing back another yearly payment of $8 then too. And the process goes on like that, with the capital left in circulation shrinking every year and coming closer to the level of the yearly payment drawn back. There are, however, some differences in the final working of the part of the debt bought by foreigners and the part that stays in the hands of citizens. But the general effect in both cases, though in different degrees, is to add to the active capital of the country.

Up to now the reasoning has granted that some other capital is destroyed, to the extent of the yearly payment set aside for the interest and principal of the debt. But that grants too much. There is, at most, a temporary transfer of some other capital, to the amount of the yearly payment, from those who pay to the creditor who receives. And he puts it back into circulation, to go on doing the work of capital. He does it either directly, by using the money in some branch of industry, or indirectly, by lending it to someone else who does, or by spending it on his own living. Either way no capital is destroyed. Its motion is merely suspended for a time: while it passes from the hands of those who pay into the public treasury, and from there, through the public creditor, into some other channel of circulation. When the interest payments are periodic and quick, and made through banks, the diversion or suspension of capital can almost be called momentary. Hence the deduction on this account is far smaller than it first appears.

As far as the yearly payment goes, no capital at all is destroyed or transferred except the part of each person's income that goes to make it up. The land that gives the farmer the sum he has to contribute stays the same, and the same can be said of other capitals. Indeed, in so far as the tax that raises the contribution has spurred anyone to work harder at his occupation, as often happens when a tax isn't oppressively heavy, it may even increase the capital that pays it. This idea carries some weight in the general view of the subject.

It remains to see what further deduction should be made from the capital the debt creates, on account of the coin used in circulating it. This can be calculated far less precisely than the item just discussed. It's impossible to say what proportion of coin is needed to carry out the sales and transfers that any kind of property usually goes through; the quantity, indeed, varies with circumstances. Still, it can be said without hesitation that, because the coin turns over so fast, or rather passes so quickly from hand to hand, the medium of circulation is always only a small fraction of the property it circulates. And from that it safely follows that the coin used in dealing in the funds, the coin that keeps them active as capital, is incomparably less than the amount of debt traded for business purposes.

It shouldn't be left out, however, that dealing in the funds becomes a separate business in its own right, which employs some of the circulating coin and, by employing it, draws it away from other pursuits. But even allowing for this, there's no reason to think that the coin diverted in the whole operation bears any considerable proportion to the amount of capital it puts to work. The debt in circulation is always at the command of any useful enterprise, and the coin that circulates it is never kept from its ordinary work for more than a moment. It flows constantly and rapidly back and forth, from the channels of industry to those of speculation in the funds and back again.

There are strong facts confirming this theory. The power of money capital that Great Britain has shown, and the height to which every kind of industry has grown there on the strength of it, can't be explained by the quantity of coin that kingdom has ever had. Accordingly, ever since Britain began its funding system, the prevailing opinion among its men of business, and among most of its shrewdest theorists, has been that the working of the public funds as capital has helped produce this result. Here at home, the signs so far point the same way. Industry in general seems to have come back to life. There are signs that our commerce is expanding. Our shipping has certainly had a considerable spurt lately. And in many parts of the Union there appears to be a command of capital that was unknown until recently, at least since the Revolution. At the same time it must be admitted that other circumstances have played a part, and a large one, in producing the present state of things, and that the signs aren't yet decisive enough to be relied on entirely.

In the question under discussion it's important to tell apart two things: an absolute increase of capital, an addition of real wealth, and an artificial increase of capital as an engine of business, a tool of industry and commerce. In the first sense a funded debt has no claim to be considered an increase of capital. In the second, it has claims that aren't easy to dispute. Bank credit is of a similar nature, and so, to a lesser degree, is every kind of private credit.

A funded debt isn't, to begin with, an absolute increase of capital or an addition to real wealth. Yet by serving as a new force in the workings of industry it does, within certain limits, tend to increase the real wealth of a community. It works the way money borrowed by a thrifty farmer, and spent on improving his farm, may in the end add to his stock of real riches.

There are respectable people who, from a just dislike of piling up public debt, won't grant it any usefulness at all. They can see no good to offset the harm they believe it carries within it. They can't be persuaded that it should in any sense be viewed as an increase of capital, for fear that someone will conclude that the more the debt, the more the capital; the greater the burdens, the greater the blessings of the community.

But it's the business of those who govern to weigh everything as it really is, and to judge how far the good in any measure is offset by the harm, or the harm by the good. Seldom is either one unmixed.

Nor does it follow that piling up debt is desirable just because a certain amount of it works as capital. There may be a plethora in the political body as there is in the natural one, a state of things in which no such artificial capital is needed. A debt, too, may swell to such a size that most of it stops being useful as capital and serves only to pamper the extravagance of idle and dissolute people. It may grow so large that the sum needed to pay its interest becomes oppressive, beyond what a government can raise without endangering the public peace. Or so large that the resources of taxation needed to meet it have been stretched too far to be extended again when the public safety demands it. Where this critical point lies can't be said. But it's impossible to believe that there isn't such a point.

And since the ups and downs of nations create a constant tendency for debt to pile up, every government ought to make a perpetual, anxious and unceasing effort to reduce whatever debt exists at any time, as fast as can be done consistently with integrity and good faith.

Reasoning on a subject made of ideas so abstract and complex, and so hard to reduce to precise calculation, as those in the question just discussed always runs the danger of falling into fallacies. Due allowance should therefore be made for that possibility. But as far as the nature of the subject allows, there seem to be satisfactory grounds for believing that the public funds serve as a source of capital for the citizens of the United States. And if they're a source at all, they're an extensive one.

What America Already Makes, and Why Now

To all the arguments brought to show that manufacturing can't succeed in the United States, it would have been enough of an answer simply to point to what has already been done. Several important branches have certainly grown up and flourished here with surprising speed, and that gives an encouraging assurance that future attempts will succeed too. It may not be out of place to list the most considerable of them:

1. Skins: tanned leather and alum-dressed leather, dressed skins, shoes, boots and slippers, harness and saddlery of all kinds, traveling cases and trunks, leather breeches, gloves, muffs and fur tippets, parchment, and glue.

2. Iron: bar and sheet iron, steel, nail rods and nails, farm implements, stoves, pots and other household utensils, the steel and iron work for carriages and for shipbuilding, anchors, scale beams and weights, various tools for craftsmen, and arms of different kinds, though the making of these last has lately fallen off for lack of demand.

3. Wood: ships, cabinetwork and turned ware, wool and cotton cards (the wire-toothed combs that ready fiber for spinning) and other machinery for manufactures and for farming, mathematical instruments, and barrels, casks and tubs of every kind.

4. Flax and hemp: cables, sailcloth, cordage, twine, and pack thread.

5. Bricks and coarse tiles, and pottery.

6. Distilled spirits and malt liquors.

7. Writing and printing paper, sheathing and wrapping paper, pasteboard, fullers' or press papers, and wallpaper.

8. Hats of fur, of wool, and of mixtures of both; women's shoes of cloth and of silk.

9. Refined sugar.

10. Oils from animals and from seeds, soap, and spermaceti and tallow candles.

11. Copper and brass wares, especially utensils for distillers, sugar refiners and brewers; andirons and other articles for household use; and scientific apparatus.

12. Tinware for most ordinary uses.

13. Carriages of all kinds.

14. Snuff, and chewing and smoking tobacco.

15. Starch and hair powder.

16. Lampblack and other painters' colors.

17. Gunpowder.

Besides the workshops making these articles, which are carried on as regular trades and have reached a good degree of maturity, there is a vast amount of household manufacturing. It contributes far more to supplying the community than anyone could imagine without having looked into it specially. That discovery has been one of the pleasant results of the inquiry this report required, and it holds for the Southern States as much as for the Middle and Northern ones. Great quantities of goods are made in the household way: coarse cloths, coatings, serges and flannels, linsey-woolseys, stockings of wool, cotton and linen thread, coarse fustians, jeans and muslins, checked and striped cotton and linen goods, bedticks, coverlets and counterpanes, tow linens, coarse shirting, sheeting, toweling and table linen, and various mixtures of wool and cotton and of cotton and flax. In many cases families make not just enough for themselves but enough to sell, and in some cases even enough to export. In a number of districts it's reckoned that two-thirds, three-fourths, and even four-fifths of all the inhabitants' clothing is made by the inhabitants themselves. Progress this great in family manufactures, made within a few years, is a highly interesting fact, both morally and politically.

Nor does the list above include every article made as a regular trade. Many others are just as well established but have been left out as less important. There are also many attempts still in their infancy which look very promising but couldn't properly be counted among manufactures already established. And there are other articles of great importance which, strictly speaking, are manufactures, but have been left out because they're bound up directly with farming: flour, potash and pearl ash, pitch, tar, turpentine, and the like.

One objection to encouraging manufactures remains, and it's of a different kind from those that doubt whether they can succeed. It rests on their supposed tendency to give a monopoly of advantages to particular classes at the expense of the rest of the community. The rest of the community, it's claimed, could get the manufactured goods they need on better terms from foreigners than from their own fellow citizens, and every measure that obstructs the free competition of foreign goods, it's alleged, forces them to pay a higher price for whatever they want.

It isn't unreasonable to suppose that measures that limit the free competition of foreign goods tend to raise prices, and there's no denying that this is what happens in a number of cases. But the facts don't always match the theory. In several instances prices have fallen immediately after a domestic manufacture was established. Whether that's because foreign manufacturers try to drive ours out by underselling them, or for some other reason, the effect has been as stated, the reverse of what might have been expected. And even if it were true that the immediate and certain effect of regulations controlling foreign competition with home manufactures was a rise in price, it's universally true that the ultimate effect of every successful manufacture is the opposite. Once a domestic manufacture has been brought to perfection and has drawn enough people into it, it invariably becomes cheaper. Free of the heavy costs that come with importing foreign goods, it can be sold more cheaply, and in time it seldom or never fails to be sold more cheaply, than the foreign article it replaces. The competition that springs up at home soon does away with anything like a monopoly, and little by little brings the price down to the lowest that still leaves a reasonable profit on the capital employed. That's what reason tells us to expect, and it's what experience shows.

It follows that it's in a community's interest, for the sake of lasting savings in the long run, to encourage the growth of manufactures. Taking the nation as a whole, a temporary rise in price will always be well repaid by a permanent fall.

One more reflection belongs here. This eventual fall in the price of manufactured goods, which comes from setting up manufactures at home, tends directly, and very significantly, to benefit agriculture. It lets the farmer buy the manufactured goods he needs with a smaller quantity of his own labor, and in that way raises the value of his income and his property.

The usual objections, both to the wisdom of encouraging manufactures in the United States and to the chances of their succeeding here, have now been discussed. The considerations that came up along the way, all of them recommending this kind of industry to the government's support, will be considerably strengthened by a few general points and some particular ones, which were naturally held back until now.

1. It seems morally certain that the trade of a country that both manufactures and farms will be more profitable and prosperous than that of a country that only farms.

One reason lies in the general effort of nations, already mentioned, to get from their own soil the basic necessities they need to consume and use. That effort makes their demand for a foreign supply of such goods largely occasional and uncertain. Hence, while the purely farming nations need the manufacturing states' goods constantly and regularly, the manufacturing states' need for the farming nations' produce is liable to very considerable swings and interruptions. The great irregularities that come from good and bad seasons have been noted elsewhere. A demand that's steady on one side and unsteady on the other must tend to turn the general course of trade between the two parties against the purely farming states. A particular situation, a climate and soil suited to some special crop, may sometimes make an exception to the rule, but there's every reason to believe it will be found sound in the main. A second circumstance that gives countries that manufacture as well as farm the commercial edge lies in the greater attraction a more varied market holds for foreign customers, and the greater scope it gives to merchants. It's an undeniable truth of commerce, and one that rests on very obvious reasons, that people will always flock most to the markets where goods are not only plentiful but most varied. Each new kind of goods is one more inducement. And it's just as clear that the merchants of a country have a wider field of enterprise in proportion to the variety, as well as the abundance, of goods they find at home to export to foreign markets.

A third circumstance, perhaps no less important than the other two, has to do with slumps in demand for particular goods, which at one time or another interfere more or less with the sale of everything. A nation that can bring only a few articles to market is likely to feel such slumps sooner and harder than one that always has a great variety of goods on hand. The first often finds too large a share of its goods for sale or exchange sitting unsold, or else it's forced into damaging sacrifices to get the foreign articles it wants, and those wants are many and pressing in proportion as its own products are few. The second usually finds that high prices for some of its articles make up for low prices for others, and the quick and profitable sale of whatever is in demand lets its merchants wait more comfortably for a turn in the market for whatever isn't. There's reason to believe that a difference in situation on this point has enormously different effects on the wealth and prosperity of nations.

From these circumstances taken together, two important conclusions can be drawn. One is that a favorable balance of trade is always more probable for countries where manufactures flourish on the base of a thriving agriculture than for countries confined wholly, or almost wholly, to agriculture. The other, which also follows from the first, is that countries of the first kind are likely to have more money than those of the second.

The facts seem to bear this conclusion out. Importing manufactured supplies seems invariably to drain a purely farming people of their wealth. Compare the manufacturing countries of Europe, in this respect, with the countries that only farm, and the difference is striking. Other causes, it's true, help explain the difference between some of them, the relative state of their agriculture among them. But between others, the most prominent point of difference is the relative state of their manufactures. And in support of the same idea, it shouldn't go unremarked that the West India Islands, whose soils are the most fertile in the world, and the nation that does the most to supply the rest of the world with gold and silver, both trade at a loss with almost every other country.¹⁶

As far as our own experience can guide us, it points the same way. Before the Revolution, the amount of coin held by the colonies that now make up the United States seemed too little for their circulation, and their debt to Great Britain kept growing. Since the Revolution, the states where manufactures have grown most have recovered fastest from the damage of the late war, and are richest in money.

It should be admitted, though, here as in the previous case, that causes unrelated to the state of manufactures account in part for what we see. The constant spread of new settlements naturally tends to produce an unfavorable balance of trade, though it makes up for the inconvenience by the growth in the national capital that comes from turning wilderness into improved land. And the different amounts of foreign commerce carried on by the different states may make real differences in their relative wealth. The first of these bears on the shortage of coin and the growth of debt before the Revolution; the second on the advantages the most manufacturing states seem to have enjoyed over the others since the late war ended.

But the fact that plenty of hard money is always found alongside flourishing manufactures, and the reverse where they don't prevail, creates a strong presumption that they work in favor of a country's wealth.

Not only the wealth but the independence and security of a country seem to be closely bound up with the prosperity of its manufactures. Every nation, with those great ends in view, ought to try to have within itself all the essentials of national supply. These are the means of food, housing, clothing and defense.

Having them is necessary to a complete body politic, to the safety as well as the welfare of society. To lack any one of them is to lack a vital organ of political life and movement, and in the various crises that lie in wait for a state, it's bound to feel such a lack severely. The extreme difficulties the United States went through during the late war, from being unable to supply itself, are still sharply remembered. A future war might be expected to show again the harm and danger of a situation to which that inability still applies far too much, unless it's changed by timely and vigorous effort. To make that change as fast as prudence allows deserves all the attention and all the zeal of our public councils. It is the next great work to be accomplished.

As long as we have no navy to protect our foreign commerce, that commerce must be a peculiarly unreliable source of essential supplies, and that fact greatly strengthens the arguments for manufactures.

To these general considerations some more particular ones can be added.

Our distance from Europe, the great fountain of manufactured goods, costs us inconvenience and loss, as things now stand, in two ways.

The bulkiness of the goods that are the chief products of our soil necessarily makes it very expensive to carry them to distant markets. Where the nations we send our products to compete in supplying their own markets, these costs fall mainly on us, and take a real bite out of the original value of what we sell. The costs of manufactured goods brought from Europe are greatly increased by the same distance. And where our own industry offers no competition in our own markets, these costs too fall mainly on us, and take a further, extraordinary bite out of the original value of our products, since those products are what we exchange for the foreign manufactures we consume.

In this country, the equality and moderate size of individual fortunes, and the growing settlement of new districts, create an unusual demand for coarse manufactures. Being bulkier, these cost proportionally more to ship, and that adds to the disadvantage just described.

In most countries, home producers compete heavily with such foreign farm products as are imported for sale. If an extensive growth of manufactures in the United States doesn't create a similar competition in manufactured goods, it seems clear from what has been said that the United States must suffer a double loss in its exchanges with foreign nations: a loss that works strongly toward an unfavorable balance of trade and does great harm to its interests.

These disadvantages weigh heavily on the landed interest of the country. In peacetime they cut seriously into the real value of the products of the soil. In a war involving either ourselves or some other nation that holds a large share of our foreign trade, the cost of shipping our goods, bulky as most of them are, could hardly fail to be a grievous burden on the farmer, as long as he has to depend as heavily as he now does on foreign markets for selling the surplus of his labor.

As far as the prosperity of the American fisheries is held back by the lack of an adequate market, there's another special reason for wanting manufactures to spread. Besides the fish, which in many places would probably make up part of the diet of the people employed, the oils, bones and skins of sea animals are known to be widely used in various manufactures. Hence the prospect of an added demand for what the fisheries produce.

Only one more angle remains from which to consider whether it's wise to encourage manufactures in the United States.

It isn't unusual to meet the opinion that while promoting manufactures may be in the interest of one part of the Union, it runs against the interest of another. The northern and southern regions are sometimes described as having opposed interests on this point. The first are called the manufacturing states, the second the agricultural ones, and a kind of conflict is imagined between the manufacturing and the agricultural interests.

This idea of a conflict between the two interests is the common error of every country's early years, but experience gradually clears it away. In fact they're seen helping and supporting each other so often that in the end they come to be thought of as one, an assumption that has often been abused and isn't universally true. Particular encouragements for particular manufactures may be of a kind that sacrifices the interests of landowners to those of manufacturers. Even so, it's a maxim well established by experience, and generally accepted wherever there has been enough experience, that the overall prosperity of manufactures and the overall prosperity of agriculture are closely connected. Various weighty considerations supporting that maxim have come up in the course of this discussion. Perhaps the greater steadiness of a home market's demand for the surplus produce of the soil is, by itself, a convincing proof of it.

Ideas of a conflict of interest between the northern and southern regions of the Union are, in the main, as groundless as they are harmful. The very differences of circumstance on which such a conflict is usually based justify exactly the opposite conclusion. Mutual needs are one of the strongest bonds of political union, and how far they reach depends naturally on how different the parts are in what they can supply each other.

Suggestions of the opposite kind are always to be regretted, as hostile to the steady pursuit of one great common cause and to the perfect harmony of all the parts.

The more the mind gets used to tracing the close connection of interest among all the parts of a society united under one government, and the endless variety of channels that carry the prosperity of each part to and through the rest, the less likely it will be to be shaken by worries and fears that spring from local distinctions.

It's a truth as important as it is welcome, and one it isn't easy to imagine exceptions to, that everything that tends to establish solid and lasting order in a country's affairs, and to increase its total stock of industry and wealth, ultimately benefits every part of it. On the strength of this great truth, every quarter can safely give its consent to all institutions and arrangements that promise to strengthen public order and add to the nation's resources.

But there are more particular considerations that strengthen the idea that encouraging manufactures is in the interest of every part of the Union. If the Northern and Middle States should be the main seats of these establishments, they would immediately benefit the states farther south by creating a demand for their products. Some of those products the South shares with the other states; others are peculiar to it, or more plentiful there, or of better quality than elsewhere. They're chiefly timber, flax, hemp, cotton, wool, raw silk, indigo, iron, lead, furs, hides, skins and coal. Of these, cotton and indigo are peculiar to the Southern States, and so, as yet, are lead and coal. Flax and hemp are raised, or could be, in greater abundance there than in the more northern states. And the wool of Virginia is said to be better than that of any other state, which seems all the more likely when you consider that Virginia lies in the same latitudes as the finest wool countries of Europe. The climate of the South is also better suited to producing silk. Growing cotton on a large scale can perhaps hardly be expected until manufactures of it have first been set up at home, and the surest encouragement and market for the other products would come from similar establishments for working them.

If it's now clear, then, that encouraging manufactures is in the general interest of the United States, it deserves special notice that certain circumstances make the present a critical moment for taking up this important business with zeal. The effort is bound to be considerably helped by two things: a large and growing inflow of money, as foreigners speculate in our public funds, and the disorders now under way in different parts of Europe.

The first of these not only makes manufacturing ventures easier to carry out. It also marks them as a necessary means of turning the inflow itself to advantage and keeping it from becoming, in the end, an evil. If no useful employment is found for the money foreigners bring here to buy up the public debt, it will soon be sent abroad again to pay for an unusual spree of spending on foreign luxuries, and we may later suffer painful drains of our hard money to pay the interest on the debt they've bought and to redeem its principal.

This useful employment, too, ought to be of a kind that produces solid and lasting improvements. If the money only gives a temporary boost to foreign commerce, it can't open new and lasting outlets for the country's products, and no real or lasting advantage will be gained. As far as it finds its way into improving farms, opening canals and similar improvements, it will do real and substantial good. But there's reason to doubt whether it's likely to find enough employment in channels like those, and still more reason to doubt whether many of the people who hold it would be drawn as readily to projects of that kind as to manufacturing, which is much closer to the kind of business they're used to and to the spirit it breeds in them.

Opening both fields, the one as well as the other, will at least give a better prospect of useful employment for whatever addition of money has come, or may come.

There's a certain ferment of mind at this moment, a certain liveliness of speculation and enterprise, which, if properly directed, can be made to serve useful ends, but which, if left entirely to itself, may have harmful effects. And with the troubled state of Europe inclining its people to emigrate, the workmen we need will be easier to get now than at any other time. Multiplying the openings for employment for those who come may well increase the number and range of valuable additions to the population, the arts and the industry of this country.

To find pleasure in the calamities of other nations would be criminal; but to benefit ourselves by opening an asylum to those who suffer because of them is as justifiable as it is wise.

The Means Other Nations Have Used

We have now taken a full view of the reasons for promoting manufactures in the United States, and examined the principal objections commonly urged against it. The next step is to consider the means by which it can be done. That will lead into a list of the particular industries that, as things stand, seem most fit to be encouraged, and of the particular measure it may be wise to adopt for each.

To judge better what means the United States should use, it will help to look at those that have been used successfully in other countries. The principal ones are these.

1. Protecting Duties

These are duties on the foreign goods that compete with the home-made goods we want to encourage. Duties of this kind obviously amount to a bounty in all but name on the domestic product: by raising the cost of the foreign article, they let our own manufacturers undersell all their foreign competitors. There's no need to dwell on whether this kind of encouragement is proper. It follows clearly from the many arguments already made, and the laws of the United States have approved it in a number of cases. It has the further advantage of raising revenue. In fact every duty laid on imports, even one laid purely for revenue, has this same effect, and except where it falls on raw materials it does the country's manufacturers a kindness.

2. Prohibitions

The second means is to prohibit rival goods outright, or to lay duties so high that they amount to a prohibition. This is another effective way of encouraging national manufactures. In general, though, it's only fit to be used once a manufacture has made enough progress, and is in enough hands, to guarantee real competition and an adequate supply on reasonable terms. The laws of the United States already contain examples of duties equivalent to prohibitions. There are other cases where the principle could usefully be extended, but they aren't many.

Manufacturing nations, as a ruling policy, reserve their home market to their own manufacturers. Given that, a similar policy on the part of the United States, wherever it's proper, is called for by the principles of distributive justice, one might almost say, and certainly by the duty of trying to secure for our own citizens a fair return of the advantages others secure for theirs.

3. Banning the Export of Raw Materials

Two motives lie behind this kind of regulation. One is the wish to secure a cheap and plentiful supply of materials for the nation's own workmen. The other, where the material is found only in that country, or is of unusual quality there, is a jealous refusal to let foreign workmen compete with the nation's own using the nation's own materials. It would be wrong to say the measure is never proper. But it should certainly be adopted with great caution, and only in very clear cases. Its immediate effect, as anyone can see, is to shrink the demand for, and hold down the price of, what some other branch of industry produces, generally speaking agriculture, to the loss of the people engaged in it. True, if the ban is really essential to the prosperity of some very important national manufacture, those who are hurt at first may in the end be made whole by the greater steadiness of a large home market, which depends on that prosperity. Still, this is a matter that calls for fine and difficult calculation, with strong considerations pulling in opposite directions, and prudence seems to say the expedient should be used sparingly.

4. Bounties

Bounties have proved one of the most effective ways of encouraging manufactures, and in some respects they're the best. The Government of the United States hasn't yet used them (unless the allowance paid on exports of dried and pickled fish and salted meat counts as a bounty), and public opinion favors them less than some other methods. Their advantages, however, are these.

(1) They're a more positive and direct kind of encouragement than any other, and for that very reason they act more immediately to spur and sustain new enterprises: they raise the chances of profit and lower the risks of loss in the first attempts.

(2) They avoid the temporary rise in prices that comes with some other methods, or they cause less of one. Either they add nothing at all to the cost of the rival foreign goods, where a protecting duty adds to it, or they add less. The first happens when the money for the bounty is raised from some other article (which may or may not raise the price of that article, depending on what it is). The second happens when the money is raised from the same foreign manufacture or a similar one. A duty of 1 percent on the foreign article, turned into a bounty on the domestic one, will have the same effect as a duty of 2 percent with no bounty; and the price of the foreign goods is liable to go up by 1 percent in the one case and by 2 percent in the other. Indeed, a bounty raised from some other source actually tends to bring prices down. It lays no new charge on the foreign article, yet it brings in competition with it and increases the total quantity of the article on the market.

(3) Bounties don't tend to cause scarcity, as high protecting duties do. A rise in price isn't always the immediate effect of a new duty, though it's commonly the final one, wherever the growth of a domestic manufacture doesn't hold the rise in check. But in the meantime, between the laying of the duty and the matching rise in price, the duty may discourage imports by cutting into the profits importers expect from selling the goods.

(4) Bounties are sometimes not only the best but the only proper way to encourage a new farm product and a new manufacture at the same time. It's in the farmer's interest to have the growing of the raw material promoted by holding off the competition of the same material from abroad. It's in the manufacturer's interest to have the material plentiful and cheap. Suppose a duty is laid on the imported material, to encourage growing it at home, before home production is large enough to supply the manufacturer on good terms. Then both the farmer and the manufacturer are badly served. The duty either cuts off the supply the manufacturer needs or raises the price of the material beyond what the owner of a young manufacture can afford to pay, and his business is abandoned or fails. And with no domestic factories left to create a demand for the raw material the farmer grows, it does him no good that the competition of the foreign material has been destroyed.

It's worth noticing, too, that a duty on imports of an article can help the home production of it only by giving it greater advantages in the home market. It can do nothing to help it sell well in foreign markets, and so it has no tendency to promote its export.

The right way to reconcile these two interests is to lay a duty on foreign manufactures made of the material we want grown, and to apply what that duty brings in, as a bounty, either to the production of the material itself, or to its manufacture at home, or to both. Arranged that way, the manufacturer starts his enterprise with every advantage he can have in the quantity and price of his raw material, and the farmer, if the bounty is paid directly to him, can compete successfully with the foreign material. If the bounty goes to the manufacturer, on the amount of domestic material he uses, the effect is almost the same. It's in his interest to prefer the home-grown article, if it's of equal quality, even at a higher price than the foreign one, as long as the difference in price is anything less than the bounty paid on it.

Apart from the simple, ordinary kinds of household manufacture, or those with very commanding local advantages, bounties are in most cases indispensable for introducing a new branch of industry. Generally speaking, nothing short of a spur and a support this powerful and direct can overcome the obstacles created by competition from the greater skill and longer experience of manufacturers elsewhere. Bounties are especially essential for goods on which the foreigners who have been supplying a country are in the habit of paying bounties themselves.

Keeping bounties going on manufactures long established will almost always be questionable policy, since in every such case there's a presumption that some natural, built-in obstacle stands in the way of success. But for new undertakings they're as justifiable as they are often necessary.

There's a certain prejudice against bounties. It comes partly from their look of giving away public money with nothing given in return, and partly from a belief that they serve to enrich particular classes at the expense of the community.

But neither of these grounds for dislike will stand up to serious examination. There is no purpose to which public money can be more usefully put than gaining a new and useful branch of industry, and nothing more valuable to get in return than a permanent addition to the nation's total stock of productive labor. As for the second objection, it applies just as much to the other methods of encouragement, which everyone admits are acceptable. Whenever a duty on a foreign article raises its price, it costs the community something extra for the benefit of the domestic manufacturer. A bounty does no more than that. In either case it's in the society's interest to accept the temporary expense, which is more than made up for by the growth of industry and wealth, by greater resources and independence, and by the cheapness that eventually follows, as noted in another place.

One thing would deserve attention, though, in using this kind of encouragement in the United States, as a reason for keeping it moderate where it's thought proper. This country's great distance from Europe puts very heavy charges on all the goods brought over from there: from 15 to 30 percent of their value, depending on their bulk.

A question has been raised about the constitutional right of the Government of the United States to use this kind of encouragement. But there's certainly no good ground for the question. The National Legislature has express authority "to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare," with no other qualification than that "all duties, imposts, and excises shall be uniform throughout the United States; that no capitation or other direct tax shall be laid, unless in proportion to numbers, ascertained by a census or enumeration, taken on the principles prescribed in the Constitution," and that "no tax or duty shall be laid on articles exported from any State."

Apart from these three qualifications, the power to raise money is full and unlimited, and the purposes it may be spent on are nothing less broad than paying the public debts and providing for the common defense and general welfare. The words "general welfare" were no doubt meant to signify more than the words before them expressed or implied; otherwise many needs that arise in the affairs of a nation would have been left unprovided for. The phrase is as broad as any that could have been used. It had to be: it wasn't fit that the Union's constitutional authority to spend its revenues should be held within narrower limits than the "general welfare," and the general welfare necessarily takes in a vast variety of particulars that can be neither listed nor defined.

Of necessity, then, it's left to the judgment of the National Legislature to decide which purposes concern the general welfare, and for which, on that ground, an appropriation of money is needed and proper. And there seems to be no room for doubt that whatever concerns the general interests of learning, of agriculture, of manufactures and of commerce lies within the scope of the national councils, as far as spending money goes.

The only limit on the breadth of the phrase that seems admissible is this: the purpose the money is spent on must be general and not local. Its effect must reach, in fact or at least potentially, throughout the Union, and not be confined to one particular spot. Nor should anyone object to this reading on the supposition that it would imply a power to do anything else Congress thought good for the general welfare. A power to spend money this broadly, granted in express terms besides, wouldn't carry with it a power to do anything else the Constitution doesn't authorize, either expressly or by fair implication.

5. Premiums

Premiums, or prizes, are related to bounties, though they differ from them in some important features.

Bounties apply to the whole quantity of an article produced, manufactured or exported, and involve a matching expense. Premiums reward some particular excellence or superiority, some extraordinary effort or skill, and are given out in only a small number of cases. But their effect is to stimulate effort generally. Designed to bring both honor and money, they appeal to two different passions, striking the chords of rivalry and of self-interest alike. That makes them a very economical way of rousing the enterprise of a whole community.

There are various societies in different countries whose purpose is to award premiums for the encouragement of agriculture, the arts, manufactures and commerce. They're mostly voluntary associations with fairly slender funds, yet their usefulness has been immense. Much has been done this way in Great Britain, and Scotland in particular owes to it a great deal of a prodigious improvement in its condition. A similar institution in the United States, funded and supported by the Government of the Union, could reasonably be expected to bring vast benefits. Some further ideas on this subject will accordingly be submitted at the end of this report.

6. Duty-Free Raw Materials

As a general rule, the wisdom of exempting the materials of manufacture from duty is obvious, especially for new establishments. It can hardly ever be wise to add the burden of taxes to the difficulties that naturally weigh on a new manufacture. And where a manufacture has matured and is in a condition to be taxed for revenue, it's generally better to tax the finished goods than the material. It's easier to keep the tax in proportion to the value of the article in the first case than in the second. There's a further argument for exemptions of this kind in the United States: they're the practice, as far as their needs have allowed, of the nations we'll meet as competitors in our own markets and in foreign ones.

There are, however, exceptions to the rule, and some examples will be given under the next heading.

The laws of the Union already offer instances of the policy recommended here, but it will probably be found wise to extend it to some other cases. Of a piece with it is the regulation exempting from duty the tools and implements, and also the books, clothes and household furniture, of foreign skilled workers who come to live in the United States. The laws of the Union already secure them this advantage, and it's proper in every way to continue it.

7. Drawbacks

Drawbacks are refunds of the duty paid on imported goods, here the duties laid on the materials of manufactures. We've already said that, as a general rule, duties on those materials ought to be avoided, with certain exceptions. Three cases among those exceptions may serve as examples. The first is where the material is itself an article of general or wide consumption, and a fit and productive source of revenue. The second is where a manufacture of a simpler kind, one whose competition with a similar home-made article we want to hold back, is something like a raw material, because a further process can turn it into a manufacture of a different kind, one we want to introduce or grow. The third is where the material is produced in this country, and in enough abundance to give the nation's manufacturers a cheap and plentiful supply.

Molasses falls under the first heading. It's a fair source of revenue, and besides, since it's a sweetener, it's only just that those who use it should pay a duty as well as those who use sugar. Cottons and linens in their white, unfinished state fall under the second. A duty on those imported is proper to promote the home manufacture of similar goods in the same unfinished state. A drawback of that duty is proper to encourage the printing and dyeing at home of the cloth brought in from abroad. Once the first of these manufactures has grown mature enough in a country to supply the second in full, the drawback stops being useful.

Hemp either is already an example of the third case in the United States, or may be expected to become one soon.

Where duties on the materials of manufactures aren't laid to prevent competition with some home product, the same reasons that recommend exempting those materials from duty, as a general rule, would recommend allowing drawbacks to the manufacturer, as a like general rule. Accordingly such drawbacks are common in the countries that pursue manufacturing systematically, which is an argument for a similar policy in the United States. The laws of the Union have adopted the idea in the cases of salt and molasses, and it's believed it will prove useful to extend it to some other articles.

8. Inventions and Discoveries

The eighth means is to encourage new inventions and discoveries at home, and the introduction into the United States of those made in other countries, particularly those that concern machinery. This is among the most useful and least objectionable of all the aids that can be given to manufacturers. The usual forms of encouragement are cash rewards and, for a time, exclusive privileges. The first must be given according to the occasion and the usefulness of the invention or discovery. For the second, as far as "authors and inventors" are concerned, the law has already made provision. But for improvements and secrets of extraordinary value, it would be desirable to be able to extend the same benefit to those who introduce them as well as to their authors and inventors, a policy other countries have practiced to good effect. Here, though, as in some other cases, it's to be regretted that the National Government's authority to do the good that might be done isn't beyond question. Many aids could be given to industry, and many internal improvements of the first importance could be promoted, by an authority that works throughout the Union, which can't be accomplished as well, if at all, by an authority confined within the borders of a single State.

But if the legislature of the Union can't do all the good one might wish, it's at least desirable that everything possible be done. Measures for promoting the introduction of foreign improvements, less effective than they could be with fuller authority, will form part of the plan to be submitted at the close of this report.

Manufacturing nations commonly prohibit, under severe penalties, the export of the tools and machines they've invented or improved. There are already things in the United States that call for a similar regulation, and others may be expected to come up from time to time. The principle of reciprocity seems to call for adopting it. Greater generosity in such matters might suit the general spirit of the country better. But a selfish and exclusive policy elsewhere won't always allow us to indulge freely a spirit that would put us on an unequal footing. And in so far as such prohibitions keep foreign competitors from profiting by the improvements made here, they increase the advantages of the people who introduced them, and so act as an encouragement to effort.

9. Inspection

Sound regulations for the inspection of manufactured goods are not the least important of the means of promoting the prosperity of manufactures. In many cases, indeed, they're among the most essential. Inspection helps prevent fraud on consumers at home and on exporters to foreign countries, and it improves the quality and protects the reputation of the national manufactures. It can't fail to help them sell quickly and well, and to guard against successful competition from elsewhere. The flour and lumber of some States, and the potash of others, have won their reputation by attention to this point. The same good name could be won for those articles wherever they're produced, by a sound and uniform system of inspection in all the ports of the United States. A similar system could usefully be extended to other goods as well.

10. Moving Money from Place to Place

Making it easier to send payments of money from one place to another matters a good deal to trade in general, and to manufacturers in particular, because it makes it easier to buy raw materials and provisions and to pay for manufactured goods. A general circulation of bank paper, which we may expect from the national bank lately set up, will be a most valuable means to this end. But much good would also come from some further provisions on inland bills of exchange. If bills drawn in one State and payable in another were made negotiable everywhere, with interest and damages allowed when payment is refused, it would greatly encourage dealings between citizens of different States by making them safer, and with that would come the convenience and benefit of the merchants and manufacturers of each.

11. Transportation

Improvements that make it easier to carry goods closely concern all the domestic interests of a community. Still, it's quite proper to mention them here as bearing importantly on manufactures. There's perhaps hardly anything that has done more to help the manufactures of Great Britain than the improvement of that kingdom's public roads and the great progress made lately in cutting canals. The United States badly needs the first; for the second, it offers uncommon natural advantages.

The signs of attention to improving inland navigation that have appeared lately in some quarters must fill with pleasure everyone with a real zeal for the prosperity of the country. These examples, it's to be hoped, will spur on the government and the citizens of every State. There can certainly be no object more worthy of the care of the state governments. And it's to be wished that there were no doubt about the power of the National Government to give its direct help on a comprehensive plan. This is one of those improvements that the whole Union could carry on more effectively than any part or parts of it. There are cases where the general interest will be in danger of being sacrificed to the clash of some supposed local interests. Jealousies in matters of this kind are as apt to arise as they are apt to be mistaken.

The following remarks are so wise and so much to the point that they deserve to be quoted in full:

"Good roads, canals and navigable rivers, by lowering the cost of carriage, put the remote parts of a country more nearly on a level with the parts near the town. That's why they're the greatest of all improvements. They encourage the cultivation of the remote parts, which must always be the largest circle of the country. They benefit the town by breaking the monopoly of the country around it. They benefit even that part of the country. They may bring some rival goods into its old market, but they open many new markets to its produce. Monopoly, besides, is the great enemy of good management, which can never be established everywhere except as a result of the free and universal competition that forces everybody to adopt it in self-defense. Not more than fifty years ago, some of the counties near London petitioned Parliament against extending the turnpike roads into the more distant counties. Those distant counties, they claimed, would be able, thanks to their cheap labor, to sell their grass and corn in the London market cheaper than they could themselves, and would thereby lower their rents and ruin their farming. Their rents, however, have risen since then, and their farming has improved."¹⁷

A spirit like the one that moved the counties in that story shows itself all too often to the eye of an impartial observer. It makes a patriot wish that the body in this country whose councils are least likely to be ruled by a local or partial spirit were free to pursue and promote the general interest in the cases where such a spirit might get in the way.

These, then, are the principal means by which the growth of manufactures is ordinarily promoted. It isn't enough, however, that the government's measures aimed directly at manufactures should be designed to help and protect them. Those that touch them only indirectly, in the general course of administration, must also be kept from any particular tendency to injure them.

There are certain kinds of taxes that are apt to bear oppressively on different parts of the community and, among their other bad effects, are very unfriendly to manufactures. All poll taxes, or capitation taxes, levied per head, are of this kind. Either they're levied at a fixed rate, which falls unequally and harmfully on the hardworking poor, or they give certain officers discretion to make estimates and assessments that are bound to be vague, guesswork and open to abuse. They ought therefore to be avoided in all but cases of desperate emergency.

All taxes of the kind (including all taxes on occupations) that are levied according to the amount of capital supposed to be employed in a business, or the profits supposed to be made in it, are unavoidably harmful to industry. It's no use trying to soften the evil by leaving it to the taxpayer, in the first instance, to declare the amount of his capital or profits himself.

People engaged in any trade or business commonly have weighty reasons to avoid disclosures that would reveal, with anything like accuracy, the real state of their affairs. They most often find it better to risk being overtaxed than to take refuge in so awkward a remedy, and the result is that they're often overtaxed.

And when the declaration, if made, isn't final, but can be overruled at the discretion of the revenue officers, which is to say by their passions and prejudices, it's not only no protection at all. The very possibility that it may be overruled is one more reason not to resort to it.

Grant the public officers the fairest intentions in the world: still, when they have to use their discretion without solid data, they're bound to be misled by appearances often. The amount of business that seems to be going on is, in a vast number of cases, a very deceptive guide to the profits actually being made. Yet it's perhaps the best guide they can have, and the one they'll most naturally rely on. A business that may need help from the government more than it's able to contribute to it may therefore find itself crushed by the mistaken guesses of the tax assessors.

Arbitrary taxes, a name that covers every tax that leaves the amount each person pays to the discretion of certain officers, are as contrary to the spirit of liberty as to the principles of industry. The most judicious writers on government have seen them in just this light, and have condemned them in the harshest terms as one of the worst features commonly found in the practice of despotic governments.

At the very least, it's certain that such taxes are especially hostile to the success of manufacturing industry, and ought to be carefully avoided by a government that wants to promote it.

The great richness of the subject of this report has led, almost without our noticing, to a longer preliminary discussion than was first planned or intended. It seemed proper to look into principles, to consider objections and to try to establish the usefulness of the thing proposed for encouragement, before listing the particular industries that might deserve or need encouragement and the measures that might be proper for each. The first task done, it remains to take up the second.

The Particular Manufactures: Iron to Grain

In choosing which manufactures to encourage, five circumstances seem to deserve particular attention. First, whether the country can supply the raw material. Second, how far the nature of the manufacture lets machinery stand in for hand labor. Third, how easily the work can be carried out. Fourth, how widely the article can be used. Fifth, how far it serves other interests, above all the great one of national defense. There are, however, some industries to which these circumstances hardly apply, and which may still, for special reasons of their own, have a claim to encouragement.

Naming the principal raw material each manufacture is made from will serve to introduce the remarks on it. And first of all:

Iron

The manufactures of iron are entitled to the very first rank. None are more essential in their kinds, and none are so widely used. They make up, wholly or in part, the tools or the materials, or both, of almost every useful occupation. You can see them at work everywhere.

The United States is fortunate in having special advantages for getting the full benefit of this most valuable material, and it has every reason to improve it with systematic care. Iron is found in many parts of the country, in great abundance and of almost every quality. Fuel, the chief means of working it, is both cheap and plentiful. That's especially true of charcoal; but there are productive coal mines already in operation, and strong signs that coal is to be found in abundance in a good many other places.

The inquiries this report has led to have turned up proof that iron manufactures, though generally understood to be extensive, are far more so than most people suppose. The kinds in which the greatest progress has been made have been mentioned elsewhere and needn't be repeated; but there's little doubt that every other kind, properly cultivated, will quickly succeed as well. It's worth noting that several of the particular trades built on iron can be carried on without the help of a large capital. Ironworks have greatly increased in the United States and are run at much more advantage than they used to be. The average price before the Revolution was about $64 per ton; today it's about $80. The rise is mainly due to the growth of the manufactures that use the metal.

Extending and multiplying these manufactures still further will have a double effect. It will encourage the mining of the metal itself, and it will turn the metal to a greater number of profitable uses.

These manufactures, too, combine more fully than almost any others the several requirements just listed as the ones to weigh in choosing what to encourage.

The only further encouragement to iron manufactures whose wisdom can be considered beyond question seems to be an increase in the duties on the foreign goods that compete with them.

Steel is a branch that has already made considerable progress, and it's known that some new enterprises on a larger scale have lately been set going. There can be no doubt that it could easily be carried far enough to supply the whole demand at home and leave a considerable surplus for export. The duty on imported steel, which is now 75 cents per hundredweight, could, it is thought, safely and usefully be raised to 100 cents. It's desirable to back the efforts now being made in so very valuable a branch with firm and decisive measures.

The United States already supplies itself, to a great extent, with nails and spikes. It is able to do so entirely, and it certainly ought to. The first and hardest stage of the work is done by water mills, and of the people employed afterward a large proportion are boys, whose early habits of industry matter to the community, to the present support of their families and to their own future comfort. It's as curious as it is true that in certain parts of the country nailmaking is an occasional family manufacture, done at home. An important fact shows that an additional duty on these articles makes sense. About 1,800,000 pounds of them were imported into the United States in the year ending September 30, 1790. A duty of 2 cents per pound would, presumably, soon put a stop to so considerable an importation. And on every view of the matter a stop ought to be put to it.

The manufacture of these articles, like that of some others, suffers from the carelessness and dishonesty of some of the people who carry it on. Inspection might, in certain cases, help correct the evil. It's worth considering whether a regulation of this kind could be applied, without inconvenience, to the export of these articles, whether to foreign countries or from one State to another. Farm tools are made in several States in great abundance, in many places by the ordinary blacksmiths. And there's no doubt that a full supply for the whole country can very easily be got among ourselves.

Various kinds of edged tools for the use of tradesmen are also made, along with a considerable quantity of hollow wares, the iron pots, kettles and the like, though the business of casting hasn't yet reached the perfection one could wish. It is improving, however. And since respectable capitals, in good hands, have been put into those branches of iron manufacture that are still in their infancy, all of them may be regarded as objects not hard to acquire.

To make sure of that result, it seems both safe and prudent to raise the duty ad valorem, that is, as a percentage of their value, to 10 percent on all manufactures of iron, or of which iron is the article of chief value.

Firearms and other military weapons could likewise, it is thought, be placed without inconvenience in the class of articles rated at 15 percent. There are already manufactories of these articles that need only the stimulus of a certain demand to make them equal to supplying the United States.

It would also be a real help to manufactures of this kind, as well as a means of public security, to provide for buying a fixed quantity of home-made military weapons every year. These would go to form arsenals, and to replace from time to time any weapons withdrawn for use, so that there would always be in store as many of each kind as was judged an adequate supply.

It may deserve the legislature's consideration later on, though, whether manufactories of all the necessary weapons of war ought not to be set up on the Government's own account. Such establishments agree with the usual practice of nations, and that practice seems to rest on good enough reasons.

There seems to be a lack of foresight in leaving these essential instruments of national defense to the chance speculations of private adventurers. That's a resource to be relied on less here than in most other cases, since the articles in question aren't things people ordinarily and necessarily buy and use for themselves. As a general rule, manufactories run directly by the government are to be avoided. But this seems to be one of the few exceptions the rule allows, resting on very special reasons.

Manufactures of steel in general, or of which steel is the article of chief value, could usefully be placed in the class of goods rated at 7½ percent. Manufactures of this kind haven't yet made any considerable progress, and that's a reason for not rating them as high as those of iron. But since steel is their basis, and since extending them is no less practicable than it is important, it's desirable to encourage them with a somewhat higher duty than the present one.

The question arises how far it might be wise to let iron in pigs and bars, the raw cast and wrought metal, come in free of duty. That would certainly favor the manufacture of iron goods; the doubt is whether it might not interfere with the production of the iron itself.

Two circumstances, however, lessen the worry on this score, if they don't remove it. One is the considerable rise in price already noted, which makes it likely that letting foreign iron in free would still leave the owners of ironworks an adequate profit. The other is the growth in demand likely to come with the growth of iron manufactures, as a result of the further encouragements proposed here. Even so, caution is the wisest course in a matter of this kind. The measure suggested ought perhaps to be kept in view, to be judged in the light of further experience, rather than adopted at once.

Copper

The manufactures that copper lends itself to are also very extensive and useful. Under this heading are meant to be included those of brass, of which copper is the principal ingredient.

The material is a natural product of the country. Copper mines have actually been worked here, and at a profit to the people who ran them, though none is known to be in that condition now. And nothing is easier than bringing it in from other countries, on moderate terms and in great plenty.

Coppersmiths and brass founders, particularly the coppersmiths, are numerous in the United States, and some of them carry on business on a respectable scale.

Multiplying and extending manufactories of these materials is worth attention and effort. To do it, we should make a plentiful supply of the materials easy to get, and a proper means to that end is to put them on the list of articles admitted free. Copper in plates, and brass, are already there; but copper in pigs and bars isn't, and neither is lapis calaminaris, the calamine or zinc ore that, together with copper and charcoal, makes up the ingredients of brass. By the same reasoning, the exemption from duty ought to cover every one of these articles that is imported.

An additional duty on brass wares will help toward the general end in view. These now stand at 5 percent, while wares of tin, pewter and copper are rated at 7½. There seems to be every reason to put brass wares on the same level as those, and there's a case for raising the duty on all of them to 10 percent.

Lead

There's plenty of proof that lead abounds in the United States, and that little is needed to develop it beyond the full extent of every domestic need. A rich mine of it has long been open in the southwestern part of Virginia, and under public management during the late war it yielded a considerable supply for military use. It's now in the hands of private owners, who not only work it with spirit but have set up manufactories of lead at Richmond, in the same State.

The duties already laid on imported lead, whether raw or manufactured, give it a decided advantage in the home market, and that amounts to considerable encouragement. If the duty on pewter wares were raised, it would give a further encouragement. Nothing else suggests itself as worth adding.

Fossil Coal

Fossil coal, that is, coal dug from the ground, is an important instrument of manufactures, and it may quite properly be mentioned among the subjects of this report.

A plentiful supply of it would be of great consequence to the iron branch. As a household fuel, too, it's a valuable product, and its usefulness must grow as wood grows scarcer with the spread of settlement and farming. Its importance to shipping, as an immense cargo carried along the coast, is strikingly shown in Great Britain.

Several coal mines are known to be at work in Virginia now, and signs of coal are familiar in a number of places.

Whether to pay a bounty on all coal of this kind produced at home, and premiums for opening new mines on certain conditions, seems to deserve particular examination. The great importance of the article will fully justify a reasonable expense of this kind, if it appears to be necessary and is thought likely to achieve its purpose.

Wood

Several manufactures of wood flourish in the United States. Ships are built nowhere in greater perfection, and furniture is generally made little if at all inferior to Europe's. These manufactures are extensive enough to have allowed considerable exports.

Exempting from duty the several kinds of wood ordinarily used in these manufactures seems to be all the encouragement needed. It's recommended by the fact that other countries follow a similar policy, and by the wisdom of giving our own woodworkers equal advantages. The abundance of shipbuilding timber in the United States doesn't seem to be any objection to it. The growing scarcity, and growing importance, of that timber in the countries of Europe warn the United States to begin measures for preserving its own stock, and to pursue them systematically. Anything that helps set up regular stores of ship timber is desirable from several points of view.

Skins

There are hardly any manufactures more important than those of skins. They have a direct and very happy effect on farming, by encouraging the raising of cattle of different kinds, and that's a very real recommendation.

It's pleasing, too, to see the wide progress they have made in their principal branches, which have matured so far that they almost defy foreign competition. Tanneries in particular aren't only carried on as a regular business in many instances and in various parts of the country; in some places they're also a valuable item among the incidental manufactures that families carry on at home.

Representations have been made, however, urging that the leather branch be given further encouragement in two ways: one by raising the duty on imported leather goods, the other by forbidding the export of bark, which the tanners use. In support of the second it's claimed that the price of bark has risen within a few years from about three dollars to four and a half per cord, chiefly because of large exports.

These suggestions are submitted as hints that deserve consideration, rather than as measures whose wisdom is obvious. It isn't clear that an increase of duty is necessary. As for the prohibition requested, there's no evidence of any considerable export of bark so far. Whatever rise in price has taken place most probably comes from a growing demand at home, as manufactures increase, and a shrinking supply, as settlement spreads, rather than from the quantities that have been exported.

It's mentioned, however, as a further reason for the prohibition, that one kind of bark commonly exported is more or less peculiar to this country, and is the material of a very valuable dye, of great use in some other manufactures in which the United States has begun to compete.

There may also be this argument for raising the duty. The object is important enough to claim decisive encouragement, and the progress already made leaves no reason to fear that such an increase would cause any trouble with supply.

It would benefit this branch if glue, now rated at 5 percent, were given a duty high enough to shut out imports. It's already made in large quantities at various tanneries, and, like paper, it's a complete economy of materials, which would be left to rot if they weren't made into something. It could usefully be placed in the class of articles paying 15 percent.

Grain

The manufactures of the various kinds of grain have a claim to special favor. Most of them are directly connected with feeding the citizens, and, besides, they enlarge the demand for the most precious products of the soil.

Flour may properly be counted a manufacture of grain, but there would be no point in mentioning it except to submit the case for a general system of inspection in all the ports of the United States. Set up on proper principles, such a system would be likely to improve the quality of our flour everywhere and to raise its reputation in foreign markets. There are, however, considerations that stand in the way of such an arrangement.

Next to flour, the two principal manufactures of grain are distilled spirits and malt liquors. The first has made very extensive progress in the United States, the second considerable progress. In both, the domestic manufacturers ought to be secured sole possession of the home market as fast as circumstances allow. Nothing is more practicable, and nothing is more desirable.

The existing laws of the United States have done much toward this valuable object. But some additions to the present duties on foreign distilled spirits and foreign malt liquors, and perhaps a reduction of those on home-made spirits, would secure it more effectively, and there doesn't seem to be any very weighty objection to either.

Raising the duties on imported spirits would favor the distilling of spirits from molasses as well as from grain. And securing to the nation the benefit of a manufacture, even one that works on foreign materials, is always of great importance, though perhaps of secondary importance.

A strong impression prevails among the people engaged in distilling, including the most candid and enlightened of them, that a greater difference between the rates of duty on foreign and on domestic spirits is needed to make the domestic manufacture fully secure and successful. And there are facts that entitle this impression to attention.

The price of molasses in the West India markets is known to have risen year after year for some time, partly because of a competition that didn't exist before and partly because of growing demand in this country. It's also plain that the late disturbances in those islands, from which we draw our principal supply, must interfere with the production of molasses enough to raise its price materially. The destruction and devastation that have come with the insurrection in Hispaniola, in particular, must not only do a great deal to bring that about but may be expected to make it last for some time. These circumstances, and the duty of 3 cents per gallon on molasses, may make it hard for the distillers who use that material to compete, at an adequate profit, with the rum brought in from the West Indies, which is so considerably better in quality.¹⁸

A great deal of geneva, or gin, is drunk in this country. It isn't long since distilleries of it grew to any importance among us. They are now becoming significant, but since they're still in their infancy they need protection.

It's represented that some of the materials cost more here than in Holland, where large quantities of gin come from; that labor costs considerably more; that the capitals engaged in the business there are much larger than those employed here; that the rate of profit at which the owners there can afford to carry it on is much lower; and that the prejudice in favor of imported gin is strong. These circumstances are said to outweigh the costs of bringing gin from Europe to the United States, together with the present difference of duty, and so to keep the manufacture here from being carried on with proper advantage.

Perhaps only experiment could decide for certain whether these claims are just. But where branches of manufacture this important are concerned, it would seem wise to risk an unfavorable outcome, and better to err on the side of too great a difference in the duties than too small a one.

It is therefore submitted that 2 cents per gallon be added to the duty on imported spirits of the first class of proof, with a proportional increase on those of higher proof; and that 1 cent per gallon be taken off the duty on spirits distilled within the United States, beginning with the first class of proof, with a proportional reduction of the duty on those of higher proof.

It's established that by far the greatest part of the malt liquor drunk in the United States is the product of domestic breweries. It's desirable, and very likely attainable, that we should supply the whole consumption ourselves.

The malt liquors made at home, though inferior to the best, are equal to a large part of those usually imported. The progress already made is a promise of what may be accomplished. The growing competition is an assurance of improvement. And improvement will come faster with measures that invite more capital into this line of business.

To make the encouragement of domestic breweries decisive, it may be advisable to replace the present rates of duty with a general rate of 8 cents per gallon. As a guard against evasion, it will also deserve consideration whether malt liquors should be forbidden to come in except in casks of considerable size. It's to be hoped that such a duty would drive the inferior foreign malt liquors from the market, and that only the best kind would go on being imported, until it in turn was displaced by equal skill and care at home.

Until then, imports limited in this way would be a useful spur to improvement. And in the meantime, paying a higher price for the enjoyment of a luxury, in order to encourage a most useful branch of domestic industry, could not reasonably be thought a hardship.

As a further aid to the manufactures of grain, though on a smaller scale, starch, hair powder and wafers (the little discs of dried paste used to seal letters) may very properly be placed among the articles rated at 15 percent. No manufactures are simpler, or more completely within reach of a full supply from home sources. And it's a policy as common as it is obvious to subject them either to duties high enough to shut them out or to outright prohibition.

The Particular Manufactures: Flax to Chocolate, and a Board to Encourage Them

Flax and Hemp

The manufactures made from these two materials are so closely related, and so often blended together, that it makes sense to take them as one. The linen branch matters a great deal to agriculture. It does wonderful things for household industry. Its materials can be grown at home in any quantity we need. And great progress has already been made in its coarser fabrics, especially by families working in their own homes. Together these give it a particularly strong claim to the patronage of the government.

That patronage can be given in several ways: by promoting the growth of the materials; by making it harder for rival foreign goods to compete here on favorable terms; and by direct bounties or premiums on the goods made at home.

First, promoting the growth of the materials.

For hemp, something has already been done through the high duty on foreign hemp. If it weren't unusually easy to grow hemp here, a duty on the foreign raw material would be a highly questionable policy, since it would interfere with the growing of hemp or with the manufactures made from it. But once we make proper allowance for how easily it grows here, and keep an eye on the future and on the country's natural progress, the measure doesn't seem, on the whole, objectionable.

One naturally wishes some way could be found to give a more direct encouragement to growing both flax and hemp, one that would work and at the same time not bring too many inconveniences with it. Bounties and premiums suggest themselves for the purpose. But nobody has yet thought of a form of either that wouldn't risk too much expense, or fall unequally on the different parts of the Union, given how differently they're situated, or prove very hard to carry out in practice.

Second, making it harder for rival foreign goods to compete. The obvious way to do this is to raise the duties on imports, and for certain articles there seem to be good enough reasons for it.

The chief of these articles is sailcloth. It's closely tied to shipping and to defense, and a flourishing manufactory of it is already established at Boston, with very promising ones in several other places.

It seems both safe and advisable to put sailcloth in the class of goods rated at 10 percent. A strong reason for doing so is that Great Britain pays a bounty of 2 pence sterling per ell (an English cloth measure of 45 inches) on every ell of sailcloth made in that kingdom and sent abroad.

It would also seem good policy to raise the duty to 7½ percent on the following goods: drillings, the coarse linens called osnaburgs, ticklenburgs and dowlas, canvas, brown rolls, bagging, and all other linens whose original cost at the port they're shipped from doesn't exceed 35 cents a yard. Britain pays a bounty averaging 12½ percent on the export of these or similar linens. That encourages their manufacture there, and it makes it harder to compete with them successfully in the countries they're sent to.

There's no real danger of hardship in raising the duty on these goods. Large quantities of tow cloth and other household linens are already made in different parts of the United States, and some recent experiments raise the hope that labor-saving machines can be put to wider use in the coarser kinds of linen. Both facts remove the risk, and they justify hoping that efforts to supply ourselves from within will succeed quickly and completely.

Third, direct bounties or premiums on the manufactured goods.

To give the manufacture more effective encouragement, and at the same time to keep the article cheap, which shipping will be glad of, it would be very useful to allow a bounty of 2 cents a yard on all sailcloth made in the United States from materials grown here. That would also help the farmers who grow those materials. An encouragement like this, if it's adopted, ought to be fixed for a moderate term of years, long enough to invite new undertakings and the enlargement of old ones. Sailcloth is important enough to justify extraordinary measures in its favor.

Cotton

There's something in the very texture of cotton that makes it especially well suited to machines. The remarkable usefulness of the cotton-spinning mill, invented not long ago in England, has been noted elsewhere in this report. But there are other machines, hardly less useful, that the various cotton manufactories employ, some of them used only for cotton, others working on it with unusual effect. This very important fact recommends cotton goods all the more to a country where a shortage of hands is the greatest obstacle to success. And the sheer variety and range of uses that cotton goods can be put to is another powerful argument in their favor.

There's a further and very strong reason to pursue the cotton branch, in all its subdivisions, with vigor: the United States can grow the raw material in abundance. Its quality is said to be lower than some grown elsewhere. Even so, it can be used to advantage in many fabrics, and with more experienced cultivation it can probably be brought much closer to perfection.

How much has already been done was described in an earlier part of this report.

It can be added that a society is now being formed, with a capital expected to reach at least half a million dollars, and that steps are already under way on its behalf to make and print cotton goods on a large scale.¹⁹

All of this points to the wisdom of removing whatever obstacles stand in the way of these manufactories, and of adding whatever encouragement may seem necessary and proper.

The present duty of 3 cents a pound on foreign raw cotton is without doubt a very serious drag on their progress.

The harm such duties do was taken up earlier, especially in discussing money bounties. Laid before a home manufacture of the article exists, or while it's still in its infancy, they hurt the manufacture, and they do worse than nothing for the home growing of the raw material itself.

Cotton doesn't have hemp's claim to be an exception to that general rule.

Cotton isn't grown everywhere in the country, as hemp is, so it offers less assurance of an adequate supply at home. But the chief objection comes from doubts about the quality of our own cotton. Its fiber is said to be considerably shorter and weaker than that of some other places, and it's been observed as a general rule that the nearer to the equator cotton is grown, the better it is. The cotton that comes from Cayenne, Surinam and Demerara is said to be worth buying in preference to that of the West India islands, even at a considerably higher price.

We may reasonably hope that with proper care and attention our own cotton can be brought closer than it is now to that of regions with a somewhat kinder climate. The facts also support the view that very great use can be made of it, and that it's a resource that gives this country's cotton manufactures more security than any that depend wholly on supply from abroad. Still, it will certainly be wise, from every point of view, to let our young manufactures have the full benefit of the best materials on the cheapest terms. The need for good materials obviously grows with the unskillfulness and inexperience of the workmen. Unpracticed hands are sure to waste a great deal when the materials they work with are poor. To give our manufacturers so essential an advantage, the present duty on imported cotton simply has to be repealed.

In its place, and far more encouraging to growing cotton at home, the government could grant a bounty on American cotton when it's worked up in an American manufactory, and could add a bounty on its export as well. Either one, or both, would do far more to promote the growing of cotton than the merely nominal encouragement it's proposed to abolish. The first would also directly encourage the manufacture.

The British bounty mentioned above, on exports of coarse linens up to a certain value, also applies to certain kinds of cotton goods of similar value.

That gives us one more argument for allowing our own manufactures the kind of encouragement just suggested, and indeed for adding some further help.

A bounty of 1 cent a yard on all goods made in the United States of cotton, or of cotton and linen mixed, provided they're not narrower than some fixed width, with a further 1 cent per pound weight of the material if it's American cotton, would add up to considerable help both to the growing and to the manufacture of that valuable article. And the Secretary believes the size of the object would fully justify the expense.

Printing and staining cotton goods is known to be a separate business from making them. It's easily carried on, and because it adds a good deal to the value of plain white cloth and fits it for a range of new uses, it's important to promote it.

Imported cottons can be printed or stained as well as those made at home. It's worth considering, then, whether all or part of the duty on white goods shouldn't be refunded, as a drawback, to those who print or stain them. That would certainly be a powerful encouragement to the business. It might to some degree work against the making of the cloth itself, but it would probably more than make up for that by the rapid growth of a related branch that is, by its nature, quicker to reach maturity. Once enough progress has been made, the drawback can be repealed, and by then the home supply of cloth to be printed or stained will have grown.

Suppose the duty of 7½ percent now laid on certain kinds of cotton goods were extended to all goods made of cotton, or made chiefly of it. That would probably more than balance whatever the proposed drawback took away from the making of the cloth, and no serious objection to the extension comes to mind. Considering all the circumstances of goods of this kind, the duty couldn't be thought inconveniently high, and there are various reasons to expect that their prices would stay moderate.

Cotton manufactories set up not long ago at Beverly, in Massachusetts, and at Providence, in Rhode Island, have been run with a perseverance worthy of the patriotic motives that started them. They seem to have overcome the first obstacles to success. They're producing corduroys, velverets, fustians, jeans and other such cloths, of a quality that bears comparison with the same goods brought from Manchester. The one at Providence has the distinction of being the first to bring into the United States the celebrated cotton mill, which supplies yarn not only to that manufactory itself but to private families for their household manufacture.

Other cotton manufactories, run as regular businesses, have also started at different places in Connecticut, though all on a smaller scale than those just mentioned. Some trials are also being made in printing and staining cotton goods, and several small establishments of this kind are already at work.

Wool

In a country where winter takes up as large a share of the year as it does over much of the United States, the woolen branch can't be ranked below any other that has to do with clothing the people.

Household manufactures of wool are carried on in various parts of the United States to a very considerable extent. But only one branch, run as a regular business, can be said to have reached maturity: the making of hats.

Hats of wool, and of wool mixed with fur, are made in large quantities in several states, and nothing seems to be lacking but an adequate supply of the material to let the manufacture keep up with the demand.

A promising attempt at making cloth, cassimeres and other woolen goods is also under way at Hartford, in Connecticut. The Secretary has samples of the various kinds made there, and they show that these fabrics have reached a very considerable degree of perfection. Their quality certainly goes beyond anything that could have been expected in so short a time and under such great disadvantages. Taken together with how slender the means at the directors' command have been, it's the best tribute that could be paid to the public spirit, perseverance and judgment that have managed to accomplish so much.

To nurture this precious young enterprise and bring it to maturity must be among our warmest wishes, and it's a matter for corresponding regret wherever the means of doing so look difficult or uncertain.

Measures that tend to secure a plentiful supply of good wool would probably be the most effective help that present circumstances allow.

The most desirable way to do that would certainly be to encourage raising sheep at home and improving the breed. But that alone may not be enough, especially since it's still an open question whether our wool can be improved enough to make it fit for the finer fabrics.

Premiums would probably prove the best way to promote the home supply, and bounties the best way to promote the foreign one. The first might fall within the scope of the institution to be proposed later in this report. The second would need a specific act of the legislature. If any bounties are granted, they ought of course to be adjusted to the quality of the wool as well as its quantity. A fund for the purpose could come from adding 2½ percent to the present duty on carpets and carpeting. Nothing in the nature of those goods argues against the increase, and it would give one more motive for making them at home, where some beginnings have already been made.

Silk

Silk can be produced very easily in most parts of the United States. Some encouraging trials are being made in Connecticut, both in producing it and in manufacturing what's produced. Stockings, handkerchiefs, ribbons and buttons are being made, though so far only in small quantities.

A manufactory of lace, on no very large scale, has long been well known at Ipswich, in Massachusetts.

At so early a stage, the only kinds of encouragement that seem advisable are to exempt the raw material from the duty it now pays on import, and to offer premiums for producing it, handed out under the direction of the institution already mentioned.

Glass

The materials for making glass are found everywhere, and the United States has no shortage of them. The essential ingredients are the sands and stones called tarso, which include flinty and crystalline substances generally, and the salts of various plants, especially of the seaweed kali, or kelp. This country enjoys a particular advantage for such manufactures in its extraordinary abundance of fuel. They do, however, need large capitals and a great deal of hand labor.

Several glass manufactories are now at work in the United States. The present duty of 12½ percent on all imported glass amounts to a considerable encouragement to them. If anything more is thought desirable, the most suitable step would seem to be a direct bounty on window glass and black bottles.

Window glass recommends itself as a matter of general convenience. Black bottles have that merit too, and on top of it they're an important item for breweries, which complain of a great shortage of them.

Gunpowder

Considerable progress has been made lately in manufacturing this very important article. It can indeed be regarded as already established, but its great importance makes it very desirable to extend it further.

The encouragement it already enjoys is a duty of 10 percent on the rival foreign article, and an exemption from duty for saltpeter, one of its principal ingredients. A like exemption for sulphur, another chief ingredient, would seem just as proper. None of it has yet been produced from sources inside the country, and its use in finishing the bottoms of ships is a further reason for putting it in the class of duty-free goods. Regulations for careful inspection of gunpowder would also have a good effect.

Paper

Paper manufactories are among those that have reached the greatest maturity in the United States, and that come nearest to supplying the whole nation. Wallpaper is another branch in which respectable progress has been made.

Nothing of importance seems to be lacking for the further success of this valuable branch, which is already protected by an adequate duty on similar imported goods.

In listing the various kinds of paper subject to that duty, however, sheathing paper and cartridge paper were left out. These are the simplest manufactures of the kind, and they're needed for military supply as well as for shipbuilding. They deserve encouragement as much as any other kind, and they seem quite as fully within the reach of what can be done at home.

Printed Books

The great number of printing presses spread across the Union seems to assure us that there's no need to depend on foreign countries for printing the books used in the United States. A duty of 10 percent, instead of the 5 percent now charged on them, would tend to help the business here at home.

One objection that comes to mind is that this might look unfriendly to learning, by raising the price of books in common use in private families, schools and other places of education. But the Secretary believes the difference would have no real effect.

As for the books that usually fill the libraries of the wealthier classes and of professional men, a rise in price of the kind an extra 5 percent duty might cause would be too slight to stand in the way of buying them.

And books imported specially for particular colleges and schools, or for public libraries, should be entirely exempt from duty, which would go a long way toward answering the objection just raised. At present they pay a duty of 5 percent.

As for the books in most common family use, the steadiness and universality of the demand would make sure that people set about supplying them at home, and the means of doing it are fully adequate. It may also be expected in the end, here as elsewhere, that the growth of the home manufacture would make the article cheaper.

It ought not to go unremarked that to encourage the printing of books is to encourage the making of paper.

Refined Sugars and Chocolate

These are among our large and prosperous home manufactures.

Drawbacks of the duties on the materials each is made from, when the finished goods are exported, would do the manufacture good. They would also follow a precedent already set, in the case of molasses when distilled spirits are exported.

Cocoa, the raw material, now pays a duty of 1 cent a pound, while chocolate, a widespread and very simple manufacture, is lumped in with the mass of goods rated at no more than 5 percent.

There would seem to be good reason to encourage the manufacture by putting a somewhat higher duty on the foreign rival than is paid on the raw material. Two cents a pound on imported chocolate would, it's believed, cause no inconvenience.

The headings above cover the most important of the manufactures that have struck the Secretary as both needing public encouragement and best deserving it, together with the measures that seemed best fitted to give it.

The remarks that have gone along with this survey make many further comments unnecessary. One or two, though, may not be wholly out of place.

In various cases bounties are proposed as one kind of encouragement.

A familiar objection to them is that they're hard to manage and open to fraud. But neither the difficulty nor the danger seems great enough to outweigh the advantages they produce when they're properly applied. And it has been shown, the Secretary trusts, that in some cases, especially when new enterprises are in their infancy, they're indispensable.

The way they're handed out will, however, have to be guarded with extraordinary care. The necessary precautions have been thought through, but to go into the details would swell this report, already long, to a size too unwieldy to be convenient.

If the principle itself isn't judged unacceptable, the means of preventing its abuse are unlikely to prove insurmountable. Practice elsewhere offers useful guides.

On this point, then, it will only be remarked here that no bounty on the manufacture of an article can safely reach beyond the manufactories where making that article is a regular trade. It would be impossible to attach adequate safeguards to a benefit of that kind if it were extended to every private family where the article happened to be made on the side. And because in a family it's only a sideline, filling time that would otherwise be lost, it can be carried on to advantage without such special help.

Another objection that may be raised to the measures proposed is that they could reduce the revenue.

But there's no truth that can be relied on more firmly than this: whatever promotes the growth of the nation's industry and wealth promotes the interests of the revenue.

Every country's ability to contribute to the public treasury rises in proportion to its industry and wealth. And where the ability to pay has grown, or even simply hasn't shrunk, the only effect of measures that reduce some particular source of revenue is a change in what gets taxed. If encouraging the manufacture of an article at home should lessen the revenue that used to come from importing it, the loss can easily be made good, either out of the manufacture itself or from some other article that may be thought more convenient.

Taken all together, though, the measures proposed here will for a long time to come increase the public revenue rather than reduce it.

There's little reason to expect that manufactures will grow so evenly with the population as to stop the receipts from duties on imports from rising, at least gradually.

Even so, since the plan proposes to abolish some duties, and to reduce others, that have been pledged to pay the public debt, it's essential that the loss be matched with an adequate substitute. To do that, all the new duties that are laid should be set aside, in the first place, to make up every shortfall that abolishing or reducing any duty may cause. It's plain at a glance that they'll not only cover it but leave a considerable surplus. That surplus will serve two purposes:

First, to form a fund for paying whatever bounties are decreed.

Second, to form a fund for the work of a board to be set up for promoting the arts, agriculture, manufactures and commerce. Hints of this institution have been dropped at several points in this report. An outline of a plan for it is now submitted.

Let a certain sum be set apart each year and placed under the management of commissioners, no fewer than three, made up of certain officers of the government and their successors in office.

Let these commissioners be empowered to use the fund entrusted to them to pay the expenses of bringing over skilled craftsmen and manufacturers in particular branches of extraordinary importance; to encourage useful discoveries, inventions and improvements, and their introduction here, by rewards in proportion to their worth, wisely offered and applied; to encourage by premiums, both honorary and paid in money, the efforts of individuals and of whole classes of people in the various fields the commissioners are charged with promoting; and to give such other help in those fields as the law may describe in general terms.

The commissioners would give the legislature a yearly account of what they've done and spent. Any money not used for the purposes of their trust would go back to the treasury at the end of every three years. They might also be forbidden to draw money out except to make some specific payment.

It may also be useful to authorize them to accept voluntary contributions, with the duty of applying each to the particular purpose its donors named, if they named one.

There's reason to believe that the progress of particular manufactures has been held back a good deal by a lack of skilled workmen. And it often happens that the capital in a business isn't large enough to bring over workmen of a superior kind from abroad. Here, in cases that deserve it, the government's help would in all likelihood be useful. There are also valuable workmen in every branch who are kept from immigrating solely by a lack of means. Occasional help to such people, properly managed, might bring the country valuable additions.

That it's right to spur the invention and introduction of useful improvements by rewards is readily admitted. But the success of such efforts must obviously depend a great deal on how they're conducted. Probably the surest way to make the rewards effective is to put their distribution under some proper body with discretion to use them, where other measures can be joined to them. It seems impossible to fix, by general rules, set payments for discoveries whose usefulness is unknown in advance and may be out of all proportion to one another.

The great use a fund of this kind could be put to in getting foreign improvements and bringing them here is especially obvious. Among these, machines would be a most important item.

The workings and usefulness of premiums have already been touched on, along with the good that has come from their award under the direction of certain public and private societies. We've had some experience of this in the case of the Pennsylvania Society for the Promotion of Manufactures and Useful Arts. But that association's funds have been too limited to do more than a very small part of the good its principles would have led to. It can be said with confidence that hardly anything has been devised that is better fitted to rouse a general spirit of improvement than institutions of this kind. They are invaluable.

In countries with great private wealth, much can be done by the voluntary contributions of public-spirited individuals. But in a community situated like the United States, the public purse must make up for the lack of private resources. And in what could it be more useful than in prompting and improving the efforts of industry?

All which is humbly submitted.

Alexander Hamilton, Secretary of the Treasury.