Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation

FOUNDING FINANCE

Mark Crispin Miller, Series Editor

This series begins with a startling premise—that even now, more than two hundred years since its founding, America remains a largely undiscovered country with much of its amazing story yet to be told. In these books, some of America’s foremost historians and cultural critics bring to light episodes in our nation’s history that have never been explored. They offer fresh takes on events and people we thought we knew well and draw unexpected connections that deepen our understanding of our national character.

FOUNDING FINANCE

How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation

William Hogeland

University of Texas Press

AUSTIN

Copyright © 2012 by William Hogeland

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Printed in the United States of America

First edition, 2012

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LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Hogeland, William.

Founding finance : how debt, speculation, foreclosures, protests, and crackdowns made us a nation / by William Hogeland.—1st ed.

p.     cm.—(Discovering America)

Includes bibliographical references and index.

ISBN 978-0-292-74361-8 (alk. paper)

ISBN 978-0-292-74450-9 (e-book)

ISBN 9780292744509 (individual e-book)

1. Finance, Public—United States—History—1789–1801.   2. Debts, Public—United States—History—1789–1801.   3. United States—Politics and government—1789–1797.   4. United States. Constitutional Convention (1787)   I. Title.

HJ247.H64 2012

336.7309′033—dc23

2012023318

oh the cuckoo she’s a good bird and she warbles and she flies and she never hollers cuckoo till the fourth day of July

—TRAD.

CONTENTS

1

The Founders, Finance, and Us (2012)

2

Riot, Regulate, Occupy (1765–1771)

3

Two Revolutions? (1771–1776)

4

Conceived in War Debt (1776–1783)

5

History on the Verge of a Nervous Breakdown (1913–2012)

6

An Existential Interpretation of the Constitution of the United States (1783–1789)

7

It’s Hamilton’s America . . . We Just Live in It (1789–1791)

8

Crackdown and Lockup: Cincinnatus, the Whiskey Rebels, and the End of Thomas Paine (1791–)

9

Gather Your Armies (2012)

ACKNOWLEDGMENTS

BIBLIOGRAPHIC ESSAY

REFERENCES

INDEX

FOUNDING FINANCE

1

THE FOUNDERS, FINANCE, AND US (2012)

On the first day of the meeting that would become known as the United States Constitutional Convention, Edmund Randolph of Virginia kicked off the proceedings. Addressing his great fellow Virginian General George Washington, victorious hero of the War of Independence, who sat in the chair, Randolph hoped to convince delegates sent by seven, so far, of the thirteen states, with more on the way, to abandon the confederation formed by the states that had sent them—the union that had declared American independence from England and won the war—and to replace it with another form of government.

Our chief danger, Randolph announced, arises from the democratic parts of our constitutions.

This was in May of 1787, in Philadelphia, in the same ground-floor room of the Pennsylvania State House, borrowed from the Pennsylvania assembly, where in 1776 the Continental Congress had declared independence. Others in the room already agreed with Randolph: James Madison, also of Virginia; Robert Morris of Pennsylvania; Gouverneur Morris of New York and Pennsylvania; Alexander Hamilton of New York; Washington. They wanted the convention to institute a national government. As we know, their effort was a success.

We often say the confederation was a weak government, the national government stronger. But the more important difference has to do with whom those governments acted on. The confederation acted on thirteen state legislatures. The nation would act on all American citizens, throughout all the states. That would be a mighty change. To persuade his fellow delegates to make it, Randolph was reeling off a list of what he said were potentially fatal problems, urgently in need, he said, of immediate repair. He reiterated what he called the chief threat to the country. None of the constitutions—he meant those of the states’ governments—have provided sufficient checks against the democracy.

The term democracy could mean different things, sometimes even contradictory things, in 1787. People used it to mean the mob, which historians today would call the crowd, a movement of people denied other access to power, involving protest, riot, what recently has been called occupation, and often violence against people and property. But sometimes democracy just meant assertive lawmaking by a legislative body staffed by gentlemen highly sensitive to the desires of their genteel constituents. Men who condemned the working-class mob as a democracy sometimes prided themselves on being democratical in their own representative bodies.

What Randolph meant that morning by democracy is clear. When he said our chief danger arises from the democratic parts of our constitutions, and none of the constitutions have provided sufficient checks against the democracy, he was speaking in a context of social and economic turmoil, pervading all thirteen states, which the other delegates were not only aware of but also had good reason to be urgently worried about. So familiar was the problem that Randolph would barely have had to explain it, and he didn’t explain it in detail. Yet he did say things whose context everyone there would already have understood.

We don’t. That’s our problem with founding finance.

The list of things Randolph found dangerous are things we don’t care much about today. Paper money? Problems with the federal impost? They sound obscure, dated, and not very problematic. When we think about the Constitutional Convention we like to think about the creation of the American presidency and the two houses of Congress, or about things that came later, like the First Amendment.

But without comprehending the finance and economic issues so important to the founders, we can’t connect realistically with our founding. In 1786, a rebellion had occurred in Massachusetts, the so-called Shays Rebellion; it was over public finance policy, personal debt, taxes, and widespread foreclosures. In 1785, a radically populist government in Pennsylvania—operating in the same building where the delegates were meeting in 1787—had withdrawn the charter for a central bank. The confederation Congress had a close relationship with that bank; the bankers got it back, but the scare both to the Congress and to the upscale investing class was real. Meanwhile, a radical convention in Kentucky called on small farmers and laborers throughout the whole west to unite against big eastern money. Ordinary people throughout the country, long barred from political power—the democracy—were organizing to restrain wealth and foster equality. Such were the effects of what Randolph called the imbecilities of the confederation. The representative state legislatures were weak in resisting the onslaught. Only a national government, Randolph and others gathered in Philadelphia believed, could correct that.

Most histories of what led up to and then went on in Philadelphia in the summer of 1787 don’t mention Randolph’s remarks about the all-important need to check democracy by forming a national government. They focus almost exclusively on the Shays Rebellion, without exploring its real economic causes, and on squabbles among the states over borders and commerce. We say America just needed a stronger government. The financial wracking of America in the 1780s, the open struggle between ordinary people and upscale investors, was edited out of our common memory long ago.

Lately, however, founding finance is back in the public debate. It’s entered our political arguments, embedded itself in our political campaigns, and plays in the 2012 presidential election. The Tea Party movement was first, not only to make protest over economic ideas a hot story again, starting in 2008, but also to connect economic protest with elemental events in our founding period. The tri-cornered hats, the placards with pictures of great founders, the take America back language, and of course the reference in the movement’s name to the Boston Tea Party of 1773 make an insistent claim on what the Tea Party movement promotes as original American values. Joined by those who call themselves constitutional conservatives, the Tea Party tells us that small government, low taxes, no public debt, and little government spending were elemental purposes in our founding as a nation.

Occupy Wall Street comes at our troubled economy from the opposite direction, and it, too, bases protest on a view of the economic values of the American founding. In dramatic actions of 2011 and 2012 against extreme income disparity and what it criticizes as too-close connections between high finance and government power, Occupy has invoked revolutionary Boston, associating Liberty Park in New York with Boston’s famous Liberty Tree, describing the real Boston Tea Party as an occupation and protest against multinational corporations. Occupy also draws on the founding national moment of 1787, quoting the first three words of the Constitution, we, the people, to suggest that a government originally founded by and dedicated to serving what Occupy calls the 99 percent has been stolen by big money, the 1 percent. The movement presents the theft as a violation of basic American purposes.

So founding finance is back, and mainstream liberals and conservatives, too, refer to the founding period when justifying or criticizing finance and economic policy. The implication is always that the legacy of the American Revolution supports a particular philosophy. But Edmund Randolph’s opening remarks at the Constitutional Convention remind us that, as in fights over economics today, fights over economics in our founding period involved bitter divisions over what kind of country Americans wanted America to be.

We fell silent for so long on founding struggles among Americans over finance and economics that it can be surprising to know that economic conflict in the founding period was once at the front and center of both academic and popular discussions of early American history. In the nineteenth century, historians like Richard Hildreth and John Marshall, as well as members of a jingoistic business community, celebrated the framers of the Constitution for eschewing economic equality. Those readers and writers admired the founders for ensuring stability, for protecting the new country from bloody extremes that egalitarian populism inspired in France after its own revolution. Randolph’s remarks at the convention wouldn’t have startled those readers and historians. They harbored no delusions that the founders wanted to form a democracy.

Then in 1913 Charles Beard published An Economic Interpretation of the Constitution of the United States. Beard argued that those delegates to the 1787 convention who ended up supporting the Constitution came overwhelmingly from the class of men holding bonds issued by the wartime Congress. Because the bonds’ future looked shaky, in the absence of a national commitment to paying them, the government the framers designed and put into effect represented, Beard said, less a glorious triumph of republican philosophy than a political action of moneyed men to assure their own payoffs.

Since many people in Beard’s time already praised the framers for being economic conservatives, observing that the framers weren’t populist democrats wasn’t shocking. But the founders’ conservatism had been celebrated for being in the best interest of the country. The shocking thing was Beard’s suggestion that when the founders limited democracy by framing the U.S. Constitution, they were acting not on a high-minded commitment to stability, moderation, and balance but on their own financial interest.

To many younger historians, Beard’s idea wasn’t just shocking; it was bracing, inspiring. It scandalized jingoists in the history and business worlds while gaining a degree of influence that, given Beard’s radical critique of the basis of our national existence, is amazing to consider today, when his ideas no longer form part of our casual discussions of founding history. Beard was influential not only on academic history, but also, through journalists and critics and political operators, on the general public. It became common knowledge in some circles that the Constitution was a genteel scam.

Beard’s influence had some strange effects. Despite an aggressive, largely successful effort, carried out in academic history circles over the past sixty years, to discredit and dismiss him, we still live with misconceptions about our founding that his work fostered. Beard’s work can be slippery; he drew his conclusions by implication more than by assertion. Still, I think it’s fair to say that many readers came away from Beard’s study with a false impression that founders with an agrarian, landowning, antifinance philosophy championed democracy. The young historians of the 1920s and ’30s who got excited by Beard’s skepticism about the framers had to make some fancy moves to get that idea to fit; policymakers and cultural custodians, too, went through gyrations to situate their politics in founding-era agrarianism. The FDR administration certainly wasn’t about to say that the Constitution under which it operated so actively was inherently undemocratic and right-wing, as Beard’s work sometimes seemed to suggest. But Hamilton was the founding face of banking, and thus of the country-club Republican conservatism that opposed FDR. The New Dealers therefore made Hamilton’s enemy Jefferson the founding face of regulating banking and investment and creating government social programs.

Given his disapprobation of Hamilton and the Federalist party, for what Jefferson deemed big-government overreaching, it’s bizarre to realize that it was the New Dealers who built Jefferson a memorial in Washington, DC, to compete with Lincoln’s, carved his face massively on Mount Rushmore and in miniature on the nickel, and put a statue of his treasury secretary Albert Gallatin in front of the Treasury building. Hamilton, who founded the department, now stands out back. The New Deal slogan Jeffersonian ends by Hamiltonian means meant fostering a populist democracy that you’d have to read Jefferson very selectively to believe he’d be anything but opposed to, via the activist federal government Jefferson often deplored, by applying regulations of a kind Hamilton would have excoriated. The slogan reveals a blithe and highly effective ignorance of the history it laid claim to.

Then came blowback. In the late 1940s, and especially in the 1950s, Beard himself, and progressive history in general, suffered attack. The critic of Beard perhaps best-known to general readers is Forrest McDonald. In 1964, McDonald would serve as chairman of the Barry Goldwater for President Committee of Rhode Island, and in keeping with the right-wing politics of the 1950s, McDonald’s interpretation of American history was aggressively probusiness and patriotic. He rejected Beard’s economic analysis in favor of reviving adoration of the founders as exemplars of republican greatness, and in his 1958 book We the People, he purported to dismantle Beard’s argument with his own supposedly more accurate economic studies.

McDonald’s study shows tendentiousness greater than Beard’s. In a 1986 article in The Journal of Economic History, Robert McGuire and Robert Ohsfeldt used what economists call regression analysis to show that McDonald set false premises and drew foregone conclusions. McGuire’s recent book To Form a More Perfect Union strengthens that critique of McDonald and other mid-twentieth-century Beard debunkers. It proposes instead a sympathetic adjustment of Beard’s methods and conclusions.

Yet in the 1950s and ’60s, a wide range of historians quickly and uncritically adopted McDonald’s study, along with others equally flawed, in what has amounted to a massive cultural effort not to criticize and correct Beard but to rule out of serious discussion of the American founding any suggestion that important, even defining, conflicts prevailed between rich, well-connected founders—those men of a variety of opinions of how government should work, who signed the Declaration of Independence and framed the U.S. Constitution—and the huge majority of unrich, ordinary Americans who—though we know so little about it—spent the founding era protesting, rioting, petitioning, occupying, and making demands on government in hopes of achieving access to economic development and restraining the power of wealth.

That economic conflict wasn’t between revolutionary Americans and British authorities. It was between some Americans and other Americans. I’ve come to see it—not its resolution but the conflict itself—as defining our emergence as a people. Knowing about it seems especially important, now, amid new political appeals to founding finance. Our most influential historians, however, have long since moved on to other things.

In Chapter 5, I consider why we don’t know much about founding economic conflicts on which the people involved staked everything. But what this book mostly offers are stories of the many struggles between founding-era Americans over cash, credit, debt, taxes, foreclosures, lending, and access to economic development. It’s a surprisingly wild tale.

The most obviously wild players are those like the back-country North Carolina Regulators, who both rioted and petitioned in the 1760s for things some historians deem anachronistic to the period: progressive taxation, government debt relief, equal access to the franchise. Later, the Pennsylvania Committee of Privates—unpropertied militia foot soldiers—took over their state and helped bring about American independence. The Shaysites of the 1780s and the whiskey rebels of the 1790s, neglected former soldiers of the Revolution, marched in military formation against federal authority.

Equally wild, though, were the upscale founders who pushed back against the populist egalitarians. In textbooks, history museums, and political speeches, the Philadelphia delegates of 1787 sit at their desks, perfectly preserved in a vacuum. Genteelly and tinnily, like windup dolls, they debate their ideas about republicanism and unicameralism and checks and balances. They seem cerebral, ancient philosophers, not hard-nosed modern politicians. Lost to us are the desires and fears that brought them into that room and unified them, for all their differences, against American economic radicalism. I want to revive both founding egalitarian populists and founding upscale gentlemen. Their conflict set collision courses we’re still on.

My stories question some familiar political ideas about economics and founding American values. Both the Tea Party and Occupy have done us the favor of bringing founding finance back into our political debate. But we keep trying to do one impossible thing with the passions and terrors and wrangling over money’s connection to government that marked our emergence as Americans: resolve them. I hope these stories do the opposite.

2

RIOT, REGULATE, OCCUPY (1765–1771)

Herman Husband lived in hope of imminent Christian millennium and therefore owned no slaves. He was a rich tobacco planter and entrepreneur from Maryland’s eastern shore, and in 1754 he left his home and traveled south, deep into the North Carolina backcountry. He wanted to make money and to build the biblical Canaan.

But Husband stayed in North Carolina to do something more: disconnect American government from economic privilege. Seventeen years later, he would flee on horseback minutes ahead of arrest and hanging, a fugitive from justice for his defiance on behalf of small farmers, artisans, and laborers. By then, Herman Husband was on his way to becoming one of America’s first full-time activists for economic and political equality.

Deemed eccentric by the privileged whose privilege he assailed, and largely ignored by history, Husband was by no means eccentric in his beliefs. Many thousands of ordinary Americans of his time shared his desires and tactics. The roots of modern American protest, specifically over finance and economics, shoot deep into the colonial period. Yet in contradiction not only to what the conservative Tea Party movement, in naming itself, asserts, but also what many Americans across today’s political spectrum have good reason to assume, our early struggles over money and government, and over the proper relationship between them, were by no means always struggles between American colonists and English authorities. As in today’s political arguments over debt, taxes, and public and private finance, ordinary, less privileged Americans and better-off, better-connected Americans vied with one another, throughout the period before the Revolution, for control of government policy regarding money.

That the better-connected and better-off had the overwhelming advantage will come as no shock. They include all of the famous founders, across the political spectrum of the day, from Alexander Hamilton to John Adams to Samuel Adams to James Madison. As we’ll see, they all rejected the radically egalitarian ideas about economics and finance espoused by many ordinary people in eighteenth-century America. Many historians have praised the famous founders for carrying out what is called a moderate revolution, eschewing economic and social egalitarianism that in the French Revolution led, only shortly later, to terror and totalitarianism. In being what we call moderate, the founders weren’t resisting temptation. It came naturally to them. Thomas Jefferson was unique among them even for flirting with radical populism. He did that mainly in letters, not in action.

Yet rioters and protestors for economic equality had a powerful impact on our founding too. In the late 1760s and early 1770s, Herman Husband and thousands of his neighbors rebelled against authority that they considered economically corrupt. Their rebellion is known to historians as the North Carolina Regulation, and it gives history some headaches. Because the royal governor of North Carolina put down the uprising, in 1771 at the Battle of Alamance, nineteenth-century historians, looking backward through the lens of American independence, saw the North Carolina Regulation as a rehearsal for supposedly inevitable revolution against England. Some modern historians, too, view pre-independence uprisings like the North Carolina Regulation as evincing populist moods they see climaxing in American independence.

There were important conflicts, however, between the Regulators and the men who became famous revolutionary leaders in 1776. The Regulators had an economic agenda that discomfited upscale American patriots as much as it discomfited British authority.

One of the strangest things about the North Carolina Regulation, from today’s perspective, is its religious inspiration. Herman Husband and other leaders of the uprising saw themselves as working toward the millennium, that culmination of human existence prophesied for Christians in the rule of Christ, prelude to an eternal state of perfect happiness for the saved.

Today’s political liberals lean secular as a group. They associate rationalist skepticism with famous American founders like John Adams, Washington, Jefferson, and Franklin. The religious right attacks that association, deploying Christian-sounding quotations from those same founders to cast the biggest names in founding history as Bible-believers. What episodes like the North Carolina Regulation suggest to me is that both sides are looking for founding historical validation in exactly the wrong places. If today’s religious rightists want to find evangelical fervor in founding-era America, they don’t have to rope in men like Washington, whose regard for something called Providence seems to me about as nonevangelical and nonmillenarian as it gets. There were real evangelicals in the founding period, with politics really biblically inspired. Herman Husband and the North Carolina Regulators are among them.

But because the right’s free-market ideology is diametrically opposed to founding evangelicals’ efforts to get government to restrain wealth and legislate equality, Christian conservatives don’t know about them, and the right goes on vainly trying to make our great founding rationalists into holy rollers. Modern liberalism can’t embrace early American economic activism either: that activism was saturated not merely with faith but with an especially illiberal kind of faith, the evangelical and millennial kind, whose calls to action are predicated not on scientific calculations for social improvement that modern liberals prize, but on spiritual warfare for transformation of the very terms of human relations, ultimately of human existence.