By Steve Simon, Regulations & Rulings Division
The Distilled Spirits Tax of 1791
It has been said, "If George Washington was the father of the country and James Madison of the Constitution, then Alexander Hamilton was surely the father of the federal government."  As the first Secretary of the Treasury, Hamilton acted to fund the new American Government, repay its debt, and assert its supremacy over the States. In doing so, he helped establish the strong Federal system we know today.
Two views of Alexander Hamilton.
Hamilton (1757 -1804) immigrated to America from the West Indies as a young man, served in the American Revolution as aide-de-camp to George Washington, and was later elected to Congress under the Articles of Confederation. After the Revolution, he opened a law practice in New York City, served in the New York State Legislature, and attended the Philadelphia Convention of 1787, which proposed to replace the Articles with a new Constitution.
After the ratification of the U.S. Constitution in 1789, President George Washington appointed Hamilton as Secretary of the Treasury. With his early background in international trade and his extensive knowledge of economic theory, Hamilton was an excellent choice for that position.
During the first President's administration, Hamilton emerged as leader of the Federalist political party, which advocated a strong Federal Government. Hamilton believed that a strong Government is necessary to protect and preserve liberty. He regarded anarchy—exemplified in the French Revolution—as freedom's worst enemy. He feared that the American people, if allowed to freely express an exaggerated concept of liberty, could destroy the benefits of our Revolution.
Of course, a strong Government requires money to operate, and that comes from taxes. Hamilton's assignment as Secretary of the Treasury was to put the new Government on a secure financial footing. This was a huge responsibility, because the Government was in debt from its first day. The new Constitution required the Federal Government to assume the National debt—incurred to finance the Revolutionary War. The Articles of Confederation had proven inadequate to deal with this debt because they did not authorize Congress to tax the people directly. Under the Articles, Congress could only requisition money from the States, which sometimes complied and sometimes did not.
Under the Constitution, Congress has the power to levy taxes—but there is a limitation. "Direct" taxes must be apportioned among the States in accordance with the decennial census. Only used a few times in American history, apportionment is a cumbersome procedure, and this made direct taxes unattractive to Secretary Hamilton. Accordingly, when he considered how to raise money to fund the Federal debt, he looked toward indirect taxes.
But which taxes are indirect and which are direct, within the meaning of the U.S. Constitution? That question has produced much confusion and disagreement throughout U.S. legal history. In modern economics, a "direct" tax is paid by the person who must bear its ultimate burden, having no one to whom that burden can be passed. But in U.S. law, the difficulty of collecting tax by apportionment among the States has led many to hold that "direct taxes" are only those that were considered such under State laws when the Constitution was ratified. Unfortunately, the States' tax laws and practices were not uniform, and there was no controlling precedent. At the 1787 Constitutional Convention, when Rufus King asked the delegates what, exactly, was meant by "direct taxes," no one answered. Hamilton believed that the "direct" tax category ought to be as small as possible. James Madison, who opposed a strong central Government, preferred the opposite opinion. Nevertheless, all agreed that customs duties and excise taxes on consumable commodities like alcohol beverages are indirect taxes.
These, then, were the taxes to which Secretary of the Treasury Alexander Hamilton turned his attention. He had already given a logical reason for favoring taxes of this sort in Federalist 21, an essay written in 1787 (before ratification of the Constitution):
It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. . . . If duties are too high they lessen the consumption—the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens, by taxes of this class, and is itself a natural limitation of the power of imposing them.
The first U.S. customs duties were already law when Hamilton took office. In his first report to Congress, in January 1790, he proposed to increase the duty on imported distilled spirits and to impose a new excise tax on domestic distilled spirits (i.e., whisky ). Both proposals were enacted by Congress and approved by President Washington in 1791.
Hamilton had a predisposition toward taxing alcohol beverages. In Federalist 12, he had stated:
The single article of ardent spirits, under Federal regulation, might be made to furnish a considerable revenue. Upon a ratio to the importation into this State [i.e., New York], the whole quantity imported into the United States may be estimated at four millions of Gallons; which at a shilling per gallon would produce two hundred thousand pounds. That article would well bear this rate of duty; and if it should tend to diminish the consumption of it, such an effect would be equally favorable to the agriculture, to the economy, to the morals and to the health of the society. There is perhaps nothing so much a subject of national extravagance, as these spirits.
Hamilton essentially repeated this argument in his January 1790 report to Congress. In that report, he said:
The consumption of ardent spirits particularly, no doubt very much on account of their cheapness, is carried to an extreme, which is truly to be regretted, as well in regard to the health and the morals, as to the economy of the community. Should the increase of duties tend to a decrease of the consumption of those articles, the effect would be, in every respect desirable. The saving which it would occasion, would leave individuals more at their ease, and promote a more favorable balance of trade. As far as this decrease might be applicable to distilled spirits, it would encourage the substitution of cyder [sic] and malt liquors, benefit agriculture, and open a new and productive source of revenue.
Hamilton's comments about the benefits of limiting alcohol consumption might seem to qualify him as a proto-prohibitionist. However, by modern standards, excessive drinking was quite serious in the 18th century. Hamilton's doctor required him to consume no more than three glasses of wine per day, and the fact that this regimen was considered abstemious says a lot about the drinking habits of Americans of that era. Perhaps Hamilton, limited by his doctor, wanted to make others suffer equally. On the other hand, perhaps his limitation helped him to see the benefits of moderation, and he wanted to share these with his fellow citizens.
In addition to revenue and social manipulation, Hamilton had a third reason to favor a whisky tax: It could be a means of augmenting Federal power. According to Hamilton's recent biographer, Ron Chernow, "Hamilton confessed to Washington an ulterior political motive for this liquor tax: he wanted to lay ‘hold of so valuable a resource of revenue before it was generally preoccupied by the state governments.' … [H]e wanted to starve the states of revenue and shore up the federal government."
In proposing his whisky tax, Hamilton walked a tightrope. To get the tax enacted, he had to show that it was not burdensome, and even possibly beneficial to people. But to get the tax collected, he had to give it some teeth. One means of providing teeth was "taxation at the source," meaning the Government collects the tax from the producer, not the ultimate consumer. This concept is still used in the collection of Federal alcohol excise taxes today. Theoretically, the producer will pass the tax burden along to the consumer in the price of the product.
But in the late 18th century, it seemed to some producers that Hamilton's whisky tax imposed costs that they couldn't pass along. These producers, generally small farmers on the young Nation's western frontier in the Appalachian Mountains, often distilled whisky from their surplus corn crop. This whisky was then often used as a form of currency on the cash-strapped frontier. These frontier distillers quickly came to believe that the new Federal Government was taxing them in a discriminatory way.
The tax on whisky distilled in a city, town, or village was based on the quantity distilled. Since the retail price of whisky in the West was about half what it was in the East, the effective tax rate in the West was twice as high, computed as a percentage of the price. Further, stills located outside of a city, town, or village were taxed on their capacity, regardless of whether they actually produced that much. Large distillers (located primarily in the East) could defer their tax payment if they posted a bond, but small (mostly western) distillers had to pay immediately, before removal of their product from the distillery. These and other features of the law made the whisky tax so unfair to the western farmer-distillers that some Hamilton critics have suggested that he intended to provoke opposition, giving the Federal Government a chance to show its strength.
Regardless of Hamilton's intent, the whisky tax certainly generated great opposition, especially on the western frontier. This opposition culminated in the famous "Whisky Rebellion" of 1794 in southwestern Pennsylvania. President Washington, accompanied by Alexander Hamilton, led 13,000 troops to put down the rebellion. At Bedford, Pennsylvania, when it became clear that the insurgents would not stand and fight, Washington left the troops to return to his presidential duties. Hamilton and General Henry Lee remained for two months, arresting the rebellion's ringleaders—whom Washington would later pardon. The successful suppression of the Whisky Rebellion helped establish the power of the Federal Government, but opposition to the whisky tax continued. Since George Washington, the Father of his Country, was unassailable, opponents of the tax focused on Alexander Hamilton.
Opposition to Hamilton and his Federalists centered in the Democratic-Republican political party, led by Thomas Jefferson. Politicians of that day had most of the weapons available to modern politicians, with one extra—the duel. Personal attacks took on added meaning with the knowledge that if one went too far, it could prove fatal. Nevertheless, Democratic-Republicans attacked Hamilton vehemently. For example, they accused him of misappropriating Treasury funds. (He exonerated himself of this charge.) Jefferson himself did not engage in this sort of character assassination, but Hamilton believed that Jefferson was behind some of those who did.
Hamilton was a very controversial figure in his day (and since then, as well), and people tended either to love him or hate him. John Adams, one of the latter group, despite being a fellow Federalist, compared Hamilton to theologian John Calvin (who had developed the controversial doctrine of Predestination): "His merits with a party are the merits of John Calvin—‘Some think on Calvin heaven's own spirit fell, While others think him instrument of hell.'" Nevertheless, Thomas Jefferson managed to provide a relatively balanced assessment of Hamilton, after the latter had been dead for several years. He said:
Hamilton was indeed a singular character of acute understanding, disinterested, honest, and honorable in all private transactions, amiable in society, and duly valuing virtue in private life—yet so bewitched and perverted by the British example as to be under thorough conviction that corruption was essential to the government of a nation.
This reference to "corruption" may be elucidated by another quote from Jefferson, recalling a dinner conversation in 1791: "Mr. Adams observed, ‘Purge [the British] constitution of its corruption . . . and it would be the most perfect constitution ever devised by the wit of man.' Hamilton paused and said, ‘Purge it of its corruption . . . and it would become an impracticable government. As it stands at present, with all its supposed defects, it is the most perfect government which ever existed.'"
The "corruption" that concerned Jefferson was the allegedly excessive influence of the Executive branch over the Legislative—not necessarily anything we would regard as dishonest today. Jefferson was especially concerned about Hamilton's proposals for funding the National debt and establishing a National Bank, both means by which speculators and financiers—and legislators—could become enriched. Jefferson envisioned America as a society based on agriculture, with the small farmer being the quintessential American. He viewed banks and long-term debt as inherently evil, or at least suspect. Hamilton, by contrast, believed that America's future lay with business, and that banks and bond markets are both necessary and beneficial.
In a 1789 letter to James Madison, Jefferson stated his famous dictum "that the earth belongs in usufruct to the living." He meant that future generations have a right to receive the benefits of the earth without impairment and, consequently, no generation has a right to impair the benefits to be transmitted to the next one. As an application of this dictum, Jefferson concluded that debt, and particularly the National debt, should impose no obligation for more than 19 years. He believed any part of the debt that remained unpaid after that time should be extinguished—so future generations could inherit the Nation's assets debt free. If this theory had prevailed, it would have drastically reduced the market value of Government securities, enabling the Government to pay off the debt without resorting to internal taxes, such as the whisky tax. To Hamilton and his Federalist party, Jefferson's theory was reprehensible and inconsistent with the Constitution's disapproval of laws "impairing the obligation of contracts."
Another issue that divided Federalists and Democratic-Republicans was the French Revolution. Initially, Americans overwhelmingly supported it; but as it began to turn bloody and anarchic, Hamilton was among the first to turn away in disgust. Jefferson was among the last—if indeed he ever did so. Although Jefferson regretted the loss of life, he wrote, "The liberty of the whole earth was depending on the issue of the contest, and was ever such a prize won with so little innocent blood? My own affections have been deeply wounded by some of the martyrs to this cause, but rather than it should have failed, I would have seen half the earth desolated."
The Democratic-Republican farmer-distillers of western Pennsylvania showed solidarity with the French Revolution during the Whisky Rebellion of 1794. A motion, introduced at one of their meetings, proposed "a standing committee... to be denominated a committee of public safety, whose duty it shall be to call forth the resources of the western country to repel any hostile attempts that may be made against the rights of the citizen or of the body of the people." "Committee of Public Safety" was the name used in France during the Reign of Terror (1793-94) for the group that sent "enemies of the state" to the guillotine.
The whisky tax became a significant issue in the presidential election of 1800. Federalist John Adams had succeeded President Washington in 1797, but the Federalist party had begun losing support. Jefferson and the Democratic-Republicans pledged to repeal the detested whisky tax and gained enough votes to carry the election. Jefferson himself won by the narrowest of margins over Aaron Burr. (The vote in the Electoral College was tied, and Jefferson finally won in the House of Representatives after 36 ballots.) The assessment of the day was that "the whisky drinkers" had made Jefferson President.
In reality, the credit for Jefferson's election belongs more to Hamilton. When he realized that the choice was between Jefferson and Burr, he gave his support to Jefferson, because he believed Burr was an opportunist. Hamilton did this, even though most Federalists thought Burr was more sympathetic to their position. Hamilton preferred a man whose position he opposed over one who seemed to change positions as he sought the shortest route to power.
When Jefferson took office, he appointed a new Secretary of the Treasury, Albert Gallatin, a Congressman from western Pennsylvania who opposed the whisky tax. Jefferson asked Gallatin to review the Treasury records, expecting to find verification that Alexander Hamilton was guilty of the financial irregularities that he had been so often accused of. Gallatin described his report to Jefferson as follows: "[Jefferson asked] ‘Well Gallatin, what have you found?' I answered: ‘I have found the most perfect system ever formed. Any change that should be made in it would injure it. Hamilton made no blunders, committed no frauds. He did nothing wrong.' I think Mr. Jefferson was disappointed." Gallatin also recommended that Hamilton's internal taxes be retained for the time being, because the Government needed them. However, those taxes, including the whisky tax, were repealed in 1802.
Predictably, Aaron Burr was not pleased with Hamilton's meddling in the election of 1800—even though Burr's second-place finish made him Vice President under the Constitutional procedure in effect at that time. In 1804, while still Vice President, Burr campaigned to become Governor of New York. As a New York citizen, Hamilton continued his opposition to Burr, contributing to the latter's defeat. During the campaign, Hamilton accused Burr of something "despicable." No one knows exactly what it was, but it led Burr to challenge Hamilton to a duel. Hamilton's sense of honor made him accept the duel, but his Christian principles led him to shoot in the air rather than at his opponent. Aaron Burr had no such principles, although his grandfather had been the famous evangelist, Jonathan Edwards. In fact, Burr was alleged to have engaged in target practice prior to the duel. On July 11, 1804, in Weehawken, New Jersey, the sitting Vice President killed the father of our Government with a single shot.
Burr was indicted for murder in both New Jersey and New York, but he escaped punishment and served out his term as Vice President. While he was never tried for murder, he was later brought to trial for treason, charged with a conspiracy to raise a private army to attack Mexico and establish an empire in the Western States. He was acquitted for lack of sufficient evidence to prove, beyond a reasonable doubt, that he had acted to forcibly sever the Western States from the U.S. Burr retired to obscurity and died in 1836.
 Business Week Online (http://www.businessweek.com), May 3, 2004: "Alexander Hamilton, Economic Prophet," an edited excerpt from Ron Chernow, Alexander Hamilton (New York, The Penguin Press, 2004).
 U.S. Constitution, Article VI, first paragraph. This covered only the $54 million debt of the Continental Congress; but in 1790, the Federal Government assumed the war debts of the individual States—an additional $25 million.
 The term "distilled spirits" includes all distilled products, such as rum, vodka, and brandy. But in 18th century America, whisky was the only such product distilled to a great extent from American produce.
 Albert Gallatin, The Speech of Albert Gallatin, a Representative from the County of Fayette, in the House of Representatives of the General Assembly of Pennsylvania, [January 3, 1795] on the Important Question Touching the Validity of the Elections Held in the Four Western Counties of the State, on the 14th Day of October, 1794, page 56.
 Chernow, Alexander Hamilton, page 647.
 The shot passed through Hamilton's liver and struck his spine, paralyzing his legs. He collapsed forward and died the next day after 31 hours of intense pain. He is buried at Trinity Church in Manhattan.