ECONOMIC HISTORY OF THE UNITED STATES: THE WHISKEY REBELLION

THE WHISKEY REBELLION

If there is any aspect of our heritage that is more American than apple pie, it is reluctance to pay taxes. Though most Americans begrudgingly admit that taxes are necessary, every April 15th, without fail, Americans engage in the most exotic of fiscal gymnastics in judging their tax obligation.

This reluctance is by no means a recent phenomenon. Nor is it uniquely America. Over generations, Europeans have developed a profound dislike for taxes and thus it was not unexpected that early immigrants to American carried with them not only their desire for a better life in the New World but an intense dislike for the taxes imposed in the Old.

The Whiskey Rebellion of 1794 was simply an extension of this smoldering hatred of a tax — any tax generally and most specifically, any tax perceived to be unfair. In the overall scheme of American history, the importance of the Whiskey Rebellion is modest at best, but the Rebellion does provide a brief vignette of what may happen when political considerations meet head-to-head with economic realities.

Though Americans had forced the surrender of Lord Cornwallis at Yorktown in 1781, the victory brought little change to the West. The “West” in those days meant anything west of the Allegheny Mountains and east of the Mississippi. The area had been a hotbed of discontent for years and after the privation of the American Revolution, the Americans living in this sector of the new nation discovered that under the Articles of Confederation they were not doing much better. In fact, from the point of view of the West, it had poured its lifeblood into the cause of the American Revolution and as a reward it appeared that one far-away, inconsistent government had simply been replaced by another. The Indian nations were still active and predatory. The Spanish still had the Mississippi bottled up in New Orleans. Land speculators had acquired the best farmland and were holding the land as an investment, not treating it as farmland.

Compounding these national problems, life in the West was not particularly pleasant.

Winters were harsh; summers hot and plagued with mosquitoes and horseflies. Snakes were plentiful and medical practitioners rare. Sanitary conditions were no better in 1794 that they had been in the Middle Ages in Europe. All in all, the West was hardly the place for those weak in body or spirit.

Beyond the ravages of nature, the greatest aggravation faced by the farmers was the presence of land speculators. During the grinding years of the American Revolution, these speculators had aggressively gone after real estate. Gambling that times would get better, they had bought up much of the prime farmland at a fraction its value and now maintained it in trust, I.E., sitting idle. As a result, by the end of the Revolution, thousands of acres of the best farmland in the West was sitting idle. Then, as the economic instability caused by the war was replaced with the political instability of peace, there were not many farmers who had the cash to buy these lands. Thus, year after year, thousands upon thousands of prime acreage sat unproductive. Season by season the feeling against these speculators intensified. Many farmers were bitter because it appeared they had risked their lives in the Revolution only to add to the wealth of the speculators who thanked the farmer by locking up the best land and leaving the veterans to farm the poorer quality land. Thus the Westerners sought recourse.

With the ratification of the United State Constitution and the formation of the form of a new government, Westerns demanded that their representatives press for a land tax. Correctly judging that a land tax would make the holding of idle land too expensive for the speculators, the farmers believed the speculators would begin releasing the farmland. They would be forced to sell at a discount just to get rid of it, as the farmers had done before them, thus completing the economic cycle. Unfortunately, while the land tax was popular in the West, it was very unpopular in the East and the land tax died in Congress. Many farmers voiced the opinion that the death of the land tax bill was proof that the same speculators who had locked up the prime farmland in the West were also those who controlled the United States Congress.

Another pressing problem in the West was that of hard currency. Hard currency, in those days, meant non-paper cash. It could be gold doubloons, Spanish dollars, English shillings, French francs or any of a wide variety of coins. While the British pound was the standard medium of exchange, doing business in wide variety of coins was a standard practice. The key was the actual mineral content of the coins. In those days, a Spanish dollar was made of silver and thus it carried with it an intrinsic value. In other words, if no one would take the Spanish dollar as a coin, it could be melted and sold as silver. By comparison, paper money has no intrinsic value. Thus it had to be accepted on the faith. Consider today’s American dollar. It only has value in the sense that storekeepers across the country — and around the world for that matter — will accept it. But you cannot melt down a paper dollar and get a dollar’s worth of value.

Returning to the West of 1790s, there had never been much hard currency in circulation so its scarcity had forced that section of the country to develop its own medium of exchange. With the average farmer seeing less than $20 in currency pass through his hands in the course of year, a barter system had been established. For larger transactions, cattle or land could be exchanged; for smaller transactions, the medium was whiskey.

(According to Davy Crockett, Congressman from Tennessee, coonskins were sometimes used as a medium of exchange as well. In Crockett’s famous “The Coon-Skin Trick,” he tells how he garnered voted by getting his constituents drunk. Crockett was short of cash at one time during an election and, as he put it, “popularity sometimes depended on a very small matter indeed; in this particular it was worth a quart of new England rum, and no more.” Crockett immediately went hunting, shot a raccoon, “whipped his hair jacket off his back,” and went back to the tavern to buy votes.)

The history of liquor in America is quite colorful, to say the least. In 1620, when the Pilgrims landed at Plymouth Rock rather than in a protected harbor, they did so, according to the diary of one Pilgrim because “we couldn’t take time for further search or consideration, our victuals being much spent, especially our beere.” Later, as the colonies developed, spirits were sold in taverns which were licensed by the individual colonies — with one condition of licensing being a plentiful supply of liquor called “good creatures of God.”

Public inebriation was a crime and in the 1630s, Governor Winthrop of Massachusetts went so far as to punish a public drunk by requiring that he wear a red D around his neck for a year. This was probably as much for reminding tavern owners that they had a responsibility to serve liquor in moderation as it was to embarrass the drunk back to sobriety.

Though “beere,” “cyder,” and “ardent spirit,” were plentiful in the colonies, there were not only colonial laws dealing with the drinking, manufacture, and sale of intoxicating fluids, but there were also penalties relating to such afflictions as swearing, blasphemy, smoking, idleness, absence from church and desecration of the Sabbath.

(Like the colonists, the term “whiskey” was an import, the spirit first developed in Scotland by monks in the 1400s. There is debate as to the etymology of the word. Some scholars believe that the word “whiskey” comes from the Scotch quhiske, which means “to move away rapidly” and referred to a light, horse-drawn carriage invented by Scotch-Irish whiskey smugglers to escape tax collectors. Others believe that the name comes from the Gaelic visgegeatha which translates as “water of life.”

Naturally, as soon as whiskey became a popular beverage, it was taxed. King’s law required that all liquor be transported in casks of 60 gallons or more which would make the whiskey difficult to smuggle as well as make it easy for tax collectors to keep an eye on the quantity produced. But, as could be expected, smugglers soon developed smaller cases which could be hidden easily be hidden in a wagon on a horse. This whiskey was known as “light whiskey,” a term which remains with us today.)

Before the American Revolution, the marketing of American whiskey had not been a profitable venture. European brands dominated the East Coast since American whiskey had a quality disadvantage and the cost of moving the product to the East Coast was expensive. But with the British quarantine of American ports there was such a demand for American whiskey that a booming industry sprang to life overnight. In many parts of the West it was said that “you could scarcely get out of sight of the smoke of a stillhouse.” In fact, the demand for whiskey became so great that many distillers began using wheat as well as rye and threatened the production of bread.

As in all business enterprises, the good times were not to last forever. Since the industry was making so much money, it was bound to be taxed. Alexander Hamilton, the first Secretary of the Treasury, was aware of the booming whiskey industry and correctly perceived it as a source of national revenue. There had been some of taxation on whiskey from as early as 1684 but it had been routinely ignored because it had been too hard to collect. The new excise proved to be difficult to ignore.

Faced with staggering fiscal problems, Hamilton shrewdly developed a scheme which would resolve three problems with one solution. Northern states were clamoring for the Federal government to absorb their war debts. Southern states, which had paid off the bulk of their war obligations, were demanding that the new nation’s capital be in the South. And there was a growing national debt that threatened to bankrupt the young nation before it was even out of its crib.

Over dinner and wine, Hamilton was able to work out an arrangement with representatives from the North and South. The federal government would absorb the states’ war debts — which pleased the North. The new capitol would be the South — which pleased the South. The revenue to fund this arrangement, about $800,000 would come from the excise tax on whiskey. While the West was to pay the tax revenues, it had no representatives at the meeting where the deal was struck.

The excise tax was met in the House of Representatives with a storm of protest. First, it was a tax and therefore quite odious. Second, to collect the tax the federal government had to hire tax collectors who would have to be paid from the money they raised thus increasing the amount of money to be raised. Third, particularly galling to the representatives of the Western states, Hamilton’s arrangement had been at the expense of the West, an arrangement that smacked of “taxation without representation,” the root cause of the American Revolution. Efforts to block the bill failed and the law went into effect.

Enraging the Western representatives even more was the fact that many of the alleged war debts were actually debts to American speculators. During the Revolution, American merchants had provided the state militia with goods and services for which they received a promise of payment. Since many of the merchants never expected to get paid, they sold their promissory notes to speculators for cash at a fraction of the true value. Now that the federal government was going to honor the promissory notes at face value through an excise tax, it appeared to the Westerners that money was simply moving from the pockets of the poor to those of the rich. Allegations that some of the speculators who held promissory notes were also the owners of the prime, untilled, idle acres in the West did not make this legislation any more popular.

Of greater concern, the excise would have to be paid in currency, I.E., hard money. Though Hamilton correctly assumed that the tax would eventually be passed along to the ultimate consumer, in this case the drinker, but the distiller still had to pay the tax up front and in currency. Since most distillers didn’t have any currency to speak of, they could not pay the tax up front and this put their business in jeopardy even though they could have paid the tax after they sold their product. Hardest hit were the small distillers to whom “cash flow” meant “whiskey” and if enforced, the excise would drive them out of business.

The administration of the Act divided the United States into 14 divisions of one state each. Districts were then subdivided into surveys and, thereafter, collectorships. Salaried offices were appointed and, to aid in the enthusiasm of assessing the tax, administrators were allowed to receive a percentage of the taxes they collected.

The hardest hit area in the country was the Fourth Survey in western Pennsylvania, Monongahela Country. With more than 1,300 distilleries, this one area represented about 25% of the national output of whiskey. Though the tax was modest, it was the principle that was galling.

The distillers in Monongahela Country faced the excise tax with a bitterness born of years of oppression. Rather than pay the hated tax, many distillers simply sent their whiskey downstream and sold the elixir to Spanish merchants in New Orleans. Smuggling the whiskey out was not difficult and there was no excise to pay. This traffic grew from a trickle in 1791 to a torrent in 1794 and involved an estimated 100,000 gallons a year. In terms of revenue loss, this amounted to about $2 million over the four years, two and a half times the amount Hamilton had hoped to raise from the excise in the first place.

There were also outbreaks of protest and violence. Some distillers refused to pay the tax. Distillers and farmers who paid the tax were harassed by those who did not. Account books were seized and burned while tax collectors were tarred and feathered. Tax collectors made mistakes as well, because of both stupidity and cupidity. Tensions built until Monongahela Country became a war zone for tax collectors. Though the excise was modified in 1792 and 1794, the tax never lost its unsavory flavor and in Monongahela Country, opposition to the excise tax in any form became a holy cause.

The spark that lit the fuse to the powder keg came in June of 1794. Prior to June, all trials of distillers who refused to pay the tax had been held in Philadelphia. This placed a great burden on the smaller distillers for it meant travel expenses to and from Philadelphia as well as loss of time in the field which was particularly critical at harvest time. Under the revised law, “new trials” were to be held in the community in which the alleged tax evasion had been committed. But there was a catch. The revision mandated that new trials were to be held locally, not pending trials, a very fine legal distinction that was to set Monongahela Country ablaze with outrage.

Only July 15, 1794, United States Marshall David Lenox out of Philadelphia and General Neville, Collector for the Fourth Survey, delivered court orders to those distillers whose cases were pending. Unaware of the subtle vocabulary of the law, the handful of distillers who received the summons were distressed to discover that their trials were to be held in Philadelphia. As it was harvest time and neighbor was helping neighbor bring in the crops before they spoiled, a trial of any duration meant that some crops would be ruined. It did not take long for word to be passed and soon a mob began to gather. Lenox, unaware of the gathering storm, left for Philadelphia while Neville returned to his mansion on Bower Hill.

The mob, which continued to grow all day, approached Bower Hill in the afternoon and demanded that Neville show himself and produce his account books. Discretion being the better part of valor, Neville slipped out a back door and hid in the forest. But the mob was hot and advanced on the mansion. A friend of Neville’s tried to stop the mob but was gunned down. Before he died, the friend sent word to Philadelphia to send troops. The troops arrived soon afterwards — all 11 of them — but were no match for the mob which had grown to more than 500 by then. The troops retreated and the mansion on Bower Hill was sacked and burned to the ground.

With the destruction of the mansion there was no turning back. Well aware that they would have to hang together or they would most assuredly hang separately, the mob agreed to a mass meeting on July 23, the next week, at the Mingo Creek Democratic Club.

Feelings were still running high eight days later and there was every indication that the Bower Hill incident would not be the only act of violence. Seizing the moment, David Bradford, a local lawyer and self-styled “Washington of the West,” took control of the meeting and suggested that perhaps Monongahela Country might be better off as an independent nation.

Above the cries of protest he called for a mass demonstration of support on July 30, at Braddock’s Field, several miles from Pittsburgh.

Bradford further inflamed the heat of the moment by ordering that the United States mail be robbed so that he could examine the individual letters to see what the people Monongahela Country thought of revolution. After the mail had been robbed and letters read, Bradford’s suspicions were confirmed: most people hated the excise task.

But few wanted a revolution.

Not to be undermined by public opinion, Bradford suggested the taking of a local fort,

Fort Fayette. This was unpopular and did little to quell the feeling that things were getting out of hand. There was also a general feeling of uneasiness of the mass demonstration scheduled for July 30.

By the day of the mass meeting, there were more than enough rumors to make the citizens of Pittsburgh nervous. Barley able to muster of 250 soldiers, the residents felt particularly uncomfortable at the prospect of facing 5,000 irate farmers and distillers gathered just a few miles outside of town. For days before the mass meeting, Pittsburgh was a beehive of activity with citizens leaving town, burying their valuables and cleaning their pistols and rifles.

With the exception of a few hotheads in the crowd, those that attended the mass meeting were solely interested in abolishing the excise tax, not revolting against the United States of America. Reluctant to fight the Pittsburgh militia and, at the same time, unwilling to leave the mass meeting without some sign of victory, the insurgents negotiated with the Pittsburgh militia to allow the crowd to march through the streets of Pittsburgh. With the force of numbers behind them, the mob was able to negotiate the march and thereafter paraded through a Pittsburgh in which every door was locked, every window bolted, every saloon closed, and every citizen with a gun waiting for trouble. When the march was completed, Bradford called for another mass meeting in two weeks, on August 14, at Parkinson’s Ferry.

Events were rapidly getting out of hand. Seven days after the mass meeting outside of Pittsburgh, President Washington ordered an end to the protest. To back up his demand, he asked the governors of Pennsylvania, New Jersey, Maryland, and Virginia to raise an army to put down the rebellion. The governors complied but rather than march directly into battle with the mob, the governors sent several commissioners to meet with the leaders of the insurgency to work out a surrender.

But the governors took too long. Before the commissioners could work out a settlement, the Parkinson’s Ferry rally occurred. Assuming that they were actually in revolt against the United States, several members of the mob took the American flag down and hoisted a new flag on their “Liberty Pole.” The new flag consisted of six stripes, one for each of the counties involved in the dispute. Benjamin Parkinson of Parkinson’s Ferry nailed a sign of protest to the Liberty Pole which read: EQUAL TAXATION AND NO EXCISE NO ASYLUM FOR TRAITORS AND COWARDS

When the meeting at Parkinson’s Ferry was finally called to order, Bradford attempted to seize control of the gathering and push for a Declaration of War against the United States. This was not a popular idea and it was opposed by the moderate insurgents, most notably Albert Gallatin, who moved the direction of the meeting to a more conciliatory position. After much discussion the meeting was adjourned with no consensus reached, particularly since there were still ongoing negotiations with the four governors at the time. But it was agreed that there would be yet another mass meeting at Parkinson’s Ferry on October 2.

But President Washington was not going to wait until October 2 to see what would happen. He had a dangerous problem on his hands and he was intent on breaking the back of the rebellion as rapidly as possible. Since the governors were making no progress, Washington took control of the militia of the states, as he was empowered to do under the newly ratified Constitution, and ordered the now nationalized troops to meet in Carlisle, Pennsylvania, before marching to the Pittsburgh area.

In the eyes of the Washington Administration, the First Parkinson’s Ferry meeting had changed the Whiskey Rebellion from an unpleasant breakdown of civil order to an outright rebellion. But Washington and Hamilton recognized the Whiskey Rebellion for what it was — and what it could become. Unchecked, the mob would grow in size and strength and possibly end by severing part of the United States into a different country. This could not be tolerated. By the Second Parkinson’s Ferry meeting, federal troops had traversed the mountains and entered the rebellious counties. But the march had not been without incident. The various military units committed petty crimes from the moment they gathered. Dubbed the “Watermelon Army,” a collective sense of their responsibilities was lacking. Drinking, chicken stealing, burning of property and thievery were common occurrences. In Meyerstown, a drunk citizen was “accidentally” bayoneted by New Jersey troops when he became rowdy in a tavern and referred to the troops with “indecent and seditious expressions.”

But the show of force was effective. The Watermelon Army was so large that it dwarfed the Whiskey Rebellion insurrection. By the time the army reached Monongahela Country, all that was left of the red-hot rebellion were a few glowing embers. The ringleaders of the rebellion were rounded up and tried. Those convicted were later pardoned. Bradford, the most virulent of the insurgents, was never captured. As the federal troops were arriving, he fled to safety down the Mississippi.

Thus the Whiskey Rebellion passed into the pages of American history. Born in the fires of outrage, it died not in a blaze of glory but a puff of smoke. While the Rebellion served to illustrate to the President and Congress that the newly formed United States of America was quite diverse in its viewpoint, it also proved that the federal government was both willing and able to firmly establish civil order.

ECONOMIC ANALYSIS OF THE WHISKEY REBELLION

Taxes have never been fair. No matter how they are assessed they are unfair to someone or some industry. In the case of the Whiskey Rebellion, the tax was viewed as grossly unfair because it centered on the economic mainstay of an area and did not allow for the idiosyncrasies of the local trade — specifically the lack of hard currency to pay the tax up front. Though the tax would eventually be passed along to the final consumer, this did not help the small distiller.

Second, from a purely economic standpoint, none of the smaller distillers were profitable businesses anyway. The whiskey distilling business in the West was close to perfect competition. There was no governmental inference and the market price was based on the basis of quantity, quality, and price. When the government imposed an excise tax, the market was upset as small distillers became unprofitable because they could not pay the tax up front. It could be said that the Whiskey Rebellion is a classic case of the effect of governmental interference in a perfect economic system.

There are at least two economic laws at work in the saga of the Whiskey Rebellion. First there is the concept of CRITICAL SIZE. With no excise tax, large and small distillers had equal access to the market. But once a variable was added, the large distillers discovered they had an advantage: they had a cash flow large enough to enable them to pay the tax in currency up front. The smaller businesses could not. The difference between “large” and “small” in this case fit the concept of CRITICAL SIZE. To be profitable under the tax, a distilling business had to be large enough to survive. Being smaller than the critical size meant bankruptcy.

The concept of ECONOMIES OF SCALE also applies. Larger distillers were more profitable than their small competitors because they could make their product cheaper. But that was only until the excise tax was introduced. Very small distillers could stay in business even though their profits were very small because they were using their whiskey as a source of barter. Thus, in the language of modern business, they did not need cash flow. In other words, as they were bartering the whiskey for what they needed, there was no reason for them to convert the whiskey to cash and the use the cash to buy malt, still piping, bottles or pay for transportation. Large distillers, on the other hand, did not have this luxury. They had to sell quite a bit of whiskey to stay in business and this necessarily meant having cash on hand. The larger companies could absorb the tax because they had cash flow and therefore they didn’t have to raise their prices to cover the additional cost.

The companies which suffered the brunt of the impact of the tax were the distilleries that were large enough to need cash to stay in operation but not large enough to absorb the shock of the tax. They were also large enough to attract the attention of the tax collector. These companies thus had to increase their prices to raise the cash money to pay the tax. This made them less competitive and many went out of business.

[This chapter is from Steven Levi’s ECONOMIC HISTORY OF THE UNITED STATES available on Kindle.]

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Steven C. Levi

Steven C. Levi

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