August 4, 1790
Congress establishes the U. S. Coast Guard as part of a new revenue law.
In March 1976, Proceedings published a special issue about the U.S. Coast Guard, which included an article by Commander Roger P. Vance, U. S. Coast Guard Reserve, about the origin of the Coast Guard. Vance’s article describes how, under the newly-formed Constitution, the need for a revenue system that would discourage smuggling resulted in the creation of a small fleet of cutters responsible for enforcing the revenue laws of the new American government:
We now know our Constitution to be sound and durable. But in early 1789, it was only an ambitious, untested plan. As members of the new government gathered in New York City that year, they would have to breathe life into the new instrument. And they would have to do so under the burden of debt inherited from the Continental Congress. They faced no problem quite so immediate and serious as that of finance.
It had been the want of satisfactory powers over finance which had led to the abandonment of the Articles of Confederation. The new Constitution expressly accepted obligations incurred by the former government under the Articles. Altogether, the sum of the inherited debts amounted to some $72 million. In addition, the annual expenses of the new government would be more than $600,000. There was no balance in the treasury to meet these obligations, so something would have to be done to realize a revenue immediately in order to show that the new nation had the vigor to make itself effective.
Fortunately, one traditional and accepted device was available which could be set in motion directly. The new Constitution permitted Congress to collect an impost on imports (but not on exports), provided the charge did not discriminate against the citizens of one state or favor those of another. The Constitution provided that financial measures should originate in the House of Representatives, which achieved its quorum on 1 April. Several days of discharging the essentials of organization followed. Then on 8 April, Congressman James Madison of Virginia rose to propose a measure for a temporary impost on imports. It would be based on levels already approved by the states under the Articles. “Our situation admitting of no delay,” it seemed wise to him to pass some simple measure “in order to embrace the spring importations.”
His colleagues knew as well as Madison did that American merchants were on a holiday from paying any impost or tonnage. The new government had been called to convene on 4 March 1789. Up to that time, the separate states would continue operating under their own various impost systems, but after that date (already a month past), it was quite open to interpretation as to whether states could legally continue collections. Eleven of the 13 states (Delaware and New Jersey excepted) were collecting duties according to their own laws as the Confederation ended, and eight of the 13 also had tonnage laws in effect prior to 1788. Philadelphia’s Independent Gazetteer discussed the situation in its issue of 27 February:
“A kind of interregnum will take place on the first Wednesday in March, with respect to duties on imports; as on that day the power of an individual state to collect such duties . . . will cease; and it must require some time for Congress . . . to form and put in execution a system of revenue. This will be an unfavorable circumstance for public credit, but individuals, who may be so fortunate as to make importations during that interval of free trade, will no doubt make a considerable saving by it.”
There was thus every reason for the House to act quickly, but the legislators immediately showed an inclination to debate every provision to its fullest, whatever the cost in time. They required leisure to consider the “proper quantum” of imposts to be laid. There were, of course, very high stakes, and precedents would be set. The shipping interests of the North would have liked to exclude foreign shipping; the growing manufacturing interests wanted to be protected by a tariff; and the staple-exporting South wanted all possible competition in both shipping and trade, so as to pull down their shipping and purchasing costs.
The consequent fullness of debate caused the new nation to begin its revenue collection under four separate acts, each embracing a part of the subject. The first was passed 4 July 1789, stipulating the duties which would go into effect on 1 August. The charges would be reduced 10% for goods carried by American vessels. A tonnage law followed on 20 July 1789, to be effective the following 15 August. Traditionally a small use tax on ships entering a harbor, its recognized purpose was to pay for armed defense of the port, lighthouse operation, dock repairs, and the like. But it was also an obvious and traditional device for discouraging one class of shipper in favor of another. It was now to be used for that purpose by Congress, although not so extensively as some of the states had used it. Foreign bottoms were to pay 50 cents a ton; any newly-built American vessels that were in any part foreign-owned, 30 cents a ton; and on American-owned-and-built vessels, six cents a ton.
The mechanics of collection were entrusted to still another law which passed 31 July 1789. It provided for 59 ports of entry along the coast, with a much larger number of ports of delivery. It also designated the positions of the collectors, naval officers, and surveyors who would do the work at those places. In theory, business should have started the next morning (1 August) when the duties went into operation, increasing in tempo as tonnage became due on 15 August. In practice, collectors struggled unevenly into action as soon as they could during August and September, as word of their appointments and the particulars of their duties reached them.
To complete the administrative system necessary to the revenue, an act for registering and clearing vessels and regulating the coasting trade was passed 1 September 1789. Its chief effect, in conjunction with the other measures, was to close the coastwise trade to all but American shipping.
These four measures were on the books by the time the Treasury Department was created on 2 September; Alexander Hamilton was appointed as the first Secretary of the Treasury nine days later. The extent to which he might have assisted or been consulted in the design of this set of laws which he was destined to administer can’t be established, though he had high influence among the members of the House. Certainly he was in New York City from the time Congress met, briskly conducting his business and political activities from his home and office at 57 & 58 Wall Street. Still, he was a private citizen, having deliberately avoided both state and national public offices in order to be available to serve at the Treasury if the offer came. It must have been an anxious time, for President George Washington kept his own counsel, and it appears certain that as late as 21 July, neither Hamilton nor anyone else knew who was to be appointed. Meanwhile, as the debates on revenue continued, he could make himself heard only through those in the House.
President Washington had the power of appointing federal customs officials. While he insisted on a free hand, he considered current service as a state customs official to be an important claim for preference for similar appointment under the new federal government. Other considerations also carried weight, however, such as Revolutionary service or some other form of working for the cause. Of 153 customs appointments made up to 2 August 1790, 63 had been former state officials and 90 had not. In this group, 47 of 63 former state collectors received appointment to federal service. Nearly all the minor officers (inspectors, measurers, weighers, gaugers, etc.) continued as a matter of course. The intermediate officers (i.e., naval officers and surveyors) lost out most heavily. It follows that a third of the collectors—and most of the principal assistants of all the collectors—faced the job of getting the new system going without having current or specific customs experience, though most were doubtless well acquainted with commerce generally.
The revenue system was created in this form, and copies of the laws and commissions of appointment began to flow from the city by stagecoach and coasting vessel, but the legislators were uneasy about their design. Was an impost on imports as allowed by the Constitution going to prove a suitable main reliance?
Legislators remembered the days before the Revolution when American shipping had thoroughly deceived the king’s customs, at least on this side of the Atlantic. During the war, running the enemy’s blockade so as to bring in much-needed goods was celebrated as high patriotism. “The habit of smuggling pervades our country,” Fisher Ames of Massachusetts pointed out during the impost debates in the House. “We were taught it when it was considered rather as meritorious than criminal.”
After the war, as each newly-sovereign state had struggled to devise a customs system of its own and to enforce it against the world (often including neighboring states), the evasions had continued.
“We daily see many articles retailed at a less price than the sum of the duty on them,” observed Thomas Dwight of the Massachusetts legislature, in an August 1789 letter to Congressman Theodore Sedgwick of that state. He predicted further that it would take a “length of time to lead the public mind into a just train of thinking on the subject.”
The collector at Penobscot, Massachusetts, wrote Hamilton at the end of 1789, noting that “under the State government by far the greatest part of these [coasting] Vessels found means to avoid the regulation then prescribed . . . Coasters have so long trampled upon the Revenue Laws of this State with impunity that they now think they are bound by no Laws.” Some in Congress who were themselves “commercial characters” doubted that this ingrained habit could be reversed, and while they talked, the merchants did as they pleased and were literally “bound by no Laws.”
The possible devices available to spike the habit of lawlessness were discussed repeatedly and seemed essentially to be two in number. During the April debate over duties, Congressman John Lawrence of New York asserted that “it does not require much illustration to prove to the satisfaction of the committee, that if you lay your duties too high, it will be a temptation to smuggling,” the profits rising in proportion. Mr. Thomas Fitzsimmons of Pennsylvania noted that “places where goods can be landed with privacy are places of but little consumption,” and if, because the duties were low, the cost of hauling overland took all the profit, there would be no smuggling. James Jackson of Georgia was sure the proposed duties were too high, “unless we establish customshouses every ten or twelve miles, like watchtowers, along the seacoasts.” But the expense of such a scheme would eat the revenue. Besides, pointed out Elias Boudinot of New Jersey, too many “such establishments are odious to the people.” Alternatively, the duties could be set low so that collectors would not be defrauded and “despised,” and then raised later. But, unhappily, neither low duties to sap the gain of smuggling nor an elaborate and expensive system to collect high duties squared at all well with the pressing need for immediate revenue. In the end the schedule of charges agreed on was less than, but very near, the level of the average of the duties levied by the states under the Articles. Smuggling would be profitable.
The representatives were guessing, of course. On every hand was lamented the want of “materials”—meaning statistics—on which to base their judgments. Not only did they wonder about the most effective plan for revenue, but they were even at a loss to know the amount they needed to raise for operating expenses and to service the debts of the new government. No sooner were the “blanks filled up” on the impost law at the end of April, fixing its exact provisions, than the House appointed Representatives Elbridge Gerry (Massachusetts), Samuel Smith (Maryland), and Josiah Parker (Virginia) as a committee to gather information on past performance from the states and to estimate on that basis what the yield of their new measure would be for the remainder of 1789.
It was an apologetic Gerry who after six months finally reported for the committee late in September. Gaining the right documents had been enormously hard, and when in hand, “so various are the revenue laws of the several States, and the modes of stating their accounts,” that the aim of the House to gather information was largely defeated. Nonetheless, the committee had formed an estimate in the face of these trying circumstances, which included “the probability that the defalcations under the Federal Government will differ from these under the State Governments.” For the five months of operation in 1789, the revenue would be $607,011.90. Representative Gerry had already had the honor in July of reporting to the House for a different committee that the expenses of government for (ten months of) 1789 might be estimated at $630,101.28; so it appeared that current expenses might be offset, but there would be no “overplus” to apply to the millions in arrears, interest or, principal. Pressure on the revenue system to increase its yield, and on the Secretary of the Treasury to find new sources of income, became a significant part of the atmosphere.
But before the revenue could be increased, it had to be collected in the first place. Within days of his appointment, Hamilton was writing letters bidding his fellow officers hasten to New York to assume their duties. To coordinate the activities of collectors, he soon established as his main channel a system of circular letters, supplemented by more particular correspondence as cases required. Although opinion was offered to him that no system would work without inspectors on the spot to curb fraudulent local practices, Hamilton managed with only correspondence. Always clear and prompt, his letters filled the need well. The law required certain quarterly reports to be made to the Treasury by the collectors, and Hamilton superimposed still others (some even weekly) in his zeal to acquire the knowledge or provide the safeguards which would permit the system to be improved. He asked difficult things of the collectors but had the good grace to adduce reasons which rang true whenever he did so.
Imperfections in the laws immediately began to appear. While recognizing these faults for what they were, he insisted that the laws be followed as written until they could be changed. Such room as there was for interpretation he reserved for himself, making any individual determinations the basis of general rules for everyone. In fact, it is probably fair to say that Hamilton’s contribution to the customs service lay in a prompt, intelligent, and alert job of administration.
The attitude of American merchants toward the new federal system was crucial, and luckily a few omens were good in this respect. It had been the wealthy men of the countinghouses who had backed the drive for the new Constitution in the first place, for if it could be made to work, they would derive great benefit. For one thing, laws would be uniform. No longer would a state, in erecting tariffs against a commercial enemy (notably Great Britain), be simply handing the business over to the merchants of a neighboring state which was more deficient in patriotism. For another, states would no longer be able to coin money or emit the bills of credit which had erased the profit of many a tedious voyage. Likewise, contracts and property would be stabilized. True, it wasn’t pleasant to pay for it all through duties, but the new laws strongly favored American shipping in many other ways. They permitted Americans to operate at less cost than foreigners and entirely preserved the coasting trade to them. If the alternative was a continuation of conditions under the Articles, it was better to pay. A group of Philadelphia merchants promptly published their intentions in the Gazette of the United States (Philadelphia, 19 September 1789):
“We, the subscribers, Merchants and Traders of the city of Philadelphia, do hereby pledge ourselves to each other, and to our fellow-citizens at large, that we will not be concerned directly or indirectly in any trade contrary to the revenue laws of the United States; but will, by every effort in our power, discourage such illicit practices, by not employing, or by dismissing from our service, any Master or Mate of a vessel, or any Pilot, who shall be engaged in a contraband trade, or in aiding or abeting others in such collusive employments.”
But if there was support for the revenue laws by some merchants of broad vision, who saw them as a lesser evil than disorder, the cue wasn’t taken by all. Perhaps it was habit; perhaps others had heard new systems announced before and found they weren’t enforced. In any event, there were infractions.
A few were caught, whereby it may be judged that many others got by. The District Court of Delaware fined Adam Caldwell $400 for assisting in landing goods from a ship lying in the Delaware, “contrary to law,” on 29 August 1789. Sharp Delany, Collector at Philadelphia, wrote Hamilton 24 December 1789 to report irregularities and added, “I made a seizure of a sloop from Halifax . . .” It was no news to the secretary by then. On 3 October, he had written Jeremiah Wadsworth that from the returns of the collectors which had already arrived he had reason to fear smuggling and was considering “guard boats.” As a young man Hamilton had been a clerk in the trading company of Beckman & Cruger on the Danish island of St. Croix in the West Indies. He was familiar at first hand with sharp and illegal practices in commerce and was thus a hard man to surprise concerning realities.
The pattern continued into 1790. In March, Meletiah Jordan wrote from Frenchman’s Bay about the expense of seizing the schooner Betsy; Benjamin Lincoln wrote from Boston detailing the seizures of the Neptune and the schooner Bee; and Otho H. Williams wrote from Baltimore of goods “irregularly landed” from the ship Vanstophorst. And so it continued. Goods illegally landed were seized, fines were levied, and the culprits were shamed in the press. A ship was seized also if the value of the goods in question was $400 or more. Officers received a share from the sale of such captures. Besides this trickle of evidence of disaffection by Americans, there were dark forebodings in the House about the behavior toward the revenue of two “foreign countries:” North Carolina and Rhode Island.
The formation of the national government had begun before these two states had ratified the Constitution. Nor was it a foregone conclusion that they would join the Union; the “antis” were very strong in both places. It was not at all certain, in the context of the times, that these states wouldn’t develop into enormous revenue headaches. It would be intolerable, opinion ran, to have two such nests of iniquitious traders, two such smuggling sanctuaries, in the very midst of the new nation. Talk of using force against them increased as the months passed. But in the meantime, the revenue laws were drawn to treat the laggards in the only way possible, as foreign states—and still to coax them into the Union. Sections 39 and 40 of the collection law read optimistically that “Whereas, The States of Rhode Island and Providence Plantations, and North Carolina, have not as yet ratified the present Constitution,” all goods, wares, and merchandise not of their own growth or manufacture must pay duty at foreign rates. (By remaining silent on the subject of their domestic produce and manufactures, such trade was tacitly permitted as an inducement to ratification.) However, no trade of any sort was to take place overland or in vessels under 30 tons—coasting and smuggling size. In September 1789, to increase the pressure, Rhode Island and North Carolina ships were given full privileges as ships of the United States—until 15 January 1790.
North Carolina, through the strenuous efforts of her merchants in coastal towns, managed to force ratification on 21 November 1789, despite the views of the backcountry. With the British West Indies closed to them, and the American coasting trade about to be closed, North Carolina traders saw themselves in serious straits, reduced to dependence on the non-British West Indies. They fumed in the State Gazette of North Carolina:
“We are doubtless to be considered as foreigners with whom there is not any commercial treaty, and in this case our vessels must pay the duty of half a dollar the ton in every port in the United States . . . hence . . . our coasting vessels must be laid up, and many valuable citizens be ruined.”
On the other hand, the Union might be strong enough to force the British islands open again, as well as to afford a mantle of legal protection in international dealings.
Rhode Island was a harder struggle; it didn’t ratify until 29 May 1790. While the muttering about using force continued to mount in Congress, the deadline on the coaxing provisions of the law was extended from 15 January to 1 April. This struggle was greatly intensified by the involvement of the issue of the location of the federal government, to which the vote of Rhode Island legislators would be pivotal if only the state ratified soon enough to be included in the vote. The temper of the House can be sampled through Fisher Ames: “I should be glad to know if any gentleman contemplates the state of Rhode Island [remaining] dissevered from the Union, a maritime state, situated in the most convenient manner for smuggling and defrauding our revenue. Surely a moment’s reflection will induce the House to take measures to secure this object [ratification].” Thus it was that by June 1790 the new revenue system was geographically complete along the American coast and revenue enforcement was rendered that much more feasible. One grave impediment had taken care of itself.
Meanwhile, skeptical views of the rectitude of commercial interests kept cropping up in the correspondence Hamilton received from his collectors. Often they were coupled with suggestions for improving the security of the revenue, suggestions which he had made it plain he was glad to have. The most repeated suggestion was for the use of boats. Before November 1789 was out, Hamilton was authorizing small sail and towing boats for “Harbour service” at public expense, though stressing frugality in their procurement. But this was harbor and bay transportation only; what was being urged was cruising boats, capable of “keeping the coast” in all weather. Benjamin Lincoln, collector at Boston, was of the opinion that great good would come of it, and other measures were recommended against the evasive few. The small coasting vessels under 20 tons which were allowed to come and go without question, without even an oath, ought to be required to enter and declare their lading. They were the worst ones for meeting a larger vessel in one of a thousand secluded spots to take off goods. Further, there should be a system for durably marking casks and containers to establish that duty had been paid.
Such comments were collected and sifted. By 23 April 1790, the secretary had digested the faults of the system and devised a report on its defects for the House. The nine months since the beginning of collections were a period when his mind must have been increasingly occupied with the formulation of plans for support of public credit, an internal excise, and encouragement of manufactures—subjects of huge importance. Some neglect of a matter already in hand because of large, new problems looming up would have been understandable, but it didn’t take place.
“These acts have fulfilled their objects in all respects as well as could reasonably have been expected from the first essay on so difficult a subject,” was the summary view of the nation’s first laws which he voiced in his April report. He then worked systematically through the laws, suggesting improvements which always looked to two ends: the convenience of commerce and the security of revenue.
There were many small corrections, of which a few may give the tenor of the whole. The House ought to consider forgiving the duties demandable after 1 August 1789, but before collections started. It wasn’t worth the dismay it was causing, many merchants being “greatly agitated.” The duty on pickled fish, which were largely reexported, was probably not worth collecting. American commodities, which had to be brought back to these shores for want of a market, ought not to have to pay duty. Having to “break bulk” at first entry and unload commodities which were to be delivered at another district, simply so that they could be weighed and measured for duties, was a distinct inconvenience and not necessary for regulation. Paying tonnage between districts, though no freight was taken, was a source of friction not worth the loss of goodwill. Ten cruising cutters, “36 to forty feet keel,” should be provided and would pay for themselves amply. The freedom of small vessels from entering “widened the door for evasions” and ought to be regulated. Regional officers to oversee collections in a group of districts (about state size) had become necessary. Collectors should be better paid, as characters of the best sort were necessary.
The result was a new collection law, passed 4 August 1790. While it was clearly the old law refurbished, it was now vastly improved through Hamilton’s efforts. The first law, passed just one year earlier, had been drawn by legislators distinctly unsure of themselves and altogether without an administrative history to guide them. Hamilton had filled the year’s interval since with a precise administration of the laws as he found them, but he filled it also with an energetic and imaginative gathering of information on which intelligent improvements could be based. His work was honored now by having his suggestions followed. He had been handed a schedule of duties set high enough to yield a profit from smuggling; success therefore depended on merchant attitude. In many ways the new government was the creature of the merchants, a creature they meant to control and from which they expected improved business conditions. Therefore they supported it generally. Contemporary events and attitudes make it clear, however, that some were not inspired to abandon their old habits. It was a risky decision for evaders, for half the mercantile community was now more inclined to inform on them than to wink at their transgressions.
The new law was an improvement over the old because the removal of needless impediments made it less irksome to trade and so more apt to be obeyed. But the key to cutting evasions (without cutting duties) was to increase the risk, and the illicit traffic was sensed to be great enough to justify expensive countermeasures. Therefore the second “essay” of the revenue would feature ten swift-cruising cutters empowered to board and examine merchantmen within four leagues (12 miles) of the coast, and small enough to appear suddenly at any secluded anchorage. The cutters, which would hopefully more than pay for themselves, would cost $1,000 each, fully outfitted, and would cost $18,560 a year to operate.
Treasury reports tell the story. The yield of the first 20 months of operation of the federal customs was $4.3 million; for the year 1800, $9 million; and by 1815, the cumulative total of receipts was $223 million. By comparison, the combined cumulative total of all other sources of revenue for the infant nation to that time was $24 million. Those first cutters, to which today’s Coast can trace its lineage, acquitted themselves nobly in this crucial endeavor.