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On taking office in 1789 President Washington nominated New York lawyer Alexander Hamilton to the office of Secretary of the Treasury. Hamilton wanted a strong national government with financial credibility. Hamilton proposed the ambitious Hamiltonian economic program that involved assumption of the state debts incurred during the Revolutionary War, creating a national debt and the means to pay it off, and setting up a national bank. James Madison, Hamilton's ally in the fight to ratify the United States Constitution, joined with Thomas Jefferson in opposing Hamilton's program.

By 1790 Hamilton started building a nationwide coalition. Realizing the need for vocal political support in the states, he formed connections with like-minded nationalists and used his network of treasury agents to link together friends with abc parties in the government, especially merchants and bankers, in the new nation's dozen major cities. His attempts to manage politics in the national capital to get his plans through Congress, then, "brought strong responses across the country. In the process, what began as a capital faction soon assumed status as a national faction and then, finally, as the new Federalist party."[4] A portrait of Alexander Hamilton by John Trumbull, 1806.By 1792 or 1794 newspapers started calling Hamilton supporters "Federalists" and their opponents "Democrats", "Republicans", "Jeffersonians" (people who supported Thomas Jefferson, the 3rd president), or "Democratic-Republicans". Jefferson's supporters usually called themselves "Republicans" and their party the "Republican Party."[5] The Federalist party became popular with businessmen and New Englanders; Republicans were mostly farmers who opposed a strong central government. The Congregationalists and the Episcopalians supported the Federalists; most of the Presbyterians, Baptists, and other minority denominations tended toward the Republican camp. Cities were usually Federalist; frontier regions were heavily Republican. These are generalizations; there are special cases: the Presbyterians of upland North Carolina, who had immigrated just before the Revolution, and often been Tories, became Federalists.[6]

The state networks of both parties began to operate in 1794 or 1795. Patronage now became a factor. The winner-take-all election system opened a wide gap between winners, who got all the patronage, and losers, who got none. Hamilton had over 2000 Treasury jobs to dispense, while Jefferson had one part-time job in the State Department, which he gave to journalist Philip Freneau to attack the federalists. In New York, however, George Clinton won the election for governor and used the vast state patronage fund to help the Republican cause.

Washington tried and failed to moderate the feud between his two top cabinet members. He was re-elected without opposition in 1792. The Democratic-Republicans nominated New York's Governor Clinton to replace Federalist John Adams as vice president, but Adams won. The balance of power in Congress was close, with some members still undecided between the parties. In early 1793, Jefferson secretly prepared resolutions introduced by William Branch Giles, Congressman from Virginia, and designed to repudiate Hamilton and weaken the Washington Administration.[7] Hamilton defended his administration of the nation's complicated financial affairs, which none of his critics could decipher until the arrival in Congress of the Republican Albert Gallatin in 1793.

Federalists counterattacked by claiming the Hamiltonian program had restored national prosperity, as shown in one 1792 anonymous newspaper essay:[8] To what physical, moral, or political energy shall this flourishing state of things be ascribed? There is but one answer to these inquiries: Public credit is restored and ESTABLISHED. The general government, by uniting and calling into action the pecuniary resources of the states, has created a new capital stock of several millions of dollars, which, with that before existing, is directed into every branch of business, giving life and vigor to industry in its infinitely diversified operation. The enemies of the general government, the funding act and the National Bank may bellow tyranny, aristocracy, and speculators through the Union and repeat the clamorous din as long as they please; but the actual state of agriculture and commerce, the peace, the contentment and satisfaction of the great mass of people, give the lie to their assertions.

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