Byron King

This could very well have been the Province of Westsylvania, part of British Imperial Canada. To the east, along a line of demarcation that follows the northeasterly arc of the Alleghenies, would be what was left of the United States of America, a collection of small, Northeastern coastal states that rely for survival on their wits as traders and seafaring merchants. To the south would be the Confederated States, an amalgamation of political jurisdictions that had long ago seceded from the failed Constitutional Compact of 1789. To the west of this spot would be the very large Province of Ohio, another jurisdiction of Canada, extending all the way to the Mississippi River. Abutting the west bank of the mighty Father of Waters would lie the French Department of Louisiana. West and southwest of the French possession would be the United States of Mexico, extending across the high plains and Rocky Mountains to the Pacific Ocean and bordering Canada to the north. Mexico would encompass the territory of Texas and extend far down through the old land of the Aztecs and well into the lands of the lost Maya.

Yes, indeed, things could be very different. Except that Mr. Alexander Hamilton, first Secretary of the Treasury of the United States, levied a tax on whiskey.

If you taste the whiskey first, it helps to understand (and at the end of this article, I will tell you how to do just that…). Dark amber in color, not unlike some varieties of that fine Pennsylvania crude oil that seeps from the cracks in the Devonian shale and Carboniferous sandstone that make up the bedrock in these parts, the whiskey has a dry taste and is certainly not to be confused with those better-advertised, rather fruity beverages that are but sweetened imitations of the real thing. Pennsylvania rye whiskey goes down straight and warm, not quite bypassing the taste buds, but it hits you hard from the inside out. In its own inimitable way, this whiskey is rough and strong and uncompromising, like the men who first distilled it on the western frontiers of the British Empire in North America in the 1700s. In 1768 one man of the cloth called it “a perfect beverage, and a blessing from God for which people would take to arms.” He was prescient, this pastor. In retrospect, the rye whiskey of the western frontier was a beverage that defined a fresh-born nation. And if nothing else, the whiskey and those who consumed it forced the nascent government of the United States to govern wisely, and even to issue honest money. Well, at least for a while.

The Whiskey Rebellion: A Staple of the Frontier Economy

Brewed and fermented spirits were a staple of the frontier economy of colonial America. Beer, for example, was available in almost all households and consumed at almost every meal. Beer-making provided a use for surplus grain, which could not otherwise be transported for sale in distant markets over the primitive roads of the time. Beer was safer to drink than most of the water that one could obtain from wells and streams. Beer had nutritional value, and in a world where most everything was scarce, one did not allow good carbohydrates to go to waste. Thus beer was a routine part of the diet of frontier families and a vital source of nutrition. If it made you feel better during the hard times, that was also a good thing.

Whiskey as well became a staple of frontier life and diet. Like beer, it was made from the surplus grain that was not consumed locally and could not otherwise be transported any great distance for sale. Whiskey served as a medicine, a tonic, and an anesthetic in a time and place where there was no alternative. And distilled whiskey had commercial value, such that it was worth a man’s while to transport it over the mountains, where it sold in Philadelphia for a price in colonial times that was the equivalent of about $25 per gallon today. In an environment in which money was scarce, whiskey not surprisingly became a store of value on the frontier. In western Pennsylvania, one estimate from the 1780s states that there was one still for every 15 residents. People used whiskey to pay bills and local taxes, and even to compensate their school teachers and clergy. Hence whiskey evolved into a form of currency in its own right, at least west of the Alleghenies.

The Revolutionary War had left the American national government broke and insolvent, with a reputation for having issued worthless paper currency, called “Continentals. Congress passed laws that forced people to use these notes literally at the point of a soldier’s gun. Inflation and bad debt, both of pandemic proportions, were ruinous to any semblance of a post-Revolutionary national economy. The Articles of Confederation, which lasted from 1777-1789, did little to remedy the sad state of monetary affairs in the young nation. The members of the Constitutional Convention of 1787 were forced of absolute necessity to address monetary affairs. The U.S. Constitution, finally ratified in 1789, specifically made provision for a currency based on gold and silver, as well as for a national bankruptcy law in order to address the oceans of bad debt that permeated every level of colonial society. But it was one thing for the Constitution to declare, as it did, that no “Thing but gold and silver Coin” could be used as legal “Tender in Payment of Debts.” It was quite another for this sovereign edict to become reality.

In the earliest days of the federal government under the new Constitution, Secretary of the Treasury Alexander Hamilton proposed that the national government raise its revenue by levying excise taxes. Among Hamilton’s proposals for raising revenue was a tax on whiskey, that staple of life along the western frontier. For a variety of reasons, this “whiskey tax” immediately aroused the sentiment of many people that the new federal government was simply the replacement of the British King by swindling, moneyed, East Coast speculators and tyrants.

The legislation that enabled the whiskey tax was reflective of the goals of Alexander Hamilton, with his desire to create a strong central government and a nation of industry. The tax placed the levy on the point of distillation, not at the point of sale. Hence many farmers and small-businessmen found themselves taxed on the capacity of their stills, which included the amounts of whiskey they consumed personally, let alone what they discarded due to waste or spoilage. The federal tax rate was lower on larger stills, thus favoring bigger businesses at the expense of small, family-run operations. And the federal tax had to be paid in, of all things, gold or silver coin, of which there were precious few during the best of times on the frontier. As a result, the new tax almost immediately destroyed the value of whiskey as a form of barter currency in its own right. But without whiskey to lubricate the wheels of commerce, the frontier economy soon began to grind to a standstill.

Stay tuned for Part II, tomorrow…

Byron King,
for The Daily Reckoning

Byron King

Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

  • fritz

    hoping that part 2 includes the part where continentals, long since worthless to citizens, were agreed by congressmen to be traded dollar for dollar for the new issue of the new central bank-the US Dollar. Important because, armed with both insider knowledge and all the silver they could muster the insiders, that is, our founding fathers, proceed to scower the countryside buying all the continental war scrip (toilet paper to the citizen, the worker, the soldier who wrought the very freedom enjoyed by the elites) they could find at 5 cents on the dollar. Thus the establishment of institutional corruption in america.

  • Roland

    “..fermented spirits were a staple of the frontier economy.” The trees planted by Jonathan Chapman aka Johnny Appleseed produced almost entirely crab apples, fit only to feed hogs or make cider. Pre-refrigeration, the cider soon “went hard.” What Chapman brought to the frontier was the gift of alcohol, Disney notwithstanding.

Recent Articles

Addison Wiggin
A Manifesto, of Sorts

Addison Wiggin

More than a decade ago, Addison Wiggin helped co-found the Daily Reckoning with Bill Bonner. Today, he recalls this life-changing experience, and explains how - despite being rooted in the world of finance - it is and will always be about much more than money. Read on...

4 DIY Halloween Costumes You Can Make in 10 Minutes or Less

Peter Coyne

Halloween is tonight! And just in case you waited until the last second to think about what you're going to wear, here are four costume ideas you can easily put together in about 10 minutes or less. With these costumes you'll be the hit of your friend's party - provided you're friends with a bunch of economists. (Downloadable masks included...) Happy Halloween!

Bill Bonner
4 Basic Truths to Help You Navigate the Financial News

Bill Bonner

The financial news is full of misinformation - reported by unreliable pundits and taken at face value by an easily swayed public that doesn't really no better. That's why today, Bill Bonner relays the four basic truths he's discovered during his 30 year career in the financial industry to help you make sense of it all. Read on...

How YOU Can Help Pass the Swiss Gold Referendum

Grant Williams

For those who doubt the effectiveness of the Swiss Gold Initiative, Grant Williams has a few startling charts to show you. Today, he relays just how popular this movement is, and how you can actually influence the outcome... no matter where in the world you call home. Read on...

How Small Cap Stocks Saved the Market

Greg Guenthner

For most of the year, no one wanted small cap stocks in their portfolios. But over the last three weeks, few sectors of the market have performed better than small caps. Greg Guenthner explains how to use this to your advantage... and what to expect for the rest of 2014. Read on...