Portrait of Alexander Hamilton in a U.S. Coast Guard cap

Written by Todd DePastino

The United States Coast Guard celebrates August 4 as its birthday.

On that day in 1790, the very first United States Congress under the new US Constitution approved a sprawling piece of legislation with a wordy title to match:

“An Act to provide more effectually for the collection of the duties imposed by law on goods, wares and merchandise imported into the United States, and on the tonnage of ships or vessels.”

The Act included a few sentences about building and manning federal ships to patrol the Atlantic coast and rowboats so that customs officials could board foreign ships coming into US ports (see below).

These men, ships, and boats would eventually become the Coast Guard.

At first glance, it seems outrageous that Congress would give birth to new branch of service, when its other service branches inherited from the Revolutionary War—the Navy and the Army—had been eliminated or whittled down to next to nothing.

After the Revolution, Congress had disbanded the Continental Navy and auctioned off its ships.

Congress had also disbanded the Army, despite George Washington’s plea to keep a tiny force of 2,631 soldiers spread across the country’s territorial borders. Instead, Congress voted to discharge everyone except 80 men to guard stores at Fort Pitt and West Point. Yes, 80 soldiers comprised the entire United States Army in 1783.

The Army remained miniscule—about 800 men—even after the ratification of the new US Constitution in 1789.

Why, then, with Congress in an anti-military and cost-cutting mood, would it approve the creation of a whole new branch of service?

To answer the question, you need to follow the money.

The Act passed on August 4, 1790, called for the construction of ten swift, shallow hulled, single-masted, large sail “cutters,” designed not for long sea voyages but for coastal patrol. They weren’t intended to guard the coast from enemies, but to interdict smugglers. The Coast Guard—called the Revenue Cutter Service or the Revenue Marine—was there to make sure importers paid their taxes to the new US government.

The original US Constitution forbid a federal income tax. The only ways to fund the government were sales of public lands, excise taxes on domestic goods, and custom duties—taxes or tariffs paid on goods imported into the United States from foreign countries.

Of these three sources of revenue, custom duties were by far the most lucrative and politically acceptable.

From 1789 to the Civil War, tariffs on imports funded, on average, 80-95% of the federal budget. It was only in 1913, after the ratification of the 16th Amendment which legalized the income tax in 1913, that tariffs started falling off as the source of our federal treasury.

Thus, back in 1789, when George Washington was inaugurated as our first President, the new government’s first order of business was to figure out how to fund itself.

Washington picked just the right person to do the figuring. Alexander Hamilton, born and raised on tiny sugar islands in the Caribbean, was a brilliant (and controversial) Secretary of the Treasury. He understood banking, finance, and the complicated networks of international trade, credit, and debt, better than anyone on earth.

And Hamilton had a plan.

Hamilton laid out his plan in three, long reports to Congress in rapid succession. Each report was more stunning and divisive than the other, and each was part of a grand vision to increase federal power, create a highly developed commercial economy, and make the United States a Great Power on the world stage.

All these goals were opposed to what the new Secretary of State Thomas Jefferson had in mind. Jefferson and most Americans wanted a simple virtuous republic built on farming that stayed out of the affairs of the world.

Congress would end up rejecting Hamilton’s most audacious Report on Manufactures, which called for the US to fund factories and big cities, populated by laboring immigrants. The report said the federal government should build roads, dredge ports, construct canals and bridges, and impose tariffs to protect American industry. Congress, led by Congressman James Madison, shelved Hamilton’s report, allowing it to die in committee.

But Madison and Jefferson—after a lot of wheeling, dealing, and horsetrading–ended up accepting Hamilton’s two other reports, the Report on the Public Credit and the Report on the National Bank. The reports were dauntingly complex and sophisticated expositions of how financial instruments worked in a global context. And, like so much Hamilton wrote, the reports went against the grain of American common sense.

For example, Hamilton explained that debt is good and paper money can be just as valuable as gold coins.

During the American Revolution, the Continental Congress and the 13 states racked up huge debts—about $77 million in all—owed to all kinds of people, from ordinary patriots buying war bonds or lending a mare or wagon to the Continental Army to foreign investors lending big money.

After the war, the Continental treasury held a zero balance, and the IOUs that had been issued to support the war were worthless. Risk-embracing speculators like Robert Morris scoured the countryside and bought up these IOUs at less than a penny-on-the-dollar, hoping that the new federal government might someday honor them.

Hamilton proposed to do just that. He would convert all that “bad paper” to good-as-gold Treasury Bonds and pay their owners 6% per year in return for the loans they had made back during the Revolution. And he would issue more bonds so that US could rack up even more debt. Hamilton wanted wealthy investors to buy into America, lend the startup government money so that the country could build itself into a powerhouse.

According to Jefferson, he and ally James Madison brokered a deal with Hamilton over dinner.  Congress would approve Hamilton’s plan for the national debt (and its related Bank of the United States) if he agreed to move the nation’s capital from Philadelphia to the Potomac River between Maryland and Virginia. Hamilton agreed.

And so Hamilton’s elaborate system public debt and public credit was approved that summer of 1790.

Now, he needed a source of revenue to start paying investors their 6% returns.

That’s where the Coast Guard came in.

In his first days as Secretary of Treasury, Hamilton had reviewed the custom collection efforts of the individual states under the Articles of Confederation (the previous founding document of the US before the Constitution). He saw that state collections were bizarrely low and concluded that most of the goods entering the US were probably evading tariffs by landing at night or away from state agents.

Hamilton argued that we needed “guard boats” to stop ships at sea and make sure they paid their taxes due.

Hamilton said that “[a] few armed vessels, judiciously stationed at the entrances of our ports, might at a small expense be made useful sentinels of the laws.”

But, Hamilton argued, the men who plied these coastal waters must be of highest and most noble character. Otherwise, they will be easily bribed by wealthy merchants to look the other way.

“If these are not respectable characters,” he said, “they will rather serve to screen, than detect fraud. To procure such, a liberal compensation must be given, and in addition to this, it will, in the opinion of the Secretary, be adviseable, that they be commissioned as Officers of the Navy. This will not only induce fit men the more readily to engage, but will attach them to their duty by a nicer sense of honor.”

These Revenue Cutter Service officers would have the authority to board ships within “four leagues” (12 miles) of the United States and search manifests and hatches until they arrive in port.

Each of the ten new cutters would patrol outside bays and harbors from Massachusetts to Georgia.

The United States Coast Guard would evolve and grow over the decades. It would act as our unofficial Navy until the US Navy was restored in 1798. And it would absorb the missions of other agencies, like the U.S. Life-Saving Service in 1915 and  the U.S. Lighthouse Service in 1939.

It would move from the Department of the Treasury to the Department of Transportation to the Department of Homeland Security, where it remains today.

So, this August 4, raise a glass to the Coast Guard, the strangest of our service branches, one which was born not in war, but peace, and served a key role in the building of a strong, independent United States of America.

The following are the sections of the 1790 law that outlines the creation of what would become the Coast Guard:

SEC. 62. Be it further enacted, That the President of the United States be empowered to cause to be built and equipped, so many boats order cutters to or cutters, not exceeding ten, as may be necessary to be employed for the protection of the revenue, the expense whereof shall not exceed ten thousand dollars, which shall be paid out of the product of the duties on goods, wares and merchandise, imported into the United States, and on the tonnage of ships or vessels.

SEC. 63. And be it further enacted, That there shall be to each of the said boats or cutters, one master, and not more than three mates, first, second, and third, four mariners and two boys; and that the compensations and allowances to the said officers, mariners and boys respectively, shall be, to the master thirty dollars per month, and the subsistence of a captain in the army of the United States; to a first mate twenty dollars per month, to a second mate sixteen dollars per month, to a third mate fourteen dollars per month, and to every mate the subsistence of a lieutenant in the said army; to each mariner eight dollars per month, to each boy four dollars per month; and to each mariner and boy the same ration of provisions which is or shall be allowed to a soldier in the said army. The said allowances for subsistence to be paid in provisions or money at the contract prices, at the option of the Secretary of the Treasury.

SEC. 64. And be it further enacted, That the officers of the said boats or cutters, shall be appointed by the President of the United States, poidented and shall respectively be deemed officers of the customs, and shall have power and authority to go on board of every ship or vessel which shall arrive within the United States, or within four leagues of the coast thereof, if bound for the United States, and to search and examine the same and every part thereof, and to demand, receive and certify the manifests herein before required to be on board of certain ships or vessels, and to affix and put proper fastenings on the hatches and other communications with the holds of ships or vessels, and to remain on board the said ships or vessels until they arrive at their places of destination.

SEC. 65. And be it further enacted, That the collectors of the respective districts may, with the approbation of the Secretary of the Treasury, provide and employ such small open row and sail boats in each district, together with the requisite number of persons to serve in them, as shall be necessary for the use of the surveyors and inspectors in going on board of ships and vessels and otherwise, for the better detection of frauds; the expense of which shall be defrayed out of the product of duties.

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