Prior to the enactment of income tax laws in the early twentieth century, the federal government obtained most of its operating funds from the collection of tariffs and customs duties levied on foreign goods entering American harbors. All vessels were subject to inspection, including private yachts. As the popularity of yachting increased, the burden of customs inspections became tiresome and unnecessary.
In 1847, Commodore Stevens proposed to the Secretary of the Treasury that private yachts not engaged in trade or commerce be exempt from inspection. The Secretary, fully aware of the manpower required to inspect each and every yacht entering a port, agreed to propose legislation that would allow the Treasury Department to license yachts and let such yachts carry a signal of the form, size and colors prescribed by the Secretary of the Navy.
At the Secretary of the Navys request, the New York Yacht Club recommended in January 1849, "The American Ensign with the addition of a foul anchor in the union be adopted...." Thus, the American yacht ensign was created.