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Reinforcement
Learning for
Finance
Solve Problems in Finance with
CNN and RNN Using the
TensorFlow Library
—
Samit Ahlawat
 Reinforcement
Learning for Finance
Solve Problems in Finance
with CNN and RNN Using
the TensorFlow Library

Samit Ahlawat
Reinforcement Learning for Finance: Solve Problems in Finance with CNN
and RNN Using the TensorFlow Library

Samit Ahlawat
Irvington, NJ, USA

ISBN-13 (pbk): 978-1-4842-8834-4 ISBN-13 (electronic): 978-1-4842-8835-1

https://doi.org/10.1007/978-1-4842-8835-1

Copyright © 2023 by Samit Ahlawat

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To my family and friends without whose support this book
would not have been possible.
Table of Contents
About the Author���������������������������������������������������������������������������������ix

Acknowledgments�������������������������������������������������������������������������������xi

Preface����������������������������������������������������������������������������������������������xiii

Introduction����������������������������������������������������������������������������������������xv

Chapter 1: Overview�����������������������������������������������������������������������������1
1.1 Methods for Training Neural Networks�����������������������������������������������������������2
1.2 Machine Learning in Finance��������������������������������������������������������������������������3
1.3 Structure of the Book��������������������������������������������������������������������������������������4

Chapter 2: Introduction to TensorFlow�������������������������������������������������5

2.1 Tensors and Variables�������������������������������������������������������������������������������������5
2.2 Graphs, Operations, and Functions���������������������������������������������������������������11
2.3 Modules��������������������������������������������������������������������������������������������������������14
2.4 Layers�����������������������������������������������������������������������������������������������������������17
2.5 Models����������������������������������������������������������������������������������������������������������25
2.6 Activation Functions��������������������������������������������������������������������������������������33
2.7 Loss Functions����������������������������������������������������������������������������������������������37
2.8 Metrics����������������������������������������������������������������������������������������������������������46
2.9 Optimizers�����������������������������������������������������������������������������������������������������77
2.10 Regularizers������������������������������������������������������������������������������������������������96
2.11 TensorBoard����������������������������������������������������������������������������������������������120

v
Table of Contents

2.12 Dataset Manipulation��������������������������������������������������������������������������������122

2.13 Gradient Tape��������������������������������������������������������������������������������������������126

Chapter 3: Convolutional Neural Networks���������������������������������������139

3.1 A Simple CNN����������������������������������������������������������������������������������������������140
3.2 Neural Network Layers Used in CNNs���������������������������������������������������������148
3.3 Output Shapes and Trainable Parameters of CNNs�������������������������������������150
3.4 Classifying Fashion MNIST Images�������������������������������������������������������������152
3.5 Identifying Technical Patterns in Security Prices����������������������������������������159
3.6 Using CNNs for Recognizing Handwritten Digits�����������������������������������������172

Chapter 4: Recurrent Neural Networks���������������������������������������������177

4.1 Simple RNN Layer���������������������������������������������������������������������������������������178
4.2 LSTM Layer�������������������������������������������������������������������������������������������������182
4.3 GRU Layer���������������������������������������������������������������������������������������������������186
4.4 Customized RNN Layers������������������������������������������������������������������������������188
4.5 Stock Price Prediction���������������������������������������������������������������������������������190
4.6 Correlation in Asset Returns�����������������������������������������������������������������������207

Chapter 5: Reinforcement Learning Theory��������������������������������������233

5.1 Basics���������������������������������������������������������������������������������������������������������234
5.2 Methods for Estimating the Markov Decision Problem�������������������������������240
5.3 Value Estimation Methods���������������������������������������������������������������������������241
5.3.1 Dynamic Programming�����������������������������������������������������������������������242
5.3.2 Generalized Policy Iteration����������������������������������������������������������������265
5.3.3 Monte Carlo Method���������������������������������������������������������������������������277
5.3.4 Temporal Difference (TD) Learning�����������������������������������������������������284
5.3.5 Cartpole Balancing�����������������������������������������������������������������������������305

vi
 Table of Contents

5.4 Policy Learning�������������������������������������������������������������������������������������������319

5.4.1 Policy Gradient Theorem���������������������������������������������������������������������319
5.4.2 REINFORCE Algorithm�������������������������������������������������������������������������321
5.4.3 Policy Gradient with State-Action Value Function Approximation������323
5.4.4 Policy Learning Using Cross Entropy��������������������������������������������������325
5.5 Actor-Critic Algorithms��������������������������������������������������������������������������������326
5.5.1 Stochastic Gradient–Based Actor-Critic Algorithms���������������������������329
5.5.2 Building a Trading Strategy����������������������������������������������������������������330
5.5.3 Natural Actor-Critic Algorithms�����������������������������������������������������������346
5.5.4 Cross Entropy–Based Actor-Critic Algorithms������������������������������������347

Chapter 6: Recent RL Algorithms�����������������������������������������������������349

6.1 Double Deep Q-Network: DDQN������������������������������������������������������������������349
6.2 Balancing a Cartpole Using DDQN���������������������������������������������������������������353
6.3 Dueling Double Deep Q-Network����������������������������������������������������������������356
6.4 Noisy Networks�������������������������������������������������������������������������������������������357
6.5 Deterministic Policy Gradient����������������������������������������������������������������������359
6.5.1 Off-Policy Actor-Critic Algorithm���������������������������������������������������������360
6.5.2 Deterministic Policy Gradient Theorem����������������������������������������������361
6.6 Trust Region Policy Optimization: TRPO������������������������������������������������������362
6.7 Natural Actor-Critic Algorithm: NAC�������������������������������������������������������������368
6.8 Proximal Policy Optimization: PPO��������������������������������������������������������������369
6.9 Deep Deterministic Policy Gradient: DDPG��������������������������������������������������370
6.10 D4PG���������������������������������������������������������������������������������������������������������373
6.11 TD3PG�������������������������������������������������������������������������������������������������������376
6.12 Soft Actor-Critic: SAC��������������������������������������������������������������������������������379

vii
Table of Contents

6.13 Variational Autoencoder����������������������������������������������������������������������������384

6.14 VAE for Dimensionality Reduction�������������������������������������������������������������389
6.15 Generative Adversarial Networks��������������������������������������������������������������399

Bibliography�������������������������������������������������������������������������������������403

Index�������������������������������������������������������������������������������������������������411

viii
About the Author
Samit Ahlawat is Senior Vice President in
Quantitative Research, Capital Modeling, at
JPMorgan Chase in New York, USA. In his
current role, he is responsible for building
trading strategies for asset management
and for building risk management models.
His research interests include artificial
intelligence, risk management, and
algorithmic trading strategies. He has given CQF Institute talks on artificial
intelligence, has authored several research papers in finance, and holds a
patent for facial recognition technology. In his spare time, he contributes
to open source code.

ix
Acknowledgments
I would like to express my heartfelt appreciation for my friends and
coworkers, in academia and the workplace, who encouraged me to write
this book.

xi
Preface
When I began using artificial intelligence tools in quantitative financial
research, I could not find a comprehensive introductory text focusing on
financial applications. Neural network libraries like TensorFlow, PyTorch,
and Caffe had made tremendous contributions in the rapid development,
testing, and deployment of deep neural networks, but I found most
applications restricted to computer science, computer vision, and robotics.
Having to use reinforcement learning algorithms in finance served as
another reminder of the paucity of texts in this field. Furthermore, I found
myself referring to scholarly articles and papers for mathematical proofs of
new reinforcement learning algorithms. This led me to write this book to
provide a one-stop resource for Python programmers to learn the theory
behind reinforcement learning, augmented with practical examples drawn
from the field of finance.
In practical applications, reinforcement learning draws upon deep
neural networks. To facilitate exposition of topics in reinforcement
learning and for continuity, this book also provides an introduction to
TensorFlow and covers neural network topics like convolutional neural
networks (CNNs) and recurrent neural networks (RNNs).
Finally, this book also introduces readers to writing modular, reusable,
and extensible reinforcement learning code. Having worked on developing
trading strategies using reinforcement learning and publishing papers,
I felt existing reinforcement learning libraries like TF-Agents are tightly
coupled with the underlying implementation framework and do not

xiii
Preface

express central concepts in reinforcement learning in a manner that is

modular enough for someone conversant with concepts to pick up
TF-­Agent library usage or extend its algorithms for specific applications.
The code samples covered in this book provide examples of how to write
modular code for reinforcement learning.

xiv
Introduction
Reinforcement learning is a rapidly growing area of artificial intelligence
that involves an agent learning from past experience of rewards gained
by taking specific actions in certain states. The agent seeks to learn a
policy prescribing the optimum action in each state with the objective of
maximizing expected discounted future rewards. It is an unsupervised
learning technique where the agent learns the optimum policy by past
interactions with the environment. Supervised learning, by contrast, seeks
to learn the pattern of output corresponding to each state in training
data. It attempts to train the model parameters in order to get a close
correspondence between predicted and actual output for a given set of
inputs. This book outlines the theory behind reinforcement learning
and illustrates it with examples of implementations using TensorFlow.
The examples demonstrate the theory and implementation details of the
algorithms, supplemented with a discussion of corresponding APIs from
TensorFlow and examples drawn from quantitative finance. It guides
a reader familiar with Python programming from basic to advanced
understanding of reinforcement learning algorithms, coupled with a
comprehensive discussion on how to use state-of-the-art software libraries
to implement advanced algorithms in reinforcement learning.
Most applications of reinforcement learning have focused on robotics
or computer science tasks. By focusing on examples drawn from finance,
this book illustrates a spectrum of financial applications that can benefit
from reinforcement learning.

xv
CHAPTER 1

Overview
Deep neural networks have transformed virtually every scientific human
endeavor – from image recognition, medical imaging, robotics, and self-­
driving cars to space exploration. The extent of transformation heralded
by neural networks is unrivaled in contemporary human history, judging
by the range of new products that leverage neural networks. Smartphones,
smartwatches, and digital assistants – to name a few – demonstrate the
promise of neural networks and signal their emergence as a mainstream
technology. The rapid development of artificial intelligence and machine
learning algorithms has coincided with increasing computational power,
enabling them to run rapidly. Keeping pace with new developments in
this field, various open source libraries implementing neural networks
have blossomed. Python has emerged as the lingua franca of the artificial
intelligence programming community. This book aims to equip Python-­
proficient programmers with a comprehensive knowledge on how to use
the TensorFlow library for coding deep neural networks and reinforcement
learning algorithms effectively. It achieves this by providing detailed
mathematical proofs of key theorems, supplemented by implementation of
those algorithms to solve real-life problems.
Finance has been an early adopter of artificial intelligence algorithms
with the application of neural networks in designing trading strategies
as early as the 1980s. For example, White (1988) applied a simple
neural network to find nonlinear patterns in IBM stock price. However,
recent cutting-edge research on reinforcement learning has focused

© Samit Ahlawat 2023 1

S. Ahlawat, Reinforcement Learning for Finance,
https://doi.org/10.1007/978-1-4842-8835-1_1
Chapter 1 Overview

predominantly on robotics, computer science, or interactive game-­

playing. The lack of financial applications has led many to question
the applicability of deep neural networks in finance where traditional
quantitative models are ubiquitous. Finance practitioners feel that the
lack of rigorous mathematical proofs and transparency about how neural
networks work has restricted their wider adoption within finance. This
book aims to address both of these concerns by focusing on real-life
financial applications of neural networks.

1.1 Methods for Training Neural Networks

Neural networks can be trained using one of the following three methods:

1. Supervised learning involves using a training

dataset with known output, also called ground
truth values. For a classification task, this would
be the true labels, while for a regression task, it
would be the actual output value. A loss function
is formulated that measures the deviation of the
model output from the true output. This function is
minimized with respect to model parameters using
stochastic gradient descent.

2. Unsupervised learning methods use a training

dataset made up of input features without any
knowledge of the true output values. The objective
is to classify inputs into clusters for clustering or
dimension reduction applications or for identifying
outliers.

3. Reinforcement learning involves an agent that

learns an optimal policy within the framework of
a Markov decision problem (MDP). The training

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territory would endanger its union. But who can limit the extent to
which the federative principle may operate effectively? The larger
our association, the less will it be shaken by local passions; and in
any view, is it not better that the opposite bank of the Mississippi
should be settled by our own brethren and children, than by
strangers of another family? With which shall we be most likely to
live in harmony and friendly intercourse?
In matters of religion, I have considered that its free exercise is
placed by the constitution independent of the powers of the general
government. I have therefore undertaken, on no occasion, to
prescribe the religious exercises suited to it; but have left them, as
the constitution found them, under the direction and discipline of
state or church authorities acknowledged by the several religious
societies.
The aboriginal inhabitants of these countries I have regarded with
the commiseration their history inspires. Endowed with the faculties
and the rights of men, breathing an ardent love of liberty and
independence, and occupying a country which left them no desire
but to be undisturbed, the stream of overflowing population from
other regions directed itself on these shores; without power to
divert, or habits to contend against, they have been overwhelmed by
the current, or driven before it; now reduced within limits too narrow
for the hunter's state, humanity enjoins us to teach them agriculture
and the domestic arts; to encourage them to that industry which
alone can enable them to maintain their place in existence, and to
prepare them in time for that state of society, which to bodily
comforts adds the improvement of the mind and morals. We have
therefore liberally furnished them with the implements of husbandry
and household use; we have placed among them instructors in the
arts of first necessity; and they are covered with the ægis of the law
against aggressors from among ourselves.
But the endeavors to enlighten them on the fate which awaits their
present course of life, to induce them to exercise their reason, follow
its dictates, and change their pursuits with the change of
circumstances, have powerful obstacles to encounter; they are
combated by the habits of their bodies, prejudice of their minds,
ignorance, pride, and the influence of interested and crafty
individuals among them, who feel themselves something in the
present order of things, and fear to become nothing in any other.
These persons inculcate a sanctimonious reverence for the customs
of their ancestors; that whatsoever they did, must be done through
all time; that reason is a false guide, and to advance under its
counsel, in their physical, moral, or political condition, is perilous
innovation; that their duty is to remain as their Creator made them,
ignorance being safety, and knowledge full of danger; in short, my
friends, among them is seen the action and counteraction of good
sense and bigotry; they, too, have their anti-philosophers, who find
an interest in keeping things in their present state, who dread
reformation, and exert all their faculties to maintain the ascendency
of habit over the duty of improving our reason, and obeying its
mandates.
In giving these outlines, I do not mean, fellow citizens, to arrogate
to myself the merit of the measures; that is due, in the first place, to
the reflecting character of our citizens at large, who, by the weight
of public opinion, influence and strengthen the public measures; it is
due to the sound discretion with which they select from among
themselves those to whom they confide the legislative duties; it is
due to the zeal and wisdom of the characters thus selected, who lay
the foundations of public happiness in wholesome laws, the
execution of which alone remains for others; and it is due to the able
and faithful auxiliaries, whose patriotism has associated with me in
the executive functions.
During this course of administration, and in order to disturb it, the
artillery of the press has been levelled against us, charged with
whatsoever its licentiousness could devise or dare. These abuses of
an institution so important to freedom and science, are deeply to be
regretted, inasmuch as they tend to lessen its usefulness, and to sap
its safety; they might, indeed, have been corrected by the
wholesome punishments reserved and provided by the laws of the
several States against falsehood and defamation; but public duties
more urgent press on the time of public servants, and the offenders
have therefore been left to find their punishment in the public
indignation.
Nor was it uninteresting to the world, that an experiment should be
fairly and fully made, whether freedom of discussion, unaided by
power, is not sufficient for the propagation and protection of truth—
whether a government, conducting itself in the true spirit of its
constitution, with zeal and purity, and doing no act which it would be
unwilling the whole world should witness, can be written down by
falsehood and defamation. The experiment has been tried; you have
witnessed the scene; our fellow citizens have looked on, cool and
collected; they saw the latent source from which these outrages
proceeded; they gathered around their public functionaries, and
when the constitution called them to the decision by suffrage, they
pronounced their verdict, honorable to those who had served them,
and consolatory to the friend of man, who believes he may be
intrusted with his own affairs.
No inference is here intended, that the laws, provided by the State
against false and defamatory publications, should not be enforced;
he who has time, renders a service to public morals and public
tranquillity, in reforming these abuses by the salutary coercions of
the law; but the experiment is noted, to prove that, since truth and
reason have maintained their ground against false opinions in league
with false facts, the press, confined to truth, needs no other legal
restraint; the public judgment will correct false reasonings and
opinions, on a full hearing of all parties; and no other definite line
can be drawn between the inestimable liberty of the press and its
demoralizing licentiousness. If there be still improprieties which this
rule would not restrain, its supplement must be sought in the
censorship of public opinion.
Contemplating the union of sentiment now manifested so generally,
as auguring harmony and happiness to our future course, I offer to
our country sincere congratulations. With those, too, not yet rallied
to the same point, the disposition to do so is gaining strength; facts
are piercing through the veil drawn over them; and our doubting
brethren will at length see, that the mass of their fellow citizens,
with whom they cannot yet resolve to act, as to principles and
measures, think as they think, and desire what they desire; that our
wish, as well as theirs, is, that the public efforts may be directed
honestly to the public good, that peace be cultivated, civil and
religious liberty unassailed, law and order preserved, equality of
rights maintained, and that state of property, equal or unequal,
which results to every man from his own industry, or that of his
fathers. When satisfied of these views, it is not in human nature that
they should not approve and support them; in the meantime, let us
cherish them with patient affection; let us do them justice, and more
than justice, in all competitions of interest; and we need not doubt
that truth, reason, and their own interests, will at length prevail, will
gather them into the fold of their country, and will complete their
entire union of opinion, which gives to a nation the blessing of
harmony, and the benefit of all its strength.
I shall now enter on the duties to which my fellow citizens have
again called me, and shall proceed in the spirit of those principles
which they have approved. I fear not that any motives of interest
may lead me astray; I am sensible of no passion which could seduce
me knowingly from the path of justice; but the weakness of human
nature, and the limits of my own understanding, will produce errors
of judgment sometimes injurious to your interests. I shall need,
therefore, all the indulgence I have heretofore experienced—the
want of it will certainly not lessen with increasing years. I shall need,
too, the favor of that Being in whose hands we are, who led our
forefathers, as Israel of old, from their native land, and planted them
in a country flowing with all the necessaries and comforts of life;
who has covered our infancy with his providence, and our riper years
with his wisdom and power; and to whose goodness I ask you to
join with me in supplications, that he will so enlighten the minds of
your servants, guide their councils, and prosper their measures, that
whatsoever they do, shall result in your good, and shall secure to
you the peace, friendship, and approbation of all nations.

FIFTH ANNUAL MESSAGE.—December 3, 1805.

To the Senate and House of Representatives of the United States:—

At a moment when the nations of Europe are in commotion and
arming against each other, and when those with whom we have
principal intercourse are engaged in the general contest, and when
the countenance of some of them toward our peaceable country
threatens that even that may not be unaffected by what is passing
on the general theatre, a meeting of the representatives of the
nation in both houses of Congress has become more than usually
desirable. Coming from every section of our country, they bring with
them the sentiments and the information of the whole, and will be
enabled to give a direction to the public affairs which the will and
wisdom of the whole will approve and support.
In taking a view of the state of our country, we in the first place
notice the late affliction of two of our cities under the fatal fever
which in latter times has occasionally visited our shores. Providence
in his goodness gave it an early termination on this occasion, and
lessened the number of victims which have usually fallen before it.
In the course of the several visitations by this disease it has
appeared that it is strictly local; incident to the cities and on the tide
waters only; incommunicable in the country, either by persons under
the disease or by goods carried from diseased places; that its access
is with the autumn, and that it disappears with the early frosts.
These restrictions within narrow limits of time and space give
security even to our maritime cities during three-fourths of the year,
and to the country always. Although from these facts it appears
unnecessary, yet to satisfy the fears of foreign nations, and cautions
on their part not to be complained of in a danger whose limits are
yet unknown to them, I have strictly enjoined on the officers at the
head of the customs to certify with exact truth for every vessel
sailing for a foreign port, the state of health respecting this fever
which prevails at the place from which she sails. Under every motive
from character and duty to certify the truth, I have no doubt they
have faithfully executed this injunction. Much real injury has,
however, been sustained from a propensity to identify with this
epidemic, and to call by the same name, fevers of very different
kinds, which have been known at all times and in all countries, and
never have been placed among those deemed contagious. As we
advance in our knowledge of this disease, as facts develop the
sources from which individuals receive it, the state authorities
charged with the care of the public health, and Congress with that of
the general commerce, will become able to regulate with effect their
respective functions in these departments. The burden of
quarantines is felt at home as well as abroad; their efficacy merits
examination. Although the health laws of the States should be found
to need no present revisal by Congress, yet commerce claims that
their attention be ever awake to them.
Since our last meeting the aspect of our foreign relations has
considerably changed. Our coasts have been infested and our
harbors watched by private armed vessels, some of them without
commissions, some with illegal commissions, others with those of
legal form but committing piratical acts beyond the authority of their
commissions. They have captured in the very entrance of our
harbors, as well as on the high seas, not only the vessels of our
friends coming to trade with us, but our own also. They have carried
them off under pretence of legal adjudication, but not daring to
approach a court of justice, they have plundered and sunk them by
the way, or in obscure places where no evidence could arise against
them; maltreated the crews, and abandoned them in boats in the
open sea or on desert shores without food or covering. These
enormities appearing to be unreached by any control of their
sovereigns, I found it necessary to equip a force to cruise within our
own seas, to arrest all vessels of these descriptions found hovering
on our coast within the limits of the Gulf Stream, and to bring the
offenders in for trial as pirates.
The same system of hovering on our coasts and harbors under color
of seeking enemies, has been also carried on by public armed ships,
to the great annoyance and oppression of our commerce. New
principles, too, have been interloped into the law of nations, founded
neither in justice nor the usage or acknowledgment of nations.
According to these, a belligerent takes to himself a commerce with
its own enemy which it denies to a neutral, on the ground of its
aiding that enemy in the war. But reason revolts at such an
inconsistency, and the neutral having equal right with the belligerent
to decide the question, the interest of our constituents and the duty
of maintaining the authority of reason, the only umpire between just
nations, impose on us the obligation of providing an effectual and
determined opposition to a doctrine so injurious to the rights of
peaceable nations. Indeed, the confidence we ought to have in the
justice of others, still countenances the hope that a sounder view of
those rights will of itself induce from every belligerent a more correct
observance of them.
With Spain our negotiations for a settlement of differences have not
had a satisfactory issue. Spoliations during the former war, for which
she had formally acknowledged herself responsible, have been
refused to be compensated, but on conditions affecting other claims
in nowise connected with them. Yet the same practices are renewed
in the present war, and are already of great amount. On the Mobile,
our commerce passing through that river continues to be obstructed
by arbitrary duties and vexatious searches. Propositions for adjusting
amicably the boundaries of Louisiana have not been acceded to.
While, however, the right is unsettled, we have avoided changing the
state of things by taking new posts or strengthening ourselves in the
disputed territories, in the hope that the other power would not, by
contrary conduct, oblige us to meet their example, and endanger
conflicts of authority the issue of which may not be easily controlled.
But in this hope we have now reason to lessen our confidence.
Inroads have been recently made into the territories of Orleans and
the Mississippi, our citizens have been seized and their property
plundered in the very parts of the former which had been actually
delivered up by Spain, and this by the regular officers and soldiers of
that government. I have therefore found it necessary at length to
give orders to our troops on that frontier to be in readiness to
protect our citizens, and to repel by arms any similar aggression in
future. Other details, necessary for your full information of the state
of things between this country and that shall be the subject of
another communication.
In reviewing these injuries from some of the belligerent powers, the
moderation, the firmness, and the wisdom of the legislature will be
all called into action. We ought still to hope that time and a more
correct estimate of interest, as well as of character, will produce the
justice we are bound to expect. But should any nation deceive itself
by false calculations, and disappoint that expectation, we must join
in the unprofitable contest of trying which party can do the other the
most harm. Some of these injuries may perhaps admit a peaceable
remedy. Where that is competent it is always the most desirable. But
some of them are of a nature to be met by force only, and all of
them may lead to it. I cannot, therefore, but recommend such
preparations as circumstances call for. The first object is to place our
seaport towns out of the danger of insult. Measures have been
already taken for furnishing them with heavy cannon for the service
of such land batteries as may make a part of their defence against
armed vessels approaching them. In aid of these it is desirable that
we should have a competent number of gunboats; and the number,
to be competent, must be considerable. If immediately begun, they
may be in readiness for service at the opening of the next season.
Whether it will be necessary to augment our land forces will be
decided by occurrences probably in the course of your session. In
the meantime, you will consider whether it would not be expedient,
for a state of peace as well as of war, so to organize or class the
militia as would enable us, on a sudden emergency, to call for the
services of the younger portions, unencumbered with the old and
those having families. Upward of three hundred thousand able-
bodied men, between the ages of eighteen and twenty-six years,
which the last census shows we may now count within our limits,
will furnish a competent number for offence or defence in any point
where they may be wanted, and will give time for raising regular
forces after the necessity of them shall become certain; and the
reducing to the early period of life all its active service cannot but be
desirable to our younger citizens, of the present as well as future
times, inasmuch as it engages to them in more advanced age a quiet
and undisturbed repose in the bosom of their families. I cannot,
then, but earnestly recommend to your early consideration the
expediency of so modifying our militia system as, by a separation of
the more active part from that which is less so, we may draw from
it, when necessary, an efficient corps fit for real and active service,
and to be called to it in regular rotation.
Considerable provision has been made, under former authorities
from Congress, of materials for the construction of ships of war of
seventy-four guns. These materials are on hand, subject to the
further will of the legislature.
An immediate prohibition of the exportation of arms and ammunition
is also submitted to your determination.
Turning from these unpleasant views of violence and wrong, I
congratulate you on the liberation of our fellow citizens who were
stranded on the coast of Tripoli and made prisoners of war. In a
government bottomed on the will of all, the life and liberty of every
individual citizen become interesting to all. In the treaty, therefore,
which has concluded our warfare with that State, an article for the
ransom of our citizens has been agreed to. An operation by land, by
a small band of our countrymen, and others—engaged for the
occasion, in conjunction with the troops of the ex-bashaw of that
country, gallantly conducted by our late consul Eaton, and their
successful enterprise on the city of Derne, contributed, doubtless, to
the impression which produced peace; and the conclusion of this
prevented opportunities of which the officers and men of our
squadron destined for Tripoli would have availed themselves, to
emulate the acts of valor exhibited by their brethren in the attack of
the last year. Reflecting with high satisfaction on the distinguished
bravery displayed whenever occasion permitted in the Mediterranean
service, I think it would be a useful encouragement, as well as a just
reward, to make an opening for some present promotion by
enlarging our peace establishment of captains and lieutenants.
With Tunis some misunderstandings have arisen, not yet sufficiently
explained, but friendly discussions with their ambassador recently
arrived, and a mutual disposition to do whatever is just and
reasonable, cannot fail of dissipating these; so that we may consider
our peace on that coast, generally, to be on as sound a footing as it
has been at any preceding time. Still it will not be expedient to
withdraw, immediately, the whole of our force from that sea.
The law for providing a naval peace establishment fixes the number
of frigates which shall be kept in constant service in time of peace,
and prescribes that they shall not be manned by more than two-
thirds of their complement of seamen and ordinary seamen.
Whether a frigate may be trusted to two-thirds only of her proper
complement of men must depend on the nature of the service on
which she is ordered; that may sometimes, for her safety, as well as
to insure her object, require her fullest complement. In adverting to
this subject, Congress will perhaps consider whether the best
limitation on the executive discretion in this case would not be by
the number of seamen which may be employed in the whole service,
rather than by the number of vessels. Occasions oftener arise for the
employment of small than of large vessels, and it would lessen risk
as well as expense to be authorized to employ them of preference.
The limitation suggested by the number of seamen would admit a
selection of vessels best adapted to the service.
Our Indian neighbors are advancing, many of them with spirit and
others beginning to engage, in the pursuits of agriculture and
household manufacture. They are becoming sensible that the earth
yields subsistence with less labor and more certainty than the forest,
and find it their interest, from time to time, to dispose of parts of
their surplus and waste lands for the means of improving those they
occupy, and of subsisting their families while they are preparing their
farms. Since your last session, the northern tribes have sold to us
the lands between the Connecticut reserve and the former Indian
boundary; and those on the Ohio, from the same boundary to the
rapids, and for a considerable depth inland. The Chickasaws and
Cherokees have sold us the country between and adjacent to the
two districts of Tennessee, and the Creeks, the residue of their lands
in the fork of Ocmulgee, up to the Ulcofauhatche. The three former
purchases are important, inasmuch as they consolidate disjointed
parts of our settled country, and render their intercourse secure; and
the second particularly so, as with the small point on the river which
we expect is by this time ceded by the Piankeshaws, it completes
our possession of the whole of both banks of the Ohio, from its
source to near its mouth, and the navigation of that river is thereby
rendered forever safe to our citizens settled and settling on its
extensive waters. The purchase from the Creeks too has been for
some time particularly interesting to the State of Georgia.
The several treaties which have been mentioned will be submitted to
both houses of Congress for the exercise of their respective
functions.
Deputations now on their way to the seat of government, from
various nations of Indians inhabiting the Missouri and other parts
beyond the Mississippi, come charged with the assurances of their
satisfaction with the new relations in which they are placed with us,
of their disposition to cultivate our peace and friendship, and their
desire to enter into commercial intercourse with us. A statement of
our progress in exploring the principal rivers of that country, and of
the information respecting them hitherto obtained, will be
communicated so soon as we shall receive some further relations
which we have reason shortly to expect.
The receipts at the treasury during the year ending the 30th day of
September last, have exceeded the sum of thirteen millions of
dollars, which, with not quite five millions in the treasury at the
beginning of the year, have enabled us, after meeting other
demands, to pay nearly two millions of the debt contracted under
the British treaty and convention, upward of four millions of principal
of the public debt, and four millions of interest. These payments,
with those which had been made in three years and a half
preceding, have extinguished of the funded debt nearly eighteen
millions of principal. Congress, by their act of November 10th, 1803,
authorized us to borrow one million seven hundred and fifty
thousand dollars, toward meeting the claims of our citizens assumed
by the convention with France. We have not, however, made use of
this authority, because the sum of four millions and a half, which
remained in the treasury on the same 30th day of September last,
with the receipts which we may calculate on for the ensuing year,
besides paying the annual sum of eight millions of dollars
appropriated to the funded debts, and meeting all the current
demands which may be expected, will enable us to pay the whole
sum of three millions seven hundred and fifty thousand dollars
assumed by the French convention, and still leaves a surplus of
nearly a million of dollars at our free disposal. Should you concur in
the provisions of arms and armed vessels recommended by the
circumstances of the times, this surplus will furnish the means of
doing so.
On this first occasion of addressing Congress, since, by the choice of
my constituents, I have entered on a second term of administration,
I embrace the opportunity to give this public assurance, that I will
exert my best endeavors to administer faithfully the executive
department, and will zealously co-operate with you in every measure
which may tend to secure the liberty, property, and personal safety
of our fellow citizens, and to consolidate the republican forms and
principles of our government.
In the course of your session you shall receive all the aid which I can
give for the despatch of the public business, and all the information
necessary for your deliberations, of which the interests of our own
country and the confidence reposed in us by others will admit a
communication.

SPECIAL MESSAGE.—January 13, 1806.

To the Senate and House of Representatives of the United States:—

I lay before Congress the application of Hamet Caramalli, elder
brother of the reigning bashaw of Tripoli, soliciting from the United
States attention to his services and sufferings in the late war against
that State. And in order to possess them of the ground on which
that application stands, the facts shall be stated according to the
views and information of the executive.
During the war with Tripoli, it was suggested that Hamet Caramalli,
elder brother of the reigning bashaw, and driven by him from his
throne, meditated the recovery of his inheritance, and that a concert
in action with us was desirable to him. We considered that concerted
operations by those who have a common enemy were entirely
justifiable, and might produce effects favorable to both, without
binding either to guaranty the objects of the other. But the distance
of the scene, the difficulties of communication, and the uncertainty
of our information, inducing the less confidence in the measures, it
was committed to our agents as one which might be resorted to if it
promised to promote our success.
Mr. Eaton, however (our late consul,) on his return from the
Mediterranean, possessing a personal knowledge of the scene, and
having confidence in the effect of a joint operation, we authorized
Commodore Barron, then proceeding with his squadron, to enter
into an understanding with Hamet if he should deem it useful; and
as it was represented that he would need some aids of arms, and
ammunition, and even of money, he was authorized to furnish them
to a moderate extent, according to the prospect of utility to be
expected from it. In order to avail him of the advantages of Mr.
Eaton's knowledge of circumstances, an occasional employment was
provided for the latter as an agent for the navy in that sea. Our
expectation was, that an intercourse should be kept up between the
ex-bashaw and the commodore, that while the former moved on by
land, our squadron should proceed with equal pace so as to arrive at
their destination together, and to attack the common enemy by land
and sea at the same time. The instructions of June 6th, to
Commodore Barron, show that a co-operation only was intended,
and by no means a union of our object with the fortune of the ex-
bashaw, and the commodore's letters of March 22d and May 19th
proved that he had the most correct idea of our intentions. His
verbal instructions indeed to Mr. Eaton and Captain Hull, if the
expressions are accurately committed to writing by those gentlemen,
do not limit the extent of his co-operation as rigorously as he
probably intended; but it is certain, from the ex-bashaw's letter of
January 3d, written when he was proceeding to join Mr. Eaton, and
in which he says, "Your operations should be carried on by sea, mine
by land," that he left the position in which he was with a proper idea
of the nature of the co-operation. If Mr. Eaton's subsequent
convention should appear to bring forward other objects, his letter of
April 29th and May 1st views this convention but as provisional, the
second article, as he expressly states, guarding it against any ill
effect; and his letter of June 30th confirms this construction.
In the event it was found that after placing the ex-bashaw in
possession of Derne, one of the most important cities and provinces
of the country, where he had resided himself as governor, he was
totally unable to command any resources, or to bear any part in the
co-operation with us. This hope was then at an end, and we
certainly had never contemplated, nor were we prepared to land an
army of our own, or to raise, pay, or subsist, an army of Arabs, to
march from Derne to Tripoli and to carry on a land war at such a
distance from our resources. Our means and our authority was
merely naval, and that such were the expectations of Hamet, his
letter of June 29th is an unexpected acknowledgment. While,
therefore, an impression from the capture of Derne might still
operate at Tripoli, and an attack on that place from our squadron
was daily expected, Colonel Lear thought it the best moment to
listen to overtures of peace then made by the bashaw. He did so,
and while urging provisions for the United States, he paid attention
also to the interests of Hamet; but was able to effect nothing more
than to engage the restitution of his family, and even the
persevering in this demand suspended for some time the conclusion
of the treaty.
In operations at such a distance, it becomes necessary to leave
much to the discretion of the agents employed, but events may still
turn up beyond the limits of that discretion. Unable in such case to
consult his government, a zealous citizen will act as he believes that
would direct him were it apprized of the circumstances, and will take
on himself the responsibility. In all these cases the purity and
patriotism of the motives should shield the agent from blame, and
even secure the sanction where the error is not too injurious. Should
it be thought by any that the verbal instructions said to have been
given by Commodore Barron to Mr. Eaton amount to a stipulation
that the United States should place Hamet Caramalli on the throne
of Tripoli, a stipulation so entirely unauthorized, so far beyond our
views, and so onerous, could not be sanctioned by our government;
or should Hamet Caramalli, contrary to the evidence of his letters of
January 3d and June 29th, be thought to have left the position
which he now seems to regret, under a mistaken expectation that
we were at all events to place him on his throne, on an appeal to the
liberality of the nation something equivalent to the replacing him in
his former situation, might be worthy its consideration.
A nation, by establishing a character of liberality and magnanimity,
gains in the friendship and respect of others more than the worth of
mere money. This appeal is now made by Hamet Caramalli to the
United States. The ground he has taken being different not only
from our views but from those expressed by himself on former
occasions, Mr. Eaton was desired to state whether any verbal
communications passed from him to Hamet, which had varied what
we saw in writing. His answer of December 5th is herewith
transmitted, and has rendered it still more necessary, that in
presenting to the legislature the application of Hamet, I should
present them at the same time an exact statement of the views and
proceedings of the executive through this whole business, that they
may clearly understand the ground on which we are placed. It is
accompanied by all the papers which bear any relation to the
principles of the co-operation, and which can inform their judgment
in deciding on the application of Hamet Caramalli.

SPECIAL MESSAGE—January 17, 1806.

To the Senate and House of Representatives of the United States:—

In my message to both houses of Congress at the opening of their
present session, I submitted to their attention, among other
subjects, the oppression of our commerce and navigation by the
irregular practices of armed vessels, public and private, and by the
introduction of new principles, derogatory of the rights of neutrals,
and unacknowledged by the usage of nations.
The memorials of several bodies of merchants of the United States
are now communicated, and will develop these principles and
practices which are producing the most ruinous effects on our lawful
commerce and navigation.
The rights of a neutral to carry on a commercial intercourse with
every part of the dominions of a belligerent, permitted by the laws of
the country (with the exception of blockaded ports and contraband
of war), was believed to have been decided between Great Britain
and the United States by the sentence of the commissioners
mutually appointed to decide on that and other questions of
difference between the two nations, and by the actual payment of
damages awarded by them against Great Britain for the infractions
of that right. When, therefore, it was perceived that the same
principle was revived with others more novel, and extending the
injury, instructions were given to the minister plenipotentiary of the
United States at the court of London, and remonstrances duly made
by him on this subject, as will appear by documents transmitted
herewith. These were followed by a partial and temporary
suspension only, without any disavowal of the principle. He has
therefore been instructed to urge this subject anew, to bring it more
fully to the bar of reason, and to insist on the rights too evident and
too important to be surrendered. In the meantime, the evil is
proceeding under adjudications founded on the principle which is
denied. Under these circumstances the subject presents itself for the
consideration of Congress.
On the impressment of our seamen our remonstrances have never
been intermitted. A hope existed at one moment of an arrangement
which might have been submitted to, but it soon passed away, and
the practice, though relaxed at times in the distant seas, has been
constantly pursued in those in our neighborhood. The grounds on
which the reclamations on this subject have been urged, will appear
in an extract from instructions to our minister at London now
communicated.
 SPECIAL MESSAGE.—February 3, 1806.

To the Senate and House of Representatives of the United States:—

A letter has been received from the Governor of South Carolina,
covering an act of the legislature of that state, ceding to the United
States various forts and fortifications, and sites for the erection of
forts in that state, on the conditions therein expressed. This letter
and the act it covered are now communicated to Congress.
I am not informed whether the positions ceded are the best which
can be taken for securing their respective objects. No doubt is
entertained that the legislature deemed them such. The river of
Beaufort particularly, said to be accessible to ships of very large size,
and capable of yielding them a protection which they cannot find
elsewhere, but very far to the north, is, from these circumstances,
so interesting to the Union in general, as to merit particular attention
and inquiry, as to the positions on it best calculated for health as
well as safety.

SPECIAL MESSAGE.—February 19, 1806.

To the Senate and House of Representatives of the United States:—

In pursuance of a measure submitted to Congress by a message of
January 18th, 1803, and sanctioned by their appropriation for
carrying it into execution, Captain Meriwether Lewis, of the first
regiment of infantry, was appointed, with a party of men, to explore
the river Missouri from its mouth to its source; and, crossing the
highlands by the shortest portage, to seek the best water
communication thence to the Pacific ocean; and Lieutenant Clarke
was appointed second in command. They were to enter into
conference with the Indian nation on their route, with a view to the
establishment of commerce with them. They entered the Missouri,
May 14th, 1804, and on the 1st of November, took up their winter
quarters near the Maudan towns, 1609 miles above the mouth of the
river, in latitude 47° 21´ 47´´ north, and longitude 99° 24´ 45´´
west, from Greenwich. On the 8th of April, 1805, they proceeded up
the river in pursuance of the objects prescribed to them. A letter of
the preceding day, April the 7th, from Captain Lewis, is herewith
communicated. During his stay among the Maudans', he had been
able to lay down the Missouri according to courses and distances
taken under his passage up it, corrected by frequent observations of
longitude and latitude, and to add to the actual survey of this
portion of the river, a general map of the country between the
Mississippi and Pacific, from the thirty-fourth to the fifty-fourth
degrees of latitude. These additions are from information collected
from Indians with whom he had opportunity of communicating
during his journey and residence among them. Copies of this map
are now presented to both houses of Congress. With these I
communicate, also, a statistical view, procured and forwarded by
him, of the Indian nations inhabiting the territory of Louisiana, and
the countries adjacent to its northern and western borders; of their
commerce, and of other interesting circumstances respecting them.
In order to render the statement as complete as may be, of the
Indians inhabiting the country west of the Mississippi, I add Dr.
Sibley's account of those residing in and adjacent to the territory of
Orleans.
I communicate also, from the same person, an account of the Red
river, according to the best information he had been able to collect.
Having been disappointed, after considerable preparation, in the
purpose of sending an exploring expedition up that river in the
summer of 1804, it was thought best to employ the autumn in that
year in procuring a knowledge on an interesting branch of the river
called Washita. This was undertaken under the direction of Mr.
Dunbar, of Natchez, a citizen of distinguished science, who had
aided, and continues to aid us with his disinterested valuable
services in the prosecution of these enterprises. He ascended the
river to the remarkable hot springs near it, in latitude 34° 31´ 4
´´.16, longitude, 92° 50´ 45´´ west, from Greenwich, taking its
courses and distances, and correcting them by frequent celestial
observations. Extracts from his observations, and copies of his map
of the river, from its mouth to the hot springs, make part of the
present communications. The examination of the Red river itself is
but now commencing.

SPECIAL MESSAGE.—March 20, 1806.

To the Senate and House of Representatives of the United States:—

It was reasonably expected, that while the limits between the
territories of the United States and of Spain were unsettled, neither
party would have innovated on the existing state of their respective
positions. Some time since, however, we learned that the Spanish
authorities were advancing into the disputed country to occupy new
posts and make new settlements. Unwilling to take any measures
which might preclude a peaceable accommodation of differences,
the officers of the United States were ordered to confine themselves
within the country on this side of the Sabine river; which, by the
delivery of its principal post (Natchitoches), was understood to have
been itself delivered up by Spain; and at the same time to permit no
adverse post to be taken, nor armed men to remain within it. In
consequence of these orders, the commanding officer of
Natchitoches, learning that a party of Spanish troops had crossed
the Sabine river and were posting themselves on this side the Adais,
sent a detachment of his force to require them to withdraw to the
other side of the Sabine, which they accordingly did.
I have thought it proper to communicate to Congress the letters
detailing this incident, that they may fully understand the state of
things in that quarter, and be enabled to make such provision for its
security as in their wisdom they shall deem sufficient.
 SPECIAL MESSAGE.—April 14, 1806.

To the Senate and House of Representatives of the United States:—

During the blockade of Tripoli by the squadron of the United States,
a small cruiser, under the flag of Tunis, with two prizes (all of trifling
value,) attempted to enter Tripoli, was turned back, warned, and
attempting again to enter, was taken and detained as a prize by the
squadron. Her restitution was claimed by the bey of Tunis, with a
threat of war so serious, that, on withdrawing from the blockade of
Tripoli, the commanding officer of the squadron thought it his duty
to repair to Tunis with his squadron, and to require a categorical
declaration whether peace or war was intended. The bey preferred
explaining himself by an ambassador to the United States, who, on
his arrival, renewed the request that the vessel and her prizes
should be restored. It was deemed proper to give this proof of
friendship to the bey, and the ambassador was informed the vessels
would be restored. Afterward he made a requisition of naval stores
to be sent to the bey, in order to secure peace for the term of three
years, with a threat of war if refused. It has been refused, and the
ambassador is about to depart without receding from his threat or
demand.
Under these circumstances, and considering that the several
provisions of the act, March 25th, 1804, will cease in consequence of
the ratification of the treaty of peace with Tripoli, now advised to
and consented to by the Senate, I have thought it my duty to
communicate these facts, in order that Congress may consider the
expediency of continuing the same provisions for a limited time or
making others equivalent.

SIXTH ANNUAL MESSAGE.—December 2, 1806.

To the Senate and House of Representatives of the United States in
Congress assembled:—
It would have given me, fellow citizens, great satisfaction to
announce in the moment of your meeting that the difficulties in our
foreign relations, existing at the time of your last separation, had
been amicably and justly terminated. I lost no time in taking those
measures which were most likely to bring them to such a
termination, by special missions charged with such powers and
instructions as in the event of failure could leave no imputation on
either our moderation or forbearance. The delays which have since
taken place in our negotiations with the British government appears
to have proceeded from causes which do not forbid the expectation
that during the course of the session I may be enabled to lay before
you their final issue. What will be that of the negotiations for settling
our differences with Spain, nothing which had taken place at the
date of the last despatches enables us to pronounce. On the western
side of the Mississippi she advanced in considerable force, and took
post at the settlement of Bayou Pierre, on the Red river. This village
was originally settled by France, was held by her as long as she held
Louisiana, and was delivered to Spain only as a part of Louisiana.
Being small, insulated, and distant, it was not observed, at the
moment of redelivery to France and the United States, that she
continued a guard of half a dozen men which had been stationed
there. A proposition, however, having been lately made by our
commander-in-chief, to assume the Sabine river as a temporary line
of separation between the troops of the two nations until the issue
of our negotiation shall be known; this has been referred by the
Spanish commandant to his superior, and in the meantime, he has
withdrawn his force to the western side of the Sabine river. The
correspondence on this subject, now communicated, will exhibit
more particularly the present state of things in that quarter.
The nature of that country requires indispensably that an unusual
proportion of the force employed there should be cavalry or
mounted infantry. In order, therefore, that the commanding officer
might be enabled to act with effect, I had authorized him to call on
the governors of Orleans and Mississippi for a corps of five hundred
volunteer cavalry. The temporary arrangement he has proposed may
perhaps render this unnecessary. But I inform you with great
pleasure of the promptitude with which the inhabitants of those
territories have tendered their services in defence of their country. It
has done honor to themselves, entitled them to the confidence of
their fellow-citizens in every part of the Union, and must strengthen
the general determination to protect them efficaciously under all
circumstances which may occur.
Having received information that in another part of the United States
a great number of private individuals were combining together,
arming and organizing themselves contrary to law, to carry on
military expeditions against the territories of Spain, I thought it
necessary, by proclamations as well as by special orders, to take
measures for preventing and suppressing this enterprise, for seizing
the vessels, arms, and other means provided for it, and for arresting
and bringing to justice its authors and abettors. It was due to that
good faith which ought ever to be the rule of action in public as well
as in private transactions; it was due to good order and regular
government, that while the public force was acting strictly on the
defensive and merely to protect our citizens from aggression, the
criminal attempts of private individuals to decide for their country
the question of peace or war, by commencing active and
unauthorized hostilities, should be promptly and efficaciously
suppressed.
Whether it will be necessary to enlarge our regular force will depend
on the result of our negotiation with Spain; but as it is uncertain
when that result will be known, the provisional measures requisite
for that, and to meet any pressure intervening in that quarter, will be
a subject for your early consideration.
The possession of both banks of the Mississippi reducing to a single
point the defence of that river, its waters, and the country adjacent,
it becomes highly necessary to provide for that point a more