Front Page Titles (by Subject) 3: THE ORIGINS OF AMERICAN LIBERALISM - Economic Liberalism, vol. 1 The Beginnings
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3: THE ORIGINS OF AMERICAN LIBERALISM - William Dyer Grampp, Economic Liberalism, vol. 1 The Beginnings 
Economic Liberalism (New York: Random House, 1965). vol. 1 The Beginnings.
Part of: Economic Liberalism, 2 vols.
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THE ORIGINS OF AMERICAN LIBERALISM
In the history of liberalism, the men who made the American Constitution are important in two ways. They were political craftsmen of the highest order, a fact which is well known and a little commonplace. What is not so well known and just as important is their theoretical achievement, not simply in the history of liberalism in America but in the Western world. The achievement consisted in bringing together two elements in liberal doctrine which never before had been integrated and which are in fact quite difficult even to reconcile. One was the idea that the individual in order to be free must have power. The other was that the state in order to maintain its independence and to protect individual freedom also must have power, some of which must be taken from the power of the individual and hence from his freedom.
The Americans of the constitutional period therefore are important for their ideas about power. That, as one thinks of it, is to be expected from political theorists who become politicians (a word that need not be pejorative). The way they related the two kinds of power was the distinctive feature of their liberalism. In it the political and economic aspects were closely connected. They are explained separately here only for analytical reasons. My emphasis on the economic aspect does not mean it was the more important or received the greater attention, but that I have emphasized that which is the subject of this book.
The American doctrine was an interpretation of British liberalism according to the needs of a new nation. The men who developed it wanted to do two things—to establish a government that would provide more individual liberty than any other had yet done and at the same time to establish a government that quickly would become powerful in the world. There is no necessary conflict between individual liberty and government power once that power has been asserted and has been accepted by those whom it rules and by other nations. The compatibility is suggested in many ways by the history of England. But a conflict is possible, and indeed probable, while national power is coming into being and has not been entirely asserted and accepted. This was the condition in the period covered in this study, from about 1787 to 1815.
There were many areas in which the interests of the individual could conflict with those of the Federal government, and the conflict presented issues like these: Should the individual trade freely with foreigners, thereby keeping agriculture in its ruling position and retarding the development of manufacturing which in turn would reduce the potential military power of the United States? Or, conversely, should the government intervene in order to hasten the development of manufacturing and military power, thereby turning the economic development of the United States away from the course to which it would be directed by a free market? Again: Should the Federal government establish its financial reliability by guaranteeing the entire debt of the Confederation and of the state governments, an act which alone would make the government the major power in the economy? Or, conversely, should its financial power be limited in order to increase the power of the individual, thereby weakening its ability to act when either domestic or foreign affairs made action desirable? The conflict between individual and national power also was manifested in such measures of policy as the Bank of the United States, the chartering of corporations by the Federal government, the direction of internal improvements, the control of monopoly, and the distribution of land.
These issues and the double objective of individual and national power are the subject of this chapter. So much has been written about the founding fathers that the reader may wonder if there is anything left to say about them. There is, because there in fact has not been much written about their economic ideas, and what has been written has been from the viewpoint of the period of the writer more than that of the period of those written about. Each generation likes to rewrite its history to confirm its presuppositions, as Henry Adams once suggested, and in America the generations have been especially fond of discovering they want to do just what the founding fathers would have done in the same circumstances. I do not belittle the earnest effort in such writing; I am impressed by its ingenuity. But I do not think it is intellectual history. To interpret the ideas of the past according to the problems and longings of the present is not history—it is rhetoric or argumentation. In the period between the world wars of this century, most American intellectuals believed the Federal government should exercise more economic power, and there were many historians who discovered that the men who wrote the Constitution intended the Federal government to have just that power. In the same period there was unrest and some longing for radical changes. Jefferson was then discovered to have been a revolutionist. After World War II such ideas became unpopular and were replaced by some quite conservative beliefs. Hamilton then was discovered. In writing this chapter I have tried to keep in the front of my mind the question, What were the founders of America trying to do? My conclusions are derived from what they themselves wrote and said, and have been very little influenced by what others have written about them.1
Most of the ideas described here were expressed between 1787, when the constitutional convention met, and 1815 when the second war with Britain ended. They were in letters, speeches, state papers, books, and tracts by the men who were the leaders of thought and usually of government as well—men like Franklin, Hamilton, Jefferson, Madison, Paine, Barlow, Taylor, Gallatin and a few others. Their political and economic ideas usually were put forward together, and hence a description of their political theory usually helps to understand their ideas about economic policy. The theories were not always consistent in themselves nor with each other and they changed as those who held them grew older. I have therefore noted the inconsistencies and changes of belief that were substantial. Except for the general division between the Federalists and the Republicans, the order of explanation is chronological. The first important event in the intellectual—and general—history of the period was the constitutional convention in 1787.
The Constitutional Convention
The reason most often advanced for calling the convention was the necessity of “regulating commerce,” this being the term for what today is called economic policy. Regulation, over all of the colonies taken together, had not been an issue of long standing. The Americans did have experience with particular regulations in particular colonies and they were familiar with the history and practice of economic policy in Britain. But they had not had any significant experience with the problems of making, executing, and obeying policy for their own country in its entirety. After 1763 Parliament for the first time seriously tried to regulate the economic life of the colonies. The following twenty-five years, until 1787, were all the Americans had in which to become familiar with economic policy. In the first thirteen of the years—to 1776—what they learned best was how to evade and resist the law, a lesson that was useful to them as rebels but served them badly when the law was their own. The following seven years did not provide much experience that was useful in peacetime, and when the Revolutionary War ended in 1783 a depression began from which the country did not fully recover until the Constitution was ratified in 1789. Even if their experience had been more instructive it could not have taught them much in so short a time as twenty-five years. Moreover, the men who were most influential in making American policy were comparatively young when the convention met. Madison was thirty-six and Hamilton was thirty. Jefferson was in France, as ambassador, during the convention. Franklin and Washington had an important part in it but their role was less to initiate than to mediate and unify.
Nor were the delegates merely young and inexperienced, which in the great world are regarded as handicaps. They set to their work in a climate of disillusionment. In 1776 the Americans had believed that once their country was independent, it quickly would find a lucrative place in world trade. But in 1783 they discovered that Europe was not eager to trade with America, and if there was to be a flourishing commerce it would have to be obtained on American initiative and European terms. The principal commercial city of the United States was Philadelphia, where the convention was held. Its distressed condition was described by Mathew Carey, the pamphleteer:
I have in 1786 seen sixteen houses to let in two squares, of about 800 feet, in one of the best sites for business in Philadelphia. Real property could hardly find a market. The number of persons reduced to distress, and forced to sell their merchandize, was so great, and those who had money to invest were, so very few, that the sacrifices were immense. Debtors were ruined, without paying a fourth of the demands of their creditors. There were most unprecedented transfers of property. Men worth large estates, who had unfortunately entered into business, were in a year or two totally ruined—and those who had a command of ready money, quadrupled or quintupled their estates, in an equally short space. Confidence was so wholly destroyed, that interest rose to two, two and a half, and three per cent per month. And bonds, and judgments, and mortgages were sold at a discount of twenty, thirty, forty, and fifty per cent In a word, few countries have experienced a more awful state of distress and wretchedness.2
The depression affected all of the states and frequently was advanced as the reason why they should ratify the Constitution. To every doubter in the Virginia ratifying convention, Francis Corbin said:
Let him go into the interior parts of the country, and inquire into the situation of the farmers. He will be told that tobacco, and other produce, are miserably low, merchandise dear, and taxes high. Let him go through the United States. He will perceive appearances of ruin and decay everywhere. Let him visit the sea coast—go to our ports and inlets. In those ports, Sir, where he had every reason to see the fleets of all nations, he will behold but a few trifling little boats, he will everywhere see commerce languish, the disconsolate merchant, with his arms folded, ruminating in despair, on the wretched ruins of his fortune, and deploring the impossibility of retrieving it.3
The economic crisis however was probably no more important in securing ratification than the deeply felt need for a government of greater authority than the Articles of Confederation permitted. Although the Americans had been made suspicious of power by their experience with the considerable authority of Parliament, they nevertheless acknowledged the need for a more commanding government than they had. The need was made urgent by several challenges to the Confederation, the leading one being the rebellion of the Massachusetts farmers under Daniel Shays. Madison said it had “a very sensible effect on the public mind.”4 Hamilton excited support in New York for ratification by his frightening references to the disorders in North Carolina and Pennsylvania in addition to those in Massachusetts.5 “Toward the prevention of calamities of this kind, too many checks cannot be provided,” he said.
The need for more political and economic authority was before the delegates when they met. They had to create a government with enough power to maintain domestic peace, to make the independence of the United States secure, and to assist the economic growth of the nation. And they wanted to do all of this without greatly restricting individual liberty.
“THE REGULATION OF COMMERCE”
On the need for more economic power, all of the delegates agreed. The consensus is disclosed in their numerous proposals to “regulate commerce.” Some of the men who made them were Hamilton, Madison, Franklin, Edmund Randolph and Richard Henry Lee of Virginia, James Wilson of Pennsylvania, and Charles Pinckney of South Carolina. The power was written into the first draft of the Constitution, and the agreement is reflected in the fact that the official journal of the convention does not mention any debate but merely records that the power was adopted. The point receives less mention than the vote to establish the post office.6 During the ratification period, some of the opponents of the Constitution, like George Mason of Virginia, indicated there was a clear feeling in favor of regulation. Others opposed the Constitution but did not oppose regulation, stating it could have been incorporated in the Articles of Confederation.7 After the Constitution was adopted, the agreement was expressed as clearly as before. In one of his first messages to Congress, Washington said the interest of a free people required Congress to “promote such manufactures as tend to render them independent of others for essential, particularly military supplies,” and the house replied, “We concur with you. . . .” Jefferson in a presidential message in 1802 said the government had a duty to “maintain commerce and navigation; to foster our fisheries; and protect manufactures, adapted to our circumstances.” Monroe in 1818 urged the protection of manufactures.8
The consensus proves one point: that the founders believed economic policy was an important part of the work of government. In addition, it suggests they knew something about economic affairs and held opinions about how they should be regulated. That, however, is all the consensus proves. It does not prove there was any agreement on how the economy should be regulated. An enterprise economy is “regulated” (by competition which in turn can be enforced by the government), fascist, communist, and socialist economies are regulated, and so is a mixed economy. What separates them is the kind of regulation and its purpose. If these simple considerations are not attended to, one is likely to believe that because the word “regulation” was used so commonly it must have had a common meaning. It is, moreover, easy to move from the word “regulation” to “control,” then to “power,” and finally to conclude that the delegates gave the Federal government the power to control the economy in detail, from which it follows that they must have been hostile to the idea of laisser faire. Some such free association must be the explanation for those writings that contend the constitutional convention meant Congress to regulate the economy in whatever way it thinks necessary.
Actually in the proposals to regulate commerce there were four different kinds of economic policies implied. (a) Regulation meant to some only the establishment of uniform trade relations among the states and the removal of barriers to interstate trade. (b) To another group it meant that Congress should use the tariff and other controls over foreign trade in order to advance the international power of the United States. (c) To a third group, it meant the use of tariff duties as the major source of Federal revenue. (d) To a fourth group, it meant the Federal government should assist the economic development of the nation in particular ways, that most often proposed being “the encouragement of manufactures.”
(a) The first view was held by the delegates who insisted on state sovereignty and by those who believed in complete laisser faire in the customary sense, i.e., no interference by the government other than to assure free domestic and international trade. Among the delegates holding this first view were Elbridge Gerry and Hugh Williamson, and they defended it more by political than by economic reasoning.9 They believed the Federal government would acquire an alarming amount of power if it were able to create corporations, grant monopoly rights, pay bounties, and protect manufactures.
(b) Regulation in order to strengthen the international power of the United States was the least important of the four positions advanced in the convention. But it became more important shortly afterwards. James Iredell said that Congress needed regulatory powers in order to secure favorable terms of trade from other countries.10 The many proposals for a commercial policy of reciprocity were expressions of this position, which was the position of the Republican party until 1805.
(c) That revenue should be the purpose of regulation was contended by many, and they later insisted that such was the meaning of the clause of the Constitution which gives Congress the power to regulate commerce. In one of the papers of the Committee on Detail of the convention is the statement: “That the United States in Congress be authorized . . . to pass acts for the Regulation of Trade and Commerce as well with foreign Nations as with each other to lay and collect taxes.” The delegates from Connecticut maintained the principal revenue source would be the tariff, and their opinion was repeated in one of the broadsides addressed to the citizens of King’s County in New York. Charles Pinckney had wanted regulation to mean more than revenue but after the convention he said that revenue was all it had come to mean.11
(d) That the economy should be regulated in order to hasten its industrial development was the position of Hamilton, Madison and of others whom hindsight shows to have been the leading members of the convention. They did not, however, rule it, and one must be cautious in appraising their influence.
Hamilton on August 18 proposed that the government be empowered to charter corporations where the public good required them, but the proposal was not discussed at the time. It raised the issue of how much economic power the Federal government should have. The issue was raised again on September 14 when Franklin—dropping for a day his role as peacemaker—proposed that the power to establish post offices and post roads be enlarged to include “a power to provide for cutting canals where deemed necessary,” which implies public enterprises. Madison then moved that Franklin’s proposal be enlarged to include the power of incorporation, which would have given the Federal government power over private as well as public enterprises. What is interesting is that the proposals—all of them controversial, almost provocative—should have been made only a few days before the convention adjourned, when unanimity was urgently needed and when many delegates were trying heroically to find compromises that would produce it. Proposals such as that made by Madison had been made earlier in the convention. That they were made again so near the time adjournment suggests that their advocates were making a last great effort to write broad economic powers into the Constitution. Perhaps they prevailed upon Franklin in the belief that his great authority would be decisive. But they were defeated. One can obtain some notion of how the delegates reacted to the proposals from the following entry in Madison’s journal (he was both the leading participant in the debates and their principal recorder):
Mr. Madison suggested an enlargement of the motion into a power “to grant charters of incorporation where the interest of the U. S. might require and the legislative provisions of the individual States may be incompetent.” His primary object was however to secure an easy communication between the States which the free intercourse now to be opened, seemed to call for—The political obstacles being removed, a removal of the natural ones as far as possible ought to follow. Mr. Randolph 2ded. the proposition.
Mr. King thought the power unnecessary.
Mr. Wilson. It is necessary to prevent a State from obstructing the general welfare.
Mr. King—The States will be prejudiced and divided into parties by it—In Philada, and New York, it will be referred to the establishment of a Bank, which has been a subject of contention in those Cities. In other places it will be referred to mercantile monopolies.
Mr. Wilson mentioned the importance of facilitating by canals, the communication with the Western Settlements—As to Banks he did not think with Mr. King that the power in that point of view would excite the prejudices and parties apprehended. As to mercantile monopolies they are already included in the power to regulate trade.
Col: Mason was for limiting the power to the single case of Canals. He was afraid of monopolies of every sort, which he did not think were by any means already implied by the Constitution as supposed by Mr. Wilson.
The motion being so modified as to admit a distinct question specifying and limited to the case of canals.
N- H- no— Mas. no. Ct. no— N- J- no— Pa ay. Del. no— Md. no. Va. ay. N- C- no— S- C- no— Geo ay. (Ayes — 3, noes — 8.)
The other part fell of course, as including the power rejected.12
The vote settled an issue that was raised on the first day of the convention when Edmund Randolph in presenting the Virginia plan included in regulation “the establishment of great national works—the improvement of inland navigation—agriculture—manufactures—and a freer intercourse among the citizens.” The vote on Madison’s amendment was a rejection of both Hamilton’s proposal of August 18, and of the proposal of Robert Morris to include in the Constitution a provision for a national bank. Finally, the vote rejected not only Madison’s amendment but the more formidable proposal he had made earlier—also on August 18, possibly a day set aside for economic planners—to give Congress the power “to establish public institutions, rewards, and immunities, for the promotion of agriculture, commerce, trades, and manufactures.”13 The very extensive powers proposed by Randolph, Morris, Franklin, Hamilton, and Madison were reduced to the limited provisions of Section 8 of Article I, which include the power to tax, borrow, regulate commerce, pass uniform bankruptcy laws, coin money, establish post offices and post roads, and grant patents.
The only other form of economic control considered was the regulating of consumption or sumptuary control. It was proposed by George Mason of Virginia and was defeated. Gouverneur Morris spoke against it, stating it would create a landed nobility “by fixing in the great land-holders, and their posterity their present possessions.”14
It is instructive to consider the forms of control that might have been adopted. They can be deduced from the controls which the governments of France and England exercised or tried to exercise during the period of mercantilism, from the sixteenth to the middle of the eighteenth century: the fixing of prices, wages, and interest rates, prohibitions of forestalling and engrossing, regulating the quality of goods, licensing of labor, programs to increase the population, sumptuary control, monopoly grants and other exclusive rights, incorporation, state enterprise, and the control of foreign trade and finance including the protection of domestic industries. The convention considered only four: monopoly and other exclusive rights, control of foreign trade, state enterprise, and sumptuary control. The last two were rejected. The granting of monopoly rights was restricted to patents and copyrights. The control over foreign trade was left in an ambiguous state, except for the prohibition of export taxes. Although not made explicit, the Constitution allowed some power to increase the population, because the Federal government could offer free land as an inducement to immigration.
Not even proposed were the powers to control prices, wages, interest rates, the quality of goods, the conditions of their sale, and the allocation of labor. All of these powers were cherished by the practitioners (although not the theorists) of mercantilism, and could they have been asked for an opinion of the Constitution they would have said it provided a feeble economic policy indeed. Those who today believe the Federal government has extensive economic authority to exercise, if it will, cannot support their belief by the records of the constitutional convention (nor the Constitution of course), because the delegates were not agreed upon the issue.
However the Federal government usually has exercised more power than is explicitly given it by the Constitution and has in fact exercised powers which were explicitly rejected by the convention delegates, as when it established the Bank of the United States, a semipublic corporation in 1791, only four years after the convention. One reason for the government’s action is that certain disputed issues, like incorporation and protection, were left in an ambiguous state. Another is the great influence in the formative years of the country of men like Hamilton who believed the government should have substantial economic power. A third reason is that less than twenty years after the Constitution was written almost all of the leading men acknowledged that the national interest required the exercise of considerably more power than they had believed was necessary.
THE AMBIGUITY ABOUT POLICY
When the convention ended, some of the delegates believed a limited mercantilist government had been established. Of those who did, not all approved it. Hamilton did not believe the Constitution did this, although he was determined to make the most of what it did do. Other delegates believed the government had only those few economic powers which the Constitution explicitly enumerates. Still others were uncertain about what had been decided on particular points, if in fact anything had been decided at all. They believed the Constitution was ambiguous, perhaps contradictory, in these matters.
It was. However, it is doubtful that the delegates could have made it any better. As the convention went on, their differences became more apparent and more profound, and the decision that they made, although unclear and contradictory, probably was the only alternative to no decision at all, in which event the thirteen states might have tottered along to collapse under the Articles of Confederation.
The ambiguity and contradiction are apparent in the fact that there were four different ideas about what policy should be, that is, of what was meant by the phrase, “the regulation of commerce.” It produced a continuing controversy, and the controversy was sharpest over the powers of protection and incorporation. Even though the former was neither accepted nor denied and the latter was expressly rejected, some of the delegates left the convention believing both powers were implied in the Constitution, others believing neither was implied, and still others believing that the issues had not been settled. Hamilton and Madison believed (they said) that the Constitution empowered Congress to levy a protective tariff and also to create public corporations with monopoly power. Madison was candid in saying the powers were not made explicit, and explained they could not have been made so at the time without evoking unwarranted hostility and an unfounded suspicion that they would be abused. He seems to have meant that the public outside the convention, and not the delegates, would be hostile and suspicious. What he said about the public seems to have been quite true. About forty years after the convention, when the issues still were being debated, he said that if Congress had not had the powers of protection and incorporation that fact would have been made known when the first Congress discussed the issues. In it were many delegates to the constitutional convention and to the state ratifying conventions.15 This, however, is slim evidence when set against Madison’s own record of the convention in which he noted the defeat of his proposal to give Congress the power of incorporation. The defeat implied a rejection also of his proposal for the encouragement of manufactures.
The delegates actually may have favored Madison’s motion but defeated it because they thought such powers would prevent the Constitution’s being ratified. If so, the public and not the delegates determined the content of the Constitution, in which case one cannot assert that the powers of protection and incorporation are certain. At most they are only possible (if public opinion changes). The powers in fact were used later, but the constitutionality of incorporation was never wholly acknowledged and that of protection was extensively questioned down to the Civil War.
There is ambiguity also in the “general welfare” clauses of the Constitution—in the preamble, which declares the intention to “promote the general welfare,” and in Section 8 of Article I in which Congress is given the power “To lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States. . . .” Those who believe the premise of constitutional government is limitation argue that the welfare clauses do not confer any discretionary powers on Congress. They believe a constitution enumerates particular powers (which the welfare clauses do not) and prohibits general powers; that if Congress can do what it believes is essential for the general welfare, then it possesses general powers and the Constitution is thereby made meaningless. They explain the appearance of the term “general welfare” in the preamble as a part of a statement of intention which is specified in the body of the Constitution and the term there as being directly related to the enumerated powers which precede it. In this interpretation, Section 8 of Article I means that taxes, duties, and imposts are to be used in order to provide for the general welfare, and does not mean that Congress can provide for the general welfare by other means than such levies; it cannot, in this view, create corporations, grant monopoly rights, subsidize manufactures, etc., in the interest of the general welfare.
Against this interpretation is the view that the welfare clauses, particularly that in the body of the Constitution, empower Congress to use its discretion in order to provide for the general welfare, which means that it can use methods that are not enumerated or clearly implied in the Constitution. If the view were carried to its logical conclusion, Congress could do anything it wished and would be the supreme power in government. The Constitution then could not serve to limit the authority of Congress. The view hardly ever is carried so far and therefore has escaped the criticism to which a consistent statement would open it. Those who hold the view can, however, find support in the fact that Congress has exercised powers which are not enumerated or implied, in the fact that the Constitution was not interpreted strictly even in the early years of the nation, and in the fact that it must be viewed flexibly if the government is to meet the problems which changing conditions present.
The welfare clauses are noted here in order to describe a source of ambiguity in the Constitution and hence to suggest an explanation of the controversy over economic policy. My purpose is not to explain the issue in constitutional law, which I am not able to do. I do however feel able to appraise the issue according to the criteria of the political and economic doctrine of the period. The logical implication of the second interpretation is an unlimited government and is wholly inconsistent with the ideas of the founding fathers. Their doctrine does, however, make possible the exercise of powers which are not enumerated because the doctrine itself is not entirely consistent.
THE CONTRADICTIONS IN POLICY
In addition to ambiguity, there was contradiction in the Constitution. Export taxes were prohibited, but the tariff was not. A protective tariff was neither acknowledged nor explicitly denied. A tariff for the purpose of revenue was admitted, even by those delegates who believed in complete free trade. Most of them were from the South and they accepted a revenue tariff in return for a guarantee of slavery. Yet if the South had wanted no restriction whatever on exports, it also should have opposed any restriction on imports. Not much economic sophistication is needed to see that if imports are reduced, exports probably will be also. After the tariff had been in effect, the South understood the connection very well.
Another contradictory feature of the Constitution was the prohibiting of special preference to any state and yet permitting the tariff. The revenue might have been used in the general interest, but the tariff’s effect on resource allocation (especially the effect of a protective tariff) was to favor particular sections of the country at the expense of others. The provision for patents and copyrights perhaps did not wholly contradict the many expressions of hostility to monopoly. On the other hand, it was not consistent with them either, and the provision surely has created many monopoly problems.
Rather than being called ambiguous and contradictory, the Constitution usually has been called a structure of compromises. But “compromise” is not quite the word to describe the more fundamental provisions. It hardly does for economic policy. It also is not appropriate for the major political decision which was made—the distribution of power between the Federal government, the state governments, and the people. Did the founding fathers create a federal government or a national government? Madison thought it was national. Hamilton thought the issue had not been decided. Others thought a federal government had been created. Hamilton probably was right, as he was about many other matters. The major political issue, like the issues of economic policy, had to be decided as the nation lived under the Constitution, grew and confronted problems, and settled them. The convention in 1787 was a remarkable assembly, but it did not solve in a certain, clear, and straightforward way the principal political and economic problems before the country. No one was more aware than the delegates themselves of the fact that their work was imperfect and that their achievement, although great, was limited. The convention was one phase of an evolving movement which had the result of creating and enlarging the national power of the United States.
The next phase was the discussion and debate (which are not the same thing) from 1787 to 1815. The issues then were defined more clearly and met more directly. The most remarkable feature was the substantial agreement reached on the economic powers of the Federal government. It was not, however, reached until each group had made its ideas known and opened its policy to the critical examination of the opposition. The economic policy of each group. Federalist and Republican, had a political premise, and the policy was justified by the premise. The first to develop a distinctive political and economic doctrine was the Federalists.
The Ideology of the Federalists
The economic policy of the Federalists was designed to increase the national power of the United States, whereas the economic policy of the Republicans was meant to improve the capacity of the people for self-government. It is by their purposes, more than by their means, that the two groups can be most clearly differentiated. There were other differences between them, but none was as continuously maintained and none was as important.
Like the English mercantilist writers and the classical economists, the Federalists under Hamilton were devoted to the national interest. It presented however a more complex problem to the Federalists than it did to their English predecessors. I have described how the political and economic weakness of the country under the Confederation was the force that led to the constitutional convention and to ratification. Not all of the Americans, however, were equally disturbed by the political and economic distress. Although most of them agreed that the Federal government must have more power if the nation was to survive, they did not agree on how much more was necessary. Those like Hamilton and Madison believed power had to be increased very much, and to do so an entirely new structure of government was necessary. Power had to be increased in order to remove the contesting authority of the states and to make the independence of the nation secure. Thus, the nationalism of the Federalists had two aspects: the supremacy of the Federal over the state governments (the domestic aspect) and the ability of the Federal government to assert the authority of the United States in international affairs (the foreign aspect).
The Federalists did not believe in a federal government—one in which the state and national governments have coordinate authority. What they actually favored was a national government. They would have been more candid had they called themselves “Nationalists” or at least something like “Continentalist,” which is the name Hamilton gave to a series of papers expressing his early political and economic ideas. The Federalists were not at first explicit about their belief in the supremacy of the Federal government. The belief is elaborately qualified by protestations in favor of individual liberty and the integrity of the states, as in The Federalist papers from which they took their name. They kept the name even when they clearly showed they did not accept genuine federalism. When those who did accept it formed an opposition, they at first called themselves anti-Federalists. (Later the terminology became more confusing. The anti-Federalists became the Republican party. The Federalists after about 1805 divided, some of them advocating the coordinate authority of the states and becoming actual federalists—small “f”—and in one of the most querulous spectacles in American history they attempted a secession of New England in 1814. Another group of Federalists—large “F”—retained their nationalism and became National-Republicans from whom the original Republicans, or anti-Federalists, distinguished themselves by forming the Democratic-Republican party which was the predecessor of today’s Democratic party, while the Republican party of today comes from the Federalists who did not become federalists, but National-Republicans who became just Republicans after first being Whigs.)
THE DIFFERENTIA OF THE FEDERALISTS
To say the Federalists were the party of national power does not mean their opponents were indifferent to that power. But they did not think it was as important as the Federalists thought it to be. The object of the opposition was to extend individual liberty, to make it the property of many and not only of those who at the time were capable of exercising it. That not everyone was capable at the time was admitted by the Republicans, but they believed the government’s responsibility was to enlarge the capacity for freedom. They believed also that the government did not need a large amount of power to discharge its responsibility. To the Republicans, government power was the enemy of individual liberty. They wanted to limit it by increasing the power of the electorate and by guaranteeing the authority of the state governments. Their ideas are described in detail below. They are noted briefly here, because so often the Republican opposition is explained in a different way.
What usually is said is that the Federalists were conservative and the Republicans were liberal, because the Federalists wanted a government only of “the rich and well born,” while the Republicans wanted a government of the people. The distinction is not useful. It does not explain why Hamilton’s measures were conservative and Jefferson’s were liberal, it does not describe the issues of political and economic policy as they appeared to the men themselves; and it breaks down completely when the policy is analyzed by the modern definition of “conservative” and “liberal,” as almost always is done. By using the words in their modern sense, one can say Hamilton was conservative for wanting to limit the franchise but liberal in wanting to manage the national debt in a way that would increase employment. Jefferson was liberal in wanting to enlighten the mass of the people, but illiberal in believing many of them urgently needed to be improved. The difficulties can be compounded. The reader may decide whether Hamilton was a conservative or a liberal (in the modern sense) in proposing the following measures: (1) the protection of manufactures, (2) tolerance of monopoly, (3) taxes on luxuries, (4) the establishment of a central bank. Or whether Jefferson was liberal or conservative in the following measures: (1) opposition to immigration on the grounds that European morals are depraved, (2) opposition to Federal powers of incorporation, (3) the redistribution of wealth in land, (4) the encouragement of agriculture. By today’s meaning of conservative and liberal, one would have to say that each man proposed conservative measures (the first two in each list) and also proposed liberal measures (the last two); and therefore each must have been conservative at one time and liberal at another. But because both kinds of measures were proposed at the same time, that is rather like saying that a spotted dog is black at times and white at times. The difficulty of course is in the definition of conservative and liberal; the definition is alien to the period. In today’s usage, a liberal is one who believes in a popular government with extensive economic powers, a conservative one who wishes to limit the economic powers of government and has little confidence in the electorate.
Rather than try to separate the Federalists and the Republicans according to today’s definitions, it is more useful to regard the distinctive feature of Federalist policy as being nationalism and the distinctive feature of Republican policy as being popular improvement. The distinction does not require ignoring the other features of the two doctrines or supposing them to be unimportant. Actually they become more understandable. An example is Hamilton’s belief that the franchise should be limited because the mass of people is incapable of participating in government. The belief easily can be related to Hamilton’s nationalism. If the end of government is power and if the need for power is urgent, the quality of the people participating in government is important. If the mass is in fact incompetent its participation will defeat the purpose of government. As Hamilton believed the survival of the nation was imperiled by the want of power in the Federal government, his opposition to popular representation was therefore all the stronger. An even closer connection between the means and the end of his doctrine is seen in his belief that the state governments should be deprived of all authority that would interfere with the authority of the Federal government. In the area of economic policy, each of his measures if adopted would have increased the industrial capital of the United States and hence, so he believed, have increased its economic power.
Hamilton, however, did not always make his belief in power explicit. Although he did so in the constitutional convention where frankness was possible, he did not when he urged the public to ratify the Constitution, as in The Federalist and before the ratifying convention of New York. In his public statements, he moderated the belief in strong government by assertions of faith in individual liberty. He submitted that limiting the franchise would not deprive the people of freedom, because they would be represented by the merchant class and the “middling farmers” who knew the interest of the people better than they themselves did.16 He reassured the state governments that the Constitution did not threaten their power. Within the Federal government itself, no single branch would be able to monopolize power because each was restrained by the others. Nor was there any danger that a single group in the country, inside the government or out, would be able to monopolize power permanently, because the republic extended over a large area and over a great diversity of interests, each of which had enough power to advance its legitimate purposes and to protect itself.
There was, however, one intimation of power in his public statements. It was in his intransigent opposition to a frequent amending of the Constitution. To look upon it as open to continual alterations would call into question the very basis of government, which is the certainty of law. Moreover, from a practical viewpoint, continual amendments might make the Constitution worse instead of better, especially if everyone was prepared to make additional amendments to correct the mistakes in the amendments meant to correct the mistakes in the original document. He felt, it seems, that those who wanted to amend the Constitution frequently were irresponsible. One must guard, he said, against “interesting too strongly the public passions,” which is what he thought frequent amendments would do.17
The public was not persuaded however Although impressed by The Federalist papers—at least to the extent of believing that the structure of the government was sound—the public hesitated to accept the Constitution as it stood because of the substantial power which the structure made possible. Hamilton tried to dismiss the fear by an exercise of logic. He said to the New York convention:
After all our doubts, our suspicions, and speculations on the subject of government, we must return at last to the important truth, that when we have formed a Constitution upon free principles, when we have given a proper balance to the different branches of administration, and fixed representation upon pure and equal principles, we may with safety furnish it with all the powers necessary to answer in the most ample manner the purposes of government.18
There is a note of exasperation here. He seems to be saying: You have admitted the liberal premise of the proposed government. You have acknowledged its structure is consistent with the premise. Why, then, do you draw back before the natural conclusion: Give it power!
Eventually the public did accept the Constitution—but only after a bill of rights had been promised and the fear of power allayed. The fear was not unfounded. In his major speech to the convention,19 Hamilton had proposed a government like that of Great Britain—“the only government in the world which unites public strength with individual security,” he called it. The president of Hamilton’s government and the senators would serve for life (like monarch and Lords), and the government would have the power to nullify all state actions which interfered with the national interest. The house of representatives (Commons) would be elected by direct and comparatively wide suffrage. Hamilton said:
In my private opinion, I have no scruple in declaring, supported as I am by the opinion of so many of the wise and good, that the British government is the best in the world; and that I doubt much whether anything short of it will do in America.
When the convention created a very different kind of government, he had grave doubts, but nevertheless signed the Constitution as being “better than nothing.”20
The possibility, indeed the probability, of “nothing” was alarming, and Hamilton did as much as anyone to secure ratification. He told the people of New York state that the Constitution was “as perfect as human forms can be,” which to a lawyer might stand as a synonym for “better than nothing” although not to the common listener. The reader of The Federalist is not likely to think the authors are defending a lesser evil. He is more likely to believe that a very great thing was done at Philadelphia, that those who opposed it were pig-headed, so thoroughly is each of their objections met and put down. All that might make him wonder is why so invincible a plan of government needed so elaborate and repetitious a defense. The reason is the skepticism of the authors’ contemporaries. Most of it has vanished, and The Federalist today is regarded as one of the great tracts on political philosophy. Whether or not it is that, it certainly is a great lawyer’s brief.
The Federalist PAPERS
From the viewpoint of economic policy, there are three ideas in The Federalist which are of particular interest: the theory of society, the conception of self-interest, and the statement of the general powers of government. All are consistent with the ideas of the English liberals. On two of the ideas, the correspondence is close enough to make one think Hamilton and Madison had Adam Smith in mind when they wrote.
Society, according to The Federalist, is a collection of contending individuals and groups called “factions.” Each is interested in its own purposes and is unwilling to defer to the purposes of others. The purposes are numerous and the most important is the accumulation of wealth. Left to themselves or to an inadequate government the factions will clash, there will be disorder and violence, and liberty will be destroyed, either because the peace which is essential to liberty will be absent or because peace will be established on Draconic terms that make liberty impossible. There is no way to prevent factious behavior without rooting out its causes in human nature—a remedy, Madison said, which is worse than the disorder. Hamilton was even more explicit in not wanting to tamper with human nature. “We must take man as we find him,” he said, referring to self-interested men (which he regarded the majority of them to be). Since factious behavior cannot be prevented, it must be controlled, and the Constitution is designed to do that (Madison). It allows rival groups to contest with each other and thereby assures them their liberty. But none of the factions can acquire enough power to destroy the liberty of others. Each is restrained by the constitutional devices for dividing power: the division between state and Federal governments, the separation of powers within the Federal government, the power of each branch to restrain the others, the difficulty of making fundamental political changes by amending the Constitution, and finally the fact that the aggregate power of the government, or things it can do, is limited. There is an additional obstacle in the large area of the nation: a faction would have difficulty in obtaining support from all parts of the country.
The rivalry of factions for political power has an analogue in the rivalry of firms for economic power. Each faction, like each firm, wishes to advance its interests, and the interests of a group (faction or firm) are most completely realized when it has a monopoly of either political or economic power. This means that a group is in the best possible position when none other has any freedom at all and rivalry has been eliminated. Therefore, in order to maintain freedom, rivalry must be maintained. In economic conduct, rivalry is perpetuated by a competitive structure of the market—that is, by providing an opportunity to all to engage in rivalry. In political conduct, rivalry can be assured by a structure of government that allows each group to express its interests but prevents any of them from acquiring a monopoly of power. In other words, competition is the method of maintaining and also of controlling rivalry in both its economic and political aspects. The Federalist conception of political competition is analogous to the conception of economic competition in classical economics.
Another idea which the Federalists had in common with the economic liberals was that self-interest can be used to keep men interested in the competitive game. They are held to economic rivalry by the rewards that go to the successful. The rewards are greater to those who acquire monopoly power. The more likely it is that men will obtain that power, the more vigorously will they compete for it. If the power is impossible or unlikely to obtain, they will tire of the game and try another. They are not like the donkey which can be coaxed forward simply by the sight of a carrot just beyond its nose—they must have a nibble at the carrot now and then. Usually they get no more, because monopoly power is likely to be temporary and to be eliminated by subsequent rivalry. But there must be a great likelihood of temporary monopoly if men are to be held to competition. If there is not, competition erases the motive that produces it and becomes a transparent scheme of frustration. Men will detect the scheme and replace it.
The interest of men can be held to competitive politics, and their loyalty to government thereby secured, by appeals to their self-interest and by rewards for their successful competition. Some of the rewards are monetary and others are political power. When the idea was advanced in The Federalist it seems not to have incited any opposition. But when as Secretary of the Treasury Hamilton showed he meant to practice it, the hostility was immediate: “base self-interest,” “depravity,” and “corruption” were some of the ways it was described by the anti-Federalists. Hamilton’s attitude was unshakable. “We must take man as we find him; and if we expect him to serve the public [we] must interest his passions in doing so,” he told the constitutional convention.21 The attitude was elaborated in the papers:
Ambition must be made to counter-act ambition. The interest of the man must be connected with the constitutional rights of the place. . . . This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public.22
Men’s loyalty can be secured by opening the prospect of power to them and making the realization of it likely. They would be prevented from abusing their power by the restraints the Constitution imposes. Moreover, the government can use other rewards than power to secure loyalty and it can offer them to the many who are excluded from government by the necessarily few positions in it. Such rewards were dispensed by Hamilton in his funding program, which by guaranteeing the national debt gave a large number of people an interest in supporting the government.
What made the opponents of Hamilton most indignant was his respect for self-interest. The man was bewitched by notions of human depravity, Jefferson said, adding generously that Hamilton himself had escaped it. Hamilton seemed to be saying that the new government could not have the loyalty of men merely by offering them liberty but also had to buy their support and thereby pay for the government’s survival. Such an act was, to the anti-Federalists, a repudiation of the principle that liberty is its own reward. Moreover, the act did not merely acknowledge the reality of base instincts. It asked that men be ruled by them. In addition, there was in Hamilton’s remarks on self-interest an Olympian quality which could add irritation to indignation. His opponents may have wondered, who exactly are the men who have to be paid for their loyalty? Not themselves surely. They disdained such motives. Not Hamilton himself, because they acknowledged his personal integrity. Did he have the common people in mind? Partly, but not entirely, because they did not have enough influence to require such an elaborate scheme of rewards and restraints. Was he thinking of his followers? If so, that was another reason for keeping them out of office.
Hamilton could have asked why the opposition was so agitated. They certainly had been prepared for his proposals, both by what he had said earlier about self-interest and by what they themselves had said. It was an idea as common to America as to Britain that men are self-interested, especially in economic affairs. “For it is an observation, as true as it is trite, that there is nothing men differ so readily about as the payment of money,” Hamilton wrote. The remark suggests the statement of Smith that, “It is only under the shelter of the civil magistrate that the owner of . . . valuable property . . . can sleep a single night in security.” In 1774, at the age of seventeen, Hamilton wrote:
A vast majority of mankind is entirely biassed by motives of self-interest. Most men are glad to remove any burthens off themselves, and place them upon the necks of their neighbors. . . .
He told the constitutional convention: “one great error is that we suppose mankind more honest than they are.” He told the citizens of New York, in The Federalist, that “a power over a man’s support is a power over his will.”23
Hamilton was not alone in these ideas. Earlier, Noah Webster (who was a political writer as well as the maker of the dictionary) had written that property is the basis of all political power, and John Adams in supporting his contention that self-interest is the most important feature of human nature had quoted from Harrington’s Oceana:
Men are hung upon riches, not of choice as upon the other, but of necessity and by the teeth; for as much as he who wants bread, is his servant that will feed him, and if a man thus feeds a whole people, they are under his empire.24
In The Federalist, Madison said the different abilities, or “faculties,” of men produce an unequal distribution of property, that the protection of their faculties is “the first object of government,” and that the protection creates “a division of the society into different interests and parties.”25
The protection of property meant more than preserving the particular distribution of wealth in its economic sense (as capitalized income) and it did not mean preserving the status quo for its own sake. It meant making individuals secure in their lives, liberties, and economic goods—which is “property” as the word was used by Locke. He had much influence on the Americans. It is indicated in Madison’s statement that property becomes private when it has been improved by the labor of an individual and in another statement which implies that the ability to work is a part of an individual’s property. On occasion Hamilton also used the word “property” as Locke did.26 When therefore the Federalists said that government exists in order to protect property, they frequently meant its purpose is to protect the life, liberty, and economic interest of the individual. (If they had been asked how this purpose was related to their belief in power as the purpose of government, they probably would have said that government must have power in order to protect property.) The particular powers of government could not only be those explicitly given it by the Constitution. The men who wrote it could not know what the future would require except (as Hamilton said) that the problems would be “illimitable in their nature.” Hence the Federal government, according to Hamilton, has extensive powers and most of them are implied or “resulting” (i.e., follow from given duties of government).
In The Federalist, however, this interpretation of the Constitution is not made explicit. One would not infer it from Madison’s statement of the six specific powers of the Federal government. They are similar to the powers which Smith believed were appropriate to a policy of laisser faire. The powers according to Madison are:
1. Security against foreign danger, 2. Regulation of the intercourse with foreign nations, 3. Maintenance of harmony and proper intercourse among the States; 4. Certain miscellaneous objects of general utility, 5. Restraint of the States from certain injurious acts; 6. Provisions for giving due efficacy to all these powers.27
Smith stated the government should have the power to (1) provide national defense, (2) maintain justice, and (3) undertake certain kinds of public works of great utility which would not be undertaken by private enterprise because they required a large amount of capital and were not certain to yield a profit.28
Madison’s third and fifth classes are mainly determined by uniquely American conditions. The sixth is implicit in Smith’s or in any other conception of power because it is simply the provision of means to given ends. Smith’s defense corresponds to Madison’s first class, his justice to the third and fifth classes when the American elements are removed from them, and his public works correspond to Madison’s fourth class. There remains the second power in Madison’s statement. It includes the control of foreign trade. Smith condemned such control in principle, but he did not always condemn the use of particular kinds of control. He approved of them if they served the national interest, which, he believed, they usually did not do. The Americans however believed controls often were in the national interest, and the first to make the belief known were the Federalists.
Economic Policy of the Federalist Party
The economic policy of the Federalists had two objectives. One was to promote the economic development of the country, particularly to increase the amount of industrial capital; the other was to make the country’s independence secure. The measures which they proposed are easier to understand if the objectives—the first economic and the second political—are recognized. The measures are difficult to describe in a single term. Some would have required extensive Federal power, such as the program to aid manufactures by tariffs, rebates, premiums, subsidies, bounties, quality inspection, and a board of industry to supervise it. Hamilton has been called a practitioner of mercantilism for the program. But other measures were designed to increase free exchange, such as establishing the credit of the Federal government, the Bank of the United States, and eliminating obstacles to trade among the states. The policy was not a free-market policy in all aspects, although the Federalists believed it was a modification of that policy and they wished to make markets as free as possible. They, and the Republicans too, were quite familiar with the doctrine of laisser faire in the sense of a free-market policy. They acknowledged it sincerely as a guiding principle, but were not prepared to allow it to determine entirely the economic development of the United States. They believed the policy would place the country at a disadvantage in the world and could imperil its independence. Their opposition to laisser faire was not opposition to economic liberalism as such, because laisser faire is only one form that economic liberalism can take. The other forms are forms of state direction done with the consent of those affected by them. They were proposed by the mercantilist writers, as the preceding chapter of this volume explains, and they were proposed in the nineteenth century by the liberal economists then, as the concluding chapter of the second volume explains.
LAISSER FAIRE AND NATIONALISM
Laisser faire and nationalism, it is helpful to recall, had been mixed before the Americans tried to combine them. The mercantilist writers of England believed that free markets should be encouraged if they served the national interest and controlled if they did not. Smith, and Hume before him, tried to reconcile the power the individual must have to be free with the power the state must have. When Smith stated that one of the functions of government is defense, he acknowledged the state had a legitimate claim to power. The statement is a substantial qualification of his principle that free trade is superior to controlled trade. A nation that practiced free trade could become so specialized that it could not maintain itself in war when its shipping was curtailed. But if it placed defense before free trade it would have to protect all industries of possible military value. Smith explicitly examined the problem in his pages on the Navigation Acts and concluded that if military necessity conflicts with free trade, military necessity must rule. That is because “defense is of much more importance than opulence.” Smith also acknowledged, in a passage rarely quoted, that by means of a tariff “a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country.” He immediately added that protection could not increase the total amount of capital, even though it could increase particular kinds, and that it would cause the nation’s wealth to be less than it would be if trade were free. He made still other exceptions to the principle of free trade.29 So did Ricardo and other classical economists.
Smith did not believe the best policy was always that which increased the nation’s wealth. He occasionally judged measures by their contribution to national power. By this standard he approved of the protection of shipping and proposed the creation of government enterprises for those works which were beyond the scope of private business. To be sure, he did not believe that the nation often had to choose between wealth and power. He believed they usually were consistent. What is noteworthy, however, is that he did not think they always were so, and that when they were not he placed “defense” above “opulence.” This had been done at the very onset of economic liberalism and it was done also by the last of the great classical economists, John Stuart Mill. In a celebrated passage, Mill stated the condition in which protection could be justified by the test of opulence (that is, by the test of “political economy”):
The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country.30
What is most interesting is the phrase, “on mere principles of political economy,” because it implies that protection can be justified in other ways as well.
We do not suppose too much when we suppose the Federalists knew the distinction in liberal doctrine between wealth and power. In reading over their letters and documents one is impressed by the numerous references to Smith. His influence on the Americans has not often been noticed. That is ironical in view of his saying in The Wealth of Nations that the education of its leading men was all that America owed to Europe. There are other European economists mentioned in the American writings—most of the French Physiocrats, Hume and Dugald Stewart, but none as often as Smith.
The liberal influence is also apparent: (a) in some of the measures proposed by the Americans; (b) in the language which they often used, like Madison’s “the theory of ‘let us alone’ ”; and (c) clearly in some of the passages of Hamilton’s Report on Manufactures which so closely parallel The Wealth of Nations as to be plagiarism.31 There was an important precedent for it, because Jefferson inserted in the Declaration of Independence a paragraph very similar to one in Locke’s Second Treatise on Civil Government.32 American liberalism was not however wholly derivative. Franklin collaborated with the Englishman George Whately on Principles of Trade (1774) which uses the expression “laissez-nous faire,” and cites its origin. During the Revolution there appeared a number of Essays on Free Trade written by Peletiah Webster in opposition to the attempted control of prices and provisioning. In the first of them he stated:
Freedom of trade, or unrestrained liberty of the subject to hold or dispose of his property as he pleases, is absolutely necessary to the prosperity of every community, and to the happiness of all individuals who compose it; . . .33
The essays disclose a considerable knowledge of the effect of price movements on the output and distribution of goods and present some acute observations on the usefulness of free markets in wartime. Webster stated that a free-price system was essential to the securing of an adequate supply of goods. What is perhaps most important about the essays is their unexpected conclusion that a restrictive commercial policy is necessary in order to advance the economic development of the United States. The conclusion is typical of American economic thinking from at least 1750 onward. The writers usually would elucidate the principles of economic liberalism and then conclude that state intereference was necessary in the American environment. In some the conclusion was nonsense because it bore no relation to the principles, but in others it was not. There is no necessary inconsistency between the postulates of economic liberalism and the exercise of economic authority by the government. The two may or may not be consistent, depending on the power of the individuals to express their choices or (to use language fashionable today) to participate in the decision-making process. The consistency between the economic freedom of the individual and the economic authority of government became clear in the nineteenth century in Britain and is explained in the concluding chapter of the second of these volumes.
Madison, who was probably the most influential of all the men who made the Constitution, had a considerable interest in economic policy. In his later years he made an elaborate statement about a free-market policy, and the statement represents what most of the founders believed. It was not something mustered up for a transient debate but was the conclusion of a remarkable statesman about a major issue. He had begun as a Federalist and in the 1790s became a Republican. He wrote in 1828:
I will premise that I concur in the opinion, that, as a general rule, individuals ought to be deemed the best judges of the best application of their industry and resources.
I am ready to admit, also, that there is no country in which the application may, with more safety, be left to the intelligence and enterprise of individuals, than the U. States.
Finally, I shall not deny, that, in all doubtful cases, it becomes every government to lean rather to a confidence in the judgment of individuals, than to interpositions controlling the free exercise of it.
There are however exceptions.
1. The theory of “Let us alone” supposes that all nations concur in the perfect freedom of commercial intercourse. Were this the case, they would, in a commercial view be but one nation, as much as the several districts composing a particular nation; . . . But this golden age of free trade has not yet arrived: nor is there a single nation that has set the example. . . .
A nation leaving its foreign trade, in all cases, to regulate itself, might soon find it regulated, by other nations, into a subserviency to a foreign interest. . . .
2. The theory supposes, moreover, a perpetual peace; a supposition, it is to be feared, not less chimerical than a universal freedom of commerce. . . .
3. It is an opinion in which all must agree, that no nation ought to be unnecessarily dependent on others for the munitions of public defense; . . .34
THE OBJECTIONS TO FREE MARKETS
The principal objections which the Americans consistently could have to laisser faire were that: it could make the country subservient to a foreign economy and thereby weaken its independence; it could reduce the military power of the nation and in this way also weaken its independence; and it could deprive a nation of the power to determine the direction of its economic growth (an argument, it will be noted, that is often used today in underdeveloped countries).
Daniel Raymond was, in his way, the first professional economist in America. In 1820 he wrote of free trade:
It is a miserable, short-sighted, beggarly policy, calculated to prevent all improvement in the capacity of either individuals or nations, for acquiring the necessaries and comforts of life.
He felt so strongly that he could not admit that anyone who believed in free trade might also believe in promoting the nation’s interest. Hence he condemned Smith, and although the criticism is unfounded it is worth quoting because it expresses candidly a typical American objection to laisser faire:
It seems to be an admitted dogma with Dr. Smith, that national interests and individual interests are never opposed, but a more unsound doctrine in principle, or a more abominable one in its consequences, cannot well be imagined.35
There were other Americans however who while objecting to a policy of entire laisser faire did not want to abandon it completely, as Raymond did. They wanted to adapt it to the particular requirements of the United States, which they thought were different from those of Britain. Their ideas gave American political economy its distinctive feature. I wish there were satisfactory words to label their doctrine. All I can think of is “liberal nationalism” or “national liberalism,” which, in the twentieth century, are hopeless.
The most common objection made to laisser faire in foreign trade was that all nations would have to practice it before it could be useful to any of them. The objection is the kind made to every principle of social conduct, from honesty in elections to conserving water in a drought—all or none. To this objection there was added another. It was that the United States must restrict trade in order to develop a manufacturing industry. In the thinking of the time, the two objections often were made together. But conceptually they are two distinct ideas. Among those who did not want a manufacturing industry and who did want the country to continue to be agricultural, there was opposition to free trade on the grounds that the trade restrictions of other countries would injure the American economy. They were not explicit about why unilateral free trade would injure America, and merely felt that in some way it would. An economist today could devise a model to substantiate their fear: for example, by assuming (to be technical for a moment) that the terms of trade would move against the United States and so force it to export a larger quantity of goods in order to obtain a given quantity of imports. This group—those who wished to continue agricultural specialization—were opposed to free trade because not all nations practiced it. This is the group whose opposition was expressed in the common objection to laisser faire in foreign markets (that the United States should not trade freely because other countries did not).
The other objection (that free trade would prevent manufacturing development) was made by those who wanted the economy to become industrial. They would have opposed free trade even if every other country in the world had practiced it. When this group expressed the common objection to free trade—that America could not practice it because other nations did not—the group was not saying what it meant and indeed was using a convenient argument for an extraneous purpose.
If one accepts the premise of the Federalists that economic policy should foster industrial growth (adding even at the cost of some inefficiency in the total allocation of resources), one must acknowledge that they were logical in urging the intervention of the state. One also must acknowledge (as Ricardo later did in connection with the Corn Laws) that the allocation of resources will not be optimum in an economy (national or international) where the rates of return are affected by taxes and subsidies. This I take to be implied in the following statement that Hamilton made in his Report on Manufactures:
Whatever room there may be for an expectation, that the industry of a people, under the direction of private interest, will, upon equal terms, find out the most beneficial employment for itself, there is none for a reliance, that it will struggle against the force of unequal terms, or will, of itself, surmount all the adventitious barriers to a successful competition, which may have been erected, either by the advantages naturally acquired from practise, and previous possession of the ground, or by those which may have sprung from positive regulations and an artificial policy.36
In the italicized portion is the additional implication that the Federalists would have wanted to restrict trade even if foreigners had not, so long as American costs were higher than others.
It is instructive to compare the ideas Hamilton expressed in those of The Federalist papers he wrote and in his state papers with the ideas he expressed in The Continentalist papers of 1781.37 In the early writings he admired the mercantilist practices of England and France and he proposed fairly extensive control of economic life in America. His reason was that if individuals are left to manage their own affairs the national interest will be impaired. He conceded that trade has its natural laws which must be respected, but he believed that it should be controlled within the limits of its laws—which is a common kind of double-think known before Hamilton’s day and since. (M’Culloch once said “the laws which regulate the prosperity and decay of nations are as certain as those which govern the celestial bodies; but more interesting, inasmuch as man may modify them by his interference.”)
About the purpose of control the early Hamilton wrote: “To preserve the balance of trade in favor of a nation ought to be a leading aim of its policy.” To support his proposals he cited the economic progress of England under Elizabeth and her successors, of Holland under mercantilist control, and France in the hands of “the great Colbert.” He was scornful of those who opposed the control during the Revolution, stating that only the form and not the principle of control was at fault. “It became a cant phrase among the opposers of these attempts, that trade must regulate itself,” he said, when in fact what was needed was more effective regulation. He submitted a “revision” of the Articles of Confederation in order to make effective regulation possible. The Continental Congress was to be replaced by an “executive ministry” composed of “individuals of established reputation, and conspicuous for probity, abilities, and fortune.” The Continentalist papers did not win much popular support, which is not surprising. Sometime after writing them, Hamilton read The Wealth of Nations and in 1783 wrote an extended commentary which unfortunately is lost.
One cannot know for certain why Hamilton proposed a different economic policy in 1787 and after. The Wealth of Nations may have changed his mind. Or the public hostility to a controlled economy may have changed it. Whatever the reason, his policy after 1787 was not like that in 1781. If he is to be scored off—or praised—for being a practitioner of mercantilism, he will have to be made a quite young one, because he was twenty-four when The Continentalist was published.
In his later and more persuasive expressions, Hamilton disclaimed any wish to impose direct and detailed controls over the economy and he said his policy was directed only to “those general political arrangements concerning trade on which its aggregate interests depend, rather than to the details of buying and selling”—details, he said, which are in the province of local and state governments and not of the Federal government. The idea was expressed in his statement on the constitutionality of the Bank of the United States. The statement continued:
Accordingly, such only are the regulations to be found in the laws of the United States, whose objects are to give encouragement to the enterprise of our own merchants, and to advance our navigation and manufactures. And it is in reference to these general relations of commerce that an establishment which furnishes facilities to circulation, and a convenient medium of exchange and alienation, is to be regarded as a regulation of trade.38
The intention of the statement seems to be to reassure the opponents of big government and not to describe Hamilton’s conception of the “regulation of trade.” He meant much more by regulation than this, or else he wished the government to do more to trade than “regulate” it. In the same paper, he takes away most of the limitation on government which the above statement imposes. He later said:
The means by which national exigencies are to be provided for, national inconveniences obviated, national prosperity promoted, are of such infinite variety, extent, and complexity, that there must of necessity be great latitude of discretion in the selection and application of those means. Hence, consequently, the necessity and propriety of exercising the authorities intrusted to a government on principles of liberal construction.39
If the means of promoting national prosperity are of “infinite variety, extent, and complexity,” they surely can include control over “the details of buying and selling.” Or if they are not to include such obvious measures, they clearly are not of “infinite variety.” What Hamilton seems to have wanted was a varied selection of economic controls which could be employed at the discretion of reasonable and capable men. The controls at times would affect only the aggregate interests of trade and at other times would be specific, detailed, and prescriptive.
theReport on Manufactures
An example of the second kind is in the program for protecting manufactures which he submitted in his Report on Manufactures. He proposed such controls as: nonprohibitory duties on manufactured goods which the country did not then produce but would in the future; prohibitory duties on manufactured goods then being produced; the prohibition of the export of raw materials used in manufacturing; the use of bounties or subsidies, instead of tariff duties, to the farmers growing materials used in manufacturing or to the manufacturers using domestic instead of imported material, the granting of rebates to manufacturers using raw materials that of necessity had to be imported and that also were used in the household, the encouragement of invention by patents, monetary rewards to inventors, and an embargo on American inventions, the inspection of manufactured goods; and the creation of a board “for promoting arts, agriculture, manufactures, and commerce.”
This is a substantial amount of government intervention. To say the anti-Federalists found it distasteful would be an understatement. It alarmed them. Hamilton seems to have known it would, and in the Report he tried to draw the sting of the opposition, to reassure it that each recommendation was constitutionally proper, to refute objections before they were raised, and to cite precedent for his proposals.
The effect of the Report is illuminating. It was not well received by Congress. None of the important recommendations was enacted. When the Republicans adopted protection in 1805, they did not use any of Hamilton’s elaborate economic reasoning and except for the tariff did not use any of his protective methods. After 1815 protection became a permanent feature of the economy, and the Report often was cited, but usually by men who had no intellectual excuse to invoke Hamilton. Much of their tariff propaganda was a crude display of self-interest. The protective methods they proposed had little in common with Hamilton’s except the tariff, and he actually had not placed much reliance on it.
In a practical sense the Report was not a success. In a more important sense however it was. Underlying its complex techniques and the economic reasoning that supported them was a simple idea. It was that the United States must have industrial capital if it was to be powerful. That idea was forced on everyone after about 1805 when America found its foreign trade menaced by the Napoleonic Wars, its domestic economy imperiled by the uncentainty of imports, and its independence so threatened that it again had to go to war. The country did not welcome an industrial system nor accept it gracefully. There was nostalgia for an agricultural ideal and there were many regrets. “But who in 1785 could foresee the rapid depravity which was to render the close of that century the disgrace of the history of men?” Jefferson wrote in 1816. He continued:
We have experienced what we did not then believe, that there exist both profligacy and power enough to exclude us from the field of interchange with other nations: that to be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturist. . . . Shall we make our own comforts, or go without them, at the will of a foreign nation? He, therefore, who is now against domestic manufactures, must be for reducing us either to dependence on that foreign nation, or to be clothed in skins, and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that manufactures are now as necessary to our independence as to our comfort. . . .40
The acceptance of Hamilton’s position meant that nationalism finally came to rule the thought and action of the leaders of the country. Jefferson’s question was perhaps meant to excuse himself for not having accepted nationalism sooner. No one in 1785 could have foreseen just how the century would end. But Hamilton then had been able to foresee the necessity of national power.
When the country acceded to protection it was not however led into a system of detailed controls. It relied on the tariff and rejected the other measures that Hamilton had proposed. Whether the consequence was a slower rate of industrial development is an interesting question. The protectionists after 1815 said that manufacturing was retarded by the low duties, but then they never were satisfied. The opponents of protection said there was far too much industrial development at the expense of agriculture, but anything short of complete free trade would have dissatisfied them. Another interesting question is the cost at which America obtained its manufacturing plant, which is the cost at which it purchased national power. On this issue the protectionists after 1815 were massively unimpressive, their major point being that the aggregate national wealth was higher than it would have been under free trade. That is one of the purest items of nonsense in American political economy. The free-trade forces were correct on the issue, saying that industrial development was being fostered at the expense of agriculture and that the national wealth on balance was less than it would have been under free trade.
Of more immediate effect than the program of protection was Hamilton’s policy for the domestic economy. The policy was principally a fiscal and monetary program: a method of managing the debt of the state governments and of the Confederation, a system of taxation, a new monetary standard, and a central bank. The domestic policy of other Federalists was not limited to fiscal and monetary measures. Madison, it has been noted, wanted the government to establish corporations for building roads and canals. (Hamilton at one time concurred but later dropped the idea.) None of the Federalists included in their domestic policy any measures for the control of monopoly or inequality. The neglect was not the result of the problems being ignored by everyone at the time. The Republicans attended to them, and there was much feeling among the people about them. A constitutional amendment prohibiting the granting of monopoly rights was proposed by four states in the period when a bill of rights was being drawn. The use of public lands and taxation as methods of reducing inequality were proposed by the anti-Federalists.
THE FISCAL AND MONETARY PROGRAM
In the 1790s the attention of everyone was on Hamilton’s fiscal and monetary program, and the other aspects of domestic policy had to wait upon its being settled. It excited much more controversy than protection. The debate began when he proposed that the Federal government assume the entire debt of the state governments along with the debt of the Confederation, about $72 million in all. The debt certificates were to be redeemed at par in cash or in new bonds issued by the Federal government.
The most controversial point was whether the old debt should be redeemed at par. Many who held bonds at the time the funding of them was proposed had bought them up in the expectation of redemption at par. They were dollar patriots who deserved no consideration, according to opponents of Hamilton. There was, however, another point and it was more important. It was whether the government should have the great financial power which the management of the debt would give it. Hamilton contended that redemption at par would make the country confident of the financial responsibility of the government and would have a favorable effect on trade. Redemption also gave a number of people a clear economic interest in the survival of the government, a fact of which Hamilton was doubtlessly aware, believing as he did that “if we expect the [citizen] to serve the public [we] must interest him in doing so.” The opposition also was aware of the connection and accused Hamilton of corrupting the American people by offering to pay for their loyalty. He was accused also of corrupting others in order to increase his power and then was accused of wanting to create a financial oligarchy in order to destroy liberty. Hamilton’s reply was that only the Federal government could manage the total debt of the states and of the Confederation and that to give the states the power to settle their debts would be to invite the expectation that it never would be paid (because the state governments were irresponsible about their financial obligations).
Much of the opposition to funding was ingenuous, and some of it was irresponsible. There was no way to reward the original holders of the debt, because there was no record of them, and even if there had been the states could not be relied upon to do it. The credit position of all governmental units was deplorable and could be improved only by some such drastic action as Hamilton proposed. These facts apparently were accepted by Congress, because in the end it adopted his program.
An interesting feature of the argument is the statement that funding would increase trade, or what today is called income and employment. A century or so earlier the English mercantilist writers had tried to establish a connection between the money supply and the amount of trade, and a century and a half after Hamilton economists again made the effort, in the 1930s. The conclusion in the three instances is the same, even though the reasoning is not: that an increase in the money supply will (or usually will) increase employment and income. Hamilton said a “sound and settled state of the public funds” would give businessmen confidence in the government, make the future seem more secure, and improve what today is called their expectations. The new debt certificates, which Hamilton proposed to issue to replace the old, would be negotiable and add to the supply of money. They could be used as a medium of exchange or as cash balances. If used in the latter way, they would yield an interest income to merchants, reducing the cost of liquidity and hence the costs of doing business. Hamilton also said, in another connection, that the increased supply of money would directly reduce the rate of interest. The lower interest rates and greater money supply would increase the merchants’ turnover, and the resulting expansion of trade would be favorable to agriculture and manufactures. Hamilton’s doctrine was put to the test of events in 1792 when there was a financial crisis, and he intervened by causing the Treasury to buy government securities on the open market in order to maintain their prices and to arrest the rise in interest rates.
His funding program was inflationary, and its immediate objective (as distinct from the long-term objective of establishing the credit of the government) was to avoid another depression such as that which had alarmed the country in the 1780s. One cannot help but speculate over what the consequences would have been if the nation had adopted the funding program as a permanent, guiding principle and not just as an expedient to set the economy going. Had the country agreed to employ the Federal debt for the purpose of avoiding depressions, our economic history might have been different. The damage that was done to industrial development by recurring depressions probably was greater than the benefits which protection gave, and the cost to agriculture of depressions probably was greater than the burden of the tariff. But the country would not agree to vesting great financial power in the government. Hamilton himself seems not to have been wholly aware that his funding program could be used to maintain trade. His remarks are defensive. He said he was opposed to the growth of the public debt and he insisted his ideas on public finance were as orthodox as those of the opposition. As Britain was conquered by classical economics, which while giving it an excellent policy for maintaining efficiency in particular markets turned it away from the problem of aggregate stability, so the United States accepted the same canons, except that having had an opportunity to see how unemployment could be managed it had less excuse for later neglecting the problem. The episode is, I think, one of the most disappointing in the history of economic doctrine.
That Hamilton had no wish to control the aggregate stability of the economy is clear also from his remarks on the Bank of the United States and on the bimetallic monetary standard which he proposed. Both these measures were designed to provide a stable monetary unit and were not meant to stabilize income. Like the classical economists, Hamilton wanted the supply of money to be determined by the amount of employment (rather than the other way around, as the mercantilist and modern writers would have it). He believed that in this way the value of money could be made stable. Smith had explained the idea in his theory of banking, and elements of the theory are noticeable in Hamilton’s report on the Bank.41 Smith said that a nation should fix gold or silver, or both, as the basic monetary unit and should give the banks the power to issue paper money. If only paper circulated, the metal would not wear out and hence not force a deduction from the net revenue of society. The banks would keep only a fraction of the metal as reserve against their notes and would invest the remainder abroad. By making loans (and issuing notes) only for legitimate business purposes and for short periods, the supply of paper money could not increase more than the supply of goods produced by borrowers, nor could the money supply ever diminish more than the supply of goods. Hence the value of money would be stable. Hamilton, in an uncritical (hence uncharacteristic) moment, entirely accepted Smith’s theory of banking.
In his report in 1791 on the establishment of the mint, he proposed bimetallism. Silver and gold were to be coined freely at the ratio of fifteen to one. The dollar was to replace the pound as the monetary unit. Some months earlier he had proposed the Bank of the United States. It was to make loans to the Federal government (which would own one-fifth of the stock), to state and to foreign governments. The rate of interest was not to exceed 6 percent. (He defended the maximum by saying, “whatever has a tendency to effect a reduction, without violence to the natural course of things, ought to be attended to and pursued.”) He regarded the Bank as “not a mere matter of private property, but a political machine of the greatest importance to the State.”42
There are other evidences of Smith in the proposal. The Bank was to “trade in nothing but bills of exchange, gold and silver bullion, or in the sale of goods pledged for money lent.” Loans were to be made only for short periods, no money was to be issued on the security of land, and the required reserves were to be set at the discretion of the Bank’s managers—all of which would adapt the supply of money to the needs of trade. If too much was issued some would return to the Bank, and if there was too little the Bank would expand.43
The other element in Hamilton’s fiscal and monetary program was taxation. Prior to the Constitution the most common taxes had been those on imports and exports. They had been levied by the states which now were deprived of the power (although they could levy other kinds of taxes). One of the purposes of the Federal government’s assumption of the debt of the states was to limit their need and hence their power to impose taxes and another purpose was to make the Federal government the principal tax collector. The tax system, like the Bank and the new monetary standard, was not meant to stabilize trade.
The best tax system, Hamilton said in The Federalist, is that which is least oppressive, and the least oppressive is that which makes
the luxury of the rich tributary to the public treasury, in order to diminish the necessity of those impositions which might create dissatisfaction in the poorer and most numerous classes of the society.
Convenience is another quality of a good tax system, and the most “convenient branch of revenue” would be tariff duties, over which of course the states had no power. Certainty was another. Arbitrary taxes, “that leave the quantum of the tax to be raised on each person to the discretion of certain officers are as contrary to the genius of liberty as to the maxims of industry.”44 After he had expressed an ability to pay doctrine, in The Federalist, he disavowed it in certain practices, opposing taxes on business profits because they were easy to evade. The most controversial tax was the excise on whiskey. He justified it as a means of restricting a “pernicious” luxury of the poor while placing a burden on the rich (to whom perhaps it was a pernicious necessity).45 He had no sympathy at all with the farmers of western Pennsylvania whose wheat growing and distilling were drastically curtailed by the tax and who brought their problem to the public’s attention by armed insurrection, which finally was put down by Federal troops under Hamilton’s command. In his correspondence about the Whisky Rebellion Hamilton viewed it less as an issue of justice in taxation than as a challenge to the authority of the Federal government.
It is interesting to compare Hamilton’s ideas about taxes with those of Smith. Smith said a sound tax was: (a) proportionate to the individual’s ability to pay, (b) certain, i.e., not arbitrary; (c) convenient, and (d) inexpensive to collect. He favored taxing goods and services consumed by the rich (consistently with the first characteristic, which ostensibly was Hamilton’s attitude also). Hamilton’s opposition to arbitrary taxes rests on the reasoning Smith used. In his “First Report on Public Credit,” Hamilton explained that the collection of excises and imports would be controlled with the “most scrupulous care” in order to protect businessmen from “every species of injury” from the revenue collectors.46 He believed tariff duties were inexpensive to collect. On their desirability however there was a difference between Hamilton and Smith.
MONOPOLY AND INEQUALITY
They also differed on the problems of monopoly and inequality. Hamilton was quite unmoved by Smith’s sympathy for the poor, by his lively opposition to monopoly, and by his hostility to merchants (whom as a group Hamilton seems to have found more congenial than any). There is some notice of the problem of inequality in Hamilton’s proposing luxury taxes, but their purpose was to remove potential discontent (another purchase of loyalty), and he also noticed the problem in a limited way in his policy for the management of public lands. He said land policy should have two objectives: to assist the settlement of the West, and to raise revenue, which he thought was the more important. He proposed that the government attract “monied individuals and companies, who will buy to sell again.” He hoped in this way to reduce the government debt and proposed that debt certificates be made redeemable in land. The government, however, would not accept certificates worth less than 500 acres. The purpose of that stipulation was to induce large transfers of land. It was not meant to assist those who wished to settle on the land themselves; they were not permitted to buy more than 100 acres.47
The only Federalist who proposed a redistribution of wealth was Noah Webster. He submitted that “a general and tolerably equal distribution of landed property is the whole basis of national freedom.”48 He made the proposal during the ratification period, but nothing came of it when the Federalists were in power. There is in fact no reason why the party should have wanted to do anything about inequality because its premise was to take men as they were.
On the issue of monopoly, the Federalists were majestically silent. They did not support the proposed constitutional amendment to prohibit monopoly grants nor did they identify themselves with the popular opposition to monopoly. Their silence can only mean they did not believe the monopoly problem was worth notice; and some of their measures show that they were willing to support certain monopolies. The Bank of the United States was one. Another would have been the Federal corporations that were to make internal improvements. More important than either were the monopolies that protection could have created.
It perhaps should be remarked that the Federalist attitude toward monopoly was less consequential than the same attitude in a leading party would be today. One reason was that a large part of the economy was agricultural and did not present a monopoly problem. Another reason was the hostility to monopoly which was expressed by the anti-Federalists, who early in the 1790s became a formidable opposition and who were important in deciding the government’s economic policy. It is to their political economy that the chapter now turns.
Republican Economic Policy
THE DIFFERENTIA OF REPUBLICANISM
As power was the distinctive feature of Federalist doctrine, that which was distinctive about Republicanism was enlightenment, improvement, and education of the people in order to increase their ability to be free. The purpose is implied in the tracts which Paine wrote during the Revolution; it appears in the writings of Joel Barlow; and it is made most explicit by Jefferson. Men, he said can be “habituated to think for themselves, and to follow reason as their guide.”
Jefferson may have taken the idea from the French utilitarians, from Rousseau, or from Joseph Priestley’s Lectures on History and General Policy (with all of whom he was familiar). They believed the government should provide public instruction in order to enlighten the people. Jefferson’s utilitarianism however went beyond education and beyond the utilitarianism of the Europeans who influenced him. He believed the common environment of the people had to be controlled, and for most of them education—as formal instruction—was but a small part of it. They were much more influenced by what they saw of government, by the conduct of the men in it, and most of all by the circumstances of their economic life. Jefferson believed the government should be a model of rectitude and the conduct of those in it should set an example to be emulated, that the economic environment of the people should inculcate responsibility, independence, honesty, and the other moral qualities that are essential to liberty. He believed, in other words, that men were very much influenced by externals. Although not the captives of their environment, they were sensitive to it and for a considerable time could be under its rule.
On this premise, Jefferson quite reasonably opposed the policy of the Federalists, which was an appeal to self-interest. It did not evoke the best in men but the worst, he believed, because he found most expressions of self-interest to be pernicious. Instead of improving the environment of the people, the Federalists debased it. They deluded men instead of habituating them to the reason which would make them free. Against Hamilton’s belief that government must take men as it finds them, he set the opposite belief that government must improve them. That could be done, he said,
by education, by appeals to reason and calculation, by presenting . . . other motives to do good and to eschew evil, such as the love, or the hatred, or rejection of those among whom he lives, and whose society is necessary to his happiness and even his existence; demonstrations by sound calculation that honesty promotes interest in the long run; the rewards and penalties established by the laws; and ultimately the prospects of a future state of retribution for the evil as well as the good done while here.49
Joel Barlow likened the obligation of government to the “tender duty of a father.” The government, he said, can remove the natural deficiencies of men by education, by “tender ministrations,” by persuading them that they are free and equal. “This point once settled, everything is settled,” he said. He finished off his political tracts with the quatrain:
Although it reads a little bumptiously today, there was reason in it at the time. Men are not the material of free government if they think they are inferior creatures, which they are apt to do after long subjection.
Barlow—to digress briefly on an attractive figure—had an astonishing amount of presumption but a winning way with words. He quoted the couplet:
which is like Smith’s remark that rebels and heretics are those unfortunates who when matters come to a point of violence happen to be on the losing side.51 During the French Revolution, Barlow addressed a Letter to the National Convention instructing it in the reform of France. He disavowed any presumption. He was moved to address them, he said, by “the interest which the human heart naturally takes in uttering the truth on a very important subject.” In another communication to it (he was a great letter writer) he accused John Locke, one of his intellectual predecessors, of betraying free principles in the constitution Locke wrote for the colony of South Carolina. John Adams, as noted below, had remarked on that constitution also. My favorite letter is Barlow’s Advice to the Privileged Orders. He told the French aristocracy:
Engrave it on the heart of man, that all men are equal in their rights, and that the government is their own, and then persuade him to sell his crucifix and buy a musquet,—and then you have made him a good citizen.
The early Americans, it is pleasant to observe, didn’t think they had to pull a long face when they talked of first principles.
When Barlow, Jefferson, and others said that the work of government was enlightenment, they did so because they believed the people in their present state were not fully capable of freedom. The Republicans did not, as is so often contended, believe the common people could be given complete power immediately and trusted to use it wisely nor did they condemn the Federalists for not holding this belief. Had the Republicans believed this, they would not have believed the people had to be improved. All governments have in them “some trace of human weakness, some germ of corruption and degeneracy.” The germ becomes virulent when men contend over property. It also has other manifestations. Men have an insatiable appetite for power, they can be deluded for a protracted time, and they are belligerent: “In truth I do not recollect in all the animal kingdom a single species but man which is eternally and systematically engaged in the destruction of its own species.” All this was said by Jefferson and does not suggest an unqualified belief in human goodness.52
Nor did he hold the opposite view of human nature. If he had thought men were wholly depraved, he would not have thought the government could improve them. (Nor could Hamilton have believed men were wholly bad, because he then could not have supported any form of government other than one that was authoritarian.) What Jefferson did believe was that the evil in men exists alongside much that is good and that in favorable conditions the good will prevail. Along with the avarice, ambition, irrationality, and belligerence, “nature has implanted in our breasts a love of others, a sense of duty to them, a moral instinct, in short, which prompts us irresistibly to feel and to succor their distresses.” (Not quite “irresistibly,” because if we were irresistibly altruistic, government would be unnecessary and improvement would be as unnecessary as it would be impossible.) Jefferson attributed this conception of human nature to the founding fathers. He wrote:
We [Republicans] believed, with them, that man was a rational animal, endowed by nature with rights, and with an innate sense of justice; and that he could be restrained from wrong and protected in right, by moderate powers, confided to persons of his own choice, and held to their duties by dependence on his own will.53
This statement is as important for what it says about the power of government as about human nature. It expresses the Republican belief in the limitation of power and in the sovereignty of the people, the latter being both an end in itself and a means of limitation. Jefferson did not think the Constitution made the abuse of power impossible. Rather than rely on checks and balances, he preferred an “absolute acquiescence in the decisions of the majority—the vital principle of republics, from which there is no appeal but to force,” and upon the restraining power of state governments, “the surest bulwarks against anti-republican tendencies.”54 Reliance on “majority” will must be taken to mean the will of the competent majority, or else the other elements of his political doctrine have no meaning.
To want to limit the powers of government is unusual in one who has been influenced by utilitarian doctrine and suggests its influence on Jefferson was not substantial, that it probably did no more than leave him with the idea that the government ought to “help” the people. The important question is what kind of help. Thoroughgoing utilitarians believe the state must have great powers so that it can provide the individual with all of those things he cannot provide for himself. They are especially insistent that the state exercise wide powers over the economy because he needs most assistance in managing his economic affairs. The ideas come from Bentham, the greatest of the utilitarians. His doctrine was one of those that justified the extension of the economic power of the British government in the nineteenth century which, as explained in volume two, was not, except in foreign trade, the golden age of laisser faire it is supposed to have been. In other countries economic control has been justified as a means of providing the greatest good to the greatest number, or of increasing the power of the nation, or of providing for the general welfare—all of which have been supposed to be synonymous.
Actions of this kind do not correspond to Jefferson’s conception of a proper economic policy (although they might to Hamilton who justified the Bank as essential to “the general welfare”).55 The economic policy that was nearest to the wishes of Jefferson was one that encouraged independent agriculture and required little government power. Although circumstances forced him to turn away from this policy, he did so regretfully and without abandoning his faith in the superiority of agriculture and in the wisdom of a minimum state.56
In the evolution of his ideas about economic policy, three periods are distinguishable: (a) Between 1774, when he wrote A Summary View of the Rights of British America, and 1790, when he returned from France and became Secretary of State in Washington’s cabinet, he believed the government should not interfere with agriculture but should let it develop in its own way, which he thought (or hoped) would be in the form of independent homesteads. He was opposed to the state’s offering any assistance whatever to manufacturing. He was opposed also to America’s becoming involved in an extensive foreign trade and believed that what little trade was necessary should be conducted with entire freedom. (b) From 1790 to 1805, when he began his second term as President, he still relied on agriculture, but now favored more production for the market including the foreign market. In his foreign trade policy he urged a program of reciprocity in which the United States would trade freely with those countries that traded freely with it and would restrict its trade with others. In the second period, more of his statements of economic policy were in criticism of Hamilton than were positive proposals in themselves. He opposed the funding program, the Bank, and protection. (c) After 1805 his ideas changed substantially. He came to believe that agriculture could no longer be the only important industry, that America must have its own manufactures, and that foreign trade had to be regulated with a strict view to the national interest, i.e., in order to increase national power. After 1807 he secured the adoption of laws that prohibited imports and exports, the purpose being to isolate the United States from the disorder of the Napoleonic Wars. From 1807 until the peace of 1815 he proposed that manufacturing be encouraged by state governments, that it be conducted on a small scale, preferably on farms as household manufacturing. Actually, in the period of isolation the factory system of manufacturing was started and became so entrenched that when the war was over it was able to secure protection to perpetuate itself.
Although Jefferson proposed different measures of policy in each period, the premise of the measures did not change. It was that policy should be a means of improvement, that it would be so if agriculture were encouraged and if the powers of the government were held to a minimum. His ideal agricultural economy was a collection of self-sufficient homesteads on each of which there were household manufactures. To show how such an economy could be realized he made his estate, Monticello, into such a homestead. Jefferson’s agrarianism was not like that of the physiocrats, and was even farther from the agricultural system which today’s liberals, often in Jefferson’s name, propose. It was in fact the atomization of the economy into isolated units. It implied a collection of independent and economically isolated farms, on each of which the dwellers consumed only what they produced, and between which there was no buying and selling although there were noneconomic relations. The agrarian economy would not have been held together by the market, bringing together the supplies of specialized producers and the demands of particular buyers. There would be no specialization between farms, because each would be self-sufficient. There being no specialization, there would be no reason for exchange. Nor would there be any need for control by the government, because there would be no economic relations for it to control. In brief, there would have been no economic system. It follows there could be no danger of the government acquiring excessive power by controlling the economy.
Such was Jefferson’s conception of the ideal economy. It suggests a Platonic construction, perfect in the mind and unknown outside it. The nearest the world has ever come to it is the medieval manor and life on the frontier. It has nothing to do with physiocracy, even though many historians and biographers of Jefferson say it has. The physiocrats had a distinctive theory of value: that for a given use of labor, agriculture yielded a larger return than other industries, the excess being the net product. They had a policy of free domestic and international trade and they proposed that the government support itself by taxing the net product of agriculture instead of harassing manufacturing and other urban industries as it had been doing for so long in France. Except for a passing remark in a minor state paper, Jefferson never showed any sympathy with physiocratic value theory, and in the same paper he concluded with the very un-physiocratic statement that trade should be restricted. Moreover, Jefferson later rejected Turgot’s suggestion that the American tax system be revised by instituting a single levy on the net product of agriculture. Jefferson’s belief in self-sufficient agriculture was contradictory to the physiocrats’ belief in an exchange economy. To be sure he often mentioned the physiocrats in his letters, but he also mentioned Adam Smith frequently, writing on one occasion: “In political economy, I think Smith’s Wealth of Nations the best book extant.”57
However neither Smith nor the physiocrats were responsible for Jefferson’s ideal economy. If he could have conjured it into existence—and only in this way could it have come into being—it would not have been an economic system as the world then or since has known one to be.
One may wonder why Jefferson entertained so fanciful a notion. The reason is partly his political doctrine and partly his polemical style. He believed that individuals should be protected from the government and that the government should help them to protect themselves. Those who live on self-sufficient farms are independent, and their material well-being cannot be impaired by the government. In economic affairs their protection from arbitrary power is complete, and being so protected they are secure also in their political liberty. As the government has no power over their subsistence, it has no power over their will—to adapt a phrase of Hamilton’s that was thoroughly consistent with Jefferson’s thinking. Or, to paraphrase Harrington, a man who feeds himself is under his own empire. His independence is different from that of individuals who prosper in a market economy, because his conduct is not affected by what others do and it does not affect them. The income and wealth of a self-sufficient farmer would be much less than that of a farmer in a market economy, but the security of his economic and political freedom would be greater. Hence the independent farmer was thought to be the guardian of liberty and independent, atomistic agriculture to be the most desirable form of economic organization.
Taken literally, the policy was useless. As Mathew Carey said, “His Arcadia must have been sought, not in Virginia or Maryland, but in Virgil’s or Pope’s pastorals, or Thomson’s seasons.”58 Jefferson, I believe, knew this as well as anyone. He did not mean the policy to be taken literally. Even in his most bucolic period (before 1790) he urged measures which were quite inconsistent with independent agriculture, such as free foreign trade. In a system of independent agriculture, there could be no trade, free or regulated. Later he developed his ideas of trade in more detail and suggested a number of ways in which it could be regulated in the interests of national economic development.
Why then did he make so much of independent agriculture? Even if it did have a logical relation to his political beliefs, of what importance could it be if it was entirely unrealistic? I think it was his way of emphasizing the idea that economic independence is the basis of political liberty. He customarily dealt in overstatement in order to impress others with his point, just as Hamilton had his own debating technique which was logic-chopping. Jefferson’s Arcadian remarks were meant (it seems to me) to stress the point that the freedom of the individual is most secure when he is most independent and that he is most independent in an agricultural economy that is based as little on the market as possible even though the basis would of necessity be greater than was ideal. At all times he urged the government to foster agriculture, to foster as little as possible the development of an industrial exchange economy, and to promote the establishment of household manufactures on the farms. The “government” which was to do this was the government of each state, not the Federal government. That the Arcadian policy was not meant to be taken literally is indicated in a letter he wrote in 1785, one of the years when he most often proposed it:
You ask what I think on the expediency of encouraging our States to be commercial? Were I to indulge my own theory, I should wish them to practise neither commerce nor navigation, but to stand, with respect to Europe, precisely on the footing of China. We should thus avoid wars, and all our citizens would be husbandmen.59
As he grew older, Jefferson moderated his strictures on commerce and relaxed some of his opposition to the government’s exercise of economic power. His final policy, however, embodied much less power than the policy of Hamilton did at all times. Although Jefferson abandoned his unqualified opposition to monopoly, he never became tolerant of it and always insisted it be restrained. When he adopted the view that internal improvements were the responsibility of the Federal government, he made the qualification that they be preceded by a constitutional amendment, which the Federalists never had believed was necessary.
Each of his later ideas was as consistent as the earlier with the principle that the state should do as little as possible and that little should improve the people. None however had as direct a relation to the principle as his proposals for a redistribution of land. They were made at different times in his life. Since most of the national wealth was land, changes in land ownership would redistribute most of the national wealth. His land policy had two economic objectives: to eliminate gross inequality of ownership and to foster freedom in the use of land. In 1785, he wrote that although an equal distribution was “impracticable,” gross inequality could be reduced by “silent measures,” such as abolishing primogeniture and the levying of a tax in “geometrical progression.” At another time he recommended that free land be given to immigrants. He would have secured freedom in the use of land by eliminating feudal encumbrances and so allow each generation to use its land as it wished, with one restriction however: that it must not encumber the generations which follow it. He said that no generation should incur debts greater than its ability to pay them. The limitation would enable each succeeding generation to use its inherited capital as it chose.60 The limitation also would assure to each generation an amount of capital no less than the amount with which the preceding generation began, thereby guaranteeing to each that its economic opportunities would not be curtailed by a declining stock of capital.
THE EXTREME REPUBLICANS
The idea implies the state has an obligation to provide some amount of economic opportunity to the population, a provision which is clearly a measure of improvement. The obligation was made explicit by Joel Barlow, and a means by which it could be discharged was described by Paine. They addressed their statements to the French but the ideas were a part of the political currency of America also. In his ideas for promoting equality Jefferson had most in common with the extreme Republicans, whom Paine and Barlow typified. One of the birthrights of a man is a right to a living, Barlow said, and to the young of the poor the government is “bound in justice as well as policy, to give . . . some art or trade.” The duty is more important than the duty to protect impersonal wealth, because it is a law of God while the protection of impersonal wealth is a law of man. The government could perform its duty by putting the “common stock” to use. He believed there was abundance enough in the country to eliminate all poverty. Barlow was one of the first in America to express the belief. Since his time, it has been expressed so often that it hardly ever is questioned except by economists. They seem alone in doubting that if capital were equally distributed, poverty would vanish. It was not Barlow’s policy to abolish private property but to tax away a part of it for the benefit of the poor. What remained would have greater security, he said, because there would be no propertyless class to challenge it.61
A particular method of redistributing wealth was proposed by Paine in Agrarian Justice (1797). He said the state should levy a ground rent equal to 10 percent of the value of property at the time of the owner’s death. The total value of property was, he said, in part “the free gift of the Creator” and in part the result of the labor of the owner. The tax would make available to society some part of the value which was not the product of individual effort. Out of the tax receipts the government would pay everyone 15 pounds upon his or her becoming twenty-one years old and ten pounds a year to all over fifty. The rich, he suggested, could return their subsidies. Provision for the others “is not charity, but a right, not bounty, but justice” and it not only eliminates injustice but increases the security of wealth. In an earlier work, The Rights of Man (1791), he proposed an annual progressive tax on wealth, beginning at 3d per pound on estates worth less than £500 and rising to 100 percent on estates over £23,000. Part of the proceeds would be paid directly to the poor and a part used to finance public works.62
Paine, like Barlow, was not opposed to private property Indeed, he often protested that he approved of it. The capital tax was meant, he said, “not to set bounds to property acquired by industry” but “to place the prohibition beyond the probable acquisition to which industry can extend.” That is, the tax was designed to limit the inheritance of wealth. Paine and Barlow were aware of the objections which would be made to redistribution and they answered them in advance. It would be said that the poor were not entitled to assistance, which they denied by saying assistance was a right, that there was not capital enough to provide assistance, to which Barlow replied there was enough capital to eliminate poverty at least; that assistance would reduce the diligence (or incentive) of the poor, which they denied by the opposite assertion; that capital taxes violated the rights of private property, which they countered by asserting the superior right of the individual to a livelihood; and that redistribution would create disorder, to which they replied redistribution would make wealth more secure. The only argument for redistribution which is missing is the notion, current until a few years ago, that redistribution will increase spending and employment. Paine and Barlow probably were familiar with the idea, since it frequently was made in the economic tracts of the eighteenth century. It was not wholly relevant, however, because their’s was the long-term objective of equity, and they were not concerned with the short-run problem of unemployment.
The commercial, or international trade policy of the Republican party was restrictive, but less so than that of the Federalists; and there was a minority group in the party which believed in perfectly free trade.
Typical of the ideas of most Republicans were those of Madison whose declaration of 1828 on laisser faire is quoted above. When commercial policy was debated in Congress in 1794, he said he accepted the principles of free trade but believed them practical only when all nations had equal advantages in production and navigation or when all countries were willing to practice free trade. Meanwhile the United States should trade freely only with those countries that traded freely with it, and should use reciprocity to extend the area of free trade.63 The Republicans urged that the principle of reciprocity be initiated by the United States and that the United States propose a commercial treaty to France. The Federalists opposed such a treaty. They favored equal treatment to all nations, excepting Great Britain, to which (they believed) concessions should be made in the interest of peace. The debate then moved into political policy: should the interests of the United States be turned toward France or Britain, or, more candidly, which commitment offered most to American security? Both sides, it is clear, regarded commercial policy as a means of strengthening the nation’s power and did not consider it mainly as a device for increasing the nation’s wealth. The Republicans became in time as nationalistic as the Federalists were. After 1805 American shipping became fair game to both France and Britain, and Jefferson eventually isolated the country from foreign commerce. Before this occurred, an interesting Republican made a curious appeal to Napoleon: “Dites à l’amerique, dites à l’angleterre; que le commerce soit libre, et le commerce sera libre.”64 It came from Robert Fulton, the inventor of the steamboat. He was not altogether naive in urging this simple wisdom on the perpetrator of the Continental system, because many Americans at first believed Napoleon would extend the ideals of the French revolution which they took to be their ideals also. Later there was another simple statement, when the United States was at war with Britain and Stephen Decatur, the naval hero, offered the toast, “Free trade and no impressment.” On this occasion free trade had an entirely different meaning. It denoted the ability of the nation to determine its own trade policy without interference from other nations. So thoroughly had foreign economic policy become an instrument of national power that the words “free trade” could be used to mean trade regulated in the national interest.
The national interest did not, however, have the same meaning to all the Republicans. There was a difference between Paine and Jefferson on commercial policy—Paine believing in perfectly free trade—and a difference also over the proper method to redistribute wealth. In addition to these viewpoints, there were two others, those of John Taylor and of Albert Gallatin.
JOHN TAYLOR AND AGRARIANISM
Taylor was the intellectual leader of the Southern opposition to Federalist policy. His objections were well reasoned and based on premises which he was good enough to make explicit. His conception of the human material out of which governments are made was suggestive both of Hamilton’s and Jefferson’s. With Jefferson he believed the motives of men were a mixture of good and evil, and with Hamilton he believed that evil should be assumed to be the stronger. Stable government could not be achieved, he said, “unless rights and duties are thus honestly balanced against each other—unless political good and evil are duly mingled, so as to assuage the asperity of the latter, by the pleasantness of the former.”65 The idea suggests Hamilton’s belief that self-seeking must be controlled by a dispensation of “regular honors and emoluments” which would attach men to the government. However, Taylor’s ideal government had only enough power to maintain domestic order, and that was less power than even Jefferson in time came to accept. Taylor’s description of the proper division and limitation of power represents the most extreme expression made in America of the idea of the minimum state.
His economic policy, except for slavery, was appropriate to his political doctrine. He explicitly opposed all of Hamilton’s measures that would have increased the economic authority of the Federal government and he implicitly disagreed with the measures of Jefferson which would have had the same effect. Taylor was against the funding of the debt, the Bank of the United States, internal improvements under Federal guidance, monopoly grants, and was against the Federalist intention to industrialize the United States. He believed an industrial economy contaminated the people with “the avaricious passions of trade.” The ideal economy was one in which “the powers of the human mind” seek “the proud distinctions of science and refined art.” Taylor agreed with Jefferson that economic conduct would elicit either the virtue in men or their evil depending on its environment. As Jefferson did, he asserted categorically that the proper environment was agriculture, because it begot “a love of virtue and independence.” It is more productive than other economic activity because it receives the bounty of nature (in a vague sort of physiocratic way), it is less subject to the hazards of the market, and it tends to equalize the distribution of wealth.66
In international economic policy, Taylor was an uncompromising free-trader. The Federalist policy of protection aroused him more than any other policy, and against it he marshaled all of his economic knowledge, arrayed his political principles, and wrote with a vigor and prolixity which were unusual even in his age. Protection, he said, was unconstitutional. The proposed higher duties taxed the many for the benefit of the few, destroyed agriculture, created a restrictive system, fostered a depraved (industrial) environment, and, finally, were unnecessary because existing duties were high enough.67
The exception to Taylor’s laisser faire was slavery, which he regarded as “a misfortune to agriculture, incapable of removal, and only within the reach of palliation.” He proposed that Negroes be removed to the Northwest Territory, where slavery was prohibited, and eventually to Africa. In his early writings he did not approve of slavery but was resigned to it because he thought abolition was impossible. As the controversy between southern agriculture and northern manufacturing became sharper, he left this moderate position and defended slavery on principle. The defense is noteworthy because it later was repeated by the spokesmen of the South. Taylor said the slaves were not to be pitied, but rather the workers of the North. Compared to their oppression by industrialism, the condition of the slave was a happy one. He was cared for by a sympathetic master while the northern worker faced an impersonal labor market; and the slave could look forward to an old age of security while the northern worker had a future offering only the poorhouse or the army.68 On this theme, Calhoun later played many variations.
For his defense of slavery, Taylor has been called the prophet of secession. Actually the distinction (if it is one) antedates the controversy over slavery; and slavery, according to Taylor, was not an important issue of policy. The most important was laisser faire, which as early as 1795 he saw threatened in what seemed to be the unimportant matter of excise taxes. Taylor objected to them because they discriminated against some parts of the country in order that others might gain an advantage and therefore they violated the liberal principle of equal treatment. He warned then that there could be only one consequence if such discrimination continued:
If oppressed, states will combine—the grand divisions of northern and southern will retaliate, as majorities or ministers fluctuate—and a retaliation between nations, invariably ends in a catastrophe.
A decade later he warned again of the tendency. By then it had been arrested by the Republican administration, he believed, but had not been dispelled from the popular mind. To give the government “the control and direction of every branch of internal manufacture” would be to give it “a power, so nearly approximated to despotism, as to have become hateful to every nation not degraded to the lowest condition.”69
Taylor is important for his support of free domestic and international trade. He made no significant concession to the national interest, and, excepting slavery, his economic policy was more thoroughly one of laisser faire than that of anyone else of his age including the British liberals. He was not as competent as some others were in the whole of economic doctrine. He occasionally was mistaken, egregiously so in his criticism of Hamilton’s funding program for which, ironically, he was best known and most valued by the Republicans. But in the important area of economics where its principles must be related to those of political philosophy and a program of public action made from both, Taylor made a substantial contribution. It was to warn of the danger to individual liberty which lay in the state’s exercising broad economic powers. The idea had been expressed many times before, but it was important enough to be repeated. Had he written less and that more lucidly, he perhaps would be better remembered today.
However he probably would not have had more influence on his contemporaries. He did not respond to the national interest as they did; indeed, compared to them, he was indifferent to it. They who in their doctrine and actions accepted national power were the more influential. The great influence of the Federalists, and especially of Hamilton, was the result, I believe, of their insisting from the very start that national power was the object of government. The power which the Federal government actually acquired was less than the Federalists wanted but was even further from the small amount which the Republicans originally thought was sufficient. In time the Republicans (except those like Taylor) accepted the inevitability of power and acceded to a nationalistic economic policy.
In the change, Albert Gallatin became their authority on economic affairs. He was the only Republican whose knowledge of economics could be set against that of Hamilton. Although not another Hamilton, in either economics or politics, he was nearer to him in stature than were any of the other Republicans, and he often was called Hamilton’s alter ego. There was a correspondence of ideas between the two men which helps to explain the eminence that Gallatin had. As Republican economic policy became nationalistic, the change affected Gallatin less than it did others in the party because he never had accepted the entire policy with which the party began. Although the party made much of him from its start, he never was as far from Hamilton’s policy as most Republicans were. He was so welcome an acquisition in the 1790s because he could understand the kind of economic analysis that Hamilton employed and could oppose him on theoretical grounds. Then as the Republicans changed their views the influence of Gallatin increased, because the change brought them to his position.
The point is illustrated by Gallatin’s remarks on the fiscal policy of Hamilton. On the controversial issue of redemption at par, Gallatin agreed with Hamilton. He set forth his position in the Sketch of the Finances of the United States which was published in 1796 after Congress had adopted Hamilton’s program. Gallatin stated that since the decision had been made to redeem at par, the government must honor it scrupulously. His reasons were similar to those Hamilton gave when he proposed redemption. Failure to respect the debt, Gallatin said, would impair confidence in the Federal government and would injure the commerce of the nation.70
There is more to the Sketch. Its purpose seems to have been to show that the Republicans could speak on economic matters as competently as the Federalists. Its premise is that the government is an economic burden, and the idea is analogous to the Republican belief that the government is a political burden also. Its expenses are “a destruction of capital” (although the destruction may be unavoidable), whether the money is used to hire labor or to refinance a debt. It follows that Hamilton was wrong in saying that funding would stimulate economic activity and so increase the nation’s wealth. The premise of the Sketch is pure Smith, whom Gallatin respected to the point of reverence. Government is unproductive, because it absorbs labor that otherwise would add to the economy’s net revenue; it lives off the revenue produced by others.71
Hamilton’s ideas of public finance were inconsistent with those of Smith. They were, as noted above, both older and newer—older in having first been set down by the mercantilists when they wrote that inflation would increase employment, and newer in having been revived in the policy of deficit finance in the twentieth century. Beyond the inconsistency however was an important correspondence of opinion between Hamilton and British classical economics. The classical argument was meant to restrict the power and corruption of government and was not directed to the problem of increasing employment nor to that of establishing the credit of a new government. How the classicists might have responded to these problems is best discerned in the writings of their predecessors, the English mercantilists, who were confronted with both unemployment and the unstable government. Many of the ideas of the mercantilists, including their conception of the national interest, were repeated in America by Hamilton.
It is unlikely that in Hamilton’s policy there were any important measures to which Gallatin could take exception. There were points of doctrine on which Gallatin disputed Hamilton’s views, but on the important issue of what actions the government should take he accepted Hamilton’s policy. So it was on the issue of the Bank. When Gallatin was Jefferson’s Secretary of the Treasury the charter of the Bank was about to expire, and Gallatin urged its renewal. Thirteen years earlier he had supported Hamilton’s plan for the Bank and by implication had disassociated himself from the Republican notion that central banking was intrinsically wrong. He said the objections raised against it were only faults of administration, not of the principle of central banking. Later many Republicans were converted to that view. During the campaign to renew the charter, some of their newspapers reprinted the arguments Hamilton had used when he made the original proposal. When renewal was considered in 1811 it was defeated in Congress by the deciding vote of the Vice President. But the government, after being without a central bank for a few years, established the second Bank of the United States in 1816. Very little then was said about its constitutionality. Gallatin said it was constitutional because it was a “necessary and proper” means for executing the powers of the commerce clause. Hamilton had said it fell within the general welfare power of the clause. Most Republicans seemed to think that constitutionality was not an issue. The utility of central banking was. In 1792 Hamilton had said that the most incorrigible opponents of the Bank would “be compelled to acknowledge that it is an absolutely indispensable engine in the management of the [government’s] finances and would quickly become a convert to its perfect constitutionality.”72 The conversion was not as rapid as Hamilton had predicted, but it was thorough.
Gallatin agreed with Hamilton on the issue of protection as he had on funding and banking. The agreement was not supported by the same reasoning (just as it was not on the other issues). Moreover, he came to the position of protection by a circuitous, indeed a bewildering, route. Although he accepted it, one would not recognize the fact from a cursory inspection of his statements on commercial policy. “I was, as far as I know, the earliest public advocate in America of the principles of free trade,” he said in 1846. If this is so, he must have meant by “free trade” something odd indeed. As Secretary of the Treasury, he approved of Jefferson’s commercial policy of reciprocity. It was not antithetical to free trade, but neither was it the real thing. When Jefferson’s policy changed to protection, Gallatin raised no objections. He went over Jefferson’s second inaugural address before it was given and although he suggested changes in certain parts, he proposed none at all in the passage urging the subsidizing of manufactures. Later Gallatin was associated with the free trade movement, which actually was for free trade and which carried on its journal the banner, “Laissez-nous faire.” The movement held the Free Trade Convention in Philadelphia in 1831, and Gallatin wrote the memorial which was addressed to Congress. It was a genuinely free trade document. Yet fifteen years later. Gallatin again was in favor of protection. His support was qualified but real. He wrote that the duties which then were levied for revenue should be managed in a way which would aid “the progressive development of national enterprise and industry.” The statement is more than an expression of economic patriotism. He approved of duties as high as 25 percent, which is substantial protection even though the manufacturers wanted more. Manufactured goods which required more protection “must generally be considered as unnatural, forced hot-house products,” he said.73
The paradoxical quality of Gallatin’s views is to be explained, I believe, by the fact that like many other leaders of economic thought in America he eventually made the national interest the ruling objective of policy and like them he did so with hesitation, doubt, and reservations about the power which the policy implied. In their political economy they tried to compromise the powers which the individual needed in order to be free with the powers which the government needed in order to increase the strength of the nation. The compromise does not stand up well under logical examination. Logic however is not an indispensable requirement of policy. Certainly the policy of classic liberalism is not remarkable for its logic. What appears to be more important is the ability of the policy to provide for continuing economic endeavor, for growth, and national development. By this test the political economy of the early Americans was eminently successful.
THE STOIC ORIGINS OF LIBERALISM
THE MERCANTILISTS AS LIBERALS
THE ORIGINS OF AMERICAN LIBERALISM
 Some of the commentaries that present an interpretation different from mine are: W. W. Crosskey, Politics and the Constitution in the History of the United States (Chicago, 1953), I, Pt. II, Joseph Dorfman, The Economic Mind in American Civilization, 1606-1865 (New York, 1946), I, Bk. 2, Pt. I; the papers by Frederick K. Henrich, Oscar Handlin, Louis Hartz, and Milton S. Heath on “The Development of American Laissez Faire,” in “The Tasks of Economic History,” Journal of Economic History, Supplemental Issue, Dec., 1943, 51-100; and Daniel J. Boorstin, The Lost World of Thomas Jefferson (New York, 1948).
 Mathew Carey, The New Olive Branch (2nd ed., Philadelphia, 1821), pp. 15-16.
 Francis Corbin to the Virginia ratifying convention, in The Debates of the Several State Conventions on the Adoption of the Federal Constitution, etc., ed. Jonathan Elliot (Washington, 1836), III, 104-105.
 “Madison to Jackson,” in The Records of the Federal Conventionof 1787, ed. Max Farrand (New Haven, 1911), III, 449.
The Federalist, 6. (The number in all citations of The Federalist refers to the number of the paper and not the page.)
 “Journal of the Federal Convention” (Aug. 16), Elliot’s Debates, I, 245.
 Farrand’s Records, III, 336.
(Richard Henry Lee), “Observations on the System of Government Proposed by the Late Convention. By a Federal Farmer,” in Pamphlets on the Constitution of the United States, etc., ed. Paul Leicester Ford (Brooklyn, 1888), p. 301.
 Elliot’s Debates, IV, 353.
 “King’s Journal [of the constitutional convention]” (Sept. 15), Farrand’s Records, II, 635.
Williamson’s speech before the House, Feb. 3, 1792, Farrand’s Records, III, 365-366.
 (James Iredell) “Observations on George Mason’s Objections to the Federal Constitution. By Marcus.”, Ford, op. cit., p. 358.
 “Committee of Detail, VII,” Farrand’s Records, II, 157.
“Sherman and Ellsworth to the Governor of Connecticut,” ibid., III, 99.
“A Flatbush Farmer to the Inhabitants of King’s County,” reproduced in Broadsides Relating to the Ratification of the Constitution (Washington, n.d.), photostatic copy, no. 26. Charles Pinckney, “Observations on the Plan of Government Submitted to the Federal Convention, etc.,” Farrand’s Records, III, 116.
 “Madison’s Journal” (Aug. 18), ibid., II, 325.
“Madison’s Journal” (Sept. 14), ibid., II, 615-616.
 “McHenry’s Journal” (May 29), ibid., I, 26.
Ibid., III, 375-376.
“Official Journal” (Aug. 18), Elliot’s Debates, I, 247.
 “Madison’s Journal” (Aug. 20), Farrand’s Records, II, 344.
 “Madison to Professor Davis” (1832), Farrand’s Records, III, 477, 478, 518.
The Federalist, 35.
The Works of Alexander Hamilton, ed. Henry Cabot Lodge (New York, 1885-86), I, 466-467.
Ibid., I, 363-375.
Ibid., I, 370, 397.
Ibid., I, 389.
The Federalist, 51.
Adam Smith, The Wealth of Nations, ed. Edwin Cannan (New York, 1937), p. 670.
Hamilton, “A Full Vindication,” Works, I, 15.
Ibid., I, 389.
The Federalist, 73.
 John Adams, A Defense of the Constitutions of Government of the United States, etc. (London, 1794), I, 159.
The Federalist, 10.
 Madison, “Note on the Speech on the Right of Suffrage,” Farrand’s Records, III, 450.
Hamilton, Works, I, 35.
The Federalist, 41.
 Smith, op. cit., p. 651.
 Smith, op. cit., pp. 431, 425.
 John Stuart Mill, Principles of Political Economy, etc. (London, 1891), p. 593, italics mine.
 The passages were brought together by Edward G. Bourne in “Alexander Hamilton and Adam Smith,” Quarterly Journal of Economics, VIII (1893-94), 328-344.
 Cf. the passage in the Declaration beginning, “Prudence, indeed, will dictate . . .” with Locke’s, “Secondly, I answer, such revolutions . . . ,” in Of Civil Government, Two Treatises (London, 1940), p. 231.
 Peletiah Webster, An Essay on Free Trade and Finance (Philadelphia, 1779), p. 5.
 “Madison to Cabell,” Elliot’s Debates, IV, 349-351.
 Daniel Raymond, Thoughts on Political Economy (Baltimore, 1820), pp. 375, 355.
Industrial and Commercial Correspondence of Alexander Hamilton Anticipating His Report on Manufactures, ed. A. H. Cole (Chicago, 1928), p. 268, italics mine. This work includes the “Report on Manufactures.”
 See papers IV-VI, Works, I.
 Alexander Hamilton, “On the Constitutionality of the Bank,” Papers on Public Credit, Commerce, and Finance, ed. Samuel McKee, Jr. (New York, 1934), p. 128.
Ibid., p. 108.
The Writings of Thomas Jefferson, ed. Albert Ellery Bergh (Washington, 1905-07), XIV, 390, 391-392.
 Smith, op. cit., Bk. ii, ch. i.
Hamilton, “Report on the National Bank,” Works, III, 125-178.
Ibid., III, 175-176, 159.
Ibid., III, 128, 150, 161.
The Federalist, 36.
“Report on Manufactures,” p. 299.
 “First Report on Public Credit,” Papers on Public Credit, etc., p. 38.
 Smith, op. cit., pp. 777-778.
Hamilton, “First Report on Public Credit,” p. 43.
 “Plan for Disposing of the Public Lands,” American State Papers, ed. Walter Lowrie and Mathew St. Claire Clarke (Washington, 1832), pp. 8-9.
 “An Examination into the Leading Principles of the Federal Constitution,” Ford, op. cit., p. 59.
 “To Thomas Law,” Writings, XIV, 142-143.
 Joel Barlow, “Advice to the Privileged Orders,” Political Writings (New York, 1796), pp. 72-73, 23-27.
“The Conspiracy of Kings,” ibid., p. 250.
 The couplet is not Barlow’s, and he may have gotten it from Harington’s Epigrams.
 “Notes on Virginia,” Writings, II, 207.
“To John Taylor,” ibid., X, 45-47.
“To Samuel Smith,” ibid., X, 56-57.
“To James Madison,” ibid., IX, 359.
 “To Thomas Law,” ibid., XIV, 141.
“To Judge William Johnson,” ibid., XV, 441.
 “First Inaugural Address,” ibid., III, 321.
 Hamilton, “On the Constitutionality of the Bank,” Papers on Public Credit, etc., p. 131.
 See, e.g., Writings, VIII, 352; XII, 294; XIII, 122, 123, 170, 207.
 “Circular to the American Consuls,” Writings, VIII, 352.
“To Thomas Mann Randolph,” ibid., VIII, 31.
 Carey, op. cit., p. 24.
 “To Hogendorp,” Writings, V, 183.
 “To the Rev. James Madison,” ibid., XIX, 17-18.
Ibid., IV, 275-277.
Ibid., VIII, 454, 459.
 Barlow, “Advice to the Privileged Orders,” op. cit., pp. 75-78.
The Life and Works of Thomas Paine, ed. William M. Van der Weyde (New Rochelle, 1925), VII, 70-74, 79-81.
 Thomas Hart Benton, Abridgment of the Debates of Congress, from 1789-1865 (New York, 1857), I, 458ff., 464, 465-467.
 “Robert Fulton on Canals for France and on Freedom of Trade, 1798,” Bulletin of the New York Public Library, V (Aug. 1901), 9, 364.
 John Taylor, An Argument Respecting the Constitutionality of the Carriage Tax (Richmond, 1795), p. 25.
 John Taylor, A Defense of the Measures of the Administration of Thomas Jefferson (Washington, 1804), pp. 18, 73.
 John Taylor, Tyranny Unmasked (Washington, 1822), pp. 132, 138, 141, 149-150, 162, 168, 177, 194.
 John Taylor, Arator; Being a Series of Agricultural Essays, Practical and Political (3rd. ed., Baltimore, 1817), pp. 40, 42, 47.
———, A Letter on the Necessity of Defending the Rights and Interests of Agriculture, etc. (Petersburg, 1821), pp. 3-5.
An Argument Respecting . . . the Carriage Tax, p. 16.
A Defense of . . . Jefferson, p. 43.
The Writings of Albert Gallatin, ed. Henry Adams (Philadelphia, 1879), III, 148.
Ibid., III, 143. See Smith, op. cit., p. 315.
 Gallatin, Writings, III, 135.
Hamilton, “Objections and Answers, etc.,” Works, II, 267.
 “To J. R. Ingersoll,” Writings, II, 628, 629.
The Journal of the Free Trade Convention, etc. (Philadelphia, 1831).