The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Economic Liberalism the Beginnings
• 1: The Stoic Origins of Liberalism
• 1: The Consequences of Stoicism
• 2: Zeno and the Moral Sage
• 3: The Modifications In Stoicism
• 4: Epictetus
• 5: Cicero
• 6: The Stoic Legacy
• 2: The Mercantilists As Liberals
• 1: National Power and Full Employment
• 2: The Means to Full Employment
• 3: The Market
• 4: The Political Ideas
• 5: The Economic Setting of Mercantilist Policy
• 6: Comment On the Commentaries On Mercantilism
• 3: The Origins of American Liberalism
• 1: The Constitutional Convention
• 2: The Ideology of the Federalists
• 3: Economic Policy of the Federalist Party
• 4: Republican Economic Policy

2

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:

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:

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:

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:

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:

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:

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.

[16]The Federalist, 35.

[17]Ibid., 49.

[18]The Works of Alexander Hamilton, ed. Henry Cabot Lodge (New York, 1885-86), I, 466-467.

[19]Ibid., I, 363-375.

[20]Ibid., I, 370, 397.

[21]Ibid., I, 389.

[22]The Federalist, 51.

[23]Ibid., 7.

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.

[24] John Adams, A Defense of the Constitutions of Government of the United States, etc. (London, 1794), I, 159.

[25]The Federalist, 10.

[26] Madison, “Note on the Speech on the Right of Suffrage,” Farrand’s Records, III, 450.

Hamilton, Works, I, 35.

[27]The Federalist, 41.

[28] Smith, op. cit., p. 651.