Front Page Titles (by Subject) 3: Economic Policy of the Federalist Party - Economic Liberalism, vol. 1 The Beginnings
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3: Economic Policy of the Federalist Party - 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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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.
 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.