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A speech given to the Economic Club of Indianapolis on April 19, 2006. Forrest McDonald is Professor of History at the University of Alabama and has written a number of introductions to Liberty Fund books. In this talk he explores the differences between what type of economic order founding fathers like Alexander Hamilton intended to create and the kind of economic order they actually created.

Copyright 2006 Forrest McDonald.

If I should ask you what kind of economic order the Founding Fathers contemplated when they established the constitutional order, you would doubtless reply capitalism or a market economy. If I addressed that question to a similar number of professional American historians, the answer would be the same, the difference being that most of you would add "Thank God" and most of them would add "unfortunately."

For a second thing, the Constitution created the largest contiguous area of free trade in the world. Neither the states nor the Congress could levy taxes on the interstate movement of goods which the states had been theoretically able to do prior to the adoption of the Constitution. For yet another, the contract clause of Article I, section 10 - "No State shall. . . pass any. . . Law impairing the Obligation of Contracts" - was a commitment to unfettered capitalism insofar as it prohibited state legislative interference into market transactions. Mystery surrounds the contract clause: it was proposed by Rufus King (who was a delegate representing Massachusetts) late in August and was roundly rejected. Somehow the clause made its way into the finished document a couple of weeks later.

As to whether the Framers intended to create a capitalistic order, the weightier evidence balances to the contrary. Let us start by considering what they understood by property rights. The appropriate source is Sir William Blackstone's 4 volume Commentaries on the Laws of England, a work that James Madison said was "in every man's hand." On the second page of the second volume, subtitled "Of the rights of things," Blackstone defines property as "That sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe." Splendid statement, but Sir William devotes the remaining 518 pages of the volume to qualifying and specifying exceptions to his definition.

Every state had adopted English prohibitions of "offenses against public trade," which banned usury, regulated the price of bread, and forbade such practices as "forestalling" (buying or contracting commodities on their way to market), "engrossing" (buying large quantities of commodities with intent to sell them in other markets), and "regrating" (buying and reselling products in the same market). Americans, like Englishmen, also recognized that their right to acquire and hold private property was subject to rights residing in the public. As an aggregate of individuals, the public retained rights to grazing, wood gathering, hunting, passage, and water use on privately owned lands. In its corporate or governmental capacity, the public reserved the right to restrict the use of private property and even take it from the owners in certain conditions.

These legal barriers were reinforced by ideological considerations. Granted, Americans were, by and large, a practical and not an ideological people, but they had embraced a pair of ideas that took deep roots. First was republicanism. When Americans proclaimed their commitment to republicanism as part of the reaction against George III in 1776, most did so willy-nilly without knowing what it entailed. The body of literature on the subject was large and readily found, however, and soon public figures were versed on the subject. The actuating principle of a republic was public virtue, virtue meaning manly devotion of one's self to the wellbeing of the public. The opposite of virtue was vice, meaning effeminacy, or a love of luxury.

The very idea of economic growth that inheres in a market economy was incompatible with this primary principle of republicanism. Plato, believing that relative equality of property is essential to a republic, proposed to limit inheritances and recommended that no republic be established on the sea or on a navigable river, for that "would expose it to the dangers of commerce" and the inequalities that resulted from trade. Lycurgus, "in the most perfect model of government that was ever framed," ancient Sparta, had forbidden trade altogether. And Montesquieu, whom American devoutly admired, declared that if people were allowed "to dispose of property [as they] pleased," a republic would be "utterly undone." As disparate a pair of Americans as John Adams and Benjamin Franklin agreed. Adams denounced credit as responsible for "most of the Luxury & Folly which has yet infected our People," and declared that anyone who could devise a way to abolish credit forever "would deserve a Statue to his Memory." Franklin characterized commerce as "generally cheating" and wrote bitterly of its corrupting and debilitating effects.

The second ideological barrier arose from the agrarian tradition and the accompanying mystique of the land. You have heard Jefferson's quotation - isnt it on the Jefferson Monument in Washington? - "those who labor in the earth are the chosen people of God if ever He had a chosen people." That attitude was widely shared in l8th century America, and so was Jefferson's comment that "the mobs of great cities add just so much to the support of pure government as sores do to the strength of the human body." These prejudices found expression in assorted ways, including the ubiquitous landed property qualifications for voting and office holding, which insured that agricultural interests would dominate government at the expense of commercial, manufacturing, and financial interests.

Moreover, the agrarian tradition impeded economic development in an explicitly anticapitalist way. Its most vituperative and generally accepted version was that formulated by Henry St. John, First Viscount Bolingbroke, and his circle of English Tory friends. Bolingbroke had led the opposition to Sir Robert Walpole (the first "Prime Minister") who guided the Financial Revolution during the l720s and l73Os that transformed England into a modern capitalistic state by monetizing the public debt. Bolingbroke glorified landowners and castigated "money men," coining a litany of opposition to capitalism that warped the perspective of Americans as they imbibed it and infected them with a "paranoid political style."

Perhaps it appears that you can't get to the modern world from there. But notice that my original question was not what kind of economic order the Founders established, but what kind of order they contemplated establishing. Had I phrased it the first way, you (and the historians) would have been right. What I have been talking about was what the Framers contemplated. What they actually did was something quite different.

Thus far I have left two crucial considerations out of account. I have spoken of private property, but the Revolutionary War resulted in the United States collectively owning huge amounts of public property, in the forms of public lands and public debts. Before the Revolution vacant land belonged to the Crown except in the proprietary colonies of Pennsylvania and Maryland. Now the western lands, consisting of millions of acres, belonged to Virginia, North Carolina, and Georgia in the South and to the United States government in the north. The public debts (not counting $10 million owed the King of France and various Dutch bankers) totaled $65 million. The public lands were worth far more than all private lands combined, and the public debts (owned by a large number of citizens) amounted to more than all the commercial property in the country.

The common view was that the public lands should be sold to raise the money to pay off the public debts. That course was already being followed, after a fashion. Several groups of speculators contracted with Congress or state governments to buy vast tracts payable in installments with public securities at par value - a bargain for the speculators, inasmuch as the securities could be bought on the open market for ten or fifteen cents on the dollar.

At this point the second consideration I left out comes into play, namely Alexander Hamilton. Hamilton's ruling passion was the love of Fame: an obsession with achieving immortality through the grateful remembrance of posterity by being the Lawgiver, in the tradition of Lycurgus of Sparta and Solon of Athens, who "transmits a system of laws and institutions to secure the peace, happiness, and liberty of future generations." No small number of Hamilton's contemporaries shared that aspiration, but they saw it in relatively narrow terms, meaning the creation of a balanced constitution that would ensure the people's safety and liberty. Hamilton sought nothing less than to make over the people themselves.

Hamilton thought that his country was kept from being a great nation, indeed kept from being a nation at all, by the inertia of a society whose pervasive attributes were provincialism and lassitude. Provincialism was reinforced by habit and by interest, but in each state and every region its main prop was an oligarchy. The distribution of wealth in America was more nearly equal and society was more nearly fluid than in the Old World, but status and substantial wealth were vested in a handful of intermarried families that were essentially closed to newcomers. Now, Hamilton had nothing against a hierarchical and deferential social order; he was the politest of men (except when it came to Aaron Burr). But he vehemently abhorred dependency and servility, for these were contrary to his idea of manhood. Moreover, he hated the narrow provincialism that the American order both nourished and fed upon; and he resented, as only an outsider can, the clannishly closed quality of the system.

The system also discouraged industry - in the sense of selfreliance and habitual or constant work and effort - by failing to reward it. Status derived not from the marketplace, where deeds and goods and virtues could be impartially valued, but from birthrights. More precisely, status rested upon personal relationships which rested upon family connections which in turn rested upon owning land and upon the mystique that land was the source of wealth and virtue. In other words, the agrarian mentality of Thomas Jefferson was well-nigh universal in America. The work ethic prevailed only among a tiny minority. And though there was little poverty in America, there was also little industry - and lots of sloth, indifference, drunkenness, and dissipation. To Hamilton, this was anathema because of its inherent injustice and because, in his eyes, it made the nation weak and despicable.

His audacious, self-appointed mission was nothing less than to remake American society in his own image. By 1786, after reading Jacques Necker's treatise on the finances of France and Sir James Steuart's book on political economy, he conceived a means of accomplishing that revolutionary change. What distinguished the diligent few was that they measured worth and achievement in terms of money, whereas the majority disdained money and made do with a cumbersome system of personal obligations, barter, and fiat credit. To transform the established order, to make society fluid and open to merit, to make industry both rewarding and necessary, what needed to be done was to monetize the whole. For money is oblivious to class, status, color, and inherited social position; money is the ultimate, neutral, impersonal arbiter. Infused into an agrarian society, money could be the leaven, the fermenting yeast, that would stimulate growth, change, prosperity, and national strength.

The first step in the process, after the Constitution had been ratified and Hamilton became Secretary of the Treasury, was to devise a means of establishing public credit. Credit entails credibility, believability, trust; and the United States had none. Hamilton addressed his efforts to the ultimate source of credit, the market. Rather than attempting to pay off the public debts in a short time (something quite beyond the nation's capacity), he proposed to consolidate state and national debts and "fund" them, which is to say provide funds for making regular interest payments but leave the question of retiring the principal - whether soon, late, or never - to the discretion of government. In addition he proposed the creation of a sinking fund, consisting of surplus revenues and the proceeds of a new loan in Europe, which would be used to buy government securities on the open market. The sinking fund's key function was to engage in openmarket operations aimed at bringing the prices of public securities to par. Once that was done, the investing public would be convinced that public credit had been established, and when investors believed that public credit had been established, it would ipso facto be established. Hamilton's proposals were enacted into law. As a consequence, certificates of the public debt, heretofore a politically divisive and economically crippling national burden, were transformed into capital. Moreover, capital was created into the bargain; the market value of the paper before Hamilton took office late in 1789 had been less than $15 million; a year later it was about $45 million. And, taking care of the public debts left the public lands a wholly free and clear blessing for the nation.

The next step in Hamilton's grand plan was to create a national banking system. Originally, he had wanted to monetize the public debt directly - that is, to have it circulate as money - but the terms of the congressional act made that difficult. Accordingly, Hamilton used the securities as the basis for currency rather than as currency itself, in the form of subscriptions to the capital stock of the national bank. The bank's notes would circulate equally with specie as currency. Paper was supporting paper, but this was not financial trickery as the Jeffersonians charged. Hamilton perceived that - monetary theorists to the contrary notwithstanding - money is whatever people believe is money and will voluntarily accept as money. Underlying his thinking was the realization that the United States, as a raw and undeveloped land, was long on potential natural wealth but short on institutional wealth, meaning liquid capital. He therefore regarded as desirable any stable and orderly means of increasing the money supply, within the limits of what could be efficaciously employed in developing the natural wealth. In essence, he was creating the machinery whereby the nation could be built on credit, financing its economic development not out of savings but out of the expectation of future profits.

Hamilton built on some of the arguments Adam Smith developed in Wealth of Nations but rejected Smith's doctrine of noninterference in its broadest sense. He recognized - as later economic theorists befogged by Marxism failed to do - that social values and habits dictate economic activity, not the other way around. "Experience teaches," he wrote, "that men are often so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements, in the most ordinary occupations, are adopted with hesitation, reluctance, and by slow gradations." Men would resist change, he believed, so long as even "a bare support could be ensured by an adherence to ancient courses." The natural order was for social habits to dictate economic norms and for government to reflect the interplay of the two. Hamilton saw the advantage of using government to bring about economic changes that would in turn alter society.

While rejecting laissez faire, however, he was emphatic in his commitment to capitalism. Primarily that commitment was moral, not economic, for Hamilton believed that the greatest benefits of government-encouraged private enterprise were not material but spiritual, the enlargement of the scope of human freedom by expanding the opportunities for human endeavor. "Minds of the strongest and most active powers," he wrote, "fall below mediocrity and labour without effect, if confined to uncongenial pursuits. And it is thence to be inferred, that the results of human exertion may be immensely increased by diversifying its objects." In its own right, to stimulate the human mind was a distinct good. "Every new scene, which is opened to the busy nature of man to rouse and exert itself, is the addition of a new energy to the general stock of effort. The spirit of enterprise, useful and prolific as it is, must necessarily be contracted or expanded in proportion to the simplicity or variety of the occupations and productions, which are to be found in a Society."

And so we return to the original question. Did the Founding generation contemplate the creation of a capitalistic, free-market economy? No, the majority did not. Had the will of the majority prevailed, had the Jeffersonians prevailed, had those committed to pure republicanism prevailed, the United States would have remained an agrarian, colonial economy destined to become a collection of banana republics. Fortunately, a handful of like-minded visionaries working through Alexander Hamilton and his office as Secretary of the Treasury used the freedoms of the Constitution and its protections to create a capitalistic, free-market economy and ensured that the United States would become the richest, most powerful, freest country the world has ever known.

I join you in thanking them and I thank you.