Strong Conservative Government

The Libertarian sect of the Conservative faith devoutly believes in the power of free markets to generate wealth, efficiently allocate resources, reward merit, bridge social classes, and ameliorate all manner of social ills. However, Libertarians often fail to recognize or at least neglect to acknowledge that free markets to not arise out of nothing. Markets, with their reliance on the rule of law, a reliable common currency, and social stability, depend upon strong governments. Ron Chernow’s recent biography, Alexander Hamilton, reminds us just how much American capitalism relies upon the governmental structures created by the nation’s first treasury secretary.

After the American Revolution, the United States (plural intentional) remained a rather loose confederation of states lacking a strong central government not dependent on the largesse of the states. There was not even a common currency. States, like small principalities collected duties as products crossed state boundaries. In many cases, people thought of themselves primarily as Virginians or New Yorkers. The American identity was real, but still secondary. The Articles of Confederation were not working. Economic growth was limited by interstate trade restrictions and a lack of liquidity, and there remained a real potential for the American states to become pawns in the international competition between France and England.

The states convened a convention to make the appropriate modifications, but what emerged was the US Constitution that instituted a comparatively strong federal government with a strong executive. The ratification of the Constitution was not automatic and it required considerable lobbying by Hamilton in New York and James Madison in the Virginia to secure it. The Federalist Papers written primarily by Hamilton and Madison with contributions by John Jay laid out the intellectual case for the Constitution and played a pivotal role in New York’s crucial ratification. Even with the ratification, it took the presidency of George Washington to tie the country long enough for the Constitutional institutions to take tenuous root.

What is less appreciated is how Hamilton used the treasury department to bind the nation together. Hamilton arranged for the assumption of individual state debts by the federal government. This was opposed by southern states like Virginia that had already paid their debts and did not want to subsidize some northeastern states that still retained significant debt. Since the new constitution prohibited interstate customs duties, it was less possible for some states to pay their debts. Hamilton helped negotiate a compromise with Thomas Jefferson whereby the federal government would assume state debts and in return the new federal capital would be moved to the South. With this grand compromise, the economic fortunes of the states became strongly coupled.

The Republicans (later to become the present day Democrats) led by Jefferson still believed in a bucolic agrarian society dominated by patrician farmers like themselves. Manufacturing and financial services were suspect and somehow less ennobling. The Republicans represented a populist movement deeply distrustful of wealth not obtained from the fields. As one wit would have it, the Jeffersonian Republicans did not trust people who earned their income by the furrows, rather than the sweat, of their brows. This philosophy was buttressed by the nearly universal experience of plantation owners in the South. They were typically in debt to British creditors as they tried to simultaneously live the extravagant lives of country gentlemen, while managing not particularly efficient plantations. It is not surprising that those who were land-rich and cash-poor would nurture animosity against creditors and banks

Hamilton, the self-made hero of the Revolutionary War who immigrated to the colonies as an orphan from the West Indies, realized that only through robust commerce would the country become wealthy enough to maintain its political independence. Hamilton’s key contribution was the formation of a national bank and the creation of a national debt. Contrary to the deficit spending that the federal government engages in now, the national debt in post-Revolutionary War America was more akin to present day paper money. Hamilton believed that the debt should be repaid regularly through customs duties, but bank notes backed by the United States government provided necessary liquidity to finance commercial growth. It is additionally ironic that this increase in liquidity reduced interest rates and actually alleviated some of the debt burden born by plantation owners in the South.

Nonetheless, the fact that those in New York grew rich in commerce was resented and many believed that Hamilton must by privately benefiting from his forceful institution of the national bank. After Jefferson became president he had his treasury secretary, Albert Gallatin, carefully comb the US financial records looking for evidence of Hamilton’s perfidy or other fraud. To the disappointment of Jefferson, his treasury secretary found “the most perfect system ever formed. Any change that should be made in it would injure it. Hamilton made no blunders, committed no frauds.”

The country was prosperous and Jefferson wisely retained Hamilton’s bank and government financing structures, griping, “[I]t mortifies me to be strengthening principles I find vicious.” It was not until James Madison became president and allowed ideology to overwhelm prudence that the national bank was disestablished. General discontent from the resulting economic downturn may have contributed to the War of 1812 against the British.

Hamilton, who arguably is the person most responsible for the capitalist country we have grown into, was a champion of a broader interpretation of federal powers than Jeffersonian Republicans. When the Constitution granted the legislature or the executive a general power, Hamilton claimed that Congress retained an “implied powers … necessary and proper” for the exercise of the general power. Jefferson and the Republicans ineffectively argued that since the expressed power to create a national bank was not specifically written in the US Constitution, there was not such power. Hamilton’s interpretation prevailed. If it had not, it is doubtful whether the tiny band of 13 colonies would have remained cohesive enough to become a continental and eventually a world power.

Though rhetorically Jefferson always articulated a small government vision, he was not above the expansion of executive power when he became president. It was Hamilton’s doctrine of implied powers that made possible Jefferson’s Louisiana Purchase. Chernow cites John Quincy Adams apt description of the Louisiana Purchase as “an assumption of implied power greater in itself, and more comprehensive in its consequences, than all the assumptions of implied powers in the years of the Washington and Adams administrations.”

The past two hundred years have seen political parties turn upside down in other ways. Jeffersonian Republicans believed that will of the people as expressed through Congress was the ultimate authority. They did not subscribe to the concept of judicial review of the constitutionality of laws. While modern day liberals must resort to courts to win victories they cannot win at the ballot boxes, their erstwhile champion, Jefferson chafed a judicial review as just one more way the Federalists were thwarting the will of the people. He complained of the “original error of establishing a judiciary independent of the nation.” By contrast, Hamilton believed that the country could survive without an independent judiciary.

Perhaps the saddest part of Chernow’s book is the description of the death of Hamilton in a duel with Aaron Burr, Jefferson’s vice-president, who later hatched schemes to divide the United States. Sadly, Alexander’s death was presaged by the death of Hamilton’s oldest and most promising son, Philip, also in a duel.

As poignant as these parts are, Chernow’s greatest contribution is filling in the history of ideas that served to create US capitalism and the reminding us of the necessity of a strong vigorous government for capitalism. Sometimes, strong governments can enhance and protect liberty. Whereas, Jefferson may be perceived at the champion of the commoner against moneyed interests, it was his political adversary Hamilton that created economic structures that allowed the US to remain free and independent. It was the avidly abolitionist Hamilton who helped create an economic meritocracy, while Jefferson could not match his beautiful rhetoric in the Declaration of Independence that “all men are created equal” by freeing his slaves.

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