Читать книгу A Republic No More - Jay Cost - Страница 12
ОглавлениеMadison, Hamilton, and the First Bank of the United States
AMERICANS NOWADAYS are wont to speak about the Founders, the men who led the way against the British to forge a new nation at the end of the eighteenth century, as a unified group. In many senses of the phrase, they were. They shared disgust with the heavy-handed treatment the colonies received from the English; they believed that the colonies would be better off independent; and they pledged their lives, fortunes, and sacred honor to see that through to the end.
But there were wide disagreements between them on many matters, some peripheral but others quite vital. Nowhere was this divide more evident than in the views of James Madison of Virginia and Alexander Hamilton of New York during the early days of the new republic. While the two were in agreement on the superiority of the Constitution over the Articles of Confederation, they had deep disagreements about the nature of the new government that was to be implemented. Though not at issue during the period of ratification, their philosophical clash dominated the American political scene for the first decade under the Constitution, and remained an important dividing line for forty years thereafter.
The flashpoint for the controversy was Hamilton’s proposal to charter a Bank of the United States. Hamilton saw the Bank as a vital economic institution that could secure the prosperity of the nation in the face of foreign competition. Madison, on the other hand, made his strongest arguments against the Bank on the philosophical front. He and Thomas Jefferson saw it as an unconstitutional expansion of federal power that placed the legislature in hock to the executive branch and favored wealthy, northeastern merchants over the rest of the country.
It is important to note that the Bank was actually never as bad as Madison feared it might become. This is not so much because Madison was wrong, but because of the singular genius of Hamilton, who expertly navigated the nation through a financial panic in 1792. Later on, the able stewardship of Albert Gallatin, who served as secretary of the treasury during the early 1800s, ensured that the Bank did not threaten the national interest.
Even so, the Bank was problematic in the ways Madison argued, and it does serve as a microcosm of the argument in this book: the Bank was an institutional innovation that altered and disrupted the power relations within the government, tended to favor some factions over others, and, were it not for Hamilton’s capable management, the speculative frenzy it generated might have had a severely negative effect on the nation’s well-being.
The Constitution, as understood by Madison, intends to “break and control the violence of faction” by carefully balancing the structures of government against its powers. But this design implies that the two must be in sync—adjusting one without toggling the other can lead to corruption. Though supported by many eminent members of the Founding generation, the Bank nevertheless was a challenge to Madison’s view of the Constitution because it disturbed this synchronicity. While his worst fears were never realized, the Bank still serves as an apt metaphor for our story.
We shall begin our story by examining the problem of republican government that Madison and the Framers faced in the 1780s. Put simply, it did not seem to work very well. We shall then look at Madison’s proposed solution to the problems he saw, and how his ideas influenced the constitutional design. Then, we shall turn our attention to Hamilton, who had other views and priorities. The dispute between them remained latent during the ratification phase, but it became active when Hamilton proposed his Bank. In the final analysis, Hamilton certainly had the better arguments about the economic necessity of the Bank, but Madison’s warnings about its threat to the republic turned out to be prescient.
Prior to the Revolution, republican government had typically depended on the balancing of different estates. Government derived its authority not merely from the people at large, but rather a mixture of the common folk, a nobility, the clergy, and in the case of Great Britain a monarchy as well. The point of this arrangement was to balance the interests of the various classes of society, so that ultimately the public good would be promoted. Each must maintain its appropriate station so as to retain the proper equilibrium, as the English had attested when they responded to the excesses of James II with the Glorious Revolution of 1688. No less a republican eminence as Montesquieu endorsed England as the only country whose laws offered political liberty.1
Revolutionary Americans were deeply familiar with republican philosophy, as well as with the discontents in the British system who denied the perfection of Albion’s constitution.2 The Country party ideology of Cato’s Letters and Bolingbroke pointed backward in time, toward an idyllic (and largely fictional) period before the Norman Invasion, when the hearty Anglo-Saxon race did not have to swear fealty to an overbearing monarch. In that view, the once-virtuous English system had been corrupted by the leadership of Sir Robert Walpole, the first British prime minister who was accused of bribing members of Parliament. When Americans looked at the interference of the Crown in their affairs following the Seven Years War, they saw a similar pattern, and resolved to do something about it—something quite radical.
Their solution was to inaugurate a government heretofore unseen by modern eyes: there would be no special status for landed, moneyed, or otherwise elite interests; there would be no king; there would only be the people. This radicalism rings forth in the most famous passage of the Declaration of Independence:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.—That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,—That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.3
There is no mixed estate here. Governmental authority begins and ends with the people. Today, we take this as a given—and indeed are wont to criticize the Founders for not following through on this premise by promoting, for instance, universal suffrage, abolition, or women’s rights—but in the summer of 1776 the Declaration of Independence was the boldest statement on behalf of popular government yet written.
Yet the experience of the Revolution, and especially of the decade that followed, seemed to prove the Americans wrong and the advocates of a mixed estate right. America had done away with established privilege, replacing its toehold in government with democratic institutions, and had met with economic and social misery. The people seemed incapable of ruling.
For starters, the national government created to replace the king—organized under the measly Articles of Confederation—was chronically strapped for cash. Lacking the ability to raise taxes, it was dependent upon requisitions from the states, which they regularly did not provide. This ultimately led to the Newburgh Conspiracy in the spring of 1783, in which senior army officers as well as members of Congress plotted to force Congress to fund their pensions. It was only through the influence of George Washington—who resolved to be a true republican general in the mold of Cincinnatus—that the coup went nowhere.4
Unfortunately, that was not the end of governmental incompetence following the war. The impotence of the central government meant that the rights of British loyalists, as granted under the Treaty of Paris, often went ignored by state governments. Meanwhile, the British regularly violated their own commitments, particularly in the West, with little fear of reprisal from the American government. What’s more, foreign governments gleefully played states off one another, utilizing the lack of central management to maximize their trading profits. The states themselves had difficulty even coordinating over shared waterways like the Potomac River.
The most dangerous want of central authority had to do with a fast-spreading dispute between debtors and creditors, which occurred in part because of the economic downturn of the decade, and threatened an outbreak of widespread civil unrest. In the state of Rhode Island, a coalition of debtors won control of the government and enacted very liberal laws on the repayment of debts, basically forcing creditors—even those from other states—to take massive haircuts. Meanwhile, in neighboring Massachusetts, eastern creditors held the balance of power and refused to offer debt relief to the farmers of the west. Their inattention to the yeomanry’s grievances eventually led to the civil unrest known as Shays’ Rebellion.5
Madison, then in his mid-thirties and serving in the Virginia House of Delegates after a stint in the Continental Congress, had, like many of his contemporaries, surmised that the core problem was the Articles of Confederation itself. According to Madison, it was a “treaty of amity and commerce and alliance, between independent and sovereign states.”6 But Madison took his analysis much farther than any other politician of the era. He had, thanks to books supplied from France by his good friend Jefferson, taken a careful study of previous confederations between independent states, and found similar defects to what plagued the American nation in that decade.7 That spring, he wrote a systematic treatise entitled the Vices of the Political System of the United States, detailing his complaints.
The problems, Madison argues, were many. Without a strong central authority, the state governments had failed to follow through on requisitions, regularly encroached the national government’s authority, violated the laws of nations, trespassed on the rights of other states, failed to act in concert when mutual interests suggested they should, behaved illiberally to political minorities, and generally failed to pass sensible and forward-looking laws. The reason for all of these troubles, Madison suggests, was that the states had been ruined by factionalism, or battles between “a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.”8
Influenced by his Calvinist education at Princeton, Madison believed that self-interested behavior was an inevitable aspect of social and political life, and thus governmental success depended not on the virtue of the people, but rather on how well the state managed the selfishness. America in 1787 was an abject failure on that front, with a federal government powerless to do anything and state governments gripped by the very factional gamesmanship that needed management.9
Toward the end of the Vices, Madison lays down a vital marker:
The great desideratum in Government is such a modification of the Sovereignty as will render it sufficiently neutral between the different interests and factions, to controul one part of the Society from invading the rights of another, and at the same time sufficiently controuled itself, from setting up an interest adverse to that of the whole Society.10
This is arguably the most succinct statement of the republican problem ever delivered up to that point in history. Madison’s ability to perceive and articulate this fundamental question of government is one reason he has been remembered as one of the most acute political thinkers this nation has ever produced. Unfortunately, this desideratum (or need) is easier described than fulfilled, and nearly five years after the Americans defeated the British, they only knew of solutions that had not worked.
Unsurprisingly, the delegates who arrived at the Constitutional Convention in the spring of 1787 had very different views on how to solve the problems that plagued America. The most extreme alternative to the Confederation was supplied by thirty-one-year-old Colonel Hamilton, a former chief of staff to General Washington, whose prodigious intellectual talents combined with a natural sociability and cosmopolitan worldview to make him stand out in an era chock full of formidable men.11 As even his soon-to-be adversary Jefferson would admit years later, Hamilton was “a singular character. Of acute understanding, disinterested, honest, and honorable in all private transactions, amiable in society, and duly valuing virtue in private life.”12 The energetic young colonel possessed a very sour view of the capacity of the people to manage their affairs directly, and his alternative was reminiscent of the British Constitution. In Hamilton’s proposal, a lower chamber of Congress would be elected by the people, but both the Senate and the presidential office would be filled by appointment, with those positions being life-tenured. So far out of the mainstream of thinking at the Constitutional Convention was Hamilton that his fellow delegates never took up his proposal for a vote—yet, as we shall see, Hamilton’s views of government would become much more relevant during Washington’s administration.13
On the other end of the spectrum were delegates like Elbridge Gerry of Massachusetts, George Mason of Virginia, and William Paterson of New Jersey, whose plan allowed Congress to collect taxes and created a new executive committee, but offered little else in terms of centralization. This proposal attracted the support of small state delegates, as well as some who would ultimately oppose the final draft produced by the Constitutional Convention.
Madison’s solution was embodied in the Virginia Plan, proposed by Governor Edmund Randolph but really the junior statesman’s brainchild. This plan effectively occupied a middle ground between Hamilton and Paterson. It differed substantially from the final version of the Constitution in many respects (e.g., by imagining a much more nationalized array of institutions that wielded much greater powers), but it nevertheless dominated the agenda of the Constitutional Convention and, in the end, served as the framework for the eventual Constitution. As a consequence, both exhibit key features of Madison’s thinking at the time, and represent his attempts to solve the republican puzzle he had succinctly described in his Vices.
Both the Virginia Plan and the Constitution retained the radical innovation of the Declaration; there would be no established, mixed estates within the new nation. How then did the young Virginian address the problems of factionalism that this had presented? Madison would discard another dominant theme of previous republican philosophy: that of a small, reasonably homogenous polity. It was Aristotle who had originally argued that a true polity had to be of limited territory, population, and diversity, so that citizens could communicate with one another, share knowledge of their circumstances, and know who could be trusted to run the government.14 The Anti-Federalists would come to argue fervently for this principle, believing that in anything but a small republic (as embodied by the states), the people’s voice would be lost to the desires of the elites.15 Madison had developed an opposite view. The experience of the state governments had disproved for him the idea that small states could embody the republican ideal.16 Diversity was inevitable due to the natural divisions between men; even a state as small as Rhode Island was rent in two by the dispute over debts. What was key, in Madison’s opinion, was how the government managed those factions, and the larger the sphere the more manageable the factions would become.17 In Vices, Madison asserts:
Place three individuals in a situation wherein the interest of each depends on the voice of the others, and give to two of them an interest opposed to the rights of the third? Will the latter be secure? The prudence of every man would shun the danger. . . . Will two thousand in a like situation be less likely to encroach on the rights of one thousand? The contrary is witnessed by the notorious factions & oppressions which take place in corporate towns limited as the opportunities are, and in little republics when uncontrouled by apprehensions of external danger. If an enlargement of the sphere is found to lessen the insecurity of private rights, it is not because the impulse of a common interest or passion is less predominant in this case with the majority; but because a common interest or passion is less apt to be felt and the requisite combinations less easy to be formed by a great than by a small number.18
Having abandoned this core principle of classical republicanism, Madison went on to modify another. An institution like the House of Lords had served the purpose of guaranteeing the rights of some sort of aristocratic estate, and indeed the general view of theorists was that a bicameral legislature should protect the “better” class of people. Madison turned that notion on its head: the purpose of a Senate would not be to carve out protections for the wealthy minority, but rather to create purely artificial distinctions within the government among the whole populace, so as to facilitate the combat of interests. This is not to say that Madison had no expectations for the role of a natural aristocracy; instead, he hoped that a better sort of leader would emerge in the national government, in particular the Senate.19 The point, however, is that all power would flow from the people, and only the people, but it would flow in different ways in different intervals to different points of concentration, thus facilitating what Madison anticipated would be a grand clash of interests and factions. As he argues in Federalist #51:
Whilst all authority in (the government) will be derived from, and dependent on the society, the society itself will be broken into so many parts, interests and classes of citizens, that the rights of individuals or of the minority, will be in little danger from interested combinations of the majority.20
Thus, Madison believes that a “well-constructed union” covering a large geographical sphere could “break and control the violence of faction.”21 In fact, the two pieces fit together: as long as the government is designed appropriately, a proliferation of factions would actually be beneficial. The structure of government would channel their fights properly, and a multiplicity of groups would ensure that nobody gains the upper hand for long.
The implications of these innovations are profound, for Madison premises republican government not on virtue—a common theme dating back more than a millennium—but on a decided lack thereof.22 That is not to say that Madison expects men to be the villainous brigands that Thomas Hobbes envisions in the state of nature, but rather that civic virtue—generally defined by theorists as the capacity to put the good of the community ahead of one’s selfish interests—is an unreliable safeguard. Writing at the end of the 1780s—a decade when state after state, faction after faction, and person after person put their own interests ahead of the common good—this was less an assumption than a sad acknowledgement of reality.23 But Madison brushes this aside: let there be a congeries of competing, parochial interests; the more the merrier, in fact. Madison’s separation of powers—or, rather, the separation of powers that emerged in the Constitution after all the compromises had been made—would balance these interests, ensuring that the final product would advance the public good and respect private rights.24
Madison was not completely satisfied with the final draft of the Constitution, but considered it a major improvement over the Articles of Confederation, and he committed himself to its defense. Largely absent during the Constitutional Convention, Hamilton joined the fray with characteristic vigor. He and Madison joined with John Jay, the architect of the Treaty of Paris, to pen the Federalist Papers, anonymous essays published in New York to promote adoption of the Constitution.
It has often been remarked that the subsequent break between Hamilton and Madison was peculiar, given their collaboration on the essays. Indeed, before historians were taking up this puzzle, contemporary observers—and even the principals themselves—pondered the nature of the divide. Often, the blame is placed upon Madison, in no small part because he became a critic of many Hamiltonian provisions that he had previously supported. Some have claimed that Madison’s change of heart was due to the spell that Jefferson had over him; when the former returned from his diplomatic duties in Paris, the latter (so the claim goes) shifted from a staunch nationalist to a skeptic of central power. Others have speculated that it was due to Madison’s Anglophobia; similarly, Hamilton once remarked that his former ally had a “womanly attachment” to France.25 Still others have suggested that regional concerns were in play; Hamilton’s economic program favored the Northeast and Madison, a member of the House during the first three Congresses, was sensitive to the worries of his Virginia constituents.
Madison, however, had a very different answer. Late in his life, in conversation with Nicholas Trist, he said:
As to (whether) I deserted Colonel Hamilton, or rather Colonel H. deserted me; in a word, the divergence between us took place—from his wishing . . . to administer the government . . . into what he thought it ought to be; while, on my part, I endeavored to make it conform to the Constitution as understood by the Convention that produced and recommended it, and particularly by the State conventions that adopted it.26
This view has gained less purchase among popular and academic writers, but it does much to squash the idea that Madison changed his mind. From his perspective, it is irrelevant that he supported certain policies before the government came into being; as long as he believed those policies violated the new governing charter, he was obliged to oppose them.
So, perhaps neither deserted the other. Perhaps instead the two were allied with one another on the first question (is the Constitution preferable to the Articles of Confederation?) but diverged on the next (what shape should federal policy take in light of this new Constitution?). This conclusion runs contrary to the conventional wisdom, which holds that Madison had flip-flopped on his attitude about the government between the time of the Federalist Papers and the inauguration of the new government. Even so, a careful reading of those famous documents supports the idea that, deep down, the two agreed less than they may once have thought.27 We have already looked closely at Madison’s thinking, so it is time to turn to Hamilton’s.
Hamilton’s contributions to the Federalist Papers are likely greater in number than Madison’s, but none is remembered in the same way as Madison’s efforts in #10 and #51. These are broad-based, largely philosophical arguments for the utility of the proposed union. Hamilton, on the other hand, was at his best in the early part of the series, with powerful jeremiads about the inevitable troubles that would befall the nation if it rejected the Constitution. Then, in the final third of the essays, he offered persuasive entries defending the new executive and judiciary. Even so, Federalist #11 comes as close as anything to outlining Hamilton’s core convictions about the potentials of the new American government, à la Madison’s ideas in #10 and #51. Read at the time of its publication, Federalist #11 may not have been as illuminating, but considered in the context of his economic program, it is perhaps his most foundational work.
In that essay, Hamilton opens with a point that reflects his cosmopolitan worldview: “The importance of the Union, in a commercial light, is one of those points about which there is least room to entertain a difference of opinion. . . . This applies as well to our intercourse with foreign countries as well as each other.” He goes on to assert that the “adventurous spirit” of America has “already excited uneasy sensations . . . in the maritime powers of Europe.” He believes that a united America could “oblige foreign countries to bid against each other, for the privileges of our markets.”28 In other words, Hamilton sees the possibility of a great commercial empire, one that could even force the fearsome Great Britain to deal with the United States on terms dictated by the latter.
But, as Hamilton had demonstrated in the preceding essays, disunion among the several states kept the United States from making the most of its potential. A lack of a central authority had enabled the European powers to play each state off the others, and ultimately get for themselves a better deal than they would have if Americans were bound together in a tighter union. Hamilton sees worse things to come should the states fail to unite:
It would be in the power of the maritime nations, availing themselves of our universal impotence, to prescribe the conditions of our political existence . . . and confine us to a passive commerce. . . . The unequalled spirit of enterprise, which signalizes the genius of the American merchants and navigators, and which is in itself an inexhaustible mine of national wealth, would be stifled and lost, and poverty and disgrace would overspread a country which, with wisdom, might make herself the admiration and envy of the world.29
On the other hand, a “vigorous national government . . . directed to a common interest, would baffle all the combinations of European jealousy to restrain our growth.” But even more than this, the sort of economic coordination that could come only from a central government would bind the country together in a shared quest for ever-increasing prosperity:
An unrestrained intercourse between the States themselves will advance the trade of each by an interchange of their respective productions, not only for the supply of reciprocal wants at home, but for exportation to foreign markets. The veins of commerce in every part will be replenished, and will acquire additional motion and vigor from a free circulation of the commodities of every part.30
Taken as a whole, Federalist #11 is a magnificently prescient statement, and a testament to the brilliance of Hamilton. Somehow, he saw beyond the America of 1787—an undeveloped, disconnected, fractious collection of states dominated by subsistence farmers—and perceived the vast economic powerhouse that the United States is today. Thanks to her commerce, America today dominates the world without having to hold a single foreign people prisoner, and Hamilton saw this potential before anybody else in the country or the world. He is the originator of the concept of American exceptionalism.
At the same time, however, the potential for conflict with Madison should be obvious. Madisonian balance and Hamiltonian prosperity are goals that are not necessarily in conflict, but they are not necessarily in harmony, either. A Hamiltonian government that promotes national development may not retain a balance between all factions; quite the contrary, it may systematically favor those deemed most helpful to the leadership’s long-term goals. In fact, as we shall see, one of Hamilton’s goals was to yoke the prosperity of the wealthy merchant class to the fate of the Union through policies that favored both. Madison was thoroughly appalled by this.
The potential for tension is especially apparent when we consider Federalist #11 in light of Hamilton’s view of the English Constitution. As mentioned above, Hamilton envisioned an executive branch almost entirely independent of swings in the mood of the public. He had a similar desire to see the Senate so inoculated. Only the House would be directly tied to the people, and here Hamilton once explained to Jefferson that he was comfortable with the executive wielding extralegal influence within that chamber, much as the king of Great Britain used patronage to acquire the votes of recalcitrant members of Parliament. In his notes, Jefferson recorded a dinner conversation he once had with John Adams and Hamilton:
Conversation began on other matters and, by some circumstance, was led to the British constitution, on which Mr. Adams observed “purge that constitution of its corruption, and give to its popular branch equality of representation, & it would be the most perfect constitution ever devised by the wit of man.” Hamilton paused and said, “purge it of its corruption, and give to its popular branch equality of representation, & it would become an impracticable government: as it stands at present, with all its supposed defects, it is the most perfect government which ever existed.”31
What is Hamilton on about here? Return to his broader theory of republican government: the people’s representatives were not to be trusted to perceive the public interest, let alone sacrifice their own parochial desires for the sake of the common good. What was needed was a strong executive, largely free from public meddling, that had the capacity to, in effect, bribe small-minded members of the legislature to do the things that they should otherwise be doing. For Hamilton—a man who never took a dishonest dollar—this is not about venality for its own sake. This is about compelling venal men to do what they really ought to do, anyway.32
Intentions aside, one can see why Madison would not truck with any of this. In his vision of the new American republic, there were simply to be no special favors whatsoever to be dispensed by the government—no patronage, no sinecures, no insider information leading to vast fortunes. The whole point of his system was to enable factions to rise up to prevent other factions from doing precisely these things, so that the only product of public policy was well and truly public spirited. Corruption was not a tool to be used ultimately for the public good by a natural elite; instead, it was a form of cancer that could pervert otherwise good men into destroying the republic itself. Ironically, the main focal point of the disagreement was none other than their old colonial master: Great Britain. In the old mother country, Hamilton saw an example of republican empire to be emulated while Jefferson and Madison saw a cautionary tale of how a true republic may be destroyed.33
Thus, what united them in defense of the Constitution was not so much a shared vision of what the new government should be, but rather what it should not be. Both judged the Constitution to be a supreme improvement over the Articles of Confederation, but once the fight to replace it was won, it is not terribly surprising—in historical retrospect, at any rate—that the two would part ways, and indeed become leaders of the political factions that would dominate American politics for the next decade.34
In the final analysis, it was not so much that the two held views that necessarily contradicted one another; rather, they possessed different priorities that could, and did, come into conflict. For Madison, the ultimate goal of the new government was to balance different factions and produce public policy that was only in the public interest; for Hamilton, the goal was a vigorous government to spur the country on to national greatness. Insofar as these views suggested divergent policy demands, Madison and Hamilton could be expected to turn from allies into opponents. That is precisely what happened, as the public debate turned from ratification to the Bank—a controversial institution that may have been necessary from Hamilton’s perspective, but was anathema to Madison.
Washington was chosen unanimously to be the nation’s first president, and while his cabinet did not sample from Anti-Federalist sentiment, it drew from a broad spectrum of nationalist political opinion.35 Jefferson—a skeptic of expansive federal power—became secretary of state. Randolph—who refused to sign the Constitution but eventually supported it for ratification—became attorney general. Washington chose for secretary of the treasury his former chief of staff Hamilton, who had grand plans for the office. In Federalist #11, he hopes to make “one great American system, superior to the controul of all trans-atlantic force or influence.”36 The first step in this process was to get a handle on America’s disastrous public finances.
That would be no little feat, as there were centuries’ worth of precedent demonstrating America’s reckless approach to its debt. Some of this was due to Great Britain refusing to allow the colonies to coin their own money, but the balance of the blame lay with the colonial governments, the first in the world to print fiat paper money. The result was rampant inflation and eventually an insistence by Britain that the colonies cease and desist. The Continental Congress was little better either, printing fiat “Continentals” that quickly became debased; by 1781, a single dollar of specie (or hard currency) was worth a whopping 168 Continental dollars. Farmers and merchants refused such worthless paper, and so the Continental Army was forced to impress supplies, with loan certificates promising future repayment.37 But the impotent national government counted on just $500,000 per year in requisitions from the states during the 1780s, so there was no repayment, meaning the certificates were basically worthless, often snatched up by speculators for pennies on the dollar.38
All told, the creditworthiness of the United States was very low indeed by the time Hamilton was sworn in as the first secretary of the treasury. This was Hamilton’s top concern because, as he writes in the Report on Public Credit, the nation was “possessed of little active wealth, or in other words, little monied capital” and needed the capacity to borrow on “good terms.”39 Accordingly, he suggests guaranteeing the repayment of existing federal debt, for the federal government to assume the states’ debt loads, and a new tax on alcohol, tea, and coffee.40 This, he asserts, would help the flow of currency, extend trade, promote agriculture and manufacturing, and lower interest rates.41
In the Report on a National Bank Hamilton proposes the chartering of a national bank, which he argues would have several beneficial effects. First, it would help the nation’s economy, as gold and silver deposited in a bank with good credit can generate much greater capital flows than just their sum in hard coin. Second, it would give the government a reliable resource for borrowing money at favorable rates of interest. Third, it would facilitate the payment of taxes. The Bank, Hamilton proposes, would be largely held by private interests, though the government would supply $2 million of its $10 million capitalization limit via a loan from the Bank itself. The rest would come from private purchases of bank stock, with 25 percent up front in gold or silver and the rest to be paid over time at an interest rate of 6 percent.42
Finally, Hamilton proffers a vast system of public support for manufacturing, which at this point in the country’s history badly trailed the advances being made in Great Britain. In his Report on Manufactures, he offers a series of justifications to diversify the economic basis of the American economy, from a virtual agricultural hegemony to one where industry had a prominent role to play. This would diversify, sharpen, and streamline existing labor; it would promote the application of time- and expense-saving machinery; it would improve employment opportunities; it would promote immigration; it would provide more opportunities for expression of the people’s creative talents; and it would create new domestic markets for the consumption of foodstuffs. Thus, Hamilton advances tariffs on manufactured items, regulations on exports of vital materials, bounties, premiums, tariffs and tax breaks on raw materials, and more. All of this, Hamilton asserts, would stimulate the people to dedicate time and capital toward manufacturing.43
Hamilton had submitted all these proposals by December 1791. Considering that this work followed right on the heels of his defense of the Constitution, both as an anonymous author of an estimated fifty-one Federalist essays and as a delegate to the New York State ratifying convention, and that he had done all of this before he turned thirty-five years of age, we can appreciate clearly why Jefferson once commented that Hamilton was “a host unto himself.”44 It was Hamilton above all else who gave the young government energy and purpose during Washington’s first term.45
Considered in light of Federalist #11, it is pretty clear what Hamilton intended to do. His goal was to harness the natural bounty of the United States, as well as the energetic, intrepid character of its people, to transform the young nation into a world power. To do that, the debt problem had to be solved, interest rates had to be brought under control, the veins of credit had to be opened, and a forward-looking industrial policy had to be implemented. And, in a subtext that runs through all four proposals, he intended to tie the interests of the well-to-do to the success of the government itself. Their private prosperity would hinge on it thriving, and Hamilton adopted the logic of Madison’s large geographical sphere to prop up the republic; he would use the private interests that past philosophers had argued was its greatest threat. But while Madison was concerned about keeping a proper balance between factions, Hamilton was particularly worried about capturing the moneyed class and bending it toward the public good.
In general, Hamilton believed Americans had to follow the example of their former British masters, whose economy and military had benefited greatly by a sensible system of public finance such as what Hamilton was offering.46 That these ideas, in the main, constituted the economic thinking of the later Whig and Lincolnian Republican parties for the whole of the nineteenth century is a testament to his far-sightedness.
It also signals his culpability in the rise of partisan politics, for these policies provoked heated backlash, at least in due course. According to historian Ron Chernow, by the summer of 1791 Hamilton had become the “enfant terrible of the early republic, and a substantial minority of the country was mobilized against him.”47 There were a host of reasons for this opposition; Hamilton’s proposals tended to favor the Northeast over the West and South, indebted states like Massachusetts over fiscally responsible ones like Virginia, commercial interests over poor farmers, and so on. Even so, these issues, while certainly salient, do not really capture the essence of the critique against Hamilton, which was universal in scope, rather than merely dependent on one’s geographic or socioeconomic status, and was symbolized by the name his opponents chose for themselves—that of the Republicans.
Today, this party is often called the “Democratic-Republican” Party, to distinguish it from the modern Republican Party and to signal that it eventually became the modern Democratic Party. Here, we are going to avoid this term and stick with “Republicans” or “Jeffersonian Republicans.” “Democratic-Republican” is not generally what they called themselves, and anyway the modern Democratic Party was just one off-shoot from a later split within the Jeffersonian Republicans. The other off-shoot became the National Republican Party for a time, then finally the Whig Party. The Whigs did form the basis for the modern Republican Party.48
The cluster of views that historian Lance Banning calls the “Republican persuasion” did not develop immediately; opposition to the early elements of Hamilton’s plan was present, but usually followed regional lines.49 In fact Jefferson—Hamilton’s eventual archrival—helped broker a deal to bring about the federal assumption of state debts. It was only after Hamilton proposed the Bank that the Republicans began to put together a systematic critique.
Some of their arguments were antiquated; for instance, their commonplace fears of banks as institutions belied a lack of knowledge of public finance and leaned heavily on the simple prejudices of the age. Some were paranoid; for instance, many were convinced that Hamilton and his friends were looking to establish an American monarchy.50 Some were too influenced by the hyperbole of Britain’s Country Party; the most radical Republicans were ready, willing, and able to interpret any trifling insult as a portent of the republic’s impending doom.51 But amidst these unpersuasive claims, the Republicans leveled some extremely cogent assertions that ring true even today. Three interrelated complaints stand out in particular.
First, in Madison’s view, Hamilton was going against the plain meaning of the Constitution as understood at the time of ratification. Though Madison himself had proposed at the Constitutional Convention a power for Congress to grant charters, such as the Bank’s, the Convention had voted it down.52 Moreover, the clauses in the Constitution that Hamilton was using to justify the Bank’s legality (the General Welfare and Necessary and Proper Clauses) were ones that the advocates of the Constitution had assured its opponents during the ratification debate would not lead to unlimited legislative power.53 Many observers at the time, and indeed historians ever since, have strained to reconcile Madison’s constitutional interpretation of the 1790s to his advocacy for vast federal powers in 1787. But that misses the point. Madison had long been worried about the capacity for government—especially the legislative branch—to overstep its legal boundaries, which is exactly what he thought was happening here. Regardless of what he wanted in 1787, he believed that what the government was doing was contrary to the guarantees about the Constitution that its advocates made during the ratification debates, and therefore what the people thought it meant when their representatives assented to it.54 From this perspective, it is easy to appreciate why Madison would fear this power grab, even if it was a power he thought the government should have, as a sign that the Constitution’s republican balance, which was his paramount concern, was being disrupted.
Second, the Republicans worried that Hamilton’s program was showering benefits upon a select few, notably friends of Hamilton as well as the commercial interests in the Northeast. In point of fact, the Republicans were absolutely correct. Though Hamilton himself did not become wealthy due to his economic policy, many people with connections to him most certainly did. For instance, rumors of Hamilton’s funding plan were so widely known in certain circles before he released its details that a speculator as far away as Amsterdam had advance warning. Ultimately, this facilitated a transfer of wealth from the South and West to the Northeast, as speculators who were in the know sent their agents to the back areas of the country to snatch up as much government paper as they could.55
Nobody was more culpable in this corruption than William Duer, Hamilton’s friend and first assistant secretary of the treasury. Previously a business partner of Hamilton’s wealthy father-in-law, William Schuyler, Duer was well positioned to collect information about Hamilton’s intentions, and when he left the Treasury Department he put his knowledge to good use. In late 1791 and early 1792, Duer and members of a speculative company tried to corner the market on U.S. debt securities, and in so doing overextended their credit lines. When they couldn’t pay their creditors, a panic began and a run on Bank deposits threatened to bring the whole American financial system down. It was only through the acumen of Hamilton, who directed some $100,000 in Bank open-market purchases of securities, that the credit crisis was quelled.56
Ultimately, the core driver of the Republican complaint on this front was essentially the provision of a government rent to those who had the means to take advantage. With the new government backing the Bank, it was a sure-fire winner. Writing to Jefferson from New York City in the summer of 1791, Madison was appalled by the speculative frenzy that had been launched:
It seems admitted on all hands now that the plan of the institution gives a moral certainty of gain to the Subscribers with scarce a physical possibility of loss. The subscriptions are consequently a mere scramble for so much public plunder which will be engrossed by those already loaded with the spoils of individuals. . . . It pretty clearly appears also in what proportions the public debt lies in the Country. What sort of hands hold it, and by whom the people of the U.S. are to be governed.57
A month later, Madison wrote his friend once again:
It is said that packet boats & expresses are again sent from this place to the Southern States, to buy up the paper of all sorts which has risen in the market here. These & other abuses make it a problem whether the system of the old paper under a bad Government, or of the new under a good one, be chargeable with the greater substantial injustice. The true difference seems to be that by the former the few were the victims to the many; by the latter the many to the few.58
In the view of the Republicans, this was precisely the sort of occurrence that a good government was supposed to prevent. How can one region of the nation, one class of society, or one clique with insider information profit at the expense of the rest of the citizenry? The answer, they believed, was that the republic had been corrupted, in much the same way they believed that Rome and England had been transformed from republics into something much worse.59 Per Madison, this result was just as bad as that which had occurred under the Articles of Confederation. In the 1780s, fractious majorities in the states legislated against the rights of the minority and the good of all; now, however a northeastern minority was violating private rights and public good.
How could a minority possibly get away with plundering a majority like this? The answer lies in the Republicans’ third cogent attack on the Hamiltonian system: it had employed the Bank to buy off a faction within the legislature, much as the Republicans believed King George III had done with the Parliament. To buttress these claims, the Republicans relied heavily on the accounts of John Beckley, the first clerk of the House of Representatives and a staunch ally of Jefferson and Madison. In late winter of 1793, Beckley had reported to Jefferson that some nineteen members of the House, plus an additional seven in the Senate, were “paper men” (i.e., had invested heavily in Bank shares). Beckley also reported to Jefferson rumors of Hamilton bending the rules to benefit well-positioned investors.60 In a private letter to Washington dated September 9, 1792, Jefferson argued:
[Hamilton’s system is] calculated to undermine and demolish the republic, by creating an influence of his department over the members of the legislature. I saw this influence actually produced, & its first fruits to be the establishment of the great outlines of his project by the votes of the very persons who, having swallowed his bait were laying themselves out to profit by his plans: & that had these persons withdrawn, as those interested in a question ever should, the vote of the disinterested majority was clearly the reverse of what they made it. These were no longer the votes then of the representatives of the people, but of deserters from the rights & interests of the people: & it was impossible to consider their decisions, which had nothing in view but to enrich themselves, as the measures of the fair majority.61
Taking these concerns about private gains and public corruption together, Madison worried to Jefferson that the holders of Bank shares “will become the pretorian band of the Government, at once its tool & its tyrant; bribed by its largesses & overawing it by clamours & combinations.”62 In other words, the Hamiltonian finance system threatened the balance that he sought to construct in the Constitution and that he defended in the Federalist Papers. Who, in the original schema, was supposed to check an executive branch that was too partial to one faction? The answer: the legislative branch. But Madison and Jefferson believed that the new institution, one not envisioned by the Constitutional Convention (and indeed voted down by it), had stymied this vital check by bribing them. This, in turn, freed the Bank to pursue a fractious agenda, and gave Duer an opening to make his run, almost bringing the economy down with him.
Fortunately, the sound and sure management of the Treasury by the exemplary Hamilton meant that the worst fears of the Republicans were not to be realized—at least not in the 1790s. Still, their critique of the Bank identifies the basic trajectory that corruption will take over the next 225 years. Some new government power may be a necessary tonic to a national ailment, but absent corresponding revisions to the institutions that exercise that power, it has the potential to distort the vital process of checks and balances, which in turn can breed corruption. In the case of the Bank, it granted new powers to an extraconstitutional institution that, per the Republicans, were used in part to bribe legislators. The result may have been benevolent in the grand scheme of things, but that had more to do with the singularity of Hamilton. Bank policies were indeed factional and could indeed have been catastrophic, if the secretary had not acted so effectively to stop the panic induced by Duer’s failed scheme.
What can we make of this now, almost 225 years after this feud burned so hot? For starters, Hamilton’s program was an ingenious plan to modernize the U.S. financial system, stabilize government debt, and diversify the economy. Even a cursory survey of the American economy in the late 1780s demonstrates that such a program was sensible, if not absolutely vital, for the nation’s long-term prosperity. That moderate Republicans (including, above all Madison himself!) some twenty years later would finally adopt much of his program, which in turn formed the basis of Whig and Lincolnian Republican economic policy for the next century, demonstrates just how perspicacious it was.
Meanwhile, the Jeffersonian Republicans were much less pragmatic. The gentry farmers of Virginia may have dreamed of a true republic in the sense that the Country Party imagined it, but what of Napoleon? What of George III? What of Charles IV? The great powers of Europe were not finished with the American continent, not by a long shot, and were intent—as Hamilton argues persuasively—on forcing America into a “passive commerce.” Hamilton doubted that the structure of the Constitution, at least as Madison envisioned it, was sufficient to ensure America’s security in the international world.
This has been the general consensus of historians for generations, and it is by and large fair. But there is another way to look at the matter, one that is more sympathetic to Jefferson and especially Madison, who clearly and rightly saw civic dangers lurking in the shadows cast by Hamilton’s Bank. Return to those three criticisms that they leveled so effectively, for they are causally linked: Hamilton had extended the power of the government beyond its original scope, his argument about the Necessary and Proper Clause notwithstanding; this extension undermined the balance between powers and structures that the Framers had implemented, as patronage from the executive-run Bank came to influence members of Congress; and the final result produced factionalism, corruption, and almost—were it not for Hamilton’s vigorous intervention—economic catastrophe.
This gets to the heart of the Madisonian perspective on the Constitution. His system was designed to survive venality and self-interestedness; indeed, as noted above, it assumed a baseline presence of such vices. As Madison writes in Federalist #51, “ambition must be made to counteract ambition,” which implies a soundly designed structure remains in place to make it so. Unbalancing the system, as the Bank did, prevented it from counteracting ambition against ambition properly, giving an undue advantage to the financial elites in the Northeast, especially Duer. We can see that most clearly in how the Bank ensnared members of Congress, according to Beckley. As Jefferson asserted to Washington, a fair vote on the Bank might have produced a very different result, had it not been for the profit members were taking from the Bank. Little wonder that Madison flipped from being a proponent of federally chartered institutions to one of its fiercest critics. This sort of behavior is exactly what had appalled him in the states in the 1780s.
Historians, political pundits, and the civic minded have long viewed the fight over the Bank as the opening salvo in the battle between partisans in the debate over more or less government, a conflict that continues to this very day. It also serves as an epitome for the argument of this book. For the style of corruption bred by the Bank will recur time and again: ambitious national leaders see some problem that the existing powers granted under the plain meaning of the Constitution do not allow; they expand those powers successfully; this may or may not solve the problem, but it disrupts the balance the Constitution hopes to achieve; and it lends itself to corruption as one faction or another can take advantage of the new weaknesses within the system.
And, as we shall see in the next chapter, such innovations in governmental power—once successfully claimed—are virtually irrevocable. The Republicans rode to power on a wave of popular discontent in 1800, but once installed in office, they accepted many Hamiltonian innovations and added several new powers to the federal menu. Corruption, unsurprisingly, followed soon thereafter, in no small part because the managers of these powers could not hold a candle to Hamilton.
As Madison argues in Federalist #10:
It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.63
Fortunately, there was an enlightened statesmen to manage the nation’s financial affairs in the early 1790s. As we shall see, Gallatin—himself possessed of extraordinary capacities—would manage ably the Bank after the Republicans took control. But, per Madison, it is in vain to say that men like Hamilton and Gallatin will be there when they are most needed. The Bank may not have exhibited the worst potentialities that Madison feared, but its successor would. As hack politicians replaced exemplary souls at its helm, a corrupt Second Bank would bring the country unneeded economic misery in 1819. And worse would soon follow.
