U.S. Intellectual History Blog

Government and the Market in the Federalist Era

o'connorThe following is a guest post from Mike O’Connor (the second of a series–see the first post here). Mike is one of the original USIH bloggers and a founder of the Society for U.S. Intellectual History. He is the author of A Commercial Republic: America’s Enduring Debate over Democratic Capitalism, which will be published in May by the University Press of Kansas. The book’s Facebook page can be found here, and information from the publisher is available here.

“The past,” it has been observed, “is a foreign country: they do things differently there.” The wisdom of L.P. Hartley’s observation, however, is most often honored in the breach, as the tendency to incorporate the thinking of historical actors into a contemporary worldview is quite prominent in the today’s United States. In the modern era, wrote Daniel Rodgers, few bother to make distinctions between the past and present. “One travel[s] between past, present and future in the momentary blink of the imagination,” as if “through a wrinkle in time.” Jill Lepore has characterized this trend, specifically as it relates to the cult of the American founders, as “antihistory”: from its perspective, “either we’re there, two hundred years ago, or they’re here, among us.”

It is perhaps unsurprising, then, that this distortion pervades the modern understanding of the origins of government economic intervention in the United States. The popular perception of the 1790s as a period riven by a great intellectual and political chasm, with Alexander Hamilton on one side and Thomas Jefferson on the other, is a useful one: personal enmity and ideological incommensurability played a large role in the period’s political debates. Yet little of value emerges beyond that basic framework.

Conventional wisdom designates Hamilton the “conservative” and Jefferson a “liberal.” These labels, which even at their best tend to obscure more than they illuminate, become completely meaningless when applied to Federalist-era political economy. Regarding the most important issues of the day, Hamilton favored government economic intervention, an industrial economy, and the growth of American cities. His most influential and articulate opponents—foremost among them Jefferson and James Madison—ferociously opposed all of these things. Yet neither the “pro-business” Hamilton nor the “anti-government” Jefferson and Madison took positions that would resonate with modern-day audiences. Specifically, none of these men based their positions on the notion that the free market embodies the fairest and most equitable system of producing and distributing society’s goods. The partisans who conducted the original debate over federal intervention in the American economy did so on their own terms, and no position figured as a precursor of any twenty-first century analogue.

Perhaps the primary reason that late eighteenth century positions seem so unfamiliar is that the issue to which they offered responses is no longer resonant. Political figures of the 1790s exhibited little concern about whether the government could impose upon private businesses through, say, regulation or taxation. Instead, Americans of this period debated whether the government of the United States should support the nation’s economy. Only with this distinction in mind do the positions of Hamilton’s Federalists and Madison’s and Jefferson’s Republicans become comprehensible to modern sensibilities.

Hamilton’s motivations were primarily nationalist. The United States was a new, weak country teetering on the edge of insolvency. Washington’s secretary of the Treasury recognized that a nation whose finances were so shaky that its own citizens were afraid to invest in it would be forced to depend for capital on the good will of foreign banks and governments. Furthermore, a country that could not raise its own funds or manufacture its own industrial goods (including, significantly but not exclusively, weapons) was one that was vulnerable to economic and military attack. Given these convictions, Hamilton strongly opposed the notion that the United States should be content with whatever results emerged from market competition, believing that the nation’s economy was so underdeveloped that even necessary businesses were likely to fail. Under these circumstances, Hamilton believed, “There is no purpose, to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry; no [c]onsideration more valuable than a permanent addition to the general stock of productive labour [sic].” Such a position—which favored business and industry, advocated for government economic intervention, and minimized the role of the market—was a creature of the 1790s. It can find no place within the categories provided by modern political and intellectual taxonomy.

In order to achieve his desired results, Hamilton fashioned a series of policies that would create several interlocking and mutually reinforcing institutions whose purpose was to shore up the nation’s credit and stimulate the growth of American industry. He proposed that the federal government assume state debts from the Revolutionary War, that the federal liability be securitized and sold as an investment vehicle, that the US found a national bank and, finally, that the federal government invest directly in emerging private industrial enterprises.

Hamilton’s opponents noted, not unfairly, that those who founded industries, borrowed from banks, and invested in federal bonds tended to be wealthy. The secretary’s policies, they argued, were little more than a giveaway of public benefits to an already privileged class. Yet their strongest objections confronted directly the heart of Hamilton’s project: Republicans of the 1790s simply did not want an industrial or commercial economy. They distrusted the market and believed that only farmers, who raised their own food, could exhibit the independence necessary to sustain the virtues upon which a healthy republic depended. Jefferson famously called agriculturalists “the chosen people of God,” but he also observed that “[c]orruption of morals…is a mark set on those” who “depend” for their “subsistence…on the casualties and caprice of customers.” Madison held that industrial capitalism offered only “the most servile dependence of one class upon another class.” On their view, the market was a corrupting influence, one to be avoided whenever possible. Though Jefferson and Madison recognized that capitalist institutions and practices were already in place in the young United States, the two founders saw the acceleration of their development as a curse, not a lodestar for government policy. The Republican position opposed government economic intervention because they wished to avoid, or at least delay, a flowering of market-oriented activity in the United States. Today, of course, those who oppose economic intervention often do so on the grounds that the determinations of the market are the most just and efficient, and should be respected. Again, the positions that defined the debate over government economic intervention for the first generation of Americans, when properly understood, have little resonance among today’s political partisans.

Though Hamilton’s political influence was waning when he was killed by Aaron Burr in 1804, his ideas exerted a lasting influence. Each of his recommended policies was eventually adopted, and the principle of government economic stewardship was established relatively early in the nation’s history. Since then, few American politicians or intellectuals have succeeded in challenging the understanding that the government bears responsibility for the performance of the nation’s economy. The last significant attempt to do so defined the political economy of the Jacksonian era, which will be the subject of my next post.

6 Thoughts on this Post

  1. This is a marvelous post. Next time I teach the first half of the survey, I’m going to assign this to my students. It’s an excellent, succinct summary of the key differences between the Federalists and the Republicans, as well as a masterful rendering — in a few deft strokes! — of the difference and distance between “the Founding Fathers” and today.

  2. Well done, Mike! I agree with LD. …What follows is for the sake of conversation:

    “Market” and “free market” and “market competition” are used somewhat interchangeably in this post (which I think must be an excerpt from the book). Are those terms defined in a prior chapter or introduction? I ask because Jeffersonian Republicans didn’t reject all markets, but only the scale and type of the one utilized by Hamilton in his proposals. The Jeffersonian yeoman farmer types wanted local markets and barter—small-scale stuff. And did those small-scale farmers reject gov’t intervention in the form of regulating weights and measures, or property boundaries? Are those not types of economic interventions (i.e. preventive ones for the sake of efficiency, meaning helping the local farmers avoid constant hearings with judges and magistrates)? And isn’t there room for corrupting influences in this local schema? In sum, this group wanted moral and regulatory interventions, which are also indirectly economic ones, but they wanted it all to feel local. Thoughts? – TL

  3. Tim:

    It’s funny you should ask about definitions. At a much earlier stage, I wrote at least twenty pages defining and historicizing terms like “market,” “capitalism” and “democracy.” Adam Smith and the ancient Greeks were in there–it was a truly grand intellectual exercise! In what I’m guessing might be a fairly common scenario, readers of all sorts exhibited a strong consensus that this section didn’t really say anything, so it was replaced with a few functional one-sentence definitions that seem to work just fine. My definition of the market would be pretty unremarkable: something along the lines of an process defined by the aggregate actions of buyers and sellers determining prices by means of voluntary exchange. So perhaps there’s a lesson for all the dissertation and first-book writers who might be reading.

    I also think you’re absolutely right that Jeffersonians did not reject all markets. What they didn’t like is production for the market. In other words, if you were a farmer who had some extra crops left over, and could trade it for, say, some candles made by another farming family up the road, they were fine with that. But this seemingly small exception really tied the whole scheme in knots. Because ultimately if the farmer does well selling his/her “excess” produce, he/she will notice which crops people want most and begin planting those more frequently. An inexorable drift will set in toward becoming a merchant who happens to sell agricultural products rather than an independent cultivator in the Jeffersonian sense. And if the candle-maker does well enough, then he/she will also start devoting more of his/her time to manufacturing, to the point of abandoning farming entirely and becoming a full-time manufacturer. (To give credit where credit is due, this is Drew McCoy’s analysis from The Elusive Republic rather than my own.) This division of labor is what economists love because it makes economies more efficient. But Republicans hated it because they saw production for the market–even of agricultural goods–as threatening to the character necessary to sustain the republic.

    Of course, by the time that Jefferson and Madison had each become president, both welcomed industry, and even government support for it. In that sense, Hamilton was vindicated. In another sense, though, he was not. Once the Federalists had been vanquished, there was no one left to point out that the Republicans had changed their tune a bit over time. Thus Jefferson never said, “Back in 1791, Hamilton was right and we were wrong.” (How that fudging led to the construction of the myth of the founding fathers is one of the themes of David Sehat’s new book that will be out next year.)

    And I also think that you’re right about Jeffersonians supporting standardization of measurement and the like, and that these are certainly examples of government intervention. But I wrote about macroeconomic policy, and so, unfortunately, just don’t know very much about those things.

  4. I disagree.

    You open a whole can of worms when you state, “What they didn’t like is production for the market.” There are way too many counter examples, I can come up with off the top of my head. The thesis of the McCoy book was that the Jeffersonians wished to freeze development of the American society to prevent it from sliding inexorably toward an urbanized economy which according to theory was incompatible with sustaining a republic. Their solution was to expand across the space of the American continent. The other half of the solution was what to do with the surplus caused by the incredible fertility of the American soil. According the McCoy, the Jeffersonians advocated free trade to deal with this surplus. Production for the worldwide market was an absolute necessity in their elusive quest to keep American society at an appropriately virtuous stage of development. Joyce Appleby wrote Capitalism and a New Social Order in 1982 to combat the claims of the “republican synthesis.” Her choice of Jeffersonians were Middle state wheat farmers producing grain for export to Europe.

    In regards to governmental intervention in the marketplace James Madison wasn’t exactly shy. Bruce Ragsdale, in a book entitled A Planter’s Republic, termed Madison’s Port Bill of 1784 as a “stunning display of faith in the power of law to transform economic structures.” (P.269)

    I argue that the recurring theme of Madison’s federal career is his attempts to rectify an unfavorable balance of trade with Great Britain (and favor France) by commercial discrimination from the earliest tariff of 1789 through the disastrous Embargo of 1808. John Crowley wrote a wonderful book back in the 90s entitled The Privileges of Independence which argues that the Jeffersonians were Neomercantilists.

    They often rejected the decision of the marketplace. Jefferson writes of manipulation by British factors in the tobacco and credit markets leading to virtuous Virginia planters becoming a “species of property annexed to certain mercantile houses in London.” Massachusetts farmer William Manning believed that “the Few” used market transactions to live off the laboring many.

    The Jeffersonians also held on to decidedly anti-market ideology. The Federalists tended to accept the decisions of the marketplace and enforce the rights of voluntary contract. The Jeffersonians held to older notions of a “just price.” One can see this theme recurring in the debates concerning Madison’s plan of discrimination. Since previous holders of securities did not receive an “equivalency,” the opponents of the administration’s financial plans wanted to correct the decisions of the marketplace and the Federalists are advocating a policy of laissez-faire. Members of the Jeffersonian coalition are in favor of an “omnipotent” Congress acting as a court of equity. For example see James Madison’s court of equity analogy in Annals of Congress vol. I, 1237.

    I am also not sure about the validity of Jill Lepore’s quote. I would argue that the majority of historians view the early republic through the distorting lens of the “Progressive” historians and their consensus school critics. Two historiographical essays by Staughton Lynd showed who shaped the debate concerning the era. In “On Turner, Beard, and Slavery,” he showed how the largest source of property and a large engine of he economy has been trivialized in our history. In the second essay “Beard, Jefferson, and the Tree of Liberty,” Lynd shows how Beard accepted Jefferson’s account of the 1790s. Jefferson managed to erase the planter-yeoman class-conflict ( or the even more exploitive planter-slave conflict) out of our histories. The rapacious elites were a small group of financiers who preyed upon “agrarians” who somehow included the leadership class of the most powerful state of the Union many of whom owned dozens or in Jefferson’s case roughly two hundred. Perhaps instead of telling stories of Jefferson’s election of 1800 as “Jeffersonian Democracy” perhaps we should characterize him as the first President of the Slave Power.

  5. Brian:

    No doubt I erred with my “production for the market” comment. I was trying to be succinct, but perhaps came across as glib and, worse, inaccurate. My apologies.

    But my central point remains the same, and I’m not sure that it’s one with which you’d disagree. When you write that “the other half of the solution is what to do with the surplus caused by the incredible fertility of the American soil,” I think I would phrase it “the other half of the problem.” Though Jeffersonians were committed to westward expansion and international trade, as I remember McCoy these were “second best” adjustments to the theory that were made necessary precisely because productivity pushed the independent yeoman toward undesirable market activity. I see this as more-or-less in line with your characterization. But I haven’t read the book in quite a while, and don’t have it in front of me, so please feel free to correct my understanding.

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