Hamilton vs. Jefferson: The Shaping of a New Nation
The fledgling American republic emerged victorious from its conflict with Great Britain as a loose confederation of 13 states weighed down by crushing debt. During the 1790s, the Founding Fathers used their vision and ideas to address these issues and shape the new nation. However, two of the Founding Fathers— Alexander Hamilton as the Secretary of Treasury and Thomas Jefferson as the Secretary of State— their beliefs shaped by very different social backgrounds and experiences, had deeply conflicting ideas on fundamental issues such as the role of the American people in governance, the nature of the national economy, the scope and power of central government, and even the interpretation of the Constitution. This conflict led to the emergence of two distinct parties.
The Federalists, led by Hamilton, wanted to promote economic growth through industry and commerce, and decisively manage the national debt and economy with structured approaches such as a central bank and a federal monetary policy. Distrusting the ability of the masses to act cohesively for the common good, they favored a strong federal government led by the elite. To that end, they were willing to interpret the Constitution broadly and assume “implied” powers necessary to implement difficult changes. Contrastingly, the Anti-federalists (or Democratic-Republicans), led by Jefferson, believed in a decentralized agrarian economy. Fearing the tyranny of a strong federal government akin to a monarchy, they favored a balance of power tilted towards the states, and ultimately the people themselves.
They were suspicious of commercial activity as being susceptible to corruption at the cost of farmers. Insisting on a strict interpretation of the Constitution, they wanted to limit the federal government to “explicitly stated” and “absolutely essential” powers. While “these opposing visions wind like the twin strands of DNA through American history” and both the points of view have meritorious elements, in context of the crises facing the nation during its formative stage, the Federalists’ adoption of a strong central government and progressive policies was a more judicious choice for addressing national debt, binding the confederation together into a nation, building international trust in America’s credit, and creating a strong framework for future prosperity.
Hamilton believed that America could prosper as a nation only if it could raise liquid capital to invest in its economy. The capital would come from a combination of national revenue generated through tariffs and taxation, and domestic and international borrowing. Therefore, it was crucial for the nation to have the ability to borrow at will. This required establishing solid trust among investors that America would unfailingly honor its debt obligations. He understood that repaying the Revolutionary War debt in full will help establish the much-needed credibility in America’s national debt. The new national government had inherited an enormous debt burden from the Confederation in terms of bonds, requisition IOUs and continentals. Hamilton proposed to redeem these instruments at generous terms, replacing them with new federal bonds. Additionally, he fought hard and long to assume the debts incurred individually by the thirteen states with a shrewd and deliberate calculation that replacing state instruments with federal ones would force oligarchs to support the Union in their self-interest. These actions were an expression of Hamilton’s belief in a well-managed, purposeful national debt system as a “national blessing.”
Jefferson, on the other hand, did not believe in government debt because it unjustly imposed burdens on future generations. His fear of uncontrolled spending by the government has in fact come true in modern times in the form of a large deficit approaching $1 trillion in 2018. However, Jefferson’s beliefs ignored the reality that internal generation of revenue in a new nation was nowhere near sufficient to invest in economic growth and that America had to rely on external sources of funding to become economically stronger, and the fact that America had to move beyond an agrarian economy to reduce dependence on Great Britain’s for goods. Driven by his views on keeping states largely autonomous, he failed to see that if the financial interests of the state oligarchs were not tied to the success of the federal government, the resulting weak alliance would pose a threat to the Union.
In pursuit of his nationalistic objective, Hamilton was able to get Jefferson’s support for the federal assumption of state debts by sacrificing his personal desire for New York as the capital of United States. His actions on war debts resulted in significant increase in value of the new American bonds and led to their broad international acceptance. This proved the soundness of Hamilton’s views on national debt. In fact, without his decisive and astute actions on retiring national debt and establishing American’s creditworthiness, the new government would have been severely hobbled by shortage of liquid capital, and not been able to effectively run the country and power its growth.
Hamilton wanted the federal government to be empowered to use all means necessary to function effectively except the ones explicitly prohibited in the Constitution. His assertion was put to a severe test in an attempt to create a national bank. He argued that Clause 18 of Section 8, or so-called “Elastic Clause” that gave Congress the power to make all laws “which shall be necessary and proper” to carry out the enumerated powers, was intended to provide the flexibility to act broadly on any of the powers listed in Section 8. Therefore, chartering a bank was “implied” within Clause 1 of Article 1, Section 8 that gave Congress the power to collect taxes and pay debts. Jefferson cited the 10th Amendment of the Constitution, which required those powers not granted to Congress to remain with the states or people, and argued that Congress had no legal authority to enact the Bank Bill since chartering a bank was not one of the “enumerated” powers of Congress in the Constitution. He supported “strict construction,” or a highly constrained interpretation of the Constitution.
He claimed that if the Congress were to be allowed to assume any power under the excuse of it being necessary for public good, it would ultimately lead to the loss of checks on abuse of authority by the federal government. Hamilton countered that limiting “necessary” to only explicitly stated acts would significantly weaken the government and impair its ability to function effectively. Jefferson’s reasoning was flawed because Clause 18 did limit the elasticity specifically to enumerated powers within Section 8. Besides, authors of the Constitution could not possibly have imagined all possible scenarios that America would face in the future. Limiting Congress strictly to only a narrow list of predetermined actions would likely result in inability to respond to some unforeseen critical situations. Fortunately, Hamilton was able to persuade Washington to sign the Bank Bill and create the institution that played a critical role in America’s economic growth. Even though the Constitutional debate has not been concluded, with originalists like ex-Justice Antonin Scalia choosing to interpret the Constitution strictly as written, Hamilton’s opinion on pragmatic interpretation of the Constitutional has granted the U.S. government the required flexibility to deal with many crises without resorting to difficult amendments.
Hamilton understood the importance of manufacturing in bringing prosperity of America. He envisioned a country where trade and manufacturing would increasingly supplement traditional agriculture and lead the nation to domestic self-sufficiency instead of undesirable reliance on imports. In the 1791 Report on Manufactures, he argued that a thriving domestic manufacturing sector was critical to America’s security and independence. If the United States could produce the good necessary for its subsistence, it would not be at the mercy of foreign traders. It would have its own stable supply and not be forced to pay for goods at prices dictated by international market conditions. Hamilton also realized that it was essential to nurture American manufacturing during its infancy until it could mature and compete effectively with well-established economies such as Britain’s. He proposed protective measures such as tariffs on imported goods to make them more expensive than domestically produced goods and for the price difference to drive increased demand for American goods.
Higher demand would eventually result in lower cost of production for American products and their price parity with imported ones. Jefferson’s vision, rooted in morality, called for America of small independent farmers— people he considered “virtuous”. He considered merchants and corporations to be evil and exploitative of the laborers who honestly worked the land, and believed industry and trade to have a corruptive influence in politics. He was particularly scathing about banks and called them as dangerous as armies. As a proponent of equality and free trade, he considered tariffs unfair to America’s trade partners and wanted a mutual and unconstrained flow of goods across borders.
Jefferson did not consider the fact that the failure to develop America’s manufacturing would make it highly dependent on foreign powers for the supply of non-agricultural goods. Without internal production to compete with imported goods, by law of supply and demand, those countries could raise prices at will and hold America to ransom. It was the kind of national subservience that was counter to the Republican spirit he championed, and a threat to national sovereignty. His opposition to tariffs was based on lofty ideals of free trade but not pragmatic. When American industry was just being set up, it was not probably not going to be as efficient as economies which had industrialized earlier. The cheaper goods produced by those countries were likely to be cheaper and choke demand for goods produced domestically. Without market demand, American enterprises would not have been able to survive.