Chapter 20: America's First Great Debate
As the first President of the United States, George Washington appointed two cabinet secretaries who went to war with each other. Alexander Hamilton and Thomas Jefferson fought on many fronts, but perhaps the most significant front was Hamilton’s economic agenda.
Looking to the recent success of Great Britain, Hamilton tried to bring the Industrial Revolution to America – and Jefferson tried to stop him. In this episode, we’ll discuss the intricacies of Hamilton’s plan, why he fought for it, and why Jefferson fought against it.
Sources for this episode include:
Andreadēs, Andreas M. History of the Bank of England: 1640 to 1903. Trans. by Christabel Meredith. P.S. King & Son. 1909.
Appleby, Joyce. “Liberalism and the American Revolution.” The New England Quarterly, vol. 49, no. 1, 1976, pp. 3–26.
Chernow, Ron. Alexander Hamilton. Penguin Group. 2004.
Hamilton, Alexander. “Final Version of the Report on the Subject of Manufactures.” 1791. https://founders.archives.gov/documents/Hamilton/01-10-02-0001-0007
Jefferson, Thomas. Notes on the State of Virginia, Query XIX: Manufacturers. 1781. https://teachingamericanhistory.org/library/document/notes-on-the-state-of-virginia-query-xix-manufactures/
Richter, Daniel K. Before the Revolution: Americas Ancient Pasts. Harvard University Press. 2011.
Trumbull, Levi R. A History of Industrial Paterson. Carleton M. Herrick, Book and Job Printer. 1882.
After the Revolution, General George Washington returned to Mount Vernon, his estate in Virginia. The war had taken its toll on Mount Vernon, which had been failing to turn a profit in his absence, as he led the American Continental Army. Mount Vernon would suffer his absence further, for it wouldn’t take long before he was called into service once again – this time to attend a convention in Philadelphia.
Unanimously chosen to be the presiding officer of that convention, Washington oversaw the delegates as they negotiated a framework for a new national government. This new Constitution of the United States had some detractors. Chief among them was Washington’s fellow Virginia delegate, Patrick Henry, of “Give me liberty or give me death!” fame. But those anti-federalists would be unable to stop its ratification.
You see, the document was ambiguous enough that it had the potential to serve the interests of whoever was reading it. That included southerners and folks who wanted limited government, like another Virginian, the 36-year-old James Madison, as well as northerners and folks who wanted strong, central government, like Washington’s former aide-de-camp, Alexander Hamilton. In fact, Hamilton and Madison would work together, after the convention, to get the Constitution ratified, writing a series of essays known as the Federalist papers.
And once the Constitution was ratified, a national election was held. Chosen – once again, unanimously – by the electors to be first President of the United States was George Washington. He headed up to the first temporary capital in New York City to form a cabinet.
Over the next eight years, Washington led the new nation through a turbulent beginning, as the government started feeling out the powers and the limits of the Constitution. And in the example he set, Washington created several important precedents for the nation. He resigned his military post before taking office, ensuring the government would always be run by a civilian rather than a military leader. Washington asked to be addressed simply as “Mr. President” – an unusually low distinction for a head of state. And knowing how central he was to the American imagination of its federal government – and how that needed to change – he decided to step down after two terms. After that, no president would serve more than two terms for the next 144 years, and then the Constitution was amended to guarantee nobody ever did it again.
But there was one norm he hoped to make last, yet couldn’t: A government of statesmen un-tied to political parties. “I mean, we’re all Whigs, right?” Not only did Washington fail to prevent partisanship in America’s future, he couldn’t even prevent it in his own administration. Because just months into his presidency, his cabinet was suddenly divided between two factions that were viciously opposed to one another. The two-party system was born. And although there were many issues dividing them, perhaps the most significant was industrialization.
This is the Industrial Revolutions
Chapter 20: America’s First Great Debate
Okay, let’s back up a second – because you’re going to want to know this first…
Back in the 1690s, England was in trouble. Allied with their new King William III’s native Dutch Republic (and really, all of Europe) against King Louis XIV’s France in the Nine Years War, the English realized that the coming century was going to see war expand to a global scale. And to fight those wars, they were going to need a bigger, better Navy.
But how to pay for it?
In the decades between the Wars of the Three Kingdoms and the Glorious Revolution, many Whigs had fled the British Isles. Some went to the New World. Others went to Calvinist countries in Europe. A few did both.
Among that last category was a Scotsman named William Paterson. As a young man, he had gone to the Caribbean and suggested that Scotland set up a colony in the Americas, perhaps at the Gulf of Darien on the isthmus of Panama. As history nerds listening will know, that colony did end up happening. And it did not go well for Scotland. But I digress.
Then, in the 1680s, Paterson settled in Amsterdam, where he may have been involved in the movement to put the Dutch Republic’s stadtholder – William of Orange – on the English throne. Because after that Glorious Revolution he settled in London.
But while in the Dutch Republic, Paterson had taken note of the Bank of Amsterdam, and its innovative financial practices – like issuing bank notes in exchange for bullion, bank notes which could then be used as currency throughout the city. Paper money made exchange more efficient and Paterson wanted to bring that idea to England.
His new Bank of England would also act, in effect, as a lender to the crown. This way, the government could borrow at low interest rates while, in turn, provide the Bank the critical monopoly to print money.
And so, after three years of planning, the world’s first modern central bank was born in 1694. The crown borrowed heavily from the Bank as it built up its army and navy. In the process, the army and navy spent loads of cash with merchants like the Galtons (shout out Chapter 18!) and the Wilkinsons (shout of Chapter 6!). And as war capitalism grew with paper money, finance grew; and financing of other industrial pursuits came along – textile mills, coal mines, chemical plants, machine tools, and more.
Central banking created the conditions for manufacturing as we know it, while simultaneously stabilizing national politics and state security.
The idea of the central bank has since spread across the world, and its role has expanded into all sorts of monetary policies – like those around interest rates – to control the value of currencies.
One of the first countries to adopt this idea was the new United States. It happened almost immediately, upon ratification of the Constitution. But that doesn’t mean it happened without a fight.
If you know your American history, you know what’s coming next.
In choosing his Secretary of the Treasury, Washington reached out to Pennsylvania’s Robert Morris, remembered as the Financier of the Revolution. To Washington’s surprise, Morris told him that nobody in the new nation understood finance and economics better than Washington’s old aide-de-camp, Alexander Hamilton.
Hamilton was a tireless sort, and he went out of his way to read economic texts and treatises (even during the Revolution) – including new books like Adam Smith’s Wealth of Nations and the memoirs of the French finance minister, Jacques Necker. Even Thomas Jefferson agreed in later years – by that point, Hamilton’s bitter enemy – that nobody was better suited for the dirty role of leading the Treasury Department than Hamilton.
Washington appointed Hamilton to be the first Secretary of the Treasury.
For his Secretary of State, Washington chose Jefferson – the primary author of the Declaration of Independence who had been serving as a representative of the United States in France since the end of the Revolution. In fact, in that capacity he took the extraordinary role of helping the French Revolution off the ground, working with the Marquis de Lafayette – back home after fighting alongside the Americans – to draft a Declaration of the Rights of Man.
To understand the divide that was coming, we need to understand the ways the liberal ideology influenced the two cabinet secretaries differently.
Hamilton believed in liberal economics, democracy, and the independence of the United States from foreign powers. Ever the pragmatist, he believed that in order to secure these things for longevity, the United States needed to become a permanently united nation, powerful enough to fight off the forces of Europe in the future. And to those ends, a strong, central government was required.
Jefferson was an idealist whose own sense of liberalism abhorred those beliefs. In many ways, Jefferson's writings make him look like some kind of quasi- or perhaps proto-anarchist. He was so unconvinced about the new Constitution he questioned whether it was right for him to serve in the federal government. He dreaded the idea of a national president who could serve more than one term. And he was ever-cautious of a fast-moving, effective government, believing it would always, inevitably, be oppressive. But he also hated the powers of high finance and industry. He feared capitalism as much as he feared big government.
Hamilton’s plans promoted both. They would make the federal government more powerful than the state governments, while also enriching speculators in America’s (primarily northern) cities. And Jefferson believed those enriched speculators would become loyal to Hamilton, personally, as a result.
The war between Hamilton and Jefferson began before Jefferson even made it to New York. Hitting the ground running, Hamilton made his Report on Public Credit to Congress in January 1790. In it, he recommended that the federal government assume state debts.
After the Revolution, but before the Constitution, the national government had a lot of difficulty raising tax revenue, so it had to borrow money. Plus, there was a lot of debt leftover from the Revolution, still held by individual states, and someone had to deal with it. The whole point of the Constitution was to pool American resources. So why not pool American debt, which now totaled a whopping $79 million?
Plus, the move would help establish a credit history for the nation. Faith in American credit, Hamilton believed, was critical to faith in America itself.
This created a detractor in one of Hamilton’s old friends – James Madison. After a blistering campaign to get elected to the House of Representatives, Madison understood that he would need to pivot slightly on the issues of federalism. His constituents in Virginia were not altogether trusting of this new central government. Plus, Virginia had mostly repaid its debt from the war. Under Hamilton’s plan, though, Virginian taxes would be used to bailout states like South Carolina and Massachusetts. Playing to his local constituency, Madison complained that the scheme would punish states like his.
Jefferson helped the two sides compromise. Hamilton’s assumption plan would pass through Congress, and the permanent capital city would be placed in the South, on the Potomac River, to please Virginia. Although he would have preferred the capital in or around New York, Hamilton knew the assumption plan was more important. Because by assuming state’s debts, the federal government would hold a power over said states, a power that would keep the states united under that federal authority. And when he realized this, Jefferson would never cooperate with Hamilton again.
To make that power permanent, Hamilton needed to make the debt permanent. That’s not to say that the debt shouldn’t be paid back, but that the United States should always be borrowing and always be improving its credit – and by extension, its legitimacy, authority, and power. To this end he recommended to Congress that they charter a National Bank.
Modeled on the Bank of England, this First Bank of the United States (as it was later known) would issue bank notes and lend to the federal government at low interest rates. Of course, this led some American patriots to question Hamilton’s loyalties. “Like, what are we doing adopting these British ideas? We cast off the British, remember?”
Again, Hamilton believed that to secure its independence, America needed power.
The Bank of England had allowed Great Britain to become the world's pre-eminent superpower by financing its armed forces. Having an established credit stabilizes the political and economic order. Even if America wanted to cast other British norms to the side, a National Bank would both secure the nation and one day allow it to throw its weight around in the world. In the process, the new nation would be less reliant on Britain, not subservient to them, as his opponents often claimed.
Besides, by creating a National Bank that issued bank notes, it could create a new and trustworthy national currency, desperately needed at the time, since colonial currency crashed in the Revolution.
Now, the loans from this National Bank to the government would need to be paid back, on time, in a continual manner. So, Hamilton advocated higher taxes on all sorts of products – like whiskey, which will lead to a bit of a kerfuffle – as well as a sinking fund to gradually eliminate the existing glut of debt from the Revolution.
What Hamilton's opponents failed to appreciate was that his system was also designed to reduce interest rates. Lower interest rates meant easier borrowing, which meant greater private sector investment, which meant industrialization and economic growth.
But there were some legitimate concerns about this arrangement.
Madison opposed the existence of a long-term government debt, believing it would be taken over by foreigners: “As they have more money than the Americans, and less productive ways of laying it out, they can and will, pretty generally, buy out the Americans,” he wrote to Hamilton.
And there was no doubt who would stand to profit the most from this scheme – the bankers and merchants with whom Hamilton was cozy. Financers in New York and Philadelphia were decried by farmers across the states as stockjobbers and gamblers, who did no labor but shuffle papers around, and who exploited and got rich off honest people. That the government should not only sanction those practices, but to prop them up, was unconscionable to them
And, of course, it was going to be tricky – politically – to convince Americans to pay a bunch of federal taxes when they had just fought a war over taxes they didn’t want to pay. To this end, Hamilton created a massive tax-collecting bureaucracy. This included tax collectors with some quasi-military powers like the Revenue Cutter Service, a precursor to the Coast Guard. By the time he left office, Hamilton’s Treasury Department dwarfed all others. At about 500 employees, its size was greater than all other federal departments combined.
Like the debt assumption plan, the National Bank passed through Congress, much to Jefferson’s and Madison’s chagrin.
Now, it’s also important to recognize the different experiences of our characters.
Brought up on sugar plantation islands of the Caribbean, Hamilton emigrated to the northern British colonies to study law and other subjects under a mix of instructors – Tories and Whigs, Anglicans and Presbyterians, etc. He had to work hard for his success and cozy up to those who could help him along. And thanks to his extreme intelligence, he was welcomed company in the homes of the New York and New Jersey elite. These included bankers, traders, and other merchants. Living and working in Manhattan, Hamilton’s view of America was urban and industrial.
Jefferson and Madison hailed from quite different backgrounds. Both were born into a landed Virginia elite. Both were students and masters of Enlightenment thinking. And both went on to serve in the Virginia legislature, where they were surrounded by similar sorts. Living on and managing estates in the Virginia countryside, their view of America was rural and agricultural.
And these backgrounds were going to lead to a clash over the topic of industrialization.
The Bank of England had created the conditions for the Industrial Revolution, underway in England for the past few decades. The First Bank of the United States would likely do the same in America. And to help this process along, Hamilton recommended Congress help subsidize modern industry in his 1791 Report on Manufacturers.
Written more like a treatise on economics than a government report, the Report on Manufacturers alluded to Smith and pontificated the virtues of entrepreneurship.
Arguing against the Physiocratic tendencies of his rivals, Hamilton writes…
“…manufacturing labour reproduces a value equal to that which is expended or consumed in carrying it on, and continues in existence the original Stock or capital employed—it ought on that account alone, to escape being considered as wholly unproductive: That though it should be admitted, as alleged, that the consumption of the produce of the soil, by the classes of Artificers or Manufacturers, is exactly equal to the value added by their labour to the materials upon which it is exerted; yet it would not thence follow, that it added nothing to the Revenue of the Society, or to the aggregate value of the annual produce of its land and labour. If the consumption for any given period amounted to a given sum and the increased value of the produce manufactured, in the same period, to a like sum, the total amount of the consumption and production during that period, would be equal to the two sums, and consequently double the value of the agricultural produce consumed.”
In other words, your cotton ain’t all that useful until a manufacturer gets his hands on it.
But of course, it wasn’t just cotton. In the report, Hamilton called for the support and expansion of mills for other textiles – wool, silk, and linens – as well as for iron foundries, metalworks, grain mills, wood mills, coal mines, glass factories, arsenals, paper mills, printers, and even candy makers.
Hamilton was perhaps the only American at the time who understood that an Industrial Revolution was underway. And he feared that, if America remained a farming nation, it would be left behind by industrializing European powers. And perhaps conquered by them in the long run.
“We a young and growing empire with much enterprise and vigor, but undoubtedly are (and must be for years) rather an agricultural than a manufacturing people,” he admitted to the British military officer and diplomat, Sir George Beckwith. “Yet our policy has had a tendency to suggest the Necessity of introducing manufactures, which Accordingly have made some progress in Connecticut, where Cloth has been manufactured to some Extent.”
By this point, textile mills in Britain were employing thousands of workers who were carding, spinning, and weaving unthinkable quantities of cotton goods with massive machines.
Hamilton also worried that, by sending its cotton to Britain, America was exporting its wealth potential to the old mother country. Under Hamilton's leadership, the Treasury Department made attempts to steal British manufacturing secrets, including from our old friend from Chapter 5, Sir Richard Arkwright.
But even if the United States possessed the knowledge of industrial machines, its merchants did not yet possess the financial capital to build them. “In countries where there is great private wealth much may be effected by the voluntary contributions of patriotic individuals, but in a community situated like that of the United States, the public purse must supply the deficiency of private resource. In what can it be so useful as in prompting and improving the efforts of industry?” Hamilton writes in the Report on Manufacturers.
And if there were any qualms about taxpayers footing the bill for industrialization, Hamilton argues, “there is no truth, which may be more firmly relied upon, than that the interests of the revennue are promoted, by whatever promotes an increase of National industry and wealth.”
Hamilton was talking about economic stimulus.
This time, Congress shelved the report. So instead, under Hamilton's direction, the new National Bank would issue bonds for a new corporation, the Society for the Establishment of Useful Manufactures.
And the society would set up a new industrial city – what they hoped to be the “city of the future” – at Paterson, New Jersey.
By exempting property owners there from taxes for the first ten years, Paterson began as a free enterprise zone and the home to one of America’s first public-private partnerships. Based at the Great Falls of the Passaic River, water would power the mills of the factory town.
The Society itself failed, unable to turn substantial profits fast enough to pay back the bonds. But it did spawn development in Paterson, where 13 textile mills were running by 1815, employing some 2,000 workers. This cradle of American industrialization expanded into steel and machine engines as time went on.
But guess who hated these efforts to industrialize the United States? Jefferson and Madison.
Now, consider where they were coming from. In the late Middle Ages, as the tools of warfare became more expensive (cannons, etc.), high finance became the means Kings used to solidify their power, as the support of lords and knights became less relevant. And to pay back the loans of high finance, monarchs like Henry VIII, Elizabeth I, and Charles I pushed aggressive taxation policies. And thanks to some pretty ancient charters, urban craftspeople were somewhat less exposed to these taxes than farmers were. Hence, the connection Jefferson and Madison may have seen between finance & manufacturing, and authoritarianism.
On top of that, the idea of subsidizing private industry – as Hamilton recommended in his report – went far beyond the limitations of the Constitution, as they saw it. Hamilton suggested it followed the clause that authorizes Congress to “provide for the common Defense and general Welfare of the United States” – but to the Virginians, that reading of the clause gave the government the power to do anything.
To them, Hamilton’s recommendation struck at the heart of the American experiment. It struck at their view of the national character of the United States.
Jefferson, in particular, saw America as a safe haven for simple, country living. He was also a Francophile who hated everything British. And he did not want anything like British textile mills to come to America.
As he wrote in his Notes on the State of Virginia, Jefferson said…
“In Europe the lands are either cultivated, or locked up against the cultivator. Manufacture must therefore be resorted to of necessity not of choice, to support the surplus of their people... While we have land to labour then, let us never wish to see our citizens occupied at a work-bench, or twirling a distaff... for the general operations of manufacture, let our work-shops remain in Europe... The mobs of great cities add just so much to the support of pure government, as sores do to the strength of the human body. It is the manners and spirit of a people which preserve a republic in vigour. A degeneracy in these is a canker which soon eats to the heart of its laws and constitution.”
Well, besides his Rousseauian ideas about the godly virtues of farming, Jefferson understood this much about industrialization: It would lead to great disparities of wealth. Capital would accumulate in the hands of a few. And he believed that only an agrarian economy would allow America to remain an egalitarian democracy.
So, how did it all play out?
The policy disagreements between Hamilton and Jefferson soon boiled over into all-out character assaults of each other in the public eye. Hiding behind private correspondences and the newspapers they controlled, they attacked each other’s motives, loyalties, and even religious views. Rumors and inuendo were abound.
They both stayed on in the cabinet through Washington’s re-election, but they would not last the administration. Unsuccessful in his foreign policy agenda (in part thanks to Hamilton), Jefferson resigned in December 1793, ostensibly to return to private life as a farmer. Hamilton resigned about a year later, ostensibly to spend more time with his wife (who he’d been cheating on) after she suffered a miscarriage.
In reality, both men used their time out of office to consolidate the two political parties they had spawned. For Hamilton, it was the Federalists – which included founding fathers like John Adams and Charles Cotesworth Pinckney. For Jefferson, it was the Democratic Republicans – which included founding fathers like James Madison, James Monroe, and the guy who eventually shot Hamilton dead, Aaron Burr.
The two-party system was inevitable. I’m not even qualifying it. That’s what happens in a representative democracy which elects its legislators from single-member districts with first-past-the-post elections – that is, elections where only one person wins, and he or she needs just a plurality of the votes – and elects an executive in another branch to be the head of government. Because then coalitions form and some game theory kicks in.
Jefferson was elected president in 1800. Much like with his personal life, his presidency was full of contradictions to the idealistic principles and virtues espoused in his writings.
Meanwhile, the Federalists were gradually reduced to no more than a historical memory, as they drowned in infighting, Hamilton’s sex scandal, and some deeply unpopular policy decisions. The Democratic Republicans came to dominate American politics for the next few decades, in that period we remember as the Jeffersonian Era. The National Bank’s charter was not renewed, and the economy remained largely agrarian, rather than industrial.
And yet, there is no doubt that today we are living in Hamilton’s America. It’s an America with an economy built on sophisticated financial systems, manufacturing, high-tech industry, and futuristic cities; as well as a political order based on powerful federalism and a strong Executive Branch of government.
Part of this is because Federalists were packed onto the federal courts during the Washington and Adams Administrations, and they fixed Hamilton’s ideas about the Constitution into legal precedents. Another part of this is because of the strength of American credit – and by extension, the strength of the American economy – which Hamilton ensured from the get-go. His financial system catalyzed markets that went on to capitalize industrialization in future generations.
This concludes our focus on the new Untied States for the time being. But we will be moving on to another event that drove a wedge between the Federalists and Democratic Republicans: The situation in France. Next week, on the Industrial Revolutions.
This week I’m on vacation, so Chapter 21 won’t be released until July 16th. But next week I will be releasing a special bonus episode. I’ll be interviewing fellow history podcaster Gary Girod, host of the French History Podcast. Until then, au revoir. And to my fellow Americans, Happy Independence Day.