Hamilton's Curse: How Jefferson's Archenemy Betrayed the American Revolution

Thomas J. DiLorenzo (2008)

As the Hamilton biographer Ron Chernow noted, "[S]lavery was. well entrenched in much of the north" and "New York and New Jersey retained significant slave populations" long after the Revolution. "New York City, in particular, was identified with slavery . . . and was linked through its sugar refineries in the West Indies." (Hamilton was born and raised in Nevis, in the West Indies.) By the late 1790s one in five New York City households, like Hamilton's, "still held domestic slaves," who were "regarded as status symbols" by the wealthier and more aristocratic New Yorkers. Slavery was not ended in New York City until the early 1850s. (10)

Another Federalist, President John Adams, tried to achieve just this goal when he appointed hundreds of "midnight judges" to the federal judiciary during the very last hours of his administration. With Jefferson about to be inaugurated as president, the Federalists hoped that all those politically loyal judges would subvert the new administration's strict construction of the Constitution and its limited government policies. (27)

Hamilton argued that a government debt fully funded by tax venues was a form of "capital" that was literally as good as gold, and would be traded on the open market as such. Such talk led the great Yale University social scientist William Graham Sumner to comment, in the early twentieth century, that Hamilton was "completely befogged in the mists of mercantilism," that his economic theories "show a remarkable amount of confusion in regard to money, capital, and debt," and that his reputation in the area of finance has "been greatly exaggerated."
In reality, government borrowing reduces the productive capital of the private sector—the sole source of wealth creation—and diverts it to government spending programs. By shrinking the private sector in order to enlarge the state, government borrowing harms capital accumulation, investment, and economic growth. Hamilton had it all backward, as Sumner wrote. (44-5)

To fund the nationalization of the war debt, Hamilton proposed the notorious whiskey tax and other excise taxes. Jefferson and Madison opposed his plan, as did the Pennsylvanian Albert Gallatin, who would later serve as Jefferson's treasury secretary. Gallatin denounced the assumption plan as "subversive of the rights, liberty and peace of the people," and his remark was endorsed by the Pennsylvania legislature. Gallatin also recognized that government debt actually drained productive investment capital from the private sector, did not "increase the existing amount of cultivated lands, of houses of consumable commodities," and did not make "the smallest addition either to the wealth or to the annual labor of a nation." He understood, too, that Hamilton's tariff placed a disproportionate burden on the agricultural South, making a mockery of Hamilton's talk of "national unity" and "the common good" through big government. (Most tariffs—sales taxes on imports—were on manufactured goods and benefited mostly northern manufacturers by keeping out European competition and thereby allowing them to charge higher prices. Very little was manufactured in the agrarian South at the time, so that the tariff was all cost and no benefit to most southerners.) During the Whiskey Rebellion Hamilton tried unsuccessfully to have Gallatin arrested and put on trial.
Other critics of Hamilton's financial schemes were outraged that a tax burden was being placed on poor farmers in order to assure interest payments to the wealthy. Still others feared that the new taxes would "let loose a swarm of harpies who, under the domination of revenue officers, will range through the country, prying into every man's house and affairs." They feared, in other words, a new army of tax-collecting bureaucrats, just like the ones with whom King George III had plagued America before the Revolution. (47-8)

Perpetual government debt—as opposed to the mere emergency borrowing that Jefferson acquiesced in—essentially relies on forced labor. Citizens are forced to work to pay taxes to pay off the principal and interest on the debt. Not only are today's citizens turned into tax serfs by a large national debt, but so are future generations, who are of course politically defenseless. This is why a 'good bond rating"—whether it is for bonds issued by federal or by state and local governments—does not necessarily denote a healthy economy, but merely the willingness of a governmental jurisdiction to enslave its taxpaying citizens. (53)

But in the early nineteenth century (and beyond, until 1865) the Supreme Court's opinion was just the Supreme Court's opinion, nothing more. Justices were not the black-robed deities that they are today. The citizens of the states took notice of Marshall's opinion and then proceeded to ignore it. Kilpatrick cites the case of Ohio in his book The Sovereign States. The state levied a $50,000-per-year tax on each of the BUS's two branches in the state. The BUS [Bank of the United States] refused to pay, so Ohio's state auditor sent a deputy, John L. Harper, "to collect the tax by persuasion if he could, but by violence if he must." When Harper was denied payment by the bank's management, he "leaped over the counter, strode into the bank vaults, and helped himself to $100,000 in paper and specie. He then turned this over to a deputy . . . stuffing this considerable hoard into a small trunk, with which he had thoughtfully come equipped."
The BUS sued the deputies and the state of Ohio, relying on Marshall's imperious opinion about the federal government's supposed supremacy. The Ohio state legislature responded by thumbing its nose at the entire federal government with the following declaration:
"[We] are aware of the doctrine, that the Federal courts are exclusively vested with jurisdiction to declare, in the last resort, the true interpretation of the Constitution of the United States. To this doctrine . . . [we] can never give [our] assent."
The Ohio legislature then quoted Jefferson and Madison's Virginia and Kentucky Resolves of 1798 to remind the central government that it is the people of the states who are sovereign, despite the ruminations of a single government lawyer with lifetime tenure. "The people themselves" are "the true source of all legitimate powers," the state legislature declared. (64-5)

The Panic of 1819 was the first boom-and-bust cycle of the economy caused by government monetary policy. It was an inevitable consequence, in other words, of the Hamiltonian system of governmental debt accumulation combined with a government-run bank that prints money in order to fund the debt. This, and the growing corruption associated with the BUS, would lead President Andrew Jackson to declare war on Hamilton's bank, a war that he eventually won. (68)

Marshall rarely, if ever, relied on information from the Constitutional Convention itself, or on the state ratification conventions, in his constitutional interpretations. Instead, he cited The Federalist Papers, which were predominantly the Hamiltonians' nationalist views of what the Constitution should look like—views that had been rejected by the convention. He worked diligently for thirty-five years to replace the Constitution with "constitutional law," which is very different from and often has nothing in common with the actual Constitution. (79)

Not until the 1860s did the power of the Supreme Court to decide the constitutionality of federal legislation become more or less supreme. As Woodrow Wilson correctly observed in a book written while he was still a Princeton University professor, "The War between the States established . . . this principle, that the federal government is, through its courts, the final judge of its own powers." (83-4)

Observing all of this near the end of his life, Thomas Jefferson offered his opinion in a December 25, 1820, letter to Thomas Ritchie. As threatening to liberty as Congress was beginning to seem, Jefferson wrote, "it is not from this branch of government we have most to fear." The real problem was that "the judiciary of the United States is the subtle corps of sappers and miners constantly working under ground to undermine the foundations of our confederated fabric. They are construing our constitution from a co-ordination of a general and special government to a general and supreme one alone." (A sapper is a soldier who digs battlefield fortifications.) (91)

In recent years, for example, federal jurists have argued that the federal government has the power to decide on gun-control policy in the vicinity of schools because it can be said to affect interstate commerce. How? Because schools are about education; education affects the productivity of the workforce; the workforce produces goods that cross state lines; therefore schools, and all the activities involved with schools, supposedly constitute "interstate commerce." Even more convoluted reasoning has been used in thousands of other cases, and it all started with John Marshall and his crusade to "write Hamiltonian principles into legal precedent," as Gutzman put it. (92)

[Cf., e.g., Wickard v. Filburn]

Rossiter was certainly right when he wrote that the Hamilton/Marshall view of the Constitution prevailed with a vengeance beginning in the 1930s. Between 1937 and 1995, not a single federal law was declared to be unconstitutional by the Supreme Court. Not one among hundreds of decisions and thousands of pieces of legislation. Hamilton had won: any legislation that is not explicitly prohibited by the Constitution is permitted. (96)

After Alexander Hamilton and his party were repudiated in the election of 1800, the newly elected president, Thomas Jefferson, used his inauguration to enunciate laissez-faire principles that he believed should guide America into the new century. In his first inaugural address he explained that "a wise and frugal Government" was one that protected the lives and liberties of its citizens, period. Citizens, he said, should otherwise be free to earn a living without government interference, especially heavy taxation, which would "take from the mouth of labor the bread it has earned."
Hamilton responded with a vitriolic attack in which he called Jefferson's speech a "symptom of a pygmy mind." He viewed his rival's inaugural address as a direct assault on the economic theories he had painstakingly laid out. In particular, the series of reports he had issued while serving as President Washington's secretary of the treasury represented the clearest summary of his economic and political views. In issuing these reports, Hamilton was not conducting an academic exercise; in his official capacity he was trying to establish the blueprint for the American economy. So it must have been infuriating to see, within just a matter of a few years of his issuing these comprehensive reports, a new president forthrightly declaring a different direction. And not just any president, but his fiercest political rival.
When Jefferson announced that "the sum of good government" was to leave men "free to regulate their own pursuits," he was indeed turning away from Hamilton's grand plan for a government-directed economy. As Hamilton had made clear in his various reports, he did not believe that Americans could or should be left to their own pursuits without government regulation, which is to say, without his regulation. He was quite totalitarian-minded on this question. William Graham Sumner remarked in his biography of Hamilton: "He naturally could not consent to a policy which would have dictated to him to hold his rash hands, when his whole being was in a quiver to seize that which he thought was going wrong, and impress upon it at once, and with unshrinking reliance on his own judgment, the form and tendency which he thought best." (99-100)

Although Hamilton condemned transportation costs as evil when borne by foreign manufacturers seeking to cater to American consumers, he also proposed the use of tax dollars to facilitate the transportation of goods. He argued in his Report that private capital markets would not be sufficient to finance the building of roads and canals, so government subsidies would be necessary. He was quickly proven wrong, once again. As the economist Daniel Klein has shown, by 1800—nine years after the publication of the Report on Manufactures—some sixty-nine private road-building companies had been chartered by the states, and they built new roads "at rates previously unheard of in America." By 1845 more than four hundred roads had been built using private funds. Local merchants invested in the companies because they understood it was clearly in their interest to do so. Entire communities invested, as neighbors persuaded neighbors that it was in the interest of all. Businessmen from larger cities invested in smaller communities because they wanted to expand their markets there.
No governmental coercion was necessary, only persuasion. At least one state—Connecticut—exempted road-building companies from state taxation. The government did not condemn the land needed for roads; rather the road-building companies paid for it in cash and shares of stock. The American spirit of volunteerism prevailed. This was something that Tocqueville would notice immediately but that Hamilton apparently had little or no faith in. Private financing of road (and canal) building may work in "some countries," he wrote, but in a country "like the United States, the public purse must supply the deficiency of private resource." He did not explain why America was unique in this regard among all the nations of the earth.
A number of American states did take Hamilton's advice and used tax dollars to subsidize canal building in early America, but it was generally one big financial disaster in state after state. Perhaps the most spectacular failure occurred in Illinois in the late 1830s. As described by Abraham Lincoln's law partner William Herndon, in 1837 the Illinois legislature, led by Lincoln himself, devoted more than $10 million so that "every river and stream . . . was to be widened, deepened, and made navigable." By these means Illinois would supposedly become "the Empire State of the Union." The whole project turned out to be "reckless and unwise," with the tax burden imposed on the people of Illinois characterized as "monumental in size." None of the grandiose-sounding canal projects was finished. Such debacles were so commonplace that in his history of America, John Bach McMaster concluded that by the 1830s "in every state which had gone recklessly into internal improvements [i.e., government-subsidized road and canal building] the financial situation was alarming. No works were finished; little or no income was derived from them; interest on the bonds increased day by day and no means of paying it save by taxation remained." (113-15)

In contrast to the grandiose motives that Baxter ascribed to [Henry] Clay, the author Edgar Lee Masters, a well-known playwright and onetime law partner of Clarence Darrow, portrayed him much more accurately:
"Clay was the champion of that political system which doles favors to the strong in order to win and to keep their adherence to the government. His system offered shelter to devious schemes and corrupt enterprises. . . . He was the beloved son of Alexander Hamilton with his corrupt funding schemes, his superstitions concerning the advantage of a public debt, and a people taxed to make profits for enterprises that cannot stand alone. . . . The Whigs adopted the tricks of the pickpocket who dresses himself like a farmer in order to move through a rural crowd unidentified while he gathers purses and watches." (120-1)

The major danger of economic isolationism is that a nation divorces itself from the international division of labor. Individuals and businesses all around the world have various specialties, and a business will become stronger and more profitable if it can purchase its supplies from whoever offers it the best deal, whether that partner is from the United States, Canada, or anywhere else. Protectionists know this; that's why they invariably advocate protectionism for the things that they sell but free trade for the things that they buy, such as parts and materials that they use to manufacture their own products. (133)

Republicans also enacted the third element of Alexander Hamilton's mercantilist agenda:corporate welfare. As of 1861, no federal government program of any significance had subsidized corporations for road, canal, or railroad building. There had been many experiments at the state level, and every one of them was a financial disaster. In the typical scenario, Whig politicians would promise a commercial empire if only the state legislature would earmark millions to build roads, canals, and railroads. When legislatures followed through, little or nothing would actually be built; millions would be stolen; and the states' taxpayers would be left with a public debt that would take decades to pay off. State government experiments with Hamiltonian corporate welfare during the first half of the nineteenth century were so disastrous that by 1875 only one state—Massachusetts—had not amended its constitution to prohibit such expenditures of public funds. (136)

The same story can be told of the radio, real estate, milk, airline, coal, oil, and agricultural industries, to name a few. Consider what happened with the telephone industry. By the beginning of the twentieth century, a dozen years after AT&T's initial patents expired, there were more than three thousand telephone companies in America. Some states had as many as two hundred telephone companies operating simultaneously. AT&T started out with a patent monopoly on telephone service, but it had lost more than half of the market to competition, and prices were being driven down sharply by the competition. So after World War I the company created a formidable lobbying force and persuaded every state to grant it another monopoly in telephone service and to make competition illegal—all supposedly "in the public interest." (144-5)

Generations of historians have labeled Abraham Lincoln a 'dictator," although supposedly a benevolent one. "Never had the power of a dictator fallen into safer hands," wrote James Ford Rhodes, author of a multivolume history of the United States. "If Lincoln was a dictator, it must be admitted that he was a benevolent dictator," announced the Lincoln biographer James G. Randall. Many other historians have made similar comments.
The "dictator" references are no accident. The plain historical fact is that Lincoln did ignore the Constitution and effectively declare himself dictator. He began a war without the consent of Congress; unilaterally and illegally suspended the writ of habeas corpus; imprisoned tens of thousands of northern political dissenters; censored all telegraph communications; confiscated firearms in the border states in violation of the Second Amendment; deported Democratic Congressman Clement Vallandigham for his outspoken anti-administration speeches; issued an arrest warrant for the chief justice of the United States, Roger B. Taney, after he issued an opinion that only Congress and not the president could suspend habeas corpus; illegally orchestrated the secession of West Virginia from Virginia; and shut down several hundred opposition newspapers in the North, in some cases imprisoning the editors and owners. "This amazing disregard for the . . . Constitution was considered by nobody as legal," wrote the historian Clinton Rossiter in his book Constitutional Dictatorship.
Although Lincoln did not become a "permanent" president, the precedents he established have endured to this day. Countless American politicians and pundits have cited those precedents to rationalize trampling on the liberties of their fellow citizens and various other unconstitutional governmental actions, especially undeclared wars. (147-8)

Hamiltonian political hegemony, including the near-death of the principle of states' rights or federalism, was achieved during the War between the States. But the citizens of the once-sovereign states still retained some control over the government in Washington after the war. The Jeffersonian states' rights tradition, therefore, had some life in it yet.
But that life was snuffed out completely in one revolutionary year, 1913. During that one year three sweeping changes occurred: the Seventeenth Amendment to the Constitution was ratified, and so for the first time U.S. senators would be directly elected rather than appointed to office by state legislatures; the federal income tax was adopted; and the Federal Reserve System was created. All three institutions almost completely centralized power in Washington and constituted the death blow to the old Jeffersonian tradition in American politics—and the final" decisive victory for the Hamiltonians. Hamilton's totally centralized government, with an increasingly arrogant chief executive who could bully and manipulate the governors and legislatures of the states (as well as their citizens), was finally realized 126 years after he first enunciated his plan at the Constitutional Convention. The world would soon discover that national borders would not limit the bullying, interventionist proclivities of American presidents. (150-1)

At the Massachusetts ratifying convention Fisher Ames referred to U.S. senators as "ambassadors of the states." (152)

[Frank Chodorov:] "No kingship in the history of the world ever exercised more power than our Presidency, or had more of the people's wealth at its disposal." (163)

There were no checks at all on the powers of government—exactly as Hamilton would have wanted it. To give the federal government a blank check, the Court adopted the amazing line of argument that the government needed to prove not that any of its programs were actually legitimate under the Constitution, only that they were "hypothetically legitimate." Of course, any reasonably clever lawyer can dream up myriad hypothetical situations to justify virtually any kind of governmental action. (179)

Jefferson mocked Hamilton's twisted reasoning in an 1800 letter to Edward Livingston, saying, "Congress . . . [is] authorized to defend the nation. Ships are necessary for defence; copper is necessary for ships; mines necessary for copper; a company necessary to work mines; and who can doubt this reasoning who has ever played at 'This is the House that Jack Built'? Under such a process of filiation of necessities the sweeping clause makes clean work." It is fair to say that for several generations now the U.S. Supreme Court has been hard at work playing the very game that Jefferson mocked, using the Commerce Clause to make "clean work" of expanding the central government's powers. (180-1)

The bribery power inherent in federal grants allows the federal government to regulate behavior at the state and local levels even if it does not have constitutional authorization to do so. For example:
"In 1985, Nevada passed a law that increased its speed limit to 70 mph. The law also provided that if the federal officials threatened to cut off aid to the state, the limit was to be lowered. Within sixty seconds of the new law coming into effect, the Chief of the Nevada division of the Federal Highway Administration advised that the federal Department of Transportation declared that all future funds for state highways would be withheld unless the Nevada speed limit was reduced to 55 mph." (emphasis added)
Nevada was forced to retain the 55-mph speed limit. (182-3)

After Lincoln's assassination, as Clyde Wilson explains, the president "was now the martyred savior in the world historical drama of American uniqueness." A huge literature developed that depicted Lincoln as a Christ figure who died for America's sins, and "the conflation of America with God's plan for the perfection of human history was complete." "By the time we get to [President Bill] Clinton," writes Wilson, "the imperial office itself had become the object of worship. It does not matter how tainted the credentials of its occupant. In the drama of salvation, a sleazy prevaricator can be the savior of the oppressed. It does not matter if this requires the murder of innocent women and children at home or abroad. The emperor can do no wrong." (186)

Modern economic research has shown that the Fed has made numerous attempts to create a "political business cycle," basically by using its powers over the money supply to pump up the economy with easy credit just before presidential elections. The economist Robert Weintraub documented how Fed monetary policy shifted to fit the preferences of newly elected presidents in 1953, 1961, 1969, 1974, and 1977—all years in which the presidency changed hands. The policy was based, in other words, not on what was best for the cause of economic growth and stability but on the Fed chairman's desire to please his boss. (188)

In recent years, the Fed has been responsible for the NASDAQ crash and the bursting of the housing market "bubble." In each instance, the Fed first made credit very inexpensive (low interest rates) and widely available. Businesses and individuals then went into debt much more than was prudent. In the former case, too many businesses became capitalized before they even demonstrated that there was a significant consumer market for their products. Cheap credit, courtesy of the Fed, allowed them to do so. A liquidation of billions of dollars of capital ensued. In the case of the housing market, the extraordinarily low interest rates that the Fed orchestrated from late 2001 to 2006 caused many thousands of ordinary citizens to become real estate speculators, overinvesting in real estate that they thought would never drop in price. This was on top of all the "professional" investors who did the same thing. When the real estate market slowed, and then declined, in 2006 and 2007, many of these investors found themselves deep in debt that they could not afford, and mortgage defaults and bankruptcies ballooned as the entire economy teetered on recession. (190)

Hamilton wanted a standing army of tax collectors, and America got one when the internal revenue bureaucracy was created during the Lincoln regime. (191)

"[T]here are far too many great men in the world; there are too many legislators, organizers, . . . conductors of the people, fathers of nations, etc. — Frederic Bastiat, The Law (196)

Remember, true federalism has been dead for more than a century. The states have become mere puppet governments controlled by their masters in Washington. Americans endure pervasive and confiscatory taxation. We have long had an imperial presidency. American foreign policy seeks a version of Hamilton's "imperial glory," dressed up in various guises, such as "promoting global democracy." Hamilton's standing army of tax collectors exists in the form of the IRS. Mercantilistic economic interventionism has replaced real capitalism, for the most part. Americans are buried in an avalanche of public debt that is hardly the "blessing" Hamilton promised; the unfunded obligations of the federal government alone amount to more than $70 trillion, which would require an average tax rate of more than 80 percent to pay off. Hamiltonian judicial activists beginning with John Marshall have rewritten (read: abandoned) the Constitution to make that document what Hamilton wanted it to be: a rubber stamp for approving almost any governmental activity imaginable. And America has a powerful central bank, the Federal Reserve, that has instigated economic boom-and-bust cycles and prevented a free market from operating in the banking industry.
In short, Hamiltonian statism reigns. The only reason America has prospered in the face of this monopolistic government Leviathan is that this country has such vast resources, including what the economist Julian Simon has called "the ultimate resource"—people—and a relatively high degree of economic freedom compared to the rest of the world. (196-7)

If Americans are ever to have more peace and prosperity and less government, it is imperative that a devolution of power occur. Americans need to reclaim their rights under the Ninth and Tenth Amendments of the Constitution to begin restoring the American tradition of states' rights as a means of controlling their own government. Some form of legal and peaceful resistance to the central state must come into existence once again. (197)