Echoes Dispatches From Economic History
James Madison's fights with Alexander Hamilton helped define the relationship between government and finance in the U.S. Source: Library of Congress Prints and Photographs division
Madison-Hamilton Financial Fight Is Often Misunderstood
Americans across the political spectrum who object to intimate links between government and high finance have often upheld James Madison as their champion.
Conservatives who condemn the Federal Reserve, trade regulations and the tax code for strangling markets and restricting freedom often cite Madison as a founding libertarian. Liberals criticizing connections between government and the investing class for concentrating wealth into an ever smaller segment of society look to Madison as a defender of more democratic approaches.
Madison, a Virginia congressman and framer of the U.S. Constitution, went on to serve two terms as president. His clash with Treasury Secretary Alexander Hamilton in the 1790s has long been seen as an expression of the starkest ideological division attending the nation’s birth -- a division that persists in U.S. politics. But the fight between the two men was weirder, more complicated and ultimately more revealing of the relationship between finance and the American founding than is usually understood.
A Shifting Relationship
As a congressman in the 1790s, Madison opposed Hamilton’s comprehensive plan of national finance. Hamilton wanted to use a national debt to yoke American wealth to the federal government, making funds available for ambitious public projects and aligning the interests of high financiers with the country’s success. Madison accused Hamilton of enabling an aristocracy. He objected to Hamilton’s plan to assume the states’ war debts (although he ended up reluctantly voting for it) and to charter a central bank, which Madison would condemn in the 1790s as an unconstitutional expansion of federal power that would risk tyranny.
Yet in the 1780s, Madison and Hamilton had an entirely different relationship. They worked closely together in the Congress of the Confederation. Although that body governed 13 member legislatures, not the whole country, the two young congressmen were nationalists. At the time, aspirations for American nationhood centered on building a large federal debt in the form of bonds issued by the Congress to wealthy investors throughout the states.
Madison and Hamilton both supported the Congress’s superintendent of finance, Robert Morris. Morris was a merchant, an aggressive speculator, a leader of the ostentatious lending and commerce crowd, and -- until he landed in debtors’ prison -- probably the richest man in the country. He was also among the first of his generation to envision the U.S. as a commercial empire, one that might compete with European powers by directing the wealth of the investor class to grand national goals.
Morris’s influence on Hamilton is well-known. But Madison’s activities on behalf of Morris were almost as thoroughgoing. Madison helped Morris stimulate nationalism by increasing and funding the Congress’s debt. When other Virginia politicians attacked Morris as self-dealing and corrupt, Madison defended him. And Madison made every effort to persuade the Congress to pass Morris’s novel federal tax on imports, known as the “impost.” The tax was to be collected by federal agents and earmarked for public creditors, thus obviating state sovereignty and linking federal power to big money.
Madison, Hamilton and Morris shared a belief that taxation in support of a national debt offered a clear path to unifying the country behind the federal government. Madison continued the push to realize Morris’s dreams in the late 1780s, when he helped convert a meeting intended to improve the Articles of Confederation into what we call the Constitutional Convention -- throwing the articles out and forming a nation. During the convention, he successfully fought to include taxation and other government financial powers in Article I, Section 8 of the Constitution.
In that debate, Madison clarified his desire for nationhood in terms that Madisonians today might find unhappily Hamiltonian: “Compliance by thirteen separate and independent governments with periodical demands of money from Congress,” he argued, “can never be reckoned upon with the certainty requisite to satisfy our present creditors, or to tempt others to become our creditors in future.”
In this light, Madison’s sudden attacks in the 1790s on Hamilton, his old partner, can look like partisan flip-flopping; Hamilton certainly saw it that way. Although his objection to Hamilton’s bank wasn’t exactly a turnaround, Madison’s rationale involved a contradiction with further resonance for politics today. The proposed central bank, Madison now claimed, violated the Constitution, which gives the government no explicit power to create a bank. Skepticism about implied powers has prevailed in conservative circles ever since.
Yet Hamilton and Madison had pored over the articles seeking an implied right to levy the federal impost. And in “Federalist 44,” Madison defended unenumerated government powers: “No axiom is more clearly established in law or in reason,” he wrote then, “than wherever the end is required, the means are authorized; wherever a general power to do a thing is given, every particular power for doing it is included.”
In the 1790s, Madison reversed himself not only on the proper relationship between the government and high finance but also on the nature of the Constitution itself. Hamilton had a right to be startled. A bad personal and political breakup was under way.
To ignore the background of that breakup -- the former agreement between Hamilton and Madison about finance and government, and their close partnership in bringing shared ideas to life -- is to ignore the complex economic and political realities that shaped the nation’s beginnings.
(William Hogeland is the author of “Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation.” The opinions expressed are his own.)
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