When we learn about the early history of the United States, the issues considered important then might seem largely irrelevant now. Sure, the framers of the Constitution debated the fundamental purpose and scope of government, but they agreed upon a framework that's been used ever since. Are their concerns over matters of economics relevant in our modern, technological society?
They certainly are. Consider the disagreements between founding fathers Alexander Hamilton and Thomas Jefferson. Hamilton and Jefferson were famous rivals, disagreeing publicly on many issues, from the power of the federal government to the limits of democratic rule. Some of their biggest and best-known differences were over economic matters.
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The issues Hamilton and Jefferson disagreed on may seem arcane and remote, but their opposing viewpoints can be seen in many contemporary issues. When politicians say we need to tailor agricultural subsidies to support small family farmers, there are echoes of Jefferson in their voices. When others argue for unified national goals in education, rather than a variety of state goals, Hamilton's ghost lurks in the background.
Because these issues are still important, the Minneapolis Fed has based its 20th Annual Student Essay Contest on them. The contest asks, 'Hamilton vs. Jefferson: Whose economic vision was better?'
These two great men differed on a number of issues of economic significance. You can write your essay about any one you wish, or several. You can also look at the big picture of their economic visions, or pick a contemporary controversy that reflects their differences. But first you must understand some of the issues Hamilton and Jefferson struggled over. What follows is an illustration of some, but not all, of these economic points of contention.
Banks
It is well known that Hamilton and Jefferson disagreed strongly about the national bank. Hamilton was the architect of the First Bank of the United States, believing it essential to the financing of the federal government and to the establishment of a robust domestic banking system. As such, Hamilton is considered a pioneer of central banking and a forebearer of the modern Federal Reserve. Jefferson believed the bank would put too much power over the government in the hands of the bank's owners.
But the issue went deeper than that. Jefferson, in fact, didn't like banks at all. Steadfast in his belief that working the land was the only 'honest' way to make a living, he saw bankers as essentially swindlers, and he didn't trust them. Hamilton, by contrast, thought banks were to be a vital part of the American future—if we want a strong economy, we need lending, and lending is the business of banks. Better to have American banks doing the lending, he argued, than British or other foreign banks.
This disagreement is part of a long history of controversy about banking. There are basically two opposing views: One sees debt as essentially bad and looks at bankers as exploiting borrowers' bad fortunes or poor judgments; the other sees lenders as providing a useful service for which there is enough demand that borrowers are willing to pay interest.
In retrospect, it may seem obvious that Hamilton was right, at least in predicting how America would develop. But this controversy is still alive, and Jefferson's voice can be heard today, for example, in the reaction to problems in the subprime mortgage market.
Federalism
The debate over Federalism in the early years of the United States may seem to be only a political issue, but it also had important economic aspects.
After the end of the American Revolution, the United States had considerable war debt, mostly held by the states. Hamilton had a plan for the federal government to assume and pay down the states' foreign debts. Many in the South were skeptical of that plan, largely because Southern states had paid off more of what they owed and didn't want to assume responsibility for the Northern states' debts.
In the end, the two sides reached a compromise. The federal government would assume the debt, in exchange for placement of the nation's capital in Jefferson's native Virginia. In this way Hamilton was able to ensure that the debt would not be defaulted upon.
But again, the broader debate was far from over. Controversy still rages over the level at which economic policies should be conducted. Contemporary points of contention include infrastructure, education, health care and social welfare spending. The modern day Hamiltonians lean toward unified national economic policies, while Jeffersonians favor a pluralist approach in which individual states and municipalities decide.
National Economic Vision
In addition to their quarrels over specific policies, Hamilton and Jefferson also didn't agree on the big picture. In fact, all their particular battles over various issues can be seen as cases of this more general dispute.
The big picture to them was the nature of the American future. Jefferson believed that liberty and democracy were the greatest virtues a society could strive toward. To that end, he thought an agrarian society made up of independent farmers was best; the 'Empire of Liberty,' he called it.
Hamilton thought Jefferson's vision was antiquated and that an agricultural economy would keep the United States poor. For the new nation to be a world power, he believed it had to move toward the economy of the future, one based on trade and manufacturing. In addition to his plan for banks, Hamilton also made numerous proposals for policies to develop the American economy, such as protective tariffs for infant industries (something many economists today would frown upon).
As with banking, it is tempting to look at the subsequent unfolding of American history as a victory for Hamilton; after all, the United States is the largest industrial economy in the world, and only a small minority of the population still lives on farms. However, the Jeffersonian vision still holds a powerful grip on the American spirit, from the Homesteading movement to modern visions of 'local self-reliance.' A primary example of this spirit in action today is agricultural policy, though there are many others. These programs are largely intended (at least in theory) to support small family farmers.
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