The Libertarian sect of the Conservative faith devoutly believes in the power of free markets to generate wealth, efficiently allocate resources, reward merit, bridge social classes, and ameliorate all manner of social ills. However, Libertarians often fail to recognize or at least neglect to acknowledge that free markets do not arise out of nothing. Markets, with their reliance on the rule of law, a reliable common currency, and social stability, depend upon strong governments. Ron Chernow's recent biography, Alexander Hamilton, reminds us just how much American capitalism relies upon the governmental structures created by the nation's first treasury secretary.
After the American Revolution, the United States (plural intentional) remained a rather loose confederation of states lacking a strong central government not dependent on the largesse of the states. There was not even a common currency. States, like small principalities collected duties as products crossed state boundaries. In many cases, people thought of themselves primarily as Virginians or New Yorkers. The American identity was real, but still secondary. The Articles of Confederation were not working. Economic growth was limited by interstate trade restrictions and a lack of liquidity, and there remained a real potential for the American states to become pawns in the international competition between France and England.
The states convened a convention to make the appropriate modifications, but what emerged was the US Constitution that instituted a comparatively strong federal government with a strong executive. The ratification of the Constitution was not automatic and it required considerable lobbying by Hamilton in New York and James Madison in the Virginia to secure it. The Federalist Papers written primarily by Hamilton and Madison with contributions by John Jay laid out the intellectual case for the Constitution and played a pivotal role in New York's crucial ratification. Even with the ratification, it took the presidency of George Washington to tie the country long enough for the Constitutional institutions to take tenuous root.
What is less appreciated is how Hamilton used the treasury department to bind the nation together. Hamilton arranged for the assumption of individual state debts by the federal government. This was opposed by southern states like Virginia that had already paid their debts and did not want to subsidize some northeastern states that still retained significant debt. Since the new constitution prohibited interstate customs duties, it was less possible for some states to pay their debts. Hamilton helped negotiate a compromise with Thomas Jefferson whereby the federal government would assume state debts and in return the new federal capital would be moved to the South. With this grand compromise, the economic fortunes of the states became strongly coupled.
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