The Republican Paradox: Liberty, Prosperity, Virtue, and Vice in the American Founding

“Adversity makes men, and prosperity makes monsters,” Victor Hugo once famously declared. Eighteenth-century republicans propounded a strikingly similar maxim. Political liberty, they argued, begets economic prosperity—indeed, prosperity requires liberty—but prosperity, so often, begets vice, though political liberty requires a virtuous people. Paradoxically, then, the prosperity resulting from a free society fathers the vices so destructive to liberty, giving rise to political unfreedom and economic bankruptcy. Avoiding this vicious cycle was the central concern for many eighteenth-century republicans; indeed, it was the chief paradox of republican theory, befuddling a great many political thinkers, including, most especially, English and Scottish moral philosophers, who in turn influenced American theorists. The chief question, in fact, for the American Founders, was how the new nation might secure economic opulence without imperiling the virtue so requisite for republican government.

Upon securing independence from Britain, the Jeffersonian branch of American political thought developed what they believed was a satisfactory answer to the republican paradox: the encouragement of “virtuous” commerce and the discouragement of “vicious” commerce. The former included agriculture and household manufacturing; the latter included, most conspicuously, the speculative world of finance: banking, stockjobbing, and the accumulation of wealth through paper instruments. If economic prosperity could somehow be grounded upon tangible, manual industry, then perhaps America might become the first opulent republic to triumphantly safeguard that “precious jewel Liberty. ” ¹

Liberty is a notoriously difficult concept to define; indeed, “there is no word that admits of more various significations,” said Montesquieu. ² Some argue for a “positive” form liberty, including freedom from poverty or sickness; others insist that liberty simply denotes a general freedom from coercive state power. Some believe that democracy is the pinnacle of liberty; others associate unbridled democracy with majority tyranny. Still others define liberty in a more active sense; that is, that liberty does not consist solely in the enjoyment of rights, but in the virtuous exercise of political citizenship. ³ Political liberty, then, for our purposes here, assumes a fairly broad definition: namely, the general protection of well-established civil liberties—such as those enumerated in the Bill of Rights—and the existence of a meaningful degree of civic participation in political discourse and decision-making. Economic prosperity, for its part, denotes a condition, first, of tangible economic growth, and second, of an ability for citizens, with reasonable exertion, to obtain goods and services beyond the most basic necessities.

The American Founders, like their British contemporaries, were greatly concerned with the role of morality in the ultimate sustenance of republican government. It was commonly held in the eighteenth century that “a decline of manners threatens a decline of empire”; that the “welfare of all countries in the world depends upon the morals of their people, for though a nation may get riches by trade . . . yet when their manners are depraved, they will decline insensibly, and at last come to utter destruction.” ⁴

Historians like Drew McCoy, Bernard Bailyn, Gordon Wood, and J. G. A. Pocock have long emphasized the central significance of national morality in early American political thought. ⁵ The Jeffersonian emphasis on agricultural has prompted the most historiographical attention, but the Jeffersonian skepticism, if not outright fear, of speculative finance—though not entirely ignored in the literature—has not received adequate attention, and the rationale behind their strict opposition to fractional-reserve banking not properly understood. Jeffersonian Americans did not assail banking and finance because they opposed commerce or even luxury; rather, they assailed it because they sincerely believed that the absence of speculative finance—a “vicious” form of commerce—was among the most effective guarantees that America might yet survive as a commercial, opulent republic, safeguarding the virtue so requisite for political liberty.

Historians, moreover, have not sufficiently explained the sudden transition in Jeffersonian thinking in the first quarter of the nineteenth century: from lambasting all banking institutions, to embracing a seemingly opposite, radical view that fractional-reserve banking ought to be “planted in every village,” with no hindrances whatsoever. ⁶ And yet the transition was not contradictory at all, but rather a serious...