The dollar is in freefall against the euro and other major international currencies. Foreclosures are becoming increasingly commonplace. The United States is trillions of dollars in debt to the Chinese. Major investment banking firms are collapsing. Credit is drying up. We seem to be facing a major financial crisis; the worst, some are saying, since World War II.
In 1787, the Revolutionary War had left state governments heavily in debt. The popular solution was to print more paper money, but because there was little hard currency to back the paper, the paper became essentially worthless. Ordinary citizens were also heavily in debt, unable to pay their creditors or pay the taxes that the states levied to finance their own debts. Some farmers had gone beyond defaulting on their obligations, and were resorting to armed rebellions, such as Shays' Rebellion in western Massachusetts. There was widespread agitation for debt relief, or the outright cancellation of debts—a solution attempted in Rhode Island.
In the midst of this massive financial crisis, James Madison wanted to borrow some money to invest in land, hoping that the return on his investment would give him financial independence (he was thirty-six and still living with his parents). Madison approached Jefferson, in Paris, about securing loans from French lenders, but no one wanted to take the risk in such an unstable financial climate, where there was no protection for creditors. A frustrated Madison realized that the United States would never attract capital until this situation was successfully resolved.
In Federalist 10, Madison addresses the problem of factionalism in political life. His greatest concern is that, unless factionalism is defused, the majority faction will trample on the rights of the minority. Specifically, the majority of debtors will trample on the rights of the minority of creditors. Madison distrusts democracy, because popular rule will always be rule by the debt-ridden, who will be tempted to legislate their way out from under their obligations.
Complaints are every where heard from our most considerate and virtuous citizens, equally the friends of public and private faith, and of public and personal liberty, that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice, and the rights of the minor party. but by the superior force of an interested an over-bearing majority.
Madison argues explicitly that “faction” arises from “different degrees and kinds of property.” He says: “[T]he most common and durable source of factions, has been the various and unequal distribution of property. Those who hold, and those who are without property, have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination.”
In a small-scale, direct democracy, there was constant danger of popular tyranny—of the majority ganging up on the minority, of the mass of debtors ganging up on the minority of creditors. Madison’s solution was to enlarge the scale of government, and to make it representative rather than direct. This would have the effect of diluting special interests, because legislators would be answerable to larger constituencies, and would be focused on national rather than purely local concerns. In a large republic, separate factions, or interests groups, would balance each other out; no tyrannical majority would emerge that couldn’t be checked by a combination of other interests. Madison concludes:
The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States: a religious sect may degenerate into a political faction in part of the Confederacy, but the variety of sects dispersed over the entire face of it must secure the national Councils against any danger from that source: a rage for paper money, for an abolition of debts, for an equal distribution of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular part of it...
It’s the principle of dilution or, as Madison confessed privately, of divide et impera—divide and conquer. Madison, who with Jefferson helped to create the two-party system, recognized that factions would always exist (“the causes of faction cannot be removed”); the solution he offered was to create a system for regulating those factions. Instead of one voice—the voice of the majority—outshouting the rest, he conceived of the American political system as an ongoing conversation in which many voices are heard. But in the end, it was clear that the intention was to protect property and credit, and to create a system that secured power to the wealthy minority.
Case in point: the Fed and JPMorgan act quickly to bail out Bear Stearns, while President Bush threatens to veto a bill that would protect ordinary Americans from home foreclosures. (For related commentary, see, for example, David Abromowitz, "Selective Bailouts: Help for Wall Street, Not Your Street.")
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