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The two opposing political philosophies being debated in 2012 can be traced back to George Washington’s presidency.  Alexander Hamilton, Washington’s Secretary of the Treasury and a Federalist,  offered an economic plan that created a centralized bank (First Bank of the United States), imposed trade tariffs and exise taxes, and had the federal government assume all of the states’ debt. He justified government expansion by referring to implied powers implicit in the Constitution. Former Federalist Thomas Jefferson opposed the expansion of government,  supported states rights, and followed a more explicit interpretation of the Constitution with strict limitations on federal government. Eventually, Jefferson’s side formed a party referred to by historians and people of the time as Republicans, but known today as Democratic-Republicans. Hamilton and Jefferson are the patrons of the two opposing American political philosophies of big government vs. small government.

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President Washington didn’t openly join either side, but he supported Hamilton’s policies as his Treasurer. Both the House and Senate were pro-administration (Federalist) throughout Washington’s presidency and remained Federalist through John Adam’s (also a Federalist) presidency. During this period, there was a financial crisis in 1792 when Hamilton bailed out the Bank of New York, the bank he started, through providing securities that brought the price of securities down by 24%. There was also a land speculation bubble that burst in 1796.

From 1800 to 1825, the Democratic-Republicans dominated Congress. The charter of the First Bank of The United States expired in 1811 and wasn’t renewed. After the Nepoleanic wars ended, there was an ”Era of Good Feelings”, where there was a general feeling of Unity between all politicians as the Federalist party faded into history. There was basically a diluted, moderate Democratic-Republican party. The Second Bank of  The United States was chartered in 1817 as a reaction to the difficulties in financing the War of 1812. After the panic of 1819, however, politicians split into Hamiltonian and Jeffersonian factions again over the existence of a centralized bank.

The Democrats emerged as the Jeffersonian Party; and the National Republicans, who later became Whigs, favored Hamiltonian policy. The Jeffersonian Democrats dominated the presidency and both houses until 1860.  After the charter for the Second Bank of The United States was allowed to expire by Jackson’s administration in 1837, there was a contraction and a five-year long depression. Despite this economic downturn (and a brief surge in Whig popularity),  there was no central bank again until 1913.  There was another panic that spread from Great Britain’s central bank in 1857, but the economy quickly recovered after President Buchanan (Jeffersonian Democrat)  lowered tariffs and withdrew government usage of bank notes. The panic leveled out and was over by 1859.

In 1854, a new Republican Party formed from the remnants of the Whigs (as did other abolitionist third parties to fight slavery.) The Republicans dominated Congress and the presidency until 1885. After the war, they became  the representatives of Hamilton’s philosophies.  In order to fund the Civil War, the US government left the gold standard and created greenbacks, or legal tender fiat currency that was not readily redeemable in gold. As a result of the war,  the transition back to the gold standard, and Republican protectionist tariffs, the growth of the American industrial revolution was slowed in what is known as the long depression between 1873 and 1896.

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