The Founding Father of Crony Capitalism: Alexander Hamilton

The current financial crisis demonstrates once again that Alexander Hamilton was one of the worst things to happen to America.

Daily Article from Mises.org, the site of the Austrian school of economics
by Thomas J. DiLorenzo Posted on 10/21/2008 . [Emphases below added by Mac]

As soon as the federal government announced its trillion-dollar bailout (for starters) of Wall Street plutocrats, defenders of the bailout pulled out what they apparently believed was their secret weapon: the myth of Alexander Hamilton as the alleged inventor of American capitalism. Hamilton, they said, would approve of the bailout. Case closed. How could anyone dispute "the architect of the American economy"?

Forbes.com immediately published an article entitled "Alexander Hamilton versus Ron Paul" to make the point that libertarian critiques of the bailout should be dismissed, since Hamilton was such a great statesman compared to Congressman Paul and his supporters. The Wall Street Journal Online published a piece by business historian John Steele Gordon in which he argued that our real problem is that central banking is not centralized enough; called for a financial-market dictator/regulator; supported the bailout; and, most importantly, blamed the current economic crisis on … Thomas Jefferson! Jefferson opposed America's first central bank, Hamilton's bank of the United States, and was a hard-money advocate. It is this kind of libertarian, free-market thinking, said Gordon, that is the cause of the current crisis.

What all this frantic Hamilton idolatry demonstrates is how the myth of Alexander Hamilton is the ideological cornerstone of the American system of crony capitalism financed by a huge public debt and legalized counterfeiting through central banking. It is this system that is the real cause of the current economic crisis — contrary to the false proclamations issued by Forbes.com and the Wall Street Journal.

We live in "Hamilton's republic," as the writer Michael Lind has proudly stated. Americans may like to quote Jefferson, George Will once wrote, but we live in Hamilton's country. This is true, but it is not the blessing that people like Lind, Will, and others proclaim. Just the opposite is true, as I argue in my new book, Hamilton's Curse: How Jefferson's Archenemy Betrayed the American Revolution — And What It Means for America Today.

The Real Hamilton
Hamilton was the intellectual leader of the group of men at the time of the founding who wanted to import the system of British mercantilism and imperialistic government to America. As long as they were on the paying side of British mercantilism and imperialism, they opposed it and even fought a revolution against it. But being on the collecting side was altogether different. It's good to be the king, as Mel Brooks might say.

It was Hamilton who coined the phrase "The American System" to describe his economic policy of corporate welfare, protectionist tariffs, central banking, and a large public debt, even though his political descendants, the Whig Party of Henry Clay, popularized the slogan. He was not well schooled in the economics of his day, as is argued by such writers as John Steele Gordon. Unlike Jefferson, who had read, understood, and supported the free-market economic ideas of Adam Smith, David Ricardo, John Baptiste Say (whom Jefferson invited to join the faculty of the University of Virginia), Richard Cantillon, and Turgot (a bust of whom still sits in the entrance to Monticello), Hamilton either ignored or was completely unaware of these ideas. Instead, he repeated the mercantilist myths and superstitions that had been concocted by apologists for the British mercantilist state, such as Sir James Steuart.

Hamilton championed the cause of a large public debt — which he called "a public blessing" — not to establish the credit of the US government or to finance any particular public works projects but for the Machiavellian idea of tying the interests of the more affluent to the state: being government bondholders, they would, he believed, then support all of his grandiose plans for heavy taxation and a government much larger than what was called for in the Constitution.

He was right. They, along with Wall Street investment bankers who have marketed the government's bonds, have always provided effective political support for bigger government and higher taxes. That is why Wall Street investment bankers were first in line for a bailout, administered by one of their fellow investment bankers, Treasury Secretary Paulson.

Hamilton argued for a large standing army not because he feared an invasion by France or England, but because he understood that the European monarchs had used such armies to intimidate their own citizens when it came to tax collection. Evidence of this is the fact that Hamilton personally led some 15,000 conscripts into Western Pennsylvania (with George Washington) to attempt to quell the famous Whiskey Rebellion. He was eventually put in charge of the entire expedition, and rounded up two dozen tax protesters, every one of whom he wanted to hang. They were all pardoned by George Washington, however, to Hamilton's everlasting regret.

In a publication entitled "A History of Central Banking in America" the Fed proudly labels Hamilton as its founding father, boasting that he even spoke just like a contemporary Fed chairman. The First Bank of the United States, which was opposed by Jefferson and Madison, created 72 percent inflation in its first five years of operation, as Murray Rothbard wrote in A History of Money and Banking in the United States. It was not rechartered in 1811, but was resurrected by Congress in 1817, after which it created America's first boom-and-bust cycle, which led to the Panic of 1819, the title of another of Rothbard's great works on American economic history.

After years of generating political corruption and economic instability [c.v. Fannie Mae/Freddie Mac--mac], Hamilton's bank finally came to an end by the early 1840s, thanks to President Andrew Jackson. This led to the twenty-year "free banking" era. Hamiltonian central banking was resurrected once again in the 1860s with the National Currency Acts. This is an important reason why some historians have labeled the postwar decades as a period of "Hamiltonian hegemony."

When Anna Schwartz, Michael Bordo, and Peter Rappaport evaluated this precursor to the Fed in an academic publication, they concluded that it was characterized by "monetary and cyclical instability, four banking panics, frequent stock market crashes, and other financial disturbances" (see their paper in Claudia Goldin, ed., Strategic Factors in Nineteenth-Century Economic Growth). Naturally, the government's response to all of this economic panic and instability caused by centralized banking was to create an even more centralized banking system with the Federal Reserve Act.

Hamilton is perhaps best known among economists for his Report on Manufactures. In his 1905 biography of Hamilton, William Graham Sumner wrote that Hamilton's report advocated "the old system of mercantilism of the English school, turned around and adjusted to the situation of the United States." Thomas Jefferson also wrote that Hamilton's "schemes" for protectionism, corporate welfare, and central banking were "the means by which the corrupt British system of government could be introduced into the United States." He was right.

Hamilton's reputation as having had great expertise in economics and finance has been greatly exaggerated, wrote Sumner, who also wrote that Hamilton's economic thinking was marred by "confusion and contradiction" and that Hamilton was "befogged in the mists of mercantilism." Unfortunately for us, all of Hamilton's bad ideas "proved a welcome arsenal to the politicians" who succeeded him, noted Sumner.

At the constitutional convention Hamilton proposed a permanent president who would appoint all the governors of the states and would have veto power over all state legislation. His opponents correctly interpreted this as advocating a monarchy and, worse yet, a monarchy based on mercantilism. The reason for consolidating all political power first in the central government, and then in the hands of one man, the permanent president, was so that an American mercantilist empire could be centrally planned and controlled without any dissenters, such as tax protestors or free traders who resided in the various states. Hamilton (and his political heirs) understood that forced national uniformity is the only way in which such a central-planning scheme could work. The socialists of the 20th century understood this as well.

Hamiltonian mercantilism is essentially the economic and political system that Americans have lived under for several generations now: a king-like president who rules through "executive orders" and disregards any and all constitutional constraints on his powers; state governments that are mere puppets of the central government; corporate welfare run amok, especially in light of the most recent outrage, the Wall Street Plutocrat Bailout Bill; a $10 trillion national debt ($70 trillion if one counts the government's unfunded liabilities); a perpetual boom-and-bust cycle caused by the Wizard of Oz–like central planners at the Fed; constant military aggression around the world that only seems to benefit defense contractors and other beneficiaries of the warfare state; and more than half of the population bribed with subsidies of every kind imaginable to support the never-ending growth of the state.

This is Hamilton's curse on America — a curse that must be exorcized if there is to be any hope of resurrecting American freedom and prosperity.

BIO
Thomas DiLorenzo is professor of economics at Loyola College in Maryland and a member of the senior faculty of the Mises Institute. He is the author of The Real Lincoln, Lincoln Unmasked, How Capitalism Saved America, and, more recently, Hamilton's Curse. You can receive the Mises Daily Article in your inbox. Go here to subscribe or unsubscribe.

Response to my 'Stopping Offshoring--Merchantilism Is Back!'

Russell, author of the Offshoring editorial, sent me a response to my criticism of his anti-offshoring editorial on DevX.com in 2004.

If you know anything about merchantilism, economics, classic liberalism, Adam Smith, protectionism, or any related subject, the following comeback from Russell will absolutely drive you crazy! How do you argue with this kind of logic?

My attempt to do so follows below...

--mac

Russell replies: (Oct 21/04)

Mac,

I do think intelligent people have learned something--they've learned to be liberals.

My position is moral because, as you might try to remember from your high-school civics classes, the government in America is supposed to be us. Those politicians and bureaucrats that you seem to hate so much are the doctors, lawyers, moms, police, former students, editors, businesspeople, and teachers who formerly worked elsewhere in America.They are of us, not some amorphous faceless mass arrayed against and dedicated to defeating capitalism. In this country, we are our own masters. That's what democracy is.

Your argument that the government is currently run by unions is simply laughable. Worker unionization in this country has dropped precipitously over the past forty years. At the height of union power, in the 1940's and '50s, it consisted of over 30% of the workforce; today, it's down to about 9%.

If you reread the editorial, you'll find that I'm not calling for an end to competition--American workers are more than equal to the competition--when it's offered on a level playing field. The problem is that the playing field's not level, not that people are afraid of competition.

And you're correct that it's not society's duty to defend individuals' jobs against cheaper labor elsewhere *in America*--but it *is* in society's interest--and thus society's duty--to ensure that its workforce remains productively employed so that they can continue toprovide innovation that will ensure the future competitiveness of that society against others.

As for Smith, he was writing in the 1700's, when *location* played a much larger part in determining the value of goods, and holds far less value today, when location is becoming increasingly irrelevant, and the value of labor is measured not against Smith's idea that "There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock." but by the global value of labor, which, as we've seen, now varies according to which country (not which neighborhood) has the greatest number of potential workers willing to work for the lowest price. The availabilityof labor has changed. In Smith's time, the "society or neighborhood"wasn't global. America's population isn't high enough to win *that* race; therefore we have to change the rules.

If you want to continue this discussion logically, I'll pose two problems for you.

1. As you're against "government interference" of all kinds, you obviously think that's a better model for civilization, so: show me a single successful society where their government doesn't interfere with business or labor. Tell you what, I'll give you all of recorded human history to search in.

2. Tell me what jobs you would counsel today's children to prepare for. Give me *specific* jobs, not some nebulous "prepare-yourself-for-everything" advice. Bear in mind that I'm talking about *all* the upcoming workers in America - either we have to employ them, or we have to support them, or we have to watch them starve.

Thanks,
Russell

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Notice the nicely pseudosophisticated recasting of the old Marxist argument that labor competition will inevitably drive all workers down to poverty in a vicious cycle of competition.

Notice the failure to grasp the fundamental principle that competition MEANS one has an advantage over the rival -- to the rival, it's terribly terribly unfair. If you'd only fight fair--pay the same, impose the same burdens on yourself, do things the same old way--why, we'd be able to compete just fine! Yes indeed you would.

Oh, by the way, I *can* propose a nation that has had minimal government interference in labor, the economy, or corporations: Hong Kong from the end of WWII until 1999. Ptht!

"Stopping Offshoring"--Uh oh, Merchantilism Is Back!

A colleague at DevX posted an editorial back in 2004, "Offshoring: It's Not Too Late To Change," arguing that we should, basically, outlaw offshoring on the grounds that it was hurting US programmers, and the Indians weren't competing "fairly" because their salaries were lower and they didn't have all the governmental obligations we imposed (that would be news to the Permit Raj, wouldn't it?). Americans, he asserted, can compete with anybody--but not if they are charging a fifth the price! (See http://www.devx.com/opinion/Article/22202)

An astounding set of assertions; medieval merchantilism returned almost unphased by the intervening 300 years of prosperity. I'm afraid I ranted a bit:
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Sigh...

This is just standard liberal balderdash, justifying action because we are hurt, seeing in the market and human forces some conspiracy that must be stopped at any price, justifying special interest pleading, a harkening back to protectionist rhetoric that crops up at every crisis since the Middle Ages.

Citing the numerous past and current infringements by government on the market and on liberty is not justification for more such infringements. The idea that government politicians and bureaucrats (for God's sake!) are the forces of goodness and social justice who will protect poor us from the evil corporate masters--well, that's just willful naivete. When you castigate corporations for not being good, for not considering the consequences of their actions, for not bearing in mind societal costs--well of course they are guilty of all these things. That's not the question -- the question is, WHO will you nominate as the masters to manage these societal goodnesses -- the effing government, for all that's holy? What a joke! Have you learned nothing?

This is about getting the power of government to side with you, instead of someone else. A hundred years ago companies lorded it over employees because when the employees tried to organize and take advantage of the forces of the marketplace, the government sided with the corporations and sent out the cops to shoot the union organizers, and passed laws attempting to stop the market in its march toward improved working conditions. Fifty years later, the government didn't suddenly come to its senses and become a neutral arbiter, a societal force for good that ensured that nobody was hitting anybody but things would be decided peacefully-- no, the government *changed sides*! Now it's the union bullies who hurt people and the cops who stand by and do nothing to protect people and property and the peace while they do it. And the laws are used to create sinecures for favored groups of workers--harming not only their companies, but other workers and the customers, not to mention the marketplace.

But you aren't calling for the government to stop meddling and handing favors to special interests when you complain of, for example, the agricultural subsidies which of COURSE go to gigantic corporate farmers -- you don't want them to stop doing that obvious inanity-- no, you just want to use it to justify you're getting some -- you just want them to do the same thing for *your* special interest. And for the same reason: You'd rather the government protect you from your customers, clients, and employers, than have to deal with them yourself. Well of course you would! So would everybody! That's understandable. What I don't understand is why that makes your position so moral?

Where is it written--and who wrote it, and when did they write it, and who the hell do they think they are--that once you've established yourself in an enterprise or a field of study or a specialty--that the government guarantees you won't have to compete for that against anybody ever again? That society *owes you* that job, that salary, that good living, that life direction? Or if you are a company making, let's say, RAM chips, that nobody can compete with you so well that they threaten your business? Where the hell is that written? If a developer is losing a job to some Indian who will do roughly the same job for a fifth the price--why is it suddenly society's role to intervene and prevent this guy from having to defend his job? Prevent a situation in which this developer is going to have to go into a new profession? Why? Because he's an American and the other guy is Indian? How about if somebody in New Jersey is willing to work for less than somebody from California--shall we stop that inconvenience to the California developer? Oh yes--we should! There are regular attempts to prevent companies from moving themselves and their jobs out of state!

So now the government becomes, in the eyes of the great liberals, those who launched the great revolution of the 18th and 19th centuries against the dead hand of government--that government becomes the guarantor of No Change! You find a profession you like? Fine--register with Washington and nobody can take it away from you!

Think I'm kidding? France and Germany have nearly that situation right now. Booming economies, too, I notice!

Once you put that notion into action, it's everybody's ballgame. People line up to get protection, make-goods, stop their bosses and then their neighbors from inconveniencing them. Corporations are right at the front of the trough, too -- and why not? You've established the rules of the game: The government is there to prevent anybody from getting in your way, competing "unfairly" for your job, moving your job, painting their house a color you don't like (as happened in my town recently), and there's no end to it. The government is the arm of society for forcing people to Do The Right Thing. Which is fine--as long as they properly understand what The Right Thing is.... or until they foolishly elect a Republican into office... or a Hitler, or a Taliban.

Welcome to the bullying society.

(And then try to take away from the government that power you conceded to them for your own interests. Hah.)

I have an alternative suggestion (for dealing with poor countries). If other countries are poor, let's end our tariffs and other unfair blockages that prevent them from selling us stuff and improving their condition. We've got more of those than almost anybody, GATT notwithstanding. Let's stop subsidizing sugar beet farmers in New Orleans so Jamaicans can sell us sugar and get off the dole. Let's stop subsidizing tobacco farmers and let them go find another kind of job. Let's stop subsidizing rich companies and engaging in "unfair competition lawsuit" farces that are nothing but opportunities for politicians to sell votes. Let's stop sending foreign aid billions to the governments who run such oppressive countries that the poor can never rise up because the rich there own the government. Really own the government, not this mere shadow of the thing we like to tease ourselves with here.

And for God's sake please stop to think that every time you suggest empowering the government to do another wonderful good, there are those awful companies you disdain so much with their lobbyists lining up in Washington to pervert your intentions and turn them against you, and against smaller competitors--and the pols are happy to let them. And when, as surely you must, you suggest using the government to attack evil corporations, please bear in mind that rich people and rich corporations know how to defend themselves in the long run, but an empowered government is empowered forever--even when it has corrupted itself and turned its attentions to you. Remember that this good thing can be bad too --the Jim Crow laws were designed to prevent black people from offering their services cheaper than white laborers and through employer *greed* undermining segregation. I remind you that Smith's great insight into markets is that they do not create good from the intentions of the actors.

Jeez, I can't believe I'm reading this kind of self-righteous drivel from you. You'd think that a hundred years of liberal nostrums turned to dust in our mouths would have taught intelligent people something. Apparently not.

mac
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The Editor in Chief of DevX, Lori Piquet, urged me to post the remarks as a reply to his essay, and I responded:

That's all i need--a discussion. Russell did respond, taking the standard liberal positions. Our problem is that we disagree at the most fundamental level - what is the role of government in a free society? He thinks it's to do whatever is convenient and helpful; whatever, as he puts it, is in "our" interests. The entire history of self-interested government moves him not a whit. Such naive faith in activist government simply depresses me--it was against this exact notion of the role and duty of the ruling classes that the US government was set up with an entirely different approach -- one that Russell and everybody who believes as he does -- and that's nearly everybody, because it's so wonderful to be able to have the government force goodness on everyone and fix everything and pay for everything -- have completely abandoned. Which is fine -- except they don't even *know* they have abandoned it. They aren't aware of it in the first place. They don't know that this exact same argument went on for the entire 18th century, with yards of books and tracts written arguing all sides.

It just makes me tired. There is always a fresh generation eager to put its hands on the efficacious levers of a powerful government--and there always will be--fanatically attentive to the shortcomings of every private individual, yet completely oblivious to the endless horrors of activist government, they are on every school board, every zoning commission, every condominium association, every high school student government, bright-eyed, intelligent, and as ignorant as newborn babes. But by God, they know power when they see it, and they have plans for it. Yes, they have plans.

The Founders did an amazing job of wrenching our ancestral society 180 degrees around from the notions of paternalistic government that had ruled for ten thousand years, and the respect for the individual and suspicion of government overreaching they inculcated lasted a hundred years. How can we ever reclaim that heritage? I don't know. I wish I knew.

But forums on topics like this are just a tiresome raging of ignoramuses, and you can't be writing corrective essays every day. I'm sorry I bothered to respond to him -- plainly, judging from his response, he is immovable in his righteous view.