September 16, 2016


Why Hamilton--Not Jefferson--Is the Father of the American Economy (Stephen S. Cohen and J. Bradford DeLong, 2/16/16, Fortune)

Before Hamilton, it was the Jeffersonian economic mold, the mold that Britain had imposed through its mercantilist colonial policy, into which the American economy was being poured. Jefferson wanted to cut America loose politically from what he saw as the corruption of Imperial Britain. But he had no major quarrel with the un-industrialized agrarian economy that the British Empire was designing America to be.

Hamilton, a New Yorker, thought differently: that liberty could spring from the city as well as the countryside, and that prosperous market economies needed big pushes to get themselves going. And so Hamilton pushed the United States into a pro-industrialization, high-tariff, pro-finance, big-infrastructure political economy, and that push set in motion a self-sustaining process.

Representatives of both western farmers and New England manufacturing workers saw that it was good for them to impose high tariffs on imported British goods, and use the revenue to build the infrastructure for an America that would not just be Europe's farmer, logger, and miner, but a manufacturer and a researcher in its own right.

After Hamilton, the U.S. economy was different. It was a bet on manufacturing, technologies, infrastructure, commerce, corporations, finance, and government support of innovation. That turned out to be good for more than just farmers and the bosses and workers: it turned out to be good for the country as a whole.

Urban commercial prosperity was essential for a good and a free society. A desperately poor urban population could not be supporters of liberty. And a rural society--even a frugally prosperous one--that lacked a critical manufacturing capability could not defend itself against empire building by Britain, France, the Netherlands, or Spain. At best, it would be dependent on unwanted and unfair foreign alliances. 

[T]he United States we have today is not Jefferson's, but Hamilton's. Why? Because once the Hamiltonian system was set, it stuck. It worked. And so, very quickly it became too strong and too useful to too many powerful groups for any political coalition to dismantle it.

Hamilton's system was constructed of four drivers that reinforced one another, not just economically but politically: high tariffs; high spending on infrastructure; assumption of the states' debts by the federal government; and a central bank.

The economy was to be reshaped to promote industry. And the principal instrument for this was a high tariff on manufactured imports from Britain, the traditional world-dominant manufacturer.

The tariff would provide the incentive to invest in the development of manufacturing technologies and would subsidize the nascent manufacturing firms that would make those investments.

It was also to be the major source of federal government revenues, and would thus support an extensive program of infrastructure development. This was vital for territorial expansion and economic development, and for adding the critical political support of the western farmers to the northern coastal commercial and labor interests.

But that was not all. The tariff was also the instrument that permitted the federal government to credibly assume states' debts incurred to fund the Revolutionary War, thus strengthening the central government (central to Hamilton's plans).

The creation of a federal government debt also constituted the basis of a new and vigorous financial market. No wonder then that in Hamilton's strong and settled opinion: "a national debt, if it is not excessive, will be to us a national blessing."

Posted by at September 16, 2016 6:51 PM