Hamilton’s Curse- The Founding Father of Crony Capitalism

GadsdenThis chapter review is being written on July 4th, after something of a hiatus. Not a hiatus from the work that the Policy Institute does but a hiatus from blogging caused by too much to do in the struggle for liberty and too little time to do it. As Christ said “The harvest is plentiful, but the laborers few.”

To the left is the flag that is on this author’s flagpole today. It is the Gadsden flag, an early republican naval ensign. In part that’s because of the flag’s symbolism. A coiled rattlesnake ready to strike was an early symbol of resistance to tyranny, something that is very relevant in today’s political climate.

What does this have to do with Alexander Hamilton? Everything, really. Hamilton was, indeed, a patriot as his military action in battles like the seige of Yorktown demonstrate. Unfortunately, he was also a brilliant and manipulative political strategist who believed that the United States needed to become an aristocratically led monarchy to achieve its destiny as a great empire. And his vision caused him to be involved first in bringing down the Articles of Confederation because they could not be made to conform to his vision of empire, then to rebuild the economy on the model of British mercantilism in order to create the capital necessary to build the empire. Just because a man is both a genius and a patriot, does not mean that he is automatically an admirable figure in a nation’s history, as the book demonstrates.

Dr. Thomas DiLorenzo chronicles the 7 decade struggle to make Hamilton’s economic system the adopted system of the United States and the many faces it wore during that period. It was a see-saw battle which saw Hamilton’s system advance and recede several times, mostly along regional and philosophical lines, before the War Between the States brought Hamilton’s system into use in the United States to stay (for now, at least).

One of the pillars of Hamilton’s system was “crony capitalism,” also called today corporate welfare. It’s modern supporters call the system “tax-financed subsidy.”Modern liberals claim to hate “corporate welfare” but this is a ruse and a political shell game. They are more than willing to supply “tax-financed subsidies” to businesses in the “green economy,” for instance and are more than willing to make revolutionary changes to tax structure to raise the funds for it. When it is pointed out that “tax-financed subsidies” is “corporate welfare,” supporters will launch into lengthy soliloquies on the necessity of the action, all of which purposefully tries to steer the questioner in the opposite direction of his question.  They learned well from Hamilton, whose Report on Manufactures for the new United States government under the Constitution is considered to be either a masterpiece of economic vision or a confusing jumble of economic non-sequiturs, based on the reader’s knowledge of how economies work.

DiLorenzo demonstrates that Hamilton placed himself clearly in the camp of what, in the late 19th century became the “Progressive movement,”  in opposition to Adam Smith’s laissez faire approach to economics. Under Smith’s system (which is not theoretical but empirical, i.e. based on observation), the free market decides where investments are best made. Rewards and punishments come in the form of profitability or bankruptcy. Under the Hamiltonian-mercantilist system, highly educated and specialized central-planning “experts” can best decide where subsidies and protectionist taxation (tariffs) can be applied in order to give a fledgling invention or industry the help it needs in establishing itself. And if the market doesn’t want that particular product? Then obviously, more subsidies are necessary until public perception catches up to “innovation.” DiLorenzo explains in some detail how Smith successfully demonstrated that the best competitors, meaning the best businessmen with the best product wins in a free market. Hamilton argued for the power of government to be used to “level the playing field” but forgot to point out that this means that such a system can be abused to provide rewards for political allies instead of its stated purpose. In British mercantilism the King became a de facto business partner with subsidized business; in Hamilton’s system it is co-operative politicians.

Hamilton’s call for import tariffs had an unintended but not unforseen consequence: the increase of foreign import duties to match. Adan Smith had explained this relationship in the Wealth of Nations. Hamilton arrogantly insisted that Smith’s observations had been mistaken. This led to a form of economic isolationism that Hamilton actually thought a good idea. In fact it created regional strife and industrial stagnation internally and gave foreign manufacturers an advantage in the world market.

Hamilton wrote in his Report on Manufactures of his certainty that only government would have the resources and the motivation necessary to build roads to the interior. Unfortunately for his theory, within 10 years of his publication of the report, state chartered private firms were busily building roads at rates that astounded observers. Road building companies were eagerly invested in by merchants and manufacturers to provide easier access to growing western markets. Unfortunately, this lesson did not make an impression on Hamilton’s enthusiastic supporters later in the 19th century. They insisted in pouring good money after bad in building a system of roads and canals, many of them literally to nowhere, that became a money pit, bankrupting several mid-western states and causing severe economic consequences nationally. A major culprit whose name became prominent later was an ingenious Illinois state legislator and enthusiastic supporter of the Hamiltonoan philosophy who managed to become the key player in bankrupting his state through “internal improvements” crony capitalism in the 1840’s- Abraham Lincoln.

Hamilton’s system went into disgrace for a time, especially during the presidency of Thomas Jefferson. The election of 1800 was a complete repudiation of the Federalist-Hamiltonian philosophy of government. During Jefferson’s first term Hamilton died. Henry Clay became the new champion of what Hamilton had coined the American System. Clay became not only the systems champion but one of its beneficiaries. Being a hemp farmer he received a sizable hemp subsidy (hemp was an important crop because it made the finest marine rope available at the time). As the American System gained ground in the 1820’s in the wake of the War of 1812 it began to cause severe regional divisions between north and south. The industrial north was being subsidized with the tariffs raised by taxing imports into the agrarian south. At the same time the south’s markets were being severely restricted by retaliatory tariffs on agricultural imports. This situation eventually bloomed into the nullification crisis of the early 1830’s and then later into the secession crisis of 1860-61.

In the meantime the twice-chartered national bank, which would have allowed the creation of huge amounts of credit for the federal government was allowed to expire in 1811 and simply killed by withdrawal of funds in 1836. A new national bank was vetoed in 1841 and several times after this. This was an extremely important pillar of the American System. Hamilton’s scheme simply would not work without a vast amount of available credit. Hamilton’s empire was to be built on debt and the creation of fiat money. Jefferson’s system was hard currency (gold and silver based) and “pay as you go.”

As the War Between the States showed, these were incompatible systems and the result was an acrimonious and bloody divorce suit that demonstrated the vast differences between Hamilton’s “living document” method of constitutional interpretation featuring gross abuse of the “General Welfare” and “Elastic” clauses versus the strict constructionist interpretation which posits that the words and phrases in the Constitution have meaning and the intent of the writers of the document should be followed when discernable.

In the next chapter we will see what happened as the American System became dominant and how it got that way.

Series NavigationHamilton’s Curse Chapter 8–Poisoned Fruits of “Hamilton’s Republic”Hamilton’s Curse- Hamilton’s Disciple: How John Marshall Subverted The ConstitutionHamilton’s Curse–Hamiltonian Hegemony