Alexander Hamilton is widely credited with being the father of the modern American economic system. In fact it can be said that Hamilton is the Victor Frankenstein to the monstrosity that Henry Clay, a master propagandist, dubbed the American System. The American System consisted of a central bank, permanent debt, corporate welfare, centralized authority, heavy taxation, “protective tariffs,” fractional reserve banking, etc. Prof. DiLorenzo describes this system as Hamilton’s attempt to adapt the British system of Mercantilism, one of the primary causes of the War For Independence, to the new republic.
DiLorenzo delves into the opposition to a central bank that Hamilton faced from divided sovereignty advocates like Jefferson, a recently converted James Madison, Edmund Randolph and others. At the request of Washington reports were prepared on the constitutionality of the bank. The strict constructionists all declared it illegal, based on the explicit rejection of the power to create a national bank by the Constitutional Convention while Hamilton prepared a masterpiece of equivocation in which he revealed his strategy for getting the Constitution he really wanted but couldn’t get at the convention.
Hamilton introduced the idea of “implied powers” based on an expansionist interpretation of the “necessary and proper” and “general welfare” clauses of Article I. Further, Hamilton introduced the doctrine that the Federal government may exercise ANY power not expressly prohibited to it by the Constitution, flying in the face of the 9th and 10th Amendments and ignoring the state ratification debates.
Foreshadowing much worse abuses to come, a national bank bill was passed and signed by Washington as the result of a compromise involving the expansion of the District of Columbia to make it adjacent to Washington’s property on the Potomac river. Senators threatened Washington that they would withhold their votes on the DC bill until he agreed to sign the bank bill.
DiLorenzo shows that the creation of the Bank of the United States (BUS) resulted in what fractional reserve banking on a national scale must do- inflated the currency, prices rose 72% from 1791-96, and created cheap credit for northern industrialists, but increased costs for southern planters via import tariffs to pay the service on increased government debt. Thus the regional cracks became sectional divides.
One of the most interesting aspects of the BUS is that the corruption and growth of centralization it spawned at the national level created resentment and opposition at the state level. Several states imposed exorbitant taxes on state branches of the BUS. One of these was Ohio which actually imposed a $50,000 per year tax in spite of a ruling by John Marshall’s Supreme Court claiming that it was unconstitutional, which it collected (two-years worth) from the BUS branch by force of arms.
The BUS sued Ohio deputies on the basis of Marshall’s decision which earned it the equivalent of a legislative “raspberry,” the Ohio legislature declaring the Supreme Court’s decision meaningless under Ohio’s 10th amendment sovereignty. One wonders if the current Ohio legislature will pass a resolution (HCR 11) in the current session which simply declares that Ohio retains its sovereignty under the 10th Amendment, no forcible collection of taxes necessary?
DiLorenzo explains the common view that while Marshall’s court had usurped the authority of “judicial review” many of its decisions were simply ignored as mere opinion until after the War Between The States and why.
The book chronicles Hamilton’s BUS legacy in terms of its impact on state banks after it usurped regulatory authority over these banks. It did so by buying their bank notes, which necessarily kept them afloat, then redeeming their notes demanding payment in specie (gold, silver and precious metal coins). In so doing it forced many state banks to overextend well beyond their specie reserves causing bank runs.
Favored state banks were not subjected to such treatment but state banks opposed to the BUS were savaged by it. DiLorenzo explains how policy set by the BUS continued to wreak havoc even after the BUS was de-chartered in 1811 and went out of business. The US Treasury continued many of the BUS policies and even expanded some, due largely to the War of 1812, wreaking inflationary havoc and leading to a re-chartering of the BUS.
The re-institution allowed an inflationary, cheap credit (based on the fact that the BUS had paper out at about 10 times the specie available) real estate boom and an inflation of real estate values followed by a huge bust, the country’s first depression, the Panic of 1819, where real estate values plummeted causing a huge increase in bankruptcies and a lack of available credit causing a decrease in production. Sound familiar? DiLorenzo uses the details of what has been related here to quickly explain, in simple terms, the Austrian theory of boom-bust cycles caused by centralized credit interventionism.
Andrew Jackson, a Jeffersonian, was so appalled by the blatant abuses of power and economic corruption engaged in by the BUS, especially its president, Nicholas Biddle, that he determined to destroy it before its charter expired. Jackson also offered his opinion that John Marshall’s Supreme Court opinion that the BUS was constitutional, was just that, an opinion. And he declared that he believed it to be unconstitutional.
Jackson’s actions toward the BUS were based on a number of factors which DiLorenzo explains well. Jackson stood for free-market economics, reduced tariffs, hard money (money backed by gold) and paying off the national debt. Thus Jackson’s Democrats were the sworn ideological enemies of Hamilton’s Federalists later Whigs and even later Republicans.
The book explains the brilliant methodology by which Jackson managed to drive a stake through the heart of the BUS vampire, though Biddle did not give it up without a fight. Before its death knell, Biddle attempted to manipulate credit so as to create a depression and he was successful in creating a short-lived recession. DiLorenzo chronicles how Jackson and Van Buren worked to establish the Independent Treasury System, considered by many to be the most stable monetary system of the 19th century. It was a hard money system.
The book goes into deeper detail regarding the continued legacy of Hamilton’s economic system; inflation, currency debasement and constant boom-bust, also called bubble-burst, cycles. Inflation can be a boon to unscrupulous politicians (a redundancy?) who use the newly created money to pander for votes, as long as they can slough off blame for the problem onto non-participants (the ubiquitous “middle-man,” private sector, “unregulated” businesses, etc.) or rival political parties.
The book chronicles how inflation is actually a hidden tax and how government interventionism essentially causes businesses to mis-allocate assets due to a lack of knowledge about future values. Hence, depreciation schedules are often meaningless and replacement of old equipment is discouraged. Consumers are also effected because they are not sure of the cost of an item in the future. Thus, they adopt a “buy now” philosophy which discourages savings meaning less assets are available for investment. Once their credit is used up they retrench. The resulting boom-bust cycles are then blamed on a “lack of regulation” and new centralized restrictive policies are introduced to “fix” the problem, making things, in reality, worse.
In the concluding section of the chapter DiLorenzo asks the question- “how can someone as obviously brilliant, if not a genius, have been so politically naive as to not know the destruction his system would bring?” He also begins to go about answering it. You’ll have to read it to find out that answer.
Next chapter- Chapter 4- Hamilton’s Disciple: How John Marshall Subverted The Constitution