Alexander Hamilton (77 page)

Hamilton evoked a thriving future economy that bore scant resemblance to the static, stratified society his enemies claimed he wanted to impose. His America would be a meritocracy of infinite variety, with a diversified marketplace absorbing people from all nations and backgrounds. Though slavery is nowhere mentioned in the report, Hamilton’s ideal economy is devoid of the feudal barbarities of the southern plantations. Hamilton’s list of the advantages of manufacuturing has a quintessentially American ring: “Additional employment to classes of the community not ordinarily engaged in the business. The promoting of emigration from foreign countries. The furnishing greater scope for the diversity of talents and dispositions which discriminate men from each other. The affording a more ample and various field for enterprise.”
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Manufacturers and laborers would flock to a country rich in raw materials and favored with low taxes, running streams, thick forests, and a democratic government. And that influx of workers would eliminate one of the most pressing obstacles to American manufacturing: high wages.

While Hamilton’s emphasis on “diversity” may please modern ears, his stress on child labor is more jarring. Of the productive British cotton mills, he commented: “It is worthy of particular remark that, in general, women and children are rendered more useful, and the latter more early useful, by manufacturing establishments than they would otherwise be.” In Britain’s cotton mills, it was “computed that 4/7 nearly are women and children, of whom the greatest proportion are children and many of them of a very tender age.”
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Hamilton’s approval of this may sound callous, and it is certainly fair to fault him for not foreseeing the brutality of nineteenth-century mills. On the other hand, child labor in farms and workshops was then commonplace—Hamilton himself had started clerking in his early teens, and his mother had worked. Hamilton didn’t see himself as inflicting grim retribution upon the indigent so much as giving them a chance to earn decent wages. For Hamilton, a job could be an ennobling experience: “When all the different kinds of industry obtain in a community, each individual can find his proper element and can call into activity the whole vigour of his nature.”
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Hamilton did not equate child or female labor with exploitation.

In the best of all possible worlds, Hamilton preferred free trade, open markets, and Adam Smith’s “invisible hand.” He wrote late in life, “In matters of industry, human enterprise ought doubtless to be left free in the main, not fettered by too much regulation, but practical politicians know that it may be beneficially stimulated by prudent aids and encouragements on the part of the government.”
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At this early stage of American history, Hamilton thought aggressive European trade policies obligated the United States to respond in kind. He therefore supported temporary mercantilist policies that would improve American self-sufficiency, leading to a favorable trade balance and more hard currency. For a young nation struggling to find its way in a world of advanced European powers, Realpolitik trumped the laissez-faire purism of Adam Smith.

Reluctant to tinker with markets, Hamilton knew that he had to present a cogent brief for any government direction of investment. There was an obvious objection: wouldn’t smart entrepreneurs spot profitable opportunities and invest capital without bureaucratic prompting? Yes, Hamilton agreed, entrepreneurs react to market shifts, but for psychological reasons they sometimes respond at a sluggish pace. “These,” he wrote, “have relation to the strong influence of habit and the spirit of imitation; the fear of want of success in untried enterprises; the intrinsic difficulties incident to first essays toward a competition with those who have already attained to perfection in the business to be attempted.”
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Young nations had to contend with the handicap that other countries had already staked out entrenched positions. Infant industries needed “the extraordinary aid and protection of government.”
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Since foreign governments plied their companies with subsidies, America had no choice but to meet the competition.

After doing the intellectual spadework for government promotion of manufactures, Hamilton listed all the products he wanted to promote, ranging from copper to coal, wood to grain, silk to glass. He also enumerated policies, including premiums, bounties, and import duties, to protect these infant industries. Wherever possible, Hamilton preferred financial incentives to government directives. For instance, knowing that tariffs taxed consumers and handed monopoly profits to producers, Hamilton wanted them to be moderate in scale, temporary in nature, and repealed as soon as possible. He preferred bounties because they didn’t raise prices. In some cases, he even wanted
lower
tariffs—on raw materials, for instance—to encourage manufacturing. And to speed innovation, he wanted to extend patent protection to inventors and adopt the sort of self-protective laws that Britain had used to try to hinder the export of innovative machinery.

For Hamilton, the federal government had a right to stimulate business and also, when necessary, to restrain it. As Arthur Schlesinger, Jr., has observed, “Hamilton’s enthusiasm over the dynamics of individual acquisition was always tempered by a belief in government regulation and control.”
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In arguing, for instance, that government inspection of manufactured articles could reassure consumers and galvanize sales, he anticipated regulatory policies that were not enacted until the Progressive Era under Theodore Roosevelt: “Contributing to prevent fraud upon consumers at home and exporters to foreign countries—to improve the quality and preserve the character of the national manufactures—it cannot fail to aid the expeditious and advantageous sale of them and to serve as a guard against successful competition from other quarters.”
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He also recommended that the government inspect flour exports at all ports, “to improve the quality of our flour everywhere and to raise its reputation in foreign markets.”
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Endorsing still another form of government activism, Hamilton claimed that nothing had assisted Britain’s industry more than its network of public roads and canals. He therefore touted internal improvements—what we would today call public infrastructure—to meld America’s scattered regional markets into a single unified economy.

Even though he devoted only two skimpy paragraphs to the manufacture of gunpowder, Hamilton never lost sight that his
Report on Manufactures
was initially driven by the need for self-sufficiency in arms. Determined not to be caught shorthanded in case of war, Hamilton supported “an annual purchase of military weapons” to aid “the formation of arsenals.”
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So vital were supplies to national security that Hamilton did not rule out government-owned arms factories.

In closing, Hamilton made clear that the energetic programs he described were not suited to all countries at all times but were devised for an early stage of national development: “In countries where there is great private wealth much may be effected by the voluntary contributions of patriotic individuals. But in a community situated like that of the United States, the public purse must supply the deficiency of private resources.”
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Hamilton’s
Report on Manufactures
ultimately came to naught. Unlike his magnificent state papers on public credit, the mint, and the central bank, this report charted a general direction for the government, not solutions to specific, urgent problems. The House of Representatives shelved the report, and Hamilton made no apparent effort to resurrect it from legislative oblivion. For a document never translated into legislation, the report aroused exceptional apprehension because of its broad conception of federal power. As always, Hamilton cited constitutional grounds for his program, invoking the clause that gave Congress authority to “provide for the
common defence
and
general welfare.
”
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Owing in part to Hamilton’s generous construction of this clause, it was to acquire enormous significance, allowing the government to enact programs to advance social welfare.

Madison was deeply alarmed by these arguments. Thus far, he said, those expounding a liberal interpretation of the Constitution had argued only for leeway in the
means
to attain ends spelled out in the Constitution. But no mention was made of manufacturing as an
end
of government. “If not only the
means,
but the
objects
are unlimited,” Madison groaned, “the parchment had better be thrown into the fire at once.”
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Nor could Jefferson conceal his horror at the report, which called for an even more sweeping arrogation of power than had Hamilton’s bank. In one postbreakfast talk with Washington, Jefferson mentioned Hamilton’s latest position paper and wondered somberly whether Americans still lived under a limited government. He dreaded the powers that would accrue to government under his colleague’s loose reading of the Constitution. He grumbled that “under color of giving
bounties
for the encouragement of particular manufactures,” Hamilton was trying to insinuate that the “general welfare” clause “permitted Congress to take everything under their management which
they
should deem for the
public welfare
.”
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For Jefferson, this opened wide the floodgates to government activism.

When the craving for bank scrip had created a speculative bubble in the summer of 1791, Hamilton had cooled off the contagion before it got out of hand. The relief had proved short-lived. The very prosperity that his ebullient leadership engendered—reflected in rising exports, a booming demand for American bonds in Europe, and a rush of newly chartered companies—generated effervescent optimism that fed yet another mad scramble for government securities and bank scrip, pushing their prices to new highs during the winter of 1791–1792.

Once again, the main protagonist was Hamilton’s old chum William Duer, always a restless soul beneath his bonhomie. Duer’s wife, Lady Kitty, had long been chagrined by her husband’s compulsive gambling. She once admonished him, “I fear…your mind will be too much harassed with the variety of business and speculations you undertake to allow you…inward quiet.”
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In a similar vein, Duer’s friend, Samuel Chase of Maryland, pleaded with him to control his acquisitive impulses: “I know the activity of your soul and fear your views…and schemes are boundless…. I sincerely wish that you would set limits to your desires.”
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Unfortunately, nobody could cure William Duer’s speculative bent. He was now the colossus of New York financial markets and derisively crowned “King of the Alley” by Jefferson.
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In late 1791, determined to corner the market in government bonds and bank shares, he formed a secret partnership with Alexander Macomb, a wealthy land speculator. Hamilton had just chosen Duer as governor of the Society for Establishing Useful Manufactures, where Macomb also served as a director. Now, to finance stock manipulation, the reckless Duer borrowed vast sums on his personal notes and drew other SEUM backers into an investing cabal nicknamed the Six Per Cent Club because of its plan to monopolize 6 percent government bonds.

In January 1792, Hamilton was monitoring financial markets in New York with foreboding when hectic trading in bank scrip received a sudden fillip from the announcement of three new banks being formed. Aside from the Bank of New York and a projected branch of the Bank of the United States, New York at this time had no other banks. The Million Bank was to be organized by Macomb and Hamilton’s old adversary from the New York Ratifying Convention, Melancton Smith. At a time when banks had political colorings, the Million Bank was seen as a vehicle to boost the fortunes of Governor George Clinton. “The bank mania rages violently in this city,” James Tillary told Hamilton, “and it is made an engine to help the governor’s re-election.”
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When the bank’s shares were floated on January 16, they were ten times oversubscribed within hours, as “bancomania” gripped the city. In rapid succession, proposals emerged for a State Bank and Merchants’ Bank, culminating in a grand proposal to amalgamate the three new banks into one gigantic institution.

As treasury secretary, Hamilton had hoped to spur banking, but he rejected these new banks as so many brazen speculative vehicles. The instant he heard about the Million Bank, he wrote a vehement letter to William Seton of the Bank of New York, who had helped him to quell the panic the previous summer. Testifying to “infinite pain” at the news of this “dangerous tumour” in New York’s economy, Hamilton warned, “These extravagant sallies of speculation do injury to the government and to the whole system of public credit by disgusting all sober citizens and giving a wild air to everything…. I sincerely hope that the Bank of New York will listen to no coalition with this newly engendered monster.”
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Seton replied that the “madmen” behind the Million Bank were trying to coerce the Bank of New York into an unwanted merger by unscrupulous means: withdrawing enough money from the bank to topple it. “The folly and madness that rages at present is a disgrace to us,” he reported.
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Hamilton wasn’t blind to the speculative hazards of creating credit. “The superstructure of credit is now too vast for the foundation,” he warned Seton. “It must be gradually brought within more reasonable dimensions or it will tumble.”
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Hamilton later conceded that share trading “fosters a spirit of gambling and diverts a certain number of individuals from other pursuits.”
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Yet this had to be weighed against the larger social benefits conferred by ready access to capital.