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HAMILTONIAN PROGRESS AND JEFFERSONIAN REGRESSION

In a spirit of philosophical bipartisanship, it would be pleasant to conclude that each of these traditions of political economy has made its own valuable contribution to the success of the American economy and that the vector created by these opposing forces has been more beneficial than the complete victory of either would have been. But that would not be true.

What is good about the American economy is largely the result of the Hamiltonian developmental tradition, and what is bad about it is largely the result of the Jeffersonian producerist school. To the developmental tradition of Hamilton, Washington and Roosevelt, Lincoln and Clay, we owe the Internet and the national rail and highway and aviation systems, the single continental market that allows increasing returns to scale to be exploited by globally competitive corporations, the unmatched military that defeated the Axis powers and the Soviet empire and has generated one technological spin-off after another, and, not least, the federally enforced civil rights laws and minimum-wage laws that have eradicated the slavery and serfdom that once existed in the South and elsewhere.

To the Jeffersonian tradition, even if it is exempted from blame for slavery and segregation, the United States owes the balkanization of the economy by states’ rights and localism, underinvestment in infrastructure, irrational antitrust laws and anti–chain store laws designed to privilege small producers, exemptions from regulations and subsidies for small businesses (defined for many purposes as those with fewer than five hundred employees), the neglect of manufacturing in favor of overinvestment in single-family housing, and a panic-prone system of tiny, government-protected small banks and savings and loans.

At key moments in American history, forces invoking the rhetoric of producerist capitalism have defeated proponents of developmental capitalism. One turning point came in the 1830s, when Andrew Jackson and his followers thwarted Henry Clay’s American System of national economic development based on protective tariffs for infant industries, national banking, and national infrastructure investment. Another less dramatic but equally significant turning point occurred in the late nineteenth century, when federal court interpretations of the Sherman Antitrust Act of 1890 prevented small and medium-size firms from collaborating in cartels. The unintended result was a wave of mergers before World War I that created a peculiarly American kind of giant, oligopolistic corporation that exists to this day, in place of cartels and cooperatives of small- and medium-size firms of the kind that exist in Germany and other nations.

Developmental capitalism in America suffered another blow in the early years of the New Deal in the 1930s, with the collapse and widespread repudiation of the National Recovery Administration—an experiment in business-labor-government collaboration of a kind practiced successfully in other industrial democracies. Yet another opportunity for developmental capitalism was missed in the 1980s and 1990s, when advocates of a manufacturing-centered, government-fostered American industrial policy were marginalized. Singing the praises of small entrepreneurs and free markets from the Jeffersonian hymnal, Republicans and Democrats alike complacently presided over the decline of American manufacturing and the inflation of the bubble economy that collapsed in 2008, bringing down the American and global economies in the worst economic crisis since the Great Depression.

There is a place in Hamiltonian developmentalism for state and local governments and small start-ups and suppliers. But unlike Jeffersonian producerism, the developmental school of economics identifies the wealth of nations not with small enterprises in lightly regulated markets, but with large-scale industrial production based on scientific and engineering breakthroughs that have usually originated directly or indirectly in government-sponsored research.

HISTORY IS NOT BUNK

In 1916, one of America’s great innovators, Henry Ford, declared: “History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today.”
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The purpose of this book is to prove him wrong. The history that we make today is illuminated by the history of our country and the world and the tradition of the values that we seek to preserve through time and change. Just as the American republic was not created as a perfect and unalterable system by a generation of demigods at the Founding, so the American economy is not a timeless and perfect market to be revealed in its natural splendor by stripping away distorting regulations. The American economy, like the American republic, exists to serve the American people, not vice versa. And economies and republics alike are created by human beings for human purposes.

From the generations of Americans who have struggled to master the tools of their time to create an economy worthy of the citizens of a democratic nation, those who continue that never-ceasing struggle in the United States and other lands have much to learn.

THE ARGUMENT

I
n order first to win and then secure its independence from Britain, the early United States, under the leadership of gifted policymakers like Robert Morris and Alexander Hamilton, had to create a competent government with a dynamic capitalist economy. But no matter how efficient public and private institutions were, the growth and prosperity of the United States were constrained by the limits imposed on all preindustrial economies. The great fortunes in the early American republic, as in other premodern economies, were those of landowners like Stephen Van Rensselaer III and Robert Livingston or merchants like Stephen Girard and John Jacob Astor, who profited from long-distance trade in luxury items for the rich. Thomas Jefferson and other agrarian thinkers promoted the vision of a democratic republic that would limit the competition of parasitic landlords and rapacious merchants with family farmers for the small surplus produced by a premodern economy. In the context of an impoverished, largely static agrarian economy, Jefferson’s vision made sense. But neither Jefferson nor Adam Smith and the early British economists foresaw the imminent liberation of humanity from Malthusian limits by industrial technology.

A people which had in 1787 been indifferent or hostile to roads, banks, funded debt, and nationality, had become in 1815 habituated to ideas and machinery of the sort on a grand scale.

—Henry Adams
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T
he time: Early evening, December 16, 1773. The place: Boston, Massachusetts. Two hundred men dressed as Indians board three British ships in Boston Harbor and dump their contents—tons of tea from the British East India Company—into the water. By doing so, these American Sons of Liberty do more than reject a particular tax to which they objected—the tax on tea, which had recently been lowered to mollify the American colonists. They also reject the asserted power of the British Parliament to levy any taxes on the colonies in North America without their consent.

“It was now evening,” recalled George R. T. Hewes in 1833, “and I immediately dressed myself in the costume of an Indian, equipped with a small hatchet, which I and my associates denominated the tomahawk, with which, and a club, after having painted my face and hands with coal dust in the shop of a blacksmith, I repaired to Griffin’s wharf, where the ships lay that contained the tea. When I first appeared in the street, after being thus disguised, I fell in with many who were dressed, equipped and painted as I was, and who fell in with me, and marched in order to the place of our destination.” The protesters boarded the three ships and spent three hours smashing chests of tea and tossing them overboard. “We were surrounded by British armed ships,” Hewes recollected, “but no attempt was made to resist us.”
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The British government responded to the Boston Tea Party in 1774 with repressive measures, the Coercive or Intolerable Acts. When the British navy closed the port of Boston until the British East India Company was repaid, the colonists organized the Continental Congress. The conflict escalated until the first battles at Lexington and Concord near Boston on April 19, 1775, began the American War of Independence. As the citizens of the new United States would soon discover, political independence did not immediately translate into effective economic independence from Great Britain.

“IN SUBSERVIENCE TO THE COMMERCE OF GREAT BRITAIN”

In the beginning, there was no American economy, only the British imperial economy. The plantations, or colonies, in North America were intended to help the British Empire in its rivalry with the other major powers of Europe. In the centuries before it unilaterally began to adopt free trade in 1846, Britain, like other European states, practiced mercantilism, a policy that treated the economy as an instrument of state power. Mercantilist policies included subsidies and preferential tax treatment for favored industries and their raw material inputs, efforts to obtain surpluses in precious metals like gold and silver and in high-value-added exports, and the conquest or founding of colonies whose inhabitants would provide markets and raw materials for the mother country. In his 1684 treatise
England’s Treasure by Foreign Trade
, the mercantilist theorist Thomas Mun wrote: “The ordinary means therefore to increase our wealth and treasure is by Foreign Trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value.”
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The king in 1721 told Parliament that “it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material.”
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No philosopher influenced the American Revolution more than the seventeenth-century English political thinker John Locke. Thomas Jefferson’s Declaration of Independence is practically a paraphrase of Locke’s writings on natural rights and liberty. In economics, Locke was a mercantilist, not a libertarian. In his
Letter Concerning Toleration
, Locke says that “the pravity of Mankind . . . obliges Men to enter into Society with one another, that by mutual Assistance, and joint Force, they may secure unto each other their Properties in the things that contribute to the Comfort and Happiness of this Life . . . But forasmuch as Men thus entering into Societies, . . . may nevertheless be deprived of them, either by the Rapine and Fraud of their Fellow-Citizens, or by the Hostile Violence of Foreigners; the remedy of this Evil consists in Arms, Riches, and Multitude of Citizens; the Remedy of the other in Laws.”
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For Locke, as for other early-modern mercantilists, military power, economic growth, and population growth were mutually reinforcing, and all three enhanced the ability of the state to defend its people in an anarchic world. In a journal entry in 1674, Locke wrote: “The chief end of trade is riches and power, which beget each other. Riches consists in plenty of moveables, that will yield a price to foreigners, and are not likely to be consumed at home, but especially in plenty of gold and silver. Power consists in numbers of men, and ability to maintain them. Trade conduces to both these by increasing your stock and your people, and they each other.”
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The policy of mercantilism that Britain shared with other European empires included a division of labor in which British manufacturers sold finished products to a captive market of consumers in the American colonies, Ireland, and India, which in return exported raw materials and food to the British Isles. In 1721, the British Board of Trade told the king: “Having no manufactories of their own, their . . . situation will make them always dependent on Great Britain.”
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The British parliamentarian Edmund Burke, who sympathized with the American colonists, summarized the policy: “These colonies were evidently founded in subservience to the commerce of Great Britain . . . On the same idea it was contrived that they should send all their products to us raw, and in their first state; and that they should take every thing from us in the last stage of manufacture.”
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Adam Smith made a similar observation in
The Wealth of Nations
, which was published in 1776, the same year in which the American colonies that would form the United States declared their independence: “The liberality of England, however, towards the trade of her colonies has been confined chiefly to what concerns the market for their produce, either in its rude state, or in what may be called the very first stage of manufacture. The more advanced or more refined manufactures even of the colony produce, the merchants and manufactures of Great Britain choose to reserve to themselves, and have prevailed upon the legislature to prevent their establishment in the colonies, sometimes by high duties, and sometimes by absolute prohibitions.”

Beginning in the seventeenth century, England (which became Great Britain with the 1707 Act of Union with Scotland) sought to prevent the development of colonial manufacturing that might compete with British manufacturing by a variety of methods. The Navigation Acts, passed in 1651, 1660, and 1663, required all English trade to be carried in English ships with majority-English crews. All items in “enumerated” categories going to or from the American colonies had to be unloaded in Britain, taxed, and then reexported. The colonists were permitted to buy only British goods or goods that had been reexported from Britain.

The imperial government outlawed American exports that competed with British manufactured goods. For example, the 1699 Woolens Act forbade the sale of woolen cloth outside of the place where it was woven.
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This destroyed the Irish woolen industry and prevented the emergence of one in the American colonies. In 1732, Britain similarly destroyed an emerging beaver-hat industry in the colonies by outlawing the export of hats to other colonies or foreign countries.
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When Parliament lifted a ban on exports of pig iron and bar iron from the colonies in 1750, it outlawed further development of the industry. But the colonists ignored the prohibition and by 1775 the annual production of iron in the colonies, most of it for domestic consumption, was roughly the same as in Britain, despite the smaller colonial population.
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Even as it banned manufactured exports from the American colonies to Britain or other parts of the empire, the imperial government encouraged the export of raw materials from the colonies to Britain. Import duties on wood and hemp from the American colonies to Britain were abolished. The colonists also received bounties, or subsidies, for exporting raw materials. Timber from the abundant forests of North America was particularly important. The purpose of regulation was to create a buyer’s market in raw materials and a seller’s market in manufactured goods for British industry.
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Hindering the transfer of technology from Britain to America was another British mercantilist technique. In 1719, Britain banned the emigration of skilled workers in industries including steel, iron, brass, watchmaking, and wool. The law punished suborning, or recruitment, of skilled workers for employment abroad with fines or imprisonment. Skilled immigrants who did not return to Britain within six months of being warned by a British official faced the confiscation of their goods and property and the withdrawal of their citizenship.
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Britain followed its ban on the emigration of skilled workers with a ban on the export of wool and silk technology in 1750. In 1781 and 1785, the act was enlarged into a comprehensive ban on machinery of all kinds. The ban on skilled emigrants was repealed only in 1825, while the ban on technology exports lasted until 1842.
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Evaluated in terms of its goal of fostering domestic manufacturing at the expense of other countries, Britain’s mercantilist system was a great success. Between the reign of the Tudors and the nineteenth century, Britain’s state-sponsored program of economic development turned the island nation first into a commercial and financial powerhouse and then into the first superpower of the machine age. But Britain’s imperial trade laws thwarted American manufacturers and frustrated American merchants, who frequently smuggled goods from other colonies and countries. The government also antagonized the colonists after the Seven Years’ War (French and Indian War) of 1756 to 1763, when it attempted to ban white settlement of large areas of the trans-Appalachian West, in order to avert conflict with the Indians. This enraged land-hungry Anglo-American frontiersmen as well as rich American colonials like George Washington who owned vast tracts of western land. These economic conflicts, along with struggles over power and status, helped to ignite the American War of Independence from 1775 to 1783.

FUNDING FATHERS

In the folklore of American patriotism, a collection of brave yeoman farmers along with a few urban tradesmen and gentry leaders like George Washington overthrew the mighty British Empire after the United States declared its independence on July 4, 1776. This story is doubly misleading. It is embarrassing for Americans to admit that the United States owed its independence to the intervention of France—in particular, to the French navy, which bottled up General Cornwallis’s army at Yorktown, Virginia, permitting joint American and French forces to defeat it. It is even more embarrassing for Americans influenced by Jeffersonian populism to admit that the American cause might have failed, but for the skill of three financiers—an English immigrant, a Polish Jewish immigrant, and a rich American snob.

The English immigrant, Robert Morris, is unknown to most Americans, but his ability to muster and direct money was as critical as the military skills of General Washington and America’s French allies. Born in Liverpool in 1734, Morris immigrated to the North American colonies with his father, an agent for a Liverpool tobacco importer. After his father was killed in 1750 in a freak cannon accident, Morris served as a clerk for Charles Willing in Philadelphia. Following Willing’s death in 1754, Morris went into business with Willing’s son Thomas. Their partnership, Willing and Morris, became the largest mercantile firm in Philadelphia and Morris grew rich from the West Indian trade.

As a member of the Continental Congress, Morris thought that the Declaration of Independence was premature but threw himself into supporting the war. Morris retired from Congress in 1778, then served in the Pennsylvania Assembly in 1778–1779 and 1780–1781. He was appointed superintendent of finance in February 1781 and served until 1784, a year after Britain recognized America’s independence.

Immediately after being appointed superintendent of finance, Morris created the Philadelphia-based Bank of North America, modeled on the Bank of England, headed by his partner, Thomas Willing, and chartered by Congress and also, because of doubts about congressional authority, by Pennsylvania. His proposal for a 5 percent tariff on imports to fund the government failed because of opposition from a single state, Rhode Island, which took advantage of the requirement of unanimity of states. Morris lent his own money to the government and used his own credit to raise other loans, issuing promissory notes which, depending on their terms, were known as “Long Bobs” or “Short Bobs.”

Morris benefited from the assistance of Gouverneur Morris. Unrelated to Robert Morris, Gouverneur Morris was from a family of aristocratic New York landowners; his brother served in the British army and his mother was a Loyalist. He combined a caustic tongue with a habit of adulterous affairs, in one of which he is said to have lost his leg in the course of escaping from a tryst (officially the cause was a street accident). He thought little of ordinary people, whom he described as “reptiles,” but served the cause of independence in Congress, where he mobilized for support for Washington’s army at Valley Forge, and then as assistant to Robert Morris. After the war, he served at the Constitutional Convention, where he spoke more than any other delegate, wrote the Preamble, and edited the Constitution. Later he replaced Jefferson as America’s minister to France, in time to witness the French Revolution, of which, unlike Jefferson, he disapproved.

As superintendent of finance, Robert Morris also drew on the talents of Haym Salomon, a Polish Jew fluent in eight languages who immigrated to the American colonies in the early 1770s. On behalf of the Patriot cause, Salomon spied on Hessian mercenaries while supplying them with goods. Arrested, he escaped, reportedly by bribing a Hessian guard. Having lost a small fortune in British-occupied New York, Salomon retained his international contacts and his reputation, which permitted him to sell $200,000 worth of government bonds on the basis of his personal credit. On behalf of Morris, Salomon arranged loans with the French government and also served as the paymaster for French forces in America. Afflicted with tuberculosis following his imprisonment by British forces, Salomon died in 1785. A statue of George Washington on Wacker Drive in Chicago is flanked by statues of Robert Morris and Haym Salomon, whose “genius and unselfish devotion” were praised in 1941 by President Franklin Delano Roosevelt.
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