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Hamilton's Counterfeit Capitalism

December 16, 2008

Tags BiographiesU.S. HistoryPolitical Theory

As we await Bush's replacement to straighten our wayward lives, it's crucial to understand how we got here and why policy makers are so determined to do the wrong thing. Austrian economics explains why their policies are flawed, but no one with a voice seems to care. When history confirms that hands-off is the only effective and humane approach to a bust, and to prosperity generally, while hands-on brings ruination, why do governments today consider every option but free markets?

You could blame it on the heavy influence of Keynesianism, but we could ask why Keynes is so popular. He got away with blaming the market for the Depression of the 1930s. How can his followers do the same today after 70 more years of intense interventionism? To read today's mainstream commentaries, you would think the free market slipped in the back door when no one was looking.

We know governments have always meddled in their economies, but the United States was supposed to be appreciably different. Did we begin with unhampered markets, witness their failure, then switch to a more "progressive" approach? At what point in our history did we begin promoting interventionism as an ideal?

Review the country's founding, and it isn't immediately obvious where the state's heavy hand first made its mark. Nowhere in the Declaration, for example, do we find a footnote calling for high taxes and a central bank to support our inalienable rights. It's hard to imagine that the patriots who fought at Breed's Hill or Yorktown were inspired by visions of a massive redistribution of their wealth to special interests. But when we consider the Constitution's "general welfare" clause, we start to wonder. Was it colonial shorthand for anything goes, provided sufficient political support?

Thomas Jefferson said no; Congress did not have unlimited powers to provide for the general welfare, "but were restrained to those specifically enumerated." His political rival Alexander Hamilton, on the other hand, had two answers. As the author of Federalist #84, in which he referred to constitutions "as limitations of the power of government itself," he might agree with Jefferson, at least publicly. But later, as Treasury secretary under Washington, he dropped the façade of government restraint. As long as any proposed legislation was "in the public good," he considered it lawful under the Constitution.

As Thomas J. DiLorenzo tells us in his engaging new book, Hamilton's Curse: How Jefferson's Arch Enemy Betrayed the American Revolution — and What It Means for Americans Today,

Hamilton dismissed Jefferson's strict constructionism and viewed the Constitution as a grant of powers rather than as a set of limitations. With clever manipulation of words, he believed, the Constitution could be used to approve virtually all government actions without involving the citizens at all.

In a recent article, DiLorenzo says that Hamilton "fought fiercely for his program of corporate welfare, protectionist tariffs, public debt, pervasive taxation, and a central bank run by politicians and their appointees out of the nation's capital."

Regarding the stipulation that policies must promote "the public good" or serve "the public interest" — phrases that Hamilton used countless times — DiLorenzo reminds us that "no government policy can be said to be in 'the public interest' unless it benefits every member of the public." And how often does that happen? The "public interest" turns out to mean favored special interests.

A Revolutionary War hero and aid to General Washington, Hamilton began pushing for "a government of more power" in 1780; and in 1787, with the help of a gross distortion of Shays's Rebellion, he brought state delegates together for the Constitutional Convention, the proceedings of which were closed to the public. According to an 1823 book by John Taylor of Caroline, which relied heavily on notes taken by Convention delegate Robert Yates, Hamilton moved quickly to consolidate all power in the hands of the executive branch, proposing a permanent president and senate.

Governors of the states would be appointed by the national government, and any state law that conflicted with the federal constitution would be considered void. What Hamilton wanted was a "great" national government much like the one from which Americans had recently seceded. Not surprisingly, the convention attendees rejected his proposal, establishing instead a confederation of free and independent states that delegated a few specific powers to the central government.

In 1802, Hamilton privately denounced the Constitution as "a frail and worthless fabric," but by then he had already established the methodology for rendering it irrelevant, as DiLorenzo puts it, through the "lawyerly manipulation of its words."

Hamilton's Agenda

In his 1791 Report on Manufactures, he urged Congress to authorize the payment of "pecuniary bounties" (subsidies) to the manufacturers of certain items, on the basis of the general-welfare clause. The clause was "doubtless" intended to mean more than what it expressed, Hamilton argued, so it was up to Congress to decide what it meant and how to fund it. As DiLorenzo points out, generations of nationalist judges have used Hamilton's argument to expand the government far beyond its constitutional limits.

In addition, the nation, not the states, had "full power of sovereignty," Hamilton insisted. The states were "artificial beings" and thus it would make no sense to talk of their right of secession — though somehow those same artificial states had united to secede from England. Furthermore, Hamilton argued, the Constitution grants the government "implied powers," one of which was to establish a national bank to promote a "paper circulation" and thereby extend loans in excess of its reserves of gold and silver. Hamilton said the Constitution's commerce clause gave government the power to regulate all commerce, not just interstate commerce. A national bank, which would regulate commerce within states, was thereby authorized.

As DiLorenzo explains, Hamilton and his nationalist compatriots couldn't make mercantilism work with a confederation of sovereign states. If northern states passed a high protectionist tariff, for example, imports would flood into the low-tariff southern states, then spread to the rest of the country. With a nationalist government, high tariffs could be imposed on all states, with some states effectively being taxed for the benefit of other states.

A Standing Army of Tax Collectors

Hamilton interpreted the Constitution's "war powers" to mean "that unlimited resources should be given to the military, including conscription and a standing army in peacetime," DiLorenzo writes. "He also wanted government to nationalize all industries related to the military, which in today's world would mean virtually all industries."

A standing army in times of peace was necessary to enforce government taxation. And what better way to make this point than to do a little enforcing? Thus, in 1794, Hamilton personally accompanied President Washington to western Pennsylvania with 13,000 conscripts and officers from the creditor aristocracy of the eastern seaboard to crush the so-called Whiskey Rebellion. After rounding up a score of tax rebels, some of whom were old and veterans of the Revolutionary War, Hamilton drove them through the snow in chains all the way to Philadelphia, where he ordered local judges to issue guilty verdicts and sentence them to be hanged. Washington, who had returned home before the cross-state slog, pardoned the only two who were eventually convicted, leaving Hamilton bitterly disappointed.

Other areas of the American frontier — in Maryland, Virginia, North and South Carolina, Georgia, and the entire state of Kentucky — engaged in home whiskey production and fiercely opposed the new tax. Whiskey was not only a beloved consumable, it served as money, as a medium of exchange, and locals considered the tax as onerous as the king's Stamp Tax of 1765. There was no rebellion in these areas because no one was willing to collect the taxes. Hamilton had picked the four counties in western Pennsylvania as his target because local officials were corrupt enough to help him.

The tax and the federal assault on the protestors put the spotlight on Hamilton's "public interest" tactic. As Rothbard noted, "in keeping with Hamilton's program, the tax bore more heavily on the smaller distilleries. As a result, many large distilleries supported the tax as a means of crippling their smaller and more numerous competitors." The smaller distilleries were taxed by the gallon, while the larger ones paid a flat fee.

The hated tax also helped get Jefferson elected in 1800. The election resulted in a tie between Jefferson and Aaron Burr, and was thus thrown into the House. Selecting who he considered the lesser of two evils, Hamilton used his influence to break the tie in favor of Jefferson, a deed that helped bring about his fatal duel with Burr in 1804.

But before Jefferson took office, DiLorenzo explains, Federalist President John Adams helped Hamilton's cause when he appointed hundreds of "midnight judges" to the federal judiciary in the last 19 days of his administration. Though Jefferson got rid of most of them, he overlooked the appointment of Hamilton idolater John Marshall, who served as chief justice from 1801–1835.

"In Marbury v. Madison [1803] John Marshall essentially asserted that he, as chief justice, had power over all congressional legislation," DiLorenzo writes. This was consistent with Federalist #78, where Hamilton said it belongs to the courts "to ascertain [the Constitution's] meaning as well as the meaning of any particular act proceeding from the legislative body." Though Marbury v. Madison marks the birth of judicial review, the Hamiltonian idea that the government should be the sole judge of its own actions didn't prevail until it was imposed by force of arms — during the War between the States.

Hamilton's Disciples

Following Hamilton's death, Kentucky senator Henry Clay, a wealthy slaveholder known as the "prince of hemp" for his huge hemp crops, joined Marshall and others in promoting statism and corporate privilege. As DiLorenzo tells us, Clay "spent decades, literally, advocating protectionist tariffs on foreign hemp; government-subsidized roads and canals, so that he could transport his hemp eastward; a nationalized bank that could inflate the economy." Clay wanted to force complete self-sufficiency on the country and deprive Americans of the benefits of the international division of labor — a good deal for Kentucky hemp growers, but not for consumers.

Far from bringing about the harmonious relations Clay promised, his mercantilist agenda provoked sectional strife. The tariffs he championed "overwhelmingly favored northern states," inasmuch as there was little manufacturing in the South even by the 1860s. "To southerners, tariffs were all cost and no benefit." Protectionist tariffs, an essential part of Hamilton's scheme for a mercantilist America, would be a prime mover of the forces for war.

When Lincoln became president, he moved quickly to implement Hamilton's system of corporate welfare. Not even his bloody war deterred him. He and his majority Republicans imposed tariff rates of 50 percent, authorized enormous subsidies to railroad corporations, and created a nationalized banking system. Greenbacks issued under the new system depreciated by more than half, and consumer prices in the North more than doubled between 1860 and 1865. Because of the inflation, real wages plummeted, and the war ended up costing northern taxpayers $528 million more, DiLorenzo says.

The Credit Mobilier scandal of 1882 was the most notorious consequence of Hamiltonian corporate welfare, but, as DiLorenzo notes, "it was only the tip of the iceberg" of the predictable waste and corruption that results from government favors. The public was outraged over the scandal and called for more political control of business — they called, in other words, for more of what created the problem in the first place.

As Gabriel Kolko showed in his 1963 ground-breaking work, The Triumph of Conservatism, "American businesses, far from resisting political control, sought such regulation because they could use it to their advantage," DiLorenzo explains. The railroad industry, for example, lobbied for creation of the Interstate Commerce Commission, which soon outlawed discounts to customers. Cornelius Vanderbilt had been engaging in this "ruthless" practice, but "[b]y making discounts illegal, the ICC relieved railroad companies from the pressure to compete for customers." Other businesses such as gas and electric utilities turned to the political arena for grants of monopoly — seeking to obtain from government what they failed to achieve on the market.

The Hamiltonian Revolution of 1913

In 1913, government acquired effective control of the country's wealth and strengthened its rule over the states by passing three laws: the income tax, the direct election of senators, and the federal reserve act. The first two arrived as the Sixteenth and Seventeenth Amendments; the "currency bill" was slipped in just before Christmas. All three, per Hamilton's rhetoric, were promoted under cover of "the public interest." All three were cons — abuses of confidence by public officials. All three "delivered a death blow to the old Jeffersonian tradition in American politics," and brought about "the final, decisive victory for the Hamiltonians."

Were these laws really so bad? Judge for yourself.

Prior to the Seventeenth Amendment, US senators were "ambassadors of the states"; they were appointed by state legislatures. They would speak for their state governments, which would presumably have control over how they voted. Having senators appointed was intended as a check on the powers of the federal government. It limited "senators' ability to sell their votes to special-interest groups nationwide," DiLorenzo explains. Thanks to the Seventeenth Amendment, political corruption has "expanded by orders of magnitude," he says. "U.S. senators now travel all around the country seeking special-interest campaign contributions."

An income tax was not popular in Hamilton's day, but he recognized the need for high taxes to fund the "energetic" government he wanted. The first federal income tax was imposed in 1862, and though it was abolished a decade later, "the experience had whetted the appetites of special-interest groups," DiLorenzo writes. By 1913, American farmers had made a deal wherein they would support an income tax in exchange for lower tariff rates. The income tax became law in 1916, and by 1930 tariff rates had soared to their highest level ever — 59.1 percent, on average. So much for the farmers' deal making.

After the adoption of withholding in 1943, the income tax became entrenched, as Charlotte Twight has written, "both through its administrative apparatus and through its acceptance in the minds of most taxpayers." With its confiscation of enormous amounts of wealth and the army of bureaucrats and agents needed for collection, the income tax renders states as well as citizens hat-in-hand beggars when trying to influence the federal government. In their relationship to Washington, states have become Hamilton's "artificial beings."

Loathing and fearful of competition, big businesses in the late 19th century tried to form voluntary cartels, but such arrangements are notoriously unstable, DiLorenzo points out, so they turned to government to make them work. What the big bankers wanted was a monopoly of the issue of bank notes so they could have a more "elastic currency." Previously, if an individual bank issued too many notes, depositors would get nervous and demand redemption in gold. Because all banks issued more notes or deposits than they had gold in reserve, they were all one bank run away from being exposed.

The currency act that created the Fed in 1913 was a crucial step in eliminating this problem — for the bankers. Two decades later, the government took gold out of the picture, so that covering a member shortfall was no longer a problem. Through the magic of the printing press, the Fed could also provide instant revenue to the government to pay for military adventures.

The Fed and the income tax provided the "funding mechanisms" for getting the United States into the European slaughterhouse called World War I. "Like all wars, World War I permanently ratcheted up the powers of government and fueled the urge among politicians to 'plan' American society in peacetime just as they had planned in war," DiLorenzo explains.

The Fed has the power to do the one thing it shouldn't do: regulate the money supply. By doing so it distorts price relations and guarantees a correction, which, since 1929, the government regards as a clarion call to "do something." Ignoring economic wisdom, it does everything it can to prevent the necessary correction, thereby making the recovery longer and more painful. When the economy pulls out of the depression, government takes the credit, and the Fed begins inflating again, inaugurating another boom-bust-correction/intervention-crisis sequence that will bear heavily on almost everything we hold dear. Between 1789 and 1913, prices remained roughly stable, DiLorenzo notes, and government was little more than a footnote in people's lives. Since 1913, prices have increased twentyfold, while today government intrusion has no limits.

Conclusion

As with his two books on Lincoln, Thomas J. DiLorenzo has done a masterful job of exposing an American icon whose influence has been highly detrimental to the majority who live outside the rarefied reality of national politics.

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Is there any escape from Hamilton's world? It all depends on us. The book's last chapter, "Ending the Curse," calls for a "devolution of power." We need to shake up the ruling caste and strip the central government of its Hamiltonian features, which means, among other things, ending judicial tyranny, repealing the Sixteenth and Seventeenth amendments, outlawing protectionist tariffs, and abolishing the general-welfare clause. We should recall that the latter two measures were achieved in the Confederate Constitution of 1861 as well as state constitutions in the antebellum period. DiLorenzo also wants to dismantle "government's Hamiltonian monopoly on money," which would in itself be a major setback to despotic government.

Hamilton's Curse is a pleasure to read and a must-read for anyone who values freedom and seeks a deeper understanding of the prevailing nonsense.

George F. Smith is the author of The Flight of The Barbarous Relic, a novel about a renegade Fed chairman. Visit his website. Visit his blog. Comment on the Mises blog.


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