Cronyism

FOREWORD

By focusing on one phenomenon and intentionally ignoring others, physical scientists compress data, then detect patterns that they try to generalize. Outstanding historians of the United States, including Charles Beard, Forrest McDonald, Richard Hofstadter, Murray Rothbard, and now Patrick Newman with his Cronyism: Liberty versus Power in Early America, 1607–1849 and Cronyism: Rise of the Corporatist State, 1849–1929, have also practiced data compression and pattern recognition. For whatever reasons, differences in temperament, or prejudices, their generalizations about main currents of US history differ in important ways, but they also have much in common. All focus on design and management of the state. Some of them interpret poor public policies as consequences of unintended mistakes that a more enlightened public administration would not make. Others view those policies as consequences of a government constituted with excessive powers that will inevitably be used to promote some private interests at the expense of others.

Charles Beard argued that their financial interests determined how the Founding Fathers designed the US Constitution. His Economic Interpretation of the Constitution of the United States (1913) marshaled evidence that bolstered his hypothesis that the Founding Fathers engineered the US Constitution to reward people like themselves—prosperous lawyers, merchants, farmers, and government creditors.

Forrest McDonald’s larger data set convinced him to reject Beard’s hypothesis. He gathered more data about the Founders’ economic interests, personal holdings, and votes at the state ratifying conventions. In We the People: The Economic Origins of the Constitution (1958), McDonald showed that Constitutional Convention delegates’ economic positions didn’t necessarily align with their support of or opposition to the Constitution. So he looked elsewhere for their principal motivations. In Novus Ordo Seclorum: The Intellectual Origins of the Constitution (1985), McDonald described the delegates’ education, reading, and experience as sources of their theories about laws, economics, and politics.

While Forrest McDonald thought of himself as a right-winger, Richard Hofstadter was well to the left. Nevertheless, Hofstadter’s 1948 book The American Political Tradition and the Men Who Made It, which predated McDonald’s work, shared McDonald’s emphasis on the Founders’ ideas and ideals. Like McDonald, Hofstadter described the Founders’ pragmatism, acquired from their experience as lawyers, merchants, and politicians. He also noted the importance of the Founders’ theories of history as inputs into their decisions about constitutional design. Hofstadter’s biographical essays about Jefferson, Jackson, Lincoln, Theodore Roosevelt, Woodrow Wilson, Herbert Hoover, and Franklin Roosevelt focus on common characteristics of their actions that transcended their professions of abstract principles. Those actions, he found, were directed at protecting and extending Americans’ property and enterprises. Hofstadter’s writings fostered a 1950s school of American history that emphasized a transcendent consensus among competing states that provided continuity and stability to US politics.

Parts of Murray Rothbard’s The Progressive Era (2017) and of his History of Money and Banking in the United States (2002) remind me of Beard’s hypothesis. Others remind me of Hofstadter’s. In America’s Great Depression (1963), Rothbard described how Herbert Hoover implemented versions of the same misdirected interventionist policies that would be important components of Franklin Roosevelt’s New Deal. Hoover’s and Roosevelt’s pursuit of similar policies reflected their common belief in the interventionist policies pursued during World War I, when both men had been prominent members of the Wilson administration. Chapters of those three books by Murray Rothbard describe how that Progressive consensus about the proper relationship between the market and the state came about. More generally, Rothbard described numerous episodes and incidents in which prominent American statesmen used professions of devotion to the public interest as subterfuges to expand government powers that could be used to promote their private economic interests. Rothbard also documented countervailing coalitions that temporarily frustrated some of those efforts, most of which eventually failed to arrest the growth of central government powers. Rothbard presented US history as a struggle between advocates of a powerful central government with ample powers to tax, regulate, and allocate privileges, on the one hand, and proponents of a minimal state that would be confined to providing public safety and enforcing commercial contracts, on the other. Rothbard saw the US War of Independence as a temporary triumph of liberty over power. He saw the Articles of Confederation and the US Constitution as engineering counterrevolutionary expansions of the state at the expense of competitive markets. He interpreted US history after 1788 as recurrent exercises of excess central government powers to redistribute resources via taxes, regulations, military adventures, and social welfare programs.

In the tradition of Murray Rothbard’s “Liberty versus Power” framework, Patrick Newman’s Cronyism: Liberty versus Power in Early America, 1607–1849 (2021) described consequences of the rampant cronyism integral to the US Constitution. Cronyism is a system of social relationships intermediated though federal and state governments’ grants of special privileges (monopolies, subsidies, regulatory protection, bailouts, land grants, and contracts) to favored business and political interests.

Newman told how the Founders implemented mercantilist policies that distorted competitive market forces by restricting free entry into shipping and other industries and by authorizing local and national monopolies enforced by limited access to state and federal charters. Like Rothbard, Newman interpreted the Articles of Confederation and the Constitution as platforms for distribution of rents to favored clienteles, such as Robert Morris’s Bank of North of America, Alexander Hamilton’s Bank of the United States, and James Madison’s Second Bank; protective tariffs; federal assumption of state debts that benefitted speculators in government bonds to the detriment of poorer tax payers; subsidies for favored industries; and military adventures to reward favored commercial interests and speculators in western lands. Newman helped us understand what Thomas Jefferson really meant when in his 1801 inaugural address he said, “We are all Federalists.” Despite their protests against Federalist cronyism, Jefferson’s and Madison’s administrations practiced cronyism as well. Elections could change the beneficiaries of cronyism, for example, from shippers/merchants under the Federalists and National Republicans to land speculators and state banks under Jackson’s Democrats. Betrayals of promised reforms, first by the Jefferson and Madison administrations and then during the Jackson and Van Buren presidencies, were consequences of a system of adverse incentives that our Founders built into our system. These and other outcomes of cronyism that Newman described so well seemed to generate a version of the “consensus” that Hofstadter praised for sustaining a stable US political system.

Newman’s Cronyism: Rise of the Corporatist State, 1849–1929 continues telling how ideas and networks of private interests influenced outcomes. It describes how the inauguration of Abraham Lincoln in 1861 and the consequent secession of eleven states allowed the Republican Party to implement longstanding, big-government Whig-Republican proposals that Democratic presidents and Congresses had blocked—a national banking system, federal subsidies for building a transcontinental railroad, and tariffs. He describes and interprets late nineteenth-century changes in industrial structures as responses to new technologies, other countries’ trade and monetary policies, and US policies to restrict competition. Newman extends Murray Rothbard’s interpretation of some government regulations as arrangements to enforce cartels. Private cartels’ own members cheated too often, and their monopoly profits attracted new entrants, so industry associations induced the government to set up cartels disguised as government regulatory commissions. Newman extends Rothbard’s and other scholars’ accounts of “regulatory capture” in the late nineteenth and early twentieth centuries.

Of special interest to a macroeconomist like me is Newman’s account of the founding and early operating decisions of the Federal Reserve System, as well as his account of the Fed’s role in financing World War I. In the 1920s, the Fed helped the Bank of England establish a “gold exchange” standard, a sort of “limping” gold standard propped up by convertible paper notes that supported price levels in the US and Western Europe that were substantially higher than pre-1914 levels. That paper money system was vulnerable to the bank runs that accompanied the Great Depression that began in 1929. Newman’s decision to end Cronyism: Rise of the Corporatist State, 1849–1929, on the eve of the Great Depression sets the stage for what I hope will be a third volume that starts by analyzing unintended consequences of the corporatist policies that Herbert Hoover and Franklin Roosevelt deployed in misdirected efforts to restore US prosperity.

That US statesmen mostly adhered to a no-inflation policy from 1790 to 1914 but after 1929 did not indicates a significant break in a pattern of outcomes that must somehow reflect a new political consensus about how to manage monetary and fiscal policies. I would like to understand the sources of that broken pattern and how much of the change came from shifts in ideas and political compromises among representatives of competing financial interests.

Meanwhile, under both political parties, cronyism continues and even grows in the US, so that pattern endures. Newman’s work helps us understand why it will be difficult to disrupt it. Doing that would require changing both a constitution and a civic culture, defined as a system of beliefs about what we can expect from other citizens. Another admirer of Ludwig von Mises and Rothbard, Argentina’s President Javier Milei, seems to be trying to do that. Milei wants to unleash market forces by dismantling a system that fostered the rampant cronyism, industrial policies, and trade barriers that have done so much long-term damage to Argentina’s economic well-being. Meanwhile, more and more leaders of both US political parties advocate those failed Argentine policies.

Thomas J. Sargent

July 11, 2025

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In the preface to the Hebrew edition of his book, Hofstadter wrote that his original title—more accurate, he thought, but vetoed by his publisher—was Men and Ideas in American Politics.

Milton Friedman’s Columbia PhD thesis assembled statistical evidence that he used to estimate the excess returns to being a doctor that the American Medical Association and government regulators gathered for US physicians.