Sunday, July 23, 2017

Comments on Risk Panel at SHEAR 2017

SHEAR Comments July 2017

R. E. Wright

[These comments refer to the 9 am Saturday 7/22/17 panel "Minimizing Risk: Life Insurance, Mutual Aid Associations, and Social Networks in Antebellum America" at the annual conference of the Society for Historians of the Early American Republic. The papers were by Robert Colby, Laurel Daen, and Kathryn Olivarius. page 52.]

I assess professional papers on a scale from HU to P, where the latter stands for Pernicious and the former to Highly Usable for policymakers, practitioners, or scholars. Examples of Pernicious papers are those of Farley Grubb on colonial paper money and some articles published in the Journal of the Early Republic that contain fundamental flaws, like confusing assets and liabilities, that impact the sign of conclusions.
While the papers we’ve heard here today stumble in a few places, I am happy to report that none of them are even close to being so unworthy as to be worthy of a grade of P. That said, I wouldn’t classify any of them as HU either, though I don’t think that is the fault of the authors but rather the sorry state of the historiography of the Early Republic. Historians Against Slavery, of which Randall and I are board members, is in the business of creating scholarship useful in the fight against modern slavery.
A big part of the problem is that many young scholars interested in business, economic, and financial history are not being adequately supervised in our discipline’s putative top Ph.D. programs. That was the gist of my recent negative review of a good friend’s book on the political economy of New York. Numerous other studies have emerged in recent years that contain major holes or conceptual flaws because top History Ph.D. programs won’t hire bona fide business, economic, financial, or even legal historians to help their graduate students.
All three papers, for example, would benefit from an explication of the theory of asymmetric information, or more specifically adverse selection, which can be described in this context as the predilection of those most in need of insurance to seek it most earnestly, and moral hazard, which is the predilection of insureds to seek as much money from insurers as possible. Historians can and should use these concepts, which in fact were introduced to me by Naomi Lamoreaux at a conference almost twenty years ago. The terms are not only useful conceptually and help to connect detailed archival work to bigger issues in political economy, they also direct research efforts because scholars do not need to spend resources proving the existence of asymmetric information in any given context. Like gravity, it is definitely there and has been since humankind was kicked out of Paradise. What changes over time is how asymmetric information, which is a major type of market failure, is mitigated, if it is at all.
So while Christy Ford Chapin has a serious chance of influencing ongoing healthcare debates, these papers won’t influence ongoing policy discussions about disability insurance. If anything, the authors would do well to study the literature on contemporary disability insurance. Laurel’s paper, for example, does not differentiate between what would today be called “own occ,” or what traditionally was known as “his occ,” on the one hand and “any occ” disability insurance on the other. “Any occ” insurance, as the name implies, ceases when the insured can undertake any occupation. SSDI is the leading example today. It is much less expensive than “own occ” insurance for two reasons. First, insureds are more likely to be able to undertake any occupation than they are their own, more specialized occupation, which of course is a logical subset of the category “any” occupation. Second, it is much easier for insurers to monitor shirkers with an “any occ” policy because if insureds are observed walking, painting a door, shopping, etc., they obviously can undertake some type of occupation. The ability to walk long distances unaided, shop, and perform other quotidian activities, however, is not an indication of an insured’s ability to audit a company, manage a bank, perform surgery, and so forth. So the moral hazard is much higher in “own occ” policies, which is one reason why Guardian Life Insurance Company of America charges a pretty penny for such policies today. The tradeoff between “any occ” and “own occ” policies, of course, is precisely the issue being explored by the non-profits in Laurel’s paper.
I could go on to the other papers but I’m running out of time and want to explore the contribution of these three papers to our understanding of the Early Republic. Beyond the new archival work, I don’t see much but that is because the historiography of the Early Republic appears to be in transition. The Market Revolution discussion has, thankfully, long since expired, as has all that silly business about Republicanism versus Liberalism. The new History of Capitalism subfield is largely just warmed-over Marxism. Capitalism is amorphously defined by that group at best and I think purposely so, so that it can be used when convenient as a sort of black box that seems laden with meaning but actually explains nothing at all.
The single most important topic at this conference, it seems to me, is slavery. Thankfully, I’ve seen little in the Baptist mold, i.e., the recent notion that slavery caused economic growth in the U.S. and U.K. I hope that is because SHEAR members know that the “slavery causes growth hypothesis” has already has been destroyed by economist historians and by myself in The Poverty of Slavery: How Unfree Labor Pollutes the Economy. In that book, I point out that slavery created negative externalities, pollution if you will, many times more costly to society than the profits earned by enslavers. Ergo, slavery was a net loss to the economy even as it enriched Southern slaveholders. One of the many externalities I point to in the book, which by the way covers all slave societies globally throughout world history, is that slaves often serve as disease vectors, a point that Robert’s and Kathryn’s papers certainly reinforce.
All three papers also show the importance of finance in early U.S. economic growth. When I first came up twenty years ago, the existence of both a sophisticated financial system and economic growth were widely denied. I recall some fellow, Bob Arnett or something like that, claiming that the economy didn’t grow in the 1790s because Robert Morris’s land speculations did not pan out. Still scratching my head over that but if cataloguing the reasons for the early U.S. economic miracle, the occurrence of which is now beyond doubt, is too tedious or distasteful for historians of the early republic, they could also work on policies and practices that limited growth, like slavery, the denial of full civil rights to women and Indians, and so forth. And these three fine papers show that while asymmetric information was mitigated in various ways, it sometimes remained an important barrier to market efficiency, as in the life insurance market in New Orleans as Kathryn shows, and in the slave trade as Robert’s paper thoroughly demonstrates.
In sum, it’s good that SHEAR is finally paying more attention to the business and economic history of the Early Republic. Talented, young scholars appear ready to move the historiography forward, but they need more support if they are to influence more than the people in this room.
Thank you.

Thursday, July 13, 2017

Hamilton's Blessed Debt

Hamilton’s Blessed Debt

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University 

Delivered at Museum of American Finance, Wall Street, New York, 7/12/17 for MAF and AHA (Alexander Hamilton Awareness Society). Video will be available on C-SPAN details TBD.

            According to Duke University political scientist Richard Salsman in his new book, The Political Economy of Public Debt: Three Centuries of Theory and Evidence, people hold one of three views on government debt, if they hold any view at all. Holders of the optimistic view believe that debt is an unadulterated good, the closest thing to a free lunch possible in a world of scarcity. To fund their activities, optimists believe, governments need only sell bonds, preferably in their own currency. Or, if debt-issuance is too pricey, or too dicey, governments need only print money. Inflation will occur but inflation, especially unexpected inflation, is a good thing because it redistributes wealth from creditors, who are just evil rich people, to debtors, the poor salt of the earth.
            Holders of the pessimistic view, by contrast, think any government borrowing, especially long-term borrowing, an abomination. Borrowing simply imposes the tax burden on generations unborn. Every dollar the government borrows, moreover, takes a dollar away from entrepreneurs and businesses in a process called crowding out. Governments that borrow in another currency will soon find the burden too great and hard default, like Russia did back in the 1990s. Governments that are able to borrow in their own currency will soon print money to cover payments and soft default by causing unexpected inflation. That will hurt creditors, i.e., savers, the salt of the earth, and help debtors, a species of profligate swine.
            Holders of the third view Salsman calls realists. For them, context is everything. Borrowing is simply a tool that can be used responsibility to improve a nation’s economic situation or irresponsibly to destroy it. In some situations, government debt is good policy but in others it is unwarranted. So neither pessimists nor optimists are always wrong. It depends on the situation. Moreover, savers and debtors simply represent economic positions that can, and do, change over the life cycle. Neither group is inherently or morally good or bad.
            Alexander Hamilton’s view of the national debt can be summed up in a single quotation, a line from his April 1780 letter to a Philadelphia merchant and financier of the American Revolution named Robert Morris. The line is often given as quote a national debt DOT DOT DOT will be to us a national blessing unquote. That rendition, though, was designed by Hamilton’s enemies to paint him as a debt optimist in a country that was, due to its Mother’s long struggle with debt dependence, solidly pessimistic about sovereign debt. But the part left out of the quotation, the DOT DOT DOT part, shows that Hamilton was a debt realist and not prolix as it consisted of just five words, quote if it is not excessive unquote. So Hamilton believed that a national debt would be a blessing, if, and only if, it was kept within reasonable bounds, a concept to which we shall return in due time.
            But first, it is important to understand the context of the debt as Hamilton understood it. He was not advocating that the government should always borrow money to stimulate the economy or to transfer wealth to the poor in order to decrease the nation’s Gini coefficient or some other measure of wealth or income inequality. Rather, Hamilton was arguing for the eventual repayment of a debt already incurred by the state and federal governments to win the American Revolution. Some of the burden would fall on the unborn, as debt pessimists complained, but the unborn would receive something of immense value in return, their political liberty.
            To fail to repay the debt owed to foreigners, a position thankfully held only by a few xenophobes, would ruin the nation’s sacred honor and thereby prevent the United States from borrowing abroad to finance future wars or territorial expansions. Servicing the foreign debt would be costly in the short run but in the bigger picture would allow America to continue to borrow abroad should it need to.
More debt pessimists, however, were willing to repudiate the domestic debt, or the sums owed by the U.S. government to U.S. citizens. Such a move would simply be a one-time capital levy that would keep taxes down for everyone in the future, the debt pessimists argued. Most holders of government debt instruments or IOUs were speculators who had purchased them for pennies on the dollar. They were rich, in other words, and could well suffer the loss. In fact, the low price they were willing to pay for government IOUs proved that they expected a default.
Hamilton countered that the low prices reflected only the time value or opportunity cost of money, which was quite high in the 1780s, and the possibility, not the certainty, of repudiation. Again, context is critical as most of the IOUs were in default, with the issuing governments paying neither interest nor principal as promised, or resorting to the practice of paying interest on IOUs with yet more IOUs. Late in the 20th century financial historian Edwin Perkins showed that Hamilton was right and that early speculators in Revolutionary War debt did not earn windfall returns, especially when the risks they undertook are considered. In any event, Hamilton also argued that repudiation would be immoral and would make it difficult, if not impossible, for the federal government to borrow from Americans, and maybe even foreigners, when necessary in the future. That would mean the next war would have to be financed by oppressive taxes and/or the sale of state assets at ruinous prices.
To ensure that the federal government would not try to repudiate part of its debt by changing the value of money, Hamilton induced Congress to pass the Mint Act. In addition to providing for the production of U.S. coinage, the act carefully defined the U.S. dollar in terms of grains of silver and gold. That anchored the real value of all debts denominated in dollars and induced increasing numbers of Americans to give up reckoning value in their old colonial units of account, like York shillings, in favor a decimalized dollar.
Hamilton then went a step further and argued that the federal government ought to assume, or take responsibility for, the war-related debts of the several states. Boy did that ever make the debt pessimists howl! They feared that Hamilton was trying to create a huge, permanent national debt that would be used to cow the populace into submission to federal authority. But again Hamilton argued from first principles, noting that the states should not have been obliged to incur a wartime debt in the first place. Only the want of an effective federal government had necessitated the practice. Moreover, only the new federal government received the right to tax foreign trade so it could generate the revenue to repay the debts much more cheaply and easily than the state governments could do.
The debt pessimists, led by James Madison and Thomas Jefferson, also pushed for what was called discrimination. They proposed that the government repay the original holders of government wartime IOUs, who were mostly soldiers, sailors, and farmers, in combination with subsequent holders of the debt, who they depicted as wealthy speculators who defrauded the original holders. Hamilton put the kibosh on discrimination as well, noting the administrative difficulties of tracking the chain of ownership for each of hundreds of thousands of IOUs. Moreover, original holders had not been defrauded in most cases, they simply valued the cash payments they received over holding the IOUs until the bankrupt governments that issued them finally got around to repaying them. They knew when they sold that they were relinquishing all rights to the principal and were fine with it. To give them some of the cut would be a windfall for them but would ruin the nation’s reputation for fair dealing at both home and abroad.
With the aid of some astute backroom bargaining, Hamilton managed to implement most of his plan for the Revolutionary war debt, including assumption of state debts and non-discrimination against holders. Here is where most history books stop, though it is far from the whole story. The details of Hamilton’s funding program were brilliant and what ultimately established American public credit, or its ability to borrow again in the future, from sources foreign and domestic, to do nice little things like double the size of the country, fight and win a second war for Independence, defeat Mexicans angry over the annexation of Texas, and win a long, bloody War between the States that ended slavery, well kinda sorta. With the possible exception of Texas, those all sound like blessings to me. Just kidding: don’t mess with Texas.
As noted previously, markets for government IOUs existed throughout the 1780s but most were rather thin and hence inefficient, by which I mean costly and time-consuming. Literally scores of different types of IOUs were extant and not even brokers knew the details of each. Under Hamilton’s plan, holders of the IOUs traded them in for just three types of registered government bonds called Threes, Sixes, and Deferreds. Registered meant that the government tracked each owner of the bond by name and location, a fact that will help me make another point a little later.
Threes were so called because the government paid on them three percent interest annually, or zero point 75 percent quarterly to be precise. They were redeemable at the pleasure of the government, which meant, in effect, after the other bonds had been paid off because who in their right mind would pay a debt with only a three percent interest charge before it repaid higher interest debt?
The government paid six percent annually, or 1.5 percent quarterly, on Sixes, and retained the option to redeem up to 2 percent of the principal annually. That brilliant feature allowed the federal government to slowly repay the principal due on the bonds when it had adequate resources to do so.
Deferreds were so called because the government deferred paying interest on them until the end of the year 1800, when they converted in Sixes. They were zero coupon bonds, in other words, convertible on maturity not into cash but into Sixes. The market price of Deferreds slowly rose towards that of Sixes as maturity came ever closer.
When a holder of Revolutionary war debt redeemed their IOUs, most of which promised 6 percent interest, they voluntarily received a combination of Sixes, Deferreds, and Threes that yielded about 4 percent total. A few holders thought that a bad deal and held off but most preferred a more or less certain 4 percent over the possibility of one day receiving 6 percent. Hamilton’s bonds were fully funded, or backed by taxes and pledges, while the wartime IOUs were not. In addition, a liquid market for Hamilton’s bonds formed immediately. That means that holders could sell their bonds to other investors at fair market prices quickly and at minimal brokerage expense. Holders of Revolutionary War IOUs might not be able to find a buyer at all or they might be offered a lowball price. A holder of a Three, by contrast, could see the going rate published in the local newspaper and contract with a broker to sell it in a day or two for a half percent commission or less. Or, the holder could sell it immediately to a dealer for a dollar or so less than the price listed in the paper.
Debt pessimists complained that Hamilton’s debt would be perpetual because Threes were payable at pleasure and Sixes had no definitive repayment schedule. They were simply wrong about that as the national debt was entirely repaid during Andrew Jackson’s presidency. There was no way that Hamilton or anyone else could know that in the 1790s but clearly what Hamilton wanted was repayment flexibility. He wanted the government to repay its obligations when it was best able to do so, not according to some rigid schedule that might coincide with a war, a natural disaster, or an opportunity to buy additional territory.
The opportunity cost of the national debt, Hamilton argued, was low because his bonds did not lay idle, like so many full-bodied gold and silver coins did, in vaults and chests. Rather, federal bonds were often used to collateralize bank loans and to make large payments. Indeed, millions of dollars changed hands each year in thousands of separate transactions. Hamilton’s bonds were, in other words, near-money instruments that did not crowd out private investment to a considerable degree and that served a unique role in the portfolios of banks and other businesses as secondary reserves, or reserves that paid interest but could be quickly turned into cash when needed. After federal bonds had been extinguished in the 1830s, state bonds were demanded to fill those same roles but they never did so quite as well as Hamilton’s Threes, Sixes, and Deferreds had.
 The next line in Hamilton’s April 1780 letter to Robert Morris on the national debt explained that the debt quote will be powerfull cement of our union unquote. By that, Hamilton meant that one of the debt’s blessings would be political rather than economic. By making the federal government the creditor of people throughout the nation, the national debt would create political sentiments in favor of the Union as bondholders protected their vested interest in the health of the national government. Debt pessimists, including many historians with anti-Hamiltonian axes to grind, assumed and claimed that Hamilton’s bonds were owned only by a relatively small number of rich urban elites. I showed otherwise in One Nation Under Debt by using extant federal bond registers to show that tens of thousands of Americans throughout the Union owned federal bonds at some point.
I devoted an entire chapter to bondholders in Virginia, the home state of great debt pessimists like Thomas Jefferson. Many federal bondholders in Virginia owned plantations and slaves. Others were professional doctors and lawyers. Others were urban artisans and retailers. Some were women. Abigail Adams wasn’t the only female trading government securities, Woody! Some bondholders lived in what is now called NOVA, by what would become the nation’s capital. Others lived Southside, others on the Blue Ridge, others in the Valley, and others along the James, in Richmond and beyond.
We’ll never know with certainty what influence those bondholders had on public opinion in Virginia but the fact that federal bondholders were spread across the state both geographically and occupationally suggests that they well could have cemented the Union. One federal bondholder, Charles Dabney, was a bona fide Revolutionary War hero who had raised his own legion in defiance of the King’s tyranny. He owned a huge musket called Dabney and generally was considered what we would call today a badass. I doubt not that Dabney would have rode on Richmond, Dabney in hand, charged and primed, if the government there had threatened secession during his lifetime.
In addition to establishing public credit, keeping the Union intact, and providing investors with liquid, low-risk assets, Hamilton’s funding system kept total taxes to reasonable levels. State taxes all but disappeared for over a decade and federal taxes came mostly in the form of tariffs and tonnage duties, both of which were relatively cheaply collected and less distortionary than real estate taxes. Of course all taxes create some distortions. The infamous tax on whiskey that led to the Whiskey Rebellion was needed to offset the effects of the tariff on imported spirituous liquors, which were so high that they acted as a protective tariff. If it sounds odd to you that Alexander Hamilton counteracted a protective tariff that is probably because you have the wrong idea about Hamilton’s views on protection. Dick Sylla’s Illustrated Biography of Hamilton will set you straight on that.
I’d like to spend the rest of my time with you reviewing some of the salutary secondary effects of Hamilton’s Blessed Debt. Foremost among them was the Bank of the United States. Chartered in 1791, the Bank, or First Bank, Bus, or Be You Ess as it is sometimes called, was a commercial bank owned in part by private investors and in part by the federal government, at least until it sold its shares at an immense profit. The institution, which eventually established branches in eight seaport cities, primarily made short-term loans to businesses, including merchants and manufacturers, but it was also the federal government’s bank. It was responsible for paying interest on the national debt when it fell due four times a year, transferred money from where the government earned it, which was mostly in major port cities, to where the government spent it, which was mostly along the frontier and wherever bondholders lived, which was all over the place as I indicated a few minutes ago. Perhaps most importantly, the Be You Ess stood ready to lend the government money should it find that its debts due outstripped its current revenue.
The Bank of the United States also acted as a lender of last resort during the financial panics that hit the nascent financial system in 1791 and, harder and more infamously, in 1792. Under Hamilton’s guidance, it implemented what would later be called Bagehot’s Rule after Walter Bagehot, the founding editor of The Economist magazine who described the rule in his 1873 book Lombard Street: A Description of the Money Market in London. I’ve taken to calling the rule Hamilton’s nay Bagehot’s rule. Nay is spelled N E E and is a genealogical term that means originally called. Hamilton did not spell the rule out in a book but he implemented it perfectly, especially during the 1792 Panic when he persuaded bankers to lend freely at a penalty rate to all who could post sufficient collateral, i.e., his Threes, Sixes, and Deferred bonds, at rational prices. The markets soon steadied and the young American economy continued to grow robustly, an expansion that had begun soon after Hamilton announced his funding program.
The bubbles that burst in 1791 and 1792 included government bonds but also the stocks of the Be You Ess and the nation’s handful of other commercial banks, including the Bank of New York, which Hamilton had helped to found shortly after the British pulled out of Manhattan after the American Revolution. Before his untimely demise, Hamilton also helped to found two other corporations, another bank and the Society for the Establishment of Useful Manufacturers. All three had difficulties obtaining corporate charters at first, so Hamilton helped them to establish work arounds that had the effect of easing entry into the corporate sector, access to which state governments jealously guarded at first. Thanks to Hamilton’s loopholes, which established perpetual succession and even limited liability by contract, rather than statute, state governments realized that they had to ease charter requirements or face the formation of numerous unchartered, which is to say unregulated, joint-stock companies.
Due to the ease of entry forced by Hamilton’s legal genius, over 23,000 for-profit corporations received special acts of incorporation in the United States before its Civil War and another 10,000 plus chartered under general acts of incorporation. That was far more corporations per capita than any other nation on earth, including Britain, though it must be admitted that the Mother Country’s corporations were larger on average. Early U.S. corporations were engaged in transportation, including bridges, canals, roads, and railroads; finance, including commercial and savings banks, fire, marine, and life insurers, and building and loan societies; manufacturing, including everything from cotton and woolen textiles to steam engines; utilities, including water and gas light; and services, from cemeteries to hotels. Shares in all those endeavors traded in the same markets that had developed to exchange Hamilton’s bonds and eventually many businesses, and state governments, learned from the federal government and began selling bonds to finance their operations as well.
What Hamilton’s funding plan amounted to was nothing short of a financial revolution. In just 5 years, America went from being backwards and bankrupt, without public credit or even a clear unit of account in which to denominate debts, to a nation with a well-defined dollar, taxes sufficient to pay the interest on a large debt composed of liquid bonds owned throughout the nation and abroad, and small but growing commercial banking and insurance systems.
Hamilton’s financial revolution, in turn, made possible the agricultural revolution described by Winifred Rothenburg, Paul Rhode, and others, whereby farm efficiency increased as crop yields jumped and a local transportation revolution -- bridges, short canals, and turnpikes -- made it less expensive to bring goods to market. The agricultural revolution freed laborers from farm work, making them available to work on regional transportation connections like long canals, railroads, and steamship lines. Improved transportation meant a much lower cost per ton mile, which rendered feasible the growth of both cities and factories in the nation’s vast interior. Thanks to the series of economic transformations initiated by Hamilton’s financial revolution, the North, and even parts of the South, industrialized before the Civil War. If you didn’t know that already, it is because Alfred Chandler and other early business historians didn’t have very good archival skills and simply assumed the antebellum economy away.
Since passage of the U.S. Constitution, white male citizens enjoyed a government that protected life, liberty, and property from invaders foreign and domestic. The bonds that composed its national debt traded regularly in public markets, so there was constant affirmation of the government’s willingness and ability to fulfill its promises. The new government created by the Constitution was key. While places like Western New York experienced agricultural, transportation, and industrial revolutions and thrived economically, adjacent areas in Upper Canada with identical culture, climate, flora, and fauna remained economically backward. Canada, after all, was still subject to the whims of a distant monarch and his or her placemen in the New World but de facto ruled by unelected oligarchic cliques bent on rent-seeking.
Only after Canadians won their independence from the cliques in the 1830s and 1840s and from the Crown in 1867 did Canada begin to catch up to America economically. By the time I began making beer runs to Ontario in the late 1980s, Western New York and Canada were virtually indistinguishable, except for the drinking age and the metric system. Virtual economic parity, I’m told, had been reached several decades earlier. Now, if anything, the Toronto half of Torafalo, or Buffaronto if you will, that urban stretch that runs from the eastern shore of Lake Erie, down both banks of the Niagara River to the Falls, and then along the western part of Lake Ontario, looks rather nicer than the Buffalo half.
The reason for the present disparity may well be that the U.S. national debt has become excessive. It is now larger than the nation’s annual GDP and seemingly out of control while Canada’s national debt is just 66 percent of its GDP and under control. While the nominal national debt stayed about the same during Hamilton’s tenure as Treasury Secretary, strong economic and population growth meant that debt as a percentage of GDP dropped dramatically. Thereafter, thanks to the fiscal constitution -- a series of rules about borrowing and taxation like don’t borrow without dedicating a tax to service and repay the debt --  that Hamilton put into place, the national debt increased as a percentage of GDP only during wars and depressions and after territorial acquisitions, like the Louisiana Purchase. After each of those borrowing binges, economic growth and small budget surpluses combined to reverse the trend.
            As recently as the end of the Cold War in the early 1990s, the U.S. debt to GDP ratio improved, so much so that at the end of Bill Clinton’s second term there was genuine concern that U.S. government bonds would become completely extinct for the second time in U.S. history. But it was not to be, as debt optimists swept into power and destroyed Hamilton’s fiscal constitution under the cover of putative wars on terror and drugs. In fact, all Bush II and Obama have done is to borrow and spend in order to win votes. Taxing and spending is too risky as people immediately feel taxes. Most, however, pay little attention to borrowing and the debt optimists are there telling them that they needn’t worry about the national debt as everything is going to be just fine, which is true only for those who owe more than they own and aren’t reliant on bonds, Social Security, or other forms of fixed income.
            And I’m just talking about the explicit part of the national debt. So-called entitlement programs add many trillions more to the nation’s fiscal burden. Interest on the national debt in 2016 amounted to $241 billion, or 1.3% of GDP. Spending on Social Security, Medicare, and Medicaid totaled $2 trillion, or a little over 10% of GDP. We’ll spend even more in 2017 but the spending is formulaic and hence largely capped. Interest paid on the national debt, by contrast, could skyrocket because most of the debt comes due and must be refinanced every five years or so. Interest rates are low now but heading higher and effectively are not capped. They reached into the upper teens in the late 1970s and could go there again if inflation expectations rise. By 2023 we could be spending 20% of GDP on debt service, which would put tremendous pressure on other areas of expenditure, including Defense, which is currently 3.2% of GDP, and nondefense discretionary spending, which is currently 3.3% of GDP. And that, of course, would put tremendous upward pressure on tax rates and would force places like Buffalo to wallow in idleness, its enterpreneurs crowded out of funding by the massive borrowings of the federal government. Twenty percent is a nightmare scenario but sometimes nightmares come true, as they did multiple times when I was growing up in the 1970s. So please forgive my Hamiltonian realism.
            Is there anything we can do to get out of this fiscal mess? Yes, thanks for asking. Hamilton advised the creation of an energetic, efficient government, one that did one thing well for as little money as possible. That one thing was to protect American’s lives, liberty, and property from tyrants foreign and domestic. Straight off, I think that Hamilton would slash the military’s budget without degrading its ability to deter foreign incursions. Nuclear weapons can deter foreign states, at least rational ones. Terrorists are best interdicted at the borders and place of attack, not the mountains and deserts of Asia.
Much of the rest of what the federal government does is to subsidize one group at the expense of another and hence not only can it be scaled back, it should be scaled back, slowly so that people can adjust. Phasing out the Department of Education, for example, would not end all education in the United States, it would merely force parents to fund their children’s educations, which most could do if their tax bills were not so high.
The so-called entitlement programs Hamilton would phase out over time and in the process render the poor better off. Yes, you heard that right. A study by the National Bureau of Economic Research, for example, showed that Social Security redistributes wealth from poor black men and Hispanics to white middle class widows. Moreover, Social Security’s life annuity works to increase wealth disparities by ensuring that the poor own no assets to pass to their children or grandchildren. Phasing out Social Security would not relegate the nation’s elderly to eating pet food, it would give people incentives to save for retirement, just as they did before Social Security was implemented in the 1930s in response to a temporary macroeconomic problem.
            Hamilton would also stop the war on drugs, which is really just a war on brown people, against whom he held no discernible prejudice. He would work to improve the administration of justice for African-Americans, Hispanics, American Indians, and immigrants so that they have incentives to work harder and smarter. That mostly means to stop doing expensive things to people and simply allow them to live like other Americans, without fear of the police, ICE, and so forth. If you don’t believe me, you should have come to my talk at Fraunces Tavern on Monday night, where I explained that Hamilton thought blacks equal to whites in every way and advocated freeing the slaves. As for Hamilton’s views on Indians, look into the history of Hamilton College.
            But the most important thing Hamilton would do today is to restore America’s fiscal constitution, a flexible set of rules established by debt realists for debt realists. As brilliantly described by Bill White, a Democratic politician and businessman from Texas, America’s fiscal constitution held that the federal government should borrow only when absolutely necessary, as during declared wars or to finance a territorial acquisition, and only when a tax sufficient to offset the borrowing was passed and dedicated to the debt’s repayment. That way, the ability of the government to repay the debt is demonstrated and, more importantly, the future cost of the borrowing is laid bare. Bush II and Obama, Whites showed in his 2014 book, America’s Fiscal Constitution, replaced those commonsense checks and balances with nonsense about the debt ceiling.
The first step is to run the debt optimists out of power, and replace them with debt realists, like Hamilton, so they can restore our fiscal constitution. Then we need to let the economy grow into the debt, shrinking its burden in the process. That does not mean austerity or even running surpluses, it just means keeping federal government deficits small compared to productivity advances. If America can stay out of war, real and fanciful ones, for a decade or so, the national debt will become non-excessive once again, and places like Buffalo will prosper once more. If America can learn to treat all its citizens equally, and slowly phase out parts of the federal government it never really needed in the first place, the national debt will again become a blessing, and places like Buffalo will blossom as never before.

Thank you!

Wednesday, July 12, 2017

Honoring America’s Hero, Alexander Hamilton

Honoring America’s Hero, Alexander Hamilton

By Robert E. Wright, Nef Family Chair of Political Economy at Augustana University and the Alexander Hamilton Awareness Society’s National Hamilton Scholar for 2017. My prepared remarks presented at the Weehawken, N.J. Elks Lodge, 11 July 2017

In many ways, words are like money. If the supply of money grows too quickly, the value of each dollar decreases and the economy experiences what we call inflation. Likewise, the value of each word is diminished in direct proportion to the number of times it is used. Hero is one such word. Since 1851, The New York Times has used the word hero in its pages almost half a million times. Almost a quarter of those uses occurred in the Third Millennium AD, or just the last 17 and a half years. That finding, by the way, isn’t determined by the length of the newspaper as the word hero was used more frequently in the 1870s and 1880s than in any subsequent decade until the 1980s, when its use took a strong upward trajectory that might be termed skyrocketing. It was certainly faster than the growth in the number of words published in the Old Gray Lady.
Because of inflation, when economic historians cite a nominal dollar figure from the distant past, we often remind readers or listeners that a dollar used to buy a lot more than it does today. How much more is more a matter of perspective than science. The website measuringworth dot com currently lists six different ways of comparing a dollar in 1790 with a dollar today and the estimates from those 6 methodologies vary from a low of $25 to a high of almost $100,000. Anyway you slice it, though, the dollar has depreciated an appreciable amount.
When I assert that Alexander Hamilton was “America’s Hero,” I mean that he was a hero in the 1790s’ sense of the word, not in today’s depreciated language. How many orders of magnitude different those are, I’ll leave for you, the listeners, to decide.
And, of course, I speak of the real Hamilton, not the protagonist, or hero if you will, of the musical Hamilton. I thought about calling Hamilton a superhero but decided that sounded too cartoon-ish. Hamilton was a real person, not a fictional character.
The real Hamilton was a real hero, an individual, as the Oxford English Dictionary put it, QUOTE admired or acclaimed for great qualities or achievements UNQUOTE. More specifically, Hamilton was a hero-leader and hero-founder, two subspecies of hero that help to found and lead new countries and institutions.
Hamilton has also been called a military hero for his actions on Revolutionary War battlefields from Princeton to Yorktown. Here, though, hero collapses into courageous at a time when capable officers who displayed courage under fire were a dime a dozen. Literally a dime a dozen if you accept the higher valuations of the dollar from measuringworth dot com.
Seriously, for an achievement to be termed great, as in large or important or, if I may, heroic, the achiever must be an indispensable component of the achievement. He, or she in the case of the heroine, cannot be merely another component or factor in the outcome, he must be the primary causal agent, the keystone or linchpin of the whole affair.
When I call Hamilton America’s Hero, I do not mean that America embraces Hamilton as its hero. It apparently does so at present, thanks in part to the popularity of the aforementioned musical, but to this day I cannot obtain employment teaching in a college or university history department, despite having published 18 history books, because Hamilton is anathema to the powers that be in academe and I am pro-Hamilton enough to have named my firstborn son Alexander Hamilton Was Wright. That’s right, his first name is Alexander, his two middle names are Hamilton and Was, and his last name sounds like correct but actually means a maker of things, as in Alexander Hamilton made America. I will not give the silly views of Hamilton’s critics a hearing here today but I thought them wrong when I earned my Ph.D. twenty years ago and today I know that they are wrong.
Hamilton is America’s Hero because he was indispensable to the nation’s founding and subsequent flourishing. Only his long-time friend George Washington was similarly heroic and, indeed, the two were indispensable to each other. We might consider them a heroic dyad, a binary star system, each grown stronger with the help of the other’s gravity … and gravitas. Had either of those luminaries perished at Valley Forge, or during that even more miserable but less well known winter at Morristown, we almost certainly would not live in a prosperous, united United States.
That claim, strong as it is, can strain credulity only in those who do not fully comprehend America’s precarious position even after Britain formally recognized its independence. Everything in America, or at least everything of importance, was a mess in 1785. Just a decade later, everything of importance was as perfect as was then humanly possible. One man was directly responsible for the sea change in the young nation’s affairs, and it certainly wasn’t Thomas Jefferson or any of his Virginian minions, it was the bastard brat of a Scotch pedlar, a precocious and well-vetted immigrant from the West Indies. Imagine that.
In 1785, the nation had several competing units of account and scarcely any money in circulation, save some state-issued paper bills of credit that lost value almost daily. In 1795, America enjoyed, thanks to Hamilton, a single unit of account, the U.S. dollar, and a sufficient supply of money, rendered stable in value because Hamilton legally linked it to the precious metals. Although disrupted by the Civil War, the U.S. monetary union has survived to this day and is largely responsible for the nation’s close economic and political integration.
In 1785, private credit was scarce because only a few banks existed. In 1795, the number of banks, and the amount of capital invested in banking, was growing because Hamilton wanted it that way. In addition to writing and supporting state bank charters, Hamilton induced Congress and Washington, above the self-serving din of Jefferson, to charter the Bank of the United States, a for-profit corporation that stymied the Panic of 1792 and kept the federal government’s finances in good repair.
In 1785, state taxes were so onerous that they stirred revolutionary discontent severe enough to raise the specter of successful tax rebellions in Massachusetts and elsewhere. In 1795, state taxes were light because the states had been relieved of their onerous Revolutionary-era debts by Hamilton’s assumption plan. Rather than threatening the social and political order, rebellions against federal taxes were mere annoyances, easily put down by the dyad and the gravitas of the new federal government.
In 1785, the national government and most of the state governments were bankrupt, unable to pay the interest due on their debts much less to discharge the principal. A decade later, the United States was among the most creditworthy nations in the world as judged by the price and quantity of its bonds traded in Amsterdam and London. America used its high credit standing to purchase new lands, like the Louisiana Territory, and fight important wars against slave masters and global tyrants. The high price of its bonds was proof that, for all its foibles, the U.S. federal government fundamentally respected property rights and was not going to bury itself in debt.
In fact, Hamilton helped to establish a sort of fiscal constitution that lasted for nearly two centuries. The first major rule was to borrow only when absolutely necessary and to establish the taxes needed to repay a new debt at the same time the debt was incurred so that everybody realized that borrowing was not free, just expedient in certain circumstances.
In 1785, the country was a loose collection of states, not a unified whole. In 1795, due to the widespread ownership of federal bonds, thousands of Americans looked to the federal government, not to their state governments, as the font of sovereignty. To protect their pecuniary interests, those bondholders, as Hamilton predicted, cemented the Union together when a host of forces, like slavery, threatened to tear it asunder.
In 1785, the young nation’s economy was largely agricultural and small-scale. It still was a decade later but growing numbers of corporations were already changing the structure of the economy, shifting it towards finance, transportation, and manufacturing. Hamilton led the way here by establishing the Society for the Establishment of Useful Manufactures in Paterson, New Jersey, which was meant to be a demonstration project, not a monopolistic behemoth as Hamilton’s detractors claimed. Hamilton also pioneered corporate governance rules that encouraged investment by small investors by limiting the voting powers of large investors in corporate elections.
Commerce, internal and international, nearly at a standstill in 1785, also became more important because of Hamilton. Despite numerous claims to the contrary, Hamilton was not in favor of protective tariffs. The taxes on imports that he suggested to Congress were revenue tariffs only, designed to maximize the federal government’s revenues, and hence its ability to service and repay its debt, not to protect specific domestic economic interests. Hamilton’s Report on Manufactures makes that point clear, but the long, complex document has been widely misinterpreted and misused by those who value partisan ideology over truth.
All of those policy reforms were made possible by the passage of the U.S. Constitution. While Hamilton played little role in most of the convention’s debates, he essentially called the convention together in Philadelphia in the summer of 1787 and, through his strenuous efforts writing as Publius in The Federalist Papers, as well as his role in New York’s ratification convention, Hamilton ensured the Constitution’s passage and its subsequent interpretation by generations of jurists. Judicial review, long one of the most important of our governmental checks and balances, also can be traced directly to Hamilton.
Had Hamilton lived another 20 years, as his two main detractors, John Adams and Thomas Jefferson had the good fortune to do, all of this would be much better understood. Instead, Hamilton’s legacy has been used, and abused, to support policies and politics that Hamilton abhorred. Had he lived, both of the leading causes of the Civil War, slavery and protective tariffs, would have been reduced if not eliminated and the horrors of that conflict, and its long aftermath, avoided. I daresay our GDP would be a third higher today had Burr’s bullet not found our hero’s abdomen.
Alas, the events that took place on this very ground ten score and a farmer’s dozen years ago ended both Hamilton’s heroic deeds and his ability, in what would have been his later, reflective years, to recount all that he had done for posterity. It has been left to scholars like Richard Brookhiser, David Cowen, Forrest McDonald, Michael Newton, Richard Sylla, and a handful of others to piece together Hamilton’s many contributions to America and its prosperity and to speculate about his future heroism. But rather than lament what would have been, we should rejoice in what was, and honor Hamilton for being our hero, America’s Hero, the man, along with Washington, most responsible for this country’s greatness, past and present. We cannot resurrect Hamilton himself, but we can certainly resurrect his insights to guide us through the troubled times ahead.
Honor is another word that has lost value over time. In Hamilton’s time, to honor somebody was to repay him or her full principal and interest. Applying that concept today is subject to interpretation, but I would say what we owe to Hamilton is the Truth, as close as we can comprehend it. That means, at a minimum, not make clearly false statements about the man. So don’t claim that a statesman who wanted an energetic government wanted a big government, that a poor bastard was an aristocrat, that somebody who wanted checks and balances to apply to everyone was a monarchist, that a financier who built an amortization clause into his bonds and who stressed that a national debt could become excessive wanted a large, perpetual national debt, or that an economist who simply discussed the microeconomic effects of protective tariffs wanted to implement them. Honor Hamilton, honor Burr, honor all of the Founders by studying their own words and actions or at least by reading the best, most honest scholarship about them available.

Thank you!

Tuesday, July 11, 2017

Hamilton and the Economics of Slavery

Hamilton and the Economics of Slavery

Robert E. Wright, Nef Family Chair of Political Economy, Augustana University

Prepared remarks given 7/10/17 at Fraunces Tavern Museum: 

            I don’t think that Alexander Hamilton lived long enough, or did enough in the cause of antislavery, to quite deserve the label ABOLITIONIST, i.e., a person who actively sought to end slavery throughout the United States. While his hands were not entirely clean when it came to the ownership of other human beings, they were much, much cleaner than those of most of the Founders, including those of his mentor, George Washington. Part of this was the mere luck of being born poorer than any other Founder, or certainly any of the major Founders, with the possible exception of Franklin, who probably not coincidentally also came to hold antislavery views. But Hamilton’s brushes with slavery as an adult were also due more to chance than design. I’m thinking here of his marriage into one of New York’s wealthiest families and his long residency in Manhattan, that part of his adopted state most amenable to the peculiar institution.
            Had more of his correspondence survived, or indeed if Hamilton himself had lived long enough to find the leisure time to wax eloquent about his views, we would enjoy a much more definitive understanding of Hamilton’s views on slavery. As matters actually stand, we have to piece together the most plausible story we can, which I think would conclude that Hamilton, had he lived, would have developed economic abolitionism decades before Hinton Helper did.
            Economic abolitionism is much less studied and understood than its moral cousin, or what we might call mainstream abolitionism. For most abolitionists, slavery was immoral, plain and simple, because it was an abomination unto the Lord and/or unto natural reason or natural law. Many mainstream abolitionists did not, and would not, discuss the economic aspects of slavery. Most were not deep economic thinkers and intuited that they would lose any economic argument with slaveholders. Others grudgingly conceded that slavery was an economic good but found it repulsive to even think about exchanging material well-being for the suffering of the enslaved.
            The great classical economist Adam Smith took a stab at economic abolitionism and failed badly. He argued that, regardless of race, free people were always more productive than slaves because the latter had but paltry incentive to work hard or smart. All they would do was the bare minimum to avoid punishment and they would resist and steal at every opportunity, views also held by Franklin. Smith, a careful student of history, had to concede that the world had always been full of enslavers, which he explained proved only that people really liked to enslave others. Nobody who saw firsthand the large profits produced by many slave plantations could follow Smith’s weak brand of economic abolitionism.
            What finally convinced people that slavery was bad for the economy, that it reduced real per capita output and stymied development, was the concept of pollution, or what economists today call negative externalities. Everyone knew that, say, a tannery could be fabulously profitable but destroy a sizable town downstream. Total economic activity was therefore not the sum of private profits, it was the sum of private profits minus the costs of pollution, and other negative externalities. Ergo, slave plantations could be profitable but actually hurt the overall economy by creating costs borne by the rest of society. Enslavers’ profits were, in essence, stolen not only from the enslaved but from non-slaveholders as well.

The notion that slavery created large negative externalities percolated for centuries before culminating in Hinton Helper’s 1857 opus, The Impending Crisis of the South. That the enslavement of others enriched a few at the expense of the whole can be dated to sixteenth century French philosopher Jean Bodin, who argued that the profits created by slaves were offset by the fear induced by the institution in both slaves and the general population. As Bodin put it, slave societies were quote always in daunger of trouble and ruine, by the conspiracie of slaves combining themselves together: All Histories being full of servile rebellions and warres. unquote Johann Gottfried Herder, an eighteenth century German scholar, also clearly saw that slavery created social costs not borne by enslavers. His major example of a negative externality caused by slavery was the spread of syphilis, which devastated three continents.
The idea that slavery imposed large costs on non-slaveholders gained traction in early nineteenth century America. In 1805, Philadelphia’s Thomas Branagan compared slavery quote to a large tree planted in the south, whose spreading branches extends to the North; the poisonous fruit of that tree when ripe falls upon these states, to the annoyance of the inhabitants, and contamination of the land which is sacred to liberty. unquote George Mason had also likened slavery to a quote unquote slow Poison and in 1832, following a slave rebellion, fellow Virginian Henry Berry argued that slavery was akin to raising tigers, something the state certainly had an interest in arresting, even if it was quote a very lucrative business. unquote Virginians would not be allowed to raise the Upas tree or Tree of Death, Berry argued, even if it grew entirely on their own private land. In that same debate, Charles James Faulkner stated the matter directly: quote Slaves are injurious to the interests and threaten the subversion and ruin of this Commonwealth. Unquote
In 1833 British abolitionist Joseph Conder argued that free laborers cost society less than slaves did because slavery encouraged quote a wasteful and deteriorating husbandry unquote due to its reliance on monoculture and primitive tools as well as quote contingent social evils, which demand a precautionary provision unquote. The ultimate cost of slavery, he concluded, also included quote the state expenditure which it renders necessary in order to provide against the dangers inseparable from the existence of a servile class. Unquote
Former Kentucky slaveholder Cassius Clay converted to the antislavery cause after he took up a methodology, first tried in 1824, of comparing the economies of free and slave states. Despite Virginia’s natural advantages over New York, he noted, the latter exceeded the former in quote the elements of National prosperity and glory; wealth, numbers in new countries, literature, industry, the mechanic arts, scientific agriculture, &c. unquote Slavery, Clay concluded, was clearly to blame for Virginia’s economic retardation. Quote The twelve hundred millions of capital invested in slaves is a dead loss to the South, unquote he declared, predicting, accurately, that the free North would defeat the slave South in a civil war.
Helper took those hints and ran with them. Although his execution proved poor in places, Helper showed in devastating detail that the free states were economically superior to comparable slave states and then convincingly argued that slavery was the culprit because of the pollution necessarily created when holding millions of human beings in abject bondage. Republican politicians soon extended Helper’s ideas to claim that enslavers effectively taxed Northern workers in several ways, only the most palpable of which was the Fugitive Slave Act. The South’s poor whites were probably the biggest non-slave victims of slavery because enslavers did not support public education or quality transportation systems that would have allowed Buckram, as they were derisively known, from having a shot at bettering their condition. Who then would man the nightly slave patrols that allowed enslavers to sleep?
So slavery was not just a moral atrocity, it was economic theft en masse, one well worth fighting to end. During the Civil War, bona fide economists like John Elliott Cairnes adopted the negative externalities view of slavery. Cairnes argued:
QUOTE Those who are acquainted with the elementary principles which govern the distribution of wealth, know that the profits of capitalists may be increased by the same process by which the gross revenue of a country is diminished, and that therefore the community as a whole may be impoverished through the very same means by which a portion of its number is enriched. The economic success of slavery, therefore, is perfectly consistent with the supposition that it is prejudicial to the material well-being of the country where it is established. UNQUOTE

That remained the orthodox view until about 2010. The debate sparked by Time on the Cross in the 1970s was more about the relative efficiency of free and slave labor. All Fogel and Engerman did was to re-establish that Smith and Franklin were wrong, that slaves could be more efficient than free laborers under certain circumstances. In the twenty teens some so-called historians of capitalism began to argue something much broader, that slavery made the U.S. and U.K. wealthy. Economic historians have successfully attacked their sloppy work, which hopefully has been completely put to bed by my book The Poverty of Slavery: How Unfree Labor Pollutes the Economy, which came out of Palgrave this spring and copies of which are available for sale here.
Killing off the notion that slavery can cause economic growth and development will be an important victory for the modern antislavery movement. Slavery, you see, did not end in the nineteenth century in the U.S., or anywhere else for that matter, it merely changed names and forms into debt peonage, bonded labor, white slavery, and child exploitation. Today, we call it by such euphemisms as sex trafficking and unfree labor. Although the percentage of people enslaved today globally is less than it probably has been at any point in world history, 30 to 40 million people remain enslaved worldwide and that is 30 to 40 million too many. We did not need some Ivory Tower, Ivy League historians to strengthen modern slavery by claiming, more out of ideological conviction to support reparations claims than an understanding of economic growth processes, that slavery can stimulate economic growth and development.
            Of course, those are the same types of scholars who don’t understand Alexander Hamilton’s contribution to modern America very well. Hamilton wasn’t a royalist, he was a republican, of the constitutional monarchist variety at times, but not because he was an aristocrat. As noted earlier, he came from a very humble background. He wanted strong checks on each of the three branches of government in case a demagogue ever became president (as if!), Speaker of the House, or chief justice of the Supreme Court. Even when he spoke of constitutional monarchy, Hamilton did not advocate an authoritarian state, but rather sought bulwarks against tyranny, specifically the tyranny of the majority.
As I show in One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe, copies of which are available for sale here, what Hamilton ultimately wanted was an energetic government that provided public goods as efficiently as possible. That meant providing national defense and protection of citizens’ lives, liberty, and property at the lowest possible cost. Hamilton did not want a big government by today’s standards, he wanted one bigger than that desired by Thomas Jefferson, which Hamilton believed would be too weak to protect the young United States from foreign threats. Jefferson did not want an energetic federal government because it threatened slavery; he and his slaveholding followers hated Hamilton because they feared that he was the man most capable of threatening the peculiar institution.
Hamilton did not want any person to be under the absolute control of another, even a political leader. So at the end of his pamphlet The Farmer Refuted, Hamilton made clear that he was convinced that quote the whole human race … [was] intitled [to] civil liberty, … [which he considered] in a genuine unadulterated sense … [to be] the greatest of terrestrial blessings. unquote Importantly, Hamilton believed that people of all races were fully human. When he said that all men had the right to the administration of justice, there was no implied asterisk by the word men. I can’t credibly argue that Hamilton held no racial prejudices but belief in the systematic exclusion of any group of citizens from civil society was not among his shortcomings.
In a letter to John Jay in 1779, Hamilton believed that “negroes,” a polite term for African-Americans at the time, would quote make very excellent soldiers, with proper management … [because] their natural faculties are probably as good as ours unquote. Whites, Hamilton lamented, were quote taught … contempt … for the blacks [which made them] fancy many things [about Negroes] that are founded neither in reason nor experience unquote. One might dismiss such sentiments as so much fodder in favor of Hamilton’s desire to enlist African-American troops for the cause but Hamilton also wrote that quote the dictates of humanity and true policy equally interest me in favour of this unfortunate class of men unquote. He thought that arming blacks would not only allow them to defend themselves but also spur slaves to shake off their shackles.
In 1785, Hamilton helped to form the New York Society for Promoting the Manumission of Slaves, an NGO that encouraged New Yorkers to let their slaves go free and that hoped to prevent their re-enslavement, or the kidnapping and enslavement of free blacks, through registration. Three years later, Hamilton’s good friend, the Marquis de Lafayette, updated Hamilton on France’s new policies quote Respecting the Negroe trade, and slavery unquote. He then begged Hamilton to subscribe him to the anti-slavery societies in New York and elsewhere. Hamilton remained a member of the society until his death, and was elected counsellor of the society in 1803, but he was active only in spurts because his overriding goal was preservation of the precarious Union that he had helped forge. Without the Union, the liberties of all Americans, black and white, would be endangered.
When commenting on the Jay Treaty, which he generally favored, Hamilton approved of the emancipation of American slaves during the Revolution by the British because quote it would have been still more infamous to have surrendered them [freed slaves] to their Masters unquote. The peace treaty, Hamilton noted, did not require the British to restore property, just to not carry any away. But once captured by the British, slaves were freed and hence stopped being property.
            In addition to opposing slavery on moral grounds, Hamilton clearly understood the concept of externalities, both positive and negative. In his report on manufactures, Hamilton noted that manufacturing created positive economic spillovers, specifically an increase in quote unquote ingenuity. Hamilton also noted that alcohol consumption created negative externalities, like decreased productivity, which is why he personally preferred strong coffee over arduous spirits. In his report on the Bank of the United States, Hamilton argued that by printing too much fiat paper money, governments could create negative externalities in the form of an inflationary bubble quote incompatible with the regular and prosperous course of the political economy unquote.
            All that remained for Hamilton to become an economic abolitionist was to observe the economic differences between slave and non-slave states and to explain their differences by referencing negative externalities. When he died in 1804, the differences between North and South, and free and slave, were not yet as palpable as they would become. Had he lived into the 1820s or 1830s, as Jefferson, Adams, and Madison did, Hamilton would certainly have learned of the increasing economic differences between the two sections and put his keenly analytical mind to explaining why. As I show in One Nation Under Debt, Hamilton was nothing short of an economic genius. There is no doubt that he was economically more astute than any of the economic abolitionists, including Cassius Clay, Hinton Helper, or even J. E. Cairnes. It is difficult to believe that he would have missed the application of negative externalities to slavery.
Albert Gallatin, America’s second greatest treasury secretary, was born just a few years after Hamilton, and lived until 1849. Although a member of Jefferson’s entourage, Gallatin long opposed slavery.[1] Like Hamilton, Gallatin was a member of his adopted state’s abolition society in the 1790s. While lamenting the loss of innocent lives in the Haiti uprising, he believed the uprising itself just retribution for “the crimes of so many generations of slave-traders and slave-holders,” a sentiment similar to one that Hamilton expressed during his 1789 eulogy of Revolutionary War General Nathanael Greene that rendered him persona non grata with the Jeffersonian slaveholding elite. Unsurprisingly, Gallatin did what he could to stop the expansion of slavery into new U.S. territories but at the same time admitted he was tempted to buy slaves to help build his estate in western Pennsylvania. He resisted the temptation, though, and in one of his last public acts he opposed the annexation of Texas, and the subsequent war with Mexico, on general antislavery grounds.
Although antislavery in principle, Gallatin was no abolitionist because, like Edward Everett, he ultimately valued the Union over the lives of slaves.[2] Gallatin therefore spent his last years studying the plight of American Indians instead of slaves. Moreover, slavery remained simply a moral problem for Gallatin as well as for Everett. Hamilton was too astute an economist not to have discovered economic abolitionism. Although he, too, would have been loath to endanger the Union, he would have seen, as Helper and others later did, that slavery was not only a political threat to the Union, it was an economic threat because it created two economies – not one slave and one capitalist, whatever that means – but one a horrid Southern vampire that sucked resources out of the other by imposing massive negative externalities on it. The most telling evidence of that fact is that the Confederate states seceded not because Lincoln threatened to free the slaves but because he threatened merely to remove federal subsidies for slavery. Without those subsidies, slavery would have unraveled, and perhaps in an ugly way. Now imagine Hamilton during the Missouri or Nullification crisis arguing, in his usual indomitable way, that federal subsidies for slavery, which ranged from the postal service to river clearing to fugitive slave laws, had to cease. I think the South would have capitulated but worst case scenario the North would have won the Civil War in the early 1820s or 1830s instead of the 1860s.
Thank you!

[1] Henry Adams, The Life of Albert Gallatin (Philadelphia: J. B. Lippincott & Co., 1879), 86, 109-10, 209, 259, 406, 671-74.
[2] Matthew Mason, Apostle of Union: A Political Biography of Edward Everett (Chapel Hill: University of North Carolina Press, 2016).