Thursday, August 17, 2017
Tuesday, July 25, 2017
Nef Family Chair of Political Economy Robert E. Wright receives the Alexander Hamilton Awareness Society's Award at the Museum of American Finance, July 2017
Nef Family Chair of Political Economy Robert E. Wright receives the Alexander Hamilton Awareness Society's National Hamilton Scholar Award at the Museum of American Finance, 12 July 2017
THE TALK & C. WILL AIR ON C-SPAN 3 20 August 2013 at 11:30am EDT. Thereafter it will be available here https://www.c-span.org/video/?430707-2/alexander-hamiltons-views-national-debt
A clip is already available at that same URL.
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. http://www.shear.org/wp-content/uploads/2017/07/Philadelphia-2017-Program_FINAL.pdf 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:
http://www.frauncestavernmuseum.org/evening-lecture-series/
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!
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