Central to Hamilton’s view was protecting America’s infant industries, so up went the tariff, about 25% in 1816 Given the huge costs of shipping in the early 1800s, this was a formidable exercise in protectionism as well as a major source of federal government revenues. And up it stayed, over the opposition of agriculturalists who were buyers, not producers, of manufactured goods–and to the extreme displeasure of the British.
…They picked some big winners: one was a way to assemble guns from standardized parts using relatively unskilled labor because America lacked skilled gunsmiths. This became the basis of a powerful approach to American manufacturing called the American System. Tariffs stayed high and as steel ships radically reduced the costs of transatlantic shipping, America raised tariffs still further to offset the impacts of greater efficiency. We didn’t even honor the intellectual property of British authors…
Again and again, America renewed this high-tariff industrialization policy — over the opposition of its farmers and southern planters–for the purpose of shaping market outcomes and protecting infant industries. It worked very well and the country industrialized at a rapid pace. By the end of the 19th century those infants had grown to be the largest firms in the world, and America had overtaken free-trade Britain as an industrial power. And it kept those protectionist tariffs, the highest in the North Atlantic, with occasional very short term drops, right up to the end of World War II.
The US government engaged in social design on a big scale. In the 1800s when the federal government sold off millions of acres in what we now call the Midwest. It did not auction the land to the highest bidders. Instead, under the Homestead Act, it entailed the land rights precisely to prevent giant landholdings (and the extension of slavery) and ensure that only a family actually living on and farming the land could get it and hold it. The alternative – an auction, which might now seem the normal and right way to privatize government assets—would likely have resulted in a social structure more like that of Latin America, of very large estates and great masses of landless agricultural laborers, with all its drear consequences.
The next big redesign was the course correction regarding trusts, led by Teddy Roosevelt. Trusts came to control markets instead of being controlled by them. Remedial action began to seem imperative to many Americans. When firms become too monopolistic you have three choices: nationalize, regulate, or restore some real degree of competition. Government broke up the railroads and Standard Oil. A constitutional amendment established the income tax to address the outrageous concentration of wealth of the first Gilded Age.
FDR (get section)
government plotted the route of the economy in deliberate, concrete and specific ways. One could tell exactly what the results of these changes would be before making a commitment to them. Then government let entrepreneurs fill in the gaps, opening up new areas of trade or innovation, and ultimately taking the economy precisely where the government wanted it to go.
In this talk, Cohen takes us through the centuries from Hamilton to Eisenhower, to the decades when the process fell apart—the 1970s and 1980s. He show how the American-Asian trade relationship laid the damaging groundwork for our continued economic troubles; how the excessive financialization of our economy is only going to lead to more trouble; and how the government, established companies and new ventures can partner to yet again successfully reshape the economy in healthy and constructive ways.
We Americans have been repeating the same political-economic arguments in different keys and with different harmonies—the arguments over the costs and benefits of freer trade, of government support for industry, over the righteousness of libertarian government, over activist New Dealism—for more than two centuries now. Yet today we have largely forgotten the earlier rounds of this debate: the ones that started with Thomas Jefferson and Alexander Hamilton.
Jefferson has gotten the better monuments and the better press in both newspapers and history books. But in policy and in the real material arc of history, it is Hamilton who looms as the giant. Hamilton was the architect of the boldest, most original, and most important deliberate reshaping of the economy of the United States of America. Adam Smith’s ideas dominated and continue to dominate economics textbooks. But it is Hamilton’s more pragmatically oriented corrections to laissez-faire and to Smith’s “System of Natural Liberty” that have successfully shaped development strategy for Germany, Japan, Korea, and China—and, to a substantial degree, the United States.
Before Hamilton, it was the Jeffersonian economic mold, the mold that Britain had imposed through its mercantilist colonial policy, into which the American economy was being poured. Jefferson wanted to cut America loose politically from what he saw as the corruption of Imperial Britain. But he had no major quarrel with the un-industrialized agrarian economy that the British Empire was designing America to be.
Hamilton, a New Yorker, thought differently: that liberty could spring from the city as well as the countryside, and that prosperous market economies needed big pushes to get themselves going. And so Hamilton pushed the United States into a pro-industrialization, high-tariff, pro-finance, big-infrastructure political economy, and that push set in motion a self-sustaining process.
Representatives of both western farmers and New England manufacturing workers saw that it was good for them to impose high tariffs on imported British goods, and use the revenue to build the infrastructure for an America that would not just be Europe’s farmer, logger, and miner, but a manufacturer and a researcher in its own right.
After Hamilton, the U.S. economy was different. It was a bet on manufacturing, technologies, infrastructure, commerce, corporations, finance, and government support of innovation. That turned out to be good for more than just farmers and the bosses and workers: it turned out to be good for the country as a whole.
Urban commercial prosperity was essential for a good and a free society. A desperately poor urban population could not be supporters of liberty. And a rural society—even a frugally prosperous one—that lacked a critical manufacturing capability could not defend itself against empire building by Britain, France, the Netherlands, or Spain. At best, it would be dependent on unwanted and unfair foreign alliances.
The United States we have today is not Jefferson’s, but Hamilton’s. Why? Because once the Hamiltonian system was set, it stuck. It worked. And so, very quickly it became too strong and too useful to too many powerful groups for any political coalition to dismantle it.
Hamilton’s system was constructed of four drivers that reinforced one another, not just economically but politically: high tariffs; high spending on infrastructure; assumption of the states’ debts by the federal government; and a central bank.
The economy was to be reshaped to promote industry. And the principal instrument for this was a high tariff on manufactured imports from Britain, the traditional world-dominant manufacturer.
The tariff would provide the incentive to invest in the development of manufacturing technologies and would subsidize the nascent manufacturing firms that would make those investments.
It was also to be the major source of federal government revenues, and would thus support an extensive program of infrastructure development. This was vital for territorial expansion and economic development, and for adding the critical political support of the western farmers to the northern coastal commercial and labor interests.
But that was not all. The tariff was also the instrument that permitted the federal government to credibly assume states’ debts incurred to fund the Revolutionary War, thus strengthening the central government (central to Hamilton’s plans).
The creation of a federal government debt also constituted the basis of a new and vigorous financial market. No wonder then that in Hamilton’s strong and settled opinion: “a national debt, if it is not excessive, will be to us a national blessing.”
Finally there was Bank of the United States, which Hamilton designed to sit at the center of the financial system and tame the wildcat banks and their wildcat currencies.
As the Hamiltonian system developed, tariffs rose to about 35% of the values of manufactured imports by 1816. And the tariff stayed up: it was among very highest in the North Atlantic for more than a century. These benefits were massive. They were also massively unexpected. Hamilton believed that a focus on manufacturing, technology, secondary-product exports, corporate organization, banks, and finance was a very good bet. But he and his allies had no idea how good a bet it would be. Nobody did.
The Hamiltonian system flourished, and slowly transformed itself first into the American System of manufacturers and then into mass production and Fordism proper. It set the pattern for all subsequent redesigns of the American economy. And that has since spread over an ever-increasing proportion of the globe.
What was needed, and what the United States got at the right time, was Alexander Hamilton
So what is the lesson? The lesson is not that activist government industrial policy is always right. Jefferson’s ideology of agrarian utopia coupled with Smithian laissez-faire was wrong for its day. But Stalin’s ideology of over-investing in heavy industry to seek massive economies of scale—although it did produce a tank industry that could fight off Hitler—was equally wrong for the post-World War II move from industrial into post-industrial economies.
Similarly Japan’s MITI was great for Japan’s post-WWII catch up but became a cropper once Japan was no longer following a well-blazed industrial development trail. And turning Hamiltonian exaltation of financial depth into an ideology creates major weaknesses, the bill for which came due in 1929-1933 and again in 2007-2009.
The lesson is that ideologies—no matter what they are—are bad masters. Hamilton’s genius was in focusing on not what was decreed according to ideological first principles laid down by some academic scribbler, but rather focusing on what was in a pragmatic sense likely to generate prosperity at that moment in that situation.
Hamilton broadly got it right. His successors who continued his policies under decent Jeffersonian draperies also got it right. The post-Civil War decision to go for a heavily-industrialized economy knit together by continent-spanning railroads got it right. The Progressive course correction of the inequities produced by the Gilded Age got it right. So did the—overwhelmingly pragmatic—policies of FDR and of Eisenhower.
It is only in the past generation that we have forgotten our pragmatic past and applied ideological litmus tests to what our public policies will be. And we have suffered for it.
Stephen S. Cohen and J. Bradford DeLong are the authors of Concrete Economics: The Hamilton Approach to Economic Growth and Policy (Harvard Business Review Press, 2016). This article was adapted from the book.
“When you have the money- and “you” are a big, economically and culturally vital nation- you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly, though hopefully, in quiet, nonconfrontational ways. And you lose influence- the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others.” ― Stephen S. Cohen, The End of Influence: What Happens When Other Countries Have the Money
“Finance was the leading industry to which government opened the growth gates, as it had done previously for manufacturing, railways, suburban housing, and advanced technology. Beginning seriously in the 1980s, government deliberately, piece by piece, dismantled the regulatory structure that had tamed finance into something of a utility. And as in the past, entrepreneurs rushed in and innovated. The lucrative innovations ranged from collateralized debt obligations (CDOs—called by Warren Buffett “financial weapons of mass destruction”) and the like, on through high-speed trading (to us, a robotized cousin of front-running).4 The increase of the weight of finance in America’s GDP came about not so much by increasing the numbers of those employed in the sector, but by increasing the take of those high up in the industry. During the 1970s, average pay in finance was roughly the same as in most other industries; by 2002, it was double.5 The legions of clerks and tellers remained poorly paid; the gain went to the top, most of it to the top of the top. By 2005, finance accounted for a full 40 percent of all corporate profits. And many of the very most lucrative parts of finance—hedge funds, private equity partnerships, venture partnerships—were not structured and therefore not counted as corporations. Along with the accountants and consultants, add to this profit-making machine the Wall Street law firms that are part and parcel of finance, although they do not count as finance, but rather as business services. Finance got considerably more than 40 percent.”
― Stephen S Cohen, Concrete Economics: The Hamilton Approach to Economic Growth and Policy