The Banking Interests Behind the New Deal

In 2014 Nomi Prins wrote this piece in Fortune about the bankers behind the New Deal.  The New Deal was a banking revolution. The social aspects, cherished by the Democratic Party, were window dressing. Franklin Roosevelt had been a Wall Street fund manager, and he gave the American monetary system to Wall Street. That was the main point of the New Deal. 

Prins's story leads to Winthrop Aldrich, uncle of Nelson Aldrich Rockefeller and David Rockefeller.

Aldrich's father, Senator Nelson W. Aldrich, was the architect of the Federal Reserve Bank.

Incidentally, Bush's great grandfather, Samuel P. Bush, had served on the first board of the Cleveland Federal Reserve Bank. Samuel had been the president of Frank Rockefeller, John D. Rockefeller's brother's, company, Buckeye Steel.

FDR's great great grandfather, Isaac Roosevelt, had been Alexander Hamilton's partner in founding the Bank of New York, now part of Mellon. There's documentation, including a court case, that a bank for which Prescott Bush, Bush's grandfather, served on the board had helped fund Hitler.

Franklin Delano Roosevelt's uncle, Frederic A. Delano, was a Hong Kong-based railroad tycoon who served as the first vice chairman of the Federal Reserve Bank in Washington in 1914.

FDR represented the open control of America by elite financial interests that his cousin, Theodore Roosevelt, had put into play. Wilson signed the Federal Reserve Act, but Wilson would not have been elected if TR had not run as a third party candidate. The funder of his party, the Progressive or Bull Moose Party, was George Perkins, a close assistant to JP Morgan and former president of International Harvester.

Frank Vanderlip, who was present at the famous Fed-planning session at Jeckyll Island in 1910, was also a personal friend of Woodrow Wilson because of their work on shaping the modern American university system. Wilson, who had met JP Morgan because Morgan was a donor to Princeton, dropped Vanderlip as a friend and associate at the point at which Wilson entered the 1912 race. Vanderlip talks about that in his letters. No one knows the reason for sure, but it seems obvious.

The Anti-Federalists Are the Best Part of America

I am in the middle of Jackson Turner Main's The Anti-Federalists: Critics of the Constitution 1781-1788. Main is a great historian who meticulously traces the economic characteristics of each state's counties at the time of the Constitutional Convention and shows that the Federalist counties tended to be the wealthier ones while the anti-Federalist counties tended to be the ones where subsistence farming predominated.  Although there were wealthy people on both sides of the debate, Main shows that the economic divide was largely between indebted or subsistence farmers who lived inland and those who lived on coasts, along rivers,or in cities,and so participated in commercial life. There was therefore more substance to Charles Beard's claims in his Economic Interpretation of the Constitution than many historians and most supporters of the Constitution would prefer.  That is, the Constitution was largely passed to subvert democracy and home rule. It was passed under false pretenses: Much of Hamilton's writings in The Federalist Papers was lies, which caused Madison, whom Hamilton had hoodwinked, to break with Hamilton and side with Jefferson once the Constitution was ratified.

One of Federalists' biggest lies was their name:  "Federalist" refers to an advocate of a system with strong constituent states tied together with a weak central government.  The anti-Federalists were actually the Federalists; the so-called "Federalists" should have been called "Nationalists." Because most Americans at the time favored a Federalist, not a Nationalist, system, the Federalists lied.  Being from wealthier backgrounds, they were more adept at political manipulation.  In effect, from the beginning the Constitution was based on deception.

The anti-Federalists' objections to the Constitution include current issues: the federal government has escalated taxes; the Supreme Court has arrogated power; the executive branch has become a kingly office; a national government is too big to be democratic; the national government is guided by special interests; the national government is dominated by a financial elite.  These and related points were all made by anti-Federalists such as George Clinton, Abraham Yates, Luther Martin, William Findley, and Samuel Adams. 

Main makes clear that the Federalists frequently misrepresented their views about their intentions and what they believed would be the Constitution's effects.  Hamilton, for example, makes no mention of the "necessary and proper clause" being the basis for a central bank in The Federalist Papers.  He saved that claim for the year following the Constitution's adoption.  What we are witnessing today--  federal consolidation,  hyperelitist oligarchy, and presidential tyranny--the anti-Federalists foresaw.

I am tempted to say that they would have been surprised that it has taken this long to occur, but the level of tyranny that Americans live with today would have been unthinkable in 1786.  What would have seemed a tyrannical society to the anti-Federalists seems like a freer one to us.  The anti-Federalists would have viewed Andrew Jackson as an insufferable tyrant.  The Constitution made America into a servile nation, a nation where human dignity is impossible. 

Can a world like the anti-Federalists' be recreated?  I think not, but to begin to approximate one, it is necessary to live in a smaller country.  The American states on average had populations of fewer than 300,000 people; the total was about 3 million.  That is difficult to find today, but Uruguay has a population of about 3 million too, roughly equal to the United States population in 1787; Switzerland has a population of under 8 million; Singapore slightly over 5; Chile has 17.  All of these countries are freer than the US except for Uruguay, but Uruguay has great beaches and isn't far from Buenos Aires and Rio.   Each of these countries also has stabler economies.  I suspect that the citizenry of these countries is more committed to freedom than Americans are, and they are more moral.

Too bad the Constitution replaced the Articles of Confederation. America would have been more economically and politically successful if it hadn't.  The Civil War would have been avoided, along with more than one half million deaths.  Likely slavery would not have expanded because the Fugitive Slave Law could not have been passed.  Likely, the Constitution was responsible both for the explosion of slavery following the invention of the cotton gin in 1793  and for the Civil War. Without the Constitution there would have been less federal regulation, so innovation would have been greater.  The world would have advanced more quickly, and for a longer period, had the Constitution not given commercial interests power to institute a tyranny here. 

The Federal Budget and the Crisis of Democracy

This chart shows that there is little difference between Ryan's and Obama's budget proposals  That the Ryan proposal created controversy is evidence of a moribund political and economic system.  Chart courtesy of Chris Edwards of the Cato Institute.

This past April Michael Filozoff (h/t Candace de Russy) wrote a cogent analysis of Paul Ryan's budget proposal. The proposal created a stir but, as Filozof  shows, it is anemic--it accomplishes too little too late.  America will be the new Greece because, as Filozoff points out, Ryan is a congressman who faces biennial elections but the budget won't be balanced under his proposal until 2040. Ryan's proposal will reduce the deficit to a "whopping $385 billion" in ten years.  Why can't the budget be balanced now?

The American government has not been able to live within its means for 44 of the past 50 years.  An excessively democratic constitution that permits the majority to loot from those who produce wealth will not permit rational management.

I would add to Filozoff's analysis that the two party system is like a casino in which addicted gamblers liquidate their holdings.  There are two types of bettors. The conservatives, who bet on failed wars, and the progressives, who bet on failed social programs. Their wagers are colorful entertainment, but the casino owners are the only ones who win in the end.

The casino owners are specific special interests, starting with Wall Street.  Wall Street and a host of other special interests benefit from deficit spending and will resist, through the legacy media and through political pressure, any attempt to manage the American state rationally.  That is, Wall Street sells the financing on which government depends, directly profiting from deficits. It therefore pushes for deficits via the media, which legitimizes absurd federal programs. Wall Street profits from waste because the monetary expansion necessary to fund the waste is the sole reason that there have been consistent increases in the stock market since 1940. Wall Street's interests are linked inextricably to debt and to inflation because rising stock markets stimulate demand for their products.


In a free market when stocks go up new firms enter and profits (hence stock prices) decline. Stock markets have no reason to go up over the long term unless interest rates are artificially reduced over time and/or government regulation inhibits new firms. There is nothing in the theory of economics that predicts a consistently rising stock market. No economist has predicted stock market fluctuations based on economic theory (although some have used price earnings ratios and other indicators that have nothing to do with economic theory).

The Federal Reserve Bank has consistently expanded the money supply, reducing interest rates since 1932 to below market levels, and, since 1970, this has caused the real hourly wage to stagnate (due to inflation caused by the monetary expansion) despite productivity increases. There are, of course, short exceptional periods of rate increases to reduce inflation, but the chief trend-breaking exception was in the early 1980s under Jimmy Carter's and Paul Volcker's Fed.

Two effects of artificially depressed interest rates have been excessive expansion of Wall Street and bloating of stock and real estate prices at the expense of the real hourly wage.  As well, there has been misallocation in myriad other ways, to include dislocations that have come about because of Milton Friedman's policy, implemented by Richard M. Nixon,  of separating the dollar from the international gold standard and so expanding the dollar's role as a reserve currency around the world. This has made the dollar more valuable than it should be, resulting in the exodus of manufacturing. 

A Historical Perspective

The Ryan proposal hearkens back to a proposal of the first secretary of the treasury, Alexander Hamilton.  In 1795, right before he resigned, Hamilton wrote "Report on a Plan for the Further Support of Public Credit." In it he laid out a plan to extinguish the federal debt over 30 years.  According to Hamilton's biographer, Ron Chernow (p. 480):

He wanted new taxes passed and old ones made permanent, and he showed painstakingly that he had striven to reduce debt as speedily as possible...Hamilton's proposals were rolled into a bill passed by Congress within little more than a month of his departure as treasury secretary.

In fact, the large federal debt incurred from the Revolutionary War was not extinguished within 30 years, in part because of the War of 1812. As the statistics on Treasury Direct show, the national debt did not come close to being extinguished until Andrew Jackson was elected president in 1828. Then, it took eight years for him to abolish the Second Bank of the United States, the forerunner of today's Fed. In 1836, the year Jackson abolished that era's Fed, the national debt had been reduced to $37,513.  Abolition of the debt went hand in hand with abolition of the Fed. That did not end the federal debt, as subsequent presidents increased it. But the 19th century did not see consistent expansion of debt because Jackson abolished the Second Bank in 1836.

Conclusion

Currently, there is one candidate who favors abolishing the Fed: Ron Paul. In addition, there is a candidate who favors introducing competition into the monetary system: Gary Johnson.  Unless Americans choose to think outside the box and elect either Ron Paul or Gary Johnson, the radical incompetence that we have been witnessing will continue to the bitter end.  Meanwhile,  I am betting on gold and silver.

What Would Hamilton Say about Congress's Debt Limit Debate?

I am reading Ron Chernow's excellent biography Alexander Hamilton. On page 300 he discusses Hamilton's first Report on Public Credit which he wrote as the first Secretary of the Treasury:

In the report's final section, Hamilton reiterated that a well-funded debt would be a 'national blessing' that would protect American prosperity.  He feared this statement would be misconstrued as a call for a perpetual public debt--and that is exactly what happened.  For the rest of his life, he was to express dismay at what he saw as a deliberate distortion of his views.  His opponents, he claimed, neglected a critical passage of his report in which he wrote that he 'ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States that the creation of debt should always be accompanied with the means of extinguishment.' The secretary regarded this 'as the true secret for rendering public credit immortal.'  Three years later Hamilton testily reminded the public that he had advocated extinguishing the debt 'in the very first communication' which he 'ever made on the subject of the public debt, in that very report which contains the expressions [now] tortured into an advocation [sic] of the doctrine that public debts are public blessings.'  Indeed, in Hamilton's writings his warnings about oppressive debt vastly outnumber his pens to public debt as a source of liquid capital. Five years after his fist report, still fuming, he warned that progressive accumulation of debt 'is perhaps the NATURAL DISEASE of all Governments.  And it is not easy to conceive anything more likely than this to lead to great and convulsive revolutions of Empire.'

And, of course, Robert Rubin and Timothy Geithner are no Alexander Hamiltons.  They are more Madoff and Ponzi than Hamilton.

Hamilton: A Miniseries?

Dear HBO:  I am in the middle of Ron Chernow's 2004 "Alexander Hamilton."  I loved the "John Adams" mini-series; however, Hamilton would make for a much better subject than Adams.   Hamilton's story has everything: sex scandals (likely involving Hamilton's own birth and his mother's repeated love affairs as well as Hamilton himself), rags to riches, bravery in war,  brilliant ambition,  a sweeping vision that created the Constitution and the United States,  political intrigue, and a duel for honor, ending in Hamilton's death.

I am stunned that you have not turned Chernow's book into  mini-series!

Sincerely,

Mitchell Langbert, Ph.D.

The Second Amendment and the Doctrine of Probable Use

There are frequent discussions of whether to limit the ownership of various kinds of weapons such as assault rifles, machine guns and the like. The discussion on this topic has been historically illiterate and has failed to contemplate the fundamental reason for the ownership of guns. Guns are necessary for the public militia to protect the people from state tyranny. Hamilton noted this in the Federalist 29 and the Second Amendment makes this clear when it says that a well regulated militia is necessary for the defense of a free state.

Since the purpose of the right to bear arms is largely to protect the public from state tyranny, the public ought to have the right to own weapons that are at least equal to weapons that the state would probably use in an assault on the public to re-enforce tyranny. Thus, if tanks are likely to be used against the public in a rural area, the public militia ought to have the right to own tanks.

Rifles used against tanks would hardly be effective for the defense of a free state. All legal discussion that fails to balance the weapons that the government might use against the people with the threat that private ownership poses to the public is illegitimate and does violence to the Second Amendment. The government's probable use of a given class of weapons against the public ought to be the basis for the legality of gun ownership.

Every American Is Morally Obliged to Own a Gun

I have previously blogged about the Federalist 29 in which Alexander Hamilton discusses the militia. The militia, the body of citizens which could muster to protect the state and to protect the people, was necessary in Hamilton's view not only to protect the nation from external threat but also to protect the people from tyranny. It is evident that he saw widespread ownership of guns as a fundamental safeguard against governmental tyranny. The Second Amendment, part of the Bill of Rights, was adopted to placate not Federalists but anti-Federalists. There was no serious questioning of this view by any American, Federalist or anti-Federalist, during the time of the adoption of the Constitution. The Founders viewed the widespread ownership of guns as an important safeguard against tyranny then. The Second Amendment says that each American is responsible to own a gun. And the protection of freedom from the US government remains as fundamental today as it was in the time of Jefferson, Hamilton and Brutus.

The basis of American society is not the US government nor the Constitution, but freedom. Freedom adheres in the people. The United States can happily exist without the current form of federal government. But it cannot exist without freedom.

The Civil War fulfilled the American belief in freedom by freeing the slaves, but the war was fought not over freedom but over union. Slavery was not the main point for Lincoln and the North, and the freeing of the slaves a military tactic, not a moral statement. While the post-bellum period was unsuccessful in dealing with race, and the problems that resulted from the North's indifference and the South's resistance to equality reverberate today, the North's insistence on union changed the emphasis of American belief from freedom to union. The Republicans did not intend to dismiss laissez-faire, but by insisting on union they opened the door to enhancement of federal power. The federal government would remain limited in their view, but union, hence government, was to take precedence over individual and local choice. This was not new, as Andrew Jackson, the most laissez faire and localist of all presidents, had refused to permit nullification of tariffs by the states. Yet, the Civil War's magnitude and scope asserted centralization and federal power in a way that the founders had not intended. This change in psychology resulted from practical events, but it had philosophical ramifications that few at the time could have anticipated.

The Civil War's thrust toward centralization was re-enforced by the Progressives. This was a philosophical shift that elites advocated. The public was never entirely convinced by Progressivism, but has accepted the transformation of American government that Progressivism initiated. Nevertheless, the fundamental foundation of freedom as the cornerstone of American life and the fundamental principles on which the Constitution was based were never rescinded. The changes that Progressivism and the New Deal wrought were applied piecemeal, and never fully understood. As a result, the question of the state's threat to freedom looms larger now than it has ever before. The central government's arrogation of power appears increasingly inconsistent with the principles on which a legitimate American government based on freedom can be based.

In order to be moral Americans must live up to their responsibilities. Americans have a moral responsibility to protect the public from tyranny. The federal government threatens tyranny. Ownership of a gun, then, is fundamental to each American's responsibility. The Second Amendment says that it is the moral responsibility of Americans to own guns. It is in this light that the Second Amendment needs to be understood:

"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

A free state is secure only if it is protected from tyranny and external threat. The public must own guns to protect itself from the tyrannical state as vested today in the federal government.

Hamilton on Pecuniary Bounties

Pecuniary bounties or direct subsidies to private firms have been a hot topic under the Bush and Obama administrations. In his Report on Manufactures of December 5, 1791Secretary of Treasury Alexander Hamilton advocated subsidies or bounties as a useful tool to promote manufacturing. He proposed bounties in the first Congress. But Jefferson's Democratic Republicans opposed them, as did Madison, Hamilton's erstwhile Federalist ally (see Elkins and McKitrick, The Age of Federalism, for a careful description).

Hamilton believed that bounties can subsidize domestic manufacturers with a smaller price increase than tariffs alone. The reason is that while a $1 tariff raises prices of imports by $1, a 50 cent tariff coupled with a 50 cent bounty provides the same subsidy to the manufacturer (the tariff being transferred to the manufacturer) but raises prices by only 50 cents.

He writes* "Bounties are sometimes not only the best but the only proper expedient for uniting the encouragement of a new object of agriculture with that of a new object of manufacture. It is the Interest of the farmer to have the production of the raw material promoted, by counteracting the interference of the foreign material of the same kind. It is the interest of the manufacturer to have the material abundant and cheap."

However (p. 171), "the continuance of bounties on manufactures long established must almost always be of questionable policy. Because a presumption would arise in every such Case, that there were natural and inherent impediments to success. But in new undertakings they are as justifiable, as they are oftentimes necessary."

Thus, while Hamilton would probably have supported the current banking system in accordance with his views on funded debt to stimulate economic activity and his support for other government policies that subsidize business, he might have opposed the bailout as a subsidy to a lost cause, long established businesses like Citigroup and Bank of America that are not capable of managing themselves.

*Alexander Hamilton, "The Reports of Alexander Hamilton", edited by Jacob E. Cooke. New York, Harper and Row, 1964. p. 169.

Alexander Hamilton on the Presidential Administration of Barack Obama

"The debt...may be swelled to such a size, as that the greatest part of it may cease to be useful as a Capital, serving only to pamper the dissipation of the idle and dissolute individuals: as that the sums required to pay the Interest upon it may become oppressive, and beyond the means which a government can employ, consistently with its tranquillity, to raise them; as that the resources of taxation to face the debt may have been strained too far to admit of extensions adequate to exigencies which regard the public safety.

"Where this critical point is, cannot be pronounced, but it is impossible to believe that there is not such a point."

----Alexander Hamilton, Report on Manufactures, December 5, 1791.

Alexander Hamilton's Socialism for the Rich

Alexander Hamilton was the first American "progressive". He advocated government intervention on behalf of economic development. His Federalist philosophy was overthrown in the presidential election of 1800 when Thomas Jefferson and the Democratic Republican Party (antecedent to both today's Democrats and Republicans) was elected.

Hamilton's socialism was an elitist socialism, much like the Bush-Obama socialism of today. Hamilton proposed the infant industry argument that in order for firms to compete, government protection and subsidy were necessary. In his Report on Manufactures, December 5, 1791, which Hamilton presented to Congress in his role as first Secretary of Treasury, he wrote of start ups of manufacturing firms:

>"Experience teaches, that men are often so much governed by what they are accustomed to see and practise, that the simplest and most obvious improvements, in the most ordinary occupations, are adopted with hesitation, reluctance and by slow gradations. The spontaneous transition to new pursuits, in a community long habituated to different ones, may be expected to be attended with proportionally greater difficulty. When former occupations ceased to yield a profit adequate to the subsistence of their followers, or when there was an absolute deficiency of employment in them, owing to the superabundance of hands, changes would ensue; but those changes would be likely to be more tardy than might consist with the interest either of individuals or of the Society. In many cases they would not happen, while a bare support could be insured by an adherence to ancient courses; though a resort to a more profitable employment might be practicable. To produce the desirable changes as early as may be expedient, may therefore require the incitement and patronage of the government.

"The apprehension of failing in new attempts is perhaps a more serious impediment. There are dispositions apt to be attracted by the mere novelty of the undertaking--but these are not always the best calculated to give it success. To this, it is of importance that the confidence of cautious sagacious capitalists, both citizens and foreigners, should be excited. And to inspire this description of persons with confidence, it is essential, that they should be made to see in any project which is new, and for that reason alone, if for no other, precarious, the prospect of such a degree of countenance and support from government, as may be capable of overcoming the obstacles, inseparable from first experiments.

"The superiority antecedently enjoyed by nations, who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle, than either of those, which have been mentioned, to the introduction of the same branch into a country in which it did not before exists. To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity in the one or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government.

"But the greatest obstacle of all to the successful prosecution of a new branch of industry in a country, in which it was before unknown, consists as far as the instances apply in the bounties and premiums and other aids which are granted, in a variety of cases, by the nations, in which the establishments to be imitated are previously introduced. It is well known (and particular examples in the course of this report will be cited) that certain nations grant bounties on the exportation of particular commodities , to enable their own workmen to undersell and supplant all competitors in the countries to which those commodities are sent.

"Hence the undertakers of a new manufacture have to contend not only with the natural advantages of a new undertaking, but with the gratuities and remunerations which other governments bestow To be enabled to contend with success, it is evident that the interference and aid of their own governments are indispensable.

"Combinations by those engaged in a particular branch of business in one country, to frustrate the first efforts to introduce it into another, by temporary sacrifices, recompensed perhaps by extraordinary indemnifications of the government of such country, are believed to have existed, and are not to be regarded as destitute of probability. The existence or assurance of aid from the government of the country, in which the business is to be introduced, may be essential to fortify adventurers against the dread of such combinations--to defeat their efforts, if formed and to prevent their being formed, by demonstrating that they must in the end be fruitless."

The arguments for protectionism have not changed much since Hamilton. He was aware of the ideas of Adam Smith, but did not believe them.

Hamilton's socialist plan of course extended to banking. He had argued for a central bank, and strongly believed in the value of a "funded debt" to serve as capital for investment in manufacturing. The logic of this is the same as that of Keynesian economics 140 years later. Hamilton derived this mercantilist concept from Hume. Unlike the Keynesian economists, Hamilton was frank in his opinion that the wealthy need to be subsidized.

"The effect of a funded debt, as a species of Capital, has been noticed upon a former Occasion, but a more particular elucidation of the point seems to be required by the stress which is here laid upon it. This shall accordingly be attempted.

"Public funds answer the purpose of Capital, from the estimation in which they are usually held by Monied men, and consequently from the Ease and dispatch with which they can be turned into money. This capacity for prompt convertibility into money causes a transfer of stock to be in a great number of Cases equivalent to a payment in coin. And where it does not happen to suit the party who is to receive to accept a transfer of Stock, the party who is to pay is never at a loss to find elsewhere a purchaser of his Stock, who will furnish him in lieu of it, with the Coin of which he stands in need.

"Hence in a sound and settled state of public funds, a man possessed of a sum in them can embrace any scheme of business which offers as much confidence as if he were possessed of an equal sum in Coin.

"This operation of public funds as capital is too obvious to be denied; but it is objected to the Idea of their operating as an augmentation of the Capital of the community, that they serve to occasion the destruction of some other capital to an equal amount.

"The Capital which alone they can be supposed to destroy must consist of--

"The annual revenue, which is applied to the payment of Interest on the debt, and to the gradual redemption of the principal--The amount of the Coin which is employed in circulating the funds, or, in other words, in effecting the different alienations which they undergo...

"...it is evident that the Capital destroyed to the capital created, would bear no greater proportion than 8 to 100. There would be withdrawn, from the total mass of other capitals a sum of eight dollars to be paid to the public creditor; while he would be possessed of a sum of One Hundred dollars, ready to be applied to any purpose, to be embarked in any enterprise, which might appear to him eligible. Here, then, the Augmentation of capital, or the excess of that which is produced, beyond that which is destroyed, is equal to Ninety two dollars.

"To this conclusion it may be objected, that the sum of Eight dollars is to be withdrawn annually, until the whole hundred is extinguished, and it may be objected, that the sum of Eight dollars is to be withdrawn annually, until the whole hundred is extinguished, and it may be inferred, that, in process of time a capital will be destroyed equal to that which is at first created.

"But it is nevertheless true, that during the whole of the interval between the creation of the Capital of 100 dollars, and in reduction to a sum not greater than that of the annual revenue appropriated to its redemption--there will be a greater active capital in existence than if no debt had been Contracted. The sum drawn from other Capitals in any one Year will not exceed eight dollars; but there will be at every instant of time during the whole in question, a sum corresponding with so much of the principal as remains unredeemed, in the hands of some person or other, employed or ready to be employed in some profitable undertaking. There will therefore constantly be more capital, in capacity to be employed, than capital taken from employment. The excess for the first year has been stated to be Ninety-two dollars it will diminish yearly, but there always will be an excess until the principal of the debt is brought to a level with the redeeming annuity, that is, in the case which has been assumed by way of example, to eight dollars...

"Hitherto, the reasoning has proceeded on a concession of the position that there is a destruction of some other capital, to the extent of the annuity appropriated to the payment of the Interest and the redemption of the Principal of the debt; but in this, too much has been conceded. There is at most a temporary transfer of some other capital, to the amount of the Annuity, from those who pay to the Creditor, who receives; which he again restores to circulation to resume the offices of a capital. This he does either immediately by employing the money in some branch of Industry, or mediately by lending it to some other person, who does so employ it...

"The force of Monied Capital which has been displayed in Great Britain, and the height to which every species of industry has grown up under it, defy a solution from the quantity of coin which that kingdom has ever possessed. Accordingly it has been Coeval with its funding system, the prevailing opinion of men of business, and of the generality of the most sagacious theorists of that country, that the operation of the public funds as capital has contributed to the effect in question. Among ourselves appearances thus far favor the same Conclusion. Industry in general, seems to have been reanimated. There are symptoms indicating an extension of our Commerce. Our navigation has certainly of late had a Considerable spring and there appears to be in many parts of the Union a command of capital, which till lately since the revolution at least was unknown...

"In the question under discussion it is important to distinguish between an absolute increase of Capital or an accession of real wealth, and an artificial increase of Capital as an engine of business, or an an instrument of industry and Commerce. In the first sense, a funded debt has no pretensions to being deemed an increase of Capital; in the last, it has pretensions which are not easy to be controverted. Of a similar nature is bank credit and in an inferior degree every species of private credit.

"But though a funded debt is not in the first instance an absolute increase of Capital, or an augmentation of real wealth; yet by serving as a new power in the operation of industry, it has within bounds a tendency to increase the real wealth of a Community, in like manner as money borrowed by a thrifty farmer, to be laid out in the improvement of his farm, may, in the end, add to his Stock of real riches."

Hamilton on Banks, Paper Money and the First Subprime Bailout

Alexander Hamilton began the tradition of big government conservatism. His followers have included Henry Clay, Abraham Lincoln, Theodore Roosevelt, Nelson Rockefeller and George W. Bush. In today's nomenclature, Hamilton was the first "Republican". In other words, the Republicans have been traditionally the party of inflation, and it was only intermittently, during the century from 1871 to 1971, that the Republicans could claim to support hard money. For the first 25 years of that century, the Democrats too were a hard money party. It was only by default that the Republicans became associated with monetary stability in 1896, and they have always been wobbly supporters. The Benjamin Strong Fed was inflationary, with the approval of the Harding and Coolidge administrations. The deflation of the Hoover administration was a product of Fed policy and had little to do with Hoover. Yet, the segment of Americans who are able to grasp this issue and are anti-inflation mostly remain within the Republican party. perhaps the greatest political betrayal of the late twentieth century was Ronald Reagan's decision to adopt Keynesian (supply side) deficit and expansionist policies despite his mandate from the Reagan Democrats. Both American political parties today descend from Hamiltonian centralizing, banking and rationalizing theories. Those who are skeptical of central economic planning, big government, Keynesian economics and the ability of academics to foresee progress have nowhere to turn. Both parties are marionettes of Wall Street.

Hamilton argued for federalism and centralization of government, a central bank and for banking in general. He was an elitist who believed in the ability of bankers and merchants to make use of artificially created money in the form of bank notes to expand the economy, and this theory provided the fulcrum on which his advocacy of the Bank of the United States pivoted. He argued that bankers can rationally assess risk. He makes the same aarguments that we hear on CNN and read in the New York Times today. The themes that Hamilton emphasized, paper money, central banking, rationality of business strategy, the importance of fractional reserve banking to stimulating the economy and the ability of the business elite to build the economy were paradigms for subsequent Whig, progressive, and New Deal ideologies, of which George W. Bush and Barack Obama are the latest manifestations.

There were two strange turns in the history of the elitist, centralizing ideology. At first, Jefferson and then Jackson reacted to the Federalist-Whig philosophy of Hamilton, Clay (and then Lincoln) by advocating decentralization and hard money. Thus, decentralization and hard money were benign views that represented the values of the workman. The loco focos and workingmen's parties of the 1820s and 1830s reflected the Jacksonian resentment of banks, business monopolies, internal improvements (the profits from which went into the pockets of elite Whig stockholders) and the central bank.

In the Gilded Age, the laissez-faire ideology became associated with the elite. This was a reversal. It occurred because laissez-faire became associated with social Darwinism in the ideas of Spencer and William Graham Sumner. Thus, the Mugwump Republicans carried forward the Republican centralizing and elitist views but adopted the laissez-faire and hard money philosophy of Jefferson and Jackson because it fit the ideas of social Darwinism. This deprived the hard money position of its benign, pro-worker foundation. So by adopting laissez-faire the Republicans weakened the force of its claims and destroyed it. They did this by claiming that only the fittest would benefit from hard money. This opened the door for the Democrats to claim that central banking, the chief elitist tool, was Democratic. Then, Progressivism removed the laissez-faire element from the Gilded Age's rationalizing philosophy, retaining the traditional Hamiltonian claims of rationality of business and banking elites, the importance of a centralized state, the virtue of elite experts, and centralized banking.

In 1790 Hamilton, as the first Secretary of the Treasury, wrote his Report on Public Credit and Second Report for Further Provision Necessary for Establishing Public Credit. He also wrote a report on the Constitutionality of the Bank and Report on Manufactures. The issues in the Report on Public Credit directly concerned the question of centralization and of establishing a central bank. The questions that faced the nation at that point concerned federal assumption of the states' revolutionary war debts and how such assumption would be arranged; and the question of whether the federal government should honor its debts at par, especially because speculators had purchased bonds at steep discounts; and the payment of interest on the outstanding debt. Hamilton argued for stabilizing the nation's credit record and honoring debts.

Hamilton argues for the importance of federal debt to the expansion of the US economy. He argues that a funded debt (which has been converted into bonds and for which there is funding) can expand economic activity because the debt can function as money and because debt will cause real estate prices to appreciate. The notion that inflation can help real estate investors finds legitimacy in Hamilton's report to the first Congress. He writes (p. 6):

"The effect, which the funding of the public debt, on right principles, would have upon landed property, is one of the circumstances attending such an arrangement, which has been least adverted to, though it deserves the most particular attention. The present depreciated state of that species of property is a serious calamity. the value of cultivated lands, in most of the states, has fallen since the revolution from 25 to 50 per cent. In those farthest south the decrease is still more considerable...This decrease in the value of lands, ought, in a great measure, to be attributed to the scarcity of money."

Thus, Hamilton was among the first Americans to recognize the possibility of monetary expansion to transfer wealth to the landed, the stock holder and the wealthy. This theme was to continue throughout American history except for the four post Civil War decades because of the ideology of social Darwinism. Notably, it was in the post Civil War period that the United States made the lion's share of its economic progress, beginning with the abolition of the bank in 1836 through the advent of Progressivism in 1905.

Hamilton's preference for centralization is explicit in Report on Public Credit. It is much better, he argues, for creditors to receive payments from one source than from the several states. If the central government takes responsibility "there can be no competition for resources" and "different states, from local considerations, would in some instances have recourse to different objects, in others to the same objects, in different degrees, for procuring the funds of which they stood in need. It is easy to conceive how this diversity would affect the aggregate revenue of the country....hence the public revenue would not derive the full benefit of those articles from state regulation." Moreover, "if all the public creditors receive their dues from one source, distributed with an equal hand, their interest will be the same. And having the same interests, they will unite in support of the fiscal arrangements of the government; As these, too, can be made with more convenience, where there is no competition: These circumstances combined will insure to the revenue law a more ready and more satisfactory execution."

It was important to Hamilton to establish the national credit and he was certainly concerned with the interests of creditors, whom he saw as furthering national goals. To this end, Hamilton emphasized the importance of repaying the national debt, including interest. In the end there was a slight reduction in interest (see Elkins and McKitrick, The Age of Federalism.) But the nation did not make good on the currency it used to pay for the Revolutionary War, the Continentals. The federal government allowed them to become worthless.

In Second Report on the Further Necessity for Establishing Public Credit, Hamilton argues for a central bank and extols fractional reserve banking. Little has been added since Hamilton.

One passage that caught my eye might be extended to the subprime crisis and every other boom and bust bubble that has occurred since, including the one that occurred in 1790 in New York with respect to speculation in the stock of the First Bank of the United States:

"It may be said that as Bank paper affords a substitute for specie, it serves to counteract that rigorous necessity for the metals...and...it would retard those oeconomical and parsimonious reforms in the manner of living, which the scarcity of money is calculated to produce...

"There is perhaps some truth...but...of a nature rather to form exceptions to the generality of the conclusion, than to overthrow it...a situation in which a too expensive manner of living of a community compared with its means, can stand in need of a corrective, from distress of necessity, is one which perhaps rarely results, but from extraordinary and adventitious causes, such for example, as a national revolution, which unsettles all the established habits of a people, and inflames the appetite for extravagance, but the illusions of an ideal wealth, engendered by the cause. There is good reason to believe that where the laws are wise and well executed, the oeconomy of a people will, in the general course of things, correspond with its means."

Throughout the two reports on credit, Hamilton emphasizes the rational capacity of bankers and merchants and their sound judgment (e.g., "Those who are most commonly creditors of a nation are, generally speaking, enlightened men...", p. 3, Report Relative to Public Credit).

Hamilton argues vigorously for the positive effects of monetary expansion and a central bank. He argues that "Gold and Silver, when hey are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead Stock; but when deposited in Banks, to become the basis of a paper circulation...they then acquire life." By depositing money in a bank, merchants enable others to borrow and "It is a well established fact, that Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold and Silver. The extent of the possible excess seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one."

This rousing defense of fractional reserve banking presaged two centuries of booms and busts, the most recent being the multi-trillion dollar transfer of wealth to wealthy bankers from the general economy and an aggressive monetary expansion.

Hamilton's ideas were rejected in the early nineteenth century but subsequently adopted by both political parties in the twentieth. Most progress occurred in the 19th. The twentieth century was one of reaction and decline.

Hamilton on Federalism: The Federalist Papers No. 32-34

The Federalist Nos. 32 and 33 concern taxation. The constitution did not aim to consolidate the states into a single whole. Rather, "the plan of the convention aims only at a partial union or consolidation". State sovereignty would be "alienated" only when the Constitution granted an exclusive authority to the Union; where it gave authority to the Union but prohibited the States from exercising similar authority; and where a power granted expressly to the Union would be contradicted if similar authority were given to the states. The states and the federal government have coequal powers to tax except for exports and imports. Under the constitution the federal government has all powers that are "necessary and proper" for implementing the powers that the Constitution grants it, and "the Constitution and the laws of the United States...shall be the supreme law of the land."

Hamilton asks in No. 33: "Who is to judge of the necessity and propriety of the laws to be passed for executing the powers of the Union?" The national government "must judge in the first instance of the proper exercise of its powers...If the federal government should overpass the just bounds of its authority and make a tyrannical use of its powers, the people, whose creature it is, must appeal to the standard they have formed, and take such measures to redress the injury done to the Constitution as hte exigency may suggest and prudence justify." Hamilton does not introduce the Supreme Court in this discussion.

"...a law (passed by the Union) for abrogating or preventing the collection of a tax laid by the authority of a State (unless upon exports and imports) would not be the supreme law of the land, but a usurpation of power not granted by the Constitution...It is to be hoped and presumed, however ,that mutual interest would dictate a concert in this respect which would avoid any material inconvenience. The inference from the whole is that the individual States would, under the proposed Constitution, retain an independent and uncontrollable authority to raise revenue to any extent..."

In No. 34 Hamilton reemphasizes that "the particular states under the proposed Constitution, would have coequal authority with the Union in the article of revenue, except for duties on imports." But the states have more limited needs for revenue than does the federal government, in Hamilton's view. Future contingencies respecting the federal government would be unlimited, especially because of the threat of European wars. State budgets would likely be no greater than 200,000 pounds, but the potential exigencies of the union were likely unlimited.

He got the the 200,000 pounds part wrong, but forecasted the federal budget with uncanny accuracy. The point is that there is a partnership between state and federal governments, and in Hamilton's elitist view, the central government was to be more dominant than the states. The states need from one tenth to one twentieth of the resources, the federal government from nine tenths to nineteen twentieths. The ratio isn't as lopsided as Hamilton thought it would be, but he anticipated Progressivism nicely.

Thus, he argues for a concurrent jurisdiction in the article of taxation, a partnership between the States and the Union.

Alexander Hamilton on the Second Amendment

Hamilton's Federalist No. 29 is about the issue of regulating militias. On the one hand, it was necessary to form a "well regulated" militia in order to reduce the need for a standing army. Thus, an armed population was necessary in order to form a militia. As well, Hamilton argued that a select corps of militia ought to be formed, and that in order to eliminate the threat that the militia might pose to freedom, it was necessary for the public to be able to stop any attempt of the government to suppress freedom and therefore important that the public at large should hold firearms. This argument is clear in the Federalist 29. Those who argue just one half of the equation, that the arms were necessary to form the militia and deny that they were necessary to defend against the potential for a government assault on freedom are simply uninformed about the history of Federalism and the liberal spirit in which the United States was founded. Arguably the public can and ought to, in the view of the founders, confront attempts to suppress the ownership of firearms. A Supreme Court that adjudicates in favor of the suppression of the right to bear arms has completely lost touch with the Constitution and is no longer a constitutional body.

Hamilton writes in Federalist 29:

"The attention of the government ought particularly to be directed to the formation of a select corps of moderate size, upon such principles as will really fit it for service in case of need. By thus circumscribing the plan, it will be possible to have an excellent body of well-trained militia ready to take the field whenever the defense of the State shall require it. This will not only lessen the call for military establishments, but if circumstances should at any time oblige the government to form an army of any magnitude that army can never be formidable to the liberties of the people while there is a large body of citizens, little if at all inferior to them in discipline and the use of arms, who stand ready to defend their own rights and those of their fellow-citizens. This appears to me the only substitute that can be devised for a standing army, and the best possible security against it, if it should exist."

Those historians and political scientists who argue against American exceptionalism would do well to consider that few other major polities have respected the individual sufficiently to consider private ownership of firearms a bulwark against tyranny. In nations like Russia, France, Germany and Italy, guns are routinely regulated. Backward-thinking mercantilists who have cheered Hitler and Stalin, now advocate for a botched interpretation of the Second Amendment that would enhance their own power and the power of government that represents economic elites to suppress freedom.

The Federalists' Error: National Size and the Evolution of Faction: Progressivism's Hamiltonian Root

Montesquieu had argued that only small republics are possible, but Madison and Hamilton argued the reverse. Their claim was that small republics lead to conflict among factions, but that large size reduces factional conflict. In the Federalist No. 10 Madison argues:

"The question resulting is whether small or extensive republics are most favorable to the election of proper guardians of the public weal; and it is clearly decided in favor of the latter by two obvious considerations..."

The first, in Madison's view, is that because there is a greater absolute number of capable representatives in a large than in a small republic but because legislatures are limited in size, "the number of representatives in the two cases not being in proportion to that of the constituents, and being proportionally greatest in the samll republic, it follows that if the proportion of fit characters be not less in the large than in the small republic the former will present a greater option and consequently a greater possibility of a fit choice."

Also, in Madison's view, "as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practise with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to center on men who possess the most attractive merit and the most diffusive nad established characters."

However, Madison tempers his argument in the next paragraph by noting that "by enlarging too much the number of electors, you render the representative too little acquainted with all their local circumstances...as by reducing it too much you render him unduly attached to these, and too little fit to comprehend and pursue great and national objects.."

The second factor favoring large scale or size, in Madison's view is "the greater number of citizens and extent of territory which may be brought within the compass of republican than of democratic government; and it is this circumstance principally which renders factious combinations less to be dreaded in the former than in the latter. The smaller the society, the fewer probably will be the distinct parties and interests composing it; the fewer the distinct parties and interest, the more frequently will a majority be found of the same party; and the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily they will concert and execute their plans of oppression. Extend the sphere and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens."

In the Federalist No. 27, Hamilton argues:

"Unless we presume at the same time that the powers of the general government will be worse administered than those of the State governments, there seems to be no room for the presumption of ill will, disaffection or opposition in the people. I believe it may be laid down as a general rule that their confidence in and obedience to a government will commonly be proportioned to the goodness or badness of its administration. ..the general government will be better administered than the particular governments: the principal of which are that the extension of the spheres of election will present a greater option, or latitude of choice, to the people...And that on account of the extent of the country from which those, to whose direction they will be committed, will be drawn, they will be less apt to be tainted by the spirit of faction, and more out of the reach of those occasional ill humors or temporary prejudices and propensities which in smaller societies frequently contaminate the public deliberations, beget injustice and oppression of a part of the community, and engender schemes which, though they gratify a momentary inclination or desire, terminate in general distress, dissatisfaction and disgust."

First, notice that Hamilton's argument in favor of the expertise of the federal government is precisely the one used by the Progressives from the 1890s through the 1930s in arguing for enhancement of federal power. Hamilton argued that central government would be more rational, and the Progressives argued that centrally placed experts would be able to administer anti-trust and other regulatory systems more rationally.

Naturally, the federalist system works much better than the Anti-Federalists of the 1780s feared. However, it is also true that as the Progressives' centralizing strategy of enhancing the federal government has developed, faction has played an increasing role. Not necessarily the kind of faction about which the Federalists and the Progressives through Herbert Hoover were often concerned such as agricultural versus manufacturing interests, or labor versus management, i.e., broad social groupings, but rather special interests.

Mancur Olson* posed the argument that small rather than large factions or groups are effective in the regulatory process. Large size stimulates special interest involvement in the legal and regulatory process to the benefit of small factions. The is counter-intuitive, and Hamilton and Madison did not have the advantage of as much historical evidence as Olson had. The reason is that as the scope of the republic gets larger, the benefit from special interest lobbying also gets larger. The larger the benefit, the greater the incentive for specific firms and industries to form factions and lobby. Larger size reduces the cost per citizen of rent extraction. Large size makes the formulation for scattered and poorly coordinated factions difficult, but corporations are compact. Corporations did not exist in the Federalist era. Thus, history revealed the opposite trend: the centralization of power in the Federalist era led to special interest factions having greater power than they had in the more decentralized nineteenth century. Of course, the corporate form of organization, which flowered in the late nineteenth century contributed to this, but so did the Progressives emphasis on expertise in a centrally situated state. The economic incentives are powerful enough that special interests are able to overcome the best efforts (if there are indeed such efforts) of centrally placed experts. Moreover, the factions are able to employ experts that are superior to the government's resulting in all too fequent cases of regulatory capture by corporations.

Decentralizing the economy would reduce the incentives for lobbying and raise the costs of lobbying. As a result, the advantage that corporations and small groups that face high benefits from lobbying gain in a more centralized federal system is likely to be reversed. First, the benefit will be on average 1/50th the size it currently is for each lobbying episode. Second, the costs of lobbying will be 50 times greater because there are 50 states. Clearly, lobbying will become more expensive and more complex, making regulatory influence more difficult.

Although Hamilton and Madison may have been right in the environment in which they lived, where there were no large corporations, where the entire US population was less than four million and where benefits from lobbying were negligible by today's standards, in today's world lobbying functions like a competitive auction. To the extent that it interferes with democracy, raising the transaction costs of lobbying and reducing the benefit from each lobbying episode will enhance democracy and limit the private gains at public expense that lobbyists can accrue.

Hamilton on the Limits of Decentralization

Federalism has always meant a partnership among the states and between the states and the federal government. Just as there are certain public goods that are indivisible so that individuals cannot purchase them and so devolve upon government, so there are federal goods that the states cannot divide and pay for individually and so must devolve upon the federal government. Defense and foreign policy are indivisible not only among individuals but also among the states. In an economy with an enhanced level of decentralization as existed in the late 18th and 19th centuries it is beneficial for defense and foreign policy to be handled by the federal government. In the Federalist Papers No. 25 Hamilton wrote this:


"It happens that some States, from local situation, are more directly exposed. New York is of this class. Upon the plan of separate provisions (of defense), New York would have to sustain the whole weight of the establishments requisite to her immediate safety, and to the mediate or ultimate protection of her neighbors. This would neither be equitable as it respected New York, nor safe as it respected the other States. Various inconveniences would attend such a system. The States, to whose lot it might fall to support the necessary establishments, would be as little able as willing for a considerable time to come to bear the burden of competent provisions. The security of all would thus be subjected to the parsimony, improvidence or inability of a part. If the resources of such part becoming more abundant and extensive, its provisions should be proportionally enlarged, the other States would quickly take the alarm at seeing the whole military force of the Union in the hands of two or three of its members...Reasons have been already given to induce a supposition that the State governments will too naturally be prone to a rivalship with that of the Union, the foundation of which will be the love of power; and that in any contest between the federal head and one of its members, the people will be most apt to unite with their local government..."

Thinking of subsequent events, the Civil War and 9/11 for instance, Hamilton's vision was accurate, not just about federalism but about New York as well.

Stanley Elkins's and Eric McKitrick's Age of Federalism

Stanley Elkins and Eric McKitrick. The Age of Federalism. New York: Oxford University Press, 1993. 925 pages. Available at Amazon.com for $25.51, used and new from $6.88.

This is an important history book. It should be required reading for all Americans as we cannot understand the political dynamic in our country without a grasp of the Federalist period. Elkins and McKitrick pack this majestic study with rich and detailed information about the major players' biographies, the intellectual history behind Federalism and most of all the politics of the Federalist era.

My own interest in reading this book involved three questions: (1) to what degree is modern social democratic liberalism linked to the ideas of the Federalists; (2) to what degree has there been a continuity in the history of elitism in America (for example, were the Progressives and New Deal social democrats intellectually linked to the Federalists); and (3) to what degree did Federalism fail because of its emphasis on centralization or, to what degree did the Articles of Confederation fail because of excessive decentralization. The answer to (3) is that Federalism was replaced by Jeffersonian republicanism not on the basis on the workability or lack thereof of the Federalist ideology but because of the political ability of Jefferson and his followers, the political weaknesses and perhaps mental imbalance of John Adams and internecine fighting among the Federalists. The Federalists were elitist and did not learn how to cloak their elitism the way that the Progressives and social democrats did. With respect to substantive policy positions, the Federalists were very much in line with the Progressives and social democrats of the 20th century. The difference was the packaging, not the substance.

To answer the third question in another way, the Articles of Confederation had decentralized the American national government in ways that the Constitution corrected, and although the anti-statist philosophy of Jefferson and the anti-Federalists, rooted in English Whiggery, led to some initial opposition to the Constitution, there is little reason at this point to regard the problems with the Articles of Confederation as relevant to 21st century political debate. There was excessive decentralization, but that level of decentralization is not going to occur again unless there is a collapse of the United States government. In particular, the federal government did not have the power to tax the population directly under the Articles of Confederation and so could not have supported an army or federal law enforcement of any kind. As a result, a minor problem like Shay's rebellion was difficult to address. As well, the absence of a unified trade or defense policy made the nation weaker. Hamilton, Madison and Jay under the name of Publius addressed these questions in the Federalist Papers, and they are not controversial.

Foreign policy and defense are areas to which public goods arguments of the twentieth century apply. Thus, the Articles of Confederation did fail because of excessive decentralization, but the degree of decentralization was extreme by today's standards so that there is considerable room for decentralizing. It was, after all, Jefferson and the Republicans (or Democratic Republicans) who ultimately triumphed against the Federalists. In effect, the degree of federalism that Hamilton, Washington and John Adams implemented made a republican, anti-federalist policy workable. Even in the case of Jefferson's presidency (which is not the subject of this book) Jefferson famously took several federalist turns in areas like the Embargo Act and the Louisiana Purchase. Unless you are a dogmatic libertarian you will agree that a realistic federal government is useful and necessary.

The answers to the first and second questions begin with 18th century England, and the answer seems clear to me that there is a close link among Federalism, Progressivism and the social democratic ideology of the New Deal. Elkins and McKitrick do an excellent job of discussing the intellectual and political history. The intellectual roots of Federalism were in eighteenth century England, specifically in opposition to the ideas of Sir Robert Walpole and his "Court" ideology which the landed Whigs perceived to be corrupt. Walpole rose to power in the 1720s and built on institutions, especially the Bank of England, that had been established in the late 17th century.

"The system of public finance which thus had its birth during the reign of William III was subsequently brought to a state of considerable maturity and stability by the ministries of Walpole and Henry Pelham under the fist two Georges. But it also provided a key term in the emerging tensions of Court and Country: government money" (p. 14).

Elkins and McKitrick go on to write (p. 14):

"William III's policy of war against the France of Louis XIV, while it had the public's general support, proved vastly more expensive than anything of the sort the nation had previously undertaken. With current taxes and ad hoc private loans clearly inadequate to meet unprecedented and continuing costs, William's Treasury officials arranged with a group of London's wealthiest merchants for the first of a series of exceptionally large loans, to be secured by specific future taxes, in return for which the financiers would be granted a charter with monopoly privileges for certain forms of banking. The resulting Bank of England (1694) would handle government deposits, assist in organizing future borrowing by government, do private commercial business, and issue notes which could circulate as public currency. (Two other great chartered monopolies, the East India and South Sea Companies, would also for a time, handle large portions of the public debt.) This transformation in public finance brought long-term consequences in two broad spheres, one in the nation's business life and the other in the workings of government itself. A financial revolution of this order had of necessity to be accompanied by an administrative revolution.

"Extended periods of war, which would recur at more or less regular intervals throughout the eighteenth century, together with the growing public debt needed for maintaining them--a debt which nonetheless would prove more than adequately supportable by a very sound base of government credit--combined to bring into being a vastly expanded money market, new forms of investment, and a substantially new trading class concerned primarily with the movement of public securities and allied varieties of of negotiable paper, and with the kinds of transactions which made them profitable. Meanwhile, these same factors--an intermittent war footing and greatly increased sums available for expenditure by government--required a much expanded bureaucracy in the Treasury, Admiralty and War offices for handling them. The purposeful allocation of this patronage and other forms of royal preferment in such a way as to assure government of dependable majorities for its policies in the House of Commons was brought to something of a fine art by Sir Robert Walpole."

The opposition to the growing state, somewhat corrupt in making political appointments and expanding government (sound familiar?) was what Elkins and McKitrick call the "Country" philosophy of the Whigs. They characterize the debate between Walpole's centralizing strategy and the free market opposition as between Court and Country. Perhaps it is not coincidental that 280 years later the election of George Bush has been characterized as a contest between largely rural "red" states and largely urban "blue" states dominated by college educated professionals linked to the central banking system through employment in big business, Wall Street, government, health care and the legal system.

Elkins and McKitrick argue (p. 15):

"To the extent that the resulting Country opposition had a community of sentiment and purpose, it derived from a somewhat indeterminate mixture: a sense of exclusion, suspicion of the news kinds of power and new ranges of influence that money seemed to be opening up in London and Westminster, and hostility to men who appeared to be threatening the standards and values of which rural squires who had customarily seen themselves as the hereditary custodians. The Country voice, to which were added those of a variety of literary types, was loud in judgment.

"A perilous new era, as the Country saw it, had arrived, one in which the decisions and choices that most affected the nation's liberties, well-being and morals were more and more removed from the hands in which they had traditionally been safest--from the body that is, of the nation's landed proprietors--and were now lodged elsewhere and out of reach. Though the Glorious Revolution of 1688-9 had supposedly blown away the last traces of the divine right of kings, the Crown's executive power had nevertheless taken on a new weight, exercised in new ways and now appeared more pervasive and menacing than ever. The houses of Parliament could no longer be seen as an independent force in government or as the guardians of liberty and virtue in the nation's life, because the base upon which virtue in public service was presumed to rest--landed property and freehold tenure as the safest guarantee of independent judgment and action--was being sapped by the power of money. While the burden of a rising national debt and costs of continuing wars were being principally borne by the gentry through the land tax and excise, men in the City whose wealth was based not on the real value inherent in land but on the ephemeral values of paper and credit were enriching themselves at the nation's expense. Meanwhile, the royal ministry, with its enhanced latitude of initiative and action, and with this new class at its beck and call, was perverting the independent will of Parliament and purchasing its subservience to the Crown's own will through offices, honors, and perquisites. The sacred balance of the constitution, the venerable equilibrium of king, lords and commons, was teetering over an abyss of corruption."

"...Country spokesmen (Whigs) sounded a continuous call for a return to cheap, simple and honest government. They attacked the excise and land tax as impoverishing the nation, wars and funded debts for the same reason (and because both the burdens and the profits fell on all the wrong people), the standing army because of what it boded for the nation's liberties, and all these things because of their potential for corrupting the nation's virtue. Meanwhile, in defense of the balanced constitution and genuine mixed government they kept bringing up Place Bills to limit the Crown's patronage powers and to keep down the numbers of pensioners and placemen sitting in Parliament, and they called for more frequent elections in order to check the range of temptations laid before a too entrenched membership of the House of Commons...

"The response of Court-minded--or non-Country minded--publicists to the Country polemics was not made in a language that challenged in any fundamental way the principles the Country stood for. Indeed, they professed by and large to hold all the same principles, other things being equal. They put their emphasis, however, on the practical and technical considerations in government, foreign relations and economic life that must modify too literal construction of those principles..."

(Note Martin J. Sklar's article on Woodrow Wilson, "Woodrow Wilson and the Political Economy of Modern United States Liberalism" in Murray Rothbard's and Ronald Radosh's New History of Leviathan*. Much like the "Court's" strategy in 18th century England (p. 7):

"Perhaps the greatest source of historical misconception about Woodrow Wilson is the methodological compartmentalization of his mentality into two distinct components, the "moralistic" and the "realistic" or "commercialistic", as if they were discrete and mutually exclusive...wherever Wilson is perceived to have spoken or acted for 'the little man','democracy','liberty','individual opportunity'and the like, he was 'liberal' and moralistic; wherever he is preceived to have spoken or acted for corporate interests, economic expansion abroad and the like, he was 'conservative,' 'commercialistic,' 'expedient,' or realistic." Perhaps Wilson made the transition from Elkins's and McKitrick's Country to Court in his own lifetime.)

Going back to Elkins and McKitrick:

"...Court supporters could be as ready as anyone to deplore the burdens of war, to admit the possibility of the debt getting out of hand, or to acknowledge that standing armies needed watching, or to concede that money, commerce and virtue did not always go together. Nevertheless, the world of the eighteenth century had become immensely widened in scope for the interests of the British nation. A far-flung network of overseas trade, a colonial empire and a due weight in the power relations of Europe all required an active foreign policy and a professional military and naval establishment for giving effect to it. Moreover, such commitments and responsibilities would scarcely even be thinkable without a dependable system of public finance to support them.

"Thus while such received civic humanist values as those concerning luxury, corruption and virtue may not have been exactly repudiated, Court language certainly showed a decidedly revised slant on them. For instance, whatever the virtue once inherent in citizen militias in preference to standing armies, it was now out of the question to send off such a body to be destroyed in France or anywhere else. As for the public debt, the very size of it and the sound credit of the government on which it rested could be seen as testimony to the patriotism and good faith of the class willing to invest their money in it. And as the nation prospered and commerce flourished, luxury itself need not be thought of as leading to certain corruption if it brought refinement and amenity to the common life. So the emergent financial system, the government structure that administered it, the men of affairs who both supported and profited from it, and the beneficent consequences for the nation that could be claimed to flow from it were all defended in strong accents...

"...Virtually nobody was yet prepared to argue that regular parties might be a good thing; Court and Country each charged the other with stirring up faction; and many a country gentleman shied away from joining in any sustained and systematic effort to discredit the Court's established policies...

"...There appears to be a striking parallel between the Court-Country divisions of Georgian England and those that subsequently appeared in Washingtonian America.

"The principal concerns of the Country viewpoint in England re-emerged with an exceptional degree of similarity in the new republic and gave form at virtually every turn to the opposition temper which developed in very short order in response to the policies and actions of the new federal government...As the Hamiltonian program revealed itself over the next two years--a sizable funded debt, a powerful national bank, excises, nationally subsidized manufactures, and eventually even a standing army--the Walpolean parallel at every point was too obvious to miss. It was in resistance to this, and everything it seemed to imply, that the Jeffersonian persuasion was erected."

Jefferson's republican philosophy was largely a response to Hamilton's big government approach. According to it "a predominantly agricultural society was seen as the kind inherently most virtuous, the freest from corruption, the kind best constituted for resisting decay, and the one most to be desired for the American republic." At the root of Jefferson's emphasis on an agricultural America was a mistaken belief in Malthusian economics. In Jefferson's and Madison's view:

"What was above all to be avoided was an unholy alliance of commerce, manufacturing, money and public credit fostered by an intrusive and interfering government. The right kind of commerce could flourish in a world of free trade such as that envisioned by Adam Smith in his famous indictment of mercantilism. Such a world, as the Americans knew all too well, did not yet exist."

Hamilton aimed to implement the British "Court" system in America. But (p. 27) "it was Jeffersonian Republicanism and not Hamiltonian Federalism that would provide the opening political opener for the emergence and growth of nineteenth century middle class capitalism. In contrast to Federalism, which was elitist, Jeffersonian Republicanism was inclusive and it attracted small artisans in the cities as well as entrepreneurs. In contrast, Federalism was elitist and its elitism led to its rejection.

Elkins and McKitrick argue that historians have overlooked Hume's importance to Hamilton's thinking because Hume was not so famous an economist as Smith. Hume, they argued, emphasized development economics to a greater degree than did Smith (p. 107). They write:

"In the economic essays of David Hume, published in 1752, one finds a theoretical projection of the optimum conditions for economic development: a rudimentary but shrewd forerunner of what would in our own day come to be called developmental economics...Hume's case for a commercial society goes well beyond simply the argument for national strength. In 'Of Refinement in the Arts' he insists not only that such a (commercial) society allows a nation to be strong in times of crisis but that it is, by its very nature, a good society...Here then was a very strong case for an urban, commercial society. Its common man of virtue was not the yeoman farmer but the skilled city artisan...'Of Money' and 'Of Interest' explore the relation between the available supply of money at any given time and the general level of productivity of the entire economy. In them, Hume challenges certain common suppositions. An increase in the money supply, according to conventional wisdom, should lead to a directly proportional increase in prices. But this would only happen, says Hume, if 'every man' were to have the same sum 'slipt into his pocket in one night.' If however, the increase were concentrated in relatively few hands, the conditions would be created whereby it would be used to increase the community's real wealth, which is not money but the production of commodities. More physical goods would thereupon be available, and thus prices would not rise in direct relation to the increase of money. The same argument is made with regard to the interest rate, which in the eighteenth century was regarded as the barometer of the community's economic health. It was commonly supposed that the interest rate rose or fell in direct proportion to the amount of money available--the more plentiful, the lower the interest and vice versa--but Hume denies that it worked in any such direct or mechanical way. The key variable is again the degree and manner in which liquid capital is concentrated, the assumption being that it will be in the hands of the most energetic and enterprising men in the community. These are the merchants, the men who are able to exercise the most rational choices as to the alternative uses for money, and it is this very process of directing money into the most productive channels whether through direct investment or lending at interest--rather than the simple quantity of it--that governs the interest rate.

(p. 112) "...Hamilton knew that despite an enormous expansion of the public debt since 1750 England's credit was stronger than ever, and even more significantly, that its economic growth during that same period had been phenomenal. America, meanwhile, unlike Great Britain, did not intend to be plagued by a string of interminable wars, and could thus steadily reduce rather than increase its public debt. Meanwhile, a funded debt combined with a national bank would not only open for the United States sources of credit that were not previously available but would also provide a stable circulating currency that could be expanded to meet the requirements of trade. A generation of merchant-enterprisers would thereby be given access to the capital needed to realize the vast potential of a whole continent endowed with untapped resources and an industrious, expanding population. Even if the public debt were not reduced--of it were reduced only very slowly, which was probably what Hamilton had in mind--the taxes for supporting it would constitute a steadily diminishing burden on a population growing both larger and richer..."

"So central, indeed, was the public credit to the country's well being, as Hamilton saw it, that every means must be taken to protect it. A war with any country would threaten that credit; another serious dispute with Great Britain would destroy it...Another way of putting this would be that America's prosperity and that of Great Britain were inseparable.

Hamilton's principal design reached its completed form in "Report on the Public Credit of January 9, 1790". Elkins and McKitrick emphasize that Hamilton's mind projected fluidly.

(p. 115) "In Hamilton's scheme of things the dynamic force was beyond doubt the merchant class. These were the men who could and would use capital to create more capital--who would build the ships, develop the markets, provide the goods and make the decisions that affected the uses to which the community's resources would be put...Hamilton's faith in the capacity of the merchant class to perform a creative role in the nation's life could rest on a persuasion that this class was the receptacle for a wide variety of knowledge, experiment and ideas...Parallel with Hamilton's projection for America as a society was one for the United States as a government. The government required a sound system of taxation, undoubted stability of credit both national and international, an orderly funding of the several complicated layers of public indebtedness that had grown out of the Revolution."

Many of the early Federalist debates concerned how to "fund" the public revolutionary war debt. "The capital created by a funded debt to become 'an accession of real wealth rather than merely an 'artifical increase of Capital', it must serve "as a New power in the operation of industry' and this would occur only if it went through the hands of men who would use it to build ships and factories, launch business ventures and augment commerce.

Key problems were whether to honor the Continental debt at par, whether to assume the state war debts, how to do the accounting for and settle the Revolutionary War accounts among the states. Hamilton proposed that the federal government assume the states' war debts and a settlement of accounts whereby no state could lose (p. 120). Honoring the debt at par or 6 percent was not possible, but Hamilton proposed a compromise of 4% interest, lowering the interest rate somewhat but to a moderate degree. He set up an excise tax on whiskey to accomplish this. A national bank would provide a dependable ciruclating currency and would manage the financial transactions of the Treasury (p. 123). Moreover, relations with Great Britain would be improved in order to improve trade and so make tariff income more stable.

The authors go on to write (p. 227) : "We cannot account with final precision for all the origins of Hamilton's bank plan, though certain of the main sources are clearly enough identified. In this instance, unlike that of his first Report on Public Credit, Hamilton's direct theoretical inspiration did not come from David Hume. Hume recognized that banks could be useful in providing credit for an expanding economy, but he also believed that they were an inflationary influence and that they encouraged unduly the export of specie. Hamilton could look, however, to a number of recognized authorities such as Postlethwayt and and Adam Anderson, or a favorable theoretical exposition of banks and their functions. He made considerable use of Adam Smith...There was a very close correlation, moreover, between Hamilton's final plan and the charter of the Bank of England, and in all likelihood he worked with a copy of the British statute at his elbow." One of the chief influences on Hamilton was William Pitt (p. 227-8).

The bank's opponents made arguments similar to those of libertarians like Howard S. Katz today (p. 229): "'This bank,' said Stone of Maryland, "will raise in this country a moneyed interest at the devotion of Government; it may bribe both States and individuals.' Jackson of Georgia thought it was 'calculated to benefit a small part of the United States, the mercantile interest only..' He called it a 'monopoly...of the public oneys for the benefit of the corporation to be created. But the kind of country-party fundamentalism with regard to banks that was to become so prominent in the politics of a lter generation was not nearly so sharp here. Men were against it but were not entirely sure why..."

Jefferson wanted to augment the number of representatives in the House since "the only corrective of what is corrupt in our prsent form of government will be the augmentation of the numbers in the lower house so as to get a more agricultural representation, which put that interest above that of stock jobbers." In 1791-2 the Republican opposition to the Federalists emerged "in reaction to the rising influence of the Treasury over Administration policy" (pp. 257-8). "Madison's attempt to prevent the establishment of a national bank" had not been fruitful. "Only two major items remained to complete Hamilton's program. One was congressional approval of a plan for direct assistance to domestic manufacturing through a system of tariffs and bounties. The other was the establishment of a model manufacturing corporation--financed and organized on a sufficient scale that it might take full advantage of government bounties and new labor-saving machinery, and compete successfully with European manufactures...Hamilton's subsequently famous Report on the Subject of Manufactures was submitted to Congress on December 5, 1791. Hamilton took the occasion to prepare a major policy statement, a labor which occupied him for well over a year. As much a work of theory as a series of particualr recommendations, the Report on Manufactures was intended to establish the ground for a systematic fostering of industry by government...In his commitment to the advantages of a mixed economy, together with his concern for the productivity of the nation as a whole there is a ring of modernity. The one writer of the eighteenth century whose experience and perceptions were in certain ways analogous to Hamilton's was David Hume...The Report on Manufactures, with its acute sensitivity to the many benefits that increased manufacturing might bring to an overwhelmingly agricultural economy, is in some respects the most Humean of all Hamilton's papers."

Hamilton argued against both Jefferson's and the Physiocrats' emphasis on agriculture and against Smith's laissez faire argument (p. 259). Hamilton argued that laissez faire overlooks "the deadening force of habit and custom. People do not easily make a spontaneous transition to new pursuits, nor are cautious sagacious capitalists normally disposed to sink their money in uncertain ventures. Thus, the incitement and patronage of government were needed both to overcome old habits and to embolden reluctant investors.

"The theoretical sections of the report reaches its culmination with Hamilton's effort to show that scarcity of capital is not a valid objection to a wide-scale launching of industrial enterprise. Among the remedies are the introduction of banks, with their powerful tendency to extend the active Capital of Country, as well as the attractions of America for foreign investors, both having already been demosntrated by experience. Hamilton's principal counter-arguemnt, however, is a defense of the funded debt, the existence of which relieves from all inquietude on the score of want of Capital. He insists that the funded debt, though not in itself an augmentation of the country's real wealth, is nonetheless a powerful instrument for bringing such augemntation about. The taxes required for servicing the debt may, if the debt is not excessive, serve as a stimulus to greater exertions throughout the community...

"Hamilton now makes the general assertion -- which in a modern developing state would be taken as a matter of course -- that a mixed economy is ' more lucrative and prosperous' than a purely agricultural one...Hamilton concludes by recommending a combination of tariffs, bounties and premiums on specific manufactured products. The proposals themsevles were modest, but the overall intention was an explicit policy of active government support of industrial growth for the benefit of the entire economy...It would be...misleading...to picutre Hamilton as conjuring up a kind of 'neo-mercantilism'. Mercantilism was a conscious policy of controlling the economy for purposes of state; Hamilton's purpose was a temporary stimulation of key sectors in an effort to mobilize the energies of the entire community...His ends were...complex and wnet well beyond simpleprotection.

Madison, who opposed Hamilton's statist governmental structure, began his opposition in Congress by attacking a bill that came up on February 3, 1792 for the encouragement of cod fisheries. "The word 'bounty' set off an uproar" (p. 276) as monopolistic interferences in the marketplace. As well, speculation in stock of the Bank of the United States led to the Panic of 1792 and increasing scepticism about Federalism.

"Duer and Macomb had secretly made it up between them that their partnerhsip would be of one year's duration and that they would 'be concerned in making Speculations in the Debt of the United States and in the Stock of the Bank of the United States and Bank of New York to the 31 December 1792.' They anticipated a rising market and may even have attempted to corner it. They made extensive contracts for future delivery and to pay for them began borrowing sums large and small at extravagant interest, from all classes in the city. They also laid hands on most of the cash surplus of the SUM (Society for Establishing Useful Manufactures, the embryonic industrial incubator that Hamilton had aimed to establish and to gain governmental support for it), of which both were leading directors. This furious activity was contagious, and by February, New York City was in a speculative frenzy. Other eastern cities were affected as well. Stocks, however, did not rise as fast as expected, and by March Duer, his credit exhausted was in deep trouble...Duer's failure led to other failures and by early April the city was in the grip of panic...by the fall of 1792 things were on the mend...Duer went to debtor's prison on March 23...Duer remained in jail, hopelessly insolvent, for the rest of his days...The atmosphere, nonetheless, had been heavily poisoned. A tendency to ascribe the most extensive evils to Treasury influence and to see in it a steady perversion of public morals was now very widespread. Many had come to believe--Jefferson and Madison among them--that Hamilton himself was enmeshed in corruption. There was a direct relation between such convictions and the eruption of open partisanship that occurred in the spring and summer of 1792. The last shred of likelihood, moreover, of general support for a program of encouragement to manufactures had been blow away forever.

"A major casualty of the Society for the Establishment of Useful Manufactures. Though it was not until aferwards that the Society even got going, and although it continued operations until 1796, the Panic had nonetheless dealt it a mortal blow....For more than a generation in the future no large-scale manufacturing enterprises of any sort would be successfully launched in America. Clearly something was missing from the Humean-Hamiltonian projection of a happy mercantile-industrial commonwealth which needed only the capacity to concentrate capital under the benevolent eye of government...the failure of such indispensable elements as management and technology...At the same time, something more than a country-party fundamentalism was involved in the Jeffersonian-Madisonian rage at 'gambling scoundrels' and in the Virginians' hatred of Hamilton and all that he stood for...It was all well and good to establish the public credit in such a way as to engage the resources of teh community's most energetic men, thus making the public debt an instrument whereby capital might be concentrated for future development...What is to stop the spirit of speculation from becoming an end to itself?

"Seth Johnson wrote to Andrew Craigie in 1791:

"The best support and surest resource of a nation:

"'is in the industry and frugality of its Citizens--whatever in any way tends to lessen or destroy those useful habits must be considered highly prejudicial--The present rage for Speculation by producing in some a sudden and great acuisition of wealth, allures others, of all ranks, from those regular habits of business thro' which the acquirement of property tho slow is Certain, to engage in what, like gaming depends on chance--They feel all the anxiety and eagerness attendant on deep play.

In 1792, Philip Frenau, writing as Brutus in his National Gazette in Philadelphia wrote (p. 283):

"'that a system of finance has issued from the Treasury of the United States and has given the rise to scenes of speculation calculated to aggrandize the few and the wealthy, by oppressing the great body of the people, to transfer the best resourcews of the country forever into the hands of the speculators, and so fix a burthen on the people of the United States and their posterity, which time, instead of diminishing will serve to strengthen and encrease...with unilimited import and excise laws pledged for its support and copied from the British statute book.'"

In 1792 Jefferson (p 287-8):

"had several private conversations with Washington...in the course of which he seems to have put few checks on his detestation of Hamilton's Treasury and the debaucheries to which he thought its policies were leading. He believed that the Treasury 'possessed already such an influence as to swallow up the whole Executive powers"; that it had contrived a system for luring the citizens into 'a species of gambling, destructive of morality, & which had introduced it's poison into the government itself"; and the the Report on Manufactures, which he hoped would be rejected, went beyond any measure yet advanced for turning the Repbulic into an unlimited government...and that 'there was a considerable squadron in both (houses)whose votes were devoted to the Paper and stock jobbing interest."

Elkins and McKitrick (p. 301) emphasize the elitist nature of Hamilton's ideology:

"Nothing he did was undertaken in a spirit basically hostile to the interest of a very special class in American society, those men in whose hands he still believed the nation's future prosperity rested. Nothing had altered for him the Humean vision of the merchant-enterpriser, the man of large affairs, as the type whoe creative energies would transform the continent. True, the Virginians viewed that type through very different eyes, and the words they applied to him were not honorific ones. But otherwise they were really not wrong when they repeated in endless ways that Hamilton was usuing the financial power of the United States -- as he had determined to do from the beginning, for the benefit of speculators."

Libertarian interpretations of history often assume that Progressivism was imposed afresh in response to advocacy of business interests in the late nineteenth and early twentieth centuries. However, it is more accurate to view Progressivism as an atavistic reappearance of 18th century Hamiltonian Humeanism. To the degree that Keynesian economics was a similarly atavistic and reactionary reappearance of Humean economic theory, it may be argued that there have been two cycles of American history. The Hamiltonian Federalist cycle from 1790 to 1800, which led to the Jeffersonian revolution of 1800. Then, the Progressive-New Deal cycle which reimposed Federalism first in the very Hamiltonian name of economic efficiency and management of the large "trusts" and then in the cloak of social democracy, with central banking being strengthened to new heights in 1932.

*Murray Rothbard and Ronald Radosh, editors, A New History of Leviathan: Essays on the Rise of the American Corporate State. New York: EP Dutton & Co., 1972.