“Alexander Hamilton (January 11, 1755 or 1757 – July 12, 1804) was a founding father of the United States, chief staff aide to General George Washington, one of the most influential interpreters and promoters of the U.S. Constitution, the founder of the nation’s financial system, and the founder of the Federalist Party, the world’s first voter-based political party. …Alexander Hamilton was born in and spent part of his childhood in Charlestown, the capital of the island of Nevis, in the Leeward Islands…” – from Wikipedia, accessed May 22, 2015
Over the past three weeks, I have tried to gain a better understanding of the challenges of our time, as it relates to the financial, social, and environmental crises in our midst, to see how the lessons learnt over the years can inform our political discourse, as we grapple with the root causes and try to find solutions going forward. And what struck me in all of my readings was that one man, Alexander Hamilton, has been credited for the gains of our modern financial system and at the same time blamed for the financial crises in our midst. Little did I know, that he also is being credited for an unnamed ideology – dubbed “Hamiltonian developmentalism” – whose policies were completely opposite to the laissez-faire ones espoused by the neoliberal economists of today.
I believe that given the enormity of the financial, social and environmental crises in our midst, we will be able to see farther if we are able stand on the shoulders of this giant!! Although the challenges of Hamilton’s time was a weak United States, where a divided country was in transition from a feudalistic slave-based agricultural economy to an industrial/financial one, the challenges of today are strikingly similar. We are now dealing with a divided world in transition from a “feudalistic” debt-based, industrial economy to a post-industrial, service/knowledge/caring clean-energy, interconnected one. Revealingly, the early United States had broken free from their imperial masters of the first British Empire; this may suggest likewise, that we too need to break free from our modern day imperial masters, the Third British Empire. How we do so and bring the world together, and make this transition, can be best informed by Alexander Hamilton’s genius and his courage and the lessons learnt as he tackled the challenges of his day.
I will use two articles that I found very revealing and weave a narrative by quoting extensively from them to give you a sense of what I mean. The first article is from The Economist and is entitled ‘Financial Crises’ which lays out in detail the causes of many financial crashes over the years up to the present time, and how Hamilton set the precedent for the first American bank-bailout. Interestingly and ironically, the moves back then catalysed the formation of a private trading group, which was the precursor to the New York Stock Exchange on Wall Street. The second article is from Christian Parenti entitled ‘Reading Hamilton from the Left’, which makes a compelling case for a much greater role of the state in spearheading the development of an economy based on the clean energy sector.
“If one man deserves credit for both the brilliance and the horrors of modern finance it is Alexander Hamilton, the first Treasury secretary of the United States. In financial terms the young country was a blank canvas: in 1790, just 14 years after the Declaration of Independence, it had five banks and few insurers. Hamilton wanted a state-of-the-art financial set-up, like that of Britain or Holland. That meant a federal debt that would pull together individual states’ IOUs. America’s new bonds would be traded in open markets, allowing the government to borrow cheaply. And America would also need a central bank, the First Bank of the United States (BUS), which would be publicly owned.
This new bank was an exciting investment opportunity. Of the $10m in BUS shares, $8m were made available to the public. The initial auction, in July 1791, went well and was oversubscribed within an hour. This was great news for Hamilton, because the two pillars of his system—the bank and the debt—had been designed to support each other. To get hold of a $400 BUS share, investors had to buy a $25 share certificate or “scrip”, and pay three-quarters of the remainder not in cash, but with federal bonds. The plan therefore stoked demand for government debt, while also furnishing the bank with a healthy wedge of safe assets. It was seen as a great deal: scrip prices shot up from $25 to reach more than $300 in August 1791.
Two things put Hamilton’s plan at risk. The first was an old friend gone bad, William Duer. The scheming old Etonian was the first Englishman to be blamed for an American financial crisis, but would not be the last. Duer and his accomplices knew that investors needed federal bonds to pay for their BUS shares, so they tried to corner the market. To fund this scheme Duer borrowed from wealthy friends and, by issuing personal IOUs, from the public. He also embezzled from companies he ran.
The other problem was the bank itself. On the day it opened it dwarfed the nation’s other lenders. Already massive, it then ballooned, making almost $2.7m in new loans in its first two months. Awash with credit, the residents of Philadelphia and New York were gripped by speculative fever. Markets for short sales and futures contracts sprang up. As many as 20 carriages a week raced between the two cities to exploit opportunities for arbitrage.
The jitters began in March 1792. The BUS began to run low on the hard currency that backed its paper notes. It cut the supply of credit almost as quickly as it had expanded it, with loans down by 25% between the end of January and March. As credit tightened, Duer and his cabal, who often took on new debts in order to repay old ones, started to feel the pinch.
Rumours of Duer’s troubles, combined with the tightening of credit by the BUS, sent America’s markets into sharp descent. Prices of government debt, BUS shares and the stocks of the handful of other traded companies plunged by almost 25% in two weeks. By March 23rd Duer was in prison. But that did not stop the contagion, and firms started to fail. As the pain spread, so did the anger. A mob of angry investors pounded the New York jail where Duer was being held with stones.
Hamilton knew what was at stake. A student of financial history, he was aware that France’s crash in 1720 had hobbled its financial system for years. And he knew Thomas Jefferson was waiting in the wings to dismantle all he had built. His response, as described in a 2007 paper by Richard Sylla of New York University, was America’s first bank bail-out. Hamilton attacked on many fronts: he used public money to buy federal bonds and pep up their prices, helping protect the bank and speculators who had bought at inflated prices. He funnelled cash to troubled lenders. And he ensured that banks with collateral could borrow as much as they wanted, at a penalty rate of 7% (then the usury ceiling).
Even as the medicine was taking effect, arguments about how to prevent future slumps had started. Everyone agreed that finance had become too frothy. Seeking to protect naive amateurs from risky investments, lawmakers sought outright bans, with rules passed in New York in April 1792 outlawing public futures trading. In response to this aggressive regulation a group of 24 traders met on Wall Street—under a Buttonwood tree, the story goes—to set up their own private trading club. That group was the precursor of the New York Stock Exchange.
Hamilton’s bail-out worked brilliantly. With confidence restored, finance flowered. Within half a century New York was a financial superpower: the number of banks and markets shot up, as did GDP. But the rescue had done something else too. By bailing out the banking system, Hamilton had set a precedent. Subsequent crises caused the financial system to become steadily more reliant on state support…
…Yet this was not at all what Hamilton had hoped for. He wanted a financial system that made government more stable, and banks and markets that supported public debt to allow infrastructure and military spending at low rates of interest. By 1934 the opposite system had been created: it was now the state’s job to ensure that the financial system was stable, rather than vice versa. By loading risk onto the taxpayer, the evolution of finance had created a distorting subsidy at the heart of capitalism.“ – from ‘Financial Crises’
“Two hundred years ago, Alexander Hamilton was mortally wounded by then Vice President Aaron Burr in a duel at Weehawken, New Jersey. Their conflict, stemming from essays Hamilton had penned against Burr, was an episode in a larger clash between two political ideologies: that of Thomas Jefferson and the anti-Federalists, who argued for an agrarian economy and a weak central government, versus that of Hamilton and the Federalists, who championed a strong central state and an industrial economy…
…Hamilton was alone among the “founding fathers” in understanding that the world was witnessing two revolutions simultaneously. One was the political transformation, embodied in the rise of republican government. The other was the economic rise of modern capitalism, with its globalizing networks of production, trade and finance. Hamilton grasped the epochal importance of applied science and machinery as forces of production.
In the face of these changes, Hamilton created (and largely executed) a plan for government-led economic development along lines that would be followed in more recent times by many countries (particularly in East Asia) that have undergone rapid industrialization. His political mission was to create a state that could facilitate, encourage and guide the process of economic change — a policy also known as dirigisme, although the expression never entered the American political lexicon the way its antonym, laissez-faire, did…
…Even today, Hamilton’s ideas about state-led industrialization offer much. Consider the crisis of climate change. Alas, we do not have the luxury of making this an agenda item for our future post-capitalist assembly. Facing up to it demands getting off fossil fuels in a very short time frame. That requires a massive and immediate industrial transformation, which must be undertaken using the actually existing states and economies currently on hand. Such a project can only be led by the state — an institution that Hamilton’s writing and life’s work helps us to rethink.
Unfortunately, many environmental activists today instinctively avoid the state. They see government as part of the problem — as it undoubtedly is — but never as part of the solution. They do not seek to confront, reshape and use state power; the idea of calling for regulation and public ownership, makes them uncomfortable.
And so green activism too often embodies the legacy of Jefferson’s antigovernment politics. It hinges on transforming individual behavior, or on making appeals to “corporate social responsibility.”
Hamilton’s work, by contrast, reveals the truth that for capital, there is no “outside of the state.” The state is the necessary but not sufficient pre-condition for capitalism’s development. There is no creative destruction, competition, innovation and accumulation without the “shadow socialism” of the public sector and state planning. We may soon find that there is no potable water or breathable air without them, either.
At the heart of Hamilton’s thinking was a stark political fact — one that is now sometimes hard to recall. The newly created United States was a mess. Politically disorganized, economically underdeveloped and militarily weak, its survival was in no way guaranteed.
All the more alarming was the international context. The world was dominated by the immense power of the British, French and (admittedly declining) Spanish Empires. Hamilton saw that the colonists’ victory over Britain, won by the direct military intervention of France, would only be secured if the new nation built up its economy.
Hamilton learned the danger of weakness early on. Born of humble origins in the Caribbean, he was an “illegitimate” child and then orphaned at age thirteen. Taken in by friends, he found work as a shipping clerk. Having a prodigious intellectual talent, Hamilton also applied himself to study with fanatical discipline. Soon he was penning essays for the local press. One piece caught the attention of St. Croix notables, who in 1772 sent the young Hamilton to preparatory school in New Jersey and then to Kings College, now Columbia University…
…In Federalist 11, Hamilton laid out the economic logic of a strong central state in terms of a defense against European imperialism:
“If we continue united, we may counteract a policy so unfriendly to our prosperity in a variety of ways. By [creating] prohibitory regulations, extending, at the same time, throughout the States, we may oblige foreign countries to bid against each other, for the privileges of our markets.”
Here, Hamilton is outlining the central mechanism of economic nationalism: the state creates economic conditions; it does not merely react to them. Before the Revolution, Britain’s mercantilist policies sought to maintain captive markets and thereby enforced under-development on its American colonies. Britain had banned export to America “of any tools that might assist in manufacture of cotton, linen, wool and silk.” None of that changed with independence. And Britain was soon harassing American trade, stopping and searching ships at sea, seizing American sailors as alleged deserters.
For Hamilton, the crucial components of real independence were industrialization led by a strong federal government, combined with a permanent military that could serve both political and economic functions — defending the new nation while driving and absorbing the output of a new manufacturing sector. (It was, in effect, military Keynesianism before the fact.)
After ratification of the Constitution in 1790, Hamilton was recruited by the Washington administration to be the nation’s first secretary of the treasury. In this capacity, he issued a series of detailed economic reports to Congress outlining a program for the development of the US economy that rested on three core policies: federal assumption of state debts, creation of a national bank and direct government support for domestic manufacturing.
The linchpin of his economic proposal was a system of public credit and a national money system with a government supported Bank of the United States at its center. “Public utility,” wrote Hamilton, “is more truly the object of public banks than private profit.” In 1790, three new bond issues backed by the Federal Government replaced the miscellany of various state and federal bonds that had structured the new nation’s debt. Early the following year, Congress chartered the Bank of the United States for twenty years. With that, the first two pieces of his system were in place.
But in all this, Hamilton faced the opposition of Jefferson and the Southern planter class. Comparative economic history shows that semi-feudal agricultural elites, like Jefferson’s Virginia squirearchy, hold back political and economic development. To paraphrase Perry Anderson, semi-feudal elites extract economic surplus from the immediate producers by customary forms of extra-economic violence and coercion; they do so by demanding labor services, deliveries in kind, or rents in cash and preside over areas where free commodity exchange and labor mobility are relatively rare. They prefer stasis to change…
…For Hamilton, conversely, national survival depended on industrialization. He pushed Congress to foster domestic manufacturing with a program known as “the American School” that had four central policies: 1) tariffs on imports; 2) direct subsidies, or “bounties,” for domestic manufacturers; 3) a partially public-owned national bank; 4) broad public investments in infrastructure, or “internal improvements,” like roads, canals and ports…
…If the private sector could not consume enough to drive rapid industrialization, the public sector would. Since few export markets could absorb American manufactured goods, military procurement would created an artificial internal market for them. America’s nascent manufacturing sector relied heavily on military consumption — products associated with shipbuilding, weapons, munitions, uniforms and food rations. This socialized demand would drive private sector accumulation, investment, wages and thus consumption.
Hamilton drew up the blueprints for a planned economy — a capitalist economy, to be sure, but one that would be guided by a long-range sense of the country’s problems and potentials. And that was just what worried the reactionaries of his day. The line of development that Hamilton envisioned spelled the doom of a political economy based on slavery…
…This American dirigiste model has had a major impact on global history. As the South Korean economist Ha-Joon Chang has pointed out, every successful case of industrialization has used some version of the Hamiltonian model. A line runs directly from it to the postwar rise of the developmental states of East Asia…
…In most of the world, the real story of capitalism is not the story of laissez-faire — a doctrine the strong impose upon the weak — nor a quaint story about egalitarian local economies, but the story of the state presiding over a mixed economy. Hamiltonian developmentalism — the unnamed ideology — is amoral, pragmatic, instrumentalist and flexible.
So what is the lesson of this attenuated tale?
Like Hamilton, we face a profound crisis rooted in an economy that demands to be remade. The old redistributive agenda is not enough. Due to its dependence on the environmental curse of fossil fuels, the economy must also be significantly rebuilt around a clean energy sector. And history is very clear on the implications: In capitalist society, moments of crisis and transformation have always involved an increased economic role for the state. We are entering one of those periods.
As the waters rise and the storms grow more intense, the state and the public sector will be called forth. What the state can or will become as it “returns” is an open question — or rather, open to being reshaped by pressure from social movements.
Unfortunately, American society is very far from facing the crisis. And a huge part of the problem is the Jeffersonian notion that “the government that governs best is the one that governs least.” While that is true as regards individual liberty, it is absolutely dangerous to think that way as regards the economy.” – from ‘Reading Hamilton from the Left’
Thankfully, Jeremy Rifkin’s trilogy (see below) provides the blueprint on how we can transition to this more empathic, “third-(post)-industrial,” near-zero-marginal growth, clean-energy sector economy. It is now time that governments all over the world take note and take a page out of Alexander Hamilton’s play book and effect the transformation in our economies that is most desperately needed at this time.