We honor him on the $10 bill, but Alexander Hamilton deserves more.
How we can better energize America’s economy, create more jobs, and provide more fulfilling lives for our citizens? Politics says that the answer is either “Left!” or “Right!” But neither of those is the solution. To find the answer, we need to look at our American past.
We Americans have been repeating the same political-economic arguments in different keys and with different harmonies—the arguments over the costs and benefits of freer trade, of government support for industry, over the righteousness of libertarian government, over activist New Dealism—for more than two centuries now. Yet today we have largely forgotten the earlier rounds of this debate: the ones that started with Thomas Jefferson and Alexander Hamilton.
Jefferson has gotten the better monuments and the better press in both newspapers and history books (but not in musicals, where the brilliant Lin Manuel-Miranda and his colleagues’ rap/rock rules). But in policy and in the real material arc of history, it is Hamilton who looms as the giant. He was the architect of the boldest, most original, and most important deliberate reshaping of the economy of the United States of America. Adam Smith’s ideas dominated and continue to dominate economics textbooks. But it is Hamilton’s more pragmatically oriented corrections to laissez-faire and to Smith’s “System of Natural Liberty” that have successfully shaped development strategy for successful “late developers” like Germany, Japan, Korea, and China—and, to a substantial degree, the United States.
Before Hamilton, it was the Jeffersonian economic mold, the mold that Britain had imposed through its mercantilist colonial policy, into which the American economy was being poured. Jefferson wanted to cut America loose politically from what he saw as the corruption of Imperial Britain. But he had no major quarrel with the un-industrialized agrarian economy that the British Empire was designing America to be.
Hamilton, a New Yorker, thought differently: that liberty could spring from the city as well as the countryside, and that prosperous market economies needed big pushes to get themselves going. And so Hamilton pushed the United States into a pro-industrialization, high-tariff, pro-finance, big-infrastructure political economy, and that push set in motion a self-sustaining process.
Representatives of both western farmers and New England manufacturing workers saw that it was good for them to impose high tariffs on imported British goods, and use the revenue to build the infrastructure for an America that would not just be Europe’s farmer, logger, and miner, but a manufacturer and a researcher in its own right.
After Hamilton, the U.S. economy was different. It was a bet on manufacturing, technologies, infrastructure, commerce, corporations, finance, and government support of innovation. That turned out to be good for more than just farmers and the bosses and workers: it turned out to be good for the country as a whole.
Urban commercial prosperity was essential for a good and a free society. A desperately poor urban population could not be supporters of liberty. And a rural society—even a frugally prosperous one—that lacked a critical manufacturing capability could not defend itself against empire building by Britain, France, the Netherlands, or Spain. At best, it would be dependent on unwanted and unfair foreign alliances.
Alexander Hamilton has only a single statue honoring him, in front of the building that now houses his Treasury Department. And the current secretary of the Treasury wants to remove Hamilton’s portrait—and his stern vigilance—from the $10 bill.
Yet the United States we have today is not Jefferson’s, but Hamilton’s. Why? Because once the Hamiltonian system was set, it stuck. It worked. And so, very quickly it became too strong and too useful to too many powerful groups for any political coalition to dismantle it.
Hamilton’s system was constructed of four drivers that reinforced one another, not just economically but politically: high tariffs; high spending on infrastructure; assumption of the states’ debts by the federal government; and a central bank.
The economy was to be reshaped to promote industry. And the principal instrument for this was a high tariff on manufactured imports from Britain, the traditional world-dominant manufacturer.
The tariff would provide the incentive to invest in the development of manufacturing technologies and would subsidize the nascent manufacturing firms that would make those investments.
It was also to be the major source of federal government revenues, and would thus support an extensive program of infrastructure development. This was vital for territorial expansion and economic development, and for adding the critical political support of the western farmers to the northern coastal commercial and labor interests.
But that was not all. The tariff was also the instrument that permitted the federal government to credibly assume states’ debts incurred to fund the Revolutionary War, thus strengthening the central government (central to Hamilton’s plans).
The creation of a federal government debt also constituted the basis of a new and vigorous financial market. No wonder then that in Hamilton’s strong and settled opinion: “a national debt, if it is not excessive, will be to us a national blessing.”
Finally there was Bank of the United States, which Hamilton designed to sit at the center of the financial system and tame the wildcat banks and their wildcat currencies.
As the Hamiltonian system developed, tariffs rose to about 35% of the values of manufactured imports by 1816. And the tariff stayed up: it was among very highest in the North Atlantic for more than a century. These benefits were massive. They were also massively unexpected. Hamilton believed that a focus on manufacturing, technology, secondary-product exports, corporate organization, banks, and finance was a very good bet. But he and his allies had no idea how good a bet it would be. Nobody did.
The Hamiltonian system flourished, and slowly transformed itself first into the American System of manufacturers and then into mass production and Fordism proper. It set the pattern for all subsequent redesigns of the American economy. And that has since spread over an ever-increasing proportion of the globe.
What was needed, and what the United States got at the right time, was Alexander Hamilton
So what is the lesson? The lesson is not that activist government industrial policy is always right. Jefferson’s ideology of agrarian utopia coupled with Smithian laissez-faire was wrong for its day. But Stalin’s ideology of over-investing in heavy industry to seek massive economies of scale—although it did produce a tank industry that could fight off Hitler—was equally wrong for the post-World War II move from industrial into post-industrial economies.
Similarly Japan’s MITI was great for Japan’s post-WWII catch up but became a cropper once Japan was no longer following a well-blazed industrial development trail. And turning Hamiltonian exaltation of financial depth into an ideology creates major weaknesses, the bill for which came due in 1929-1933 and again in 2007-2009.
The lesson is that ideologies—no matter what they are—are bad masters. Hamilton’s genius was in focusing on not what was decreed according to ideological first principles laid down by some academic scribbler, but rather focusing on what was in a pragmatic sense likely to generate prosperity at that moment in that situation.
Hamilton broadly got it right. His successors who continued his policies under decent Jeffersonian draperies also got it right. The post-Civil War decision to go for a heavily-industrialized economy knit together by continent-spanning railroads got it right. The Progressive course correction of the inequities produced by the Gilded Age got it right. So did the—overwhelmingly pragmatic—policies of FDR and of Eisenhower.
It is only in the past generation that we have forgotten our pragmatic past and applied ideological litmus tests to what our public policies will be. And we have suffered for it.
Stephen S. Cohen and J. Bradford DeLong are the authors of Concrete Economics: The Hamilton Approach to Economic Growth and Policy (Harvard Business Review Press, 2016). This article was adapted from the book.