Saturday, May 30, 2015

HAWB 1801 - Alexander Hamilton and Albert Gallatin - How America Was Built

I just wanted to share something from a book written by Henry Adams in 1879, The Life of Albert Gallatin. Alexander Hamilton was our first Secretary of the Treasury, serving under George Washington. Albert Gallatin was the fourth, and longest serving, under Thomas Jefferson, then James Madison. They were political enemies - Washington's presidency, after all, was the triumph of the Federalists, while the administrations of Jefferson and Madison were the triumph of the Democratic Republicans. But that's not what I want to draw your attention to.

This excerpt from Adams' 1880 book does an excellent job of capturing the importance of Alexander Hamilton. Why is this noteworthy? Because Hamilton has been basically written out of mainstream economics. Which is pretty amazing, when you consider that Hamilton basically created the U.S. economy, from scratch, which surely has to be the greatest achievement in political economy in the past half millennia. I mean, we're talking about the USA economy here. And the guy who basically designed and launched it is not even mentioned in, for example, the most used introductory economics textbook? Which was written, please note, by conservative Harvard economics professor, H. Gregory Mankiw, who advised George W. Bush, and George Romney, and who actually published a paper in the Summer 2013 Journal of Economic Perspectives entitled - and I'm not making this up - "Defending the One Percent."

You think this doesn't mean anything? Well, I firmly believe one reason President Barack H. Obama persists in pushing the TPP and other free trade agreements is precisely because he was never taught that the ideas of Alexander Hamilton are a quite viable alternative to the market fundamentalism of asshats like Mankiw. An unblinking faith in the mystical ability of "free trade" to rain benefits and riches on everyone is an absolute, non-negotiable requirement, not only for inclusion in the mainstream economics profession ruled over by charlatans like Mankiw, but also for being included and counted among the "serious people" who are allowed to make economic policy.

Hamilton doesn't make the cut, because Hamilton, in word and in action, rejected all the tenets of modern neo-liberal economics. He believed a weak central government would result in the destruction of the new republic, and elaborated the concept of implied powers. He believed that the restless energies of entrepreneurs, financiers, and craftsmen needed to be given direction by statesmen who contemplated the good of the whole nation. And in a couple of important reports to Congress, which are basically the foundational documents of the USA economy, Hamilton demolished the arguments for free trade. Interesting: Bob Rubin's Hamilton Project never mentions that.

Henry Adams, by the way, was the grandson of John Quincy Adams and the great-grandson of John Adams. In his time, HA was one of the most influential political journalists and writers in the country.

The Life of Albert Gallatin, by Henry Adams. Published 1879, by J. B. Lippincott & Co. Text from the online version made available by Project Gutenburg.

 [Note: Emphasis are mine, not original.]
THE TREASURY. 1801-1813.
In governments, as in households, he who holds the purse holds the power. The Treasury is the natural point of control to be occupied by any statesman who aims at organization or reform, and conversely no organization or reform is likely to succeed that does not begin with and is not guided by the Treasury. The highest type of practical statesmanship must always take this direction. Washington and Jefferson doubtless stand pre-eminent as the representatives of what is best in our national character or its aspirations, but Washington depended mainly upon Hamilton, and without Gallatin Mr. Jefferson would have been helpless. The mere financial duties of the Treasury, serious as they are, were the least of the burdens these men had to carry; their keenest anxieties were not connected most nearly with their own department, but resulted from that effort to control the whole machinery and policy of government which is necessarily forced upon the holder of the purse. Possibly it may be said with truth that a majority of financial ministers have not so understood their duties, but, on the other hand, the ministers who composed this majority have hardly left great reputations behind them. Perhaps, too, the very magnitude and overshadowing influence of the Treasury have tended to rouse a certain jealousy in the minds of successive Presidents, and have worked to dwarf an authority legitimate in itself, but certainly dangerous to the Executive head. Be this as it may, there are, to the present time, in all American history only two examples of practical statesmanship which can serve as perfect models, not perhaps in all respects for imitation, but for study, to persons who wish to understand what practical statesmanship has been under an American system. Public men in considerable numbers and of high merit have run their careers in national politics, but only two have had at once the breadth of mind to grapple with the machine of government as a whole, and the authority necessary to make it work efficiently for a given object; the practical knowledge of affairs and of politics that enabled them to foresee every movement; the long apprenticeship which had allowed them to educate and discipline their parties; and finally, the good fortune to enjoy power when government was still plastic and capable of receiving a new impulse. The conditions of the highest practical statesmanship require that its models should be financiers; the conditions of our history have hitherto limited their appearance and activity to its earlier days.
The vigor and capacity of Hamilton’s mind are seen at their best not in his organization of the Treasury Department, which was a task within the powers of a moderate intellect, nor yet in the essays which, under the name of reports, instilled much sound knowledge, besides some that was not so sound, into the minds of legislature and people; still less are they shown in the arts of political management,—a field into which his admirers can follow him only with regret and some sense of shame. The true ground of Hamilton’s great reputation is to be found in the mass and variety of legislation and organization which characterized the first Administration of Washington, and which were permeated and controlled by Hamilton’s spirit. That this work was not wholly his own is of small consequence. Whoever did it was acting under his leadership, was guided consciously or unconsciously by his influence, was inspired by the activity which centred in his department, and sooner or later the work was subject to his approval. The results—legislative and administrative—were stupendous and can never be repeated. A government is organized once for all, and until that of the United States fairly goes to pieces no man can do more than alter or improve the work accomplished by Hamilton and his party.
What Hamilton was to Washington, Gallatin was to Jefferson, with only such difference as circumstances required. It is true that the powerful influence of Mr. Madison entered largely into the plan of Jefferson’s Administration, uniting and modifying its other elements, and that this was an influence the want of which was painfully felt by Washington and caused his most serious difficulties; it is true, too, that Mr. Jefferson reserved to himself a far more active initiative than had been in Washington’s character, and that Mr. Gallatin asserted his own individuality much less conspicuously than was done by Mr. Hamilton; but the parallel is nevertheless sufficiently exact to convey a true idea of Mr. Gallatin’s position. The government was in fact a triumvirate almost as clearly defined as any triumvirate of Rome. During eight years the country was governed by these three men,—Jefferson, Madison, and Gallatin,—among whom Gallatin not only represented the whole political influence of the great Middle States, not only held and effectively wielded the power of the purse, but also was avowedly charged with the task of carrying into effect the main principles on which the party had sought and attained power.
In so far as Mr. Jefferson’s Administration was a mere protest against the conduct of his predecessor, the object desired was attained by the election itself. In so far as it represented a change of system, its positive characteristics were financial. The philanthropic or humanitarian doctrines which had been the theme of Mr. Jefferson’s philosophy, and which, in a somewhat more tangible form, had been put into shape by Mr. Gallatin in his great speech on foreign intercourse and in his other writings, when reduced to their simplest elements amount merely to this: that America, standing outside the political movement of Europe, could afford to follow a political development of her own; that she might safely disregard remote dangers; that her armaments might be reduced to a point little above mere police necessities; that she might rely on natural self-interest for her foreign commerce; that she might depend on average common sense for her internal prosperity and order; and that her capital was safest in the hands of her own citizens. To establish these doctrines beyond the chance of overthrow was to make democratic government a success, while to defer the establishment of these doctrines was to incur the risk, if not the certainty, of following the career of England in “debt, corruption, and rottenness.” In this political scheme, whatever its merits or its originality, everything was made to depend upon financial management, and, since the temptation to borrow money was the great danger, payment of the debt was the great dogma of the Democratic principle. “The discharge of the debt is vital to the destinies of our government,” wrote Mr. Jefferson to Mr. Gallatin in October, 1809, when the latter was desperately struggling to maintain his grasp on the Administration; “we shall never see another President and Secretary of the Treasury making all other objects subordinate to this.” And Mr. Gallatin replied: “The reduction of the debt was certainly the principal object in bringing me into office.”
I think I would be remiss were I not to dwell, however quickly, on Adams' observation that Jefferson and Gallatin saw the greatest danger to be a national debt. Besides the historical irony that it is now, in our day, the conservatives and Republicans who are similarly afrighted by a national debt, I will point out that Jefferson and Gallatin were proven wrong by history, in quite brutal fashion, by the War of 1812, and in more congenial fashion, by their recourse to debt financing to complete the Louisiana purchase.

A national debt is not in and of itself a danger. It all depends on what you use that debt for.

One final note. I was directed to Adams' summary of Hamilton and Gallatin by a footnote in an excellent book by another Harvard professor, Thomas K. McCraw: The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy (Harvard University Press, 2012). McCraw concludes that for all their political differences, Hamilton and Gallatin actually held remarkably similar views of the USA economy. They both strongly supported federal funding of internal improvements. Gallatin tried, but he could not sway Jefferson, and especially Madison, to his view on this issue (Madison would veto an internal improvements bill in 1817).

Both Hamilton and Gallatin wanted to promote domestic manufacturing, and as Treasury Secretary, both wrote a detailed report to Congress on the issue. Here is Hamilton's 1791 report. There is no similar copy on the internet I see for Gallatin's 1810 report, but here is an extremely brief summary.

McCraw writes that "the most revealing of all the views they held in common" was their support for the Bank of the United States.
Each expended herculean efforts on its behalf, and each had memorable disagreements with Thomas Jefferson, not only about this bank, but about all banks. Hamilton, with President Washington's support, was able to establish the Bank of the United States in 1791 and to make it an immediate success. Gallatin, without similar support from President Madison, could not get its charter renewed in 1811 - to the great detriment of the nation's financial situation as the War of 1812 began. Madison realized his mistake and in 1816 signed the bill creating the Second Bank of the United States.
Dr. McCraw passed on in November 2012. I can't help wondering if Mankiw and McCraw had spitball fights when they saw each other....


  1. Debt...well there is your problem. Of course some borrowing should be incurred, just for the fact that there are good people who believe in good government and want to support it, but what of the new production of goods and services and the endless supply of labor that does that ? THAT is, in good measure what should determine the amount of new money a sovereign nation has to spend wisely on operations to protect and defend...against all enemies both foreign and domestic and for other purposes, etc....NOT the endless borrowing of properly earned money, ie. from both industrial sales and the fruits of labor should be a great part of that which determines the money supply, for if all monies are borrowed from pre-existing accounts, the interest alone will make it almost impossible for industry and labor to ever pay off that debt... as we have suffered now especially since 1913 as our national debt shows without reservation....and the interest on that money alone could rebuild the entire country in a few years if money were not created as debt...the basic fallacy in the whole monetary panoply of proceedings since and including Hamilton's time. Money should, in my opinion, be created for the public good...not the enrichment of a few who own the banks that generated or print it ! But, how do you get such debt-free money into circulation fairly to all the citizenry...for this public good instead of debt servitude being doled out ad infinatum ? ...and how do you keep the currency from being inflated/deflated while doing so ? You do it by carefully, under strict controls by all of government and I would add the states using their 10th powers, to keep track as our myriad bean counters and lawyers are want to do anyway and add a small amount, as the economy grows and assets and fruits of labor accumulate....and so the national GNP/asset base rises, with money mirroring this rise and being used for infrastructure and other public benefit as wisely as possible, with the politicos being watched and called to account as often as necessary to keep graft, corruption and straight looting from ruining the it is being done to right now ! To those who feel this would be so cumbersome as to be unworkable, I say that such is the nature of any working country, a constant problematic enterprise of conflicting ideas needing constant attention by all concerned citizens, both public and private as watchdog groups with various powers to effect beneficial changes to the economy besides giving the electorate new powers to wit, ie. true term limits and recall voting for all offices as championed by Washington with his Cincinnatus ideas; national public referendum, often binding; and votes of no confidence to throw out entire governments and call for immediate new elections, as a few of the remedies I would support for a better American recovery effort...and all subject to popular vote, with even the likes of executive order, etal. being on the voting chopping block when necessary, with those who actually move the economy as valid citizens doing the work for same, supporting the economy and voting....others who are either illegally here, felons or hard-core welfare would NOT be able to vote ! We must devise ways to save the country lest the favored few come to be able to use Lord Acton's warnings to their personal, total advantage, leaving America in the dustbin of history as they expatriate to other areas of the world to economically conquer and repeat the wretched scenario now being wrought on the American nation... I fear for us all, but not the tax-dodging, expatriate absconders who are beginning to feel the heat of discontent of the American public more acutely a good thing for all actually !

    1. Yes, but how many "elites" have the knowledge to actually adjust the money supply, and level of debt, to correct parameters? That's why we keeping harping on the disastrous indoctrination of mainstream neo-liberal economics. It is literally poisoned the minds (if not actually destroyed) the minds of elites.

      In one of his major reports (I believe the second one on public credit, but I might be wrong), Hamilton wrote, "“Public utility is more truly the object of public banks than private profit.” An idea which is absolute anathema to neo-liberals today, whether on Wall Street, at the Fed or Treasury, or in academia.

      One really interesting article in Jacobin magazine a couple years ago: Reading Hamilton from the Left

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