Friday, March 27, 2009

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...

" 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."

1 comment:

Anonymous said...

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