Friday, March 27, 2009

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.

1 comment:

Anonymous said...

Mr. Expert,

Are you going to have a follow up post or article about this anytime soon? :)

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