Sunday, June 15, 2008

Federalism and Elitism

The evolution of Hamiltonian Federalism and the American Constitution preceded the centralization of power that occurred in the 20th century. In order to understand why Americans have been ready to accede bureaucratic and money-creating power to the federal government, it is helpful to look at the country's earliest establishment. In that light, progressivism and post-World War II liberalism can be viewed as extensions of the Constitutional convention in 1787. The Constitutional convention reflected the federalist ideas of Hamilton and Madison and emphasized the importance of a central bank, federal support for business, and raising federal taxes. But this federalist impulse was rejected in 1800 by the election of Thomas Jefferson, and the America of the 19th century was not so much a Hamiltonian creation, was not so much federalist, as it was anti-federalist. Jefferson and then Jackson limited the federalist reforms. Thus, the Hamiltonian vision was very much a 20th century vision with respect to government and economics.

Hamilton was a close intellectual follower of the economic ideas of David Hume. Hume advocated a system that anticipated Keynesian monetary policy. Hume believed that a central bank should have the power to create money via credit and that allocation of the credit should be to a business elite. He believed that merchants, by which he meant bankers as well as manufacturers and traders, were more rational than the general public and could determine the best uses for created money. Hume, as well as James Madison, who wrote about the inflation that followed the Revolutionary War, did not believe in that expanding the money supply would be inflationary. Rather, Hume argued that if the productivity of assets in which the business elite invested exceeded their borrowing cost, then expansion of the money supply would not be inflationary and credit expansion would result in an expanding economy. Madison's argument followed Hume's. He argued that the inflation that followed the Revolutionary War occurred because of the public's expecations about the "redeemability" of the money. This is linked to the argument put forward today that inflationary "expectations" cause inflation.

In England in the 1690s, King William III of England was waging war against Louis XIV of France and needed financing. William Paterson and a group of merchants lent 1.2 million pounds to the king, and in exchange received a charter to found the Bank of England, which gave them the power to issue notes. As the British government borrowed money, it grew and established a bureaucracy. In the early 18th century, Sir Robert Walpole developed a system of allocation of patronage to provide incentives for those in power to cooperate with the king. As Stanley Elkins and Eric McKitrick point out in The Age of Federalism* Walpole's allocation of patronage assured "government of dependable majorities for its policies". English aristocrats in the country opposed the increasing power of the king's court. As Elkins and McKitrick point out, a similar process occurred in America. The Federalists, especially Hamilton, advocated centralized government power, the establishment of a central bank and the use of credit to create a strong economy. The country aristocrats were the Virginians who disliked speculation and finance and did not trust a strong central state.

*Stanley Elkins and Eric McKitrick, The Age of Federalism: The Early American Republic 1788-1800.

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