Daniel J. Elazar's American Federalism: A View from the States, Third Edition

Daniel J. Elazar, American Federalism: A View from the States, Third Edition. New York: Harper and Row, 1984. 270 pages. Available used and new from Amazon.com for $45.

This is an excellent source book about the basic ideas of American federalism as expressed in Hamilton, Madison and Jay's Federalist Papers and as it has evolved over the ensuing centuries. Elazar is a noted historian and political scientist who died in 1999 at age 65.

This book reads almost like a textbook. If you are interested in a the best overview of federalism, this is it. Moreover, Elazar includes much intriguing information that adds interest to this important subject.

The states are important, argues Elazar, because "they retain their political position in the overall framework of the nation's political system, a position that requires constitutional support but that transcends constitutional formulations". But as well as being part of national civil society, the states are separate civil societies that cooperate with the federal government.

In chapter one, Elazar points out that "federal democracy is the authentic American contribution to democratic thought and republican government". Federalism contrasts with Jacobinism (p. 5), which is an organic theory of the state aiming to democratize feudalism. Under Jacobinism, power resides at the center of a unified, organic state. In America, the first important Jacobin was Francis Lieber, who came to America in 1848. Of course, the founding fathers were well aware of authors such as Rousseau who were founders of this ideology. As Elazar points out, there is a close link between Jacobinism and Progressivism.

The argument for bureaucracy leads to a third ideology, managerialism, which is the political application of Weberian bureaucracy and scientific management.

Importantly, Elazar points out that federalism or the "matrix model" (p. 6):

"Is best understood as a cybernetic one, a network whose loadings can be shifted from arena to arena as different power currents and messages are transmitted through the multitude of channels interlacing the system. Thus power does not move in a unidirectional way, but shifts in response to changing circumstances."

Thus, Elazar points out that modern developments are most consistent with the Founding Fathers' federalism and not with the managerialism of Progressivism (p. 6):

"The theory and experience of the new technology stand in direct contradiction to earlier notions of duplication. Put differently, technology has begun to imitate the Constitution...That system was not a pyramid, with channels for carrying orders from the top to the bottom, but a matrix of authoritative governmental units located within the framework"

Moreover, the elements of the matrix generally cooperate with each other:

"Since the beginning of the republic, the elements in the matrix have worked together to develop common policies and programs. Most important actors are involved in most important details of most steps in problem definition, planning, programming, budgeting, implementation and evaluation (such as it has been) of most policies of mutual interest to them through the political process."

States have local customs and civil societies (p. 14) but states vary as to how far they deviate from national "patterns and norms" and "policies and interests" and the degree of intra- and inter-state sharing (p.16). Elazar actually ranks the states as to cohesiveness. He also compares the internal consistency of Congressional delegations on roll call votes. However, roll call votes reflect the "results of intrastate conflict" whereas the ranking measures internal unity.

In chapter 2 Elazar asks how federalism creates order out of uncertainty and a "system of systems". If people can't obtain governmentally-related goals through the federal government they go through the states, or vice-versa. Issues often become important at the state and federal level at the same time.

Elazar does not believe that the states can afford to act on their own with respect to many programs (p. 38):

"Given the existence of a national economy in which people, goods and services flow across boundaries easily on the basis of essentially private decisions, the state governments, no matter how willing, are simply unable to cope with some problems without federal assistance. Unemployment insurance, workers' compensation, water pollution control, major highway construction and a whole host of other programs cannot be undertaken alone, even by those states that can afford them. The nation's great industrial corporations have facilities in too many different states..."

Thus, early twentieth century welfare reform efforts began in the states, but reformers found that:

"After some initial successes in the regulatory field, the reformers were unable to secure positive welfare measures except in a few states which pioneered such programs for the country as a whole. This happened partly because their proposed programs were expensive.

Elazar points out that theories of the Federalists was fundamental to the structure of the US government (p.47):

"By accepting the notion of a non centralized government based on system of systems and writing that notion into the fundamental structure of American government, the founders of the United States created the need for the development of a new politics to make their constitution operational."

The states have the primary role for the protection of property rights, although the Federal government has made increasing incursions on these in the form of regulation and federal taxation. Foreign policy, defense and the like, as well as patents, monetary policy and tariffs, are primarily federal. But most governmental responsibilities are shared at least to a degree. Issues such as bankruptcy, discrimination, sanitary inspection, banking regulation and subsidizing business are joint. Responsibilities for insurance regulation, workers' compensation and licensing businesses are state level responsibilities (p. 52).

The trend has been to supercession (see chart on p. 55). Supercession means that the federal government is encroaching on the states.

Big business has preferred federal over state regulation (p. 56):

"As the more progressive or more industrialized states began to strengthen enforcement of their own standards, however, big business shifted to support federal standards as likely to be more uniform across the country. Uniform standards would ease the burden on large state enterprises, and was also likely to be weaker than those of the largest states, where the labor lobby was strong and the business lobby politically weak.

"The legislation that emerged was a compromise. The federal government was to establish nationwide occupational safety and health standards...(OSHA)...A state could continue to maintain its jurisdiction if its plan was substantially as effective as the federal plan, as approved by the Secretary of Labor...States could choose to abandon their own efforts...OSHA could intervene in state efforts through federal monitoring power...Only 28 states were interested in developing alternatives to OSHA (with only 22 following through)...OSHA, by its actions and inactions came to be a symbol of all that was wrong with overbureaucratization...Congress reacted by limiting the scope of its (OSHA's) powers" (p. 57).

States devised consultation plans to remedy OSHA's weaknesses. States have widely varying levels of welfare (statistic cited on p. 60 from ACIR Significant Facts of Federalism). In fiscal year 1980 the federal government collected 61% of all tax revenue.

On p. 68 Elazar has a graph that shows that total public sector spending increased from 10.0% of GNP in 1929 to 33.5% of GNP in 1982. Of that state and local government grew from 7.3% of GDP in 1929 (2.0 for state and 5.3% for local) to 10.5%. Thus, the federal share grew from 2.5% to 23.0%, or tenfold. However, if you subtract defense (which grew from 1.1% to 8.5%) the federal share grew from 1.4% to 14.5%, which is still tenfold. I don't think intergovernmental transfers should be subtracted, as Elazar suggests, because they reflect federal rather than pure state policy.

It seems to me that we were better off in 1929.

Between 1961 and 1979 federal spending on education increased fifteen fold (640 to 9,979 million). Public welfare spending at the federal level increased from 59 million to $18,722 million, or over nearly 3,200 percent.

On p. 85 Elazar gives an account of the tilting of federalism toward the federal government in the 20th century:

"The patterns of sharing described above were crystallized in the 1930s and underwent some significant changes in the 1960s. The crisis-oriented centralism of the New Deal period was normalized after 1946 and the modes of cooperation developed during the 1930s were continued virtually unchanged, though in a more non centralized manner. Beginning in 1961 with the New Frontier, but even more significantly after 1963 and the inauguration of the Great Society, the recognition of the existence of cooperative federalism was accompanied by an expansion of the federal government's role, not only as an initiator of programs but as a policy innovator willing to apply various forms of pressure on the states and localities to get them to conform to its demands...

"Much of the pressure toward conformity was of the kind common in other periods of extensive governmental innovation, and was subsequently relaxed. However, particularly after Richard M. Nixon became president there were also some structural changes in the forms of sharing...The proliferation of grant programs was one of these and the expanding use of project grants was another...Other changes included the diversification of eligible grant recipients, the radical expansion of grants for inner city improvements, and the introduction of planning requirements..."

On p. 94 Elazar discusses the nature of federal expenditures:

"The greatest impact of federal spending within the United States comes not from transfers of payments to state or local governments, but form 1) defense-related expenditures; 2) direct payments to private individuals; 3)government grants to institutions for civilian research...By far the greatest share of direct federal spending is in the form of payments to individuals what have come to be known as income maintenance programs...in fiscal year 1980, $314 billion of the $634 billion federal budget, or nearly half, was committed to payments for individuals"

As of 1984, four years into the Reagan administration, "1984 budget estimates, based on a $900 budget authority with outlays of $848.5 billion, show that 42 cents of every dollar, with 29 cents to defense, involve direct benefit payments to individuals." Much of this was attributable to social security, 25% of the total revenue.

Elazar astutely notes on p. 95 (they don't make academics like Elazar much anymore):

"All modern governments provide income security or maintenance benefits in some form. Federal systems are likely to provide such programs through some kind of sharing arrangement. It does not follow automatically from the acceptance of the idea of income maintenance as a government function that it must be primarily a federal one. In a federal system, the choice is open. Canadians, for example have given primary responsibility in this field to the provinces."

Federalization leads to competitive lobbying (p. 98):

"...the key to the acquisition of federal benefits is intensive state and local activity to secure those benefits. The better a state is able to function as a coordinated civil society, the more likely it is to obtain a large share of federal expenditures to stimulate its economy. California and Texas--both virtually self-governing commonwealths in many ways, with strong traditions of intrastate cohesiveness vis-a-vis the outside world--stand as the most successful examples of the truth of this rule."

States have separate characteristics as political systems and so adapt national programs to their own needs. The three factors that shape states' political behavior are:
-political culture (the pattern of orientation to political action)
-sectionalism (the ties that link together groups of contiguous states)
-the frontier--the constant effort of Americans to extend their control over their environment and the consequent periodic reorganization of American social and settlement patterns (p. 109)

The two cultural patterns of American politics are marketplace and commonwealth.

Four consideration (what Elazar somewhat airily calls "the matrix of value concepts) are efficiency, commerce, legitimacy, and agrarianism. Elazar points out that the definition of efficiency has changed from hierarchical ordering to the "decentralized conglomeration of synergistic organizations controlled on the basis of measures of their output. In sum, both efficiency and commerce are primarily related to the concerns of power and its management."

There are three political cultures (pp. 114-16) in America, the individualistic, the moralistic and the traditionalist.

Under individualism, the democratic order is a marketplace. It emphasizes private concerns and limits community intervention. Politics is a business. "Where the norms are high, such people are expected to provide high quality government services in the best possible manner. "political life...is based on a system of mutual obligations rooted in personal relationships." Office holding is a way to obtain rewards. Politics is a specialized profession. Individualist political cultures often view politics as dirty. Bureaucracy interferes with the favor system, but it is efficient, so individualist cultures are ambivalent about it.

The moralistic political culture emphasizes the "commonwealth conception" (p. 117). "Both the general public and the politicians conceive of politics as a public activity centered on some notion of the public good and properly devoted to the advancement of the public interest...Communal power intervenes into the sphere of private activities...issues have an important place...Government service is public service...By virtue of its fundamental outlook, the moralistic political culture creates a greater commitment to active government intervention in the economic and social life of the community. At the same time, the strong commitment to communitarian characteristics of that political culture tends to channel the interest in government intervention."

The traditionalistic culture "is rooted in an ambivalent attitude toward the marketplace coupled with a paternalistic and elitist conception of the commonwealth." Government actively tries to maintain the existing social order...Political parties are of minimal importance...because they encourage a degree of openness...Political competition is usually conducted through factional alignments". Initiation of new programs occurs only if it benefits the governing elite.

The three political subcultures arose because of sociocultural differences among the people who came to America. "Because the various ethnic and religious groups that came to these shores tended to congregate in their own settlements and because, as they or their descendants moved westward, they continued to settle together, the political patterns they bore with them are today distributed geographically.

There have been three stages of the frontier (p. 123): the rural-land frontier; the urban industrial frontier, "which began in the Northeast and spread westward, transforming the society into an industrial society. "By the mid-twentieth century, it had given birth, in turn, to the metropolitan-technological frontier, which is characterized by the radical reordering of an industrial society through rapidly changing technologies and a settlement pattern that encourages the diffusion of an urbanized population within large metropolitan regions. These radically new technologies, ranging from ato9mic energy and automation to synthetics and cybernetics, and the accompanying suburbanization of the population, influenced further changes in the nation's landscape."

"By 1980, however, there were signs that a new frontier stage was emerging based on the cybernetic technologies--minicomputers, satellite-transmitted communications, cable television and new data processing devices--fostered a settlement pattern of large belts of relatively small cities."

Elazar traces the flow of different ethnic groups across the US beginning with settlement in New England in the 1600s and has an amazing map on pp. 128-9 that illustrates immigration flow across the nation of the moralistic, individualistic and traditionalistic cultures. The moralistic is from New England, the traditionalistic from the South and the individualistic from the Atlantic State including lower New York but not eastern Long Island.

He writes (p. 134):

"The amalgam of the political subcultures in the several states is varied, because representatives of each are found within every state to varying degrees. In fact, unique aggregations of cultural patterns are clearly discernible in every state. These cultural patterns give each state its particular character..."

(p. 138) Sectionalism involves arrangement of much greater permanence, which as essentially political phenomena, link whole states and persist despite the emergence of immediate conflicts or divergences...

"...for our purposes, certain common sectional bonds give the states of each section a special relationship to national politics...The nation's sectional alignments are rooted in the three great historical cultural and economic spheres into which the country is divided: the greater Northeast, the greater South, and the greater West."

"The sections reflect the thrust of the frontier. But "each has sufficient diversity to reflect the social and economic complexity of the nation as a whole" (p. 140)

"Roughly speaking the individualist political culture proceeds westward along the northern edge of the center of population line..."

p. 140: "From the New Deal years through the 1960s, Americans' understanding of sectionalism was submerged by their concern with urban-oriented socioeconomic categories, such as the struggle between labor and management or between the haves and have-nots in the big cities...The widespread but erroneous notion that sectionalism had all but disappeared was based, in part, on the myth that sections in the nineteenth-century heyday of sectionalism were separated by different public concerns. In truth, they shared the same universal concerns then, and their differences then as now, stemmed from differing attitudes toward those concerns and differing notions of how to deal with them. Beginning in the 1970s, however, there was a resurgence of sectional feeling as economic social cleavages increasingly came to follow sectional lines. The sun belt-frost belt contribution is the prime example of this new sectionalism..." (p. 141)

"The moralistic political culture is the primary source of the continuing American quest for the good society...The individualistic culture is the most tolerant of out-and-out political corruption, yet it has also provided the framework for the integration of diverse groups into the mainstream of American life.

(p. 150): "The juxtaposition of groups with different political cultures within the same political system, a product of the geology of cultural diffusion in the United States, has invariably led to some form of cultural conflict with many of the states."

(p. 152) "...political culture and conflicts between political cultures influence political behavior in the states" and so "become important in determining state responses to national politics.

"Citizen participation in politics as measured by voter turnout clearly reflects the different predispositions in the 50 states and their particular political cultures. It is reasonably clear that people who believe that they can accomplish something positive through the political process are more likely to vote and otherwise become active in politics. Thus, it would be natural for moralistic types to be most active...In presidential elections, states of the moralistic political culture consistently lead in percentage of voters turning out."

(p. 157) "Political culture also influences voting behavior itself, though usually in less clear-cut ways than it influences electoral competition. The reaon for this is that the two-party system, by reducing voter alternatives, tends to bring together voters who support particular parties or candidates for many different reasons. Nevertheless, there are moments in the electoral process when political cultural differences stand out in bold relief."

Progressivism involved more heavily emphasizing the moralistic political culture than had been true in the 19th century (p. 160):

"in the late nineteenth and early twentietch centuries, before the New Deal, there was often a great deal of conflict betweeen the policies their representatives advcoated and those adopted by the federal government. These states were in the forefront of the third-party movements appearing and reappearing at all levels of government in the two generations following the Civil War. A roster of the nation's Progressive leaders is heavily weighted with the names of their representatives. Under the right circumstances, the old Populist-Progressive bloc periodically reappears. thus, the first outspoken senatorial opponents of American involvement in Vietnam came, with a few exceptions, from the tier of states stretching from Wisconsin to Orgeon that produced the "sons of the wild jackass" two and three generations ago. William Proxmire (Wisconsin), Eugene McCarthy (Minnesota), George McGovern (South Dakota) and Wayne Morse (Oregon) exemplified this bloc throughout the 1960s."

(p. 161) "The states least unified internally are those that have strong competing cultural currents within their limits. In general, they are also least differentiated from national patterns in policy matters and tend to be dominated by the individualistic political culture. The individualistic-dominated states are almost invariably two-party states...The apparent liberalism of the dominant political forces in these states today is often a reflection of perceived economic self-interest rather than a commitment to any abstract principles or social welfare or reform."

The Supreme Court has tended to give "those interested in expanding federal power a green light."

For example, since 1962 the United States Supreme Court has taken it upon itself to act as the ultimate arbiter of the very basis of legislative representation--the drawing of electoral districts...One of the major blows at state integrity has been the Supreme Court's limitation of state responsibility for the organization and regulation of the party system. In the past, that responsibility strengthened the role of party politics as a guarantor of state integrity. Given formal status through state law in the first instance, the party system has been legitimized only tangentially through judicial interpretation or even federal legislation.

Meanwhile, p. 178, "The discretionary rule-making power of federal administrative agencies has been substantially increased, to the pont where their rule-making activities have as much or greater effect on state-federal relations than formal legislation and judicial interpretation. The sheer mass of federal business has made this necessary. Congress can, at best, set forth the general guidelines for implementing federal-state programs

Two kinds of interference: "Best known is the formal system of legislative oversight...This has given the states an important line of access to national policy." (p. 178).

"The congressional committees have become focal points for the combination of interests and actors that has come to be known as the iron triangle or the unholy trinity, depending on one's perspective. That is to say, the complex of interest groups, congressional forces and federal offices concerned with a particular game or set of programs directed to some common end. The elements in this complex reenforce one another in pursuit of their common goals. The multiplication of these iron trinagles and the power each has by virtue of its ability to link constituents, legislators and administrators in a common enterprise are major reasons why federal programs have proliferated."

(p. 192) "The one major addition to the written Constitution that has had profound effects on the position of the states in the federal union is the package of Civil War amendments, the Thirteenth, Fourteenth and Fifteenth. That package formally ratified the supremacy of the national government along the lines set forth in federalist political theory as embraced by the Yankee North.

From 1948 to 1981, a period of 33 years, state revenues grew from $10.1 billion to $189.6 billion.

p. 239: "Three generations ago and more, Americans would probably have thought it strange to think of interests aligning themselves with specific planes of government. During the nineteenth century, when cooperative federalism revolved around land grants and joint stock companies, all planes of government were involved in the same programs. Sharing then, like sharing now, prevented a serious alignment of interests on government planes. Despite all myths to the contrary, both northern abolitionists and southern slave owners appealed to all three planes of government at various times to support their respective positions.


"It was only with the rise of labor-management antagonism that the notion of separate appeals came to the fore. Even then, at the beginning both inerests found similar kinds of support or antagonism on both the federal and state planes No continuing differences developed until the 1930s, when the federal government under Democratic control adopted an open prolabor position. The industrialists then fell back on the states, since they were able to retain influence in at least some of them. Since the labor-management question loomed so large among the public concerns of the 1930s, the consequences that flowed from it were raised by political analysts from the level of the specific issue that spawned them to the basis for sweeping generalizations about the political system. Hence the notion of separate appeals, valid in this issue, was raised to the level of generalization.

"Labor and management have made their appeals on the basis of an immediate multiplicity of specific interests rather than in reference to one overriding concern at least since the mid 1950s. This meant the end of division by plane Management found a sympathetic administration in Washington under President Eisenhower, and organized labor, though still strongly in favor of active federal intervention in the nation's domestic affairs, discovered that it neglected the states at its own peril...

"The 1960s saw the end of the state-oriented ideology of business. As the business community finally came to recognize that active federal involvement in the regulation of commerce in its several forms was here to stay, they began to realize that, from its point of view, if regulation was to come in any case, it was better to have federal rather than state regulation. Federal regulation meant 1 set of rules or standards rather than 50 and, even more importantly, federal rules represent a compromise between stringent regulation and minimal regulation. At least some states--usually the largest and most powerful ones--tend to establish more stringent rules or set higher standards.

"The moment of truth for the business community came with the struggle over federal automobile safety regulation in 1966. The auto industry began their fight against federal action with traditional calls for the protection of the states' rights. Howver, they came to recognize that California and New York (which together constitute some 20 percent of the American automobile market) were exercising their rights to set higher safety standards than those being considered in Congress. The industry then shifted gears and demanded preemptive federal regulation--that is to say, federal regulation shaped to their taste. This would also prohibit the states from regulating at all in the auto safety field, thereby eliminating the higher demands of California and new York and an increasing number of smaller states that were following their lead. The automobile industry pressed for minimal federal standards. When the auto industry won most of what it wanted, other industries adopted the same strategy.

"Those interested in strong regulation, recognizing the changed situation, are turning, ableit hesitantly, away from tehir ideological commitment to federal action and are supporting higher state standards as a way to outflank business pressures. This is particualrly evident among environmentalists. When Congress began to set federal environmental pollution standards, California successfully led the supporters of more stringent controls in a fight to gain exemption

...Minnesota's efforts to establish higher standards of purity for the discharge of waters passing through nuclear power generating plants were rejected by the US Supreme Court on the grounds of federal preemption, in a manner reminiscent of the Fuller Court's restrictions on state efforts to protect workers and consumers in the 1890s.

"On the other hand, the Court sustained Montana's 30 percent severance tax. This tax was levied on coal mines and was designed to give the state fair compensation for the strip mining permitted by the federal government.

"Most recently, the drive for satisfaction on the local plane rather than from Washington has come from among the poor, the black, the young--and most recently, the liberals--groups clearly associated with the profederal alliance in the past. They are now discovering htat community self-governance as well as bureaucratic support is needed to build a stisfying life and that the states can serve as vehicles for expressing their demands even when the federal government is hostile."

p. 242: "To the extent that the federal character of the American system has been damaged, the courts are the principal cources of that damage."

The first shift in federalism "happened in the generation between 1816 and 1848, when joint fiscal management and joint stock companies for internal improvements gave way to land grants. The second took place in the generation between 1877 and 1913, when land grants gave way to cash grants. Now the move seems to be in the direction of new relationships in the field of governmental regulation. The first two periods were clearly oriented toward intergovernmental cooperation in developing an infrastructure for national and regional development. The third shifted focus to include the provision of public services on a cooperative basis. Now the country is moving in the direction of using government to control outcomes and the issue is how the various planes of government can or will cooperate. p. 253

The chief threat to federalism is the US Supreme Court. "Central to these dangers is the apparent abandonment of restraint by the US Supreme Court in matters that affect the integrity of the states and localities. The Court's actions are not designed to be antifederalist. Quite to the contrary, whenever it has addressed the issue of federalism directly, as in the Usery case, it has emphasized the importance of maintaining the integrity of the states...

But its inconsistency and some would say sheer lack of proper understanding of federal principles--or even lack of clearheadedness at times--have had that effect. In decision after decision where the Court has been interested in other issues, usually those of individual rights and sometimes of environmental protection, it has either ignored the institutional needs of the states and localities or the fefderal principle of comity on behalf of abstract principles.

p. 254 A parallel problem is athe new kind of hierarchical thinking that has spread among certain influential circles in American society. It sees the federal system as a pyramid...This image, drawn from teh organizational theories of the first half of the twentieth century embraced then by the business community but now being questioned in those quarters, is radically different from the understanding of the intergovernmental partnership of the past...While sharing was the norm and federal initiatives were vital to the development of new government activities from the earliest days of the federal republic, political leaders and federal administrators alike viewed the role of the federal government as one of assistor to the states, not as their superior. The federal role was designed to be stimulatory, not to supercede state efforts. Federal officials were to be advisers to their state counterparts, albeit advisers who could set standards to follows. Many Republicans who advocate decentralization and greater reliance on the states have shown that they are thinking in terms quite as hierarchical as their Democratic counterparts who desire greater federal activity...Hierarchical thinking is responsible for the worst aspects of concentrated cooperation whereby federal aid is used to supercede the states rather than stimulate them to act...

"There is no better example of this than the history of the voting rights amendments of 1970. These extended the franchise to those 18 years old and over in all elections--federal, state and local--by legislative fiat after it had become apparent that, where the issue had been submitted to voters of the states, it had failed more often than not. The sheer willingness to ignore both public action and constitutional requirements simultaneously can only be explained by the existence of a pervasive feeling that "Washington knows best"--hierarchical thinking in its most extreme form.

Centralization of Federal Power Has Led to Coddling of Business

The relationship between the state and federal governments fluctuates, but the overall trend has been toward centralization, with a few blips. This came about in part because of the Civil War, which enforced centralization in order to achieve noble objectives. The 13th, 14th and 15th amendments enhanced federal power over the states, requiring states to recognize citizenship, right to make contracts, equal treatment under the laws and voting rights to former slaves and, for that matter, to all citizens. The states' reaction to the growth of the railroads in the late 19th century was to subsidize them, and they enhanced the natural advantages of economies of scale through land grants, rights of way and other subsidies. In turn, the new, complex corporations faced multiple regulatory regimes across the states. This raised their costs. In the 1876 Munn v. Illinois Chief Justice Morrison R. Waite, writing for the Court, held that states have the right to regulate railroads because railroads reflect the public interest. In the 1886 Wabash, St. Louis and Pacific Railroad v. Illinois, law concerning the Illinois Grange's clamoring for regulation of railroad rates was federalized. The court held that states could engage in indirect regulation like safety regulation but not direct burdens on interstate commerce like rate regulation. The following year Congress passed and President Grover Cleveland signed the Interstate Commerce, which established the Interstate Commerce Commission. The ICC's responsibility was to set maximum railroad rates and eliminate individual discrimination. Thus, the age of centralization was born.

The aim of centralization was regulation coupled with subsidization. The regulation part reflected the impetus of Populist movements like the Grange, social Gospel Christianity, fear of labor unions and socialism and pressure from Progressives like Walter Weyl and Herbert Croly who, in the early 1900s argued that European-style social democracy was more "progressive" than American laissez-faire.

The centralization of regulation helped big business because it established a stable, unitary source of regulation that made it easy to comply. Fifty states pose a fifty times greater compliance problem than a single federal government. Moreover, industry or what Williams calls "syndicalist" influence over government is easier to organize. Mancur Olson and George Stigler have written about the economic conditions for effective lobbying, and centralization of power makes lobbying considerably easier for large firms and gives them considerable advantages over small. Many small firms over a national market are far more difficult to organize than one fiftieth the number over a state-wide market. At the same time, it is far cheaper for a few large firms to lobby a single federal government than it is for them to lobby fifty state governments. Thus, in the name of "regulation" the Progressives tipped the political scale in big business's favor.

Theodore Roosevelt and other Progressives of the early 20th century believed that big business produced wealth. Historians such as Alfred Chandler argued that transportation and communication advances with respect not only to canals, railroads and then trucking and air delivery but also with respect to telegraph, telephone, and then fax, e-mail and Internet, expanded markets facilitating reduced costs and enhanced economies of scale. There were other subsidies to big business, specifically the creation of federally subsidized credit and banking through the Federal Reserve System, tariffs almost continuously to the days of Wilson and then after, cartels and price fixing during World War I, and a host of regulations that make it more expensive for small business to compete with big.

But has big business really delivered? Since 1980 manufacturing firms increasingly exited the United States. Hence, the subsidization of manufacturing through credit and protection did not yield permanent jobs to average Americans. Executive compensation, rationalized through artificially elevated stock prices due to Federal Reserve policy, has been an exercise in self indulgence and waste. Increasingly, Americans hanker after a few high-wage investment banking and celebrity jobs, and are unwilling to work hard in traditional crafts. The images of today's youth, rap singers since the 1980s, Beavis and Butthead in the 1990s, Paris Hilton today, suggest a culture of dim wittedness and sloth. These images are broadcast by subsidized big business concerns, the media conglomerates, who profit from popular music that advocates drug use and violence. Television shows like "Entourage" suggest that the way to succeed is to hang out with other self indulgent boneheads, as long as they are good looking.

The transition from decentralized to centralized federalism and from laissez-faire to statism altered incentives in the economy. The combination of centralized creation of credit and inflation of scale enhances returns to stock offerings, first because large firms are artificially profitable because of their subsidization and second because monetary expansion itself inflates the stock market by reducing interest rates. This inflation of stock returns makes investment and commercial banking far more profitable than they would be in a decentralized and laissez-faire system. In turn, firms are encouraged to maximize stock returns by minimizing costs in that low interest rates make stock returns more elastic with respect to increases in net profit. This does several things. First, firms are encouraged to move plants overseas, where labor costs are lower. Second, their incentive to innovate is reduced because ample returns can be obtained due to the reduced interest rates and the elasticity of stock prices to small gains. Why risk invention of a new technology, when you can, like the typical US CEO, simply think about reorganization or moving plants to another country and so earn $100 million? Third, the returns to initial stock offerings are enhanced. Thus, returns to investment banking exceed market levels. Because the manpower needed to issue and trade securities is small relative to the inflated returns, the high salaries divert human resources from manufacturing to investment and speculation.

It is likely for these reasons that the innovation level of late nineteenth century laissez faire America was far greater than during the Progressive twentieth century. The most innovative Americans have been attracted to investment banking and law rather than manufacturing. Firms like Intel need to recruit engineers from overseas in order to compete. This misallocation of human resources leads to lower growth and less innovation in the economy than there would have been in a decentralized, laissez-faire economy.

The coddling of business results in a trade off between risk and return. In a laissez faire economy credit is difficult to obtain, profits are reduced and stock returns are reduced because interest rates are relatively high. This results in considerable discomfort to business executives, who in the nineteenth century complained about "overproduction" and "depression". However, the decreasing prices resulting from slow monetary growth increase real gains to labor. Real wages rise because firms are forced to think carefully about productivity given the intensely competitive milieu. Moreover, innovation is stimulated because that is the only way to earn large profits. Thus, the laissez-faire economy is rocky soil in which only the hardiest firms can grow, and they grow by extending roots that crush even the largest competitive rocks. Workers, the soil in which these competitive plants grow, benefit from the nutrients that the innovative stems produce. But the weaker plants, the firms that thrive in politically driven, low-innovation "Progressivism" complain endlessly about depression, the need for subsidization, the need for a central bank, the unfairness of the competitive economy. They are, of course, backed by feudalists and socialists, who similarly yearn for stability at the price of innovation.

The Progressive economy does not reward achievement. It rewards potential. Investment banks hire from the ranks of Ivy League students, who are in turn admitted to Ivy League schools on the basis of SAT scores. But SAT scores are not achievement, they are just potential, and they do not explain the majority of what might explain achievement. Americans are rewarded for ability, and this reduces their risk. But this also has the effect of draining men and women of ability from the ranks of the innovators into the ranks of transfer recipients. There may indeed be economic gains from stock offerings and trading, but they are minute compared to the potential gains from innovation. A single Tesla is worth all of the investment bankers in history times 10. Yet of all of the thousands of potential Teslas, only a handful will succeed. Why risk failure, when a certain career in investment banking has a far greater probability of significant success. Thus, elite Americans have become increasingly risk averse. They have chosen the way of relatively certain but high returns, but sacrificed the moral rectitude of economic creation and productivity. They have come to favor the sleight of hand that Wall Street capitalism offers, claiming to create efficiency but depending upon credit expansion and government largess.

Stanley Elkins's and Eric McKitrick's Age of Federalism

Stanley Elkins and Eric McKitrick. The Age of Federalism. New York: Oxford University Press, 1993. 925 pages. Available at Amazon.com for $25.51, used and new from $6.88.

This is an important history book. It should be required reading for all Americans as we cannot understand the political dynamic in our country without a grasp of the Federalist period. Elkins and McKitrick pack this majestic study with rich and detailed information about the major players' biographies, the intellectual history behind Federalism and most of all the politics of the Federalist era.

My own interest in reading this book involved three questions: (1) to what degree is modern social democratic liberalism linked to the ideas of the Federalists; (2) to what degree has there been a continuity in the history of elitism in America (for example, were the Progressives and New Deal social democrats intellectually linked to the Federalists); and (3) to what degree did Federalism fail because of its emphasis on centralization or, to what degree did the Articles of Confederation fail because of excessive decentralization. The answer to (3) is that Federalism was replaced by Jeffersonian republicanism not on the basis on the workability or lack thereof of the Federalist ideology but because of the political ability of Jefferson and his followers, the political weaknesses and perhaps mental imbalance of John Adams and internecine fighting among the Federalists. The Federalists were elitist and did not learn how to cloak their elitism the way that the Progressives and social democrats did. With respect to substantive policy positions, the Federalists were very much in line with the Progressives and social democrats of the 20th century. The difference was the packaging, not the substance.

To answer the third question in another way, the Articles of Confederation had decentralized the American national government in ways that the Constitution corrected, and although the anti-statist philosophy of Jefferson and the anti-Federalists, rooted in English Whiggery, led to some initial opposition to the Constitution, there is little reason at this point to regard the problems with the Articles of Confederation as relevant to 21st century political debate. There was excessive decentralization, but that level of decentralization is not going to occur again unless there is a collapse of the United States government. In particular, the federal government did not have the power to tax the population directly under the Articles of Confederation and so could not have supported an army or federal law enforcement of any kind. As a result, a minor problem like Shay's rebellion was difficult to address. As well, the absence of a unified trade or defense policy made the nation weaker. Hamilton, Madison and Jay under the name of Publius addressed these questions in the Federalist Papers, and they are not controversial.

Foreign policy and defense are areas to which public goods arguments of the twentieth century apply. Thus, the Articles of Confederation did fail because of excessive decentralization, but the degree of decentralization was extreme by today's standards so that there is considerable room for decentralizing. It was, after all, Jefferson and the Republicans (or Democratic Republicans) who ultimately triumphed against the Federalists. In effect, the degree of federalism that Hamilton, Washington and John Adams implemented made a republican, anti-federalist policy workable. Even in the case of Jefferson's presidency (which is not the subject of this book) Jefferson famously took several federalist turns in areas like the Embargo Act and the Louisiana Purchase. Unless you are a dogmatic libertarian you will agree that a realistic federal government is useful and necessary.

The answers to the first and second questions begin with 18th century England, and the answer seems clear to me that there is a close link among Federalism, Progressivism and the social democratic ideology of the New Deal. Elkins and McKitrick do an excellent job of discussing the intellectual and political history. The intellectual roots of Federalism were in eighteenth century England, specifically in opposition to the ideas of Sir Robert Walpole and his "Court" ideology which the landed Whigs perceived to be corrupt. Walpole rose to power in the 1720s and built on institutions, especially the Bank of England, that had been established in the late 17th century.

"The system of public finance which thus had its birth during the reign of William III was subsequently brought to a state of considerable maturity and stability by the ministries of Walpole and Henry Pelham under the fist two Georges. But it also provided a key term in the emerging tensions of Court and Country: government money" (p. 14).

Elkins and McKitrick go on to write (p. 14):

"William III's policy of war against the France of Louis XIV, while it had the public's general support, proved vastly more expensive than anything of the sort the nation had previously undertaken. With current taxes and ad hoc private loans clearly inadequate to meet unprecedented and continuing costs, William's Treasury officials arranged with a group of London's wealthiest merchants for the first of a series of exceptionally large loans, to be secured by specific future taxes, in return for which the financiers would be granted a charter with monopoly privileges for certain forms of banking. The resulting Bank of England (1694) would handle government deposits, assist in organizing future borrowing by government, do private commercial business, and issue notes which could circulate as public currency. (Two other great chartered monopolies, the East India and South Sea Companies, would also for a time, handle large portions of the public debt.) This transformation in public finance brought long-term consequences in two broad spheres, one in the nation's business life and the other in the workings of government itself. A financial revolution of this order had of necessity to be accompanied by an administrative revolution.

"Extended periods of war, which would recur at more or less regular intervals throughout the eighteenth century, together with the growing public debt needed for maintaining them--a debt which nonetheless would prove more than adequately supportable by a very sound base of government credit--combined to bring into being a vastly expanded money market, new forms of investment, and a substantially new trading class concerned primarily with the movement of public securities and allied varieties of of negotiable paper, and with the kinds of transactions which made them profitable. Meanwhile, these same factors--an intermittent war footing and greatly increased sums available for expenditure by government--required a much expanded bureaucracy in the Treasury, Admiralty and War offices for handling them. The purposeful allocation of this patronage and other forms of royal preferment in such a way as to assure government of dependable majorities for its policies in the House of Commons was brought to something of a fine art by Sir Robert Walpole."

The opposition to the growing state, somewhat corrupt in making political appointments and expanding government (sound familiar?) was what Elkins and McKitrick call the "Country" philosophy of the Whigs. They characterize the debate between Walpole's centralizing strategy and the free market opposition as between Court and Country. Perhaps it is not coincidental that 280 years later the election of George Bush has been characterized as a contest between largely rural "red" states and largely urban "blue" states dominated by college educated professionals linked to the central banking system through employment in big business, Wall Street, government, health care and the legal system.

Elkins and McKitrick argue (p. 15):

"To the extent that the resulting Country opposition had a community of sentiment and purpose, it derived from a somewhat indeterminate mixture: a sense of exclusion, suspicion of the news kinds of power and new ranges of influence that money seemed to be opening up in London and Westminster, and hostility to men who appeared to be threatening the standards and values of which rural squires who had customarily seen themselves as the hereditary custodians. The Country voice, to which were added those of a variety of literary types, was loud in judgment.

"A perilous new era, as the Country saw it, had arrived, one in which the decisions and choices that most affected the nation's liberties, well-being and morals were more and more removed from the hands in which they had traditionally been safest--from the body that is, of the nation's landed proprietors--and were now lodged elsewhere and out of reach. Though the Glorious Revolution of 1688-9 had supposedly blown away the last traces of the divine right of kings, the Crown's executive power had nevertheless taken on a new weight, exercised in new ways and now appeared more pervasive and menacing than ever. The houses of Parliament could no longer be seen as an independent force in government or as the guardians of liberty and virtue in the nation's life, because the base upon which virtue in public service was presumed to rest--landed property and freehold tenure as the safest guarantee of independent judgment and action--was being sapped by the power of money. While the burden of a rising national debt and costs of continuing wars were being principally borne by the gentry through the land tax and excise, men in the City whose wealth was based not on the real value inherent in land but on the ephemeral values of paper and credit were enriching themselves at the nation's expense. Meanwhile, the royal ministry, with its enhanced latitude of initiative and action, and with this new class at its beck and call, was perverting the independent will of Parliament and purchasing its subservience to the Crown's own will through offices, honors, and perquisites. The sacred balance of the constitution, the venerable equilibrium of king, lords and commons, was teetering over an abyss of corruption."

"...Country spokesmen (Whigs) sounded a continuous call for a return to cheap, simple and honest government. They attacked the excise and land tax as impoverishing the nation, wars and funded debts for the same reason (and because both the burdens and the profits fell on all the wrong people), the standing army because of what it boded for the nation's liberties, and all these things because of their potential for corrupting the nation's virtue. Meanwhile, in defense of the balanced constitution and genuine mixed government they kept bringing up Place Bills to limit the Crown's patronage powers and to keep down the numbers of pensioners and placemen sitting in Parliament, and they called for more frequent elections in order to check the range of temptations laid before a too entrenched membership of the House of Commons...

"The response of Court-minded--or non-Country minded--publicists to the Country polemics was not made in a language that challenged in any fundamental way the principles the Country stood for. Indeed, they professed by and large to hold all the same principles, other things being equal. They put their emphasis, however, on the practical and technical considerations in government, foreign relations and economic life that must modify too literal construction of those principles..."

(Note Martin J. Sklar's article on Woodrow Wilson, "Woodrow Wilson and the Political Economy of Modern United States Liberalism" in Murray Rothbard's and Ronald Radosh's New History of Leviathan*. Much like the "Court's" strategy in 18th century England (p. 7):

"Perhaps the greatest source of historical misconception about Woodrow Wilson is the methodological compartmentalization of his mentality into two distinct components, the "moralistic" and the "realistic" or "commercialistic", as if they were discrete and mutually exclusive...wherever Wilson is perceived to have spoken or acted for 'the little man','democracy','liberty','individual opportunity'and the like, he was 'liberal' and moralistic; wherever he is preceived to have spoken or acted for corporate interests, economic expansion abroad and the like, he was 'conservative,' 'commercialistic,' 'expedient,' or realistic." Perhaps Wilson made the transition from Elkins's and McKitrick's Country to Court in his own lifetime.)

Going back to Elkins and McKitrick:

"...Court supporters could be as ready as anyone to deplore the burdens of war, to admit the possibility of the debt getting out of hand, or to acknowledge that standing armies needed watching, or to concede that money, commerce and virtue did not always go together. Nevertheless, the world of the eighteenth century had become immensely widened in scope for the interests of the British nation. A far-flung network of overseas trade, a colonial empire and a due weight in the power relations of Europe all required an active foreign policy and a professional military and naval establishment for giving effect to it. Moreover, such commitments and responsibilities would scarcely even be thinkable without a dependable system of public finance to support them.

"Thus while such received civic humanist values as those concerning luxury, corruption and virtue may not have been exactly repudiated, Court language certainly showed a decidedly revised slant on them. For instance, whatever the virtue once inherent in citizen militias in preference to standing armies, it was now out of the question to send off such a body to be destroyed in France or anywhere else. As for the public debt, the very size of it and the sound credit of the government on which it rested could be seen as testimony to the patriotism and good faith of the class willing to invest their money in it. And as the nation prospered and commerce flourished, luxury itself need not be thought of as leading to certain corruption if it brought refinement and amenity to the common life. So the emergent financial system, the government structure that administered it, the men of affairs who both supported and profited from it, and the beneficent consequences for the nation that could be claimed to flow from it were all defended in strong accents...

"...Virtually nobody was yet prepared to argue that regular parties might be a good thing; Court and Country each charged the other with stirring up faction; and many a country gentleman shied away from joining in any sustained and systematic effort to discredit the Court's established policies...

"...There appears to be a striking parallel between the Court-Country divisions of Georgian England and those that subsequently appeared in Washingtonian America.

"The principal concerns of the Country viewpoint in England re-emerged with an exceptional degree of similarity in the new republic and gave form at virtually every turn to the opposition temper which developed in very short order in response to the policies and actions of the new federal government...As the Hamiltonian program revealed itself over the next two years--a sizable funded debt, a powerful national bank, excises, nationally subsidized manufactures, and eventually even a standing army--the Walpolean parallel at every point was too obvious to miss. It was in resistance to this, and everything it seemed to imply, that the Jeffersonian persuasion was erected."

Jefferson's republican philosophy was largely a response to Hamilton's big government approach. According to it "a predominantly agricultural society was seen as the kind inherently most virtuous, the freest from corruption, the kind best constituted for resisting decay, and the one most to be desired for the American republic." At the root of Jefferson's emphasis on an agricultural America was a mistaken belief in Malthusian economics. In Jefferson's and Madison's view:

"What was above all to be avoided was an unholy alliance of commerce, manufacturing, money and public credit fostered by an intrusive and interfering government. The right kind of commerce could flourish in a world of free trade such as that envisioned by Adam Smith in his famous indictment of mercantilism. Such a world, as the Americans knew all too well, did not yet exist."

Hamilton aimed to implement the British "Court" system in America. But (p. 27) "it was Jeffersonian Republicanism and not Hamiltonian Federalism that would provide the opening political opener for the emergence and growth of nineteenth century middle class capitalism. In contrast to Federalism, which was elitist, Jeffersonian Republicanism was inclusive and it attracted small artisans in the cities as well as entrepreneurs. In contrast, Federalism was elitist and its elitism led to its rejection.

Elkins and McKitrick argue that historians have overlooked Hume's importance to Hamilton's thinking because Hume was not so famous an economist as Smith. Hume, they argued, emphasized development economics to a greater degree than did Smith (p. 107). They write:

"In the economic essays of David Hume, published in 1752, one finds a theoretical projection of the optimum conditions for economic development: a rudimentary but shrewd forerunner of what would in our own day come to be called developmental economics...Hume's case for a commercial society goes well beyond simply the argument for national strength. In 'Of Refinement in the Arts' he insists not only that such a (commercial) society allows a nation to be strong in times of crisis but that it is, by its very nature, a good society...Here then was a very strong case for an urban, commercial society. Its common man of virtue was not the yeoman farmer but the skilled city artisan...'Of Money' and 'Of Interest' explore the relation between the available supply of money at any given time and the general level of productivity of the entire economy. In them, Hume challenges certain common suppositions. An increase in the money supply, according to conventional wisdom, should lead to a directly proportional increase in prices. But this would only happen, says Hume, if 'every man' were to have the same sum 'slipt into his pocket in one night.' If however, the increase were concentrated in relatively few hands, the conditions would be created whereby it would be used to increase the community's real wealth, which is not money but the production of commodities. More physical goods would thereupon be available, and thus prices would not rise in direct relation to the increase of money. The same argument is made with regard to the interest rate, which in the eighteenth century was regarded as the barometer of the community's economic health. It was commonly supposed that the interest rate rose or fell in direct proportion to the amount of money available--the more plentiful, the lower the interest and vice versa--but Hume denies that it worked in any such direct or mechanical way. The key variable is again the degree and manner in which liquid capital is concentrated, the assumption being that it will be in the hands of the most energetic and enterprising men in the community. These are the merchants, the men who are able to exercise the most rational choices as to the alternative uses for money, and it is this very process of directing money into the most productive channels whether through direct investment or lending at interest--rather than the simple quantity of it--that governs the interest rate.

(p. 112) "...Hamilton knew that despite an enormous expansion of the public debt since 1750 England's credit was stronger than ever, and even more significantly, that its economic growth during that same period had been phenomenal. America, meanwhile, unlike Great Britain, did not intend to be plagued by a string of interminable wars, and could thus steadily reduce rather than increase its public debt. Meanwhile, a funded debt combined with a national bank would not only open for the United States sources of credit that were not previously available but would also provide a stable circulating currency that could be expanded to meet the requirements of trade. A generation of merchant-enterprisers would thereby be given access to the capital needed to realize the vast potential of a whole continent endowed with untapped resources and an industrious, expanding population. Even if the public debt were not reduced--of it were reduced only very slowly, which was probably what Hamilton had in mind--the taxes for supporting it would constitute a steadily diminishing burden on a population growing both larger and richer..."

"So central, indeed, was the public credit to the country's well being, as Hamilton saw it, that every means must be taken to protect it. A war with any country would threaten that credit; another serious dispute with Great Britain would destroy it...Another way of putting this would be that America's prosperity and that of Great Britain were inseparable.

Hamilton's principal design reached its completed form in "Report on the Public Credit of January 9, 1790". Elkins and McKitrick emphasize that Hamilton's mind projected fluidly.

(p. 115) "In Hamilton's scheme of things the dynamic force was beyond doubt the merchant class. These were the men who could and would use capital to create more capital--who would build the ships, develop the markets, provide the goods and make the decisions that affected the uses to which the community's resources would be put...Hamilton's faith in the capacity of the merchant class to perform a creative role in the nation's life could rest on a persuasion that this class was the receptacle for a wide variety of knowledge, experiment and ideas...Parallel with Hamilton's projection for America as a society was one for the United States as a government. The government required a sound system of taxation, undoubted stability of credit both national and international, an orderly funding of the several complicated layers of public indebtedness that had grown out of the Revolution."

Many of the early Federalist debates concerned how to "fund" the public revolutionary war debt. "The capital created by a funded debt to become 'an accession of real wealth rather than merely an 'artifical increase of Capital', it must serve "as a New power in the operation of industry' and this would occur only if it went through the hands of men who would use it to build ships and factories, launch business ventures and augment commerce.

Key problems were whether to honor the Continental debt at par, whether to assume the state war debts, how to do the accounting for and settle the Revolutionary War accounts among the states. Hamilton proposed that the federal government assume the states' war debts and a settlement of accounts whereby no state could lose (p. 120). Honoring the debt at par or 6 percent was not possible, but Hamilton proposed a compromise of 4% interest, lowering the interest rate somewhat but to a moderate degree. He set up an excise tax on whiskey to accomplish this. A national bank would provide a dependable ciruclating currency and would manage the financial transactions of the Treasury (p. 123). Moreover, relations with Great Britain would be improved in order to improve trade and so make tariff income more stable.

The authors go on to write (p. 227) : "We cannot account with final precision for all the origins of Hamilton's bank plan, though certain of the main sources are clearly enough identified. In this instance, unlike that of his first Report on Public Credit, Hamilton's direct theoretical inspiration did not come from David Hume. Hume recognized that banks could be useful in providing credit for an expanding economy, but he also believed that they were an inflationary influence and that they encouraged unduly the export of specie. Hamilton could look, however, to a number of recognized authorities such as Postlethwayt and and Adam Anderson, or a favorable theoretical exposition of banks and their functions. He made considerable use of Adam Smith...There was a very close correlation, moreover, between Hamilton's final plan and the charter of the Bank of England, and in all likelihood he worked with a copy of the British statute at his elbow." One of the chief influences on Hamilton was William Pitt (p. 227-8).

The bank's opponents made arguments similar to those of libertarians like Howard S. Katz today (p. 229): "'This bank,' said Stone of Maryland, "will raise in this country a moneyed interest at the devotion of Government; it may bribe both States and individuals.' Jackson of Georgia thought it was 'calculated to benefit a small part of the United States, the mercantile interest only..' He called it a 'monopoly...of the public oneys for the benefit of the corporation to be created. But the kind of country-party fundamentalism with regard to banks that was to become so prominent in the politics of a lter generation was not nearly so sharp here. Men were against it but were not entirely sure why..."

Jefferson wanted to augment the number of representatives in the House since "the only corrective of what is corrupt in our prsent form of government will be the augmentation of the numbers in the lower house so as to get a more agricultural representation, which put that interest above that of stock jobbers." In 1791-2 the Republican opposition to the Federalists emerged "in reaction to the rising influence of the Treasury over Administration policy" (pp. 257-8). "Madison's attempt to prevent the establishment of a national bank" had not been fruitful. "Only two major items remained to complete Hamilton's program. One was congressional approval of a plan for direct assistance to domestic manufacturing through a system of tariffs and bounties. The other was the establishment of a model manufacturing corporation--financed and organized on a sufficient scale that it might take full advantage of government bounties and new labor-saving machinery, and compete successfully with European manufactures...Hamilton's subsequently famous Report on the Subject of Manufactures was submitted to Congress on December 5, 1791. Hamilton took the occasion to prepare a major policy statement, a labor which occupied him for well over a year. As much a work of theory as a series of particualr recommendations, the Report on Manufactures was intended to establish the ground for a systematic fostering of industry by government...In his commitment to the advantages of a mixed economy, together with his concern for the productivity of the nation as a whole there is a ring of modernity. The one writer of the eighteenth century whose experience and perceptions were in certain ways analogous to Hamilton's was David Hume...The Report on Manufactures, with its acute sensitivity to the many benefits that increased manufacturing might bring to an overwhelmingly agricultural economy, is in some respects the most Humean of all Hamilton's papers."

Hamilton argued against both Jefferson's and the Physiocrats' emphasis on agriculture and against Smith's laissez faire argument (p. 259). Hamilton argued that laissez faire overlooks "the deadening force of habit and custom. People do not easily make a spontaneous transition to new pursuits, nor are cautious sagacious capitalists normally disposed to sink their money in uncertain ventures. Thus, the incitement and patronage of government were needed both to overcome old habits and to embolden reluctant investors.

"The theoretical sections of the report reaches its culmination with Hamilton's effort to show that scarcity of capital is not a valid objection to a wide-scale launching of industrial enterprise. Among the remedies are the introduction of banks, with their powerful tendency to extend the active Capital of Country, as well as the attractions of America for foreign investors, both having already been demosntrated by experience. Hamilton's principal counter-arguemnt, however, is a defense of the funded debt, the existence of which relieves from all inquietude on the score of want of Capital. He insists that the funded debt, though not in itself an augmentation of the country's real wealth, is nonetheless a powerful instrument for bringing such augemntation about. The taxes required for servicing the debt may, if the debt is not excessive, serve as a stimulus to greater exertions throughout the community...

"Hamilton now makes the general assertion -- which in a modern developing state would be taken as a matter of course -- that a mixed economy is ' more lucrative and prosperous' than a purely agricultural one...Hamilton concludes by recommending a combination of tariffs, bounties and premiums on specific manufactured products. The proposals themsevles were modest, but the overall intention was an explicit policy of active government support of industrial growth for the benefit of the entire economy...It would be...misleading...to picutre Hamilton as conjuring up a kind of 'neo-mercantilism'. Mercantilism was a conscious policy of controlling the economy for purposes of state; Hamilton's purpose was a temporary stimulation of key sectors in an effort to mobilize the energies of the entire community...His ends were...complex and wnet well beyond simpleprotection.

Madison, who opposed Hamilton's statist governmental structure, began his opposition in Congress by attacking a bill that came up on February 3, 1792 for the encouragement of cod fisheries. "The word 'bounty' set off an uproar" (p. 276) as monopolistic interferences in the marketplace. As well, speculation in stock of the Bank of the United States led to the Panic of 1792 and increasing scepticism about Federalism.

"Duer and Macomb had secretly made it up between them that their partnerhsip would be of one year's duration and that they would 'be concerned in making Speculations in the Debt of the United States and in the Stock of the Bank of the United States and Bank of New York to the 31 December 1792.' They anticipated a rising market and may even have attempted to corner it. They made extensive contracts for future delivery and to pay for them began borrowing sums large and small at extravagant interest, from all classes in the city. They also laid hands on most of the cash surplus of the SUM (Society for Establishing Useful Manufactures, the embryonic industrial incubator that Hamilton had aimed to establish and to gain governmental support for it), of which both were leading directors. This furious activity was contagious, and by February, New York City was in a speculative frenzy. Other eastern cities were affected as well. Stocks, however, did not rise as fast as expected, and by March Duer, his credit exhausted was in deep trouble...Duer's failure led to other failures and by early April the city was in the grip of panic...by the fall of 1792 things were on the mend...Duer went to debtor's prison on March 23...Duer remained in jail, hopelessly insolvent, for the rest of his days...The atmosphere, nonetheless, had been heavily poisoned. A tendency to ascribe the most extensive evils to Treasury influence and to see in it a steady perversion of public morals was now very widespread. Many had come to believe--Jefferson and Madison among them--that Hamilton himself was enmeshed in corruption. There was a direct relation between such convictions and the eruption of open partisanship that occurred in the spring and summer of 1792. The last shred of likelihood, moreover, of general support for a program of encouragement to manufactures had been blow away forever.

"A major casualty of the Society for the Establishment of Useful Manufactures. Though it was not until aferwards that the Society even got going, and although it continued operations until 1796, the Panic had nonetheless dealt it a mortal blow....For more than a generation in the future no large-scale manufacturing enterprises of any sort would be successfully launched in America. Clearly something was missing from the Humean-Hamiltonian projection of a happy mercantile-industrial commonwealth which needed only the capacity to concentrate capital under the benevolent eye of government...the failure of such indispensable elements as management and technology...At the same time, something more than a country-party fundamentalism was involved in the Jeffersonian-Madisonian rage at 'gambling scoundrels' and in the Virginians' hatred of Hamilton and all that he stood for...It was all well and good to establish the public credit in such a way as to engage the resources of teh community's most energetic men, thus making the public debt an instrument whereby capital might be concentrated for future development...What is to stop the spirit of speculation from becoming an end to itself?

"Seth Johnson wrote to Andrew Craigie in 1791:

"The best support and surest resource of a nation:

"'is in the industry and frugality of its Citizens--whatever in any way tends to lessen or destroy those useful habits must be considered highly prejudicial--The present rage for Speculation by producing in some a sudden and great acuisition of wealth, allures others, of all ranks, from those regular habits of business thro' which the acquirement of property tho slow is Certain, to engage in what, like gaming depends on chance--They feel all the anxiety and eagerness attendant on deep play.

In 1792, Philip Frenau, writing as Brutus in his National Gazette in Philadelphia wrote (p. 283):

"'that a system of finance has issued from the Treasury of the United States and has given the rise to scenes of speculation calculated to aggrandize the few and the wealthy, by oppressing the great body of the people, to transfer the best resourcews of the country forever into the hands of the speculators, and so fix a burthen on the people of the United States and their posterity, which time, instead of diminishing will serve to strengthen and encrease...with unilimited import and excise laws pledged for its support and copied from the British statute book.'"

In 1792 Jefferson (p 287-8):

"had several private conversations with Washington...in the course of which he seems to have put few checks on his detestation of Hamilton's Treasury and the debaucheries to which he thought its policies were leading. He believed that the Treasury 'possessed already such an influence as to swallow up the whole Executive powers"; that it had contrived a system for luring the citizens into 'a species of gambling, destructive of morality, & which had introduced it's poison into the government itself"; and the the Report on Manufactures, which he hoped would be rejected, went beyond any measure yet advanced for turning the Repbulic into an unlimited government...and that 'there was a considerable squadron in both (houses)whose votes were devoted to the Paper and stock jobbing interest."

Elkins and McKitrick (p. 301) emphasize the elitist nature of Hamilton's ideology:

"Nothing he did was undertaken in a spirit basically hostile to the interest of a very special class in American society, those men in whose hands he still believed the nation's future prosperity rested. Nothing had altered for him the Humean vision of the merchant-enterpriser, the man of large affairs, as the type whoe creative energies would transform the continent. True, the Virginians viewed that type through very different eyes, and the words they applied to him were not honorific ones. But otherwise they were really not wrong when they repeated in endless ways that Hamilton was usuing the financial power of the United States -- as he had determined to do from the beginning, for the benefit of speculators."

Libertarian interpretations of history often assume that Progressivism was imposed afresh in response to advocacy of business interests in the late nineteenth and early twentieth centuries. However, it is more accurate to view Progressivism as an atavistic reappearance of 18th century Hamiltonian Humeanism. To the degree that Keynesian economics was a similarly atavistic and reactionary reappearance of Humean economic theory, it may be argued that there have been two cycles of American history. The Hamiltonian Federalist cycle from 1790 to 1800, which led to the Jeffersonian revolution of 1800. Then, the Progressive-New Deal cycle which reimposed Federalism first in the very Hamiltonian name of economic efficiency and management of the large "trusts" and then in the cloak of social democracy, with central banking being strengthened to new heights in 1932.

*Murray Rothbard and Ronald Radosh, editors, A New History of Leviathan: Essays on the Rise of the American Corporate State. New York: EP Dutton & Co., 1972.