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The Founding of American Capitalism

Sir Vince Cable discusses Alexander Hamilton's distinctive and enduring contributions to America's future economic success.
The United States has been the world’s dominant economic power, a superpower, throughout the post-war era. And its recent dominance and past success can be put down to many things, and many individual businesses and political leaders. But there’s a very strong case for arguing that one of the founding fathers of the United States, Alexander Hamilton, stands head and shoulders above the rest. As George Washington’s first Secretary to the Treasury, he established some of the key institutions which underpin the United States’ Industrial Revolution and its emergence as a powerful and successful nation-state. His ideas on economic policy and on politics, too, were controversial at the time, but are highly relevant, even today.
He was a colourful, larger-than-life personality, who actually died in a duel with a leading politician of the time, Aaron Burr. And he had a thoroughly scandalous private life. And he also had an extraordinary capacity for making and provoking powerful enemies, who trashed his legacy when he died, hence his relative lack of recognition, as opposed to some of the other founding fathers, Washington, Jefferson and Madison. He was orphaned in a family with no money when he grew up in the Caribbean, and was sent to college in the United States by a local businessman, who spotted his talent, age 16. He was academically brilliant. But before graduating, he joined the Revolutionary Armies fighting the British.
Gallantry and organisation ability as a soldier led to his becoming aide to George Washington, who as President appointed him as his first Treasury Secretary. He was a lawyer and political thinker, rather than an economist. And he did make a massive contribution to supporting and interpreting the new Constitution. But his main legacy was as Treasury Secretary. He had a very clearly-defined view of America’s future based on economic success. Strong, central, that’s federal government, and industrialisation, as opposed to plantation and slave-based agriculture of the powerful Southern states. He made several distinctive and enduring contributions. The first was to establish an effective banking system to supply credit to expanding businesses.
And at the heart of it was a new national bank the Bank of the United States, and the introduction of what we call fractional reserve banking, which made it possible for banks to expand credit rapidly. His monetary policies were initially inflationary, but they produced a big burst of credit for infrastructure development, roads and canals. And today’s Federal Reserve, the Central Bank, owes its origin to Hamilton. And the currency which it issues has Hamilton’s portrait on the back of its $10 bills. Secondly, he restructured and consolidated the debts of the states after the War of Independence. It was controversial at the time, since he allowed speculators to benefit from the marketisation of the debt.
But as a result, the federal government acquired a stable, a transparent balance sheet, which restored the country’s creditworthiness and enabled a new independent government to borrow. The spectacular display in New York Times Square showing the constant rise in the United States’ national debt illustrates the continuing interest and concern about federal debt, which actually started with Hamilton’s reforms. Third, he rejected laissez-faire, which was the fashionable economic doctrine in the UK at that time. He favoured active government. In particular, he believed that without government support through subsidies and tariffs, new technology and manufacturing would not develop. His ideas weren’t immediately accepted.
But they were subsequently, and they helped to underpin the industrial takeoff and, of course, in due course, the Civil War between the industrial North and the agrarian South. The idea that a private enterprise system needs an active state does linger on in the United States in the early sponsorship of the internet and aerospace, and the recent rescue of the car industry. This was also the model adopted by 19th century Germany and Japan, and subsequently, many developing countries. The arguments about whether or not to have an industrial strategy remain very alive today, including in the UK. And Hamilton’s paper, Report on Manufactures, is as relevant as ever. Furthermore, Hamilton pioneered the two-party system in American politics, which has also endured.
He established the Federalist Party, which was opposed by the Republican Party. The latter survives today. Unfortunately for his subsequent reputation, Hamilton pursued his political arguments with aggressive and often very highly personal attacks on his opponent, who included the second and third presidents, Jefferson and Madison. And his mutual hostility with Jefferson created one of the big dividing lines in politics, which survives to this day. Jefferson believed in popular democracy and decentralised governments, including the rights of the states. Hamilton disparaged populism. He believed that the public could too easily be led astray by demagogues, and he advocated leadership by a business and educated elite. Initially, Jefferson and his allies destroyed Hamilton’s reputation.
It was helped by the fact that Hamilton died early and couldn’t retaliate. But the Civil War reversed the balance. Lincoln resurrected Hamilton’s faith in strong federal government and his strong opposition to slavery. Jefferson was a Virginian slave owner. Other presidents, like Theodore Roosevelt, were Hamiltonians, too. But the balance shifted again under Franklin Roosevelt, FDR, who demonised Hamilton’s pro-business elitism. And he elevated Jefferson to the pantheon of political gods. It was also politically helpful amongst white voters in the South. In recent years, Hamilton has reemerged, and the populist Trump, railing against the educated and financial elite, is a figure he would certainly have recognised and warned against over 200 years ago.
Crucially, Hamilton understood how modern economies work, and he laid the foundations for America’s subsequent success.

It has been argued that Alexander Hamilton stands head and shoulders above the other ‘founding fathers’ of the US. He established some of the key institutions which underpinned the USA’s industrial revolution and its emergence as a powerful and successful nation state.

In the film, Sir Vince Cable introduces Alexander Hamilton and he discusses how Hamilton’s ideas on economic policy (and on politics) are highly relevant, even today; this in spite of being controversial at the time. In particular, Vince discusses how Hamilton established an effective banking system, restructured and consolidated the debts of the states after the war of independence, and rejected laisse faire in favor of an active government.

Please explore Hamilton’s paper Report on Manufactures, which is an example of how he proposed the government be actively involved in the private enterprise system. Tell us in the comments what you find interesting in Hamilton’s paper. Is there anything relevant for today in the report?

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The Politics of Economics and the Economics of Politicians

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