Hamilton was born on the Caribbean island of Nevis, the illegitimate child of a Scottish pedlar (who dubiously claimed an aristocratic lineage) and a woman of French descent. He climbed to power thanks to his sheer brilliance and boundless energy. At 22, he was an aide-de-camp to George Washington in the War of Independence. In 1789, at the outrageously early age of 33, he became the country’s first treasury secretary.
In 1791, Hamilton submitted his Report on the Subject of Manufactures (henceforth the Report) to the US Congress. In it, he expounded his view that the country needed a big programme to develop its industries. The core of his idea was that a backward country like the US should protect its ‘industries in their infancy’ from foreign competition and nurture them to the point where they could stand on their own feet. In recommending such a course of action for his young country, the impudent 35-year-old finance minister with only a liberal arts degree from a then second-rate college (King’s College of New York, now Columbia University) was openly going against the advice of the world’s most famous economist, Adam Smith.
The practice of protecting ‘infant industries’ had existed before, as I have shown, but it was Hamilton who first turned it into a theory and gave it a name (the term ‘infant industry’ was invented by him). The theory was later further developed by Friedrich List, who is today often mistakenly known as its father. List actually started out as a free-trader; he was one of the leading promoters of one of world’s first free trade agreements – the German Zollverein, or Customs Union. He learned the infant industry argument from the Americans during his political exile in the US in the 1820s. Hamilton’s infant industry argument inspired many countries’ economic development programmes and became the bête noire of free trade economists for generations to come.
In the Report, Hamilton proposed a series of measures to achieve the industrial development of his country, including protective tariffs and import bans; subsidies; export ban on key raw materials; import liberalization of and tariff rebates on industrial inputs; prizes and patents for inventions; regulation of product standards; and development of financial and transportation infrastructures.[27] Although Hamilton rightly cautioned against taking these policies too far, they are, nevertheless, a pretty potent and ‘heretical’ set of policy prescriptions. Were he the finance minister of a developing country today, the IMF and the World Bank would certainly have refused to lend money to his country and would be lobbying for his removal from office.
Congress’s action following Hamilton’s Report fell far short of his recommendations, largely because US politics at the time were dominated by Southern plantation owners with no interest in developing American manufacturing industries. Quite understandably, they wanted to be able to import higher-quality manufactured products from Europe at the lowest possible price with the proceeds they earned from exporting agricultural products. Following Hamilton’s Report, the average tariff on foreign manufactured goods was raised from around 5% to around 12.5%, but it was far too low to induce those buying manufactured goods to support the nascent American industries.
Hamilton resigned as treasurey secretary in 1795, following the scandal surrounding his extra-marital affair with a married woman, without the chance to further advance his programme. The life of this brilliant if caustic man was cut short in his 50th year (1804) in a pistol duel in New York, to which he was challenged by his friend-turned-political rival, Aaron Burr, the then vice president under Thomas Jefferson.[28] Had he lived for another decade or so, however, Hamilton would have been able to see his programme adopted in full.
When the War of 1812 broke out the US Congress immediately doubled tariffs from the average of 12.5% to 25%. The war also made the space for new industries to emerge by interrupting the manufactured imports from Britain and the rest of Europe. The new group of industrialists who had now arisen naturally wanted the protection to continue, and, indeed, to be increased, after the war.[29] In 1816, tariffs were raised further, bringing up the average to 35%.By 1820, the average tariff rose further to 40%, firmly establishing Hamilton’s programme.
Hamilton provided the blueprint for US economic policy until the end of the Second World War. His infant industry programme created the condition for a rapid industrial development. He also set up the government bond market and promoted the development of the banking system (once again, against opposition from Thomas Jefferson and his followers).[30] It is no hyperbole for the New-York Historical Society to have called him ‘The Man Who Made Modern America’ in a recent exhibition.[31] Had the US rejected Hamilton’s vision and accepted that of his archrival, Thomas Jefferson, for whom the ideal society was an agrarian economy made up of self-governing yeoman farmers (although this slave-owner had to sweep the slaves who supported this lifestyle under the carpet), it would never have been able to propel itself from being a minor agrarian power rebelling against its powerful colonial master to the world’s greatest super-power.
Although Hamilton’s trade policy was well established by the 1820s, tariffs were an ever-present source of tension in US politics for the following three decades. The Southern agrarian states constantly attempted to lower industrial tariffs, while the Northern manufacturing states argued the case for keeping them high or even raising them further. In 1832, pro-free trade South Carolina even refused to accept the new federal tariff law, causing a political crisis. The so-called Nullification Crisis was resolved by President Andrew Jackson, who offered some tariff reduction (though not a lot, despite his image as the folk hero of American free market capitalism), while threatening South Carolina with military action. This served to patch things up temporarily, but the festering conflict eventually came to a violent resolution in the Civil War that was fought under the presidency of Abraham Lincoln.
Many Americans call Abraham Lincoln, the 16th president (1861–5), the Great Emancipator – of the American slaves. But he might equally be labelled the Great Protector – of American manufacturing. Lincoln was a strong advocate of infant industry protection. He cut his political teeth under Henry Clay of the Whig Party, who advocated the building of the ‘American System’, which consisted of infant industry protection (‘Protection for Home Industries’, in Clay’s words) and investment in infrastructure such as canals (‘Internal Improvements’).[32] Lincoln, born in the same state of Kentucky as Clay, entered politics as a Whig state lawmaker of Illinois in 1834 at the age of 25, and was Clay’s trusted lieutenant in the early days of his political career.
The charismatic Clay stood out from early on in his career. Almost as soon as he was elected to Congress in 1810, he became the Speaker of the House (from 1811 until 1820 and then again in 1823–5). As a politician from the West, he wanted to persuade the Western states to join forces with the Northern states, in the development of whose manufacturing industries Clay saw the future of his country. Traditionally, the Western states, having little industry, had been advocates of free trade and thus allied themselves with the pro-free trade Southern states. Clay argued that they should switch sides to back a protectionist programme of industrial development in return for federal investments in infrastructure to develop the region. Clay ran for the presidency three times (1824, 1832 and 1844) without success, although he came very close to winning the popular vote in the 1844 election. The Whig candidates who did manage to become presidents – William Harrison (1841–4) and Zachary Taylor (1849–51) – were generals with no clear political or economic views.
27
Hamilton divided these measures into eleven groups. They are: (i) ‘protecting duties’ (tariffs, if translated into modern terminology); (ii) ‘prohibition of rival articles or duties equivalent to prohibitions’ (import bans or prohibitive tariffs); (iii) ‘prohibition of the exportation of the materials of manufactures’ (export bans on industrial inputs); (iv) ‘pecuniary bounties’ (subsidies); (v) ‘premiums’ (special subsidies for key innovation); (vi) ‘the exemption of the materials of manufactures from duty’ (import liberalization of inputs); (vii) ‘drawbacks of the duties which are imposed on the materials of manufactures’ (tariff rebate on imported industrial inputs); (viii) ‘the encouragement of new inventions and discoveries, at home, and of the introduction into the United States of such as may have been made in other countries; particularly those, which relate to machinery’ (prizes and patents for inventions); (ix) ‘judicious regulations for the inspection of manufactured commodities’ (regulation of product standards); (x) ‘the facilitating of pecuniary remittances from place to place’ (financial development); and (xi) ‘the facilitating of the transportation of commodities’ (transport development). Alexander Hamilton (1789),
28
Burr and Hamilton were friends in their younger days. However, in 1789, Burr shifted his allegiance and accepted the office of attorney general of the state of New York from Governor George Clinton, despite having campaigned for Hamilton’s candidate. In 1791, Burr defeated Philip Schuyler, Hamilton’s father-in-law, to become a senator, and then used the office to oppose Hamilton’s policies.Hamilton, in turn, opposed Burr’s candidacy for the vice presidency in 1792 and his nomination as the minister (ambassador) to France in 1794. To top it all, Hamilton snatched the presidency away from Burr’s hands and forced him to become the vice president in the 1800 election. In that election, four candidates ran – John Adams and Charles Pinckney from the Federalist Party and Thomas Jefferson and Aaron Burr from the opposing Democratic Republican Party. In the electoral-college vote, the two Democratic Republican candidates came out ahead, with Burr unexpectedly tying with Jefferson. When the House of Representatives had to choose between the two candidates, Hamilton swung the Federalists towards Jefferson. This was done despite the fact that Hamilton opposed Jefferson almost as much, because he thought Burr was an unprincipled opportunist, whereas Jefferson was at least principled, albeit guided by wrong principles. As a result, Burr had to satisfy himself with the job of vice president. And then, in 1804, when Burr was running for the New York state governorship, Hamilton waged a verbal campaign against Burr, again preventing him from getting the job he wanted. The above details are from J. Ellis (2000),
29
Similarly, Latin American industrial development was given an important impetus by an unexpected disruption in international trade caused by the Great Depression during the 1930s.
30
Hamilton proposed to issue government bonds to finance public infra-structural investments. The idea of ‘borrowing to invest’ was suspect to many people at the time, including Thomas Jefferson. It did not help Hamilton’s cause that government borrowing in Europe at the time was usually used to finance wars or extravagant life style of rulers. Eventually Hamilton succeeded in persuading Congress, buying Jefferson’s consent by agreeing to move the capital to the South – to the newly built Washington, DC. Hamilton also wanted to set up a ‘national bank’. The idea was that a bank that was partly owned by the government (20%) and acting as the government’s banker could develop and provide stability to the financial system. It could give extra liquidity to the financial system by issuing bank notes, using its special position as a government-backed institution. It was also expected that the bank could finance nationally important industrial projects. This idea, too, was considered dangerous by Jefferson and his supporters, who considered banks to be essentially vehicles of speculation and exploitation. For them, a semi-public bank was even worse, as it is based on an artificially created monopoly. To diffuse such potential resistance, Hamilton asked for a bank with a finite 20-year charter, which was granted, and the Bank of the USA was set up in 1791. When its charter expired in 1811, it was not renewed by Congress. In 1816, another Bank of the USA (the so-called the Second Bank of the USA) was set up under another 20-year charter.When it came up for renewal in 1836, its charter was not renewed (more on this in chapter 4). After that, the US did without even a semi-public bank for nearly 80 years, until the Federal Reserve Board (its central bank) was set up in 1913.
31
The exhibition was called ‘Alexander Hamilton: The Man Who Made Modern America’ and was held between September 10 2004 and February 28 2005. See the web page at: http//www.alexanderhamiltonexhibition.org.
32
The Whig Party was the main rival to the then dominant Democratic Party (formed in 1828) between the mid-1830s and the early 1850s, and produced two presidents in five elections between 1836 and 1856 – William Harrison (1841–4) and Zachary Taylor (1849–51).