Having written my own defense of Alexander Hamilton’s indispensable place on America’s money, I was pleased to see another defense in the New York Times that seemed to run along similar lines: “in bumping Alexander Hamilton from the center of the $10 bill, we would be exiling the man most responsible for our nation’s having a sound currency in the first place.”
But this article by Steven Rattner, the former Obama administration “Car Czar” who was forced to settle with the SEC in a kickback scheme, isn’t making the same point at all. This ultimate insider and “crony capitalist” is lauding Hamilton for being the original crony capitalist.
Rattner praises Hamilton for “his 1791 Report on Manufactures, in which he displayed his understanding of the key role government can play in promoting economic development. Not content to report, Hamilton acted, turning Paterson, NJ, into our first centrally planned industrial hub.”
Funny he should bring up Paterson. Hamilton’s scheme, the Society for Establishing Useful Manufactures (SEUM), was a private company, but it benefited from its ties to politically connected insiders and from a special charter exempting it from state taxes.
Hamilton gave control of the operation to his former Assistant Secretary of the Treasury, William Duer, who promptly became one of Wall Street’s first great scammers. The revolving door between the Treasury Department and Wall Street began with Hamilton and the people around him, Duer most of all. While he was using his insider status to pump up a financial bubble of speculation in government debt, he was also embezzling from the Society for Establishing Useful Manufactures.
When the thefts were discovered, Duer was trundled off to debtor’s prison and his speculative ventures collapsed, helping to set off the Panic of 1792, which required a kind of bailout from Hamilton and the Treasury to stabilize the markets. Any of that sound familiar?
And what happened to the SEUM? Hamilton re-formed it and helped it raise a new round of financing, but it collapsed again in 1796. It would only become successful years later because of its control of the falls at Paterson, which provided a source of water to run local mills—in effect, a power utility serving factories that were independent of it. So much for central planning of industry.
In short, the SEUM looked less like a triumph of industrial planning and more like the 18th-century version of Solyndra: a boondoggle that helped politically connected insiders separate credulous investors from their money.
My intention here is not to vilify Hamilton, who never personally profited from these insider schemes, and whose other achievements secure his place in the American Pantheon. His role in the Revolutionary War, his authorship of the majority of the Federalist Papers, and his restoration of the new nation’s credit—any of those alone would have done it. And Hamilton’s vision of America as an industrial power was certainly prescient.
But this reminds us that the Jeffersonians, and later the Jacksonians, had a point: a central bank, and the nexus it creates between the Treasury and Wall Street, is an engine of corruption and special favors.
Yet Rattner would have us believe that this Jeffersonian-Jacksonian backlash, culminating in Jackson’s veto of the Second Bank of the United States and the expiration of its charter in 1836, ruined everything.
The lack of even a primitive central bank played a significant role in the Panic of 1837, a brutal financial downturn, as well as in the frequently ensuing bouts of economic instability that persisted until after the Federal Reserve was established in 1913.
So what actually happened between 1836 and 1913, the years without a central bank? Rattner has just finished telling us that it was central planning that is responsible for America’s entire industrial economy. So presumably it all collapsed for those 80 years of laissez-faire, right?
Er, no. This was, in fact, the period of America’s real transformation from agrarian colonial backwater to industrial superpower.
At the Great Exhibition in London in 1851, the United States announced its arrival as a technological leader with the display of the McCormick reaper, Samuel Colt’s revolver, and Day and Newell’s patent locks, the beginning of a long string of transformative inventions. Around 1871, the US surpassed Britain as the world’s largest economy. During America’s era of “free banking,” per capita GDP at least quadrupled.
Somehow, without the benefit of central bankers, intrepid Americans managed to double the size of the country and cover it with farms, factories, steel mills, mines, railroads, telegraph lines, steamboats, and everything else.
But there were panics and market crashes during this period—usually sharp, deep contractions followed by rapid recoveries. Since the creation of the Federal Reserve, of course, it’s all been smooth sailing and uninterrupted growth, right?
Again, no. It’s ironic to use the Panic of 1837 as evidence for the superiority of a system that brought us the Great Depression, our current Great Recession, and about a dozen smaller recessions and a period of double-digit inflation in between. At the very least, the evidence shows that America can thrive and grow and become a great power without a central bank, which makes the advantages of having one seem much less obvious than Rattner would like us to think.
All of this is a lesson in how not to defend Alexander Hamilton, because Rattner’s defense is to draft Hamilton as an advocate of big government, central planning, financial manipulation, and special favors.
That’s unfair to Hamilton, who was still an advocate of small government by today’s standards. The title of Rattner’s piece is “Leave Hamilton Alone,” and it’s true: he should leave Hamilton alone and not try to draft him for the narrow political causes of our own day.
But this is part of an overall trend in which the left tries to claim that the unprecedented prosperity of America’s economic rise in the 19th century, if they choose to acknowledge it at all, must really be the product of government planning and some kind of handouts.
It couldn’t be the result of laissez-faire. It couldn’t possibly be true that a nation can grow and prosper without central banks, industrial planners, car czars, intrusive regulators, a massive welfare state, and all the bureaucrats and hangers-on of big government.
Because if that’s true, then we might not need guys like Steven Rattner.
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