CHAPTER 5

The Founding Father of Crony Capitalism

The system of protection[ism] to be found in this report of Hamilton’s is the old system of mercantilism of the English school, turned around and adjusted to the situation of the United States.

—WILLIAM GRAHAM SUMNER, ALEXANDER HAMILTON

After Alexander Hamilton and his party were repudiated in the election of 1800, the newly elected president, Thomas Jefferson, used his inauguration to enunciate laissez-faire principles that he believed should guide America into the new century. In his first inaugural address he explained that “a wise and frugal Government” was one that protected the lives and liberties of its citizens, period. Citizens, he said, should otherwise be free to earn a living without government interference, especially heavy taxation, which would “take from the mouth of labor the bread it has earned.”

Hamilton responded with a vitriolic attack in which he called Jefferson’s speech a “symptom of a pygmy mind.”¹ He viewed his rival’s inaugural address as a direct assault on the economic theories he had painstakingly laid out. In particular, the series of reports he had issued while serving as President Washington’s secretary of the treasury represented the clearest summary of his economic and political views. In issuing these reports, Hamilton was not conducting an academic exercise; in his official capacity he was trying to establish the blueprint for the American economy. So it must have been infuriating to see, within just a matter of a few years of his issuing these comprehensive reports, a new president forthrightly declaring a different direction. And not just any president, but his fiercest political rival.

When Jefferson announced that “the sum of good government” was to leave men “free to regulate their own pursuits,” he was indeed turning away from Hamilton’s grand plan for a government-directed economy. As Hamilton had made clear in his various reports, he did not believe that Americans could or should be left to their own pursuits without government regulation, which is to say, without his regulation. He was quite totalitarian-minded on this question. William Graham Sumner remarked in his biography of Hamilton: “He naturally could not consent to a policy which would have dictated to him to hold his rash hands, when his whole being was in a quiver to seize that which he thought was going wrong, and impress upon it at once, and with unshrinking reliance on his own judgment, the form and tendency which he thought best.”²

Hamilton and Jefferson could not have had more diametrically opposed views on the role of government in the economy. Hamilton was a precursor to the meddling interventionists of the late nineteenth and twentieth centuries, whereas Jefferson had become convinced of the laissez-faire school of economics as espoused by Adam Smith and other writers of that era, especially French economists like Jean-Baptiste Say.

IGNORING ADAM SMITH

If Hamilton was familiar with Adam Smith’s great 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, he seems to have had only a superficial (if not incorrect) understanding of much of it. Smith devoted hundreds of pages to explaining why so many of the goods and services sold in the marketplace materialized without anyone—especially anyone in a governmental capacity—being “in charge.” His lengthy treatise concluded that individuals, pursuing their own self-interests and fed by a desire to improve their own lives and the lives of their families, will naturally cooperate with others to assure themselves that they will have bread and meat. They don’t necessarily have to care for one another; they have only to care for themselves and their families. That, it seemed to Smith, was sufficient incentive to create the spark of entrepreneurship that made economic life possible. It was the very key to economic prosperity or “the wealth of nations.”

This was Smith’s “system of natural liberty.” His analysis was not simply a theory he developed in his study; it was based on case studies and historical analysis. The Wealth of Nations contained detailed case studies of the division of labor and specialization in woolen coat and pin factories in England, for example. He showed how human cooperation and specialization—laissez-faire capitalism—had led to a thousandfold increase in production using basically the same amount of labor, but just using it smarter. The system Smith identified was one that Jefferson and his followers were well aware of and embraced, as seen in his first inaugural address. Such a system had led to a standard of living that, just a generation or two earlier, would have seemed unimaginable.

In Smith’s analysis, government was not to be involved with “planning” any part of the economy; it would provide only for law and order, protection of property and person, national defense, and a basically stable society. Government had a role, in other words, but a very limited and specific one. Smith understood that politicians were every bit as self-interested as anyone else, and that the pursuit of political self-interest was almost always at odds with the interests of the masses. When government did become actively involved in economic planning, its laws and regulations would inevitably stifle competition by granting monopoly rights to certain industries, prohibiting foreign competition, and other means. This corrupt scheme, known as mercantilism, tended to benefit politically connected businesses (certainly not all businesses) at the expense of consumers especially and of society as a whole.

Mercantilism was the very model that Hamilton chose to follow when laying out his plans for the American economy. He advocated economic interventionism as a form of economic policy and most clearly articulated his positions in his Report on Manufactures, which he delivered to Congress in late 1791. This was the fourth major report Hamilton wrote, after his papers on the public debt and banking. In this report Hamilton showed that he not only dissented from the idea of “natural liberty” in a market economy but also harbored a naive view of politics. He seemed to assume that the policies he advocated would be carried out by James Madison’s “angels” who would act only “for the public good.”

Adam Smith observed that manufacturing in England and elsewhere in Europe had developed without any government planning, as though it were led by an “invisible hand.” And when government did intervene, it invariably stifled rather than supported industrialization. Hamilton apparently did not believe that such a thing was possible in America. In the Report on Manufactures he argued, for example, that most men were such creatures of habit that “the simplest and most obvious improvements” in industry were only adopted “with hesitation, reluctance, and by slow gradations.”³ Even if this were true as a general principle, it is not necessarily a bad thing. It can be argued that “hesitation” and “reluctance” are synonyms for careful business planning, something unknown in government.

Moreover, Hamilton maintained that government intervention in the form of tax-financed subsidies for business was necessary for manufacturing to develop. This is where his theorizing becomes extremely dubious. Government bureaucrats have no way of knowing which industries will thrive and which will not. And because they have no personal financial stake in their decisions, they are more prone to making mistakes than would be genuine businessmen.

With private investment, good business decisions (to produce goods or services that please customers) are rewarded with profits; poor business decisions are penalized with losses or bankruptcy. No such market feedback mechanism exists when the government subsidizes business, as Adam Smith and other contemporaries of Hamilton’s explained. In fact, government subsidies prop up business failures, sometimes keeping them in existence for years, or decades, at taxpayers’ expense. And perversely, the government bureaucrats who dispense the subsidies are not penalized for poor decisions but are often rewarded with bigger budgets, since governments cover up bad decisions by spending even more taxpayer dollars on even more dubious projects. Hamilton the consummate government bureaucrat and political theorist must have been aware of these tendencies. His political opponents certainly were.

In his Report on Manufactures Hamilton argued for using the government to try to make certain manufacturing industries appear earlier than they otherwise would on the free market.⁴ But this kind of policy would actually reduce the wealth of a nation. Industries become economical whenever the benefits of creating the industry outweigh the costs, allowing for profit. If the costs of producing a product are, say, ten times the value of what consumers will pay for it, then resources will be wasted on manufacturing goods that consumers value much less than the resources it takes to produce the goods. This is how the Communist countries of the twentieth century “ate up their capital” and finally collapsed: year after year of using, say, a million dollars’ worth of resources to produce products that were worth less than a thousand dollars. Government subsidies only disguise such inefficiencies.

Hamilton also advocated government subsidies for businesses because he thought the fear of failure would deter business formation. In criticizing the Smithian notion that “industry, if left to itself, will naturally find its way to the most useful and profitable employment,” Hamilton claimed that there were several reasons for doubting this assertion, including “fear of want of success in untried enterprises” and fear of competing with “those who have previously attained to perfection in the business to be attempted.”⁵ But again, fear of business failure is not necessarily a bad thing if such fear is based on knowledge that one’s product is of marginal (or no) use to consumers. And surely Hamilton must have been aware of the fact that many businesses had successfully competed against rivals who had “attained to perfection” in their respective industries. Competition is a never-ending process, whereby today’s “perfectionist” is dethroned (in terms of market share) by tomorrow’s newcomer with a better idea. This is how Adam Smith portrayed competition: as a dynamic, rivalrous process of entrepreneurship, a constant struggle to profit by improving one’s product and/or reducing its price.

Besides, business development had been occurring for hundreds of years largely without benefit of subsidies. As Nathan Rosenberg and L. E. Birdzell Jr. wrote in How the West Grew Rich, “By 1750, three hundred years of gradual expansion in markets had been accompanied by a corresponding expansion in production, both in agriculture and handicrafts.”⁶ Development was, in fact, occurring all around Hamilton. By the eve of the Revolution New England had already created a highly successful commercial fishing industry that accounted for 10 percent of all exports to Europe. New Englanders pioneered the whale oil industry (the chief source of light at the time) and had become master shipbuilders, with the third-largest maritime fleet in the world.⁷ The South and the Mid-Atlantic were primarily agricultural regions, but business entrepreneurship was just as vital there. Farmers had to learn to be businessmen if they were to succeed, especially in extremely competitive foreign markets. By 1776 the American economy was about ten times larger than it had been at the turn of the century.⁸

Hamilton simply discounted all the evidence of how the marketplace functioned as he made his elaborate case for government intervention.

PROTECTIONISM

Much of the system Hamilton laid out in his reports revolved around government protectionism. He was eager to protect “infant” industries, for example. In his Report on Manufactures he asserted: “To maintain between the recent establishments of one country and the long matured establishment of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity, in the one or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government.”⁹

But entrepreneurs had over the years revolutionized myriad industries despite the powerful positions of the incumbent businesses in those industries. Again, the spur of competition had proven itself more effective than government subsidies. Consumers are whimsical. Show them a marginally better and/or cheaper version of a product, and they’ll drop the old one like it’s poison, leaving the “dominant firm” in a position to either improve its performance or go out of business. As the economist Ludwig von Mises wrote: “The consumers…make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless egoistic bosses, full of whims and fancies, changeable and unpredictable…. They do not care a whit for past merit and vested interests.”¹⁰ Nevertheless Hamilton seemed to have little faith in the competitive marketplace without his all-knowing, not-so-invisible, guiding hand.

A major problem with government-subsidized “infant industries” is that they tend to never grow up. The American steel industry, for example, has from its very inception been subsidized in various ways or “protected” from foreign competition with tariffs or quotas on imports. One of the first things President George W. Bush did after his inauguration in 2001 was to impose 50 percent tariffs on foreign steel. The steel industry had still not grown up despite 150 years of trade policy “protection.” All such “protections” are merely a means of transferring income from consumers to businesses, with the added effect of making the businesses sloppier, less efficient, and less competitive in world markets.

Hamilton was probably the first to point to the fact that other governments gave away tax dollars to businesses and instituted protective tariffs and quotas to argue that the U.S. government should as well. “[T]he greatest obstacle of all to the successful prosecution of a new branch of industry in a country,” Hamilton theorized, “consists…in the bounties premiums and other aids which are granted…by the nations, in which the establishments to be imitated are previously introduced.”¹¹ Moreover Hamilton contended that “it is evident that the interference and aid” of the U.S. government would be “indispensable” to competing internationally.¹²

This amounts to saying that because other governments embrace corrupt and debilitating economic policies, so should America. In the British mercantilist system, for instance, the government granted monopolies to certain industries. Yes, monopolies in a particular export business would indeed be more profitable than if there were competition. But the profit comes at the expense of the consuming public, which pays higher prices, and of potential competitors. The lack of competition also reduces or eliminates incentives for innovation, cost cutting, and other business improvements. So who benefits from such monopolies? In Britain, it was the king, who granted the monopolies. He effectively became a business partner of the favored monopolists and shared in a larger amount of loot. Hamilton wanted to Americanize this system of crony capitalism. (And his political heirs eventually did, as we will see.)

Hamilton based his protectionism on a number of rather absurd superstitions about international trade. He insisted, for example, that trade barriers that diminished competition would cause lower prices. This would suggest that competition causes higher prices and monopoly causes lower prices. Or that politically connected businesses lobby government for protectionist trade policies because they hope the policies will force them to lower their prices and make less profit. His basic argument was that “internal competition” would somehow become more vigorous if it were isolated from foreign competition, contrary to all worldly experience during his time and ours. And he criticized Adam Smith and others for being too theoretical and not well grounded enough in real-world experience, as he was, supposedly. After summarizing some of Smith’s arguments, for example, Hamilton declared that “most general theories, however, admit of numerous exceptions,” and he accused Smith’s theories of “blending” a “considerable portion of error, with the truths they inculcate.”¹³ But as noted, Adam Smith did not merely theorize; his work included careful case studies of various British industries and how they had developed over time.

Another superstition Hamilton enunciated was that “transportation is an evil which ought to be minimized, as if it involved pure waste.”¹⁴ This was a way of saying that goods imported from Europe, Canada, or elsewhere should be limited or prohibited altogether in order to avoid the “waste” of transportation costs. But at the same time Hamilton supported interstate competition, which also involved “evil” transportation costs. Indeed, the Commerce Clause of the U.S. Constitution was invoked to prohibit interstate tariffs and encourage free trade between the states, transportation costs and all.

Transportation costs are the costs of providing a service to consumers. If a man in New York can manufacture a pair of shoes for half of what it costs another shoe manufacturer in Indiana, and he adds another 10 percent to his price for shipping costs, he is still offering a good deal to Indiana customers. On top of that, he will force the less efficient Indiana shoe manufacturer to improve his operations and reduce his costs and prices, further benefiting consumers. (The alternative is that the Indiana manufacturer goes out of business.) Transportation of goods is not a “waste” but an indispensable element of competition.

Ignoring such realities, Hamilton championed protectionist tariffs on imported goods. In the Report on Manufactures he claimed that tariffs would enable American manufacturers to “undersell all their foreign Competitors.”¹⁵ Well, not necessarily: faced with tariffs on their imports, foreign companies have often responded by cutting their costs and prices to remain competitive in the American market.

In endorsing the protectionist tariff, Hamilton also failed to acknowledge that even if American manufacturers did underprice their foreign competitors, they would still be able to charge higher, monopolistic prices to consumers than they would be if there were more competition. They wouldn’t face the competitive pressures that drive efficiency and cost cutting. Consumers wouldn’t be the only ones to suffer, either. Tariffs on a product like steel that is used to manufacture other goods would place all steel-using manufacturers in America at a competitive disadvantage by raising the price of steel. Nor did Hamilton recognize (or at least admit) that tariffs and other forms of protection invite retaliation by America’s trading partners, who impose heavy tariffs on American goods that are imported into their countries. He complained quite bitterly about how other governments subsidized some of their own industries with protectionist tariffs, but the possibility of igniting a destructive tariff war doesn’t seem to have concerned him.

Hamilton in his report cheerfully claimed that an added benefit of import tariffs would be that they have “the additional recommendation of being a resource of revenue.”¹⁶ This claim ignored a basic economic fact of life that Adam Smith and many others were aware of: taxes on imports (tariffs) eventually turn into implicit taxes on exports. That is, tariffs leave America’s trading partners with less money with which to purchase American exports.

Another “efficacious means of encouraging national manufactures,” wrote Hamilton, would be a complete prohibition of imports altogether, creating “a monopoly of the domestic market.”¹⁷ This was one of the oldest mercantilist superstitions—that a nation could increase its wealth by isolating itself economically from the rest of the world and subjecting its citizens to pervasive monopoly. History had long proven such economic isolationism to be a benefit only to governments and their favored monopolists; it impoverished the rest of society by denying it the advantages of the international division of labor. Perhaps the most extreme example of this phenomenon was how China was once one of the most advanced nations in the world—until its government, hundreds of years ago, decided to isolate itself from the rest of the world to supposedly monopolize all of its great inventions and human advances. The result was a decline in Chinese civilization for generations.

Or, looked at in another way, a complete prohibition of imports is what nations at war attempt to do to each other—to strangle the enemy’s economy with trade embargoes enforced by naval forces. Hamilton’s (and all other protectionists’) suggestion to prohibit imports is essentially a suggestion that Americans do to themselves in peacetime what their enemies hope to do to them during wartime.

Yet another naive proposal of Hamilton’s was to prohibit “the exportation of the materials of manufactures” so as to impede the progress of foreign competitors.¹⁸ But this would only deprive American exporters of a market for their goods, allowing other foreign suppliers of the same goods to profit instead. If there is a world market for steel, a law that prohibited American steelmakers from supplying steel to Europeans would only create profit opportunities for German and Russian steel manufacturers while doing absolutely nothing to improve American manufacturing.

HAMILTONIAN CORPORATE WELFARE

In addition to calling for subsidies and tariffs, the hyperactive interventionist treasury secretary championed “pecuniary bounties.” Today we would call this “corporate welfare”—giving away taxpayers’ funds to businesses. This, he said, would be “one of the most efficacious means of encouraging manufactures” he added that “in some views” it was “the best.”¹⁹

Hamilton went so far as to argue that for most manufacturing, “bounties” were necessary or “indispensable to the introduction of a new branch” of manufacturing.²⁰ In a dramatic understatement, he admitted that there was a “degree of prejudice against bounties from an appearance of giving away the public money…from a supposition that they serve to enrich particular classes, at the expense of the Community.”²¹ It is easy to understand why such an “appearance” existed: it was true.

He also acknowledged that there were constitutional questions; Jefferson and Madison, among others, had argued that the Constitution did not allow for such government expenditures. But aha! Hamilton said; the General Welfare Clause could be invoked in defense of bounties. A politician simply needed to argue that bounties were really in the interests of “the general public” and not primarily of the businessmen getting taxpayer money. America’s corporate welfare lobbyists have been making that argument ever since.

Together with “pecuniary bounties,” Hamilton advocated “premiums.” These would be special tax-financed subsidies for “excellence” or “superiority” in manufacturing. Politicians would determine who received the premiums. But, of course, all government spending is determined primarily by politics, not by objective criteria of efficiency, “excellence,” or “the public good.” As history has shown, such schemes are merely sources of pork-barrel spending, as they allow politicians to effectively buy political support with taxpayer dollars. Hamilton surely must have understood this, for this racket had played out for generations in the European empires he so admired. “Much has been done by this means in Great Britain,” he wrote in his Report on Manufactures.²²

The economic foolishness of such an idea lies in the fact that in a market economy the only legitimate judges of excellence are consumers, not politicians. If consumers decide that a product is of excellent quality and competitive price, then the producers of that product will be rewarded with the prize of higher profits. Allowing politicians to dish out subsidies based on their perceptions of excellence would only hamper the market economy’s operation by diverting resources to businesses that were politically connected but not necessarily very good at serving consumers.

Although Hamilton condemned transportation costs as evil when borne by foreign manufacturers seeking to cater to American consumers, he also proposed the use of tax dollars to facilitate the transportation of goods. He argued in his Report that private capital markets would not be sufficient to finance the building of roads and canals, so government subsidies would be necessary. He was quickly proven wrong, once again. As the economist Daniel Klein has shown, by 1800—nine years after the publication of the Report on Manufactures—some sixty-nine private road-building companies had been chartered by the states, and they built new roads “at rates previously unheard of in America.”²³ By 1845 more than four hundred roads had been built using private funds. Local merchants invested in the companies because they understood it was clearly in their interest to do so. Entire communities invested, as neighbors persuaded neighbors that it was in the interest of all. Businessmen from larger cities invested in smaller communities because they wanted to expand their markets there.

No governmental coercion was necessary, only persuasion. At least one state—Connecticut—exempted road-building companies from state taxation. The government did not condemn the land needed for roads; rather the road-building companies paid for it in cash and shares of stock.²⁴ The American spirit of volunteerism prevailed. This was something that Tocqueville would notice immediately but that Hamilton apparently had little or no faith in. Private financing of road (and canal) building may work in “some countries,” he wrote, but in a country “like the United States, the public purse must supply the deficiency of private resource.”²⁵ He did not explain why America was unique in this regard among all the nations of the earth.

A number of American states did take Hamilton’s advice and used tax dollars to subsidize canal building in early America, but it was generally one big financial disaster in state after state. Perhaps the most spectacular failure occurred in Illinois in the late 1830s. As described by Abraham Lincoln’s law partner William Herndon, in 1837 the Illinois legislature, led by Lincoln himself, devoted more than $10 million so that “every river and stream…was to be widened, deepened, and made navigable.” By these means Illinois would supposedly become “the Empire State of the Union.”²⁶ The whole project turned out to be “reckless and unwise,” with the tax burden imposed on the people of Illinois characterized as “monumental in size.”²⁷ None of the grandiose-sounding canal projects was finished. Such debacles were so commonplace that in his history of America, John Bach McMaster concluded that by the 1830s “in every state which had gone recklessly into internal improvements [i.e., government-subsidized road and canal building] the financial situation was alarming. No works were finished; little or no income was derived from them; interest on the bonds increased day by day and no means of paying it save by taxation remained.”²⁸

TEMPORARY SETBACKS

Alexander Hamilton was so eager to centrally plan the entire economy that in his Report on Manufactures he got extremely detailed with his proposals, offering specific examples of how to subsidize many different industries, including iron, copper, lead, coal, wood, skins, grain, flax and hemp, cotton, wool, silk, glass, gunpowder, paper, and books. In this regard he was the prototypical government bureaucrat: he felt he had all the answers.

He did not, of course. Actually, he had a very limited understanding of many areas of economics. William Graham Sumner was right when he characterized Hamilton’s Report on Manufactures as marred by “confusion and contradiction.”²⁹ Jefferson, for his part, believed that Hamilton larded his reports with high-sounding rhetoric to intentionally befuddle and confuse the average reader. Jefferson believed that Hamilton “was not only a monarchist, but for a monarchy bottomed on corruption” (i.e., mercantilism).³⁰ Moreover, he interpreted Hamilton’s “schemes,” as he called them, for public debt, central banking, and subsidies to businesses as “the means by which the corrupt British system of government could be introduced into the United States.”³¹ He viewed his arguments more as propaganda for the British system than as serious economic analysis. He even wrote to George Washington that Hamilton’s ideas “flowed from principles adverse to liberty” and, if enacted, would subvert “step by step the principles of the constitution.”³²

Despite Hamilton’s ambitions to remake the American economy according to the proposals he laid out in the Report on Manufactures, little came of the report initially. When his rival Jefferson became president, it was a clear blow to his efforts to centrally plan the economy. And just three years after Jefferson’s inauguration, Hamilton was dead.

But his economic framework did not die with him. Hamilton’s political heirs would embrace his mercantilist model in the years after his death. In fact, in the decades ahead politicians would arm themselves with Hamilton’s Report on Manufactures, using it as a seemingly authoritative case for government planning of the economy. As William Graham Sumner wrote, the Report “proved a welcome arsenal to the politicians” after the War of 1812.³³ An “arsenal” for the accumulation of political power, that is, not for economic development.

THE FORTY-YEAR CAMPAIGN FOR CRONY CAPITALISM

From the aftermath of the War of 1812 to the early 1860s, the big topics of political debate in the United States were the propriety of protectionist tariffs, “internal improvements subsidies,” and a national bank. Henry Clay, leader of the Whig Party and the political inspiration of Abraham Lincoln, would adopt Hamilton’s agenda as his own under the rubric of “The American System,” a slogan that Hamilton himself coined. As the historian Maurice Baxter writes in Henry Clay and the American System, “Clay did not invent [the phrase], for Hamilton had used it more than a quarter century earlier.”³⁴ It was Clay, however, who championed the “system” for a quarter of a century in the U.S. Congress.

Clay picked up the Hamiltonian mantle shortly after Hamilton’s death. Beginning his political career as a member of the Kentucky House of Representatives, he ascended to the national stage in 1807 when he stepped in to complete the term of a senator who had resigned.³⁵ A member of the Kentucky bar, Clay had married the daughter of a wealthy capitalist, and within a few years he had become a powerful landowner and slaveholder.³⁶ Because of his large hemp crop he became known as “the prince of hemp.” He spent decades, literally, advocating protectionist tariffs on foreign hemp; government-subsidized roads and canals, so that he could transport his hemp eastward; and a nationalized bank that could inflate the economy. Not surprisingly, then, he revived Alexander Hamilton’s economic agenda—the protectionist tariffs, corporate welfare, and nationalized banking that made up the “American System.” (Never mind that this system was not American at all but a rehash of British mercantilism. As Baxter stated, “Clay thought the United States could adopt the British model of industrialization.”³⁷)

Throughout his long political career Clay would repeat Hamilton’s dubious arguments for protectionism and corporate welfare. He urged Americans to isolate themselves from world markets and to pursue “economic self sufficiency.” He referred to this as the “home market idea” and associated it with “national economic independence” or nondependence on foreign trade.³⁸ “Let us counteract the policy of foreigners, and withdraw the support we now give to their industry [by purchasing imports], and stimulate that of our own country,” he said during an 1824 tariff debate in Congress.³⁹

This policy would have crippled the American economy by depriving it of the advantages of the international division of labor, but it would have benefited the hemp producers of Kentucky by banning all foreign hemp. As early as 1810 Clay favored an average tariff rate of 50 percent. He did not get his way then, but tariff rates were increased during the War of 1812 and several times thereafter. On virtually every other issue, too, Clay was busy “confirming a Hamiltonian creed of expansive nationalism,” Maurice Baxter wrote.⁴⁰

Most historians are not educated in the field of economics, and political biographers in particular tend to interpret a politician’s actions in terms of his stated motives. Thus, Baxter makes such statements as “The American system rested on the idea of harmonizing all segments of the economy for their mutual benefit and of doing so by active support from an intervening national government.”⁴¹ In reality, the last word one should think of in regard to any kind of central economic planning scheme is harmony. The political allocation of resources inevitably creates conflict, sometimes armed conflict, as different political factions compete for the “right” to use the coercive powers of the state to benefit themselves economically at the expense of others.

Case in point: Henry Clay and the Whig Party, armed with their Hamiltonian, mercantilist agenda, inflamed political passions and caused sectional strife for decades leading up to the War between the States. For the most part, the protectionist tariffs they proposed benefited manufacturers, and there was relatively little manufacturing in the southern states, even by the 1860s. So tariffs overwhelmingly favored northern states. (Even if some farmers, like hemp farmers from Kentucky, may have benefited.) To southerners, tariffs were all cost and no benefit: they paid higher prices for most of the manufactured goods they bought, from shoes to woolen blankets to farm tools, but were largely unable to pass on their higher cost of living to their customers by raising their prices because they sold much of their agricultural produce on very competitive foreign markets. Worse, American protectionist tariffs cut off a large enough amount of foreign trade altogether, since they made America’s trading partners poorer.

Consequently, beginning in the early 1820s, there was a sharp regional difference in support for the protectionist element of the Hamilton/Clay “American System.” Most northerners supported it, while most southerners opposed it, even though there were some northern free traders (especially in New York City) and some southern protectionists (like the Kentuckian Henry Clay).

In 1824 Clay sponsored a tariff bill that succeeded in doubling the average tariff rate in the United States. Of the 107 votes on the Clay tariff bill in the U.S. House of Representatives, only three votes came from southern states. In the U.S. Senate a mere two out of twenty-five yes votes came from southern states. In 1825 the South Carolina legislature issued a declaration denouncing the entire Hamilton/Clay “American System” of protectionist tariffs, corporate welfare, and nationalized banking system. The legislature characterized Clay’s tariff as “a system of robbery and plunder” that “made one section tributary to another.”⁴²

Nevertheless Clay was emboldened by his success in 1824, and he convinced Congress to increase tariffs even further in 1828, to an average of about 50 percent. Southern politicians immediately condemned the new tariff as the “Tariff of Abominations.” It nearly created a secession crisis some three decades before the War between the States. Virginia, North Carolina, and Alabama joined South Carolina in condemning the 1828 tariff, while legislatures in Massachusetts, Ohio, Pennsylvania, Rhode Island, Indiana, and New York issued resolutions supporting it. The economic and political battle lines were clearly drawn.

South Carolina went so far as to adopt an Ordinance of Nullification in 1832, declaring the “Tariff of Abominations” unconstitutional. The state halted enforcement of the tariff in Charleston harbor, tried to retrieve money that federal tax collectors had already claimed, subjected tariff collectors to fines and imprisonment, and allocated $200,000 to the governor for the purpose of purchasing firearms for the state militia should President Andrew Jackson get serious about collecting the tariff.⁴³ This hardly sounds like the economic harmony that Maurice Baxter claimed was the nature of the “American System.” It was just the opposite: extreme conflict that almost ended up in war.

In contrast to the grandiose motives that Baxter ascribed to Clay, the author Edgar Lee Masters, a well-known playwright and onetime law partner of Clarence Darrow, portrayed him much more accurately:

Clay was the champion of that political system which doles favors to the strong in order to win and to keep their adherence to the government. His system offered shelter to devious schemes and corrupt enterprises…. He was the beloved son of Alexander Hamilton with his corrupt funding schemes, his superstitions concerning the advantage of a public debt, and a people taxed to make profits for enterprises that cannot stand alone…. The Whigs adopted the tricks of the pickpocket who dresses himself like a farmer in order to move through a rural crowd unidentified while he gathers purses and watches.⁴⁴

Clay and the Whigs were forced to compromise after their plans provoked South Carolina’s outraged response. Clay himself led the effort to enact a lower, compromise tariff in 1833. Around the same time President Andrew Jackson defunded the Bank of the United States, another keystone of the Whigs’ “American System.” These were low points in the Whigs’ history and for Henry Clay as keeper of the Hamiltonian flame. But neither he nor his party (nor their successors, the Republican Party) would give up on the American version of British mercantilism. Clay kept pushing, even as president after president vetoed his “internal improvement” bills.

After the 1840 election, when the Whigs controlled both houses of Congress as well as the White House, Clay surely must have thought that the entire “American System” would finally be rubber-stamped. It probably would have been, too, except that the Whig president, William Henry Harrison, died one month after being inaugurated. His successor, John Tyler, turned out to be a states’ rights Jeffersonian who opposed the entire Hamiltonian scheme. President Tyler vetoed a Clay-sponsored bill to resurrect the Bank of the United States and opposed his protectionist tariffs and corporate welfare schemes as well. The Whigs exploded in anger, burning Tyler in effigy in front of the White House and kicking him out of their party.⁴⁵

Just as Edgar Lee Masters said, the “American System” was a scheme of statism and mercantilism under which the majority party used its political power to plunder the minority. As such, it could produce only economic conflict, not harmony. Ultimately, Alexander Hamilton’s scheme would be a major cause of civil war.