CHAPTER 6

Hamiltonian Hegemony

[T]he Thirty-seventh Congress [1861–63] ushered in four decades of neo-Hamiltonianism: government for the benefit of the privileged few.

—LEONARD P. CURRY, BLUEPRINT FOR MODERN AMERICA: NONMILITARY LEGISLATION OF THE FIRST CIVIL WAR CONGRESS

The great debate between Jefferson and Hamilton raged on even after those two political rivals passed from the scene. In fact, the contest between their political philosophies would shape American politics for the next half century (and beyond).

Hamilton’s successors among the Federalists and later the Whigs would continue the crusade for a centralized government. They understood, as Hamilton had, that only through such monopolistic power over the citizens of the states could the federal government install a mercantilist system—nationalized banking, protectionist trade policy, and corporate welfare.

So the first half of the nineteenth century witnessed Hamiltonians pushing for their twin ambitions of centralized government power and mercantilism. John Marshall and other Federalist judges effectively tried to overturn election results; Henry Clay worked frenetically to impose the Hamiltonian “American System” on the nation; and Federalists and Whigs spread the nationalist mythology about the American founding that Hamilton had begun when he falsely claimed that the states had never been sovereign and that the central government was (and should be) “supreme.” Justice Joseph Story, who sat on the U.S. Supreme Court from 1811 to 1845, was “the most Hamiltonian of judges,” writes Clinton Rossiter.¹ In his Commentaries on the Constitution (1833) Story instructed the legal community and the political elite of the North (mostly) in the Hamiltonian superstition that the union of the “whole people” had somehow created the Constitution, and that the states had played no significant role—an outright falsehood.²

Despite all the Hamiltonians’ efforts, the Jeffersonians more or less prevailed for decades. The government remained relatively small and decentralized. By the mid-1850s tariff rates were as low as they would be for the entire nineteenth century, and federal subsidies for “internal improvements” were all but nonexistent. The Bank of the United States was dismantled in the 1830s. The American banking system was dominated by state-chartered banks that issued currency backed by gold and silver on demand and that therefore did not inflate their currency beyond what their specie reserves justified. It was not a perfect system, of course, but two highly reputable economic historians, Jeffrey Hummel and Richard Timberlake, have made compelling cases that it was the most stable banking system the United States has ever had.³

In short, the Hamiltonian economic agenda had been resoundingly defeated time and again. The Hamiltonians had failed to persuade many of their fellow citizens of the alleged virtues of big, centralized government that would primarily benefit the wealthy and politically connected. There was a good deal of support for this agenda in New England and parts of New York, but it was viewed with great suspicion in most other regions of the country.

This all changed in the first years of the War between the States. The Republican Party, which now controlled the government, had inherited the Hamiltonian agenda from the Whigs. No one was more committed to the Hamiltonian cause than President Abraham Lincoln, whom the historian John Lamberton Harper rightly calls “the greatest of [Hamilton’s] disciples.”⁴ Even as a war was being fought and President Lincoln was warning of nothing less than the death of the nation (and indeed of democracy in the world) if the Confederate Army prevailed, the Republicans made it a priority to install Hamiltonian mercantilism, complete with massive taxpayer subsidies to railroad corporations, protectionist tariffs in the range of 50 percent, and a nationalized banking system. And now that Southern Democrats had left the Congress, there was little opposition to their schemes.

As Leonard Curry wrote in Blueprint for Modern America, “[C]onstitutional scruples ranked high among the considerations that had prevented Congress from passing a Pacific railway act before 1861.” But after southern secession, “constitutional scruples rapidly disintegrated.”⁵ This is another way of saying that Jefferson’s strict constructionism was abandoned in favor of Hamilton’s “implied” and “resulting” powers theory of the Constitution, paving the way, at long last, for the triumph of mercantilism in America.

It had been sixty years since the Party of Hamilton enjoyed such political hegemony. But now the neo-Hamiltonians of the Republican Party would monopolize national politics in America, with a few brief exceptions, until Woodrow Wilson’s election in 1912.

ALL ABOUT THE MONEY

Abraham Lincoln always declared himself to be “an old Henry Clay Whig.” Nearly every member of his cabinet was a former Whig as well and had lobbied for Hamiltonian mercantilism in the form of Clay’s vaunted “American System.” So it is little surprise that the Lincoln administration moved swiftly to institute the Hamiltonian reforms that its predecessors had failed to enact.

A nationalized banking system was one key element of Alexander Hamilton’s agenda that the Lincoln regime resurrected. It did not seem to matter that such a system had been tried twice, with the First and Second Banks of the United States, and each time had created economic instability and corruption. Nor did it matter that during what economists call the “free banking era,” which began when the Second Bank of the United States was dissolved in the 1830s, the purchasing power of American currency remained stable. This stability resulted precisely because the money supply was denationalized. State governments took a more or less laissez-faire attitude toward banking; about half did not even require a state government charter for individuals who wanted to start a bank, accept deposits, and issue banknotes. Banks, then, were “regulated” mainly by competition in the marketplace: a bank that printed too much currency and did not hold sufficient specie reserves would eventually fail. Such failures did occur, but they remained localized and never caused a national bank panic or depression, as has been the case with nationalized banking systems. Panics and depressions are what economists refer to as “contagion effects” of centralized or nationalized banking.

There were problems, as there are with any banking system. So-called wildcat banks, for example, would redeem their currency in specie only at branch bank locations in the wilderness, where “not even a wildcat would live.” But these were rare events, and the problems were greatly exaggerated by Hamiltonian advocates of the nationalization of money.

The era of free banking was abruptly ended when the neo-Hamiltonian Republicans passed three Legal Tender Acts, beginning in February 1862. These acts of legislation permitted the treasury secretary to issue paper currency (greenbacks) that was not immediately redeemable in gold or silver. Then they passed the National Currency Acts of 1863 and 1864, which created a system of nationally chartered (and regulated) banks that could issue currency. A punitive 10 percent tax was placed on state-chartered banks in order to drive them into bankruptcy. The neo-Hamiltonians were candid about their intention to create an “unqualified government monopoly,” though they rather absurdly claimed that this would allow “all Americans to share in the advantages of the monopoly.”⁶ In reality, monopoly is bad for consumers, whether it is a monopoly in steel production, computers, petroleum, or currency. There is no such thing as a “good” monopoly from the consumers’ perspective.

The New York banker and congressman Elbridge G. Spaulding helped push the Lincoln administration’s nationalized banking legislation through Congress. One reason for the nationalization of the money supply was that banks chartered by the states—northern states—could not always be relied upon to supply infinite amounts of currency, as demanded by the Republican Party to finance its war on the South. Spaulding condemned such banks as “unpatriotic” if not treasonous. Naturally, he invoked Hamilton as his “authority for constitutional interpretation,” writes the economic historian Heather Cox Richardson.⁷

Other Republicans likewise cited Hamilton’s rationales for a government-run monetary monopoly. Senator John Sherman, who would later become chairman of the powerful U.S. Senate Banking Committee, repeated Hamilton’s theory of the usefulness of tying the wealthy to the government. “History teaches us that the public faith of a nation alone is not sufficient to maintain a paper currency,” he said. “There must be a combination between the interests of private individuals and the Government.” Republican banking legislation would supposedly create “a community of interest between the stockholders of banks, the people, and the government,” according to Senator Sherman.⁸ He was almost right about that. The stockholders of banks would certainly benefit from a monetary monopoly enforced by the government, but “the people” would not. Whenever politicians promote any cause in the name of “the people,” you can be sure that the people have had little or nothing to do with the cause and will not benefit from it in any significant way.

The Republican newspaper editor Horace Greeley broadcast this Hamiltonian theory to his reading audience. “The purpose of this measure,” he wrote about the 1863 National Currency Act, “is to institute such a connection between the public credit and the banking interest as shall, on the one hand, give the President virtual control of all the banks of the country, and, on the other, make every stockholder and banknote holder in the land an underwriter, so to speak, of the Government bonds…effectively harmonizing the interests of both Government and the people.”⁹ No longer would the public rely on competition and self-interest to “regulate” the banking system; a monetary dictatorship, directed from Washington, D.C., would supposedly be in “the public good,” to use another of Hamilton’s favorite phrases.

The brother of General William Tecumseh Sherman called for a centralized, government-controlled banking system in order to serve “a powerful national government and an internationally dominant American nation.”¹⁰ This call for empire was pure Hamiltonianism also; recall that Hamilton himself urged “more energy” in the national government in pursuit of “imperial glory” and national “splendor.”¹¹

On March 9, 1863, Alexander Hamilton’s hometown newspaper, the New York Times, rejoiced that the Lincoln regime’s nationalized banking policy “crystallized…a centralization of power, such as Hamilton might have eulogized as magnificent.”¹² Unfortunately, the results were not so magnificent for Americans. The federal government’s printing of greenbacks quickly created enormous inflation. Greenbacks depreciated to a value of only 35 cents’ worth of gold by July 11, 1864.¹³ The prices of goods purchased by northern-state consumers more than doubled between 1860 and 1865. Most citizens blamed “speculators” or “foreigners” and not their own government, as they should have.¹⁴ They apparently fell for all the phony rhetoric about how such a system would serve “the people.”

Because of the inflation it had created, the government itself had to pay more for the war. In his classic book A History of the Greenbacks, the economist Wesley Clair Mitchell calculated that it cost northern taxpayers $528 million more.¹⁵ Real wages—that is, wages adjusted for the effects of higher consumer prices or inflation—plummeted as well, as Mitchell determined. And the northern economy as a whole suffered from the fact that businesses could not make rational economic calculations with the constant and unpredictable increases in the price of just about everything. Economic chaos in many industries was the result.

Despite all the neo-Hamiltonians’ “public interest” rhetoric about the nationalized banking system, their economic system was an abysmal failure. In the early 1990s three distinguished monetary economists evaluated the overall effects of the National Currency Acts from the time they were enacted in the 1860s until the creation of the Federal Reserve System in 1913. They wrote that the system “was characterized by monetary and cyclical instability, four banking panics, frequent stock market crashes, and other financial disturbances.”¹⁶

But even though the nationalized banking system was a spectacular failure from the economic perspective of the general public, from the neo-Hamiltonians’ political perspective it was a smashing success. Nationalized banking consolidated political power in Washington. Hamiltonian political hegemony was finally achieved with a monopolized banking system.

THE CURSE OF ECONOMIC ISOLATIONISM

Although Henry Clay, “the prince of hemp,” spent much of his long career trying to implement protectionism, within a few years of his death America was as close to free trade as it would be during the entire nineteenth century. But that changed as abruptly as banking policy did with the ascendancy of the neo-Hamiltonians during the Lincoln administration.

The war—and the absence of Southern Democrats—provided the political sons of Alexander Hamilton with enough political cover to adopt their long-sought policy of extreme protectionism. At the outset of the Lincoln administration the protectionist effort was led by iron manufacturers/congressmen Thaddeus Stevens of Pennsylvania and Justin Morrill of Vermont; New York “ironmaster” Erastus Corning; Representative Valentine Horton, “who was financially interested in both coal mining and salt manufacturing” and Elbridge Spaulding of New York and John Stratton of New Jersey, who “came from important manufacturing states.”¹⁷ The strongest opposition in Congress came from Democrat Clement Vallandigham of Ohio, who proposed repealing the Republicans’ protectionist tariff altogether. The Republicans would gerrymander Vallandigham out of his congressional seat and then, a year later, deport him under trumped-up charges of treason for speeches opposing the Lincoln administration.¹⁸

In addition to the war, northern protectionists used hyped-up nationalism and xenophobia as smoke screens for their real agenda of lining their pockets by monopolizing northern industry. Heather Cox Richardson wrote of “the North’s growing antipathy toward Britain, France, and Canada,” but what she should have written was the Republican Party’s antipathy toward these countries. Northern farmers who sold vast quantities of agricultural goods to Europe had no special “antipathy” toward these countries; nor did many other citizens of the northern states.

Nevertheless the propaganda campaign was successful. The Republican Party espoused what Richardson called “an increasingly powerful nationalistic belief that America should concentrate on making itself the wealthiest and strongest nation by enacting prohibitive tariffs, encouraging great industrial development, supporting a strong military, and increasing national pride.”¹⁹ This was Hamilton’s vision in a nutshell. And none of it could be achieved, the Republicans argued, if foreign competition was allowed.

The neo-Hamiltonians of the 1860s wanted tariffs that would prohibit the importation of anything that was made in the United States. Lincoln himself publicly espoused this view. In a speech on the tariff issue he said, “I would continue commerce so far as it is employed in bringing us coffee [which is not grown in the United States], and would discontinue it so far as it is employed in bringing us cotton goods.”²⁰

Republican Party propagandists became “increasingly angry at Canada” for importing goods into the United States, supposedly causing the federal government to lose millions of dollars in tax revenue.²¹ According to Richardson, this “growing dislike of foreigners” that was fed to the public “increased support for the 1862 tariff” and presumably for other tariff increases as well.²²

The average tariff rate was raised from about 15 percent to 37.2 percent in 1862, and then to 47.06 percent in 1864. It remained in that range or higher for the next fifty years.²³ In addition, the “free list”—the list of manufactured items that were not covered by the tariff law—was cut in half. The great historian of American tariff policy, economist Frank Taussig, wrote that the 1864 tariff increase was not designed to finance the war. It was comprised of tariff “duties whose chief effect was to bring money into the pockets of private individuals.”²⁴ He was referring, of course, to northern manufacturers, who would be isolated from foreign competition by the tariffs, thereby allowing them to charge higher prices and earn unprecedented profits. And this was at a time when their government was at war and presumably in need of less expensive manufactured goods for the war effort.

With a president who had a long history as a protectionist, a cabinet made up almost entirely of Henry Clay Whigs, and a neo-Hamiltonian Congress, the Republican Party went on a tariff-increasing binge for several decades. Recommendations for 100 percent tariff rates on many items were commonplace, according to Taussig, and “the protective system” included “almost every article, whatever its character, whose production in the country is possible.”²⁵

The ultimate goal of the neo-Hamiltonian protectionists of the 1860s (and beyond) was what economists call “autarky,” or economic isolationism. They wanted to completely isolate America from most foreign trade in order to establish monopolies or oligopolies (competition among the very few) in various industries—industries in which quite a few of the Republican politicians of the day were personally invested. They did not totally succeed, but they did prevail in imposing extremely high tariff rates for half a century after the war.

The major danger of economic isolationism is that a nation divorces itself from the international division of labor. Individuals and businesses all around the world have various specialties, and a business will become stronger and more profitable if it can purchase its supplies from whoever offers it the best deal, whether that partner is from the United States, Canada, or anywhere else. Protectionists know this; that’s why they invariably advocate protectionism for the things that they sell but free trade for the things that they buy, such as parts and materials that they use to manufacture their own products.

Another danger that has often been realized is retaliation: foreign governments do not always sit on their hands while the U.S. government harms their economies with protectionism. They retaliate, blocking the importation of American goods into their countries.

Abolishing the international division of labor is a recipe for economic disaster, but that is exactly the economic policy recipe that the nineteenth-century neo-Hamiltonians cooked up for America. It is fortunate that they succeeded only as far as they did and did not realize Lincoln’s professed goal of choking off all international competition.

It was the American consumer who was most harmed by this protectionism. Prices in “protected” industries were higher, product quality was lower, and innovation was stifled because competitive pressures were weakened.

Other manufacturers were hurt as well. American manufacturers that imported “capital goods”—that is, goods used in the production of other items—were placed at a competitive disadvantage, since the tariffs increased their costs of production and made their products less competitive in world markets.

American exporters, especially American farmers, were harmed tremendously, because they sold a large share of their product on foreign markets—the very markets that American protectionism was designed to make poorer. Recognizing that prohibitive tariffs would make America’s trading partners less capable of purchasing American agricultural products, the neo-Hamiltonians in the Lincoln administration attempted to “buy off” farmers by establishing the U.S. Department of Agriculture, which promised corporate welfare of a sort for them too.

It is hard to believe that a man as politically astute as Alexander Hamilton, or any of his political descendants, from Clay to Lincoln, would not have recognized that as soon as protectionism was established, it would create a powerful lobbying force for more and more protectionism—and for making it permanent. As the economist Murray Rothbard once said, “infant industries” that are protected by tariffs not only never grow up, they tend to become “senile industries,” relying on protection from competition forever. The American steel industry, as we have seen, is a case in point.

The economically uneducated who write about this period, which includes most historians, usually fall into the trap of the “post hoc, ergo propter hoc” fallacy: they assume that since protectionist tariffs existed, and the American economy grew, the tariffs must have caused the economic growth. The truth is that the American economy grew in the latter half of the nineteenth century despite neo-Hamiltonian protectionism, not because of it. American industry grew rapidly during the late nineteenth century because of entrepreneurial inventiveness, technological change, capital investment, reduced transportation costs, the growth of large corporations and the invention of management methods, the increased sophistication of financial markets, the absence of income taxation, and the expansion of free labor (which is always more productive than slave labor) after the War between the States.²⁶ All of this was able to overcome the drag on the economy created by the Republican Party’s mercantilist tariff policy. Without the tariffs, the American economy would have grown even faster.

America adopted protectionism when much of the rest of the world was embracing free trade. England abolished tariffs in 1850. The British were bankrupting themselves with the cost of empire, and free trade was their one economic blessing. France and much of the rest of Europe were also moving away from mercantilism, thanks to the efforts of such free-trade crusaders as the French writer Frédéric Bastiat. But thanks to the neo-Hamiltonian Republican Party, protectionism stuck in America.

OPENING THE FLOODGATES OF CORPORATE WELFARE

Republicans also enacted the third element of Alexander Hamilton’s mercantilist agenda: corporate welfare. As of 1861, no federal government program of any significance had subsidized corporations for road, canal, or railroad building. There had been many experiments at the state level, and every one of them was a financial disaster. In the typical scenario, Whig politicians would promise a commercial empire if only the state legislature would earmark millions to build roads, canals, and railroads. When legislatures followed through, little or nothing would actually be built; millions would be stolen; and the states’ taxpayers would be left with a public debt that would take decades to pay off. State government experiments with Hamiltonian corporate welfare during the first half of the nineteenth century were so disastrous that by 1875 only one state—Massachusetts—had not amended its constitution to prohibit such expenditures of public funds.²⁷

But the War between the States once again enabled the Republicans to adopt part of the Hamiltonian scheme that Henry Clay and others had been unable to achieve. In Congress the opposition was again led by Congressman Vallandigham of Ohio, whose party was hopelessly outnumbered. He was one of the few remaining Jeffersonians in a government completely dominated by Hamiltonians.

There was no economic necessity for government subsidies to build a transcontinental railroad, as the railroad entrepreneur James J. Hill would prove by building and profitably running the Great Northern without a penny of subsidy, not even land grants.²⁸ The lack of economic necessity did not affect the plans of the neo-Hamiltonians, however. The leader of their party, Abraham Lincoln, was a longtime railroad industry lawyer and insider, and the northern railroads, manufacturers, and banks were their main political constituency, just as merchants and bankers were Hamilton’s constituency. The railroads had done as much as anyone to elect a Republican president, and they expected to be “rewarded.”

As an attorney, Lincoln had represented the Illinois Central, Chicago and Alton, Ohio and Mississippi, Rock Island, and Chicago and Mississippi railroads. He had even been offered the position of chief counsel of the New York Central.²⁹ He was a consummate railroad industry insider who traveled around the Midwest in a private train car courtesy of the Illinois Central, accompanied by an entourage of company executives. There was never any doubt that at long last, Hamiltonian “bounties” would be paid to the railroad industry.

So in June 1861, just two months after Fort Sumter and with the country at war, Lincoln called a special emergency session of Congress to begin work on the Pacific Railway Act. The legislation was signed into law in 1862. At that point the president had the right to choose the eastern terminus of the transcontinental railroad; he chose Council Bluffs, Iowa—where he had invested in land in 1857.³⁰

Many Republican congressmen and supporters became wealthy because of the Pacific Railway Act. Congressman Thaddeus Stevens of Pennsylvania “received a block of [Union Pacific Corporation] stock in exchange for his vote” on the bill, wrote Dee Brown, the historian of the American West.³¹ He also demanded, as a condition of his vote, that the law be written so that all iron used to build and equip the railroad be American-manufactured iron. So Stevens the steel manufacturer championed protectionist tariffs on iron and steel, which increased the price of those items. Then he manipulated the new railroad law to guarantee that the government would not be able to economize on behalf of the taxpayers by purchasing lower-priced foreign steel. Similarly, Congressman Oakes Ames of Massachusetts “became a loyal ally” of the railroad legislation, wrote Brown, when he and his brother were promised the manufacturing contract for shovels.³² It must have taken a lot of shovels to dig railroad beds from Iowa to California.

Once the subsidies started pouring in, the seemingly insatiable railroad corporations lobbied for more and more. They “mushroomed into one of the most powerful and ruthless lobbies that the republic had ever known,” wrote the historian Leonard Curry.³³ The two railroad corporations established by the Pacific Railway Act—the Union Pacific and Central Pacific—were paid subsidies by the mile. This gave them an incentive to build quickly and often inefficiently. If the road collapsed after spring rains, it meant even more profits in return for rebuilding the shoddy railroad line.

In addition to this source of inefficiency, many members of Congress from the western states and territories demanded a line to their district in return for their vote for additional subsidies. Consequently, myriad uneconomical rail lines were built for political reasons. This, and other kinds of regulation-in-return-for-subsidies, only put the railroads in need of more subsidies. All the risks of the enterprise were socialized—paid for by the taxpayers—whereas all of the profits went to private individuals as owners of stock in the companies.

Much of the subsidy to railroad corporations came in the form of land grants—100 million acres’ worth. This rendered the Homestead Act a failure, since that act’s purpose was to give away free land to homesteaders, not to politically connected corporations.³⁴ Only about 19 percent of the land went to farmers; the rest was snapped up by wealthy speculators and corporations. As Leonard Curry has written, “In the postwar era, public lands were handed over to private transportation interests, while legislation ostensibly designed to assist the farmers [i.e., the Homestead Act] was notoriously ineffective.”³⁵

More subsidies arrived in the 1880s, as Congress began appropriating more than $8 million per year for “river and harbor bills.” After a seventy-five-year political battle, the federal government had embraced Alexander Hamilton’s “internal improvement” spending. Today we know it as “pork barrel spending.”³⁶

A predictable consequence of Hamiltonian corporate welfare was massive graft and corruption. That soon came in the postwar era in the form of the so-called Crédit Mobilier scandal. Crédit Mobilier was a corporation that the Union Pacific Railroad contracted with to build part of the rail line from Nebraska to California. Among the company’s investors were Congressmen Oakes Ames, John B. Alley, and Samuel Hooper, all of Massachusetts, and Senator James W. Grimes of Iowa. These men, and others who assisted them, conspired to have the company bill the government for about twice the actual cost of building the railroad line. The company’s management pocketed some $30 million in profits, while those with inside information about this taxpayer swindle were able to purchase shares of stock for $5 per share that soon became worth more than $100.³⁷

To keep this scheme secret, Congressman Ames bribed his fellow members of Congress and members of the Grant administration by offering them shares of stock in the Union Pacific and Crédit Mobilier companies. He ended up bribing an honor roll of New England and Upper Midwest Yankees, among them Vice President Schuyler Colfax; Senators Henry Wilson of Massachusetts, James Patterson of New Hampshire, and John Logan of Illinois; Speaker of the House James Blaine of Maine; and Congressmen W. D. Kelley of Pennsylvania, James Garfield of Ohio, James Brooks of New York, John Bingham of Ohio, Henry Dawes of Massachusetts, and Glenni Scofield of Pennsylvania.³⁸

The whole sordid mess became public in the summer of 1872 when one of the conspirators, Henry S. McComb of Delaware, became engaged in an intense feud with Oakes Ames and in response published a list of members of Congress whom Ames had bribed.

As notorious as the Crédit Mobilier scandal was, it was only the tip of the iceberg of the kind of corruption and waste of taxpayers’ dollars that would be the inevitable—and perfectly predictable—consequence of the “American System” of corporate welfare.

THE TRIUMPH OF HAMILTONIAN “CONSERVATISM”

The American public was outraged by the Crédit Mobilier scandal and by subsequent scandals involving direct government subsidies or “bounties” to business. In response, they demanded more political control of business—not understanding that political control was the problem, not the solution. Alexander Hamilton’s phony “public interest” theory of government regulation continued to fool Americans and would do so for many decades to come.

In fact, nearly a century later scholars still clung to the theory that increased federal government regulation of business was a response to “market failure.” But in the important and influential 1963 book The Triumph of Conservatism, the historian Gabriel Kolko meticulously documented how American businesses, far from resisting political control, sought such regulation because they could use it to their advantage.³⁹ “[T]he regulation itself,” Kolko wrote, “was invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.”⁴⁰ Some thirty years later the legal scholar Butler Shaffer echoed Kolko’s views, writing of an increased recognition among scholars that “government regulation has generally served to further the very economic interests being regulated” and that the advantages businesses sought were those “denied them in the marketplace.”⁴¹

Kolko recognized the origins of this massive regulatory system: he called it “a reincarnation of the Hamiltonian unity of politics and economics” and “the new Hamiltonianism.”⁴² And it had become yet another curse on the American economy.

The history of these government regulatory schemes showed that the creation of a monopoly could be just as valuable as, if not more valuable than, a cash grant from the government. Consider the Interstate Commerce Commission (ICC), created in 1887. While the ICC had been established ostensibly to regulate the railroads “in the public interest” (there’s Hamilton’s favorite phrase again), the railroad industry had in fact lobbied for it. The first head of the ICC was a former railroad company president. One of the first things the commission did was to outlaw customer discounts, such as those that Cornelius Vanderbilt was granting to major customers who transported thousands of barrels of kerosene and other petroleum products by rail. By making discounts illegal, the ICC relieved railroad companies from the pressure to compete for customers.

Similarly, American businesses had pushed the federal government to place strict regulatory standards on imported food and drug products as a form of veiled protectionism. The result was, as Kolko noted, the Food and Drug Administration (FDA). Big businesses also understood that costly federal regulation would disproportionately harm their smaller competitors. Thus while claiming to be “socially responsible” by favoring regulation of their own industries, businesses really supported the creation of monopoly power in their industry, solely to their own economic benefit.

Teddy Roosevelt was a “progressive era” president (and admirer of Hamilton) who is credited with being a great environ-mentalist for having nationalized thousands of acres of land and built dams and other “conservation” projects with taxpayer dollars. But this, too, was a form of neo-Hamiltonian corporate welfare. Mining, farming, timber, and other interests lobbied for these programs because they would be enriched with “free” dams and irrigation, waterway improvements, cheap, subsidized water (mostly for agriculture), cheap timber lands (leased for next to nothing from the government), and cheap access to grazing lands.

One of the worst examples of “the new Hamiltonianism” in the early twentieth century was the creation of government franchise monopolies in all the utilities industries—natural gas, electricity, telephone service, water supply, and so forth. These industries were all fiercely competitive in the late nineteenth and early twentieth centuries, and that competition was driving down prices, creating incentives for innovation, and encouraging good customer service. As the UCLA economist Harold Demsetz pointed out in a book on the economics of competition:

Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906…. During the latter part of the nineteenth century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City…. [C]ompetition was common and especially persistent in the telephone industry…. Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1906.⁴³

This was all to the benefit of consumers, but the utility businesses were inconvenienced by having to compete. So a different type of competition began—in the political arena. The utilities began lobbying state and local governments to grant them monopoly franchises. All kinds of theories were invented to rationalize the monopolies. They would supposedly eliminate “wasteful duplication” of facilities, for example, as though it is possible for two manufacturing businesses to compete without “duplicating” their factories. The superstition was also invented that actual competition would somehow lead to monopoly anyway, with one large firm dominating each industry—this despite the fact such “natural monopolies” had never occurred.

All this theorizing apparently provided politicians with enough cover to grant monopolies in all the utility industries to politically connected businesses, in return for financial support, some legal and some not. State and local governments essentially shared in the loot collected by the utility monopolies. In his book The Gas Light Company of Baltimore, George T. Brown offered a good example of how utility monopolies were created. In 1890, at a time when there were three competing gas companies in Baltimore, the Maryland legislature introduced a bill calling “for an annual payment to the city from the Consolidated Gas Company of $10,000 a year and 3 percent of all dividends declared in return for the privilege of enjoying a 25-year monopoly.”⁴⁴ This type of scheme occurred in every state, leading the University of Illinois economist Horace Gray to comment that “the public utility status was to be the haven of refuge for all aspiring monopolists who found it too difficult, too costly, or too precarious to secure and maintain monopoly by private action alone.”⁴⁵

The same story can be told of the radio, real estate, milk, airline, coal, oil, and agricultural industries, to name a few. Consider what happened with the telephone industry. By the beginning of the twentieth century, a dozen years after AT&T’s initial patents expired, there were more than three thousand telephone companies in America. Some states had as many as two hundred telephone companies operating simultaneously. AT&T started out with a patent monopoly on telephone service, but it had lost more than half of the market to competition, and prices were being driven down sharply by the competition. So after World War I the company created a formidable lobbying force and persuaded every state to grant it another monopoly in telephone service and to make competition illegal—all supposedly “in the public interest.”⁴⁶

NEW DEAL HAMILTONIANS

Modern-day Hamiltonians like the writer Michael Lind refer to all of these mercantilist policies as “economic nationalism,” a phrase that implies the policies somehow benefit the entire nation. They claim that such policies were finally embraced nationally during FDR’s New Deal, and they are right, at least with regard to corporate welfare. The hallmarks of FDR’s “First New Deal” (1933–34) were the National Industrial Recovery Act and the Agricultural Adjustment Act. The former law created the National Industrial Recovery Administration (NIRA), which attempted to create a cartel in every manufacturing industry by adopting “price codes”—government-imposed controls that artificially pushed prices up. This system reflected FDR’s belief in the convoluted and false theory that low prices had caused the Great Depression.

More than seven hundred industry “price codes” were adopted and enforced by literally thousands of code police, led by a former army general named Hugh Johnson. The code police were so heavy-handed that a lowly New York tailor named Jack Magid was arrested, convicted, fined, and imprisoned for pressing a men’s suit for 35 cents when the Tailor’s Code set the price at 40 cents.⁴⁷ Six thousand statisticians were employed to dream up the “correct” prices for thousands of consumer items. The oil industry was monopolized by a law that restricted the amount of oil that could be sold in interstate and international commerce, thereby pushing up the price of petroleum and petroleum products.

The NIRA was an extreme form of Hamiltonian mercantilism. This country has never seen a closer relationship between business and government. Of course, it all only made the Great Depression worse. Monopolies tend to reduce production in order to charge higher prices. Reduced production is always accompanied by reduced employment. What was needed was more production, which would have led to more employment.

The Agricultural Adjustment Administration (AAA) attempted a similar plan with regard to agriculture, using various regulatory means to force or bribe farmers to grow fewer crops and raise less livestock in an attempt to push up the price of food. Poor sharecroppers in the southern states were especially devastated by this program of reducing agricultural production (and employment).

John T. Flynn, one of the most prominent critics of FDR, noted the similarity between the First New Deal in America and economic fascism in Italy. Mussolini “organized each trade or industrial group or professional group into a state-supervised trade association. He called it a cooperative. These cooperatives operated under state supervision and could plan production, quality, prices, distribution, labor standards, etc.” The NIRA in America “provided that in American industry each industry should be organized into a federally supervised trade association. It was not called a cooperative. It was called a Code Authority. But it was essentially the same thing….[T]his was fascism.”⁴⁸

More precisely, it was economic fascism without the racism, dictatorship, and other ugly features of European and Japanese fascism. It was indeed almost identical to how the European and Japanese fascists attempted to centrally plan their economies. Hamilton’s curse had gone international.

HAMILTON’S ULTIMATE TRIUMPH

Nationalized banking, protectionism, and corporate welfare—all these plans originated with Alexander Hamilton and were ultimately put into effect during the Lincoln administration. While the Republicans might have justified these plans as wartime measures, they lasted for decades after the War between the States ended.

And those three mercantilist schemes were just part of Hamilton’s vision for America that came to pass during the Lincoln administration. Perhaps most important of all was the plan Hamilton laid out at the Constitutional Convention for a kinglike “permanent president,” by means of which political power would be consolidated in the nation’s capital and states’ rights would effectively be abolished. Hamilton failed to achieve this objective at the Constitutional Convention, but seventy-five years later his political heirs would fulfill his ambitions.

Generations of historians have labeled Abraham Lincoln a “dictator,” although supposedly a benevolent one. “Never had the power of a dictator fallen into safer hands,” wrote James Ford Rhodes, author of a multivolume history of the United States.⁴⁹ “If Lincoln was a dictator, it must be admitted that he was a benevolent dictator,” announced the Lincoln biographer James G. Randall.⁵⁰ Many other historians have made similar comments.

The “dictator” references are no accident. The plain historical fact is that Lincoln did ignore the Constitution and effectively declare himself dictator. He began a war without the consent of Congress; unilaterally and illegally suspended the writ of habeas corpus; imprisoned tens of thousands of northern political dissenters; censored all telegraph communications; confiscated firearms in the border states in violation of the Second Amendment; deported Democratic Congressman Clement Vallandigham for his outspoken anti-administration speeches; issued an arrest warrant for the chief justice of the United States, Roger B. Taney, after he issued an opinion that only Congress and not the president could suspend habeas corpus; illegally orchestrated the secession of West Virginia from Virginia; and shut down several hundred opposition newspapers in the North, in some cases imprisoning the editors and owners. “This amazing disregard for the…Constitution was considered by nobody as legal,” wrote the historian Clinton Rossiter in his book Constitutional Dictatorship.⁵¹

Although Lincoln did not become a “permanent” president, the precedents he established have endured to this day. Countless American politicians and pundits have cited those precedents to rationalize trampling on the liberties of their fellow citizens and various other unconstitutional governmental actions, especially undeclared wars.⁵²

Lincoln also permanently altered the relationship between the federal government and the states, creating the dominant central power that Alexander Hamilton had desired. By 1865 the Jeffersonian tradition of states’ rights—by which the citizens were the masters rather than the servants of their government—had been all but eradicated. American citizens no longer possessed the rights of nullification (of unconstitutional federal laws) and secession and thus could no longer serve as a popular check on the powers of the central state. This, of course, was Alexander Hamilton’s ultimate end.

But the final blow to federalism, and the final realization of Hamilton’s vision, would not come until the fateful year of 1913.