Alexander Hamilton's Advice To The Obama Administration

Alexander Hamilton, in 1791, proposed to the United States our first true industrial policy. We adopted it over the next few years, Abraham Lincoln reaffirmed it fourscore years later, and it was again affirmed by every President of the United States until Reagan began his now-28-year "Reagan Revolution" which has disassembled America's industrial base and impoverished our nation. For over 200 years, Hamilton's policy made America the most powerful industrial nation in the world; now - after just 28 years of Reagonomics and Clinton/Rubinomics - we are the largest importer of other people's industry, and the most indebted nation in the world.

The entirety of Hamilton's paper is easily found on the web. The first third of it deals with Jefferson's objections to it (which Jefferson withdrew later in his life), as Jefferson favored America being an agricultural rather than an industrial power in 1791. Once you cut past that, though, Hamilton gets right to the rationale for, and the details of, his 11-point plan to turn America into an industrial power and build a strong manufacturing-based middle class. Ironically, his policies are exactly - EXACTLY - what Japan, South Korea, and China are doing today. And what we have ceased to do.

Hamilton had it right. We must reject Reagon/Bush/Clinton/Bush-onomics and return to what the Founders knew worked. Here are selected excerpts from Hamilton's 1791 Report on Manufactures to Congress:

First, Hamilton points out that real wealth doesn't exist until somebody makes something. A "service economy" is an oxymoron - if I wash your car in exchange for your mowing my lawn, money is moving around, it's a service economy, but no real and lasting wealth is created. Only through manufacturing, when $5 worth of iron ore is converted into a $2000 car door, or $1 worth of raw wool is converted into a $1000 Calvin Klein suit, is real wealth created. He also notes that people being paid for creating wealth (manufacturing) creates wages, which are the principal engine of demand, which drives an economy. And both come from a foreign trade policy.

"The expediency of encouraging manufactures in the United States," Hamilton started out, "which was not long since deemed very questionable, appears at this time to be pretty generally admitted."

Explaining why manufacturing was importing to America, he continued: "It merits particular observation, that the multiplication of manufactories not only furnishes a Market for those articles, which have been accustomed to be produced in abundance, in a country; but it likewise creates a demand for such as were either unknown or produced in inconsiderable quantities."

In addition, Hamilton noted, an industrial policy should be interwoven with foreign policy, for to have a foreign policy that doesn't consider its own impact on manufacturing enterprises is useless. "'Tis for the United States to consider by what means they can render themselves least dependent," of other nation's manufactures, Hamilton wrote, "on the combinations, right or wrong of foreign policy."

But there were many voices - the loudest from Thomas Jefferson - who objected to Hamilton's 11-point plan. They saw the widespread poverty in the United Kingdom and all the corruption attendant to a wealthy nation, and argued that instead of becoming an industrial power we should remain an agricultural nation. Hamilton said that both were possible, and there would even be a desirable synergy between the two.

"The remaining objections to a particular encouragement of manufactures in the United States now require to be examined," he wrote, and then first took on the Adam Smith school of thought, that industry shouldn't be encouraged because a "free market" will eventually work itself out.

"One of these turns on the proposition, that Industry, if left to itself, will naturally find its way to the most useful and profitable employment: whence it is inferred, that manufactures without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require.

"Against the solidity of this hypothesis, in the full latitude of the terms, very cogent reasons may be offered. These have relation to the strong influence of habit and the spirit of imitation -- the fear of want of success in untried enterprises -- the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted -- the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own Citizens in the branches, in which they are to be rivaled.

"To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government."

Government, Hamilton held, shouldn't just be the igniter of an industrial state. Indeed, it would be impossible to truy and successfully build an industrial nation without the help of government.

"To be enabled to contend with success, it is evident, that the interference and aid of their own government are indispensable."

The reasons were pretty straightforward, Hamilton wrote: it would take government's power to set up a playing field for the game of business where investors who would otherwise be able to make more money overseas would keep their money in the United States.

"There are weighty inducements to prefer the employment of capital at home even at less profit, to an investment of it abroad, though with greater gain," he wrote. "These impressions will prove a rich mine of prosperity to the Country, if they are confirmed and strengthened by the progress of our affairs. And to secure this advantage, little more is now necessary, than to foster industry..." He added, "[I]t is the interest of a community with a view to eventual and permanent economy, to encourage the growth of manufactures. There seems to be a moral certainty, that the trade of a country which is both manufacturing and Agricultural will be more lucrative and prosperous, than that of a Country, which is, merely Agricultural. The Nation which can bring to Market, but few articles is likely to be more quickly and sensibly affected by such stagnations, than one, which is always possessed of a great variety of commodities."

And this was absolutely the basis of the true wealth of a nation, Hamilton believed.

"There is ground to believe, that a difference of situation, in this particular, has immensely different effects upon the wealth and prosperity of Nations.

"From these circumstances collectively, two important inferences are to be drawn, one, that there is always a higher probability of a favorable balance of Trade, in regard to countries in which manufactures founded on the basis of a thriving Agriculture flourish, than in regard to those, which are confined wholly or almost wholly to Agriculture; the other (which is also a consequence of the first) that countries of the former description are likely to possess more pecuniary wealth, or money, than those of the latter."

Having provided this overview, Hamilton got right to the meat of the matter - his 11-step plan, based on Henry VII's Tudor Plan, which would later be used by Japan, Germany, South Korea, and China, to build industry. After a paragraph of introduction, the first on his list was protecting duties, known today as tariffs. An easy way of explaining tariffs is to say, "If there's a dollar's worth of labor in a pair of shoes manufactured in the United States, and you can make the same pair of shoes with twenty cents worth of labor in China, then we're going to charge you an eighty cent tariff when those shoes are imported into the United States. If you can make them with fifty cents of labor in Mexico, then our import tariff is fifty cents. Whatever and wereever, import duties are used to equalize manufacturing costs and protect domestic industries.

After Hamilton's plan was adopted, tariffs became so important that 100 percent of the revenue of the US Government from the late 1700s until the Civil War came from tariffs. Two-thirds of our revenue from the Civil War to WWI came from tariffs. And even when government had grown exponentially as we led up to World War II, fully a third of all federal revenues came from Tariffs.

Here's how Hamilton wrote it:

A full view having now been taken of the inducements to the promotion of manufactures in the United States, accompanied with an examination of the principal objections which are commonly urged in opposition, it is proper, in the next place, to consider the means by which it may be effected. In order to a better judgment of the means proper to be resorted to by the United States, it will be of use to advert to those which have been employed with success in other countries. The principal of these are:

1. Protecting duties -- or duties on those foreign articles which are the rivals of the domestic ones intended to be encouraged.

Duties of this nature evidently amount to a virtual bounty on the domestic fabrics; since, by enhancing the charges on foreign articles, they enable the, national manufacturers to undersell ;all their foreign competitors. It has the additional recommendation of being a resource of revenue. Indeed, all tile duties imposed on imported articles, though with an exclusive view to revenue, have the effect, in contemplation, and, except where they fill on raw materials, wear a beneficent aspect towards the manufacturers of the country.

2. Prohibitions of rival articles, or duties equivalent to prohibitions.

This is another and an efficacious mean of encouraging national manufactures; Of duties equivalent to prohibitions, there are examples in the laws of the United States, but they are not numerous. It might almost be said, by the principles of distributive justice; certainly, by the duty of endeavoring to secure to their own citizens a reciprocity of advantages.

3. Prohibitions of the exportation of the Materials of Manufactures.

The desire of securing a cheap and plentiful supply for the national workmen, and where the article is either peculiar to tile country, or of peculiar quality there, the jealousy of enabling foreign workmen to rival those of the nation with its own materials, are the leading motives to this species of regulation. It is seen at once, that its immediate operation is to abridge the demand, and keep down the price of the produce of some other branch of industry -generally speaking, of agriculture-to the prejudice of those who carry it on; and though, if it be really essential to the prosperity of any very important national manufacture, it may happen that those who are injured, in the first instance, may, be, eventually, indemnified by the superior steadiness of an extensive domestic market, depending on that prosperity; yet, in a matter in which there is so much room for nice and difficult combinations, in which, such opposite considerations combat each other, prudence seems to dictate that the expedient in question ought to be indulged with a sparing hand.

4. Pecuniary bounties.

This has been found one of the most efficacious means of encouraging manufactures, and is, in some views, the best. Though it has not yet been practised upon by the Government of the United States (unless the allowance on the expiration of dried and pickled fish and salted meat could be considered as a bounty), and though it is less favored by public opinion than some other modes, its advantages are these:

A. It is a species of encouragement more positive and direct than any other, and, for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempts.

B. It avoids the inconvenience of a temporary augmentation of price, which is incident to some other modes; or it produces it to, a less degree, either by making no addition to the charges on the rival foreign article, as in the case of protecting duties, or by making a smaller addition. The first happens when the fund for the bounty is derived from a different object (which may or may not increase the price of some other article, according to the nature of that object), the second, when the fund is derived from the same, or a similar object, of foreign manufacture. One per cent. duty on the foreign article, converted into a bounty on the domestic, will have an equal effect with a duty of two per cent., exclusive of such bounty; and the price of the foreign commodity is liable to be raised, in the one case, in the proportion of one per cent.; in the other in that of two per cent. Indeed the bounty, when drawn from another source, is calculated to promote a reduction of price; because, without laying any new charge on the foreign article, it serves to introduce a competition with it, and to increase the total quantity of the article in the market.

C. Bounties have not, like high protecting duties, a tendency to produce scarcity.

D. Bounties are, sometimes, not only the best, but the only proper expedient for uniting the encouragement of a new object.

The true way to conciliate these two interests is to lay a duty on foreign manufactures of the material, the growth of which is desired to be encouraged, and to apply the produce of that duty, by way of bounty, either upon the production of the material itself, or upon its manufacture at home, or upon both.

Pecuniary bounties are, in most cases, indispensable to the introduction of a new branch. Bounties are especially essential in regard to articles upon which those foreigners, who have been accustomed to supply a country, are in the practice of granting them.

The continuance of bounties on manufactures long established, must almost always be of questionable policy: because a presumption would arise, in every such case, that there were natural and inherent impediments to success. But, in new undertakings, they are as justifiable as they are oftentimes necessary.

5. Premiums

These are of a nature allied to bounties, though distinguishable from them in some important features.
Bounties are applicable to the whole quantity of an article produced, or manufactured, or exported, and involve a correspondent expense. Premiums serve to reward some particular excellence or superiority, some extraordinary exertion or skill, and are dispensed only in a small number of cases. But their effect is to stimulate general effort;

6. The exemption of the materials of manufactures from duty.

The policy of that exemption, as a general rule, particularly in reference to new establishments, is obvious.
Of a nature, hearing some affinity to that policy, is the regulation which exempts from duty the tools and implements, as well as the books, clothes, and household furniture, of foreign artists, who come to reside in the United States-an advantage already secured to them by the laws of the Union, and which it is, in every view, proper to continue.

7. Drawbacks of the duties which are imposed on the materials of manufactures.

Such drawbacks are familiar in countries which systematically pursue the business of manufactures; which furnishes an argument for the observance of a similar policy in the United States; and the idea has been adopted by the laws of the Union, in the instances of salt and molasses. It is believed that it will be found advantageous to extend it to some other articles.

8. The encouragement of new intentions 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.

This is among the most useful and unexceptionable of the aids which can be given to manufactures. The usual means of that encouragement are pecuniary rewards, and, for a time, exclusive privileges. The first must be employed, according to the occasion, and the utility of the invention or discovery. For the last, so far w respects " authors and inventors," provision has been made by law. It is customary with manufacturing nations to prohibit, under severe penalties, the exportation of implements and machines, which they have either invented or improved. As far as prohibitions tend to prevent foreign competitors from deriving the benefit of the improvements made at home, they tend to increase the advantages of those by whom they may have been introduced, and operate as an encouragement to exertion.

9. Judicious regulations for the inspection of manufactured commodities.

This is not among the least important of the means by which the prosperity of manufactures may be promoted. It is, indeed, {255} in many cases, one of the most essential. Contributing to prevent frauds upon consumers at home, and exporters to foreign countries; to improve the quality, and preserve the character of the national manufactures...

10. The facilitating of pecuniary remittances from place to place --

A general circulation of bank paper, which is to be expected from the institution lately established, will be a most valuable mean to this end.

11. The facilitating of the transportation of commodities.

There is, perhaps, scarcely any thin" which has been better calculated to assist the manufacturers of Great Britain, than the melioration of the public roads of that kingdom, {256} and the great progress which has been of late made in opening canals. Of the former, the United States stand much in need;

These examples, it is to be hoped, will stimulate the exertions of the Government and citizens of every State. There can certainly be no object more worthy of the cares of the local administrations; and it were to be wished that there was no doubt of the power of the National Government to lend its direct aid on a comprehensive plan. This is one of those improvements which could be prosecuted with more efficacy by the whole, than by any part or parts of the Union. "Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of a country more nearly upon a level with those in the neighborhood of the town. They are, upon that account, the greatest of all improvement."

It may confidently be affirmed, that there is scarcely any thing which has been devised, better calculated to excite a general spirit of improvement, than the institutions of this nature. The are truly invaluable.

In countries where there is great private wealth, much may be effected by the voluntary contributions of patriotic individuals; but in a community situated like that of the United States, the public purse must supply the deficiency of private resource. In what can it be so useful, as in prompting and improving the efforts of industry?

All which is humbly submitted.

ALEXANDER HAMILTON,
Secretary of the Treasury.

And to further demonstrate the prescience of Alexander Hamilton, consider this argument he embedded into point 4 in his 11 point plan, rebutting today's "conservatives" who say that everything from trade policy to Social Security are "unconstitutional" because they're not spelled out in the Constitution:

A question has been made concerning the constitutional right of the Government of the United States to apply this species of encouragement; but there is certainty no good foundation for such a question. The National Legislature has express authority "to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare," with no other qualifications than that "all duties, imposts and excises, shall be uniform throughout the United States; and that no capitation or other direct tax shall be laid, unless in proportion to numbers, ascertained by a census or enumeration, taken on the principles prescribed in the constitution," and that "no tax or duty shall be laid on articles exported from any State."

These three qualifications excepted, the power to raise money is plenary and indefinite, and the objects to which it may be appropriated, are no less comprehensive thin the payment of the public debts, and the providing for the common defense and general welfare. The terms "general welfare" were doubtless intended to signify more than was expressed or imported in those which preceded; otherwise, numerous exigencies incident to the affairs of a nation would have been left without a provision. The phrase is as comprehensive as any that could have been used; because it was not fit that the constitutional authority of the Union to appropriate its revenues should have been restricted within narrower limits than the "general welfare;" and because this necessarily embraces a vast variety of particulars, which are susceptible neither of specification nor of definition.

It is, therefore, of necessity, left to the discretion of the National Legislature to pronounce upon the objects which concern the general welfare, and for which, under that description, an appropriation of money is requisite and proper. And there seems to be no room for a doubt, that whatever concerns the general interests of learning, of agriculture, of manufactures, and of commerce, are within the sphere of the national councils, as far as regards an application of money.

We need to begin paying attention to the wisdom of the Founders and Framers if our country is to survive...