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Hamilton proposes to stimulate manufacturing in order to help make Americans prosperous.
This post on Hamilton’s Report on Manufactures (submitted to Congress on December 5, 1791) is the third of three posts on Hamilton’s major writings as secretary of the Treasury. The first of the series sets up the context and chronology, and gives a 2,000-word outline of the 40,000-word First Report on Public Credit. The second of the series has outlines of the Report on a National Bank, the Opinion on the Constitutionality of a National Bank, and the Report on the Establishment of a Mint.
The caveat (again): I’ve narrowed my focus to sketching Hamilton’s political and economic context, and outlining what he advocated in his official writings as secretary of the Treasury. I’m not looking at modern implications or consequences of his policies.
Context of Hamilton’s Report on Manufactures
In accordance with eighteenth-century mercantilist theory, Americans during colonial times were required to ship raw materials to England, and to purchase any manufactured goods they needed from the mother country. This is part of the reason plantation-owners such as Washington and Jefferson fell so deeply in debt.
By 1791, when Hamilton submitted the Report on Manufactures, Great Britain was several decades into the Industrial Revolution. Instead of producing small quantities of goods by hand, at home, workers were using machines in factories to produce large quantities of goods. By Gregory Clark’s estimate (see his Table 3), only about 40% of British men were working in agriculture by 1790. In America, 90% of workers were still farmers. Of those farmers, plantation owners such as Washington, Jefferson, and Madison were a minority. Many farm families produced barely enough to support themselves.
Because 90% of Americans raise their own food, the market for America’s surplus agricultural produce is mostly abroad. However, European rulers are obsessed with a favorable balance of trade (keeping gold and silver in their own countries), so they frequently impose punitive duties on American produce. Hamilton believes that it will be difficult for Americans to become more prosperous purely by engaging in agriculture – especially if they have to purchase all their manufactured goods abroad.
Hence Hamilton thinks manufacturing and agriculture are both desirable. Engaging in manufacturing will help America become free from its economic dependence on Europe. It will give Americans more goods to trade with Europe. And since those who work in manufacturing will still have to eat, it will create a new market for agricultural produce. (See III.A below.)
What goods does Hamilton want to see manufactured? Basic items such as leather goods, iron, soap, and gunpowder. (See II.E below.) Only small quantities of any of those are being produced in the United States in the 1790s.
Balance of trade
Hamilton wants a favorable balance of trade – i.e., Americans selling more goods abroad than they buy there – because that means more gold and silver will be deposited in American banks. More gold and silver on deposit will, in turn, increase the amount of money in circulation. The banks can issue more bank notes if there’s more gold and silver in their vaults. (See the post on the First Report on Public Credit.)
Integration of policies
Hamilton designed his financial system as an integrated unit. Increasing trade increases the amount of gold and silver that Americans hold; that gold and silver, deposited in banks, increases the number of bank notes that can be issued, hence the supply of money. More money in circulation means more Americans can start manufacturing enterprises or expand their farms. More business and trade means more government revenue, which helps the government make regular payments on its debt. When the debt is being paid off on schedule, the U.S. government’s IOUs also serve as money in circulation, and that can be used to fund more businesses and agriculture.
To their intense exasperation, Hamilton’s enemies soon realized that they couldn’t eliminate any one of the elements of Hamilton’s system without upsetting the balance of the others. And the system worked too well (more on that at the end of this post) to mess with it.
Here’s an outline and paraphrase of the Report on the Subject of Manufactures. As usual, I’ve included excerpts that make important points, and elsewhere given you a few words so that if you want to read more, you can find the right section in the online version.
The Report on Manufactures
Congress asked Hamilton to report on manufactures, especially “the means of promoting such as will tend to render the United States independent on foreign nations, for military and other essential supplies.” Hamilton comments:
The expediency of encouraging manufactures in the United States, which was not long since deemed very questionable, appears at this time to be pretty generally admitted.
America’s foreign trade has been hampered by the restrictions of foreign governments, so that we can’t sell all our excess agricultural produce abroad. Fortunately, the manufacturing efforts that have been tried in America have succeeded. But before we talk about promoting them, let’s look at the arguments against manufacturing.
II. Arguments against manufacturing [Begins: “There are still, nevertheless, respectable”]
A. Objection: we should focus on agriculture
Some say the U.S. has vast amounts of fertile territory, so the best use of labor and capital is bringing it under cultivation. To give his opponents’ views, Hamilton paraphrases Smith’s Wealth of Nations.
To endeavor by the extraordinary patronage of Government, to accelerate the growth of manufactures, is in fact, to endeavor, by force and art, to transfer the natural current of industry, from a more, to a less beneficial channel. Whatever has such a tendency must necessarily be unwise. Indeed it can hardly ever be wise in a government, to attempt to give a direction to the industry of its citizens. This under the quicksighted guidance of private interest, will, if left to itself, infallibly find its own way to the most profitable employment: and ’tis by such employment, that the public prosperity will be most effectually promoted. To leave industry to itself, therefore, is, in almost every case, the soundest as well as the simplest policy. [Founders Archives note 128 gives quotes from Adam Smith’s Wealth of Nations]
[I gotta say, as a laissez-faire capitalist, that sounds pretty good to me.]
Hamilton responds by comparing agriculture and manufacturing.
- Although agriculture has a strong claim to be the preeminent industry here, that doesn’t mean it should be the only one. [Begins: “It ought readily to be conceded”]
- Manufacturing enterprises can make a profit, but we don’t yet have the data to know whether the profit is more than one could earn if the land were instead rented out for agricultural purposes.
- Manufacturing isn’t superior to agriculture – but nor is agriculture superior to manufacturing. [Begins: “It is now proper to proceed a step further.”] Manufacturing makes a community more productive overall, in 7 ways:
a. Manufacturing takes advantage of division of labor (“the greater skill and dexterity naturally resulting from a constant and undivided application to a single object”) as well as saving time by not switching from task to task.
b. Manufacturing allows more use of machinery, “an artificial force brought in aid of the natural force of man.”
c. Manufacturing allows the employment of people who wouldn’t otherwise be working: “extra employment to industrious individuals and families” and employment for others who “either from the bias of temper, habit, infirmity of body, or some other cause” were not suited to work on farms.
d. Manufacturing promotes emigration from abroad. [NOTE: It took me a couple readings to grasp the paragraph below: Hamilton means people who would not emigrate in order to work a farm might emigrate in order to get involved in manufacturing in a freer country.]
Men reluctantly quit one course of occupation and livelihood for another, unless invited to it by very apparent and proximate advantages. Many, who would go from one country to another, if they had a prospect of continuing with more benefit the callings, to which they have been educated, will often not be tempted to change their situation, by the hope of doing better, in some other way. Manufacturers, who listening to the powerful invitations of a better price for their fabrics, or their labour, of greater cheapness of provisions and raw materials, of an exemption from the chief part of the taxes burthens and restraints, which they endure in the old world, of greater personal independence and consequence, under the operation of a more equal government, and of what is far more precious than mere religious toleration—a perfect equality of religious privileges; would probably flock from Europe to the United States to pursue their own trades or professions, if they were once made sensible of the advantages they would enjoy, and were inspired with an assurance of encouragement and employment, will, with difficulty, be induced to transplant themselves, with a view to becoming Cultivators of Land.
e. Manufacturing furnishes a broader scope for men’s diverse talents and dispositions. [What a great point this is!]
It is a just observation, that minds of the strongest and most active powers for their proper objects fall below mediocrity and labour without effect, if confined to uncongenial pursuits. And it is thence to be inferred, that the results of human exertion may be immensely increased by diversifying its objects. When all the different kinds of industry obtain in a community, each individual can find his proper element, and can call into activity the whole vigour of his nature. And the community is benefitted by the services of its respective members, in the manner, in which each can serve it with most effect.
f. Manufacturing affords a more ample and various field for enterprise. [Another great point!]
To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted. Even things in themselves not positively advantageous, sometimes become so, by their tendency to provoke exertion. Every new scene, which is opened to the busy nature of man to rouse and exert itself, is the addition of a new energy to the general stock of effort.
The spirit of enterprise, useful and prolific as it is, must necessarily be contracted or expanded in proportion to the simplicity or variety of the occupations and productions, which are to be found in a Society. It must be less in a nation of mere cultivators, than in a nation of cultivators and merchants; less in a nation of cultivators and merchants, than in a nation of cultivators, artificers and merchants.
g. Manufacturing creates a steadier demand for agricultural produce. [Why? because fewer people are farmers, but those who aren’t still need to eat.]
This is among the most important of the circumstances which have been indicated. It is a principal mean, by which the establishment of manufactures contributes to an augmentation of the produce or revenue of a country, and has an immediate and direct relation to the prosperity of Agriculture.
B. Objection: Manufacturing isn’t suitable for states with large tracts of unsettled land [Begins: “It may be observed, and the idea is”]
Some say that if a state has large tracts of vacant and fertile territory, it might choose to remain agricultural and to trade abroad for manufactured goods.
Hamilton’s answer: that would be lovely if there were free trade among nations: but there’s not. We have to deal with the current situation. [NOTE: This section includes a discussion of the benefits of laissez-faire and why Hamilton is not advocating it at this time; cf. IV.G below.]
If the system of perfect liberty to industry and commerce were the prevailing system of nations—the arguments which dissuade a country in the predicament of the United States, from the zealous pursuits of manufactures would doubtless have great force. It will not be affirmed, that they might not be permitted, with few exceptions, to serve as a rule of national conduct. In such a state of things, each country would have the full benefit of its peculiar advantages to compensate for its deficiencies or disadvantages. If one nation were in condition to supply manufactured articles on better terms than another, that other might find an abundant indemnification in a superior capacity to furnish the produce of the soil. And a free exchange, mutually beneficial, of the commodities which each was able to supply, on the best terms, might be carried on between them, supporting in full vigour the industry of each. And though the circumstances which have been mentioned and others, which will be unfolded hereafter render it probable, that nations merely Agricultural would not enjoy the same degree of opulence, in proportion to their numbers, as those which united manufactures with agriculture; yet the progressive improvement of the lands of the former might, in the end, atone for an inferior degree of opulence in the mean time: and in a case in which opposite considerations are pretty equally balanced, the option ought perhaps always to be, in favour of leaving Industry to its own direction.
But the system which has been mentioned, is far from characterising the general policy of Nations. The prevalent one has been regulated by an opposite spirit.
The consequence of it is, that the United States are to a certain extent in the situation of a country precluded from foreign Commerce. They can indeed, without difficulty obtain from abroad the manufactured supplies, of which they are in want; but they experience numerous and very injurious impediments to the emission and vent of their own commodities. Nor is this the case in reference to a single foreign nation only. The regulations of several countries, with which we have the most extensive intercourse, throw serious obstructions in the way of the principal staples of the United States.
In such a position of things, the United States cannot exchange with Europe on equal terms; and the want of reciprocity would render them the victim of a system, which should induce them to confine their views to Agriculture and refrain from Manufactures. A constant and encreasing necessity, on their part, for the commodities of Europe, and only a partial and occasional demand for their own, in return, could not but expose them to a state of impoverishment, compared with the opulence to which their political and natural advantages authorise them to aspire.
Remarks of this kind are not made in the spirit of complaint. ’Tis for the nations, whose regulations are alluded to, to judge for themselves, whether, by aiming at too much they do not lose more than they gain.’Tis for the United States to consider by what means they can render themselves least dependent, on the combinations, right or wrong of foreign policy.
It is no small consolation, that already the measures which have embarrassed our Trade, have accelerated internal improvements, which upon the whole have bettered our affairs. To diversify and extend these improvements is the surest and safest method of indemnifying ourselves for any inconveniences, which those or similar measures have a tendency to beget. If Europe will not take from us the products of our soil, upon terms consistent with our interest, the natural remedy is to contract as fast as possible our wants of her.
C. Objection: Manufacturing will grow on its own, without government encouragement. [Begins: “The remaining objections to a particular”]
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.
Hamilton’s answer: The growth of industry can be delayed for a variety of reasons.
- People stick to their old habits; “To produce the desireable changes, as early as may be expedient, may therefore require the incitement and patronage of government.”
- People are afraid of failure: “[T]o inspire this description of persons with confidence, it is essential, that they should be made to see in any project, which is new, and for that reason alone, if, for no other, precarious, the prospect of such a degree of countenance and support from government, as may be capable of overcoming the obstacles, inseperable from first experiments.”
- People are afraid of initial difficulties when competing against a country with long-established manufacturing; they cannot successfully compete “without the extraordinary aid and protection of the government.”
- People are discouraged by the fact that foreign governments offer bounties to their own industries, in order to allow their products to sell for less abroad. “To be enabled to contend with success, it is evident, that the interference and aid of their own government are indispensible.”
Whatever room there may be for an expectation that the industry of a people, under the direction of private interest, will upon equal terms find out the most beneficial employment for itself, there is none for a reliance, that it will struggle against the force of unequal terms, or will of itself surmount all the adventitious barriers to a successful competition, which may have been erected either by the advantages naturally acquired from practice and previous possession of the ground, or by those which may have sprung from positive regulations and an artificial policy.
D. Objection: The U.S. lacks the workers and capital needed for manufacturing [Begins: “The objections to the pursuit of”]
Some people argue that Americans can’t do manufacturing: There are too few workers. The cost of hiring them is too high. Americans have too little capital to invest in machinery.
Hamilton’s answer: the banks and the circulation of government IOUs (the “funded debt”) will provide capital, and foreigners will also invest. He makes two important points here: 1) Funding the debt [making government securities stable enough to circulate as money] is not the same as increasing capital [wealth], but it can help create real wealth; and 2) The accumulation of debt should not be encouraged just to increase capital: debt should always be paid off as quickly as practicable.
But though a funded debt is not in the first instance, an absolute increase of Capital, or an augmentation of real wealth; yet by serving as a New power in the operation of industry, it has within certain bounds a tendency to increase the real wealth of a Community, in like manner as money borrowed by a thrifty farmer, to be laid out in the improvement of his farm may, in the end, add to his Stock of real riches.
There are respectable individuals, who from a just aversion to an accumulation of Public debt, are unwilling to concede to it any kind of utility, who can discern no good to alleviate the ill with which they suppose it pregnant; who cannot be persuaded that it ought in any sense to be viewed as an increase of capital lest it should be inferred, that the more debt the more capital, the greater the burthens the greater the blessings of the community.
But it interests the public Councils to estimate every object as it truly is; to appreciate how far the good in any measure is compensated by the ill; or the ill by the good, Either of them is seldom unmixed.
Neither will it follow, that an accumulation of debt is desireable, because a certain degree of it operates as capital. There may be a plethora in the political, as in the Natural body; There may be a state of things in which any such artificial capital is unnecessary. The debt too may be swelled to such a size, as that the greatest part of it may cease to be useful as a Capital, serving only to pamper the dissipation of idle and dissolute individuals: as that the sums required to pay the Interest upon it may become oppressive, and beyond the means, which a government can employ, consistently with its tranquility, to raise them; as that the resources of taxation, to face the debt, may have been strained too far to admit of extensions adequate to exigencies, which regard the public safety.
Where this critical point is, cannot be pronounced, but it is impossible to believe, that there is not such a point.
And as the vicissitudes of Nations beget a perpetual tendency to the accumulation of debt, there ought to be in every government a perpetual, anxious and unceasing effort to reduce that, which at any time exists, as fast as shall be practicable consistently with integrity and good faith.
E. Objection: Manufacturing won’t work in the U.S. [Begins: “To all the arguments”]
Hamilton’s answer to those who claim manufacturing can’t work here: it already is. He surveys the most important manufacturing enterprises: skins (leather, shoes, harness, etc.), iron, wood, flax and hemp, bricks (plus tiles and pottery), alcohol paper, hats, refined sugar, oil and soap, copper and brass wares, tin wares, carriages, tobacco products, starch and hairpowder, lampblack and painters’ colors, gunpowder. Much household manufacturing also goes on, particularly cloth and clothing.
F. Objection: Manufacturing gives unfair advantages [Begins: “There remains to be noticed an objecction”]
Some say manufacturing gives advantages to one class, and raises prices for the rest. Hamilton’s answer: eventually manufacturing makes prices cheaper.
III. Arguments in favor of manufacturing [Begins: “The objections which are commonly made”]
A. Manufacturing will give us a better trading position.
- A nation with manufactured goods is in a better position to trade with foreigners than one that sells only agricultural produce.
- America’s economy will be healthier if it has a combination of manufacturing and agriculture.
Previous to the revolution, the quantity of coin, possessed by the colonies, which now compose the United states, appeared, to be inadequate to their circulation; and their debt to Great-Britain was progressive. Since the Revolution, the States, in which manufactures have most increased, have recovered fastest from the injuries of the late War, and abound most in pecuniary resources.
B. Manufacturing will make us better able to defend ourselves. [Begins: “Not only the wealth”]
The independence and security of a country are related to prosperous manufacturing. Every nation should produce the essentials of subsistence, habitation, clothing, and defense. That should be our next great aim. Given that we don’t have a navy, it’s especially dangerous to rely on foreign trade for essential items.
C. More general advantages to manufacturing [Begins: “To these general considerations”]
- The distance to Europe means that it costs a lot to ship our agricultural produce there. That makes our prices less competitive.
- Our frontier settlements need lots of coarse manufactured goods. They are expensive to import, because they’re very bulky. Farmers suffer especially from high shipping costs on such goods.
- Many say that manufacturing unduly benefits the North.
Ideas of a contrariety of interests between the Northern and southern regions of the Union, are in the Main as unfounded as they are mischievous. The diversity of Circumstances on which such contrariety is usually predicated, authorises a directly contrary conclusion. Mutual wants constitute one of the strongest links of political connection, and the extent of the⟨se⟩ bears a natural proportion to the diversity in the means of mutual supply.
Suggestions of an opposite complexion are ever to be deplored, as unfriendly to the steady pursuit of one great common cause, and to the perfect harmony of all the parts.
D. Why we should encourage manufacturing now [Begins: “If then, it satisfactorily”]
There is at the present juncture a certain fermentation of mind, a certain activity of speculation and enterprise which if properly directed may be made subservient to useful purposes; but which if left entirely to itself, may be attended with pernicious effects.
The disturbed state of Europe [NOTE: the French Revolution began in 1789, 2 1/2 years before the Report was submitted], inclining its citizens to emigration, the requisite workmen, will be more easily acquired, than at another time; and the effect of multiplying the opportunities of employment to those who emigrate, may be an increase of the number and extent of valuable acquisitions to the population arts and industry of the Country. To find pleasure in the calamities of other nations, would be criminal; but to benefit ourselves, by opening an asylum to those who suffer, in consequence of them, is as justifiable as it is politic.
IV. How should we encourage manufactures, which should we encourage, and by what specific measures? [Begins: “A full view having now been taken”]
Hamilton reviews what other countries have done to promote manufacturing, and evaluates which measures would be most suitable in the United States.
A. Discourage certain imports
Some countries set import duties high enough that domestic products can undersell foreign products. The U.S. government already levies some duties on imports, as a source of revenue, and to some extent the duties have this effect. [NOTE: According to Douglas Irwin, the duties imposed in 1789 and 1792 were not high enough to serve as protectionist tariffs: in fact, he states that in the 1790s, manufacturers began supporting the Republicans because Hamilton and the Federalists did not impose protectionist tariffs.]
B. Prohibit certain imports
Some countries prohibit imported items that compete with domestic manufactures, or set duties so high that it’s equivalent to a prohibition. We could do this – it would be payback for all those nations that do it to us – but it’s not a good idea if we can’t already manufacture the item in question.
C. Prohibit certain exports
We could prohibit the export of materials used for manufacturing. This should be adopted only rarely.
D. Offer bounties for certain manufactures
The government could offer a cash bonus to encourage people to produce a particular item. This does not raise the price of goods and doesn’t tend to make goods scarce (as a high import tax would). If we wanted to do this, the best option would be to put a duty on foreign manufactured goods of the sort we want to encourage, and then use the revenue to pay a bounty to domestic manufacturers of that product.
Bouties are one of Hamilton’s preferred methods of encouraging manufactures. For authority to do this, Hamilton switches to the big picture, invoking the “general welfare” clause of 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 certainly 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 defence and general welfare” with no other qualifications than that “all duties, imposts and excises, shall be uniform throughout the United states, 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, than the payment of the public debts and the providing for the common defence 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.
The only qualification of the generallity of the Phrase in question, which seems to be admissible, is this—That the object to which an appropriation of money is to be made be General and not local; its operation extending in fact, or by possibility, throughout the Union, and not being confined to a particular spot.
E. Pay premiums
The government could reward manufacturers who produce superior quality, in order to stimulate their efforts. Volunteer organizations “supported” by government should be tried here.
F. Exempt raw materials from import duties
Removing the import duties on certain materials used in manufacturing could help promote their use in manufacturing here.
G. Encourage inventions
The government could encourage inventions and discoveries by Americans, and could encourage the introduction here of foreign inventions, especially machinery. Hamilton considers this “among the most useful and unexceptionable of the aids, which can be given to manufactures.” Unfortunately Americans can’t share such ideas because other nations have restricted their circulation. (Cf. II.B above.)
It is customary with manufacturing nations to prohibit, under severe penalties, the exportation of implements and machines, which they have either invented or improved. There are already objects for a similar regulation in the United States; and others may be expected to occur from time to time. The adoption of it seems to be dictated by the principle of reciprocity. Greater liberality, in such respects, might better comport with the general spirit of the country; but a selfish and exclusive policy in other quarters will not always permit the free indulgence of a spirit, which would place us upon an unequal footing. 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.
H. Quality control
The government could set judicious regulations for the inspection of manufactured commodities, to prevent fraud and improve quality.
I. Stimulate better circulation of money.
See the First Report on Public Credit.
The government could facilitate transportation by buildings roads and canals.
V. Capitation taxes and poll taxes discourage manufactures [Begins: “The foregoing are the principal means”]
A capitation or poll tax – a fixed sum paid by every liable individual – does not encourage manufacturing.
There are certain species of taxes, which are apt to be oppressive to different parts of the community, and among other ill effects have a very unfriendly aspect towards manufactures. All Poll or Capitation taxes are of this nature. They either proceed, according to a fixed rate, which operates unequally, and injuriously to the industrious poor; or they vest a discretion in certain officers, to make estimates and assessments which are necessarily vague, conjectural and liable to abuse. They ought therefore to be abstained from, in all but cases of distressing emergency.
All such taxes (including all taxes on occupations) which proceed according to the amount of capital supposed to be employed in a business, or of profits supposed to be made in it are unavoidably hurtful to industry. It is in vain, that the evil may be endeavoured to be mitigated by leaving it, in the first instance, in the option of the party to be taxed, to declare the amount of his capital or profits.
Men engaged in any trade of business have commonly weighty reasons to avoid disclosures, which would expose, with any thing like accuracy, the real state of their affairs. They most frequently find it better to risk oppression, than to avail themselves of so inconvenient a refuge. And the consequence is, that they often suffer oppression.
When the disclosure too, if made, is not definitive, but controulable by the discretion, or in other words, by the passions & prejudices of the revenue officers, it is not only an ineffectual protection, but the possibility of its being so is an additional reason for not resorting to it. …
Arbitrary taxes, under which denomination are comprised all those, that leave the quantum of the tax to be raised on each person, to the discretion of certain officers, are as contrary to the genius of liberty as to the maxims of industry. In this light, they have been viewed by the most judicious observers on government; who have bestowed upon them the severest epithets of reprobation; as constituting one of the worst features usually to be met with in the practice of despotic governments.
VI. What manufacturing should we encourage? [Begins: “The great copiousness”]
Factors to consider: 1) what raw materials we have, 2) what manufactures can be mechanized, 3) how easy it is to manufacture a product, 4) how extensively a product is used, and 5) whether the product serves other interests, especially national defense.
Hamilton lists the following manufactures, proposing ways to encourage them all (usually via bounties or duties): iron, copper, lead, fossil coal, wood, skins, grain, flax and hemp, cotton, wool, silk, glass, gun powder, paper, printed books, sugar and chocolate. [NOTE: According to Irwin (p. 804), Hamilton recommended tariff increases of 5-10% on about 20 products; he recommended tariff reductions on 5 raw materials; and he recommended bounties to 5 industries.]
VII. Objections to the bounties [Begins: “The foregoing heads comprise”]
Some people say bounties are liable to fraud. Hamilton has thought of precautions, but to list them would “swell this report, already voluminous, to a size too inconvenient.”
Another argument: the abolition of some import duties might decrease the government’s revenue. Hamilton replies:
But there is no truth, which may be more firmly relied upon, than that the interests of the revenue are promoted, by whatever promotes an increase of National industry and wealth.
VIII. Board for promoting arts, agriculture, manufactures, and commerce [Begins: “Secondly. To constitute”]
A board should be set up to promote the arts, agriculture, manufacturing and commerce. [NOTE: Hamilton has in mind here organizations such as the Society for Establishing Useful Manufactures, organized in Paterson, NJ, in July, 1791.]
Let these Commissioners be empowered to apply the fund confided to them—to defray the expences of the emigration of Artists, and Manufacturers in particular branches of extraordinary importance—to induce the prosecution and introduction of useful discoveries, inventions and improvements, by proportionate rewards, judiciously held out and applied—to encourage by premiums both honorable and lucrative the exertions of individuals, And of classes, in relation to the several objects, they are charged with promoting—and to afford such other aids to those objects, as may be generally designated by law.
IX. Conclusion: Why should the government be encouraging manufactures?
Why should we not leave to private individuals the task of encouraging manufactures? Hamilton answers in the last paragraph of the Report on Manufactures:
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?
Was Hamilton a laissez-faire capitalist?
And in best Hamiltonian tradition, let me elaborate.
Laissez-faire now and in the late 18th century
Laissez-faire capitalism means the government does not interfere in the economy: individuals own all property and make their own economic choices. Under laissez-faire, the government’s job is to protect its citizens, including their property, from force and fraud. (See these quotes from Ayn Rand, especially the first.)
Side issue: The idea of laissez-faire economics originated among the French. A hands-off policy was a radical notion at a time when kings ruled most European countries, imposing taxes at will and manipulating coinage as they pleased. For English speakers, the ideas behind laissez-faire were first discussed at length in Adam Smith’s Wealth of Nations, 1776. (He didn’t use the phrase “laissez-faire.”) Smith, however, believed that agriculture must naturally be more productive than manufacturing, because in agriculture men were working with nature. That emphasis on agriculture suited Jefferson and Madison, who believed a republic could only survive with an agricultural economy. See, for example, Jefferson’s comments on the virtue of farmers vs. businessmen:
Those who labour in the earth are the chosen people of God. It is the focus in which he keeps alive that sacred fire, which otherwise might escape from the face of the earth. Corruption of morals in the mass of cultivators is a phaenomenon of which no age nor nation has furnished an example. It is the mark set on those, who not looking up to heaven, to their own soil and industry, as does the husbandman, for their subsistance, depend for it on the casualties and caprice of customers. — Jefferson, Notes on the State of Virginia, 1784; quoted here
I wonder if Hamilton would have countered Smith’s arguments at such length in the Report on Manufactures if Smith had acknowledged the importance of manufacturing? No way to know.
Hamilton’s intervention in the U.S. economy
As secretary of the Treasury, Hamilton advocated government intervention in the economy in the following ways. Compared to current government intervention in the economy, these are minor … But advocating them means that Hamilton was not a proponent of laissez-faire. He states as much: see II.B and IV.G above, for example.
- Taxes on imports and tonnage. Congress passed these in the summer of 1789 (before Hamilton took office), per Article I, section 8 of the Constitution. They were the government’s primary source of revenue, and Hamilton supported them. Incidentally, the utter failure of the Confederation Congress to collect voluntary contributions was still vivid enough to make voluntary taxation an impracticable idea.
- Excise taxes on whiskey. Hamilton proposed these early on because import and tonnage duties were not going to be enough to run the government and pay off Revolutionary War debts.
- Bank chartered by the federal government. The government was allowed to purchase up to 20% of the bank’s stock. It had the power to check the books, but had no control over the bank’s directors. This public/private partnership seems to have been Hamilton’s idea of a check-and-balance system for the bank.
- Government promotion of manufacturing. Congress never acted on the Report on Manufactures, although it did enact most of Hamilton’s proposed duties in 1792, in order to raise money for protecting the western frontier. (More below.)
- Running a mint. The point of having a mint was to reduce the complexity of trading with gold and silver coins from many nations that had varying values. Hamilton intended the mint to collect foreign gold and silver coins, melt them down, and reissue them as U.S. coins. The mint was not in the business of printing paper money, which Hamilton abhorred. (See last week’s post, II.C.2.) Incidentally, the U.S. Mint was so far from being an appendage of the Treasury Department that Thomas Jefferson, who thought Hamilton’s department was way too large, pushed for control of the mint by the State Department. Hamilton argued against that on 1/31/1795, in one of his last letters to Washington before his resignation from the Treasury Department took effect.
Hamilton’s long-term goals
Taxes, the bank, import duties, and the mint were all part of Hamilton’s larger goal, which was to pay off the debt and encourage America to become economically self-sufficient as well as politically independent. Submitted for your consideration:
- Hamilton scheduled the Revolutionary War debts to be paid off in twenty years, starting in 1791. In 1801, Jefferson told Congress that the debt would be paid off in 15 1/2 years. (See Hamilton Musical 64.) By 1803, America’s credit rating was so high that Jefferson was able to borrow $11.25 million for the Louisiana Purchase from British and Dutch banks.
- By the terms of its charter, the Bank of the United States was to cease to exist when the Revolutionary War debt had been paid off. It was allowed to lapse in 1811, as planned.
- The last foreign coins legally circulating (Spanish dollars) were out of circulation in the U.S. by 1857.
- Many of the duties Hamilton recommended in the Report on Manufactures were instituted by Congress in 1792, when they needed funds for defending the western frontier. By the 1810s, manufacturers who wanted protectionist policies from the government were flocking to the Republican party, because Hamilton and the Federalists were not imposing the high import duties they wanted. (See Irwin.)
My current assessment of Hamilton’s economic thought
Hamilton’s interventions in the economy were minimal within his lifetime. The big problem is the long-term effects of his broader policy arguments, particularly on the “general welfare,” “implied powers,” and “necessary and proper” clauses of the Constitution.
I have said repeatedly (so why not again?) that I’m attempting to judge Hamilton in his context. In his time, the momentum of the United States is centrifugal. That tendency to split into separate states was barely (and just in the nick of time) slowed by the Constitution. Thomas Jefferson and many of his supporters continued to argue for the power of the individual states. (See last week’s post, III.A.3, for example.) Hamilton’s focus is not on growing the federal government, but on giving it power to hold the United States together, to help Americans prosper and become economically self-sufficient. As secretary of the Treasury, he strives to remove as many hindrances to economic growth as possible (a good thing) and to help the economy grow via some government support, i.e., government interference (bad thing).
During the 19th and 20th centuries, “implied powers,” “general welfare,” and “necessary and proper” have unquestionably been abused in order to grab powers for the government that it should not be wielding. But looking at the 18th-century context, I see Hamilton trying to create an economic and financial system without having time to study the intimate relationship of economics to politics and ethics. No one in the late 18th century can defend capitalism from the ground up – from the fact that reason is man’s means of survival. If Ayn Rand had been born at the time of Adam Smith … she would probably have died in poverty in Russia.
The sheep are wandering again, aren’t they?
Despite Hamilton’s interventions in the economy while he was secretary of the Treasury, there are two things I like very much about his approach to economic thinking.
1. Hamilton advocates a diverse economy
Hamilton argues that for Americans to thrive, they need to create need a diverse economy: manufacturing and trade as well as agriculture. (See II.A above.) I don’t know any other Founding Father who advocated that so frequently and so insistently. The first five presidents were farmers. Robert Morris, superintendent of Finances (the equivalent of secretary of the Treasury from 1781 to 1784) was an excellent businessman and administrator – but he didn’t issue public statements giving his reasons for his economic policy. Too busy helping finance a war.
Hamilton is the only Founding Father who constantly pushes for a diversified economy. And he does it not just for the sake of government growth or the United States as a collective. He thinks of individual Americans, who will be able to find jobs at which they excel and which they enjoy, and who will be able to enjoy more goods than they could as subsistence farmers. (See II.A.3.e-f above.)
2. Hamilton has a good methodology
I disagree with some of Hamilton’s policies, but I think his methodology is excellent. He defines what he’s talking about. He collects facts (see the post on his first weeks as secretary of the Treasury). He reads widely (see the post on his 1781 letter to Morris). He sets long-term (decades-long) goals. He tries to figure out how to reach those goals from the present situation. He uses logic and persuasion to get Congress, Washington, and Americans to accept his program. Richard Sylla summed it up nicely back in 1998:
I have spent a lot of time studying Hamilton. He was, I think, altogether exceptional in his ability to define a problem, think it through, come up with a good solution, persuade others that it was the right thing to do, and then see to it that the solution was implemented.
I can imagine Hamilton sitting down with Ayn Rand for a discussion on the state of the United States. I think Hamilton would be shocked to see the road America has traveled, and I think he would have been open to hearing the metaphysical, ethical, and political foundations of economics. I think he would readily have admitted that some of the policies he advocated had been abused by later politicians. And then, I like to think, he would write tens of thousands of words to help remedy the situation. Can’t you just see it?
(Exits, dusting off hands and thinking about Maria Reynolds.)
- Excellent article on Hamilton’s Report on Manufactures: Douglas A. Irwin, “The Aftermath of Hamilton’s ‘Report on Manufactures’,” Journal of Economic History 64:3 (September 2004), pp. 800-821.
- Economists consider Hamilton’s Report on Manufactures an extended commentary on Adam Smith’s Wealth of Nations: see, for example, Richard Sylla’s review of Peter McNamara’s Political Economy and Statesmanwhip: Smith, Hamilton, and the Foundation of the Commercial Republic. The introduction and notes to Founders Archive Report on Manufacturing give extensive quotes from Smith. I don’t have time to dig into these, nor enough knowledge about Smith to do it intelligently; but if that’s the sort of thing you enjoy, then off you go, dear.
- I occasionally add comments based on these blog posts to the Genius.com pages on the Hamilton Musical. Follow me @DianneDurante.
- The usual disclaimer: This is the sixty-second in a series of posts on Hamilton: An American Musical. My intro to this series is here. Other posts are available via the tag cloud at lower right. The ongoing “index” to these posts is my Kindle book, Alexander Hamilton: A Brief Biography. Bottom line: these are unofficial musings, and you do not need them to enjoy the musical or the soundtrack.
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