Thanks to the blockbuster musical, Alexander Hamilton has become a modern cultural icon. He's known as an architect of the federal system, building out a strong government with the capacity for both borrowing and spending. But there's another side of his vision that doesn't get as much attention, and that's his belief in the importance of state-directed investment to build out a domestic manufacturing industry. Basically, he was an early advocate for industrial policy. Given that the US is currently in a phase of building out domestic manufacturing capacity in various areas, it's time to go back and look at the history of these efforts in the US. We speak with Christian Parenti, a professor at John Jay College in New York, and the author of Radical Hamilton: Economic Lessons from a Misunderstood Founder, about this other side of Hamilton, and the economic context in which he developed this vision. This transcript has been lightly edited for clarity.
Key insights from the pod:
Hamilton’s Report on the Subject of Manufacturers — 4:23
British economic restrictions and revolution — 8:05
Hamilton’s view of manufacturing and the state — 18:29
Agrarianism’s strong hold on the American colonies — 24:01
The first use of the world “capitalism” in English — 27:09
Why Hamilton pushed the US to take on more debt — 31:38
How the Post Office drove US industrialization — 33:49
Criticisms of industrial policy — 38:41
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Joe Weisenthal (00:02):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:22):
And I'm Tracy Alloway.
Joe (00:23):
Tracy, did you ever see the musical Hamilton?
Tracy (00:28):
No, I didn't. Can I just say, listeners, Joe has already asked me this question in preparation for the podcast answer, and he actually did a really amazing summary of all of Hamilton. You didn't sing it or rap it, which I think you should have done, but it was pretty good.
Joe (00:45):
Yeah, I mean, look, I think, can I just say I actually did like it at the time that I saw it, and I still, if I'm in the car with my kids, it's not bad to put on. I feel like liking Hamilton, it's a little cringe now. It's very Obama era...
Tracy (00:59):
It's too mainstream for you?
Joe (01:01):
It's a little 2010s. It's a little bit, we sort of moved on, but it is an entertaining show. It's not the worst, as far as musicals go, many of which are very bad, in my opinion. It's not the worst one.
Tracy (01:12):
It definitely kind of vaulted Hamilton, it feels weird to say this now, but I guess it vaulted him into the public consciousness. But it's interesting because as far as I understand — and here I have to confess that I never really did US history when I was in high school. I was in Austria and then Japan, so this is a big blind spot for me. But when I think of Hamilton now, I think of the Federalist Papers, maybe the financial system, but it turns out there's this huge body of Hamiltonian thought that is all about the real economy and I guess manufacturing, industrial policy development.
Joe (01:54):
And this is not at all in — I haven't read the Ron Chernow biography, but it's certainly not in the musical. And basically the play or the musical, he has these rap battles with Thomas Jefferson and...
Tracy (02:07):
Joe, summarize the rap battles!
Joe (02:09):
And obviously Thomas Jefferson is a defender of the system of slavery, and [he suggests] ‘What's important is doing the planting and all you guys do up north is finance.’ But we're supposed to be on the side of finance as the audience, and [the] first Secretary of the Treasury, but as you point out, there is much more to Hamilton than just the sort of dichotomy of the slave-owning plantation owners in the South and then those of us up in New York City who just do numbers and finance.
Tracy (02:39):
And I guess the other thing to point out is obviously industrial policy is having a moment, since the pandemic, and we've seen various steps and projects from the Biden administration, including the IRA and things like that. So it's kind of interesting to go back in time and consider the American historical roots of progressive industrial policy.
Joe (03:03):
Well, and this comes out every time we do an episode on the CHIPS Act or the Inflation Reduction Act, etc., someone says 'Well, industrial policy is not this new thing in America.’ And they say ‘We did this in the past,’ and they sort leave it there.
But I think it's a good idea to actually start exploring some of those historical roots of the role that the federal government can and has played in the past in channeling industries, channeling capital, channeling real physical resources, promoting domestic manufacturing. Everyone says, 'Oh, we always did this in the past,’ but we sort have to talk more about what that past looked like.
Tracy (03:36):
Yes. So this is the episode for anyone who has ever said that statement: ‘The US has a long history of industrial policy.’
Joe (03:43):
That's right. We're going to go back to the very beginning. Well, I'm really excited about our guest. Like I said, I never read the Ron Chernow biography, but I did read Radical Hamilton: Economic Lessons From a Misunderstood Founder. The author Christian Parenti is joining us. He is a professor in the John Jay economics program that's housed within the CUNY system of New York City. So Christian Parenti, thank you so much for coming on Odd Lots.
Christian Parenti (04:06):
Thank you very much for inviting me.
Joe (04:08):
I loved your book, but did you watch the musical?
Christian (04:11):
I did not watch the musical. I don't really like musicals, so I didn't see it.
Joe (04:15):
I have a complicated view towards musicals myself, so I totally get that. Why did you think another Hamilton book was necessary?
Christian (04:23):
Well, I did read the Chernow biography, and while reading it, there's a mention of the “ Report on the Subject of Manufacturers," which is Hamilton's magnum opus in many ways. And it is an argument for, and a blueprint for, planning to drive a transition from an agrarian based economy to a manufacturing based economy.
And that was very interesting to me, and I tried to find more on it, and there really wasn't that much in the literature. So this book actually began by mistake almost. The idea was to republish the Report on the Subject of Manufacturers, and I would do an introduction, and then the introduction turned into a book. Along the way, it was like 'Oh, we'll have it as an appendix.' But it became an effort to fill in the gap around Hamilton's thinking about the real economy and about what we would call industrialization or industrial policy, but what they called manufacturers.
Tracy (05:18):
Why do you think that Hamilton's legacy is so much more focused, I suppose, on the Federalist Papers, on maybe building the financial system, versus the paper that you just mentioned? Because again, I will confess that before I read the book, I had never heard of that particular piece of Hamilton writing.
Christian (05:38):
Part of it has to do with the fact that the Report on Manufacturers was controversial from the beginning, and there was pushback from the beginning, and there has been pushback against the kinds of policies that it advocated all the way through. So it just sort of dropped away.
And there is a mythology about American capitalism, which tries to minimize the role of government in that story. And so that's why we previously hadn't thought sufficiently about the Report on the Subject of Manufacturers, because it clashes with prevailing notions about how capitalism works, which is that it's all about free enterprise and entrepreneurs and free trade. And in fact, what the story of Hamilton's Report on the Subject of Manufacturers shows, and I think you can see it throughout world history, is that successful capitalist industrialization pretty much always involves an activist state that intervenes, gets prices wrong, and helps drive an economy towards manufacturing.
In fact, in the beginning of the Report on the Subject of Manufacturers, Hamilton launches a critique of Adam Smith. Hamilton supposedly wrote a whole treatment of Smith's Wealth of Nations, but that's been lost to us. But that's why. And I studied with Alice Amsden, who's passed away, who was an economist at the New School many, many years ago, and she wrote the definitive book or sort of the first big book on Korean industrialization, and it was all about this. And so that really interested me. And the similarity, the fact that the US at the beginning of the story of American capitalism is the story of a developmentalist state. And I've been interested in those questions as they appear in the global south.
Tracy (07:19):
It's funny you mentioned Korea's development, because we did an episode, Joe, I don't know if you remember, many, many years ago about the development of the K-pop and entertainment industry in South Korea, and how much of it was actually driven by a conscious government effort, where a lot of people think even this kind of creative industry develops naturally. But in the case of South Korea, there was a lot of support.
Joe (07:43):
I actually have Alice Amsden's book, Escape From Empire: The Developing World's Journey Through Heaven and Hell, on my bookshelf. I need to read that book. What were the economic conditions in the US at the time? Or I guess was it the US? In the colonies at the time, that Hamilton was looking at that, he said, ‘Okay, we need to talk about a government role in manufacturing.’
Christian (08:05):
To some extent, this gets into why the revolution occurred. And British mercantilism was putting very explicit and onerous restrictions on economic development in the United States. For example, hat makers in the US couldn't have more than two apprentices, right? There was a robust fur trade, and beaver pelts were much in demand in Europe for making hats. And the US had a nascent hat industry, and British economic policies made it illegal for it to develop as much as it could. Similarly around iron smelting; iron could only be processed to a certain level.
So there were very real restrictions on the development of manufacturers, because Britain held these 13 colonies as colonies. And so they wanted these colonies as a market. So that's one of the reasons actually that northern kind of nascent manufacturing interests gravitate towards revolutionary causes. There's all sorts of interests, right? I mean, it's like, the rhetoric of freedom is appealing to the working classes.
In the slave South, there was fear that the British Empire was going to restrict slavery, because there was the Somerset case in 1773, I think it is, in which a planter, a British planter in Jamaica, comes back to England with an enslaved person. And that person gets in touch with abolitionists, who say slavery is illegal in England, even though it's legal in the colonies. This goes all the way through the English court system, and it is ruled that, yes, you may be enslaved in Jamaica, but as soon as you set foot in England, you are free.
This sent shockwaves of fear throughout the elites of the South. One of the richest people in the British Empire was a South Carolina slave owner, Henry Lawrence, who later is actually president of the Continental Congress. And he felt threatened. Like, 'Well, now I can't travel to England with my chattel slavery, my servants. What's next? Maybe they're going to come after slavery entirely.'
Because there was a movement also in the northern colonies against slavery. So there's a whole variety of causes that coalesce and drive many of the colonists, though not all, to embrace revolution and independence. The economic conditions, getting back to your question, were pretty underdeveloped. Agriculture was predominant in the South. The economy was dominated by large planters. Most white Southerners didn't own slaves, but almost half did own slaves. But most slaves were owned by a small group of men who owned many, many slaves and much land.
So that was the southern economy. And in the North, you had small family farms, and there had almost been a kind of re-peasantization in that many of these farms were quite self-sufficient and had only a tenuous connection to the cash economy. The war, the Revolutionary War, will actually drive many of those northern tier farmers into the cash economy, because they have to pay taxes and they have to come up with cash.
And in those northern family farms, there were small craft productions. There was home-based productions generally, like building along with your self-sufficient farm, you maybe produced a little extra dairy for the market, but then also in the winter you create barrel staves or shoes or something like that. So there was this workshop based manufacturing.
There are no American banks. And the 13 colonies are all independent. There's no transportation network. So after the war, it's an absolute mess. And Hamilton's concern is, first and foremost, national security. He says ‘We're going to be reconquered and recolonized if we don't have a strong army and navy and state. And the only way we can afford that is if we transition as quickly as possible to a manufacturing based economy. And that's not going to happen by following Adam Smith and letting the market do its thing. We need to actually have a plan that can help push this transition.’
At first, Hamilton is not particularly concerned with economics. He's writing about democracy and all that. When fighting begins, he organizes an artillery company and he serves for about a year on the front lines. And because he's so brilliant and good at what he does, he's receiving these offers from generals to join their staffs, and he holds out until Washington offers him a place on his quote -unquote "family," which is to say his staff.
So then Hamilton transitions to the role of a kind of military planner, and he has an overall view of the war, and what he sees is one: total dysfunction at the level of politics, because the colonies are not properly united. They're operating under the Articles of Confederation, which is just a loose security pact, and each colony is essentially a sovereign state. And so there's a Continental Army which answers to Congress, but there are also these militias, state militias. And so states would send aid to the Continental Army and put provisions on them, say, ‘This clothing is for the Pennsylvania line. Please don't distribute this weaponry to the New England line,’ this kind of stuff. Congress had no means of taxing. So Hamilton is viewing all of this from this kind of Archemedian, bird's eye view on Washington's staff.
Tracy (13:52):
So one of the things that comes through in your book, and again, I don't know much about this, but I didn't realize how much of a basket case the Revolutionary War kind of was and how disorganized in some respects and just terrible physical conditions. So you write about how there were soldiers who rebelled because they weren't getting paid, because there were no taxes. So the federal government, which didn't really exist, could not pay them. And also how soldiers had to be let loose in the forest to slaughter wild pigs because they didn't have enough food supply and things like that. It very much seems to highlight the idea or the importance of the role of the supply chain and physical real goods in military conflict, and I guess by extension, in government.
Christian (14:40):
Absolutely. And I think many of us labor under misapprehension that the Revolutionary War was a guerilla war and that the Patriots were living off the land and taking pot shots at the British from behind stone walls.
Joe (14:54):
That's how we learned it when I was in elementary school.
Christian (14:55):
Yeah, that's how I learned it. But actually it was a conventional war, which is to say, very expensive. And most of the conflicts were force-on-force with these long supply chains. Everything had to be provided to these armies. Salt, for example. Something as mundane as salt. This was extremely important. As one old article put, it said, ‘Salt was as important to the Revolutionary War armies as gasoline was to the armies of 1945.’
If you didn't have salt for the animals, they would very quickly get weak and couldn't function. You had to cure food with salt. So salt was essential. There really wasn't a salt industry in the colonies, because one of the few things that the British Navigation Acts — one of the weird little kind of wrinkles in them — was that they allowed ships coming from Europe to fill their hulls for ballast with French salt.
So there was this flow of relatively cheap high quality salt into the colonies. So the colonies didn't actually have much of a salt industry. So during the war, that's cut off, so they have to start developing a salt industry. They've got these anemic little foundries; one down in Virginia, some up in Pennsylvania. They have to start building all this up as the war is going on. And even though there were these long supply lines, things were so harsh that there was also what they called the ‘Grand Forage,’ that soldiers would go out to requisition and nominally purchase supplies.
But they're doing this with a series of increasingly worthless scripts. At first you have the Continental dollar, which the British are also counterfeiting. And then they just overproduce Continental dollars so that they're worthless. Then they create this IOU system called Pierce's notes, which turn into another kind of paper currency.
But these requisition squads would go out into the countryside and say to farmers like, 'Well, if you support the cause, we're here to buy with this worthless money, whatever, 10% of your produce, half your chickens, whatever.' And if you refuse, then they said 'Well, you're a loyalist. You're against our cause, so we're just going to confiscate everything.'
So they're pushing all of this paper currency, which during the war leads to inflation, and then there's a big crash after the war. So it's totally chaotic, and the scale of some of these operations is nuts. There was a campaign in 1779 against the Iroquois, who had mostly sided with the British, and it involved damming a river, building a road to the river, building a fleet of boats to go down the river, and then blowing this dam and riding this wave of water down river to then launch on this expedition against the Iroquois. So capital intensive, labor intensive, big economic endeavor.
Joe (17:47):
So one of the things that's interesting these days is people have talked for years in the US like, 'Oh, we need to revive domestic manufacturing.' It's just one of those things that gets said. What seems to help get the votes over the line to actually do endeavors, even when it comes to something like climate, is the idea of existential national security threat. ‘We have to compete against China.’ That's how it's framed.
And when there's the rivalry with China as the framing, then that opens the door for votes. And it sounds like, and you talk about this in your book, that ultimately it was the same. That at the end it's like, there is no sovereign US without manufacturing. That we can't maintain our independence even if we win it without manufacturing.
Christian (18:29):
That was Hamilton's insight. That this independence would be totally illusory if it was not backed up with material force, and that material force was going to be expensive, and that required an economic transformation and industrialization program. But they didn't use that word. They talked about manufacturers. So that's what he sets out to do.
And amidst the war, he has a kind of what seems to be a mental breakdown. He goes into this nervous fever during the winter when they're all at Valley Forge and there's a number of generals going rogue. And he's sent up to re-impose order, and then he has this crazy breakdown. And after that, his writing is really different. He begins a series of letters to elites outlining the need for constitutional convention and an economic plan. And so the rest of his life is that. And it should be said that, the war ends in 1783.
There are rebellions increasing in the ranks, mutinies. Culminating with a mutiny by officers in Newburgh, New York, which is often misrepresented as if these guys were all greedy and trying to have some coup d'etat. But they are suffering, like their men. I mean, they have boots — some of their men are shoeless — but it's like they had really suffered and they were demanding from Congress some resources.
After the war, beginning in, the fighting kind of winds down around 1780, but the Treaty of Paris isn't until 1783. And there then begins what's called the critical period, which is a period in which the United States is still governed by the Articles of Confederation and all sorts of serious economic and political and even military problems begin to happen. There's a trade war between New Jersey and New York and New York and Connecticut. Maryland and Virginia are having similar trade wars on the Chesapeake.
There's conflict with maroon communities — self-emancipated, formerly enslaved people, some of whom had served with the British Army — who have these autonomous communities on the border of South Carolina and Georgia. There's increasing conflict with Native Americans in what's now Kentucky. There's conflict between groups of white settlers and their speculative land backers, like these two competing factions in the Wyoming Valley of Pennsylvania, which turns into a shooting war in which people are being killed and homes are burned.
And then all of this culminates with Shay's Rebellion in 1786 in western Massachusetts. And all of these states had gone heavily into debt during the war. And many of those IOUs that I mentioned earlier were bought up at pennies on the dollar vis-a-vis their face value by speculators. And in Massachusetts, 35 people owned almost half of all of the state's debt. And Congress is making these requests. And in 1784, there's this massive requisition request, which by 1786 is really hurting people on the ground. And so this request for a tax take from Congress is part of what's pushing Massachusetts to shake down its farmers. There's also interestingly, a series of volcanic eruptions, one in Iceland and one in Japan...
Tracy (21:54):
Oh, yeah. Which affected the growing season, right?
Christian (21:56):
Yeah. There's really, really cold summers and floods knocking out crops and barns. So all this is happening...
Joe (22:05):
We were barely hanging on in those days.
Christian (22:07):
Yeah. And so amidst this, through this massive wave of foreclosures in Massachusetts. And also in New Hampshire and other parts of New England, but in Massachusetts, this coalesces into an actual armed rebellion led by veterans of the Revolutionary War. In particular, Daniel Shays. The Shaysites didn't call themselves Shaysites, they called themselves "regulators."
And what they did was they just closed down the courts. And the militia was called up to put an end to this, and the militia would switch sides or refuse to fight or just melt away. So the coastal elites who owned all the debt that they were trying to collect on by foreclosing these farms create a private army. They take up a subscription of a private army, and there's actually a series of force-on-force battles with cannons. And the Shaysites are defeated in the early spring-winter of 1787. And it's in response to that crisis that the Constitutional Convention happens in Philadelphia.
Tracy (23:05):
This is Hamilton. This is what Joe said Hamilton, the musical, was.
Joe (23:08):
Right, right.
Tracy (23:08):
Okay. So can I just ask you, you can kind of see why Hamilton would make the argument that the US, such as it was at that time, needs to develop industrially, build out manufacturing capacity, create a strong system of government and things like that. But one thing I don't quite understand from that period is, why was agrarianism seemingly so well regarded? Because it's hard for me to even envision a time when there was this agrarian ideal, because we're so used to talking about development, linear development of economies. You move from farming to manufacturing to a service-based economy. It's weird to think that at that time there was actually a number of people who said that agrarianism was the best economic system.
Christian (24:01):
Yes. Most famous among them, Thomas Jefferson. Agrarianism was popular because that's what most people did. And Jefferson, famously or infamously, says in one correspondence that it would be better to leave manufacturing workshops in Europe, because manufacturing brings with it a degradation of character, and that the farming classes are the most noble.
And so it was a very romantic argument about national character. Underneath that though was also a very material concern with what it would mean for the Slave South, were the North, where there was, at this point, at the end of the revolution, slavery has been outlawed in Massachusetts, it's been outlawed in Vermont, which is not yet actually a state. It's on the way to being outlawed in Pennsylvania and New York. That'll take a couple more decades. But the Southern elite can see the writing on the wall that their system is unpopular. And if the North becomes more populous and wealthier, then it would dominate the federal government — this was their fear — and then perhaps come after their property.
And that is indeed what happened. And part of what drove that northern hostility to slavery was humanitarian. It was like a religious kind of humanitarian sensibility, but there was also an element of self-interest. Northern farmers were really worried that this system would crowd them out of western lands and that it might extend to the North. They did not think ‘Oh, slavery is naturally limited to agrarian work on cotton and tobacco in the South.' They were worried that the workers of the North could also be enslaved. That's just emerging at the time of the Revolution.
So anyway, so that's part of what is motivating Jefferson's hostility initially to manufacturing. And this is romanticization of the agrarian character. It's also that they don't want the Northern states to get too powerful. And so the Constitution actually involves all sorts of compromises to compensate for the fact that that's very likely to happen. The Senate being one of those important compromises, where every state gets two senators and the Southern elites dominated the Senate for a very long time.
And it should be said, up until the Civil War, the richest people in the country were always Southern elites, even though the South was generally impoverished. And even to this day, the Southeast of the US bears the marks of underdevelopment in terms of numerous indicators of wellbeing, rates of interpersonal violence, early death, all this kind of stuff.
Joe (26:42):
What did industrial policy, which again, I know they didn't call it that at the time, but to Hamilton, what did it look like specifically? What should the federal government be empowered to do? How should it make those decisions? Like, okay, philosophically, he criticized Adam Smith. He saw reasons on the ground why there needed to be a strong state to develop that. What does that look like in practice in terms of actual policy choices made by the government to foster these industries?
Christian (27:09):
Well, all that is laid out in the Report on the Subject of Manufacturers, and he calls the things that the federal government should do, "the means proper." It should also be said that the report on manufacturers is the first time the word "capitalist" is used in the English language.
Tracy (27:24):
I was amazed to read that, so you said [it was] the first published mention of the word "capitalist."
Christian (27:29):
As far as I can tell, yeah. It had been used in French earlier, but that was the first time it's in English. So the "means proper" for Hamilton involved tariffs. Prohibitive taxes on imports, so as to defend "infant industries" as they would later be called. Hamilton calls them "infant manufacturers." But also drawbacks from those tariffs, subsidies for specific firms that need help, bans on exports of strategic raw materials, investment in physical infrastructure, investment in planning, and R&D, research and development, and general education.
And ultimately, he wanted to have a planning board, something like the Japanese Ministry of Industry and Technology. That never came to fruition. But he lays out in tremendous detail basically the means proper, this toolbox for economic planning. And the standard story is that it was shot down. He even opens the door to the idea of public ownership. He also, more well known of course, and before pitching the manufacturing plan, he creates the credit system.
He creates the first Bank of the United States. And the standard story is that, well, it came to nothing, but actually a bunch of it was passed. And over time, more and more of what Hamilton outlined in the report on manufacturers is implemented. And it's often implemented in moments of crises, because frequently what happens is the free marketeers win the argument. There isn't sufficient taxation, there isn't sufficient regulation, and then there's an economic crash and a crisis in which planning is sort of spontaneously summoned in to clean up the mess. So in the long run, the Report on the Subject of Manufacturers really does triumph and does guide American industrialization and was also very influential on other industrialization processes.
Tracy (29:44):
Can you talk about the relationship between Hamilton's vision of industrial policy — and again, he doesn't use that term, but "the means proper" — and I guess, how it's financed? Because he seems to make — and obviously this is where I think a lot of what we're seeing from the Biden administration now tends to get a little bit controversial, because people say like, ‘Ah well, we're building all this stuff, but also the public debt has absolutely exploded.’
What did Hamilton say about that aspect of it? And one thing that I was kind of thinking is he talks, or he seems to talk a lot about external financing. So building up state credibility in order to convince creditors to give you money so that you could fund all these projects. And when I think about that — in addition to some of the tariffs and bounties and subsidies that he was talking about — I don't want to say "beggar thy neighbor" policies, but you start to think about, well, why would these other countries fund American development? And also, can everyone pursue these types of policies all at once? Can everyone draw on external debt in order to develop their own economies?
Christian (30:59):
Well, taking the first part first. So what Hamilton does is, all the states have debt. And so when he is Treasury secretary, he's the first Treasury secretary under Washington, he pursues assumption of the state debts as it's called. So the federal government will buy up at face value all these state debts, which will help reinflate the state economies and liberate the state governments from this debt. But in exchange, the states have to hand over their Western land claims. And many states didn't have a Western boundary. It was just like, and the western boundary of Virginia is...
Tracy (31:32):
It's somewhere in that direction...
Christian (31:34):
Yeah, we haven't been to the Pacific yet, but it's out there, as far as we can go.
Joe (31:37):
I didn't realize that.
Christian (31:38):
And so getting all of that land and federalizing it, is also a very important part of the toolbox for American industrialization. So the way Hamilton pays for the debt is by taking a loan in Europe, and he offers 4% interest when most European debt is offering 3% interest. And there's a debate at the time about whether or not the debt should just be paid off. And Hamilton says ‘No, no, we need to, this is a...’
Tracy (32:06):
Roll it over, essentially. You want to keep borrowing?
Christian (32:09):
Yeah. What he calls a funded debt. So this is what happens. And part of this is also about keeping your enemies close. He doesn't want the speculator class to turn on the state and attack it and undermine it. He wants to deal them in and critics say ‘Oh, see, he was just a servant of these elites.’ And it's like, well, yeah, he was helping their interests, but he also was concerned very pragmatically about having this class of speculators turn against the state.
And so he wanted them to be committed to state stability. I should say, he's very explicit about the risk of the country fragmenting and falling apart and disintegrating into civil war, which it does to some extent due to the power of states. So Hamilton was very opposed to state power. Anyway, so that's part of how he funds it. And then also prior to the Washington administration, states had their own rules, and generally the tariff was around 8%. After Hamilton's plans go through, it's about 13%. The interesting thing is that the overall tax burden actually goes down.
Tracy (33:15):
Yeah, actually, I made a note of this, because I thought it was really interesting. And again, I think when people think about public infrastructure building and industrial policy nowadays, they think like ‘Oh, my taxes will go up.’ But in this particular instance, I think they fell 77% from 1785 to 1788.
Christian (33:35):
Yeah, and I mean, that's partly because there wasn't this insane effort to just pay off all the debts. And also because there are productive investments being made. Another crucial piece of this toolbox is actually the Post Office.
Joe (33:47):
Yeah, that was really interesting to me. Say more about that.
Christian (33:49):
So in the Postal Clause — my favorite clause in the Constitution — Article I, Section 8 of the Constitution, is very often overlooked. And that explains what the government can do. Most constitutional scholarship focuses on how the government works; the divided government, different branches. But what does this government allow itself to do is rarely explored. And so Article I, Section 8 is where that is laid out. That's what Congress can do.
There's a debate around the Postal Clause. Benjamin Franklin and Hamilton and other Federalists, as they were called, they wanted to empower the federal government to build canals, because they needed transportation infrastructure. And that is opposed by primarily Southerners. As is later said, some decades afterwards, when the question of canals, federally-funded canals again comes up, Daniel Macon, a congressman from Georgia answers a young local politician who asked him, he says ‘How come we're opposed to federal funding of canals?’
And Macon says ‘If we allow Congress to fund canals, they will no sooner and with more propriety, soon be after our slaves.’ He doesn't say “slaves,” [he uses] some euphemism. So there was again this concern, the more you empower the federal government, the greater the risk to slavery. So there is no mention of canals.
However, the Postal Clause says that the Post Office has the right to build post roads. And that little thing: roads. Well, by the 1820s, most rivers were declared Post roads. And the Post Office becomes a massive public works agency. We think of rivers as passive natural features, but they required enormous amounts of transformation to be economically useful.
And it was the Post Office that did that. Hiring contractors. For example, on the Red River, which runs up through Arkansas. This is after Hamilton's time, but these are the effects of Hamilton's work playing out. There was a 100-mile long snake-infested log jam called the Raft, and that blocked settlement of Arkansas and Missouri. And it was the federal government, i.e. the Post Office, that went in and cleared that. And so the Post Office built the vast majority of roads, and that lowered transportation costs that knit together a national economy. It also subsidized business communications and the press and did enormous amount to create a national market.
Joe (36:16):
That's incredibly interesting. And up until you talked about in the book, I had not realized the developmental role for the Post Office. But I'm glad you said that thing about the young Congressman. Why do we oppose allowing the federal government to have this role in the building of canals? And there was concerns that the abolition movement was going to rise and their way of life and their economic system was going to get destroyed by the advent of slavery.
There still is a lot of opposition to the idea that the federal government can have a productive role to play in building out infrastructure or doing whatever the equivalent is of building out a canal today. So are there deeper strains or other sort of related ideas that you can draw between the late 1700s and today, excluding slavery, why there's still economic interest of deep anxiety about the role of the federal government in these things?
Christian (37:08):
Yeah, I think persistent throughout American history is the fear of the slippery slope by the incumbent economic elites. And if the federal government is proposing transformations of any sort, there are always going to be some interests that are threatened by that. And the other thing is, it's expensive, and so no one really wants to pay taxes. And so industries and lobbies are constantly pushing to lower taxes. And so part of the argument for that is don't spend the money, don't do these big projects. Just give us the money. Let us keep the money. These big projects are pointless and we handle the money better.
Tracy (37:46):
In the few minutes remaining, can you please defend industrial policy from every single criticism that has ever been made against it? No, but I am thinking back to Adam Smith and Adam Smith's argument was partly one of security, the idea that trade would build relationships between countries, whereas Hamilton's argument, it seems is centered on the development of the US, the building of a strong state, and how those two are related to each other.
So I guess number one, what does Hamiltonian-style industrial policy actually mean for trade relationships between countries and the prospects for peace? But then also, can you talk a little bit about arguments about, well, government spending creates unproductive capacity or it's unfair for governments to pick winners or losers? Again, I'm asking you to basically address all the critiques of industrial policy in the few minutes we have allotted to us.
Christian (38:41):
Well, the first thing I would say is it's not like industrial policy always works out. There are problems with it. It's not easy to do. However, if you look at the history of industrialization in one country after another, it does raise the standard of living, and it generally works. But it always involves a developmentalist activist state. So I don't think there's any escaping that.
Now that can be done in better or worse ways. And the US plays an important role in that. These ideas from Hamilton go to Friedrich List, who goes to Germany, who is then very influential on the Meiji restoration in Japan and Japan's industrialization and on and on to today. So in terms of, I think that's the most important argument is that the actual story of industrialization always involves an activist state.
In terms of trade, I mean, Hamilton was not opposed to trade. He just didn't want to be subordinated to this dominant power, the British. I mean, his concern with national sovereignty and industrial development didn't come at the expense of international trade. So almost always, exports also play a very important part of industrialization. Take for example, a place like Rwanda. Rwanda is very explicit, very kind of Hamiltonian. They say ‘Look, if we don't have economic growth and development, we're going to have another genocide. We've had four or five,’ whatever it is.
And they're heavily dependent on exporting tea. They don't want to not export tea, but they've had conflicts with the IMF because they want to run a 3% budget deficit so that they can fund public education all the way through K through 12. And they say ‘Look, if our farmers are all illiterate, we can't increase productivity and we can't develop.’ So I'm speaking to the industrialization rather than industrial policy. What we're dealing with here in the US is something new, which is kind of like the question of reindustrialization, and that's actually a very different problem and project.
Joe (40:36):
The book is written to the Left. What did you feel the need for this particular audience to read this particular history?
Christian (40:45):
Well, there's a hostility, I think, to the US projects on the Left that is not helpful. And there's also a misunderstanding of the Constitution. I mean, people write off the Constitution as a document written by slave holders. And I was struck in getting into this, getting under the hood, about how many progressive elements there are in the American constitutional tradition.
And I came away from this project with a much deeper appreciation and respect for that, and I wanted to disabuse leftists who fall into these sort of facile notions about the Constitution being bad. I disagree with that. And I think there's actually a lot of room for quote-unquote "progressive goals" to be met through the Constitution. The General Welfare Clause, which Thomas Jefferson freaked out about and he didn't like it. He said, ‘This could mean almost anything.’ It's like, yes, it opens the door to all types of egalitarian projects potentially.
Tracy (41:44):
I have one more thing, which is, again, when I think about Hamilton's experience versus what's happening today, one of the things I think about is that, as you said, a lot of what he recommended didn't immediately come to fruition. People like Jefferson stood in the way, and nowadays there seems to be a sort of similar back and forth within DC, but how do you build political consensus for this type of policy? That really seems to have been the challenge for Hamilton. It happened over time to some degree, but it certainly didn't happen immediately.
Joe (42:15):
Just rap about it.
Tracy (42:16):
Yeah.
Christian (42:17):
Yeah. I don't know how you build political consensus around it. You don't do it by not admitting any fault and not having conversations. So I cannot tell you how political consent can be built, but...
Tracy (42:34):
I suppose you'll have to write a whole other book about that.
Christian (42:35):
Yeah. I mean and there are, well, you guys, I just listened to a podcast you did with some Irish guy about the EU policies. It's not like there aren't problems with these agendas and those have to be acknowledged and those blockages removed.
Joe (42:49):
That's what I was going to say. Tracy, when you said that, ‘Oh, it seems so quaint that people were skeptical of the arrow of economic trajectory,’ I was like we just did this episode. And I felt like I had a lot of sympathy...
Tracy (43:00):
I know. I know, but if you read the book, the idealization of agrarianism is just very surprising to me. Especially because you think back to the late 1700s, and you don't think that subsistence farming was a particularly glamorous activity. But then again, as Christian was pointing out, there's all this idealism and values attached to the hard work of being a farmer.
Joe (43:26):
And wealth of the elites. And wealth of the slave and plantation owners.
Tracy (43:28):
And that too.
Christian (43:30):
And it did provide autonomy for yeoman farmers. And so there were legitimate concerns about the loss of that autonomy. One final argument for industrial planning, for government intervention, is that it is, as Karl Polanyi says, laissez-faire free trade was planned and planning is spontaneous. Because the pattern again and again is that the forces that want free market advocate for that, they get deregulation, they get tax cuts, and that inevitably leads to a crash in which the government has to step in and regulate and nationalize.
And we just lived through that with 2008, right? I mean, you had an entire generation of bankers and policy experts who had argued against government intervention, and when 2008 came, what did they do? They basically nationalize the US banking system for a number of years and bailed the whole thing out. So another argument for industrial policy is that government intervention in the capitalist economy is inevitable. It's going to either happen ad hoc during an emergency, or it can happen consciously through democratic deliberation.
Joe (44:39):
Christian Parenti, thank you so much for coming on. Everyone go read the book. And also, there are a number of just extraordinary interesting people at your department at John Jay. I'm in a band with one of the professors. I play music with your colleague, Thomas Herndon. A number of smart people there, and it's a really interesting program here in New York City.
Christian (45:00):
Great Master's program.
Joe (45:01):
Yeah. Thank you very much.
Christian (45:02):
Thank you.
Joe (45:15):
Tracy, I really enjoyed that conversation. Even setting aside, sort of some of the economic lessons, just sort of revisiting some of the assumptions we make about the history of that time and what it was actually like I find to be very useful.
Tracy (45:29):
Yeah. We didn't even really get into this, but there was also, I think, an instance of price controls immediately after the Revolutionary War. We're going to have to do a whole other hour on this with Christian at some point.
Joe (45:40):
Yeah, we should. There's another interesting thing, and I meant to ask a question about it, but I'm aware that there is a thing in American history called the War of 1812 and I almost know nothing about it. I certainly was not, I think they set the White House on fire. That's all I know. But in the book, there's a lot in there about the basically insufficiency of the US national defense at that point, born in part due to poor domestic investment that allowed us to be in a situation where the British could destroy Washington DC.
Tracy (46:10):
It's funny, I didn't study or hear that much about the Revolutionary War, but when I went to university in London, there sure was a lot of talk in my international history class about the War of 1812. That's so funny.
Joe (46:22):
Yeah. I literally realized I know very little about it, and I don't think it gets talked about very much.
Tracy (46:27):
I was waiting for you to drop the idea of Hamilton being a secret MMTer.
Joe (46:33):
Clearly. I mean, come on. No, but it is really interesting and this idea that there were ways in the US Constitution, and I thought that was a really interesting point that embedded in the Constitution are these various clauses and comments or lines that really do open up a lot of space for active economic power from the government.
Tracy (46:53):
Yeah. I also thought the point about, well, not just dismissing some of the negativities that can go with industrial policy is really important because if you can do it, you can also do it wrong, to Christian's point, and there are plenty of examples throughout world history of things going off the rails and stuff like that. But you need to have a reasonable and honest discussion about the pros and cons and the goals of the policy, as well. What exactly you're trying to do here and what the results are that you want to see. It can't just be throw money at every single problem. You have to have some specificity about what you're trying to achieve.
Joe (47:33):
Absolutely. And that's so fascinating. I knew that about Friedrich List and the industrialization of Germany and the influence that his work in Germany then had on Japan, but the fact that his work actually draws to Hamilton; the fact that Hamilton was the first to write the word "capitalist" in the English language? Pretty fascinating history.
Tracy (47:50):
Yeah, absolutely. Shall we leave it there?
Joe (47:52):
Let's leave it there.