October 2013

The Hamiltonian Economic Tradition

by John Hendrickson

The United States is at a critical crossroads. This fall Congress is debating the issue of a continuing resolution to fund the federal government. The federal budget is over $3 trillion and the national debt is approaching $17 trillion. The federal government has also been running trillion dollar deficits. Although the budget deficit is projected to be smaller this fiscal year — below a trillion — the fiscal outlook of the nation continues to remain bleak. The unfunded liabilities of entitlement programs such as Social Security and Medicare are estimated to approach at least $70 trillion. The Patient Protection and Affordable Care Act will also cost trillions of dollars as a new entitlement program. America is desperately in need to renew itself by returning back to the principles of the Founding. Specifically, in addressing the economic problems, policymakers need to remember the wisdom of Alexander Hamilton, whose conservative economic philosophy created our capitalistic economic system.

Alexander Hamilton is considered the “chief architect” of Federalist President George Washington’s administration’s policies.”[1] Forrest McDonald, a leading historian of the American Founding and biographer of Hamilton, argued that “Hamilton’s fiscal system, which breathed life into the Constitution, was an example of conservatism — of constructive, prudential change — at its best.”[2] Hamilton’s policies consisted of paying down Revolutionary War debts, establishing the first Bank of the United States, and establishing a system of tariffs. In regard to taxation, Hamilton argued that the federal government needed a tax policy that would sustain the government, but “he was generally in favor of moderate taxes.”[3] Some scholars have even argued that Hamilton’s philosophy on taxation was “a precursor to supply-side economics, because he believed that if tax rates went too high, tax revenues would begin to decline.”[4] He also argued that Congress’ power to tax should be limited.[5]

Hamilton’s economic program placed the nation onto a sound economic path. His policies were later continued by the Whig Party under the leadership of Henry Clay of Kentucky and Daniel Webster of Massachusetts. Both Clay and Webster pushed the American System, which was a system of economic nationalism and reflected the Hamiltonian economic goals of economic development. The Republican Party continued the political philosophy of Hamilton and the Whigs through the leadership of President Abraham Lincoln and the Gilded Age administrations, most notably, the administration of President William McKinley. Hamilton continued to influence Republicans into the 20th century. President Warren G. Harding and President Calvin Coolidge were influenced by Hamilton’s political and economic philosophy.

“The party now in power in this country, through its present declaration of principles, through the traditions which it inherited from its predecessors, the Federalists and the Whigs, through their achievements and through its own, is representative of those policies which were adopted under the lead of Alexander Hamilton,” stated Vice President Calvin Coolidge in a 1922 address to the Hamilton Club.[6]  Andrew Mellon, who served as Secretary of the Treasury in the administrations of President Harding, Coolidge, and Herbert Hoover, was also a Hamiltonian. Mellon’s distinguished service also earned him the compliment of being referred to as the greatest Treasury Secretary since Alexander Hamilton.

It was during the 1920s that the presidential administrations of Warren G. Harding and Calvin Coolidge slashed government spending, reduced tax rates, and paid down the national debt. In fact economists Richard Vedder and Lowell Gallaway wrote that “the seven years from the autumn of 1922 to the autumn of 1929 were arguably the brightest period in the economic history of the United States.”[7] These policies, which unleashed the economic growth in the 1920s, were Hamiltonian policies. The same was true for the economic expansion that occurred under President Ronald Reagan. Although President Reagan was not very successful at reducing government spending, the resulting lower tax rates created an incentive for economic growth.

Hamilton may be seen by some as a proponent of “big government” — which to a certain extent he was compared to some of his contemporaries, most notably Thomas Jefferson — but his economic policies were conservative. Although Hamilton and Jefferson disagreed, Hamilton’s philosophy was not the beginning of modern liberalism or progressivism. As Michael P. Federici wrote in The Political Philosophy of Alexander Hamilton:

Hamilton was not a libertarian, but he was not an advocate of the managerial state either. His view of human nature would not have allowed either the faith in economic anarchy suggested by libertarians or the heavily regulated state advocated by Keynesians. Hamilton’s policies lack enough of the Gnostic flavor of Jacobinism or Progressivism to consider his political economy an antecedent to modern American liberalism. They were not designed or intended to eradicate poverty, fear, want, as FDR’s New Deal was designed to do, and they did not aim to dramatically change the scope of government’s role in individual lives. Hamilton’s objections were far more modest.[8]

Federici argues that “Hamilton’s political economy becomes sober to the point of being incompatible with later ideologies and developments in American history, like the New Deal, the welfare state, and the managerial state.”[9] As McDonald wrote, “Hamilton rejected laissez-faire theories…., but “proposed, therefore, to use government to encourage economic change,” while “emphatic in his reliance upon voluntarism and capitalism.”[10]

The economic principles that Hamilton promoted, and which have guided past policymakers, can still be utilized today. These principles consist of limited government, low taxation, paying down the national debt, and a strong monetary policy that protects the value of the dollar. These are the policies that are desperately needed in today’s economy. The “new normal” economy will continue as long as these principles are rejected.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Forrest McDonald, “How Conservatism Guided America’s Founding,” Imprimis, Vol. 12, No. 7, July 1983, Hillsdale College, Hillsdale, Michigan, p. 5.

[2] Ibid.

[3] Michael P. Federici, The Political Philosophy of Alexander Hamilton, The Johns Hopkins University Press, Baltimore, Maryland, 2012, p. 190.

[4] Ibid., p. 190-191.

[5] Ibid., p. 191.

[6]Calvin Coolidge, “Our Heritage from Hamilton,” in The Price of Freedom: Speeches and Addresses, Charles Scribner’s Sons, New York, 1924, p. 109.

[7]Richard Vedder and Lowell Gallaway, Out of Work: Unemployment and Government in Twentieth-Century America, Holmes & Meir, New York, 1993, p. 68.

[8]Federici, p. 191.

[9] Ibid.

[10] Forrest McDonald, “Hamilton, Alexander (1757-1804),” in American Conservatism: An Encyclopedia, edited by Bruce Frohnen, Jeremy Beer, and Jeffrey O. Nelson, ISI Books, Wilmington, Delaware, 2006, p. 370.