Subj:
cea paper to acrobatize
Date:
5/14/2003 1:56:43 PM Eastern Standard Time
From:
Tom Velk
To:
Tom Velk
Dear Curtis and other Colleagues: Following as part of this email is a
more
or less complete draft of the text of the paper to be presented in
May/June
03 at the Ottawa meetings of the Canadian Economics Association (CEA).
I may
make additions, but you may post this on the website since any later
changes
will be minor. tom velk, 802 988 9669, tomvelk@aol.com, mcgill
University
econ. dept. 514 398 4832
Hume Across the Ocean: His influence upon Hamilton's Economic Policies
Tom Velk, A. R. Riggs and Dov Zigler
Hume is an American in his principles in the Sam Rayburn/ Lyndon
Johnson
tradition. Hume never ran for dogcatcher, and so he would not have met
the
Rayburn test for membership in the President’s Cabinet, but his
practical
ideas appealed to the most hard-headed of America’s founding fathers.
No
mere dogcatcher, but a former artillery colonel promoted to Cabinet
rank, had
been guided by Hume’s ideas since boyhood. That American strategist
was
Alexander Hamilton. Once in office, he used Hume’s blueprint to
construct
the core economic institutions of the new nation.
In his essay 'Of Commerce,' Hume dichotomizes between 'manufacturing
societies' and 'farming societies'. Manufacturing societies use their
surplus
agricultural produce to support artisans while farming societies use
surplus
agricultural produce to maintain armies. According to Hume, farming
societies in antiquity were well-off and politically powerful while
those
devoted to manufacturing and occupied with the consumption of luxuries
were
weak (e.g., Sparta vs. Athens). He says the opulent societies of
antiquity
were 'soft' and therefore less competent in the art of war, even if
they were
technologically advanced. However, Hume argues
that 'things have changed.'
In Hume's time, manufactures allow for improved cultivation and
therefore
ever increasing agricultural surplus. Greater agricultural surplus in
turn
supports more manufacturers, leading to a virtuous circle of economic,
political, civic and even military development. Eventually, the surplus
becomes so great that 'manufacturing societies' are able to raise
armies of
such scale and strength as to overshadow agriculturally minded
competitors.
("Minded" is the right word, as the economic foundations of a community
profoundly effect community habits of mind in respect of consumption,
production and governance -- a relationship critical to Hamilton's
application of Hume's implied strategy of systemwide social
development).
Perhaps more significant for our purposes, Hume believes that a
community
whose economic core is constituted by manufacturers has a potential
"superfluity of labor" which "in times of peace goes to the maintenance
of
manufacturers and the improves of liberal arts. But it is easy for the
public
to convert many of these manufacturers into soldiers and maintain them
by
that superfluity which arises from the labour of the farmers."
This process yields the maxim: "Manufacturers encrease the power of
the
state only as they store up so much labour and that of a kind to which
the
public may lay claim without depriving any one of the necessaries of
life.
The more labour therefore, is employed beyond the mere necessaries, the
more
powerful is any state... Thus the greatness of the soevereign and the
happiness of the state are, in a great measure, united with regard to
trade
and manufactures."
We say Hume is not so much falling into the labor theory error as he is
elaborating a theory of the community mindset needed for civic progress
and
development. It is this vision of the interaction between an economic
background and its role in evolving a modern state, able to compete
with the
Motherlands beyond the Sea, that, we argue, motivates Hamilton's
schemes for
economic development, as found in his state messages on the Bank,
assumption
of the debt, the Mint, Trade and Manufactures. Even more important to
Hamilton, we believe, is the capacity for national defence which mobile
human
capital provides. Like Hume, Hamilton believes the first obligation of
government is survival. Hamilton frequently writes of the economic and
political jealousy of America’s European competitors. He was intensely
aware
of the short run danger presented by restive revolutionary soldiers,
whose
unpaid war wages gave them a motive to remain in arms, threatening the
stability of the new nation, still in its vulnerable infancy. In the
long
run, the United States would need her army to resist European
adventures and
to maintain peace at home -- Hume’s human capital based theory of
development
showed Hamilton how to obtain and then pay for internal and external
defenses.
Hume believes that the most significant capital is what we now call
'human
capital.' Economic strength is measured in population quantity and
quality.
The more readily a state can shift labour from private use to public
use, the
greater the power of the state. "Trade and industry are really nothing
but a
stock of labour, which, in times of peace and tranquillity, is employed
for
the ease and satisfaction of individuals; but in the exigencies of
state,
may, in part, be turned to public advantage." Once again, Hume is not
really
a labor theory advocate, as he is proposing a state strategy of
encouraging a
more economically mobile form of human Capital -- the same grand
purpose as
Hamilton's.
And so Hume's developmental theory of 'the (dynamic) natural value of
labor' is distinguishable from Smith's more static assertions
concerning
'labor value.'
Particularly important to us is our belief that it is this vision of
the
need to encourage by policy a more mobile endowment of human capital
which is
the political motivation behind Hamilton's 'Report on Manufactures' for
Congress, as well as his plans for the Bank, assumption of the debt,
immigration, and the tariff. A critically important payoff for us is
that
our reading of Hume, which we think is also Hamilton's, allows us to
square
the radicalism of Hamilton's economic policies with the general
'conservatism' of Hume. Hamilton is certainly a radical if by that
label we
refer to the extraordinary degree of change he was advocating for his
new
nation. His actual United States was a skim of formerly distinct
colonies,
the wide Atlantic in front of them and a "desolate wilderness, full of
wild
beasts and wild men" behind them. It was a land of farmers, dependent
upon
the old world for manufactures and governance, obsessed with a dream of
independence, but in fact burdened with an illiquid national debt, and
lacking a domestic growth in the supply of labor adequate to its
potential
for industrial growth, or its needs for defense. To the extent there
existed
a de facto static plan for the future, it was Jefferson's -- who wished
for a
thousand generations more of such yeoman farmers, gradually expanding
west,
living simple rural lives, on small freeholds and in quiet villages,
somehow
protected from their envious, expansionist former colonial masters.
Hamilton, we think, saw in Hume's arguments the strategic long run
danger of
this "conservative" dream of stasis, and he did his best to set the
United
States upon a much different strategic course of political and social
action.
Hume's teaching, that national greatness and public happiness are
derivatives of "trade and commerce" is, we think reason enough for
Hamilton
to espouse his far-reaching radical transformation of US society and
economy.
What's more, Hume paints the ancient agricultural model as an
unrepeatable
historical incident not at all in touch with the circumstances of
modernity
and the movement of human history. A Jeffersonian agricultural state
would
not be conservative but instead would be a radical departure from the
currents of human history, especially the British history of which the
US is
a part. In Hume's own words:
"It is a violent method, and in most cases impracticable, to oblige the
labourer to toil, in order to raise from the land more than what
subsists
himself and family. Furnish him with manufactures and commodities, and
he
will do it himself..."
The "big economic idea" of the Jeffersonians was that property served
the
public interest best when it was equally distributed, and such a
distribution
was to be aggressively preserved, sought after or imposed some way.
This
utopian egalitarianism was said to be legitimized by natural rights,
often
found in an imagined original contract. Another part of Jefferson's
big idea
is stability: the yeomen simply reconstituted themselves, generation
after
generation. Hume's big idea, in contrast, was dynamic and
inegalitarian.
Property, and goods not so abundant as to be free in nature, were to be
distributed by rules, perhaps those found in specific contracts,
actually
agreed to by parties to a particular action. Another species of
contract,
equally to be respected, consists in the habits, traditions and
practices of
the past, which allow us to form strong expectations about the rules by
which
we interact among ourselves, individually and corporately. If the
rule-driven process of this kind of contractual exchange is orderly,
predictable, uniform across persons, independent of superstition and
resistant to fraud, it will exhibit Humean Justice. The final result
may
easily be an unequal distribution of wealth. Nonetheless, the riches
and
"instability" so engendered make for a better world. For Hume, the
just
rights of property were an (necessary) invention of mankind, artificial
in
that God took no hand in their design, nor was there to be found in
real
history any original contract to the contrary. Hamilton was a man in
full
agreement with Hume.
Hamilton was in some respects a radical: he wished to create an
America far
different from the one in which he lived. He wanted big cities, active
government, sophisticated financial markets, international trade and
industry. We admit that because such dreams were in stark contrast
with 18th
century reality, they might be said to be distinctly non-Humean. But
the
goal that Hamilton was seeking by means of his dramatic proposals was
profoundly Humean. It is, we think, Hume's promise of the benefits of
material prosperity, and Hume's defeat of the argument that riches are
best
distributed when they are equally distributed that allowed Hamilton to
advocate an urbanized, industrialized new order, inevitably containing
a few
persons of great wealth, those highly specialized persons being
supported by
their earnings in trade, finance and manufacturing. Hamilton needed to
defend
his vision against those who deplored the supposed immorality of great
wealth, of earnings from "mere" trade, who questioned the morality of
usury
and finance, and who imagined there was special virtue in the simple
economy
of the farm and village. Hume offers a powerful counter-argument to
the
Jeffersonian claim that the rough egalitarianism of the yeomanry was
the best
guarantor of good government.
Despite the resistance of Jefferson, both in to the particulars of the
schemes and to the greater vision behind them, Secretary of the
Treasury
Alexander Hamilton, operating as a kind of Prime Minister, or at least
as
First Lord of the Treasury, put Hume's ideas into systematic practice.
George Washington allowed him a free hand, in recognition of the great
need
for an end to the new nation’s economic tribulations. The people,
whose
Confederation Government had ended in financial disarray, seemed
willing
tolerate dramatic change. The Humean course set by Hamilton determined
the
future of the republic. By the time Thomas Jefferson became president
the
general plan was too entrenched to be changed.
A paper that aspires to discuss the transfer of ideas—in this instance
from
David Hume to Alexander Hamilton—should properly contain a word of
caution.
Ideas can quickly become part of a stock of received wisdom, an
unwritten
consensus from which people, even on opposite sides of an issue—or an
ocean—may draw at will. Furthermore, until very recently policy-makers
and
people in general who would not consider themselves plagiarists were
reluctant oftentimes to give credit where credit was due. These and
other
factors make it extremely difficult to trace the progress of ideas.
The
recent case of John Locke, the seventeenth century Englishman once
universally recognized as the spiritual father of the American
Revolution,
will illustrate our point. Today some reputable scholars claim that
the
history of the Revolution, including its ideological origins, could be
written without a single reference to Locke, a state of nature or
natural
rights.1
John Locke’s name appears only once in the voluminous writings of
Alexander Hamilton.2 Neither do Locke’s ideas figure prominently in
Hamilton’s correspondence. On the other hand, he seldom mentioned
David Hume
by name either, but when he did his admiration for the Scottish
philosopher
seemed boundless.
Hamilton’s debt to Hume begins early. Aged sixteen
(others say he was, in fact, as old as eighteen), in what was his first
published political debate, writing “The Farmer Refuted”, a response to
Samuel Seabury, who had challenged the arguments found in Hamilton’s
maiden
publication, Hamilton quotes Hume as an enunciator of “political
maxims,
which will be eternally true”. Hamilton requested Hume’s works from
his
friend Timothy Pickering in April 1781, and he was particularly
intrigued
with Hume’s essays on economics. In 1775 Hamilton quoted the
“celebrated
author,” in 1782 he referred to the philosopher as “a very ingenious
and
sensible writer,” he relies upon Hume’s arguments in writing “The
Continentalist No. V”, and at the Constitutional Convention of 1787 he
praised Hume as “one of the ablest politicians.” Later, as Secretary
of the
Treasury, Hamilton would pattern much of his fiscal and monetary policy
around the reasonings and observations of “the profound and ingenious
Hume.”3
Hamilton’s intellectual debt to Hume went unrecognized for many
years,
and even as late as 1970 Broadus Mitchell’s fine single-volume
biography did
not mention the philosopher. In 1964, however, the late Clinton
Rossitor,
referring to The Federalist Papers, remarked that Hamilton’s debt to
Hume
“may have been larger than he realized even in his more humble
moments.”4
Rossitor called Hamilton “the American Hume,” and Forrest McDonald,
writing
in 1979, agreed that “Hamilton repeatedly expressed Hume’s thoughts as
his
own.”5
Gerald Strourzh finds a significant debt to Hume in his
“Alexander
Hamilton and the Idea of Republican Government” (Stanford 1970.)
Mark G. Spencer’s two volume edit (Thoemmes Press, 2002, Bristol, UK,
isbn1
85506 934 2), entitled “Hume’s Reception in Early America” serves to
remind
us of the wide spread presence of Hume’s work in library collections,
newspaper debates and even classrooms of early America, but David
Hume’s
genius was not universally applauded in the new nation, however.
Hamilton’s
celebrated rival in the first cabinet under George Washington,
Secretary of
State Thomas Jefferson (unappreciative of Hume’s support for America)
called
him “the great apostle of Toryism,”6 a “degenerate son of science,”7 a
“traitor to his fellow man,”8 and one “who undermined the free
principles of
the English government.”9 This was because Hume’s History of England,
a new
venture in its field, did not properly condemn the Stuart monarchs of
the
seventeenth century. Furthermore, for American patriotic tastes Hume
had
laid out in his essays on economics a critique of English whig
politicians
that was unacceptable. In addition, his critical observations on
mercantilism, the orthodox economics of the day, did not condemn with
enough
fervor the intervention of government in the marketplace. Hume had
also rej
ected the idea of disinterested virtue as a motivating force in those
who
presumed to govern, a first article of faith among British and American
whigs. Passions induce people to action, affirmed Hume, and a wise
government would avail itself of those primary motivators so that they
would
be forced to serve the public good.10 For people such as Jefferson
this
utilitarian idea, whether advanced by a Hume or a Hamilton, was
tantamount to
an endorsement of corruption in government.11
But the core of Hume’s economics, the set of ideas that appealed
most to
Hamilton, appeared in nine essays published in London in 1752 and
entitled
Political Discourses.12 In “Of Commerce” Hume rejected the idea that a
nation can achieve greatness as an agricultural entity alone. In “Of
Refinement in the Arts” he took issue with certain religious zealots
who
denoted luxury as evil. In “Of Money” he criticized those who thought
that
an injection of money into the economy would work long-term wonders,
and in
“Of Interest” he argued with those who claimed that abundance of money
leads
to low interest rates.
“Of the Balance of Trade” and “Of the Jealousy
of
Trade,” two of his most important treatises, were directed against the
protectionist policies of the reigning mercantilists. “Of Taxes”
pleaded for
moderation and rejected the French physiocratic single tax on land, and
“Of
Public Credit,” warning that the public is no blessing, deplored the
expedients of Lord Oxford’s partisans to draw bills on posterity and
imprudently use public credit to create paper riches. Finally, Hume
addressed his essay “Of the Populousness of Ancient Nations” to
exposing the
doomsday thinking of the Reverend Robert Wallace of Edinburgh. In the
following summary of Hume's economic aphorisms we think we find an
outline of
Hamilton’s beliefs as well. 1) a nation's strength lies in its
productivity,
which in turn is stimulated by variety and innovation; 2) trade, likely
to be
found in an active community of manufacturers, benefits everyone, state
and pe
ople, rich and poor; 3) luxury, economic growth and refinement in the
arts
are compatible, and complementary, even though they may be associated
with an
unequal distribution of wealth; 4) the flow of money from nation to
nation is
the instrument of economic evolution and progress, while economic
isolation
is a recipe for stagnation; 5) the rate of interest, and the associated
state
of the market for government debt is an indicator which, read by the
experienced eye, tells of the health and growth in the economy; 6) free
trade
is to be desired, although national efforts to stimulate domestic
industry
are sometimes appropriate; 7) a country cannot become rich by beggaring
its
neighbor; 8) a government should not tax the rewards of effort lest it
destroy the incentive to growth; 9) the public debt in the hands of
judicious
magistrates can have beneficial effects, but can also be dangerous; and
9)
since no utopia existed in any past golden age it is unlikely that
radical
innovations in government, especially those produced by speculative
projectors, are ever likely to produce the gains promised.
In the economic essays, as in his other works, Hume’s prescriptions
were
always reformist, but moderate, balanced, carefully argued and
conservative.
He believed in freer trade, but he rejected the idea that unhampered
pursuit
of private gain would benefit society, and he never discounted the role
of a
strong government’s visible, directing hand on the economy. He
believed in
interdependence of nations and that international neighbors could grow
rich
together, with no need to exploit one another’s weaknesses. The engine
that
drives a society, he said, must be the production of goods and
services, and
no country could be happy, progressive or great without industrial
development and the advancement of commerce.13
It will take no great leap of understanding to discern the immediate
appeal of these Humean ideas to Alexander Hamilton, who became
Secretary of
the Treasury in September 1789. Disgusted with the weak Confederation
government of the 1780’s, Hamilton was determined to follow whatever
policy
would promote solvency and national strength for the United States.
Seizing
upon a loose construction of the Constitution to accommodate his claim
that
“the goodness of a government consists in a vigorous execution,”14 he
set out
to make the government of the United States at least an equal partner
with
private enterprise in determining the nation’s future. His economic
policy
reports to Congress in the 1790’s show that he was indeed a disciple of
Hume,
but he lacked the pragmatism and the toleration of contrary ideas that
distinguished the best efforts of his mentor.
Hamilton submitted four major reports to Congress on the American
economy
between January 1790 and December 1791. They included the “Report
Relative
to a Provision for the Support of Public Credit,” January 9, 1790; the
“Second Report on the Further Provision Necessary for Establishing
Public
Credit,” December 13, 1790; the “Report on the Establishment of a
Mint,”
January 28, 1791; and the “Report on the Subject of Manufactures,”
December
5, 1791.15 Three of these are important to an analysis of Hamilton’s
policy,
the Report on the Mint being a technical treatise that will not be
discussed
in our paper.
Hume says at least four important, insightful and original things about
money, inflation and finance. He talks about the dynamic, actual and
historical process played out as new money enters the economy. He also
discusses, in the manner of a thought experiment, the logical, nonhistoric
contrast between two imagined states of the world, one with a small
amount of
money and one with more. He also examines, partly in history, and
partly by
means of logic, the consequences of having in simultaneous circulation
two
qualitatively different kinds of money, gold and paper. Finally,
Hume’s
discussion of the specie flow mechanism, virtually unchanged from the
way he
first expressed it, is not only invariably credited to him, but is also
a
standard component of modern international trade theory, as well as
being the
core proposition of the so-called monetary approach to the balance of
payments. All four views of money are part of Hamilton’s thinking as
he
proposes to create, for the new nation, a currency made uniform by the
influence of a national bank. The bank would be possessed of the
capital and
influence required to organize and subsidize secondary markets in
reserve
assets, standardize bank practices, and moderate the temptation to
inflate
the currency, otherwise constantly on offer to elected officials. In
other
words, the Bank Hamilton builds in accordance with Hume’s blueprint is
not
only a governor on the ambitions and practices of the banking sector,
such as
it was in those times, but it would be a limiter upon promiscuous
politicians
as well. That it well-served in that latter capacity is evident in the
fury
with which it was later attacked by the Jacksonians. That Hume’s four
big
ideas about money and finance are not in conflict, but are mutually
suppo
rtive, is demonstrated by the way Hamilton combined them in his
economic plan
for the new nation.
The first report on Public Credit may be studied as a counterpart to
Hume’s earlier essay, “Of Public Credit.” The philosopher had listed
the
advantages and disadvantages of public borrowing, and the Secretary
followed
the pace and demeanor of the Hume essay. Hamilton read his mandate
from
Congress as a command to lay down rules for the provision of an optimal
quantity of funded credit, a kind of treasury bill that could circulate
as
money. He argued that trade is extended by public credit, and
agriculture
and manufacturing stimulated by it. As foreign trade expands a
reduction in
interest rates results, the rate driven down by an increase in the
quantity
of money and the quickness of circulation.16 Hume had made the same
points,
in the same order, but qualified them extensively.17 Hamilton
qualified
very little.
In the meanwhile, acting upon the report, Hamilton deflated the
American
bond market while restoring face value and even specie parity to
securities
that were almost worthless in purchasing power. Issuers of the
securities—various government and quasi-government agencies, including
army
quartermaster units, state governments and the Continental Congress
from the
old Confederation government—had offered no financial security to the
debts’
owners.
The Secretary claimed that unilateral changes in the interest
payment
schedule would cut annual interest costs (or more accurately, annual
interest
obligations, since the nominal rates were not being paid fully) almost
in
half. Vigorous growth would follow.18 But Hamilton pointed out that
he
certainly did not believe that a public debt is a public blessing,19
despite
the centralizing effect that assumption would have upon the states. On
this
point he showed some of the caution expressed by Hume. Hamilton
proposed
that to thwart the government’s temptation to spend, it should be
forced to
set aside a linked obligation to tax—to tie each spending item, and
each
existing evidence of past debt, to some particular revenue source.20
According to the Secretary a stable government securities market, a
liquid money market and a responsible tax system would combine to
stimulate
domestic and foreign trade. Each merchant, keeping his capital in
money and
the securities market, instead of invested in landed estate, would
promote
commerce and manufacturing. The rate of interest would fall, partly as
a
result of increased public credit and in part as a result of increased
riches, further stimulating economic activity.21
Again Hamilton’s argument was virtually identical to Hume’s, except
Hamilton placed more emphasis upon additional money in reducing
interest
rates. Hamilton’s contention that a well-funded and contractually
secure
public debt would reduce the interest rate is compatible with Hume’s
ideas,
in his essay “Of Interest,” about the lowness of the interest rate
following
from “an increase of industry and commerce, not of gold and silver.”22
Hamilton buttressed his point by saying that an unfunded debt, by
hurting
confidence, would necessarily raise the interest rate.23 In the same
vein he
argued for rigorous adherence to the bond market’s rules of ownership
and
transfer, so that property rights, in the form of absolutely secure
promises
in the money market, be strictly observed. Thus the practical utility
of
enhanced economic growth would be realized.24 A utilitarian view of
property
rights, clearly discernible in Hamiltonian economics, may also be found
in
Hume.
Hume’s contentions in “Of Money” seem also to have inspired Hamilton
when
he sat down to write his “Second Report on Public Credit,” sometimes
referred
to as the “Report on a National Bank.” Echoing Hume, the Secretary of
the
Treasury affirmed that the real wealth of a nation lies in men,
manufactures,
mines and farms. As long as these are at work the quantity of money
would
have a high potential level, a level that likely would eventually be
supplied
by the natural process of international trade.25 Hume had written in
“Of
Money,” “We may conclude, that it is of no manner of consequence, with
regard
to the domestic happiness of a state, whether money be in greater or
less
quantity.”26 Hamilton said the same thing and then gave an excellent
summary
of Hume’s best-known contribution to economics, that of the specie flow
mechanism. It is the process whereby specie—the international stock of
gold
and silver—flows toward whatever country has the most active level of
trade.
The money remains in motion, however, to accommodate trading deals
everywhere. This process redistributes money all over the world,
making the
global trading nations one vast market with one price level and a
common
money stock. Hamilton noted,
A nation, that has no mines of its own, must derive the precious metals
from
others; generally speaking, in exchange for the product of its labor
and
industry. The quantity, it will possess, will therefore, in the
ordinary
course of things be regulated by the favourable, or unfavourable
balance of
its trade, that is, the proportion between its abilities to supply
foreigners; and its want of them; between the amount of its
exportations and
that of its importations. Hence the state of its agriculture and
manufactures, the quantity and quality of its labour and industry, must
in
the main, influence and determine the increase or decrease of its gold
and
silver.27
In the Second Report Hamilton linked the public banking system more
closely to the state of agriculture and manufacturing than Hume had
done.28
Hamilton’s proposed Bank of the United States would serve the state by
concentrating capital, providing a secure source of funds in
emergencies and
a safe depository for federal funds, giving financial and technical aid
to
collection of taxes and payment of interest on the public debt. It
would
also provide a uniform circulating medium, help the treasury conduct
foreign
trade, aid in settling foreign debts, control private banks and
multiply the
financial capacity of the nation’s stock of gold and silver.29
Hume had complex feelings about public banks, because of a
disastrous
French experiment with one. In 1752 Hume felt no need to defend a
public
bank, since the bank of England, the model for Hamilton’s proposal, was
long-established. In 1790, in the United States, however, many
believed that
the Constitution did not authorize Congress to create such a
quasi-governmental agency.
Hamilton was prepared not only to propose
the
institution, but also to defend its constitutionality in order to
secure the
President’s signature on the bill.30 Hamilton’s related views on the
“implied powers” element in the American Constitution were eventually
adopted
by the Federalists on the Supreme Court, and profoundly shaped later
juridical history. His bank was crucial for his larger program of
industrialization of the country, in his view 200 years behind Europe’s
advanced nations.31
Besides the bank, the other elements in Hamilton’s blueprint for
industrial development were contained in his famous “Report on the
Subject of
Manufactures,” which was ultimately rejected by Congress but widely
studied
and admired. It is now generally considered his most important state
paper.
The report, two years in embryo, outlined a leading role for the
federal
government, for, as the Secretary said, “in a community situated like
the
United States, the public purse must supply the deficiency of private
resource.”32
The “Report on Manufactures” quoted Adam Smith in his Wealth of
Nations
(1776), using the classical economist’s words to refute physiocratic
notions
concerning agriculture as the sole source of national wealth, but
Hamilton
did not endorse the concept of laissez-faire. He seemed to mention
Smith’s
arguments mainly in order to disagree, especially with those that
advocated
free and unfettered commerce.33 Strongly influencing this report
instead was
the skeptical thinking of David Hume, who always believed the carrot to
be
better than the stick, but who assumed as inevitable—although in some
ways
undesirable—the existence of energetic government to guide and direct
economic activity.
Hamilton in the “Report on Manufactures” also felt compelled to
respond
to those who believed that manufacturing was less efficient or less
moral
than agriculture. He emphasized value-added as the true and only
measure of
economic enterprise, a utilitarian, Humean view that neither made
concessions
to farmers as “the chosen people of God,” nor allowances for what items
were
to be produced. “It is very conceivable,” the Secretary wrote, “that
the
labor of man alone, laid out upon a work requiring great skill and art
to
bring it to perfection, may be more productive, in value, than the
labor of
nature and man combined.”34 Alluding to the potential relative
national gain
from the expansion of manufacturing versus agriculture, a discussion
that may
also be found in Hume’s essay “Of Commerce,” Hamilton exhibited a
sophisticated understanding of the theory of value-added. He claimed
categorically that manufactured products, often associated with
frivolous
luxury and national dissipation in contemporary thinking, were really
beneficial to the state.35 Hume had spent an entire essay, “Of
Refinement in
the Arts,” on a consideration of this subject. He contended, as
Hamilton
did, that a state abounding in luxury, even of the venal kind, would be
better off than one abounding in sloth and ignorance. Both argued that
a
state enjoying luxury would be more happy, free and even virtuous than
one
dependent on simple agriculture. Luxury items, said Hamilton, signal
surplus
production alienable by the state in times of emergency, a Humean idea
also
to be found in the essay “Of Commerce.”36
While fundamentally a free trader, Hume had noted in “Of the
Balance of
Trade” that “all taxes . . . upon foreign commodities, are not to be
regarded
as prejudicial or useless.”37 Hamilton seized upon this idea to argue
that
the state should provide a helping hand to infant industries. His
plans for
tariffs, bounties and subsidies were also based upon the need to combat
regular practices of competing nations, who granted export subsidies,
protection of technological expertise, bounties, premiums and other
aids
including the creation of public monopolies and private cartels.
Mankind’s
natural hesitation to take risks and enter into new pursuits could be
overcome by government encouragement, Hamilton claimed.38
Would bounties and protective tariffs for new industry have the
effect
of creating permanent domestic monopolies, which might impose prices
well in
excess of those charged in international markets? Hamilton admitted
that
monopoly, and its attendant high prices, might be a transitory effect
of
creating a protected domestic market. But he argued, as Hume had in
“Of the
Balance of Trade,” that costs of production fall as domestic industry
begins
to operate with efficiency.39 Furthermore, he tells us that the
monopoly
status enjoyed by the first few entrants into the protected domestic
market
would not last beyond the time when others joined in, the whole process
having the eventual effect of helping to create a competitive, worldclass
domestic industry in the United States.40
A competitive, world-class industrial nation remained the main goal
of
Hamilton’s economic system. As Jacob E. Cooke, editor of Hamilton’s
Reports
has noted, “The deepest purpose of his whole financial program was to
strengthen the new government.”41 The Secretary of the Treasury never
lost
sight of Hume’s contention that commerce, in promoting human happiness,
simultaneously promotes the power of the state. “Can we expect, that a
government will be well-modelled by a people, who know not how to make
a
spinning-wheel, or to employ a loom to advantage?,” wrote Hume.42
Development leads to less rebelliousness among a people, fewer
factions,
better government and even more liberty, because the middle class,
traditional defenders of human rights, is augmented by heightened
economic
activity.43
Hume's analysis of the relationship between the quantity of labor,
measured
by population, and associated levels of national income and personal
consumption was incompatible with the doomsday scenario commonly
presented by
advocates of a simple labor theory of value.
Hamilton’s wish to
stimulate
immigration, so as to alleviate the shortage of labor and encourage
manufactures in his fledgling nation was entirely consistent with
Hume’s
belief that prosperity and population growth are compatible with one
another.
"Wherever there are the most happiness and virtue, and the wisest
institutions, there will also be the most people" (On the Populousness
of
Ancient Nations, page 112 of Rotwein). Elsewhere, Hume argues that
since
population growth is associated with rising income it should be
encouraged.
As farm productivity expands, and a demand for consumption goods
appears, an
urban civilization appears, and national power, and population size,
advance
together (On the Populousness of Ancient Nations, pages 108-112, esp.
page
111 of Rotwein).
Hume’s analysis of the connection between the employment status of
labor and
the level of income helps Hamilton to argue for the benefits of a
stimulus to
manufacturing, despite the possible costs in terms of income
inequality. In
the agricultural state, income is divided more or less equally; "Not to
mention the great equality of fortunes among the inhabitants of the
ancient
republics, where every field, belonging to a different proprietor, was
able
to maintain a family, and rendered the numbers of citizens very
considerable,
even without trade and manufactures." (Of Commerce, page 9, Rotwein
edition).
But in such a land, without manufacturers, income however equal, is
low. The
soporific state is not a productive one: "Everything in the world is
purchased by labour; and our passions are the only causes of labour.
When a
nation abounds in manufactures and mechanic arts, the proprietors of
land, as
well as the farmers, study agriculture as a science, and redouble their
industry and attention. The superfluity which arises from their
labour, is
not lost; but is exchanged with manufacturers for those commodities,
which
men's luxury now makes them covet. By this means, land furnishes a
great
deal more of the necessaries of life, than what suffices for those who
cultivate it." (Of Commerce, Rotwein edition, page 12). Once again,
we see
how Hume makes a connection between productivity and labor which is
dynamic
and developmental, rather than static and arithmetical, as it becomes
for
Smith, Malthus and others. Hume has a manner of analysis that helps
Hamilton
form a long run development scheme for America, linking immigration,
urbanization, industrialization and growth.
Hume’s essays in his Political Discourses are not the only source
for
Hamilton’s economic system, but we contend that they are the major
source.
To understand the progression of Hume’s ideas to Hamilton, wrote
Clinton
Rossitor in 1964, “One has only to lay his speculative musings as
Publius
side by side with Hume’s essays of a political nature.”44 Even more
revealing as an exercise, because the Treasury Secretary was now in a
position to put ideas into practice, is to lay Hamilton’s Reports to
Congress
side by side with David Hume’s essays on economics. Moreover, the
basic
features of Hamilton’s program, resurrected and restyled “Henry Clay’s
American System,” were to provide an enduring alternative vision for
the
United States in the nineteenth century.
Notes
1Within the past few years a considerable body of literature
discounting
Locke’s influence on the entire eighteenth century has been building
up. See
J. G. A. Pocock, The Machiavellian Moment: Florentine Political
Thought and
the Atlantic Republican Tradition (Princeton, N. J., 1975), p. 424, and
his
“Virtue and Commerce in the Eighteenth Century,” Journal of
Interdisciplinary
History, 3 (1972), pp. 130-131, 134. See also Lance Banning, The
Jeffersonian Persuasion: Evolution of a Party Ideology (Ithaca, N. Y.,
1978); his “Jeffersonian Ideology Revisited; Liberal and Classical
Ideas in
the New American Republic,” William and Mary Quarterly, 3d ser., XLIII
(1986), 3-19; and Joyce Appleby, “Republicanism in Old and New
Contexts,”
Ibid., 20-34. A dissenting voice is heard in both Appleby and Isaac
Kramnick, “Republican Revisionism Revisited,” American Historical
Review
LXXXVII (1982), 629-664.
2Gerald Stourzh, Alexander Hamilton and the Idea of Republican
Government
(Stanford, Calif., 1970), p. 216, fn. 43.
3Harold C. Syrett and Jacob E. Cooke, eds., The Papers of Alexander
Hamilton
(New York, 1961-1979), I, 95; II, 595-596; Henry Cabot Lodge, ed.,
Hamilton’s
Works (New York, 1904), I, 409 and “The Defence of the Funding System,”
VIII,
459.
4Clinton Rossitor, Alexander Hamilton and the Constitution (New York,
1964),
p. 120.
5Ibid., p. 182; Forrest McDonald, Alexander Hamilton (New York, 1979),
p. 35.
6Thomas Jefferson to John Cartwright, June 5, 1824, in Saul K. Padover,
ed.,
A Jefferson Profile as Revealed in his Letters (New York, 1956), p.
335.
7Ibid., p. 355.
8Ibid.
9Jefferson to William Duane, August 12, 1810, in Thomas Jefferson,
Writings,
Merrill D. Peterson, ed., (New York, 1984), pp. 1228-1229.
10Hamilton quoted Hume in a speech to the Constitutional Convention,
June
22, 1787 (Robert Yates Version), Syrett and Cooke, eds., Papers of
Alexander
Hamilton, IV, 216-217.
11See Jefferson’s remarks in “The Anas,” Adrienne Koch and William
Peden,
eds., The Life and Selected Writings of Thomas Jefferson (New York,
1972), p.
126.
12David Hume, “Of Commerce,” Writings on Economics, Eugene Rotwein,
ed.,
(Madison, Wisc., 1955), pp. 3-18. The rest of the essays mentioned are
also
in Ibid., pp. 19-183.
13“Of Commerce,” Ibid., pp. 5, 12; “Of Refinement in the Arts,” Ibid.,
pp.
23-24.
14Max Farrand, ed., The Records of the Federal Convention of 1787 (New
Haven, 1966), I, 310.
15Alexander Hamilton, The Reports of Alexander Hamilton, Jacob E.
Cooke,
ed., (New York, 1964), p. vi.
16Hamilton, “Report Relative to a Provision for the Support of Public
Credit, January 9, 1790,” Ibid., pp. 2, 5-6.
17Hume, “Of Public Credit,” Rotwein, ed., pp. 93-96.
18Hamilton, “Report,” p. 33.
19Ibid., p. 41.
20Ibid., pp. 32-40.
21Ibid., p. 23.
22Hume, “Of Interest,” Rotwein, ed., p. 49.
23Hamilton, pp. 2-3.
24Ibid., p. 22.
25Hamilton, “Second Report on the Further Provision Necessary for
Establishing Public Credit, December 13, 1790,” The Reports of
Alexander
Hamilton, Jacob E. Cooke, ed., p. 58.
26Hume, “Of Money,” Rotwein, ed., p. 39.
27Hamilton, “Second Report,” p. 58.
28Hume had his doubts about banks and paper credit, but to achieve the
benefits of development and control the quantity of paper credit, he
recommended that “If the public provide not a bank, private bankers
will take
advantage of this circumstance . . . and therefore it is better. See
“Of
Money,” Rotwein, ed., p. 35.
29Hamilton, “Second Report,” pp. 48-52, 58.
30Jacob E. Cooke, ed., Alexander Hamilton:
p.
78.
A Profile (New York, 1967),
31In 1790 and 1791 the Secretary had sent out a questionnaire on the
curre
nt state of American manufactures. Hamilton, “Report on the Subject
of
Manufactures, December 5, 1791,” The Reports of Alexander Hamilton,
Jacob E.
Cooke, ed., p. 155.
32Ibid., p. 204.
33Ibid.., pp. 150, 157, 179-180.
34Ibid., p. 121.
35Ibid., pp. 115-116.
36Ibid.; Hume, “Of Commerce,” Rotwein, ed., pp. 11-12.
37Hume, “Of the Balance of Trade,” Rotwein, ed., p. 76.
38Hamilton, “Report on Manufactures,” pp. 141-143.
39Ibid., p. 158.
40Ibid., pp. 158-162.
41Hamilton, Reports, Cooke, ed., p. xiii.
42Hume, “Of Refinement in the Arts,” Rotwein, ed., p. 24.
43Ibid., pp. 25, 28-29.
44Rossitor, p. 120.
Subj:
cea paper to acrobatize
Date:
5/14/2003 1:56:43 PM Eastern Standard Time
From:
Tom Velk
To:
Tom Velk
Dear Curtis and other Colleagues: Following as part of this email is a
more
or less complete draft of the text of the paper to be presented in
May/June
03 at the Ottawa meetings of the Canadian Economics Association (CEA).
I may
make additions, but you may post this on the website since any later
changes
will be minor. tom velk, 802 988 9669, tomvelk@aol.com, mcgill
University
econ. dept. 514 398 4832
Hume Across the Ocean: His influence upon Hamilton's Economic Policies
Tom Velk, A. R. Riggs and Dov Zigler
Hume is an American in his principles in the Sam Rayburn/ Lyndon
Johnson
tradition. Hume never ran for dogcatcher, and so he would not have met
the
Rayburn test for membership in the President’s Cabinet, but his
practical
ideas appealed to the most hard-headed of America’s founding fathers.
No
mere dogcatcher, but a former artillery colonel promoted to Cabinet
rank, had
been guided by Hume’s ideas since boyhood. That American strategist
was
Alexander Hamilton. Once in office, he used Hume’s blueprint to
construct
the core economic institutions of the new nation.
In his essay 'Of Commerce,' Hume dichotomizes between 'manufacturing
societies' and 'farming societies'. Manufacturing societies use their
surplus
agricultural produce to support artisans while farming societies use
surplus
agricultural produce to maintain armies. According to Hume, farming
societies in antiquity were well-off and politically powerful while
those
devoted to manufacturing and occupied with the consumption of luxuries
were
weak (e.g., Sparta vs. Athens). He says the opulent societies of
antiquity
were 'soft' and therefore less competent in the art of war, even if
they were
technologically advanced. However, Hume argues
that 'things have changed.'
In Hume's time, manufactures allow for improved cultivation and
therefore
ever increasing agricultural surplus. Greater agricultural surplus in
turn
supports more manufacturers, leading to a virtuous circle of economic,
political, civic and even military development. Eventually, the surplus
becomes so great that 'manufacturing societies' are able to raise
armies of
such scale and strength as to overshadow agriculturally minded
competitors.
("Minded" is the right word, as the economic foundations of a community
profoundly effect community habits of mind in respect of consumption,
production and governance -- a relationship critical to Hamilton's
application of Hume's implied strategy of systemwide social
development).
Perhaps more significant for our purposes, Hume believes that a
community
whose economic core is constituted by manufacturers has a potential
"superfluity of labor" which "in times of peace goes to the maintenance
of
manufacturers and the improves of liberal arts. But it is easy for the
public
to convert many of these manufacturers into soldiers and maintain them
by
that superfluity which arises from the labour of the farmers."
This process yields the maxim: "Manufacturers encrease the power of
the
state only as they store up so much labour and that of a kind to which
the
public may lay claim without depriving any one of the necessaries of
life.
The more labour therefore, is employed beyond the mere necessaries, the
more
powerful is any state... Thus the greatness of the soevereign and the
happiness of the state are, in a great measure, united with regard to
trade
and manufactures."
We say Hume is not so much falling into the labor theory error as he is
elaborating a theory of the community mindset needed for civic progress
and
development. It is this vision of the interaction between an economic
background and its role in evolving a modern state, able to compete
with the
Motherlands beyond the Sea, that, we argue, motivates Hamilton's
schemes for
economic development, as found in his state messages on the Bank,
assumption
of the debt, the Mint, Trade and Manufactures. Even more important to
Hamilton, we believe, is the capacity for national defence which mobile
human
capital provides. Like Hume, Hamilton believes the first obligation of
government is survival. Hamilton frequently writes of the economic and
political jealousy of America’s European competitors. He was intensely
aware
of the short run danger presented by restive revolutionary soldiers,
whose
unpaid war wages gave them a motive to remain in arms, threatening the
stability of the new nation, still in its vulnerable infancy. In the
long
run, the United States would need her army to resist European
adventures and
to maintain peace at home -- Hume’s human capital based theory of
development
showed Hamilton how to obtain and then pay for internal and external
defenses.
Hume believes that the most significant capital is what we now call
'human
capital.' Economic strength is measured in population quantity and
quality.
The more readily a state can shift labour from private use to public
use, the
greater the power of the state. "Trade and industry are really nothing
but a
stock of labour, which, in times of peace and tranquillity, is employed
for
the ease and satisfaction of individuals; but in the exigencies of
state,
may, in part, be turned to public advantage." Once again, Hume is not
really
a labor theory advocate, as he is proposing a state strategy of
encouraging a
more economically mobile form of human Capital -- the same grand
purpose as
Hamilton's.
And so Hume's developmental theory of 'the (dynamic) natural value of
labor' is distinguishable from Smith's more static assertions
concerning
'labor value.'
Particularly important to us is our belief that it is this vision of
the
need to encourage by policy a more mobile endowment of human capital
which is
the political motivation behind Hamilton's 'Report on Manufactures' for
Congress, as well as his plans for the Bank, assumption of the debt,
immigration, and the tariff. A critically important payoff for us is
that
our reading of Hume, which we think is also Hamilton's, allows us to
square
the radicalism of Hamilton's economic policies with the general
'conservatism' of Hume. Hamilton is certainly a radical if by that
label we
refer to the extraordinary degree of change he was advocating for his
new
nation. His actual United States was a skim of formerly distinct
colonies,
the wide Atlantic in front of them and a "desolate wilderness, full of
wild
beasts and wild men" behind them. It was a land of farmers, dependent
upon
the old world for manufactures and governance, obsessed with a dream of
independence, but in fact burdened with an illiquid national debt, and
lacking a domestic growth in the supply of labor adequate to its
potential
for industrial growth, or its needs for defense. To the extent there
existed
a de facto static plan for the future, it was Jefferson's -- who wished
for a
thousand generations more of such yeoman farmers, gradually expanding
west,
living simple rural lives, on small freeholds and in quiet villages,
somehow
protected from their envious, expansionist former colonial masters.
Hamilton, we think, saw in Hume's arguments the strategic long run
danger of
this "conservative" dream of stasis, and he did his best to set the
United
States upon a much different strategic course of political and social
action.
Hume's teaching, that national greatness and public happiness are
derivatives of "trade and commerce" is, we think reason enough for
Hamilton
to espouse his far-reaching radical transformation of US society and
economy.
What's more, Hume paints the ancient agricultural model as an
unrepeatable
historical incident not at all in touch with the circumstances of
modernity
and the movement of human history. A Jeffersonian agricultural state
would
not be conservative but instead would be a radical departure from the
currents of human history, especially the British history of which the
US is
a part. In Hume's own words:
"It is a violent method, and in most cases impracticable, to oblige the
labourer to toil, in order to raise from the land more than what
subsists
himself and family. Furnish him with manufactures and commodities, and
he
will do it himself..."
The "big economic idea" of the Jeffersonians was that property served
the
public interest best when it was equally distributed, and such a
distribution
was to be aggressively preserved, sought after or imposed some way.
This
utopian egalitarianism was said to be legitimized by natural rights,
often
found in an imagined original contract. Another part of Jefferson's
big idea
is stability: the yeomen simply reconstituted themselves, generation
after
generation. Hume's big idea, in contrast, was dynamic and
inegalitarian.
Property, and goods not so abundant as to be free in nature, were to be
distributed by rules, perhaps those found in specific contracts,
actually
agreed to by parties to a particular action. Another species of
contract,
equally to be respected, consists in the habits, traditions and
practices of
the past, which allow us to form strong expectations about the rules by
which
we interact among ourselves, individually and corporately. If the
rule-driven process of this kind of contractual exchange is orderly,
predictable, uniform across persons, independent of superstition and
resistant to fraud, it will exhibit Humean Justice. The final result
may
easily be an unequal distribution of wealth. Nonetheless, the riches
and
"instability" so engendered make for a better world. For Hume, the
just
rights of property were an (necessary) invention of mankind, artificial
in
that God took no hand in their design, nor was there to be found in
real
history any original contract to the contrary. Hamilton was a man in
full
agreement with Hume.
Hamilton was in some respects a radical: he wished to create an
America far
different from the one in which he lived. He wanted big cities, active
government, sophisticated financial markets, international trade and
industry. We admit that because such dreams were in stark contrast
with 18th
century reality, they might be said to be distinctly non-Humean. But
the
goal that Hamilton was seeking by means of his dramatic proposals was
profoundly Humean. It is, we think, Hume's promise of the benefits of
material prosperity, and Hume's defeat of the argument that riches are
best
distributed when they are equally distributed that allowed Hamilton to
advocate an urbanized, industrialized new order, inevitably containing
a few
persons of great wealth, those highly specialized persons being
supported by
their earnings in trade, finance and manufacturing. Hamilton needed to
defend
his vision against those who deplored the supposed immorality of great
wealth, of earnings from "mere" trade, who questioned the morality of
usury
and finance, and who imagined there was special virtue in the simple
economy
of the farm and village. Hume offers a powerful counter-argument to
the
Jeffersonian claim that the rough egalitarianism of the yeomanry was
the best
guarantor of good government.
Despite the resistance of Jefferson, both in to the particulars of the
schemes and to the greater vision behind them, Secretary of the
Treasury
Alexander Hamilton, operating as a kind of Prime Minister, or at least
as
First Lord of the Treasury, put Hume's ideas into systematic practice.
George Washington allowed him a free hand, in recognition of the great
need
for an end to the new nation’s economic tribulations. The people,
whose
Confederation Government had ended in financial disarray, seemed
willing
tolerate dramatic change. The Humean course set by Hamilton determined
the
future of the republic. By the time Thomas Jefferson became president
the
general plan was too entrenched to be changed.
A paper that aspires to discuss the transfer of ideas—in this instance
from
David Hume to Alexander Hamilton—should properly contain a word of
caution.
Ideas can quickly become part of a stock of received wisdom, an
unwritten
consensus from which people, even on opposite sides of an issue—or an
ocean—may draw at will. Furthermore, until very recently policy-makers
and
people in general who would not consider themselves plagiarists were
reluctant oftentimes to give credit where credit was due. These and
other
factors make it extremely difficult to trace the progress of ideas.
The
recent case of John Locke, the seventeenth century Englishman once
universally recognized as the spiritual father of the American
Revolution,
will illustrate our point. Today some reputable scholars claim that
the
history of the Revolution, including its ideological origins, could be
written without a single reference to Locke, a state of nature or
natural
rights.1
John Locke’s name appears only once in the voluminous writings of
Alexander Hamilton.2 Neither do Locke’s ideas figure prominently in
Hamilton’s correspondence. On the other hand, he seldom mentioned
David Hume
by name either, but when he did his admiration for the Scottish
philosopher
seemed boundless.
Hamilton’s debt to Hume begins early. Aged sixteen
(others say he was, in fact, as old as eighteen), in what was his first
published political debate, writing “The Farmer Refuted”, a response to
Samuel Seabury, who had challenged the arguments found in Hamilton’s
maiden
publication, Hamilton quotes Hume as an enunciator of “political
maxims,
which will be eternally true”. Hamilton requested Hume’s works from
his
friend Timothy Pickering in April 1781, and he was particularly
intrigued
with Hume’s essays on economics. In 1775 Hamilton quoted the
“celebrated
author,” in 1782 he referred to the philosopher as “a very ingenious
and
sensible writer,” he relies upon Hume’s arguments in writing “The
Continentalist No. V”, and at the Constitutional Convention of 1787 he
praised Hume as “one of the ablest politicians.” Later, as Secretary
of the
Treasury, Hamilton would pattern much of his fiscal and monetary policy
around the reasonings and observations of “the profound and ingenious
Hume.”3
Hamilton’s intellectual debt to Hume went unrecognized for many
years,
and even as late as 1970 Broadus Mitchell’s fine single-volume
biography did
not mention the philosopher. In 1964, however, the late Clinton
Rossitor,
referring to The Federalist Papers, remarked that Hamilton’s debt to
Hume
“may have been larger than he realized even in his more humble
moments.”4
Rossitor called Hamilton “the American Hume,” and Forrest McDonald,
writing
in 1979, agreed that “Hamilton repeatedly expressed Hume’s thoughts as
his
own.”5
Gerald Strourzh finds a significant debt to Hume in his
“Alexander
Hamilton and the Idea of Republican Government” (Stanford 1970.)
Mark G. Spencer’s two volume edit (Thoemmes Press, 2002, Bristol, UK,
isbn1
85506 934 2), entitled “Hume’s Reception in Early America” serves to
remind
us of the wide spread presence of Hume’s work in library collections,
newspaper debates and even classrooms of early America, but David
Hume’s
genius was not universally applauded in the new nation, however.
Hamilton’s
celebrated rival in the first cabinet under George Washington,
Secretary of
State Thomas Jefferson (unappreciative of Hume’s support for America)
called
him “the great apostle of Toryism,”6 a “degenerate son of science,”7 a
“traitor to his fellow man,”8 and one “who undermined the free
principles of
the English government.”9 This was because Hume’s History of England,
a new
venture in its field, did not properly condemn the Stuart monarchs of
the
seventeenth century. Furthermore, for American patriotic tastes Hume
had
laid out in his essays on economics a critique of English whig
politicians
that was unacceptable. In addition, his critical observations on
mercantilism, the orthodox economics of the day, did not condemn with
enough
fervor the intervention of government in the marketplace. Hume had
also rej
ected the idea of disinterested virtue as a motivating force in those
who
presumed to govern, a first article of faith among British and American
whigs. Passions induce people to action, affirmed Hume, and a wise
government would avail itself of those primary motivators so that they
would
be forced to serve the public good.10 For people such as Jefferson
this
utilitarian idea, whether advanced by a Hume or a Hamilton, was
tantamount to
an endorsement of corruption in government.11
But the core of Hume’s economics, the set of ideas that appealed
most to
Hamilton, appeared in nine essays published in London in 1752 and
entitled
Political Discourses.12 In “Of Commerce” Hume rejected the idea that a
nation can achieve greatness as an agricultural entity alone. In “Of
Refinement in the Arts” he took issue with certain religious zealots
who
denoted luxury as evil. In “Of Money” he criticized those who thought
that
an injection of money into the economy would work long-term wonders,
and in
“Of Interest” he argued with those who claimed that abundance of money
leads
to low interest rates.
“Of the Balance of Trade” and “Of the Jealousy
of
Trade,” two of his most important treatises, were directed against the
protectionist policies of the reigning mercantilists. “Of Taxes”
pleaded for
moderation and rejected the French physiocratic single tax on land, and
“Of
Public Credit,” warning that the public is no blessing, deplored the
expedients of Lord Oxford’s partisans to draw bills on posterity and
imprudently use public credit to create paper riches. Finally, Hume
addressed his essay “Of the Populousness of Ancient Nations” to
exposing the
doomsday thinking of the Reverend Robert Wallace of Edinburgh. In the
following summary of Hume's economic aphorisms we think we find an
outline of
Hamilton’s beliefs as well. 1) a nation's strength lies in its
productivity,
which in turn is stimulated by variety and innovation; 2) trade, likely
to be
found in an active community of manufacturers, benefits everyone, state
and pe
ople, rich and poor; 3) luxury, economic growth and refinement in the
arts
are compatible, and complementary, even though they may be associated
with an
unequal distribution of wealth; 4) the flow of money from nation to
nation is
the instrument of economic evolution and progress, while economic
isolation
is a recipe for stagnation; 5) the rate of interest, and the associated
state
of the market for government debt is an indicator which, read by the
experienced eye, tells of the health and growth in the economy; 6) free
trade
is to be desired, although national efforts to stimulate domestic
industry
are sometimes appropriate; 7) a country cannot become rich by beggaring
its
neighbor; 8) a government should not tax the rewards of effort lest it
destroy the incentive to growth; 9) the public debt in the hands of
judicious
magistrates can have beneficial effects, but can also be dangerous; and
9)
since no utopia existed in any past golden age it is unlikely that
radical
innovations in government, especially those produced by speculative
projectors, are ever likely to produce the gains promised.
In the economic essays, as in his other works, Hume’s prescriptions
were
always reformist, but moderate, balanced, carefully argued and
conservative.
He believed in freer trade, but he rejected the idea that unhampered
pursuit
of private gain would benefit society, and he never discounted the role
of a
strong government’s visible, directing hand on the economy. He
believed in
interdependence of nations and that international neighbors could grow
rich
together, with no need to exploit one another’s weaknesses. The engine
that
drives a society, he said, must be the production of goods and
services, and
no country could be happy, progressive or great without industrial
development and the advancement of commerce.13
It will take no great leap of understanding to discern the immediate
appeal of these Humean ideas to Alexander Hamilton, who became
Secretary of
the Treasury in September 1789. Disgusted with the weak Confederation
government of the 1780’s, Hamilton was determined to follow whatever
policy
would promote solvency and national strength for the United States.
Seizing
upon a loose construction of the Constitution to accommodate his claim
that
“the goodness of a government consists in a vigorous execution,”14 he
set out
to make the government of the United States at least an equal partner
with
private enterprise in determining the nation’s future. His economic
policy
reports to Congress in the 1790’s show that he was indeed a disciple of
Hume,
but he lacked the pragmatism and the toleration of contrary ideas that
distinguished the best efforts of his mentor.
Hamilton submitted four major reports to Congress on the American
economy
between January 1790 and December 1791. They included the “Report
Relative
to a Provision for the Support of Public Credit,” January 9, 1790; the
“Second Report on the Further Provision Necessary for Establishing
Public
Credit,” December 13, 1790; the “Report on the Establishment of a
Mint,”
January 28, 1791; and the “Report on the Subject of Manufactures,”
December
5, 1791.15 Three of these are important to an analysis of Hamilton’s
policy,
the Report on the Mint being a technical treatise that will not be
discussed
in our paper.
Hume says at least four important, insightful and original things about
money, inflation and finance. He talks about the dynamic, actual and
historical process played out as new money enters the economy. He also
discusses, in the manner of a thought experiment, the logical, nonhistoric
contrast between two imagined states of the world, one with a small
amount of
money and one with more. He also examines, partly in history, and
partly by
means of logic, the consequences of having in simultaneous circulation
two
qualitatively different kinds of money, gold and paper. Finally,
Hume’s
discussion of the specie flow mechanism, virtually unchanged from the
way he
first expressed it, is not only invariably credited to him, but is also
a
standard component of modern international trade theory, as well as
being the
core proposition of the so-called monetary approach to the balance of
payments. All four views of money are part of Hamilton’s thinking as
he
proposes to create, for the new nation, a currency made uniform by the
influence of a national bank. The bank would be possessed of the
capital and
influence required to organize and subsidize secondary markets in
reserve
assets, standardize bank practices, and moderate the temptation to
inflate
the currency, otherwise constantly on offer to elected officials. In
other
words, the Bank Hamilton builds in accordance with Hume’s blueprint is
not
only a governor on the ambitions and practices of the banking sector,
such as
it was in those times, but it would be a limiter upon promiscuous
politicians
as well. That it well-served in that latter capacity is evident in the
fury
with which it was later attacked by the Jacksonians. That Hume’s four
big
ideas about money and finance are not in conflict, but are mutually
suppo
rtive, is demonstrated by the way Hamilton combined them in his
economic plan
for the new nation.
The first report on Public Credit may be studied as a counterpart to
Hume’s earlier essay, “Of Public Credit.” The philosopher had listed
the
advantages and disadvantages of public borrowing, and the Secretary
followed
the pace and demeanor of the Hume essay. Hamilton read his mandate
from
Congress as a command to lay down rules for the provision of an optimal
quantity of funded credit, a kind of treasury bill that could circulate
as
money. He argued that trade is extended by public credit, and
agriculture
and manufacturing stimulated by it. As foreign trade expands a
reduction in
interest rates results, the rate driven down by an increase in the
quantity
of money and the quickness of circulation.16 Hume had made the same
points,
in the same order, but qualified them extensively.17 Hamilton
qualified
very little.
In the meanwhile, acting upon the report, Hamilton deflated the
American
bond market while restoring face value and even specie parity to
securities
that were almost worthless in purchasing power. Issuers of the
securities—various government and quasi-government agencies, including
army
quartermaster units, state governments and the Continental Congress
from the
old Confederation government—had offered no financial security to the
debts’
owners.
The Secretary claimed that unilateral changes in the interest
payment
schedule would cut annual interest costs (or more accurately, annual
interest
obligations, since the nominal rates were not being paid fully) almost
in
half. Vigorous growth would follow.18 But Hamilton pointed out that
he
certainly did not believe that a public debt is a public blessing,19
despite
the centralizing effect that assumption would have upon the states. On
this
point he showed some of the caution expressed by Hume. Hamilton
proposed
that to thwart the government’s temptation to spend, it should be
forced to
set aside a linked obligation to tax—to tie each spending item, and
each
existing evidence of past debt, to some particular revenue source.20
According to the Secretary a stable government securities market, a
liquid money market and a responsible tax system would combine to
stimulate
domestic and foreign trade. Each merchant, keeping his capital in
money and
the securities market, instead of invested in landed estate, would
promote
commerce and manufacturing. The rate of interest would fall, partly as
a
result of increased public credit and in part as a result of increased
riches, further stimulating economic activity.21
Again Hamilton’s argument was virtually identical to Hume’s, except
Hamilton placed more emphasis upon additional money in reducing
interest
rates. Hamilton’s contention that a well-funded and contractually
secure
public debt would reduce the interest rate is compatible with Hume’s
ideas,
in his essay “Of Interest,” about the lowness of the interest rate
following
from “an increase of industry and commerce, not of gold and silver.”22
Hamilton buttressed his point by saying that an unfunded debt, by
hurting
confidence, would necessarily raise the interest rate.23 In the same
vein he
argued for rigorous adherence to the bond market’s rules of ownership
and
transfer, so that property rights, in the form of absolutely secure
promises
in the money market, be strictly observed. Thus the practical utility
of
enhanced economic growth would be realized.24 A utilitarian view of
property
rights, clearly discernible in Hamiltonian economics, may also be found
in
Hume.
Hume’s contentions in “Of Money” seem also to have inspired Hamilton
when
he sat down to write his “Second Report on Public Credit,” sometimes
referred
to as the “Report on a National Bank.” Echoing Hume, the Secretary of
the
Treasury affirmed that the real wealth of a nation lies in men,
manufactures,
mines and farms. As long as these are at work the quantity of money
would
have a high potential level, a level that likely would eventually be
supplied
by the natural process of international trade.25 Hume had written in
“Of
Money,” “We may conclude, that it is of no manner of consequence, with
regard
to the domestic happiness of a state, whether money be in greater or
less
quantity.”26 Hamilton said the same thing and then gave an excellent
summary
of Hume’s best-known contribution to economics, that of the specie flow
mechanism. It is the process whereby specie—the international stock of
gold
and silver—flows toward whatever country has the most active level of
trade.
The money remains in motion, however, to accommodate trading deals
everywhere. This process redistributes money all over the world,
making the
global trading nations one vast market with one price level and a
common
money stock. Hamilton noted,
A nation, that has no mines of its own, must derive the precious metals
from
others; generally speaking, in exchange for the product of its labor
and
industry. The quantity, it will possess, will therefore, in the
ordinary
course of things be regulated by the favourable, or unfavourable
balance of
its trade, that is, the proportion between its abilities to supply
foreigners; and its want of them; between the amount of its
exportations and
that of its importations. Hence the state of its agriculture and
manufactures, the quantity and quality of its labour and industry, must
in
the main, influence and determine the increase or decrease of its gold
and
silver.27
In the Second Report Hamilton linked the public banking system more
closely to the state of agriculture and manufacturing than Hume had
done.28
Hamilton’s proposed Bank of the United States would serve the state by
concentrating capital, providing a secure source of funds in
emergencies and
a safe depository for federal funds, giving financial and technical aid
to
collection of taxes and payment of interest on the public debt. It
would
also provide a uniform circulating medium, help the treasury conduct
foreign
trade, aid in settling foreign debts, control private banks and
multiply the
financial capacity of the nation’s stock of gold and silver.29
Hume had complex feelings about public banks, because of a
disastrous
French experiment with one. In 1752 Hume felt no need to defend a
public
bank, since the bank of England, the model for Hamilton’s proposal, was
long-established. In 1790, in the United States, however, many
believed that
the Constitution did not authorize Congress to create such a
quasi-governmental agency.
Hamilton was prepared not only to propose
the
institution, but also to defend its constitutionality in order to
secure the
President’s signature on the bill.30 Hamilton’s related views on the
“implied powers” element in the American Constitution were eventually
adopted
by the Federalists on the Supreme Court, and profoundly shaped later
juridical history. His bank was crucial for his larger program of
industrialization of the country, in his view 200 years behind Europe’s
advanced nations.31
Besides the bank, the other elements in Hamilton’s blueprint for
industrial development were contained in his famous “Report on the
Subject of
Manufactures,” which was ultimately rejected by Congress but widely
studied
and admired. It is now generally considered his most important state
paper.
The report, two years in embryo, outlined a leading role for the
federal
government, for, as the Secretary said, “in a community situated like
the
United States, the public purse must supply the deficiency of private
resource.”32
The “Report on Manufactures” quoted Adam Smith in his Wealth of
Nations
(1776), using the classical economist’s words to refute physiocratic
notions
concerning agriculture as the sole source of national wealth, but
Hamilton
did not endorse the concept of laissez-faire. He seemed to mention
Smith’s
arguments mainly in order to disagree, especially with those that
advocated
free and unfettered commerce.33 Strongly influencing this report
instead was
the skeptical thinking of David Hume, who always believed the carrot to
be
better than the stick, but who assumed as inevitable—although in some
ways
undesirable—the existence of energetic government to guide and direct
economic activity.
Hamilton in the “Report on Manufactures” also felt compelled to
respond
to those who believed that manufacturing was less efficient or less
moral
than agriculture. He emphasized value-added as the true and only
measure of
economic enterprise, a utilitarian, Humean view that neither made
concessions
to farmers as “the chosen people of God,” nor allowances for what items
were
to be produced. “It is very conceivable,” the Secretary wrote, “that
the
labor of man alone, laid out upon a work requiring great skill and art
to
bring it to perfection, may be more productive, in value, than the
labor of
nature and man combined.”34 Alluding to the potential relative
national gain
from the expansion of manufacturing versus agriculture, a discussion
that may
also be found in Hume’s essay “Of Commerce,” Hamilton exhibited a
sophisticated understanding of the theory of value-added. He claimed
categorically that manufactured products, often associated with
frivolous
luxury and national dissipation in contemporary thinking, were really
beneficial to the state.35 Hume had spent an entire essay, “Of
Refinement in
the Arts,” on a consideration of this subject. He contended, as
Hamilton
did, that a state abounding in luxury, even of the venal kind, would be
better off than one abounding in sloth and ignorance. Both argued that
a
state enjoying luxury would be more happy, free and even virtuous than
one
dependent on simple agriculture. Luxury items, said Hamilton, signal
surplus
production alienable by the state in times of emergency, a Humean idea
also
to be found in the essay “Of Commerce.”36
While fundamentally a free trader, Hume had noted in “Of the
Balance of
Trade” that “all taxes . . . upon foreign commodities, are not to be
regarded
as prejudicial or useless.”37 Hamilton seized upon this idea to argue
that
the state should provide a helping hand to infant industries. His
plans for
tariffs, bounties and subsidies were also based upon the need to combat
regular practices of competing nations, who granted export subsidies,
protection of technological expertise, bounties, premiums and other
aids
including the creation of public monopolies and private cartels.
Mankind’s
natural hesitation to take risks and enter into new pursuits could be
overcome by government encouragement, Hamilton claimed.38
Would bounties and protective tariffs for new industry have the
effect
of creating permanent domestic monopolies, which might impose prices
well in
excess of those charged in international markets? Hamilton admitted
that
monopoly, and its attendant high prices, might be a transitory effect
of
creating a protected domestic market. But he argued, as Hume had in
“Of the
Balance of Trade,” that costs of production fall as domestic industry
begins
to operate with efficiency.39 Furthermore, he tells us that the
monopoly
status enjoyed by the first few entrants into the protected domestic
market
would not last beyond the time when others joined in, the whole process
having the eventual effect of helping to create a competitive, worldclass
domestic industry in the United States.40
A competitive, world-class industrial nation remained the main goal
of
Hamilton’s economic system. As Jacob E. Cooke, editor of Hamilton’s
Reports
has noted, “The deepest purpose of his whole financial program was to
strengthen the new government.”41 The Secretary of the Treasury never
lost
sight of Hume’s contention that commerce, in promoting human happiness,
simultaneously promotes the power of the state. “Can we expect, that a
government will be well-modelled by a people, who know not how to make
a
spinning-wheel, or to employ a loom to advantage?,” wrote Hume.42
Development leads to less rebelliousness among a people, fewer
factions,
better government and even more liberty, because the middle class,
traditional defenders of human rights, is augmented by heightened
economic
activity.43
Hume's analysis of the relationship between the quantity of labor,
measured
by population, and associated levels of national income and personal
consumption was incompatible with the doomsday scenario commonly
presented by
advocates of a simple labor theory of value.
Hamilton’s wish to
stimulate
immigration, so as to alleviate the shortage of labor and encourage
manufactures in his fledgling nation was entirely consistent with
Hume’s
belief that prosperity and population growth are compatible with one
another.
"Wherever there are the most happiness and virtue, and the wisest
institutions, there will also be the most people" (On the Populousness
of
Ancient Nations, page 112 of Rotwein). Elsewhere, Hume argues that
since
population growth is associated with rising income it should be
encouraged.
As farm productivity expands, and a demand for consumption goods
appears, an
urban civilization appears, and national power, and population size,
advance
together (On the Populousness of Ancient Nations, pages 108-112, esp.
page
111 of Rotwein).
Hume’s analysis of the connection between the employment status of
labor and
the level of income helps Hamilton to argue for the benefits of a
stimulus to
manufacturing, despite the possible costs in terms of income
inequality. In
the agricultural state, income is divided more or less equally; "Not to
mention the great equality of fortunes among the inhabitants of the
ancient
republics, where every field, belonging to a different proprietor, was
able
to maintain a family, and rendered the numbers of citizens very
considerable,
even without trade and manufactures." (Of Commerce, page 9, Rotwein
edition).
But in such a land, without manufacturers, income however equal, is
low. The
soporific state is not a productive one: "Everything in the world is
purchased by labour; and our passions are the only causes of labour.
When a
nation abounds in manufactures and mechanic arts, the proprietors of
land, as
well as the farmers, study agriculture as a science, and redouble their
industry and attention. The superfluity which arises from their
labour, is
not lost; but is exchanged with manufacturers for those commodities,
which
men's luxury now makes them covet. By this means, land furnishes a
great
deal more of the necessaries of life, than what suffices for those who
cultivate it." (Of Commerce, Rotwein edition, page 12). Once again,
we see
how Hume makes a connection between productivity and labor which is
dynamic
and developmental, rather than static and arithmetical, as it becomes
for
Smith, Malthus and others. Hume has a manner of analysis that helps
Hamilton
form a long run development scheme for America, linking immigration,
urbanization, industrialization and growth.
Hume’s essays in his Political Discourses are not the only source
for
Hamilton’s economic system, but we contend that they are the major
source.
To understand the progression of Hume’s ideas to Hamilton, wrote
Clinton
Rossitor in 1964, “One has only to lay his speculative musings as
Publius
side by side with Hume’s essays of a political nature.”44 Even more
revealing as an exercise, because the Treasury Secretary was now in a
position to put ideas into practice, is to lay Hamilton’s Reports to
Congress
side by side with David Hume’s essays on economics. Moreover, the
basic
features of Hamilton’s program, resurrected and restyled “Henry Clay’s
American System,” were to provide an enduring alternative vision for
the
United States in the nineteenth century.
Notes
1Within the past few years a considerable body of literature
discounting
Locke’s influence on the entire eighteenth century has been building
up. See
J. G. A. Pocock, The Machiavellian Moment: Florentine Political
Thought and
the Atlantic Republican Tradition (Princeton, N. J., 1975), p. 424, and
his
“Virtue and Commerce in the Eighteenth Century,” Journal of
Interdisciplinary
History, 3 (1972), pp. 130-131, 134. See also Lance Banning, The
Jeffersonian Persuasion: Evolution of a Party Ideology (Ithaca, N. Y.,
1978); his “Jeffersonian Ideology Revisited; Liberal and Classical
Ideas in
the New American Republic,” William and Mary Quarterly, 3d ser., XLIII
(1986), 3-19; and Joyce Appleby, “Republicanism in Old and New
Contexts,”
Ibid., 20-34. A dissenting voice is heard in both Appleby and Isaac
Kramnick, “Republican Revisionism Revisited,” American Historical
Review
LXXXVII (1982), 629-664.
2Gerald Stourzh, Alexander Hamilton and the Idea of Republican
Government
(Stanford, Calif., 1970), p. 216, fn. 43.
3Harold C. Syrett and Jacob E. Cooke, eds., The Papers of Alexander
Hamilton
(New York, 1961-1979), I, 95; II, 595-596; Henry Cabot Lodge, ed.,
Hamilton’s
Works (New York, 1904), I, 409 and “The Defence of the Funding System,”
VIII,
459.
4Clinton Rossitor, Alexander Hamilton and the Constitution (New York,
1964),
p. 120.
5Ibid., p. 182; Forrest McDonald, Alexander Hamilton (New York, 1979),
p. 35.
6Thomas Jefferson to John Cartwright, June 5, 1824, in Saul K. Padover,
ed.,
A Jefferson Profile as Revealed in his Letters (New York, 1956), p.
335.
7Ibid., p. 355.
8Ibid.
9Jefferson to William Duane, August 12, 1810, in Thomas Jefferson,
Writings,
Merrill D. Peterson, ed., (New York, 1984), pp. 1228-1229.
10Hamilton quoted Hume in a speech to the Constitutional Convention,
June
22, 1787 (Robert Yates Version), Syrett and Cooke, eds., Papers of
Alexander
Hamilton, IV, 216-217.
11See Jefferson’s remarks in “The Anas,” Adrienne Koch and William
Peden,
eds., The Life and Selected Writings of Thomas Jefferson (New York,
1972), p.
126.
12David Hume, “Of Commerce,” Writings on Economics, Eugene Rotwein,
ed.,
(Madison, Wisc., 1955), pp. 3-18. The rest of the essays mentioned are
also
in Ibid., pp. 19-183.
13“Of Commerce,” Ibid., pp. 5, 12; “Of Refinement in the Arts,” Ibid.,
pp.
23-24.
14Max Farrand, ed., The Records of the Federal Convention of 1787 (New
Haven, 1966), I, 310.
15Alexander Hamilton, The Reports of Alexander Hamilton, Jacob E.
Cooke,
ed., (New York, 1964), p. vi.
16Hamilton, “Report Relative to a Provision for the Support of Public
Credit, January 9, 1790,” Ibid., pp. 2, 5-6.
17Hume, “Of Public Credit,” Rotwein, ed., pp. 93-96.
18Hamilton, “Report,” p. 33.
19Ibid., p. 41.
20Ibid., pp. 32-40.
21Ibid., p. 23.
22Hume, “Of Interest,” Rotwein, ed., p. 49.
23Hamilton, pp. 2-3.
24Ibid., p. 22.
25Hamilton, “Second Report on the Further Provision Necessary for
Establishing Public Credit, December 13, 1790,” The Reports of
Alexander
Hamilton, Jacob E. Cooke, ed., p. 58.
26Hume, “Of Money,” Rotwein, ed., p. 39.
27Hamilton, “Second Report,” p. 58.
28Hume had his doubts about banks and paper credit, but to achieve the
benefits of development and control the quantity of paper credit, he
recommended that “If the public provide not a bank, private bankers
will take
advantage of this circumstance . . . and therefore it is better. See
“Of
Money,” Rotwein, ed., p. 35.
29Hamilton, “Second Report,” pp. 48-52, 58.
30Jacob E. Cooke, ed., Alexander Hamilton:
p.
78.
A Profile (New York, 1967),
31In 1790 and 1791 the Secretary had sent out a questionnaire on the
curre
nt state of American manufactures. Hamilton, “Report on the Subject
of
Manufactures, December 5, 1791,” The Reports of Alexander Hamilton,
Jacob E.
Cooke, ed., p. 155.
32Ibid., p. 204.
33Ibid.., pp. 150, 157, 179-180.
34Ibid., p. 121.
35Ibid., pp. 115-116.
36Ibid.; Hume, “Of Commerce,” Rotwein, ed., pp. 11-12.
37Hume, “Of the Balance of Trade,” Rotwein, ed., p. 76.
38Hamilton, “Report on Manufactures,” pp. 141-143.
39Ibid., p. 158.
40Ibid., pp. 158-162.
41Hamilton, Reports, Cooke, ed., p. xiii.
42Hume, “Of Refinement in the Arts,” Rotwein, ed., p. 24.
43Ibid., pp. 25, 28-29.
44Rossitor, p. 120.