Nation-building Done Right: The Long History of American Developmentalism

Nation-building Done Right: The Long History of American Developmentalism

If America is to find its way through its current troubles, we must look to our past and draw inspiration from the efforts of our forebears. It contains many salutary lessons which Congress and the Biden administration would do well to draw upon.

Then there was Alexander Hamilton, America’s first Secretary of the Treasury. Having grappled with the logistical nightmare of keeping the Continental Army fed, armed, and supplied during the Revolutionary War, Hamilton was well aware of the thirteen colonies’ relative economic weakness and their dependence on foreign imports (including weapons), along with the importance of national creditworthiness. He formulated an elaborate strategy to address these shortcomings. In early 1790, he submitted his First Report on the Public Credit, which argued that the country should organize its national debt and establish creditworthiness by paying domestic securities at face value and consolidating the debt of states under the newly created Treasury Department. The former helped win the “moneyed men” of the country over to the cause of the new government, securing a source of credit for the future while the latter provided the new federal government with essential power. This was followed by the 1791 Report on Manufactures—a highly-detailed assessment for how the U.S. federal government could support the development of American industry, enable the young fledgling nation to resist threats from European powers, and provide for the necessities of a growing population. This included a litany of proposals: setting high tariffs on imported goods that competed with domestically produced goods, low tariff rates for raw materials needed for domestic manufacturing, “pecuniary bounties” (subsidies) for infant manufacturing, the active introduction of new inventions, a national bank, and more. Though not all of the ideas were adopted, Parenti writes that Hamilton’s scheme,

…achieve[d] its stated aim of improving economic conditions for the vast majority by lowering the overall tax burden and increasing economic growth. The new federally anchored credit system broke the vicious deflationary cycle … The money supply expanded. Interest rates declined. The costs of debt servicing declined. All of this revived investment and economic growth. As a result, the overall tax burden on common people declined significantly.

In short, the Crisis of the Confederation was defused through the creation of a central government that could balance competing economic and political interests and redistribute resources so as to engender the growth and development of infrastructure and manufacturing. A key part of this effort was convincing the nation’s investor and financier class that their long-term interest lay in accepting a reduction in short-term gains in exchange for America being granted the opportunity to survive, grow, and thrive.

THE NEXT great climacteric in American political-economy arrived with the Civil War. There was a strong socio-economic dimension to the conflict. Consider the analysis of Henry Carey, a nineteenth-century economist and President Abraham Lincoln’s economic advisor, who delved into this topic in his 1853 work, The Slave Trade, Domestic and Foreign: Why It Exists & How It May Be Extinguished. Carey found that due to economic development between 1824 and 1833, “mills and furnaces increased in number, and there was a steady increase in the tendency toward the establishment of local places of exchange; and then it was that Virginia held her convention at which was last discussed in that State the question of emancipation.” The boon in productive efficiency enabled by industrialization was rendering slavery—a financially expensive institution—obsolete. The sheer expense forced political elites in individual states to consider whether or not it was time to turn to emancipation.

The situation changed, however, with the administration of President Andrew Jackson. For starters, he pulled federal funds from the Second Bank of the United States (the successor to Hamilton’s national bank), eventually leading to its collapse. While Jackson was certainly right in noting that the bank had been captured by merchants and speculators, was biased towards coastal and urban states, and did not fund expansion opportunities for Western territories, the institution nonetheless served an important role by stabilizing the American economy via its many services, including regulating the lending practices of state banks. Its demise, rather than an effort at reform, led to economic instability (starting with the Panic of 1837), wildcat banking, a weakened currency and credit system, and greater financial speculation. One particularly harmful consequence of this was that investment that would have otherwise fueled Southern industrialization ground to a halt.

Then came the administration’s abandonment of protectionist policies, which Carey notes in detail:

In 1833, however, protection was abandoned, and a tariff was established by which it was provided that we should, in a few years, have a system of merely revenue duties; and from that date the abandonment of the older States proceeded with a rapidity never before known, and with it grew the domestic slave trade and the pro-slavery feeling. Then it was that were passed the laws restricting emancipation and prohibiting education; and then it was that the export of slaves from Virginia and the Carolinas was so great … resulted in a reduction of the price of Southern products to a point never before known; and thus it was that the system called free trade provided cheap cotton. Slavery grew at the South, and at the North; for with cheap cotton and cheap food came so great a decline in the demand for labour, that thousands of men found themselves unable to purchase this cheap food to a sufficient extent to feed their wives and their children.

Overall, policy changes such as these resulted in southern industry opting to specialize in the production of raw goods (particularly cotton) via cheap labor, which could only come from slavery. Financial firms of the time had an interest in maintaining this arrangement, as it proved quite profitable. However, the South’s lack of economic development could only result in economic vassalization, most likely by northern U.S. states. In his inaugural address Confederate president Jefferson Davis declared,

An agricultural people, whose chief interest is the export of a commodity required in every manufacturing country … There can be but little rivalry between ours and any manufacturing or navigating community, such as the Northeastern States of the American Union. It must follow, therefore, that a mutual interest would invite good will and kind offices. If, however, passion or the lust of dominion should cloud the judgment or inflame the ambition of those States, we must prepare to meet the emergency and to maintain, by the final arbitrament of the sword, the position which we have assumed among the nations of the earth.

Carey was even more explicit in an Aug 26, 1867 letter to Congressman Henry Wilson following the end of the war, stating that “…free trade gave us sectionalism, and promoted the growth of slavery, and thus led to rebellion.”

The urgency in unifying the country once more by addressing inequalities and passing radical reform measures was noted by Abraham Lincoln and his Republican allies in Congress. They went far beyond merely raising tariffs (though Lincoln did so twice in three years), with the result being that, according to American Compass research director Wells King, “the American home market was the most protected in the world” until World War II.

In his first annual message to Congress, for example, Lincoln noted that,

Agriculture, confessedly the largest interest of the nation, has not a department nor a bureau, but a clerkship only… annual reports exhibiting the condition of our agriculture, commerce, and manufactures would present a fund of information of great practical value to the country. While I make no suggestion as to details, I venture the opinion that an agricultural and statistical bureau might profitably be organized.

A few months later, on May 15, 1862, Lincoln formally established the U.S. Department of Agriculture, calling it the “people’s department.”

A wave of groundbreaking and nation-changing legislating and creations soon followed. Five days later, on May 20, Lincoln signed the Homestead Act into law, granting up to 160 acres of federally-owned land to any citizen(s) willing to live and farm/develop said land for five years (to measure the impact of this, consider that “a quarter of all U.S. adults alive in 2000 were descendants of Homestead recipients”). On July 1, he signed the Pacific Railway Act, which helped finance the transcontinental railroad and the spread of telegraph lines, further opening up the American West to expansion, settling, and development. The next day, on July 2, Lincoln signed the first of the Morrill Land-Grant Acts, distributing federal land to states and other localities for the purpose of creating colleges dedicated to the teaching “branches of learning as are related to agriculture and the mechanical arts… in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions of life.” The effort would eventually lead to the creation of the state university system, Cornell University, the Massachusetts Institute of Technology, and other institutions, transforming American education and turning the country into a leader in technical training and learning.

Then there were the changes in finance and banking. Like Hamilton, the early Republicans grasped the importance of centralizing control over the nation’s finances and directing credit towards productive ventures. Lincoln was keenly aware of the danger of unregulated financial interests pursuing profit through speculation, as was unleashed following the collapse of the Second Bank of the United States. Lincoln stated, “Labor is the superior of capital, and deserve much higher consideration,” and that “Nothing is better calculated to engender heartburnings and to enlist the enemies of the most hostile character against a bank than for the community to entertain the belief that the institution is used for the benefit of the few to the exclusion of the many.”