Funding Infrastructure the American System Way

Part one of a series. Parts two and three are now available on this site.

By Nancy Spannaus

March 5, 2021—If there’s one issue the “left, right, and center” of American politics agree on, it’s that our country desperately needs to repair and upgrade its infrastructure, from transportation to water, broadband, and energy. Electricity failures like Texas and bridge closures like that of the Brent Spence span linking Cincinnati to Kentucky are only the most dramatic recent examples of the crisis. For decades, the rate of infrastructure decay has outstripped our investment, and the most modern technologies (such as high-speed rail and nuclear power) have been left on shelf. New disasters are just around the corner.

We can prevent them by funding a multi-trillion-dollar infrastructure program the American System way.

Funding Infrastructure the American System Way

The crumbling Hudson River tunnel is a disaster waiting to happen, without major infrastructure investment.

Today, as the Biden administration moves toward putting forward a new major infrastructure plan, we have a new opportunity to tackle the problem. There will be many disagreements over exactly which projects to pursue, and that is a crucial debate. But we also face the problem on which many of a worthy project has foundered: How shall an infrastructure program vast enough to aid the whole country be funded?

The debate on how to fund national infrastructure dates back to the very establishment of our Constitution, and was answered, in principle, by American System founder Alexander Hamilton. When his ideas were followed over the subsequent centuries, infrastructure spending transformed the nation’s productivity and general welfare.

But the often-suppressed reality is that the creation of the United States’ major advances in infrastructure was dependent upon funding, one way or another, by the Federal government.  And it’s time we adopted that system once again.

Funding Infrastructure the American System Way

The Chesapeake and Delaware Canal received investment by the Bank of the United States in 1825.

This post will identify Hamilton’s outlook and provide an overview of various means used by the Federal government to fund infrastructure (also known at the time as internal improvements). Subsequent articles will deal with the specific measures taken, especially under the administrations of John Quincy Adams, Abraham Lincoln, and Franklin Delano Roosevelt.

Hamilton’s Outlook

There are two documents in which Hamilton addresses the criteria for Federal spending on infrastructure.  The first comes in his tour de force defending the Constitutionality of the National Bank, a document,  which delves deep into the nature of national sovereignty and its prerogatives. Hamilton writes:

There is an observation of the Secretary of State [Thomas Jefferson in his argument against the bank-nbs] to this effect which may require notice in this place: Congress, says he, are not to lay taxes ad libitum, for any purpose they please, but only to pay the debts or provide for the welfare of the Union. Certainly no inference can be drawn from this against the power of applying their money for the institution of a bank. It is true that they cannot without breach of trust lay taxes for any other purpose than the general welfare; but so neither can any other government. The welfare of the community is the only legitimate end for which money can be raised on the community. Congress can be considered as under only one restriction which does not apply to other governments, they cannot rightfully apply the money they raise to any purpose merely or purely local.

But, with this exception, they have as large a discretion in relation to the application of money as any legislature whatever. The constitutional test of a right application must always be, whether it be for a purpose of general or local nature. If the former, there can be no want of constitutional power. The quality of the object as how far it will really promote or not the welfare of the Union must be matter of conscientious discretion, and the arguments for or against a measure in this light must be arguments concerning expediency or inexpediency, not constitutional right. Whatever relates to the general order of the finances, to the general interests of trade, etc., being general objects, are constitutional ones for the Application of money.”

Alexander Hamilton at the Treasury

Later that year (1791), Hamilton addresses the issue of funding transportation infrastructure directly in the Report on Manufactures. I quote:

“XI   The facilitating of the transportation of commodities.

Improvements favoring this object intimately concern all the domestic interests of a community; but they may without impropriety be mentioned as having an important relation to manufactures. There is perhaps scarcely any thing, which has been better calculated to assist the manufactures of Great Britain, than the ameliorations of the public roads of that Kingdom, and the great progress which has been of late made in opening canals. Of the former, the United States stand much in need; and for the latter they present uncommon facilities.

The symptoms of attention to the improvement of inland Navigation, which have lately appeared in some quarters, must fill with pleasure every breast warmed with a true Zeal for the prosperity of the Country. These examples, it is to be hoped, will stimulate the exertions of the Government and the Citizens of every state. There can certainly be no object, more worthy of the cares of the local administrations; and it were to be wished, that there was no doubt of the power of the national Government to lend its direct aid, on a comprehensive plan. This is one of those improvements, which could be prosecuted with more efficacy by the whole, than by any part or parts of the Union. There are cases in which the general interest will be in danger to be sacrificed to the collision of some supposed local interests. Jealousies, in matters of this kind, are as apt to exist, as they are apt to be erroneous.” (emphasis added)

So, there you have it.  As long as the spending is for the general interest, or welfare (not just a local concern), infrastructure is a proper purview for Federal government spending.

Rural electrification was funded by the Federal government, but its long-term loans were paid back through electricity fees.

An Overview of Methods

There were many methods used by Federal administrations to address the need to develop infrastructure that would improve the welfare and productivity of the nation.  They included:

  1. Direct Federal spending. This method was used in Hamilton’s time through the construction of lighthouses, for example, and under Jefferson, to begin planning for the National Road.
  2. Providing funds to states from Federal land sales.
  3. Federal loans. Low-interest, long-term loans from the Federal government through various subsidiary agencies (including banks and the Reconstruction Finance Corporation) were used to support infrastructure development. Major examples can be found under the Franklin Roosevelt administration.
  4. Federal land grants. This was a major source of support given to the states or railroad corporations for development of infrastructure. This method took off especially after 1823. According to economist William Letwin, between 1823 and 1871, about one-eighth of the area of the modern United States went into such subsidies.
  5. Federal investment. During the administration of John Quincy Adams, Congress began to authorize the Bank of the United States to purchase stock in local infrastructure projects, starting with the Delaware and Chesapeake Canal in 1825, to aid in their fulfillment.
  6. Deployment of the Army Corps of Engineers. With the passage of the Survey Act of 1824, the U.S. Presidency gained the authority to deploy Army Corps engineers to survey routes for railroads and canals throughout the country.

As this listing should make clear, the construction of the United States’ major infrastructural improvements, starting with transportation, but ranging through power generation and education, etc., was never the product of “private enterprise” alone.  All its major projects depended upon support from the Federal government, acting implicitly, if not explicitly, on the basis of our Constitutional commitment to the general welfare of our people. This was the American System in action.

The question is, why don’t we begin to put that commitment to work today? (to be continued)

Nancy Spannaus is the author of Hamilton Versus Wall Street: The Core Principles of the American System of Economics, available here .