How the Founders Overcame Economic Collapse
By Nancy Spannaus
April 22, 2020—An op-ed by two economists in the April 12 edition of the Dallas Morning News put forward a message of hope for navigating the current virus-sparked crisis in the United States. “The founders faced economic collapse after the American Revolution. We can learn from their response,” read the headline of the article by Robert F. Bruner and Scott D. Miller. “Coronavirus could also foster tremendous transformation of this country,” declared the subhead.
As an advocate of a return to the Hamiltonian principles of the American System, I find this column well worth promoting.
What the Founders Faced
Bruner, an economics professor at the University of Virginia, and Miller, a research fellow at the Yale School of Management, usefully focus their essay on the role of Alexander Hamilton in addressing the devastating situation the colonies faced during and after the Revolutionary War. While not going into detail about Hamilton’s measures or economic philosophy, they describe in general terms the way the Washington Administration pulled the country together, reorganized its debts, established a credit system, and advanced proposals for investment in infrastructure.
Bruner and Miller’s description of the crisis conditions the victorious colonies faced may come as a surprise to many of his readers, especially among libertarians and others who today chafe at the idea that we needed (and need) an energetic national government dedicated to the General Welfare. They describe it thus:
Like the current crisis, the Revolution wrought devastation across the entire nation. From Massachusetts to Georgia (the extent of the country at the time), warfare and disease resulted in tremendous damage to physical, financial, and human capital. Over 1% of Americans died in the conflict — the equivalent to 3.5 million Americans today — and at least five times that number suffered injury or debilitation that precluded them from working thereafter. …
Americans’ economic problems only grew after the Revolution ended. The war left American productive capacity in ruins, and wartime inflows of cash from the French and Dutch ceased. Short of money and with diminished incomes, American consumers pulled back on spending, prompting waves of bankruptcies. Armed insurrections like the Shays’ and Greenbriar Rebellions demanded debt relief and new emissions of government cash. The hapless Confederation Congress evaded responding, leaving rescue efforts to state and local authorities.
The solution crafted by the Constitutional Convention and the Washington administration created “a new covenant” among Americans, which laid the basis for building the economy, the authors argue. Indeed, the founders went beyond simply addressing the immediate crises and addressed “root causes rather than superficial symptoms.”
In other words, the founders used their solutions to transform our society for the better—as the progress of the United States, despite all its shortcomings, up through the early 1960s shows. Their actions remind us that we have been in existential crises before and come through them a better people. It’s up to us to find a way to do the same today.
Viewed from today’s perspective, the plans that Hamilton advanced might be seen as a form of bankruptcy reorganization. There is no denying the total insolvency of the economy of the U.S. confederation in the 1780s; there wasn’t even a common currency worth the name. In the face of that insolvency, Hamilton saw that the debt had to be reorganized (which largely meant put off) in order to prioritize getting the productive activity of the nation underway again. His major proposals—the Constitution itself, federal assumption of the war debts, creation of a National Bank capitalized by federal debt, federal support for crucial industries and infrastructure–were aimed at creating the conditions for doing just that.
In fact, it was only by such prioritization of promoting industrial progress that the nation’s debts could be prevented from crushing the population—and likely sending it back under British rule.
To put it succinctly: Hamilton insisted that the purpose of his economic system, and the Constitution itself, was to promote the General Welfare of the population, not create a neatly balanced financial ledger. In principle, that was the purpose of Chapter 11 bankruptcy laws in our country, although the principle has much too frequently been breached.
Opposition, including among the Founders themselves, limited the implementation of Hamilton’s program, but the nation moved in the right direction. And when nation-threatening crises erupted again, as in the Civil War and the Great Depression, Presidents Abraham Lincoln and Franklin Delano Roosevelt adopted Hamiltonian policies to not only cure the immediate disasters, but put the nation onto a new level of productivity and progress.
As Bruner and Miller imply, we need to do it again. We have, in fact, deviated sharply from Hamiltonian principles in a way that had brought the country to the brink of bankruptcy, even before the outbreak of the virus. Speculation has been allowed to run rampant; basic public infrastructure has been left to deteriorate to the point of collapse; manufacturing has been gutted so that we can no longer provide for the health, sustenance, and security of our population. This situation has to be reversed, starting with controls on Wall Street through restoring Glass-Steagall, and including establishing a government-backed credit institution that will finance the vital infrastructure on which our future depends.
My book, Hamilton Versus Wall Street, was written with the intent of not only educating people about Hamilton’s American System, but also of spurring them to revive those principles today. I see Bruner and Miller’s op-ed as an argument for moving in the same direction. As the current crisis—in both health and economy–worsens, the urgency of implementing Hamiltonian principles looms large indeed.