Alexander Hamilton: The Unlikely Culprit Behind the Financial Crisis?

Future generations will look back upon the financial crisis of ‘08 as the most sensational “whodunit” of the young century. Was the Bush administration behind it all? Or was it the Democrats and their beloved Community Reinvestment Act? Were greedy Wall Street bankers and financial speculators to blame? Or was it Alan Greenspan and the Federal Reserve?

Austrian economist Dr. Thomas J. DiLorenzo has assigned blame to all of the above in his prolific writings, but in his new book, Hamilton’s Curse: How Jefferson’s Arch Enemy Betrayed the American Revolution–and What It Means for Americans Today , Professor DiLorenzo says that, ultimately, it’s Alexander Hamilton we have to thank for this mess.

Hamilton, the nation’s first secretary of the Treasury, is revered by many Wall Street-oriented “conservatives” as the founder of American capitalism. DiLorenzo says that Hamilton can indeed be credited with the economic system we have today — but it ain’t capitalism. In fact, Hamilton was an ardent believer in mercantilism — the economic system that Adam Smith railed against his book The Wealth of Nations , considered by many to be the “bible” of capitalism.

Key to Hamilton’s mercantilist agenda was a national bank (the precursor of today’s Federal Reserve) and an enduring national debt — the latter of which Hamilton actually considered a “blessing.” After all, with a high debt and wealthy patrons as bond-holders, the interests of the financial elite would be intertwined with those of the young government. Thus the rich and powerful would support higher taxes (levied against the poor, of course) and bigger government. Hamilton also favored protectionism, corporate welfare, and the abolition of “states’ rights”: hardly the hallmarks of free-market capitalism!

After early success in the Washington and Adams administrations, Hamilton and mercantilism were dealt a nearly fatal blow with the election of Hamilton’s arch-rival Thomas Jefferson to the presidency in 1800. In fact, it was Jefferson’s vice president Aaron Burr who ended Hamilton’s career in politics — along with his life — just four years later, in an infamous duel.

But even as Jefferson’s political descendants had almost-uninterrupted control of the national government for sixty years, Hamilton’s ideas lived on. After Hamilton’s Federalist Party went the way of the dinosaurs, the new Whig Party became the standard-bearers of mercantilism. When they followed the Federalists into the ash-bin of history, it was the Republican Party — led by old Whig Abe Lincoln — that emerged as the champions of central banking, protectionism, corporate welfare, and government centralism.

After the Civil War, the Republican Party had a monopoly on national politics for five decades — save for the two glorious and nonconsecutive Grover Cleveland administrations. Cleveland was the last Jeffersonian president; an icon of classical liberalism (much like what we now call libertarianism). His wing of the Democratic Party, the Gold Democrats or Bourbon Democrats, were challenged by the Jacksonian populists, led by William Jennings Bryan. This infighting let another faction — the Wall Street-backed Hamiltonian “Progressives” — emerge with the party’s 1912 presidential nomination. Since then, Hamiltonianism has ruled over both the Republican and Democratic parties.

A year after Woodrow Wilson’s election, the Federal Reserve System was born and proceeded to inflate the money supply and set up for the inevitable Crash of ‘29. It is precisely this scenario that played out once again in the aftermath of 9/11, as President Bush and Alan Greenspan conspired to create the housing bubble in order to “stimulate the economy.” The Democrats, now also a Hamiltonian party, only made matters worse by aggrandizing Fannie Mae and Freddie Mac. It may be a stretch to blame the long-dead Hamilton for our current crisis. But his ideas, and their widespread acceptance on both the left and the right, are clearly to blame.

8 comments to Alexander Hamilton: The Unlikely Culprit Behind the Financial Crisis?

  • Future generations will look back upon the financial crisis of ‘08 as the most sensational “whodunit” of the young century. Was the Bush administration behind it all? Or was it the Democrats and their beloved Community Reinvestment Act? Were greedy Wall Street bankers and financial speculators to blame? Or was it Alan Greenspan and the Federal Reserve?

    The answer is very clear……greedy wall street bankers who cheated the American public while filling up their pockets.

  • J.D. Seagraves

    Could you please explain your theory, because it makes no sense to me.

    Greedy bankers didn’t take any of my money — until the government stole it from me under TARP.

  • MannyfromNYC

    Agreed, J.D.

    The actual amount taken in by these “greedy” bankers is but a drop in the bucket, but I’m certainly not defending their actions.

    What about Franklin Raines at Fannie Mae? The man took in $90 million for himself and had the full support of key Democrat lawmakers even as the institution overstated its profits to the tune of $9 billion over a four year period (2001-05)!

    Personally, I’m not comfortable with discussions on economic issues where there is a regular use of normative statements and emotionally-loaded words.
    I remember how my professor in both macro and microeconomics used to constantly remind my fellow classmates to always discuss their position or views in economic terms and not to resort to mere rants and fingerpointing.

  • Raymond

    Manny you believe in posting a civil and intelligent comment.
    Here is a figure from the Bureau Of Labor and Statistics
    that I think is devoid of emotion:

    $1.00 in 1913 = $22.12 in 2008

    Have an econ professor glance at the figures while you read the mission statement
    of the Federal Reserve on their website. See if you hear anything resembling economics as an explanation.

  • J.D. Seagraves

    To clarify, it requires $22.12 today to buy what $1 bought in 1913. Something that cost $1 in 2008 would have cost $0.05 in 1913.

  • Well, Raymond… I agree with J.D. Basically, what you’ve pointed out is that in a span of 95 years, inflation has decreased the value of the dollar to the effect that it’s less than 1/20th of its purchasing power in 1913. Now, we know that a major responsibility of the Fed is to try to control inflation-so I guess by your example, you’re saying that it hasn’t exactly been successful at doing so-but then again, there are other factors involved that are beyond its control.
    Personally, I’m not exactly a fan of the Federal Reserve. First of all, it is a government entity and obviously, it is subject to political forces and objectives. One could perceive this as being beneficial or not-based on one’s perspective. Personally, I would like to take a harder look at the Fed and try to redefine and or limit its role in shaping the economy. In fact, I’m leaning towards J.D.’s position that we’d be better off without it, altogether. I think the idea of manipulating the money supply in order to generate desired political and economic goals is fraught with potential problems-and I believe it also discourages real, social and market-based reform.
    As for what an economics professor would say about your suggestion, I am almost certain to get this response:

    The Fed has vast powers but it is also limited in its ability to control inflationary forces. It couldn’t control the raging stagflation during the Carter era, for example.
    It also has to take into consideration other economic and political factors. Price inflation is generated by changes in aggregate supply and demand-in which demand (real or perceived) exceeds supply. But the Fed-being a government controlled bureaucracy, can be slow in responding to market forces or it has to implement monetary policy in conjunction with some governmental initiative-which may or may not be workable under market conditions.

    Politics and economics often operate on different levels. What makes sense-politically, may run counter to economic principles-and vice versa.

  • Dirk

    I am disgusted by the lack of understanding here.

    Inflation is necessary to create a half-life to money. Without inflation, there is no incentive to spend now, invest now, give now- only to hoard.

    The problem is that our world is using more dollars- more people, more USD transactions, more services, more production- but the Fed has constrained growth because of the “scarcity paradigm” crowd who thinks we’ll run out of energy, land, water, breathable air, etc. And if we don’t have enough money, we get deflation and hoarding, not production.

    The solution is very simple, and the Fed has FINALLY started to pursue it- quantitative easing. They should have done it sooner, but the EU central banks were worrying about inflation.

    Why, in a world of pandemic excess labor and technology obviating commodities (think wireless for copper, high-rises for land, and solar for oil) they would do that is beyond me, other than the crowd who wants to hoard their money and kill the “eaters” who threaten to take their precious natural resources…

  • J.D. Seagraves

    I am disgusted by the lack of understanding here.

    Same here.

    Inflation is necessary to create a half-life to money. Without inflation, there is no incentive to spend now, invest now, give now- only to hoard.

    B.S. We experienced the greatest period of prosperity in human history under the gold coin standard. You are advocating monetary fascism — central planning to “encourage” spending. This is why we have a negative savings rate, a massive trade deficit, and debts (personal and collective) that can NEVER be paid off.

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