Sunday, February 27, 2011

Do We Really Need to Return to Hamilton?

Do We Really Need to Return to Hamilton?
Thomas Allen

[Editor's note: Footnotes in the original are omitted.]

Two contrasting articles appear in the December 2010 issue of Chronicles. They are “Back to Hamilton” by William J. Quirk and “Prosperity” by Clyde Wilson. Quirk’s article reviews Paul Craig Roberts’ book How the Economy Was Lost: The War of the Worlds. Quirk focuses on Roberts’ promotion of protective tariffs as the means to revitalize America’s economy and increase the standard of living standard of middle class Americans. Quirk seems to agree with Roberts.

Quirk does observe that when the dollar was connected with gold, prices remained fairly stable over time. However, under the true-gold standard, general prices should decline over time because productivity rises faster than the money supply. Quirk also notes that gold disciplines politicians and checks governmental expenditures much more effectively than the supposedly independent Federal Reserve. (Where Roberts stands on the gold standard, I do not know. Based on some comments that he has made in his columns and in radio interviews, he does not appear to be a adherent of the gold standard.)

Roberts blames “globalization” for America’s economic problem. He is probably right. However, globalization has nothing to do with free trade. Trade as administered through the World Trade Organization (WTO) and other trade agreements is managed trade. An international bureaucracy answerable to no government manages world trade, which extends to local trade, for the benefit of the international corporations.

That people call these agreements free trade is a travesty. They prevent free trade instead of allowing it. The Thought Police are living and operating. To call WTO, NAFTA, and the like free trade agreements is like calling war, peace; freedom, slavery; and ignorance, strength.

Based on his paraphrase of Pat Buchanan’s statement, Roberts is aware that these agreements are not trade agreements — much less free trade agreements. Their objective is to stripe the American worker of his wealth and transfer it to the elite, who control the international corporations.

Quirk shows that the median income rose from 1947 to 1973 and declined from 1998 to 2008. Actually, median income has been declining since 1973. This decline has much more to do with severing gold’s last hold on the dollar in 1971 than with trade agreements.

The common myth that big industry and especially big banks (because they supposedly control the world’s gold) love the gold standard is false. They abhor it because it inhibits their unbridled greed. They love fiat money, especially paper fiat money and its electronic equivalent.

Bankers can create fiat paper money and its electronic equivalent out of nothing. They cannot create gold out of nothing. That is why the gold standard was abandoned.

Big business likes fiat money because they are first in line to get it. Thus, they are first to spend the new money, so they use it before it loses its value. Then they use it to repay their loans after it has lost its value and with that cheat their creditors.

Roberts does not object to managed trade. He objects to who is managing it and how they are managing it. Roberts does not want to replace the current system of managed trade with free trade. He wants to replace it with another system of managed trade.

Quirk (or Roberts, the article is not clear about whom) points to Hamilton’s arguments. Hamilton offered two arguments, which are still used, to promote protective tariffs. (1) They are necessary to build and maintain the industrial base for war. Hence, adherents of protective tariffs fear that the military-industrial complex will not develop and mature unless protective tariffs are imposed. (2) Capital used in industry produces more wealth than that used in agriculture. Today’s proponents also claim that it produces more wealth than that used in services.

If the proponents of protective tariffs want to impose tariffs to protect the military-industrial complex, they should prohibit the importation of strategic metals and rare earths. These materials are essential to modern warfare. Therefore, the country should not depend on foreign sources. The prohibition of their importation, which is the ultimate objective of a protective tariff, would force the extraction of these metals from the oceans and land sources where their concentrations may be as high as micrograms per megatons. Consumer goods that used these materials would no longer exist because no one could afford them. Inferior products would replace items that used these materials. The computer age in America except for the U.S. government, which can manufacture and steal all the money that it needs, and multinationals, which can move their computer work to other countries, may die. No sacrifice is too great for the benefit of the military-industrial complex.

If the purpose of tariffs is to build and maintain a war machine, wouldn’t it be better to subsidize these industries directly from the Defense Department’s budget? Unlike direct subsidies, tariffs do not guarantee that these industries will be built or maintained. Furthermore, direct subsidies reveal the real cost of building and maintaining these industries. Knowing the real cost, the people can then decide if these industries are worth the cost. (A major reason for using trade restrictions like protective tariffs instead of direct subsidies is to conceal the real cost.)

Hamilton was an agent of the bankers and major industrialists. He was himself a banker and helped to found the Bank of New York. He wanted protective tariffs to transfer wealth from the common American, most of whom were farmers at that time, to his rich northern friends.

Wilson reveals the truth of this objective in his article when he writes, “When tariffs were beneficial to the Northern rich and burdensome on everyone else, the United States had tariffs; when ‘free trade’ is beneficial to the Northern rich and a burden to everyone else, we have ‘free trade.’” (Wilson argues that when discussing issues, such as free trade verse protective tariffs, one must look beneath the surface. One must find out who benefits. One will usually find that the ruling elite, and not the people, is the primary beneficiary. Consequently the power of government needs to be severely restricted to limit the ability of the ruling elite to use it for its benefit.)

According to Quirk, Hamilton intended tariffs to provide temporary protection for America’s manufacturing. How long is “temporary?” The country has had protective tariffs of some sort ever since Congress adopted Hamilton’s proposal. (Yes, the United States still have some protective tariffs and other import restrictions even today with all these so-called “free trade” agreements.)

Do Quirk, Roberts, and other promoters of protective tariffs really believe that Lincoln was right when he sent 600,000 men to their death to impose his protective tariff on the South? Protective tariffs, which enriched the North at the expense of the South, was the major reason for the Southern States seceding. If they do not believe that Lincoln was justified in his action, why? If he were, why? Lincoln was merely doing what they advocate: imposing protective tariffs.

Quirk, Roberts, and other proponents of protective tariffs are victims of Bastiat’s broken window syndrome. They see people being paid to repair the broken window and people selling the material for the repair. They wrongly conclude that breaking the window is good for the economy. They see only the work and selling that it causes. (This mentality misleads people to believe that the massive destruction of capital and labor in war is good for the economy.)

What they fail to see is what Bastiat and any good economist see. A good economist sees the lost of revenue to the people who would have received the window’s owner’s money if he had not had to pay for the broken window. For example, if the owner had wanted a new pair of shoes, a shoe store and manufacturer have suffered a loss. The country as a whole has lost. If the window had not been broken, the owner and the country would have had both a window and a new pair of shoes. After the window is broken, the owner and the country have only a new window. A new pair of shoes has been lost.

Protective tariffs work the same way. They divert money from where the consumer prefers to spend it to pay the tariff or a higher price. Thus, consumers buy less. The economy and country have less wealth.

Hamiltonians like Roberts point to protective tariffs and the economic growth, primarily industrial growth, in America’s history. They conclude that this growth resulted from the tariffs. Without the tariffs, growth would have been much lower — or at least they imply this conclusion. Protective tariff promoters treat “sequences as consequences.”

Wilson notes that treating sequences as consequences is a flawed way of thinking. He writes, “If B follows A, then A was the cause of B. In fact, in understanding the wealth of nations, that is a bad assumption — because there are always multiple variables, some of them unknown, unpredictable, too deep to be observed, and even spirited and unmeasurable.” Because Congress imposed a tariff and the industrial economy of the country grew does not mean that the tariff caused this growth.

Historical examples exist that suggest that the imposition of protective tariffs cause or at least contribute to depressions. Congress enacted the McKinley Tariff Act in 1890. This tariff raised rates and made circumvention more difficult. The country suffered a severe panic in 1893 and a depression that lasted until 1896 or 1897, depending on whose criteria are considered. Did the tariff cause the depression? If everything else is ignored, which the Hamiltonians seem to want to do in promoting tariffs, the answer is yes. Most likely the tariffs were a contributing factor. However, the primary cause was the fiat silver dollar primarily as the Treasury note of 1890.

If protective tariffs really do invigorate the economy as a whole, then apparently it lacks to power to overcome the negative effects of fiat money. If true, then imposing protective tariffs without first eliminating fiat money will not solve the country’s economic problems. It may even make the problems worse.

Quirk begins his article with a discussion of Ben Bernanke and the Federal Reserve. Quirk fails to mention that the Federal Reserve is a child of Hamilton. Hamilton was an advocate of centralized banking. As the United States already have centralized banking, no need exists to go back to Hamilton for that.

Although Roberts disagrees with Bernanke on many issues, the two do agree on one thing. They agree that higher prices are preferable to lower prices. Gasoline at $5 per gallon is better than gasoline at $1 per gallon. Bernanke wants to achieve higher prices through currency depreciation. Roberts wants to achieve them through protective tariffs.

Roberts complains, and rightly so, about the United States “financing its trade and budget deficits by turning over the ownership of existing U.S. assets” and by getting foreigners to buy U.S. Treasury debt with their trade surplus dollars. He claims that dependency on foreigners to finance budget and trade deficits is “beyond the reach of monetary and fiscal policies.” This is not exactly true. If the U.S. government cuts its expenditures to match, or preferably to be below, its revenue, it would not need foreigners to buy its debt. Moreover, reducing the size of the government to match its income would lessen the burden that the economy is currently forced to carry. It would diminish the distortions of the economy that the government’s expenditures cause. It would eliminate agencies whose purpose is to interfere with and thwart economic activity. Or at least it would significantly decrease their intervention. Elimination of debt is a fiscal policy that the U.S. government can undertake to halt the adverse effects described by Roberts.

Once America’s number one export, federal debt, is eliminated, the trade balance becomes self-correcting. If Say’s Law is still valid, and it is, the concern about the trade deficit and the lack of industrial productivity vanishes. If Americans do not produce anything with which to buy imports, foreigners will cease trading with them. Imports will fade away until Americans begin to produce something with which to buy imports. Trade balances automatically correct without governmental intervention. Governmental intervention only leads to more distortion and imbalance.

Based on Quirk’s review of Roberts’ book, Roberts does an excellent job of describing America’s economic problems and much of what has caused these problems. Unfortunately, he offers a false solution.

On the other hand, Wilson identifies the primary cause of America’s economic problems: too much governmental intervention. To solve America’s economic problems, this intervention needs to be drastically reduced.

Wilson begins by giving a good description of a prosperous society. A prosperous society has minimal debt, and its debt is temporary. Only few people are very rich or very poor. Nearly everyone falls around the middle. Society’s wealth distribution is a narrow bell-shaped curve: It has a small standard of deviation. Almost everyone “has an abundance of necessities and access to some small luxuries and leisure.” It has small, unobtrusive governments with the local governments being the most noticeable and important, and the national government, the least. Private patronage supports religion, charity, education, and the arts. Cultural cohesion flourishes.

America has lost most of these aspects of prosperity. Protective tariffs will not bring them back. To the contrary, they concentrate more power in Washington. They concentrate more wealth in the bank accounts of the politically powerful.

Protective tariffs may drive wages up, but this is not a given. However, increase in prices that protective tariffs cause will nullify much, if not all, of the wage increase. Americans may be worse off after the imposition of protective tariffs. Their real income may decline, and they can afford fewer luxuries and probably fewer necessities. (The gold and silver standards are what drove real wages up during the nineteenth century and not tariffs.)

Wilson asserts, and correctly so, that hard work and merit resulting in an appropriate reward has largely vanished in today’s America. Conniving, scheming, and, most important, political connections and being a member of a politically promoted group reward people today. (In turn, the rich and powerful, i.e., the ruling elite, globalists, control most of these people.) After the ruling elite, these are the people who will benefit most from protective tariffs. The ruling elite will use them to control the tariffs and direct the tariffs to protect their interest.
Wilson concludes his article with the following:
Nobody can understand or completely manage a large economy. Surely, there are not many “lessons of history” more obvious and certain than that. But economics is a matter of human thought and action. Human thought and action can be applied to such matters as trade, labor, the money supply, in ways that are better or worse. But better or worse for whom! We need to remember what prosperity is supposed to feel like. But first we must find out who “we” are.
Thus, if improving the prosperity of the people is the objective, America is obviously going in the wrong direction. Evermore government has improved the prosperity of the ruling elite. However, it has diminished it for everyone else. If the people want to regain their lost prosperity, they need to do something different. They need a massive dismantlement of government.

The first step to take toward solving America’s economic problems is to withdraw from WTO, NAFTA, and similar agreements and organizations. (Withdrawal from the United Nations and all is subordinate organizations would also be beneficial.) Next is ending subsidizing off-shoring and oversea relocating along with all other corporate welfare. Closely related to this action is elimination of the military-industrial complex by immediately ending all undeclared wars and closing all bases in foreign countries. An armed force necessary to deter attack on the United States is much smaller than that needed to maintain a world empire. The gold- and silver-coin standards need to be reintroduced to operate parallel with the current federal-reserve-note standard with the intention of ending the latter. Abolishing the Federal Reserve and centralized banking is one of the most important elements toward long-term recover. Eliminating the overly burdensome regulatory environment in which businesses are forced to operate is another necessary component. (This highly regulated environment exists primarily for the benefit of big business as it greatly reduces their competition.) Regulatory agencies that have no constitutional foundation, such as the Environmental Protection Agency (the States are perfectly capable of taking care of their environmental problems), should be immediately eliminated. Most important is a return to constitutional government, which would reduce the size of the U.S. government by 90 percent.

Roberts’ and Quirk’s solution differs significantly from the above. They believe that the solution to the economic problems caused by governmental intervention is more governmental intervention. The correct solution is to remove the governmental intervention that caused the problems.

Jefferson was right when he “objected to using government to encourage manufacturing.” The government should leave the economy alone and let manufacturing develop in its own way and at its on pace. Jefferson said, “[It] can hardly be wise in a government to attempt to give a direction to the industry of its citizens.”

Does the county really need to return to Hamilton? Hamilton supported the concentration of political and economic power into the hands of a few. The country has been operating under his philosophy since 1860. His philosophy has led it to where it is today. Has not the time long past to abandon Hamilton’s philosophy? Has not the time come to adopt Jefferson’s philosophy of decentralizing and dispersing political and economic power?

Copyright © 2010 by Thomas Coley Allen.

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