Thomas Friedman agrees in his New York Times column “The Earth is Full” (June 8, 2008), in which he says, “[P]opulation growth and global warming push up food prices, which leads to political instability, which leads to higher oil prices, which leads to higher food prices, and so on in a vicious circle.”

In his article “What Nobody Wants to Hear, But Everyone Needs to Know,” University of Texas at Austin biology professor Eric R. Pianka wrote, “I do not bear any ill will toward people. However, I am convinced that the world, including all humanity, WOULD clearly be much better off without so many of us.”

However, there is absolutely no relationship between high populations, disaster, and poverty. Population-control advocates might consider the Democratic Republic of Congo’s meager 75 people per square mile to be ideal while Hong Kong’s 6,500 people per square mile is problematic. Yet Hong Kong’s citizens enjoy a per capita income of $43,000 while the Democratic Republic of Congo, one of the world’s poorest countries, has a per capita income of $300. It’s no anomaly. Some of the world’s poorest countries have the lowest population densities.

Planet earth is loaded with room. We could put the world’s entire population into the United States, yielding a density of 1,713 people per square mile. That’s far lower than what now exists in all major U.S. cities. The entire U.S. population could move to Texas, and each family of four would enjoy more than 2.1 acres of land. Likewise, if the entire world’s population moved to Texas, California, Colorado, and Pennsylvania, each family of four would enjoy a bit over two acres. Nobody’s suggesting that the entire earth’s population be put in the United States or that the entire U.S. population move to Texas. I cite these figures to help put the matter into perspective.

Let’s look at some other population density evidence. Before the collapse of the Soviet Union, West Germany had a higher population density than East Germany. The same is true of South Korea versus North Korea; Taiwan, Hong Kong, and Singapore versus China; the United States versus the Soviet Union; and Japan versus India. Despite more crowding, West Germany, South Korea, Taiwan, Hong Kong, Singapore, the United States, and Japan experienced far greater economic growth, higher standards of living, and greater access to resources than their counterparts with lower population densities. By the way, Hong Kong has virtually no agriculture sector, but its citizens eat well.

One wonders why anyone listens to doomsayers who have been consistently wrong in their predictions—not a little off, but way off. Professor Paul Ehrlich, author of the 1968 bestseller The Population Bomb, predicted major food shortages in the United States and that by “the 1970s . . . hundreds of millions of people are going to starve to death.” Ehrlich forecasted the starvation of 65 million Americans between 1980 and 1989 and a decline in U.S. population to 22.6 million by 1999. He saw England in more desperate straits: “If I were a gambler, I would take even money that England will not exist in the year 2000.”

Expert Poverty

By a considerable measure, poverty in underdeveloped nations is directly attributable to their leaders heeding the advice of western “experts.” Nobel laureate and Swedish economist Gunnar Myrdal said (1956), “The special advisors to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem . . . all recommend central planning as the first condition of progress.” In 1957 Stanford University economist Paul A. Baran advised, “The establishment of a socialist planned economy is an essential, indeed indispensable, condition for the attainment of economic and social progress in underdeveloped countries.”

Topping off this bad advice, underdeveloped countries sent their brightest to the London School of Economics, Berkeley, Harvard, and Yale to be taught socialist nonsense about economic growth. Nobel laureate economist Paul Samuelson taught them that underdeveloped countries “cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which the standard of living could be raised.” Economist Ranger Nurkse describes the “vicious circle of poverty” as the basic cause of the underdevelopment of poor countries. According to him, a country is poor because it is poor. On its face this theory is ludicrous. If it had validity, all mankind would still be cave dwellers because we all were poor at one time and poverty is inescapable.

Population controllers have a Malthusian vision of the world that sees population growth outpacing the means for people to care for themselves. Mankind’s ingenuity has proven the Malthusians dead wrong. As a result we can grow increasingly larger quantities of food on less and less land. The energy used to produce food, per dollar of GDP, has been in steep decline. We’re getting more with less, and that applies to most other inputs we use for goods and services.

Ponder the following question: Why is it that mankind today enjoys cell phones, computers, and airplanes but did not when King Louis XIV was alive? After all, the necessary physical resources to make cell phones, computers, and airplanes have always been around, even when cavemen walked the earth. There is only one reason we enjoy these goodies today but did not in past eras. It’s the growth in human knowledge, ingenuity, and specialization and trade—coupled with personal liberty and private property rights—that led to industrialization and betterment. In other words human beings are immensely valuable resources.

What are called overpopulation problems result from socialistic government practices that reduce the capacity of people to educate, clothe, house, and feed themselves. Underdeveloped nations are rife with farm controls, export and import restrictions, restrictive licensing, price controls, plus gross human rights violations that encourage their most productive people to emigrate and stifle the productivity of those who remain. The true antipoverty lesson for poor nations is that the most promising route out of poverty to greater wealth is personal liberty and its main ingredient, limited government.

I have devised a simple plan for improving Americans’ health by drastically reducing everyone’s weight, thereby significantly increasing longevity and reducing medical costs. All we need to do is revalue the pound. Instead of a pound being 16 ounces, it will now be 32, cutting everyone’s weight in half. We adjust our bathroom scales, our weights drop, and our health is improved.

Of course this “solution” rests on two fallacies. First, it conflates measurement with what is measured. Adjusting my bathroom scale does not change my weight, only my perception of my weight.

Second, the solution confuses cause and effect. My weight is not necessarily the cause of my health or lack thereof; in fact my weight may be caused by my ill health—an injury that keeps me from exercising or a thyroid condition, for example. More commonly, good health is the result of acting responsibly for many years: moderating calorie and alcohol intake, eating the right foods, engaging in regular exercise, getting quality dental and medical care. Such actions are likely to result in both moderate weight and good health. But I can no more make myself healthy by adjusting my bathroom scales than a doctor can cure a child’s cold by adjusting the thermometer he uses to measure her fever.

The two fallacies are so obvious that no one could possibly fall for them, right? Sadly, no. Many brilliant people have fervently believed in nearly identical fallacies for decades and are even now basing our country’s monetary policy on them.

Historian T. S. Ashton noted in his book The Industrial Revolution, 1760–1830:

If we seek—it would be wrong to do so—for a single reason why the pace of economic development quickened about the middle of the eighteenth century, it is to low interest rates we must look. The deep mines, solidly built factories, well-constructed canals, and the houses of the Industrial Revolution were the productions of relatively cheap capital.

John Maynard Keynes, making this same observation years before, concluded that simply by manipulating a country’s money supply and financial markets to artificially produce low interest rates, “deep mines, solidly built factories, well-constructed canals and houses” would spring into being. But Keynes confused “cheap capital” with easy money. Capital—inventories, pre-consumer goods, and the methods and means of production—cannot be conjured into being by manipulating interest rates. They can exist only through production and saving (deferred consumption).

Capital goods can be relatively cheap only if they are relatively plentiful. Increasing capital, all else equal, will lower interest rates. But interest rates are more than just a measure of capital availability; they also reflect lending risk. Risk in turn can be affected by such things as inflation and the reliability and efficiency of transportation, communication, and capital markets.

A lender would hardly agree to make a $100 loan unless he could reasonably expect to get at least $100 in purchasing power in return. If the government is debasing the currency, loans will be made only if interest rates are higher than the anticipated rate of inflation.

Costs and Lending Risks

Transporting goods by human or animal power is slow and costly. Sailing ships can carry far more goods far more quickly. Steam-powered ships are faster and more efficient still. Transportation costs, then, are inversely proportional to the level of technology. But costs also depend on the rule of law. When local chieftains can block mountain passes and extort steep tolls, or when highwaymen and pirates can exact their own tolls with impunity, transportation becomes risky and expensive. Conversely both transportation costs and lending risks are reduced if private property rights are respected and enforced.

Efficient capital markets foster trade by reducing transaction costs. Such markets depend on property rights and laws of exchange and on fast and reliable methods of communicating information such as prices, weather, and changing market conditions. Like transportation, communication depends on the level of technology.

Low capital costs are the result of a lot of people acting responsibly for many years: sound currency, institutions protecting private property and preserving the rule of law, inventors devising new and useful products, entrepreneurs bringing those products to market and finding ever-more-efficient ways to satisfy customers, and individuals producing more than they consume and saving for the future.

False Signals

Artificially low interest rates signal the existence of capital goods that were never actually created. While these low rates may spark investment bubbles, the bubbles must eventually burst when competition for scarcer-than-expected capital goods, services, and labor drives prices up.

Manipulating markets through monetary policy devalues a nation’s currency, destroys rather than secures property rights, and does nothing to sustain the rule of law constraining both the rulers and the ruled.

The costs of fooling ourselves can be high. By readjusting my bathroom scale I disable an indicator that might warn me when I need to change my eating and exercise habits. By overriding market money prices we similarly deny ourselves important data about the country’s fiscal health. Our weight and the real price of money are both valuable pieces of information providing vital feedback on our actions. Manipulating that feedback destroys the value of the information and, rather than giving us control, gives us only the illusion of control.

Franklin Roosevelt recognized that the war only provided a short-term fix for the economy—and a very costly one at that. What would happen after the war—when 12 million troops came home and the strong demand for guns, bullets, tanks, and ships ceased?

Roosevelt envisioned a New Deal revival. He had created the National Resources Planning Board (NRPB) in 1939 and urged it during the war to plan for peacetime. The NRPB leaders believed that government planning was necessary to promote economic development. They consciously (and sometimes unconsciously) followed ideas popularized in 1936 by John Maynard Keynes in his bestselling book, The General Theory of Employment, Interest and Money.

Capitalism was inherently unstable, Keynes argued, and would rarely provide full employment. Therefore government intervention was needed, especially in recessions, to spend massive amounts of money on public works, which would create new jobs, expand demand, and rebuild consumer confidence. Yes, government would need to run large deficits, but economic stability was society’s reward. If government planners could manage aggregate demand through public works, the boom-bust business cycle could be flattened and economic development could be managed in the national interest. No more Great Depressions. Man could indeed be master of his economic future.

Before and during the war Keynes’s ideas swept through the United States and first transformed the universities, then the political culture of the day. With statistics in hand and a near reverence for government, the Keynesians were the new generation of planners. They wanted to remake society. Not entrepreneurs, but economists were needed to gather data, plan government programs, and regulate economic development. Paul Samuelson, for example, a 21-year-old economics student, was cautious at first, but then euphoric after Keynes’s book was published. “Bliss was it in that dawn to be alive, but to be young was very heaven,” Samuelson wrote. Other economists soon accepted Keynes, and by the 1940s his ideas dominated the economics profession. In 1948, Samuelson would defend Keynes by writing the best-selling economics textbook of all time.

Planning for Peace

Those on the NRPB were among the excited disciples of Keynes and economic planning. The war itself seemed to be evidence that government jobs had pulled the U.S. economy out of the Depression. Now the economists and planners needed to take the nation’s helm to plan for peace.

According to Charles Merriam, vice president of the NRPB, “[I]t should be the declared policy of the United States government, supplementing the work of private agencies as a final guarantor if all else failed, to underwrite full employment for employables. . . .” That idea launched what Merriam and the NRPB dubbed “A New Bill of Rights.” FDR would call it his Economic Bill of Rights. Included was a right to a job “with fair pay and working conditions,” “equal access to education for all, equal access to health and nutrition for all, and wholesome housing conditions for all.”

New Bill of Rights

FDR viewed this Economic Bill of Rights as his tool for guaranteeing employment for veterans (and others) after World War II. But it was more than a mere jobs ploy; it had the potential to transform American society. The first Bill of Rights, which became part of the Constitution, emphasized free speech, freedom of the press, and freedom of religion and assembly. They were freedoms from government interference. The right to speak freely imposes no obligation on anyone else to provide the means of communication. Moreover, others can listen or leave as they see fit.

But a right to a job, a house, or medical care imposes an obligation on others to pay for those things. The NRPB implied that the taxpayers as a group had a duty to provide the revenue to pay for the medical care, the houses, the education, and the jobs that millions of Americans would be demanding if the new bill of rights became law. In practical terms this meant that, say, a polio victim’s right to a wheelchair properly diminished all taxpayers’ rights to keep the income they had earned. In other words, the rights announced in the Economic Bill of Rights contradicted the property rights promised to Americans in their Declaration of Independence and in the Constitution.

FDR promoted his Economic Bill of Rights in his State of the Union message in 1944, but he died before the war ended. Shortly before his death, Senator James Murray (D-Mont.) introduced a full-employment bill into the Senate for discussion. The bill committed the government in a general way to provide jobs if unemployment became too high. Many leading Democrats and economists supported Murray’s bill. “In this session of Congress,” The New Republic reported, “one of the first bills to be introduced will no doubt be the full employment bill of 1945, designed to carry out item number one in the Economic Bill of Rights.” The Nation joined The New Republic in endorsing the full-employment bill. “Mr. Roosevelt’s program,” it concluded, “is squarely based on the best economic authority available. It is entirely consistent with the economic doctrines of the distinguished British economist Lord Keynes.”

On September 6, 1945, President Harry Truman gave a major speech in which he supported the Economic Bill of Rights, especially a full-employment bill. Most congressmen, however, rejected both. Rep. Harold Knutson (R-Minn.) said, “Nobody knows what the President’s full employment bill will cost American taxpayers, but the aggregate will be enormous.”

Instead, Knutson and many other congressmen favored cutting tax rates and slashing the size of government as the best measure to restore economic growth. Senator Albert Hawkes (R-N.J.) even argued that “the repeal of the excess-profits tax, in my opinion, may raise more revenue for the United States than would be raised if it were retained.” Hawkes proved to be prophetic. After vigorous debate Congress scrapped the Economic Bill of Rights and cut tax rates instead. American business then expanded, revenues to the Treasury increased to balance the federal budget, and unemployment was only 3.9 percent in 1946 and 1947. The Great Depression was over.

It was disheartening to read John Stossel’s uncritical endorsement of Hernando de Soto’s diagnosis of the causes of poverty in Third World nations as their lack of street addresses and legal titles to property (“Why Do the Poor Stay Poor?,” March 2011). The error of these claims in De Soto’s The Mystery of Capital (2000) has been pointed out by several authors. . . .

First, people who have property that would qualify for a street address, if such address system existed, . . . are not among the poor. Second, in the same Third World country, there are rich as well as poor people. The lack of a street address thus cannot explain why the poor are poor. Third, in the formal and informal sectors of Third World countries, people acquire loans all the time without the presentation of government certified titles to property. Indeed, de Soto himself describes the vibrancy of economic activity in Brazilian favelas where, for example, “street cottage industries have sprung up . . . manufacturing anything from clothing and footwear to imitation Cartier watches and Vuitton Bags.” Fourth, Stossel buys into de Soto’s mistaken view of lawlessness in most of the Third World: “They need the rule of law. But many places in the developing world barely have law.” But de Soto contradicts himself on that claim, too: “[A]sset owners in the extralegal sector are . . . relatively well organized [and] ‘law-abiding,’ although the laws they abide by are not the government’s.” Furthermore, people “in the undercapitalized sector do have . . . strong, clear, and detailed understandings among themselves of who owns what.” (For more on de Soto’s self-contradictory claims, see “Mystifying the Concept of Capital: Hernando de Soto’s Misdiagnosis of the Hindrance to Economic Development in the Third World,” Independent Review, Summer 2008.) In fact, only in the most chaotic countries or failed states are crimes against private property not punished by law.

De Soto’s claims have fascinated some in the libertarian community who find someone, originally from a Third World country, Peru (but who did not grow up there), arguing that adopting capitalism and the rule of law would eliminate poverty around the world, to be a useful ally. But de Soto has an incorrect understanding of the economic history of the more developed countries, including such recent ones as South Korea and Hong Kong, as well as of the hindrance to economic development in the less-developed countries. He does not recognize that economic development or the growth of wealth preceded the development of legal titles to property in the now-developed countries. Thus he seeks to reverse the order of causality: Institute legal titles to property and economic development will follow! He also does not recognize that savings constitute the “capital” that may be borrowed with or without the presentation of legal titles to property. Titles to property may qualify someone for a loan, but without savings in the community, there would be nothing to lend. Indeed, de Soto believes that knowledge of the source of “capital” for economic development is a “mystery” for people in both the more-developed and less-developed countries. But Adam Smith explains that in the Wealth of Nations (1776), which de Soto fails to recognize.

Stossel would do better to point his readers to Adam Smith’s explanation of the institutions and policies that promote the creation of wealth among nations than to endorse de Soto’s mistaken and frequently self-contradictory views about the hindrance to economic development in the Third World.

Powell opens with four theoretical essays whose common theme is that “the engine of economic growth is not better inputs, but rather an environment in which entrepreneurial activities can be capitalized upon.” That environment is shown to determine whether entrepreneurship gets channeled into uses that make capital more productive, generating prosperity for all, or into such activities as conquest and obtaining sinecures in the bureaucracy, permitting a few to live high at the expense of the many.

A seemingly counterintuitive observation from the last essay in this section is that “those countries with the highest economic freedom . . . have a rate of business failure that is almost twice as high as countries with the lowest economic freedom. . . .” This reminder that capitalism is a profit and loss system, in which the losses play an indispensable role, cannot be emphasized enough to those who have elevated the bailout to the chief economic policy tool.

The next four chapters are devoted to countries that failed to grow because they failed to establish institutions that foster productive entrepreneurship. The wide variety of cultures and circumstances covered in this section adds to the robustness of the findings.

George Ayittey’s discussion of how country after country in Africa opted to throw out the capitalist baby with the colonialist bathwater on independence is a sobering example of libertarian class theory in action. He minces no words, characterizing most African countries as ruled by “unrepentant gangsters.” His essay is replete with details of specific poverty-inducing policies, supporting his contention that most African states direct entrepreneurship into destructive paths. As he pithily summarizes, “Because politics constitutes the gateway to fabulous wealth in Africa, the competition for political power has always been ferocious.” No wonder negative growth is the rule in those countries.

Essays on Latin America and Romania show some of the difficulties of overcoming colonial and communist legacies, respectively. The Latin American essay recounts numerous false starts on the road from parasitic to constructive entrepreneurship. Whether it was land reform programs or the neoliberal privatizations of the 1980s and 1990s, the result was the continued fleecing of the weak by the strong, with free markets wrongly getting the blame. The Romanian case shows the harm to entrepreneurship of a radically uncertain regulatory environment based on executive decrees.

This section ends with Sweden, long lionized by American “liberals” for its advanced welfare state. Here we learn how the high taxes, heavy labor-market regulation, and opulent safety net that comprise that welfare state have smothered entrepreneurship. While Sweden could live off its previously accumulated capital for a while, it eventually was beset by a host of predictable problems. The silver lining in Sweden’s case is that when these problems reached crisis level, some of the most counterproductive policies were jettisoned.

The success stories covered in the last part of the book also avoided adopting market-driven reforms until their hands were forced by necessity. Certainly ideology played little role in Ireland, where the same politician whose policies caused the problems (downgraded debt that could not be monetized and abysmal economic growth) conceded to reality and reversed course. Elsewhere, it took some changes in personnel. Once that occurred, crises begat reform in New Zealand (lagging growth induced by protectionism and a sclerotic labor market, plus a 1984 currency crisis), India (a 1991 foreign-exchange crisis), Botswana (the third-poorest nation in the world in 1965), and China (over 36 million dead from disastrous economic policies from 1949–1976). These cases contrast with Robert Higgs’s finding that crises in the United States led to permanent movements away from free markets. One possible explanation is that those countries had run out of margin for error. (As I write these words, the United States may soon find itself in that situation.) The essayists who discuss each of these disparate success stories also document some degree of backsliding once the situation was stabilized.

This book is extremely valuable for anyone who wants to know what works and what doesn’t in national economic development.

Hamilton may indeed be worthy of this title; but lest we give him and his economic ideas undue credit, we should pause to consider exactly what kind of “capitalism” Hamilton and his Federalist allies bestowed on the U.S. economy. Capitalism can mean different things to different people. Economic prosperity requires a legal system that protects individuals and secures their property from expropriation, whether it be private theft or political predation. Advocates of this system of rules often call it “capitalism.” We’ll call it “free-market capitalism.” And it’s a good thing for government to let this kind of capitalism develop by protecting private property, sanctity of contract, and consensual exchange. This ensures individual freedom of choice—and not coincidentally, it is the only known recipe for economic prosperity.

Another line of argument claims that governments should actively create and promote the products, organizations, and institutions of capitalism. Let’s call this “state capitalism.” Advocates of state capitalism argue that the institutions of capitalism should be forcefully imposed even if they are unwanted. The theory is that this will make the nation wealthier and so it should be done regardless of any objections.

It is by no means certain that the forceful imposition of the mere institutional trappings of an advanced capitalist economy actually promotes economic growth. Under the legal framework of free-market capitalism, individuals save, invest, trade, and set up markets as they see fit. Intricate patterns of interaction emerge, including some of today’s complex institutional forms of finance, industry, and commerce. Focusing on creating these institutions instead of the framework that lets them grow puts the cart before the horse. It means constructing the byproducts of progress instead of the mainspring that makes such progress possible.

Thus the statist approach to capitalist development is backward and unlikely to create wealth, even if the constructed institutions are industrial or financial. Constructivism—the idea that government can design economies to ensure growth—doesn’t work because central planning cannot substitute for the knowledge generated by the trial and error of the market process. Even the best-intentioned government officials cannot replicate the competition of market participants guided by profit and loss. Moreover, it defies human nature to assume that those who would implement state capitalism would promote solely the general welfare, without any bias toward shaping these institutions to benefit themselves or the special interests they represent.

The Early U.S. Economy

Proponents of state capitalism point to the historical development of American financial institutions as their strongest supporting evidence. In particular, Hamilton and his “financial revolution” embody the ideas of government leadership in building up a nation’s financial infrastructure. Fans of the finance-led growth hypothesis like to trumpet Hamilton’s achievements, which include a well-funded government debt, active securities markets (a stock exchange), a large and vibrant banking sector, and an enlarged money supply.

Thus many historians argue that with this infrastructure in place the financial means were created for corporate development and the growth of large-scale industry. They contend that Hamilton’s policies set the stage for the industrial revolution in America and that this experience should be replicated everywhere today.

But is government design really necessary for free-market capitalism to flourish? A closer investigation of early U.S. economic performance challenges that hypothesis.

At the close of the American Revolution, the United States was economically “underdeveloped.” In 1790 about 90 percent of the nation’s four million people were farmers. There were few large cities, and the population was clustered on the coast and near larger rivers. Poor roads impeded communication and commerce with the sparsely populated interior regions.

As for money, the United States was on a specie standard, with foreign silver and gold coinage forming the basis of the money supply. As of early 1791 there were three banks in the country, one each in Boston, New York, and Philadelphia. All issued banknotes representing claims on specie money. Although the bank notes were reportedly safe and reliable, they did not circulate widely, and there were constant complaints of a “scarcity of money.” While actual money—in both coin and note form—was present and fueling transactions in the commercial centers, in the remote farming regions barter was still commonplace.

Like banks, securities markets were rare. In 1792 only five domestic securities were quoted in New York. There were irregular and economically insignificant transactions in domestic and foreign equities. However, a larger, more continuous securities market was arising due to speculation in state and Continental Congress bonds issued during the Revolutionary War.

Grand Financial Scheme

When Hamilton became the first secretary of the Treasury under the Constitution in 1789, he surveyed a U.S. economy that was significantly less financially developed than England’s. Yet he also saw an opportunity to use his new office to spur the development of financial institutions and thereby give mercantile interests a helping hand. In the political climate of the early 1790s he was able to use the outstanding war debts as a tool to overhaul America’s financial system.

Hamilton laid out his grand financial scheme in four reports to Congress from 1790 to 1791. According to historian Frank Bourgin, Hamilton’s reports “constituted a unified and integrated program of planning on such a grand scale that even today it would appear as a magnificent conception of an economy directed and controlled toward socially chosen objectives.”

Hamilton used the public debt to implement an economic program that provided the impetus for the country’s first continuous securities market and also for its first brush with central banking. The first plank of his program was to secure the government’s credit by honoring the pre-constitutional war debt. Congress obliged in 1790, authorizing over $60 million in new U.S. bond issues to take responsibility, at face value, for all revolution-era debts.

The second plank in Hamilton’s program called for the creation of a national bank. Northern merchants largely supported the proposal, pointing to the advantages it would procure for their economic interests and for strengthening the position of the central government. Agrarian southerners were mostly opposed, arguing that such a bank would be unconstitutional and interfere with states’ rights. President Washington was eventually convinced by Hamilton’s broad interpretation of Congress’s constitutional powers and signed the Bank Bill into law on April 25, 1791.

The BUS Bubble

The Bank of the United States (BUS) was not technically a central bank in the modern sense; it was not granted a monopoly of note issue, nor did it regulate the commercial banking system. It was, however, granted important legal privileges: It was the only bank exempt from an otherwise nationwide restriction on branch banking, and its banknotes were accepted in payment of customs duties. This privilege provided the bank with a strong advantage over its competitors. The BUS charter called for an initial capitalization of $10 million—an enormous sum at the time. Three-quarters of it, however, was to consist of the new government bonds. Thus Hamilton used the bank to boost the market for government debt, making the bank and the government codependent. The size, scope, and privileged position of the BUS ensured that its actions would exert a titanic influence on the money supply and credit conditions in the United States.

Hamilton also introduced other measures to round out the overhaul of the financial system. Thanks to his prodding, a bimetallic currency was introduced to enlarge the money supply. The federal government began to recognize gold as legal tender in addition to the Spanish-based silver dollar at a 15:1 silver-to-gold ratio. And finally, Hamilton ushered in a policy of activist industrial promotion and protectionism in the form of tariffs, subsidies, and “public-private partnerships” designed to foster large-scale industry. The entire Hamiltonian program—the BUS in particular—was, in the words of David Cowen, designed to “stimulate the economy [and] enhance the shaky credit of the government.”

The Funding Act and Bank Bill brought about massive speculation in government debt and BUS stock. Although only five securities—three U.S. bonds and two bank stocks—were publicly quoted in 1792, public interest in them was intense and widespread, ranging from millionaire financiers to day laborers and widows. When the BUS opened, it began pumping vast amounts of credit into the economy. A substantial portion of BUS loans went to stock speculators in the form of “accommodation loans,” or unsecured debt, similar to modern-day margin accounts. A classic asset bubble ensued as the intense demand for these issues led to higher and higher prices. But this stock mania was soon revealed to be unsustainable. An abrupt contraction of credit by the BUS in February 1792 led to a massive selloff in securities markets—the first stock market bust in American history. Many of the speculators were heavily leveraged, expecting to repay the accommodation loans with the sale proceeds of ever-appreciating stocks and bonds. When the short-term loans came due and the banks refused to extend further credit for fear of being drained of their specie reserves, leveraged investors had no other choice but to settle their debts by liquidating their securities portfolios.

The crash piled up unprecedented losses and left several prominent speculators in debtors’ prison. Many economic historians laud Hamilton for successfully managing this crisis by using government funds to support bond prices and steady the nerves of the market. But government involvement in money and banking caused the panic in the first place. Furthermore, the events of 1792 did not signal the resolution of the BUS credit expansion. Over and above the securities panic, the inflationary practices of the BUS set into motion an unsustainable investment boom and consequent bust that would play out over the entire decade.

The BUS engaged in monetary overexpansion through the early 1790s, causing price inflation and disorder in the intertemporal structure of production along the lines theorized by capital-based macroeconomics. This expansion also pushed down real interest rates by making banks far more eager—and able—to lend. The resulting distortion of marginal returns to investment and saving led entrepreneurs to make malinvestments in transportation improvements, manufacturing, and other capital-intensive projects. Furthermore, the expectation of inflation induced individuals to bet on continued price increases by borrowing money to purchase real estate. Thus the atmosphere of easy money created by the bank also channeled resources into western land speculation and fueled local real estate bubbles.

Eventually a correction to the credit overexpansion occurred, but it took time and required a painful monetary contraction. Initially, as the newly injected bank credit worked its way through the economy, it created a disparity in international prices. Steep inflation within the United States made American exports relatively more costly abroad and foreign imports into the country relatively cheaper for Americans, leading to a reduction in net exports. By 1795 specie was flowing out of the country to pay for the increased imports, and the growth rate of bank-issued money tapered off. As a result, the money supply and price level began to fall, causing the real interest rate to rise sharply. In the ensuing credit crunch businesses that counted on rolling over short-term debt for their financing were rendered unsustainable. At this point many investments that had appeared reasonable when they were undertaken were revealed to be errors, and a wave of business failures ensued.

The long-run consequences of the Hamiltonian financial revolution were a crushingly large central government and a burdensome government debt. According to advocates of state capitalism, this last aspect was actually a good thing—they portray government debt as a blessing because it allowed for a strong central government. But contrary to their mercantilist interpretation, a bloated central government is not a blessing. As Thomas DiLorenzo’s book Hamilton’s Curse demonstrates, the strong central government, built on Hamiltonian policies, enabled unnecessary military spending, unjustified wealth transfers, and a slew of ever-expanding governmental programs and activities down to the present day.

Despite Hamilton

Hamilton’s schemes impregnated the U.S. economy with the institutions of a financially advanced, capitalist economy. But the accelerated development of securities markets and the banking industry was premature. The truly beneficial aspects of these markets would have developed in due time through the natural course of economic growth. Hamilton’s reforms merely induced a precursory period of unproductive trading in government debt instruments and credit-fueled speculation. More important, the centralized banking system created by Hamilton’s nationalist party destabilized the American economy. The new banking system immediately created a sequence of financial panic, deep-seated malinvestment, and a delayed recession.

Hamilton’s expansionary program did no better over the long run. Primarily, it left the United States with an economy prone to central bank-induced business cycles and a squandering of economic resources on redistributive polices and wars, financed by the accumulation of a burdensome debt. On net the Hamiltonian revolution was not a blessing for the U.S. economy. The United States became the world’s leading economy despite the legacy of Alexander Hamilton, not because of it.

Sometimes I think Nietzsche was right. It happens when I read things like this from the New York Times last January: “An international team sponsored by the United Nations proposed a detailed, ambitious plan on Monday that it says could halve extreme poverty and save the lives of millions of children and hundreds of thousands of mothers each year by 2015. The report says drastically reducing poverty in its many guises—hunger, illiteracy, disease—is ‘utterly affordable.’ To fulfill this goal, industrial nations would need to double aid to poor countries, to one-half of 1 percent of national incomes, from one-quarter of 1 percent.”

This is the recommendation of the UN Millennium Project, headed by Columbia University President Jeffrey Sachs. In the dog-bites-man department, the World Bank and International Monetary Fund eagerly endorsed the program.

The report was greeted more skeptically by others. A member of the project, Nancy Birdsall, president of the Center for Global Development, said poor countries’ governments could do many things to help their populations that require no outside money, such as changing their political systems. She nevertheless favors increased transfers from the developed countries.

New York University economist William Easterly had a more trenchant criticism of the project’s report. “Its approach is a sort of utopian central planning by global bureaucrats, a crash program like a Great Leap Forward for poor countries. This will not work any better than central planning by bureaucrats has worked anywhere else, which is to say not at all.”

In the year 2005, 60 years after the binge of post-World War II foreign “aid” began, you’d think we’d stop seeing such obviously futile proposals. The countries that have climbed out of poverty are precisely the ones that got little or no money from Western taxpayers and that followed market-liberal paths. The biggest recipients of handouts remained dependent and poor—until they began to liberalize their societies and let markets work.

Nothing has occurred to refute the late Peter Bauer’s critique of the foreign-aid lobby. To begin with, the term foreign “aid” begs the question and prejudices the case. What we’re really talking about are government-to-government transfers, with taxpayers as coerced accessories. This can hardly be called “aid” once we realize that governments have no constructive role in economic matters beyond protecting life, liberty, and property. Giving money to a government for economic development is like giving a china shop to a bull. Call it what you will, it’s not aid. Governments are by nature unequipped to spend money intelligently for such a purpose. The planners can’t know what needs to be produced in what quantities and how. They cannot know what tradeoffs people are willing to make to obtain any particular thing. That information can only be determined by the market process, which means through social cooperation in a regime of private property and free exchange.

Second, the champions of foreign transfers should be required (I’m tempted to say compelled) to explain how, if they are correct, any society ever became rich. I suppose the first modern countries to emerge from poverty might have petitioned for foreign aid. But from whom? This creates a tricky situation for the UN Millennium Project. If economic growth required handouts from wealthy societies, there would be none to provide them. And if economic growth didn’t require handouts, then poor countries today don’t need them. Either way, the UN Millennium Project’s plan is futile.

Only it’s worse than that. It’s dangerous. Government leaders may not know how to create prosperity with cash transfers, but they definitely know how to increase their power, help their friends, and suppress their opponents. We’ve seen quite enough of that over the years. When will the UN-types learn?

Compassion carried out with collectivist economics is indistinguishable from brutality. The path to prosperity is well lit.

* * *

Few people would want the government to tell their doctors how to practice medicine. But thanks to the war on drugs, it does just that in the treatment of chronic pain. Frank Fisher, M.D., has the horrifying details about suffering patients and persecuted doctors.

Dr. Fisher was himself victimized by a system that is eager to stigmatize chronic-pain treatment as “pill pushing.” Radley Balko reports.

Reform of Social Security remains the hot topic. Many opponents of change maintain that the system can be made sound with only some minor adjustments. Robert Murphy examines one such claim: that the rich industrial societies can easily support their aging populations.

The Vienna in which Ludwig von Mises emerged as an intellectual was a uniquely fascinating place. But events in Germany eventually changed all that. Richard Ebeling presents the second of his two-part article on the milieu in which Mises developed his liberal worldview.

We do not always rely on government to obtain justice. Instead, we have come to expect it from the marketplace itself. Exhibit A: the mundane credit card. J.H. Huebert explains how self-interested companies look out for us.

The connection between economic development and freedom has become increasingly appreciated by people of many political persuasions. Gerald O’Driscoll focuses on the key element of freedom.

Our columnists have these matters on their minds: Richard Ebeling distinguishes freedom from democracy. Donald Boudreaux defends “price gouging.” Stephen Davies looks at a much-disparaged source of economic growth. Russell Roberts claims the moral high ground in the debate on privatizing Social Security. And George Leef, hearing Bill Moyers sound alarms about a new threat from corporate power, replies, “It Just Ain’t So!”

Books undergoing scrutiny this issue examine institutional economics, government bullying, the death tax, and the economy of the 1990s.

Uruguay, a country of approximately 68,000 square miles located between two giants, Argentina and Brazil, was one of the most prosperous Latin American countries at the beginning of the twentieth century. Today, its GDP ranks low on the continent, amounting to $11 billion in 2003. A brief overview of its history will explain this decline.

Until the beginning of the nineteenth century, Uruguay was a Spanish colony. It served the military purpose of halting the Portuguese expansion in the River Plate. Curiously, internal armed unrest did not prevent the economic boom that took place between 1852 and 1875. Floods of immigrants, attracted by the possibility of making a fortune, prompted a population growth of 5.2 percent in annual terms. If this rate had continued until today, Uruguay would have a population of 200 million people instead of 3.5 million.

In the late 1800s, legislation led to the development of a free-banking system and the adoption of the gold standard. But the orientation of economic policy changed with the creation of a bank endowed with a monopoly on the issuance of currency. It was one of the first acts of government inter-vention in the production of goods and services.

The growth of the state in the economy was nurtured by the thought and actions of President Jose Battle y Ordonez at the beginning of the twentieth century. Public monopolies were set up for electricity, insurance services, and the provision of mortgages. Battle desired nothing more than to collect economic dividends for the benefit of the state and society. He supported worker strikes and had social legislation passed in an attempt to regulate the labor market. The eight-hour-work-shift law was the first of its kind in the world. High taxes were imposed on the agricultural sector, which produced most of the country’s exports.

The two world wars were not favorable to the nation because the increase in the price of commodities was counteracted by transport difficulties. In the period 1913-21 the GDP failed to grow. By then, Uruguay had already abandoned the convertibility of its currency to gold.

In 1931 an exchange-control system began to regulate the foreign currency produced by exports and used for imports. Businessmen devoted time and effort to obtaining import quotas as barriers to markets increased. The introduction of a multiple exchange-rate regime gave the authorities the means to subsidize some activities and tax others. The vested interests created by the system explain its permanence until 1970.

The performance of the economy can be divided into two periods: 1943-55, in which foreign-trade transactions were minimal and the economy grew inward (also called import substitution) at an annual rate of 4.16 percent, and the years 1955-74, in which the GDP shrank at a rate of – 0.01 percent, a period marked by high budget deficits, runaway inflation, and devaluation of currency.

By the mid-twentieth century, the welfarestate tradition was firmly rooted in the country. The “Benefactor State” grew increasingly inefficient. Emir Rodriguez Monegal, a prominent Uruguayan intellectual, pointed out that its paternalism promoted passiveness among the people and weakened the spirit of entrepreneurship.

Furthermore, the 1959 Cuban revolution attracted young Latin Americans, who looked on Cuba as a symbol of social revolution and popular resistance linked to anti- U.S. sentiment. A number of classical-liberal intellectuals tried to start a mass movement for the defense of political autonomy and human rights; they hoped to imbue the culture and media with their ideas. But freemarket economic principles were associated with the influence of the developed countries, and being “imported” principles, they were outwardly rejected.

In 1966 the acceleration of inflation and the increase in social tensions led to the adoption of a new constitution. Seven years later, amid increasing economic turmoil, the armed forces closed Congress and established a civilian-military regime, which ended in 1984.

Seeking a Space for Liberal Ideas

Ramon Diaz played a significant role in opening up a space for the discussion of freemarket ideas. Born in Montevideo on May 30, 1926, for many years Diaz taught political and international economy in the state university, the only university in Uruguay until 1985. (The first private university was created in that year.) As a lawyer and an economist he achieved success both in the private and public sectors.

His encounter with the Mont Pelerin Society, the organization of classical liberals, in 1967 was vital. He was introduced to the economist Arthur Shenfield; Antony Fisher, promoter of liberal ideas and founder of the Atlas Foundation; Milton Friedman; F. A. Hayek; and Alejandro Chafuen, who later became president of Atlas. After this meeting he methodically studied philosophy and history, mainly through books by Edmund Burke and Hayek, whom he greatly admired. He also began to publish books and articles on economic issues.1

Meeting foreign intellectuals was important to Ramon Diaz. When he joined the Mont Pelerin Society he was confirmed in the belief that he was on the right path and that his position was not Utopian. After the first meeting he attended in Vichy, he had annual or biannual contacts with liberals from different countries of Europe and America. Later on, at the end of the 1980s, he became president of the Mont Pelerin Society and did his utmost to follow Hayek’s vision of the organization.

Classical-liberal ideas would take a long time to spread in Uruguay, and in the 1960s no one believed that anyone there would embrace them. Any proposal favoring such ideas, especially one suggesting the introduction of market competition, was considered contrary to the welfare of society and disparaged as “capitalistic.”

In 1968 Diaz was appointed vice minister of industry, and during his term of office he promoted successful efforts to bring down the rampant inflation. In 1970 he was elected director of the planning and budget office, but he resigned in October because the government, bowing to election-year pressure, refused to support some of his economic proposals. He felt deceived and decided to try other ways to make Uruguayans understand the country’s economic problems and possible solutions. He committed himself to creating a new trend in public opinion.

New Journal Founded

In January 1972 Diaz founded the monthly economic journal Busqueda {Search) as a medium for spreading liberal ideas. He had proposed the project to a group of economists, but they were skeptical about its chances for success. He went ahead anyway, with the financial support of close friends, editing the publication through 1989. Firmly believing in his mission, Diaz supported the magazine himself when funds were lacking. At the beginning of the journal’s life, he and Ramiro Rodriguez Villamil did all the work, including writing the articles. Initially, few cared about the new journal that was supposed to shift the economic opinion of the country. It featured articles based on liberal philosophical ideas and analysis of the consequences of a large, heavy, and clumsy state. In every issue Diaz recorded his thoughts, sometimes signing his articles with an anagram of his own name or Adan Perez for Adam Smith. Busqueda soon had 1,000 subscribers, who turned out to be the journal’s main source of revenue. Although it was supposed to be a monthly publication, Busqueda was not issued on a regular basis until 1980, when the professional journalist Danilo Arbilla joined the staff.

Apart from setting up Busqueda, Diaz devoted time to studying Uruguayan economic history in an attempt to reinterpret it. 2 He brought to light the liberal ideas contained in the first constitution of 1830 and showed how classical-liberal principles inspired economic policy during the first 45 years of the nation’s existence.

The first Uruguayan constitution was oriented toward the protection of individual rights, notably the right to property and the freedom to work in any economic activity provided that the general interest was not harmed. Diaz traced the change in thinking to a 1917 constitutional amendment, which added public enterprises to the structure of the state. The idea that private individuals should own only small and medium enterprises and that important industrial enterprises should be owned by government became prevalent in the country.

Diaz also stressed that late-nineteenth century Uruguayan governments strongly favored a stable and healthy currency. This was due to the discipline required to maintain convertibility in the gold-standard regime. During the last quarter of the 1900s, however, the fear of worthless paper money was replaced by the fear of insufficient credit. This marked the beginning of a period in which the state became omnipresent and omniscient.

Continuation of Results

Thirty years after Diaz began working as a journalist and as a university professor, the process he started cannot be stopped. Other voices have joined him, and his ideas have spread throughout the universities and the media in Uruguay. Young professionals study abroad and bring back new ideas of economic liberty. A liberal think tank, the Center for Economic and Social Policy Research, has been established in Montevideo. In 1990-93 Diaz served as governor of the Central Bank of Uruguay during the presidency of a political leader who supported liberalism. Today he teaches the economic history of Uruguay and introductory economics at the University of Montevideo. He is also a columnist for El Observador (The Observer), a newspaper in Montevideo.

Although the process of changing opinion in a liberal direction has been slower than hoped for, nobody can deny that Ramon Diaz’s mission was fulfilled. Today, thanks to his great contribution to the intellectual heritage of his country, more people understand classical-liberal ideas and the benefits
of the free market.

1. Among them: “The Political Economy of Nostalgia” in F. A. Harper, ed., Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday (Menlo Park, Cal.: Institute for Humane Studies, 1971); “Uruguay’s Erratic Growth,” in Arnold C. Harberger, ed., World Economic Growth. Case Studies of Developed and Developing Nations (San Francisco: Institute for Contemporary Studies, 1984); and “Capitalism and Freedom in Latin America,” in Michael A. Walker, ed., Freedom Democracy and Economic Welfare: Proceedings of an International Symposium, Canada, 1988.
2. Ramon Diaz, Histona economica del Uruguay (Montevideo: Taurus, 2003).

Chauffour first explains the history of thought behind the idea that economic development itself is a human right. Advocates of that view focus on attaining “positive rights”–that is, a right to have things regarded as necessary for a good life. That notion has strong roots in socialism. Many regimes give high priority to these positive rights, but they necessarily violate true human rights in order to sustain their political agendas. Even in its less extreme forms, the “positive rights” approach to development inevitably designates some government force that is supposed to be capable of ruling in the interest of citizens, instead of permitting them to pursue their own interests as they would under a “negative rights” regime.

In advancing his argument that economic development will result from individual liberty, Chauffour uses the insights of the Austrian school of economics. He illustrates that policies intended to promote human-rights agendas are plagued with both knowledge and coordination problems. He incorporates many of F. A. Hayek’s ideas, which both cast doubt on the political feasibility of government-directed development and point out the logical inconsistencies of systems based simultaneously on positive and negative rights.

Crucially, Chauffour emphasizes that simply proclaiming that all individuals possess certain positive rights, such as freedom from hunger, does not provide governments with the resources or the knowledge necessary to guarantee those things. The mere act of declaring something to be either a right or an obligation does not help anyone, except perhaps the politicians. Chauffour might have strengthened his point here by arguing that declaring an obligation that is impossible to fulfill, such as that employers must pay “decent wages,” may be harmful in underdeveloped societies. Giving people the expectation that they are entitled to specific outcomes breeds inertia and inaction.

While most of the book is about the harm done by positive rights-based policies and how negative rights are more logically consistent than positive rights, Chauffour asserts that “it is a fact that the protection of certain negative rights cannot be ensured without positive actions by the state.” In saying that, he sells short private solutions that can emerge to solve complex property-rights issues that most governments struggle to control via regulation. Even in developing countries, the free market works well to devise protections for property rights, and Chauffour could have strengthened his case for laissez faire by noting that.

Another difficulty is that Chauffour seems to underestimate the challenges of making the transition from a society dominated by “positive rights” thinking and intrusive government to one where individual rights are upheld. Major development successes will happen when societies embrace economic freedom, but how do we create the institutional context under which people (and especially their rulers) who have been accustomed to strong government control will throw off those shackles and embrace freedom? Chauffor’s diagnosis is right and the prescription is right, but can the patient be induced to take the medicine?

Following the devastation of the earthquake in Haiti, this is a particularly good time to read The Power of Freedom. Haiti is a desperately impoverished nation, and that poverty has made the death toll far greater than it would have been in a wealthier, modernized nation. Haiti has received great amounts of foreign aid but that has not translated into economic development. Moreover, the nation ranks low on indices of economic freedom, particularly in terms of property-rights protection. Perhaps this tragedy will at least cause some development experts to consider Chauffour’s point that freedom will allow poor people to start advancing economically, whereas looking to government to catalyze development is certain to lead to disappointment.

John Taylor’s writings show how an anti-mercantilist critique could be a liberal critique, despite detailed agreement with more strictly republican analyses. His Inquiry (1814), for example, was a belated reply to John Adams’s Defence of the Constitution of Government of the United States (1787–88), in which Taylor explicitly rejected Adams’s archaic-republican “social balance” between legally entrenched social orders. For Taylor, even such republican terms as “corruption” and “virtue” had different meanings in the American context.

Each of three historical ages, Taylor writes, had its own artificial aristocracy. The newest was a financial oligarchy—England’s modern reality. American Federalists wanted it here. Oddly, he notes, colonial Americans had spotted abusive taxation more quickly than independent Americans did. Having managed to “explode . . . the antiquated social compact dogma,” they succumbed to “modern law charter dogma” protecting state-created property as eternally inviolable.

Taylor treats “those possessions as property, which are fairly gained by talents and industry, or are capable of subsisting, without taking property from others by law.” Absent church establishments and feudal dues, taxation was “the only engine for distributing and balancing property” and dividing society into “payers and receivers.” National debt, too, was a key engine of oppression, reflecting the wish “to anticipate the riches of posterity and bequeath it [our] misfortunes.”

Championing “labour” and “agriculture” against “paper feudalism,” Taylor’s class-conflict analysis highlighted the role of the state. In a world where numerous interests battened on the state, that analysis was an important tool. Taylor’s political sociology shares much with the French Restoration liberalism of J.-B. Say, Destutt de Tracy, Charles Comte, Charles Dunoyer, and Augustin Thierry.

Like Jefferson, Taylor was conversant, not just with English economists, but also with Say and Tracy. But Taylor has flashes of complete originality. After all, none (or few) of the French or English writers had looked hard at the rising American system, which they wrongly fancied was repudiating European mercantilism. Taylor was breaking new ground.

In Tyranny Unmasked (1822), written mainly against protective tariffs, Taylor carried forward his political class analysis with great sociological penetration. Taylor writes that no “property-transferring policy . . . can enrich” workers or merchants in general. A few of the latter gain by “becoming bankers, lenders to government, or factory owners.” Particular “mechanicks or agriculturists” might also profit: “A few individuals are enriched by every species of tyranny.”

Expanding, in Inquiry, on the contrast between true and false (state-created) property, Taylor observes: “Despotick power strives to blend itself with a legitimate government, as paper stock does with private property.” False property wrapped itself in the protective mantle of justly acquired property, and we must understand Federalist grumbling about “leveling” political tendencies in that light. Beneficiaries of mercantilist (re)distribution did not want their gains called into question. Finally, Taylor observes that in England, the financial aristocracy profits more from war than feudal aristocrats ever did, by gaining new fields for investment and by funding “the war which made the conquest.” Increased taxes to pay the interest were a further boon to this class.

Banking and “Paper Feudalism”

State-connected banking—the Bank of England and the Bank of the United States—was a primary target of Taylor’s political polemics. Here, a false analogy with everyday commercial borrowing confused matters. In Taylor’s view, paper stock and public debt are not necessary to commerce, even if, coincidentally, “they exist together in England.” That paper and debt were “the bane” of commerce could be “inferred from the necessity of England to resort to war and conquest to cultivate her commerce.” Paper bills were “signs or representations” of real things and a tax on monetary circulation. Taylor is happy that the American Revolution “succeeded” without establishing permanent public debt in lieu of paper currency. Revolutionary currency lost value, to be sure, but it did not linger on as an excuse for future taxation. It disappeared, having done only limited harm.

Banking, as practiced, was generally bad. The advantage of coin is the difficulty of multiplying it. Noting that under hard money, any supply of money is optimal, Taylor notices the banker’s “privilege” of keeping fractional reserves. With interest counting as assets, and multiple lendings of the same capital, massive transfers of real goods went forward. Again Taylor calls bank profits a “tax” paid to privileged corporations. Taylor’s conclusion? “The tyranny of fraud is not less oppressive than that of force.”

Taylor compares patronage gained by banking with that obtained by conquest. Where patronage “is obtained by foreign conquest, as in the acquisition of India by England, the people still suffer by the unconstitutional power it confers,” even though domestic patronage was directly “more calamitous.”

Taylor has a good grasp of international flows of money and goods—paper, specie, and commodities—and spots an illusion later central to Keynesian economic policy: “[A]n advancement of the price of labour, pari passu, would produce neither gain nor loss.” He observes that a paper-military-patronage aristocracy does without titles of nobility, but is no less dangerous for that. “Money and armies are the instruments of power,” he adds.

Everyday Class Conflict

Taylor believed that great extremes of wealth invariably sprang from extra-economic coercion and deceit. Here, he resembles that self-taught radical, Thomas Paine. Taylor sounds vaguely “Marxist,” while explaining why protectionism does not help English workingmen: “[I]t has established a monopoly which operates only in favour of their employers, increases the expenses of government, and feeds unproductive capital by sacrificing productive labour”—especially in agricultural and seafaring occupations, where the workers have “very little capital except their bodily labour.” Here is Marx’s labour-power category several decades early.

Taylor did not need to be a “proto-Marxist,” however, because liberals already possessed (but did not always employ) a theory of plunder (“spoliation”) featuring the state apparatus as the major cause of social conflict.

State Capitalism

State-promoted business enterprise was at the heart of everything Taylor opposed. Echoing James Harrington (1656), he writes that “enormous political power invariably accumulates enormous wealth, and enormous wealth invariably accumulates enormous political power.” Asserting the parasitic character of state-created capital, he denounced transfers of real wealth from the economically productive and the aggressive alliance of artificial capitalists, corrupt courtiers, and officials who profited on them.

Taxes raised to pay public debt drained resources away from productive uses, and public credit funded the standing army, an instrument of constitutional subversion and empire. America, Taylor complains, has followed England’s road to ruin, under Federalists and Republicans alike.

These considerations shed light on Jefferson’s frequent references to the need for “periodic revolutions.” Given the ills attending state-subsidized capitalism, the people must have room to undo state creation of wealth and classes. The Yazoo scandal comes readily to mind. Georgia lawmakers handed out millions of acres of western land to those who bribed them. When a later legislature undid the act, Chief Justice Marshall declared the grants a sacred trust under the federal contract clause, in a textbook example of English “charter law.”

Corporations

n Taylor’s day governments still chartered corporations as privileged monopolies for specific purposes “clothed” with a public interest. Taylor saw “hierarchy” (the established church) and “corporation” as “innately despotic,” since both were “appurtenances of sovereignty” and, therefore, “appurtenances of despotism,” because sovereignty “is indefinite.” Taylor’s insight seems ideally suited for understanding the triumph of American state capitalism, once we see that general incorporation laws in the Jacksonian Era left state-like corporate privileges intact while widening the base of privilege. (See Frank van Dun, “The Modern Business Corporation versus the Free Market?” Freeman, March 2003, pp. 29–33, and “Personal Freedom versus Corporate Liberties,” Philosophical Notes, No. 76, Libertarian Alliance [London], 2006, pp. 1–19.) The deep roots of American corporatism suggest Taylor’s relevance across most of American history.

War Finance

Taylor writes that debt financing renders a war “twice suffered; by the living, who supply all the expenses of war; by the unborn, who supply an equivalent sum, to take up certificates of the expenses. . . .” Debt issues had actually hampered the American Revolution, since “war carried on by paper, is starved by peculation, and produces the utmost degree of publick expense, with the least degree of publick spirit.” (Here Taylor anticipated several Austrian School economists.)

Taylor’s views on war and its financing deepened his critique of the presidency and centralization. The point of Taylor’s antimilitarism was to avoid the fate of “European nations,” which “exist for the benefit of armies and navies. . . .” War was “the keenest carving knife for cutting up nations into delicious morsels for parties and their leaders.” It “swells a few people to enormous size”; “puts arms into the hands of ambition, avarice, pride, and self-love”; and “breeds a race of men, nominally heroes, mistaken for patriots, and really tyrants.” Finally, party discipline gave 26 percent of the legislature—effectively controlling 51 percent—“the power of declaring war.” Alluding to dear old National Security, Taylor reminds us: “Conquests abroad are rare, and no compensation for conquest at home.”

Britain: The Negative Role Model

Unless we uprooted subsidized capitalism, America would become England—with Whig oligarchy, class conflict, economic crises, taxes, standing army, constant war, and a confusion of state-created and privately earned property. Britain was our negative role model, whose chief evils—empire and domestic oppression—were intertwined. “Compulsion” guarded English commerce: England “is enriched, because labour is her slave; goaded by a paper system, and she makes competition shrink by a fleet.” Britain’s relative internal freedom was little comfort to its dependencies, as “nearly demonstrated in the relations between England and Ireland, and quite so in India.”

Empire, Monarchy, Oligarchy

England brings us—and Taylor—to the structural logic of empire. The English state was “a confederation of parties of interest,” excluding the people, and consisting of “the church of England, the paper stock party, the East India company, the military party, the pensioned and sinecure party, and the ins and outs, once called whigs and tories,” held together by the monarchy. The English nation “has no government,” and “no British nation” existed beyond these interest groups. Taylor notes that Samuel Johnson, “the best informed tory,” favored “a brisk circulation of money.” But “a brisk circulation of power is also produced,” and Dr. Johnson “neglected to tell us . . . that money attracts power, and power, money.”

Taylor’s works abound with examples of his realistic grasp of social interrelations. He addresses two common arguments for consolidated power: “uniformity of religion” and “the difficulty of governing an extensive territory.” Europe had given up the former, and America the latter (in terms of monarchy). Practical knowledge being widely dispersed in a large state, “moral geometry” limits the “knowledge and will” of a king. Hence, “beyond his orbit, monarchy ceases and some anomalous government ensues; oligarchical, military, deputy-royal, tumultuous, or infinitely variegated by circumstances” and “neither the virtues nor vices of a monarch are felt at a distance from his person.”

“Monarchy only succeeds,” Taylor says, in “armies, garrisons, savage tribes and private families.” The wider the sphere, the more a king has only a “power of changing oligarchs.” This brings Taylor back to patronage, dependent on “the very worst kind of oligarchs . . . irresponsible and unknown.” Here indeed was a government—neither republic nor monarchy. Where a republic and a monarchy each had the “power of distributing wealth,” the monarchy was less burdensome, “because it is less expensive to gratify the rapaciousness of one, than of many.”

Were America governed as a monarchy, it could “only retain the advantage of extensive territory, by an oligarchy composed of deputy-kings, bashaws, satraps or mandarins.” As a decentralized confederation of self-governing members, America might expand indefinitely, “forming a great nation, by a chain of republicks.” Here, Taylor sketches out the possibility of republican expansion, as opposed to Madison’s belief in expansion as necessity.

False republics, Taylor says, have “the heaviest taxes.” The American party system and presidential patronage bring forth oligarchy—and presidential power, war—spreading patronage and power economically and geographically. Here, domestic and foreign concerns are joined.

Republican Nonintervention

Where national security intrudes, Taylor yields little to “realist” necessities. We Americans can resist the European system “more successfully than any other nation.” America, “possessed of extensive territory, happily removed from real causes of collision with other nations . . . is peculiarly favoured by providence” for avoiding “the artifice of legal wars,” to which small nations succumb.

The Balance of Power

Taylor denied that the laws of nations conferred sovereignty on any American government. In agreement with many liberal thinkers, he doubted the “balance of power” principle. That doctrine fostered war by assuming inherent hostility between nations, and was thus “the most complete invention imaginable for involving one combination of states, in a war with another.” (Neither was Taylor impressed with the “balance of trade.”)

Within the union, the balance-of-power idea fared no better. After the Missouri Compromise, geographical blocs defined by slavery loomed. Balance-of-power politics implied tinkering and brokering outside the Constitution; and a sustained antislavery campaign against the South as a bloc, he wrote, “would certainly destroy the union.” Taylor foresaw “civil” war, with massive death and destruction. He makes the unkind aside that, “if our consciences tell us that we ought to enslave freemen, to make slaves free,” reformers might perhaps crusade in Brazil, Cuba, or Africa, rather than at home.

Slavery and Colonization

Taylor, who himself owned slaves, describes slavery as “an evil which the United States must look in the face. To whine over it, is cowardly; to aggravate it, criminal; and to forbear to alleviate it, because it cannot be wholly cured, foolish.” He hoped the slaves might “be gradually re-exported” through colonization—a point where he is no worse than his contemporaries and successors, including Abraham Lincoln. Taylor could be quite realistic about slavery. His frequent assertions that financial exploitation is worse than slavery cut both ways. In mitigation, he pleaded: “The profit extorted from the negro slave is moderated by the immediate interest of his master . . . the master’s benevolence and . . . respect for his own reputation.”

Although Taylor, like most of his contemporaries, believed whites were intellectually superior to blacks, he denied that this justified establishing privileged castes. Free use of “intelligence” improved church and state, and we should expect the same result with “labour.” He asks, “Are slaves free, because their labour is made more productive . . . by the intelligence of their masters? Is the white population of the world justified in converting to its own use the labour of Africa, on account of superiority of intellect?” The answer assumed is “no.”

Against Institutional Fixity

Taylor writes that “If a number of people should inclose themselves within a triangle, they would hear with great astonishment, that they had lost the power of changing the form of the inclosure; and that the dead form of the triangle governed living beings, instead of living beings who created that figure, governing it” (italics supplied).

Taylor is not abandoning law, institutions, or everyday morality. He does want to avoid being locked, beforehand, into eternally fixed political institutions, including the federal union. He was eager to discredit artificial intermediate institutions. As, in effect, a liberal methodological individualist, Taylor took the society he knew as given and spent little time on naturally existing intermediate institutions, which in his day remained intact.

Agrarianism and Economic Development

Literary historian M. E. Bradford sees Taylor as a defender of “closed, rural, religious, and corporate societies.” Such republics were not anti-commercial, but neither did they need the state as economic broker, promoter, and subsidizer. Taylor has of course some agrarian themes, but unlike Jefferson, he never asked to be on the literally isolated “footing of China.” Taylor’s society was already agrarian, and he hoped his political liberalism (called “republicanism”) would, in a decentralized federation, allow agrarian communities to flourish.

Some might suppose that Taylor’s ideas would, in practice, have blocked American economic growth. Writing of the English Enclosures, French historian Paul Mantoux comments that if “the bulk of the rural population remained on the land, the triumph of the factory system might have come later, but it could not have been indefinitely postponed.” This suggests that “modernization” under republican liberalism was feasible enough, and that such modernization might have been slower, more organic, and less chaotic than the state-dependent path actually taken. (The federal center long set a bad example of providing wars for the “primitive accumulation” of Indian lands, making it unlikely that a market economy without massive state assistance would ever enjoy long-lasting political popularity.)

The Continuing Relevance of John Taylor

Taylor summed up his outlook as follows: “Our policy divides power, and unites the nation in one interest; Mr. Adams’s divides a nation into several interests and unites power.” For a brief period after his death, Taylor became a prophet for hard-money, free-trade advocates in the wider Jacksonian movement.

Taylor’s work did not have the effect for which he hoped, but it has its merits as a critical benchmark by which to measure what has happened to the Old Republic. In Taylor’s opinion, artificial aristocrats can only sustain their projects in the long run through some form of political despotism—consolidation, empire, or monarchy. These outcomes are all around us, and John T. Flynn could repeat all of Taylor’s themes in the 1940s and early ’50s. As historian J. G. A. Pocock writes, “America may have guaranteed the survival of the forms of corruption it was created to resist.” We cannot say that John Taylor failed to warn us.