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<h3><span id="lblStoryTitle"><font color="#000080"><font face="Verdana"><font size="1">http://www.mises.org/fullstory.aspx?control=1568</font></font></font></span></h3>
<h3><span><font size="5" face="Verdana" color="#000080">Ten Recurring Economic Fallacies, 1774-2004</font></span></h3>
<span id="lblStoryText">
<p class="MsoBodyText"><font face="Verdana" size="4">By H.A. Scott Trask</font>
<p class="MsoBodyText"><font face="Verdana"><img alt src="http://www.mises.org/images3/85fr.gif" align="right" border="0" width="206" height="248"></font>
<p class="MsoBodyText"><font face="Verdana"><span class="555424312-26072004">[</span>Posted
July 2<span class="555424312-26072004">6</span>, 2004<span class="555424312-26072004">]</span></font>
<p class="MsoBodyText"><font face="Verdana">As an American historian who knows
something of economic law, having learned from the Austrians, I became intrigued
with how the United States had remained prosperous, its economy still so dynamic
and productive, given the serious and recurring economic fallacies to which our
top leaders (political, corporate, academic) have subscribed and from which they
cannot seem to free themselves—and alas, keep passing down to the younger
generation.</font>
<p class="MsoBodyText"><font face="Verdana">Let’s consider ten.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #1: The Broken Window</font>
<p class="MsoBodyText"><font face="Verdana">One of the most persistent is that
of the broken window—one breaks and this is celebrated as a boon to the
economy: the window manufacturer gets an order; the hardware store sells a
window; a carpenter is hired to install it; money circulates; jobs are created;
the GDP goes up. In truth, of course, the economy is no better off at all.</font>
<p class="MsoBodyText"><font face="Verdana">True, there is a sudden burst of
activity, and some persons have surely gained, but only at the expense of the
proprietor whose window was broken, or his insurance company; and if the latter,
the other policyholders who will pay higher premiums to pay for paid-out claims,
especially if many have been broken.</font>
<p class="MsoBodyText"><font face="Verdana">The fallacy lies in a failure to
grasp what has been foregone by repair and reconstruction—the labor and
capital expended, having been lost to new production. This fallacy, seemingly so
simple to explain and grasp, although requiring an intellectual effort of some
mental abstraction to comprehend, seems to be ineradicable.</font>
<p class="MsoBodyText"><font face="Verdana">After the horrific destruction of
the Twin Towers in September 2001, the media quoted academic and corporate
economists assuring us that the government’s response to the attacks would
help bring an end to the recession. What was never mentioned was that resources
devoted to repair, security, and war-fighting are resources that cannot be
devoted to creating consumer goods, building new infrastructure, or enhancing
our civilization. We are worse off because of 9-11.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #2: The Beneficence of War</font>
<p class="MsoBodyText"><font face="Verdana">A second fallacy is the idea of war
as an engine of prosperity. Students are taught that World War II ended the
Depression; many Americans seem to believe that tax revenues spent on defense
contractors (creating jobs) are no loss to the productive economy; and our
political leaders continue to believe that expanded government spending is an
effective way of bringing an end to a recession and reviving the economy.</font>
<p class="MsoBodyText"><font face="Verdana">The truth is that war, and the
preparation for it, is economically wasteful and destructive. Apart from the
spoils gained by winning (if it is won) war and defense spending squander
labor, resources, and wealth, leaving the country poorer in the end than if
these things had been devoted to peaceful endeavors.</font>
<p class="MsoBodyText"><font face="Verdana">During war, the productive powers of
a country are diverted to producing weapons and ammunition, transporting
armaments and supplies, and supporting the armies in the field.</font>
<p class="MsoBodyText"><font face="Verdana">William Graham Sumner described how
the Civil War, which he lived through, had squandered capital and labor:"The
mills, forges, and factories were active in working for the government, while
the men who ate the grain and wore the clothing were active in destroying, and
not in creating capital. This, to be sure, was war. It is what war means, but it
cannot bring prosperity." </font>
<p class="MsoBodyText"><font face="Verdana">Nothing is more basic; yet it
continues to elude the grasp of our teachers, writers, professors, and
politicians. The forty year Cold War drained this country of much of its wealth,
squandered capital, and wasted the labor of millions, whose lifetime work,
whether as a soldier, sailor, or defense worker, was devoted to policing the
empire, fighting its brush wars, and making weapons, instead of building up our
civilization with things of utility, comfort, and beauty.</font>
<p class="MsoBodyText"><font face="Verdana">Some might respond that the Cold War
was a necessity, but that’s not the question—although we now know that the
CIA, in yet another massive intelligence failure, grossly overestimated Soviet
military capabilities as well as the size of the Soviet economy, estimating it
was twice as large and productive as it really was. The point is the
wastefulness of war, and the preparation for it; and I see no evidence whatever
that the American people or their leaders understand that, or even care to think
about it. An awareness and comprehension of these economic realities might lead
to more searching scrutiny of the aims and methods that the Bush administration
has chosen for the War on Terror.</font>
<p class="MsoBodyText"><font face="Verdana">Only a few days after 9-11, Rumsfeld
declared that the war shall last as long as the Cold War (forty plus years), or
longer—a claim the administration has repeated every few months since then—without
eliciting the slightest notice or questioning from the media, the public, or the
opposing party. Would that be the case, if people understand how much a second
Cold War, this time with radical Islam, will cost us in lives, treasure, and
foregone comfort and leisure?</font>
<p class="MsoBodyText"><font face="Verdana">Myth #3: The Best Way to Finance
a War is by Borrowing</font>
<p class="MsoBodyText"><font face="Verdana">Beginning with the War of
Independence and continuing through the War on Terror, Americans have chosen to
pay for their wars by borrowing money and inflating the currency. Adam Smith
believed that the war should be financed by a levy on capital. This way the
people of the country understand how much the war is costing them, and then can
better judge whether it is really necessary. While he conceded that borrowing
might be necessary in the early part of a war, before the revenue from war taxes
began to flow into the treasury, he insisted that borrowing be kept to a minimum
as a temporary expedient only.</font>
<p class="MsoBodyText"><font face="Verdana">Borrowing increases the costs of war
in the form of interest. Inflating the currency, which often accompanies massive
borrowing, as it did during the War of Independence, the War Between the States,
and the War in Vietnam (just to name three), is the worst method of war
finance, for it drives up prices, increases costs, enlarges debt, spawns
malinvestments and speculation, and worsens the redistributive effects of war
spending.</font>
<p class="MsoBodyText"><font face="Verdana">In 1861, the Lincoln administration
decided that the people of the north would not stand for much taxation, and that
it would increase the already considerable opposition to the southern war.
According to Sumner, the financial question of the day was"whether we
should carry on the war on specie currency, low prices, and small imports, or on
paper issues, high prices, and heavy imports?" The latter course was
chosen, and the consequences were a national debt that soared from $65 million
in 1860 to $27 thousand million ($2.7 billion) in 1865, and a massive
redistribution of wealth to federal bondholders.</font>
<p class="MsoBodyText"><font face="Verdana">In 1865, the financial question
recurred. It was:"Shall we withdraw the paper, recover our specie [gold
and silver coin], reduce prices, lessen imports, reduce debt, and live
economically until we have made up the waste and loss of war, or shall we keep
the paper as money, export all our specie which had hitherto been held in
anticipation of resumption, buy foreign goods with it, and go on as if nothing
had happened?" </font>
<p class="MsoBodyText"><font face="Verdana">The easy route was taken again (specie
payments were not resumed until 1879, fourteen years later, and almost
twenty years after the 1861 suspension) and the consequences were an
inflation-driven stock market and railroad boom that culminated in the panic of
1873, the failure of the House of Cook, and the Great Railway Strike of 1877,
the first outbreak of large-scale industrial violence in American history.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #4: Deficit Spending
Benefits the Economy and Government Debt </font>
<p class="MsoBodyText"><font face="Verdana">Three years ago, when then treasury
secretary Paul O’Neill objected to the Bush administration’s policy of guns,
butter, and tax cuts he was told by the vice president, Dick Cheney, that,
"deficits don’t matter." </font>
<p class="MsoBodyText"><font face="Verdana">Of course, they don’t matter—to
him, but they matter to the country. John Maynard Keynes's prescription for
curing a recession included tax cuts and increased government spending."We
are all Keynesians now" should be the new motto inscribed on the front of
the Treasury building in Washington.</font>
<p class="MsoBodyText"><font face="Verdana">However, Keynes taught that once the
recession was over government spending should be reduced, taxes increased, and
the deficit eliminated. Current American policy is to continue deficit spending
after the recession is over, and to borrow in peace as well as war. One
longstanding criticism of such policies is that government borrowing"crowds
out" private investment, thus raising interest rates.</font>
<p class="MsoBodyText"><font face="Verdana">In an era when credit creation is so
easy, and interest rates remain low despite massive deficits reaching $500
billion per annum, economists no longer take this objection seriously. Another
criticism is that an accumulating debt saddles future generations with a heavy
burden, which is both unfair and detrimental to future growth. Once again,
economists and politicians regard this objection as groundless. They reason that
future generations derive benefits from deficit expenditures—greater security,
more infrastructure, improved health and welfare—and that since the principal
need never be paid, it is not much of a burden anyway.</font>
<p class="MsoBodyText"><font face="Verdana">They are wrong. By avoiding having
to increase taxes, borrowing hides the price to be paid for increased government
spending (the destructive diversion of capital and labor from private pursuits
to government projects), and defuses potential public opposition to new or
expanded government initiatives, here and abroad. It is thus both unrepublican
and anti-democratic.</font>
<p class="MsoBodyText"><font face="Verdana">Second, depending on how long the
redemption of the principal is deferred, accumulating interest payments can
double, triple, quadruple,... the cost of the initial expenditure (This
country has never yet discharged its Civil War debt!) Third, interest
payments represent a perpetual income transfer from the working public to the
bondholders—a kind of regressive tax that makes the rich, richer and the poor,
poorer. Finally, the debt introduces new and wholly artificial forms of
uncertainty into financial markets, with everyone left to guess whether the debt
will be paid through taxes, inflation, or default.</font>
<p class="MsoBodyText"><font face="Verdana">Myth # 5: Government Policies to
Promote Exports are a Good Idea</font>
<p class="MsoBodyText"><font face="Verdana">The fallacy that government is a
better judge of the most profitable modes of directing labor and capital than
individuals is well illustrated by exporting policies. In the twentieth century,
the federal government has sought to promote exports in various ways. The first
was by forcing open foreign markets through a combination of diplomatic and
military pressure, all the while keeping our own markets wholly or partially
closed. The famous"open door" policy, formulated by Secretary of
State John Hay in 1899 was never meant to be reciprocal (after all, he served in
the McKinley administration, the most archly protectionist in American history),
and it often required a gun boat and a contingent of hard charging marines to
kick open the door.</font>
<p class="MsoBodyText"><font face="Verdana">A second method was export
subsidies, which are still with us. The Export-Import Bank was established by <ST1:PLACE>
Roosevelt</ST1:PLACE>
in 1934 to provide cash grants, government-guaranteed loans, and cheap credit
to exporters and their overseas customers. It remains today—untouched by
"alleged" free market Republican administrations and congresses.</font>
<p class="MsoBodyText"><font face="Verdana">A third method was dollar
devaluation, to cheapen the selling price of American goods abroad. In 1933, <ST1:PLACE>
Roosevelt</ST1:PLACE>
took the country off the gold standard and revalued it at $34.06, which
represented a significant devaluation. The object was to allow for more domestic
inflation and to boost exports, particularly agricultural ones, which failed;
now Bush is trying it.</font>
<p class="MsoBodyText"><font face="Verdana">A fourth method, tried by the
Reagan administration, was driving down farm prices to boost exports, thereby
shrinking the trade deficit. The plan was that <ST1:COUNTRY-REGION>
<ST1:PLACE>
America</ST1:PLACE>
</ST1:COUNTRY-REGION>
would undersell its competitors, capture markets, and rake in foreign exchange.
(When others do this it is denounced as unfair, as predatory trade.) What
happened? Well, it turned out that the agricultural export market was
rather elastic. Countries like <ST1:COUNTRY-REGION>
<ST1:PLACE>
Brazil</ST1:PLACE>
</ST1:COUNTRY-REGION>
and <ST1:COUNTRY-REGION>
<ST1:PLACE>
Argentina</ST1:PLACE>
</ST1:COUNTRY-REGION>
, depending on farm exports as one of their few sources of foreign exchange,
which they desperately needed to service their debt loads, simply cut their
prices to match the Americans. Plan fails.</font>
<p class="MsoBodyText"><font face="Verdana">But it got worse: American farmers
had to sell larger quantities (at the lower prices) just to break even.
Nevertheless, although the total volume of American agricultural exports
increased, their real value (in constant dollars) fell—more work, lower
profits. Furthermore, farmers had to import more oil and other producer goods to
expand their production, which worsened the trade deficit. Then, there
were the unforeseen and deleterious side-effects. Expanded cultivation and
livestock-raising stressed out and degraded the quality of the soils, polluted
watersheds, and lowered the nutritional value of the expanded crop of vegetables,
grains, and animal proteins.</font>
<p class="MsoBodyText"><font face="Verdana">Finally, the policy of lower price/higher
volume drove many small farmers, here and abroad, off the land, into the cities,
and across the border, our border. Here is an economic policy that not
only failed in its purpose but worsened the very problem it was intended to
alleviate, and caused a nutritional, ecological, and demographic catastrophe.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #6: Commercial Warfare Works</font>
<p class="MsoBodyText"><font face="Verdana">Sumner pointed out that the
Americans declared their political independence, they had not entirely freed
themselves from the fallacies of mercantilism. Mercantilists believed that
government should both regulate and promote certain kinds of economic activity,
the economy being neither self-regulating, nor capable of reaching maximum
efficiency if left alone. Thus, in their struggle for independence, the
Americans turned to two dubious policies: commercial warfare; and inflationary
war finance.</font>
<p class="MsoBodyText"><font face="Verdana">I won’t rehash the history of the
depreciating Continental—which led to the confiscation of property without
adequate compensation, defrauded creditors, impoverished soldiers and sailors,
price controls, a larger war debt—but I will point out what Sumner so amply
demonstrated in his financial history of the Revolutionary War: the commercial
war harmed the Americans far more than the British.</font>
<p class="MsoBodyText"><font face="Verdana">In the eighteenth and nineteenth
centuries, commercial war took the form of boycotts and embargoes. The idea was
that by closing our markets to British goods, or by denying them our exports,
agriculture and raw materials, we could coerce them, peacefully, into changing
their policies. This policy worked only one time, helping to persuade the
British to repeal the Stamp Act of 1765; but each time thereafter it was tried
it only antagonized them and led to some form of retaliation. In 1774-75, on
the eve of war, the Americans stood in desperate need of supplies to prepare for
war, and the English offered the best goods at the best prices.</font>
<p class="MsoBodyText"><font face="Verdana">By refusing to trade, hoping to
coerce the British into abandoning their own Coercive Acts, the Americans began
the war suffering from a supply shortage, which only grew worse; after a few
years of war, they found themselves under the necessity of trading with the
enemy, which was carried on through the Netherlands and the West Indian islands
of Antigua and St. Eustatius. President Jefferson’s embargo of 1807-09 was a
complete fiasco. Not only did it fail to accomplish its purpose of forcing the
British and French to respect our neutral commerce; it devastated the <ST1:PLACE>
New England</ST1:PLACE>
economy, which was dependent on commerce and ship-building, hurt southern
planters (who could no longer export), reduced federal tariff revenue, and drove
the <ST1:PLACE>
New England</ST1:PLACE>
states to the brink of secession.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #7: The Late Nineteenth
Century was an Era of Laissez-Faire Capitalism</font>
<p class="MsoBodyText"><font face="Verdana">Certainly, the late nineteenth
century was not an era of laissez-faire, despite the stubborn and persistent
myth to the contrary. True, there were few government regulations on business,
but high tariffs, railroad subsidies, and the national banking system prove that
the government was no neutral bystander. Sumner more accurately termed it the
era of plutocracy, in which politically organized wealth used the power of the
state for selfish advantage.</font>
<p class="MsoBodyText"><font face="Verdana">He also warned,"Nowhere in the
world is the danger of plutocracy as formidable as it is here." For
these indiscretions, the manufacturing and bond-holding hierarchy tried to get
him kicked out of Yale, where they thought he was poisoning the minds of their
sons with free trade heresies. Only during two periods since 1776 has the
government mostly left the economy alone: during the early years of the federal
republic; and in the two decades previous to the Civil War. The political
economist Condy Raguet called the first period of economic freedom, from 1783 to
1807,"the golden age" of the republic: Trade was free, taxes were low,
money was sound, and Americans enjoyed more economic freedom than any other
people in the world. Sumner thought the years from 1846 to 1860—the era of the
independent treasury, falling tariffs, and gold money—was the true
"golden age." </font>
<p class="MsoBodyText"><font face="Verdana">(Historians consider the presidents
during this last period—Fillmore, Pierce, and Buchanan—as among the worst we
have ever had. Yet, from 1848-1860, the country was at peace, the economy
prosperous, taxes low, money hard, and the national debt was shrinking. This
tells us how historians define political greatness.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #8: Business Corporations
Favor a Policy of Laissez-Faire</font>
<p class="MsoBodyText"><font face="Verdana">Never in the history of our country
have corporations, Wall Street financiers, bond holders, and other large
capitalists, as a class or interest, favored a policy of economic liberty
and nonintervention by government. They have always favored some form of
mercantilism. It is surely significant that the second Republican Party, founded
in <ST1:STATE>
<ST1:PLACE>
Michigan</ST1:PLACE>
</ST1:STATE>
in 1854, was funded and led by men who wished to overthrow the libertarian
desideratum of the 1840s and 50s. Of course there have been exceptions.</font>
<p class="MsoBodyText"><font face="Verdana">The merchants and ship-owners of
maritime New England put up a good fight for free trade and sound money in the
early years of the republic, and the New York City bankers in the nineteenth
century were conservative Democrats who supported free trade, low taxes, sound
money, and the gold standard. But these were exceptions. Consider the
testimony of William Simon, who was Secretary of the Treasury under Nixon:</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<p class="MsoBodyText"><font face="Verdana">I watched with incredulity as
businessmen ran to the government in every crisis, whining for handouts or
protection from the very competition that has made this system so productive.
I saw Texas ranchers, hit by drought, demanding government-guaranteed loans;
giant milk cooperatives lobbying for higher price supports; major airlines
fighting deregulation to preserve their monopoly status; giant companies like
Lockheed seeking federal assistance to rescue them from sheer inefficiency;
bankers, like David Rockefeller, demanding government bailouts to protect them
from their ill-conceived investments; network executives, like William Paley
of CBS, fighting to preserve regulatory restrictions and to block the
emergence of competitive cable and pay TV.</font>
[/i]
<p class="MsoBodyText"><font face="Verdana">And always, such gentlemen
proclaimed their devotion to free enterprise and their opposition to arbitrary
intervention into our economic life by the state. Except, of course, for their
own case, which was always unique and which was justified by their immense
concern for the public interest.</font>
<p class="MsoBodyText"><font face="Verdana">During the nineteenth century, those
who clamored loudest and most effectively for government intervention in the
economy were businessmen; of course farmers sometimes did so as well.
Businessmen sought promotional policies in the form of protective tariffs, a
national bank, and public funding of"internal improvements," such as
turnpikes, bridges, and canals. By the 1820s, proponents of this program called
it"the American System," with Senator Henry Clay of <ST1:STATE>
<ST1:PLACE>
Kentucky</ST1:PLACE>
</ST1:STATE>
its most prominent champion. Raguet more accurately referred to it as the
"British System." Clay ran for president on this platform three
times, and lost three times (1824, 1832, and 1844). His protégé, Abraham
Lincoln, learned from this experience, and so when he ran for president in 1860,
hoping to implement the same program, he rarely mentioned it; instead, he
promised to save the western territories from the blight of slavery and to
overthrow the"slave power"—political camouflage that worked
brilliantly.</font>
<p class="MsoBodyText"><font face="Verdana">The American System was an egregious
form of redistributive special-interest politics. It enriched <ST1:STATE>
<ST1:PLACE>
Louisiana</ST1:PLACE>
</ST1:STATE>
sugar planters, <ST1:STATE>
<ST1:PLACE>
Kentucky</ST1:PLACE>
</ST1:STATE>
hemp growers, <ST1:STATE>
<ST1:PLACE>
New York</ST1:PLACE>
</ST1:STATE>
sheep herders, <ST1:STATE>
<ST1:PLACE>
Pennsylvania</ST1:PLACE>
</ST1:STATE>
iron mongers, <ST1:PLACE>
New England</ST1:PLACE>
textile magnates, canal companies, and railroad corporations—all at the
expense of planters, farmers, mechanics, and consumers. The antebellum
protectionist movement reached its apogee with the tariff of 1828, doubling tax
rates on dutiable imports to an average of 44 percent in 1829 and 48 percent the
next year.</font>
<p class="MsoBodyText"><font face="Verdana">At the time, Raguet calculated that
the average American worked one month a year just to pay the tariff. To his
readers, who paid no direct federal taxes at all, nor any excise taxes, this
figure was shocking. In 1830, tax-freedom day was the first of February; today
it is in June, rendering our tax burden five times greater.</font>
<p class="MsoBodyText"><font face="Verdana">Another income transfer was
affected by the vicious banking system of the time, under which incorporated
bankers, without capital, charged interest for lending out pieces of
paper and deposit credit, which cost them nothing except the cost of printing.
Some libertarians have contended that this was the era of free banking. It was
nothing of the sort. Bankers were protected under the shield of limited
liability and, during financial panics and bank runs, by special laws
authorizing the suspension of specie payments—when they refused their
contractual obligation to pay specie for their notes.</font>
<p class="MsoBodyText"><font face="Verdana">And their paper was accepted by the
federal and state governments; whether one was buying land, paying import duties,
purchasing a bond, or buying bank stock, for the government, bank paper was as
good as gold. These plutocratic measures thus effected a redistribution of
wealth, long before the emergence of socialism. Sumner said that the plutocrats
of his own postbellum era (manufacturers, railroad barons, national bankers, and
federal bond holders) were"simply trying to do what the generals, nobles,
and priests have done in the past—get the power of the State into their hands,
so as to bend the rights of others to their own advantage." The
plutocrats of today are still at it, even more successfully, with almost no
opposition.</font>
<p class="MsoBodyText"><font face="Verdana">Myth #9: Hamilton Was Great</font>
<p class="MsoBodyText"><font face="Verdana"> Another myth is that the
financial genius and economic statesmanship of Alexander Hamilton saved the
credit of the infant <ST1:COUNTRY-REGION>
<ST1:PLACE>
United States</ST1:PLACE>
</ST1:COUNTRY-REGION>
and established the sound financial and economic foundation essential for
future growth and prosperity. Ron Chernow’s hagiographic biography of <ST1:CITY>
<ST1:PLACE>
Hamilton</ST1:PLACE>
</ST1:CITY>
is now moving up the best seller charts, cluttering the display tables of
Borders and Barnes & Noble, and taking up time on C-Span’s Booknotes; but
its greatest contribution will be to perpetuate the <ST1:CITY>
<ST1:PLACE>
Hamilton</ST1:PLACE>
</ST1:CITY>
myth for another generation.</font>
<p class="MsoBodyText"><font face="Verdana">Sumner’s concise and devastating
biography of that vainglorious puffin jay, written over a hundred years ago,
remains the best. He closely studied Hamilton’s letters and writings,
including the big three—his Report on the Public Credit (1790), Report
on a National Bank (1790), and Report on Manufactures (1791)—and
came to three conclusions: first, the New Yorker had never read Smith’s Wealth
of Nations (1776), the most important economic treatise written in the
Anglo-American world in that period; second, he was a mercantilist, who would
have been quite at home serving in the ministry of Sir Robert Walpole or Lord
North; and third, Hamilton believed many things that are not true—that federal
bonds were a form of capital; that a national debt was a national blessing; that
the existence of banks increased the capital of the country; that foreign trade
drained a country of its wealth, unless it resulted in a trade surplus; and that
higher taxes were a spur to industry and necessary because Americans were lazy
and enjoyed too much leisure.</font>
<p class="MsoBodyText"><font face="Verdana">The idea here was that if you taxed
Americans more, they would have to work harder to maintain their standard of
living, thus increasing the gross product of the country and providing the
government with more revenue to spend on grand projects and military adventures.
<ST1:CITY>
<ST1:PLACE>
Hamilton</ST1:PLACE>
</ST1:CITY>
was once stoned by a crowd of angry <ST1:STATE>
<ST1:PLACE>
New York</ST1:PLACE>
</ST1:STATE>
mechanics. Is it any wonder why? </font>
<p class="MsoBodyText"><font face="Verdana">Myth #10: Agrarianism or
Industrialism: We Must Choose</font>
<p class="MsoBodyText"><font face="Verdana">Historians teach that Americans in
the 1790s and 1800s had two economic choices—Hamilton and the Federalists who
believed in sound money, banking, manufacturing, and economic progress, and the
Jeffersonians who believed in inflation, agrarianism, and stasis. This is a
gross simplification. Not all Federalists were Hamiltonian; many despised him. <ST1:CITY>
<ST1:PLACE>
Hamilton</ST1:PLACE>
</ST1:CITY>
dogmatically believed that the <ST1:COUNTRY-REGION>
<ST1:PLACE>
United States</ST1:PLACE>
</ST1:COUNTRY-REGION>
should become a manufacturing nation like <ST1:COUNTRY-REGION>
<ST1:PLACE>
England</ST1:PLACE>
</ST1:COUNTRY-REGION>
and that it was the duty of the federal government to bring this about by
promotional policies. <ST1:PLACE>
Jefferson</ST1:PLACE>
, on the other hand, oscillated between liberalism and agrarianism. At his best,
he was liberal, but for a long time he dogmatically believed that the <ST1:COUNTRY-REGION>
<ST1:PLACE>
United States</ST1:PLACE>
</ST1:COUNTRY-REGION>
should remain an agricultural nation, and that it was the duty of the federal
government to keep it in such a state by delaying the onset of large-scale
manufacturing.</font>
<p class="MsoBodyText"><font face="Verdana">Hence, to expand trade, it should
fight protectionist powers and hostile trading blocs, acquire more agricultural
land through purchase or war, and, after obtaining the requisite amendment, fund
the construction of internal improvements to foster the movement of agricultural
produce to the seaports.</font>
<p class="MsoBodyText"><font face="Verdana">Thus, Jefferson authored the
Louisiana Purchase, the Tripolitan War, the Embargo; and his chosen successor,
James Madison, the War of 1812, all designed to fulfill this agrarian vision. As
president, <ST1:CITY>
<ST1:PLACE>
Madison</ST1:PLACE>
</ST1:CITY>
became ever-more Hamiltonian, supporting the re-establishment of the Bank of
the <ST1:COUNTRY-REGION>
<ST1:PLACE>
United States</ST1:PLACE>
</ST1:COUNTRY-REGION>
, the raising of tariffs, conscription, and the appointment of nationalists to
the Supreme Court. He appointed Joseph Story, which is like Ike appointing Earl
Warren, or Bush appointing Souter. Meanwhile, in retirement, <ST1:PLACE>
Jefferson</ST1:PLACE>
advocated manufacturing to achieve national economic self-sufficiency.</font>
<p class="MsoBodyText"><font face="Verdana">Why not Freedom?</font>
<p class="MsoBodyText"><font face="Verdana">Besides industrialism and
agrarianism, there was a third position—call it liberalism, or laissez-faire—which
maintained that the government should promote neither manufacturing nor
agriculture, but leave both alone, to prosper or not, expand or recede,
according to the unerring guides of profitability, utility, individual choice,
and economic law. Inspired by the writings of Adam Smith and David Ricardo, but
even more those of the French radical school of Turgot, Say, and de Tracy, whose
mottos laissez nous faire (leave the people alone) and ne trop
gouverneur (do not govern too much) captured the essence of good government.</font>
<p class="MsoBodyText"><font face="Verdana">Outstanding representatives of this
liberal philosophy were the young Daniel Webster, who made his reputation
for oratory with fiery speeches on behalf of free trade, hard money, and state
rights as a New Hampshire congressman, and the great John Randolph of Virginia,
who broke with Jefferson over the embargo and opposed the War of 1812, losing
his seat as a consequence, and Condy Raguet, the influential political economist,
who was the first American to develop a monetary theory of the business cycle,
which he did in response to the panic of 1819. Laissez-faire was the cause of
those who opposed plutocracy and supported the people. It represented both the
moral high ground and sound economic reasoning.</font>
<p class="MsoBodyText"><font face="Verdana">Conclusion</font>
<p class="MsoBodyText"><font face="Verdana">When he was writing his masterful History
of American Currency, Sumner grappled with the question of how <ST1:PLACE>
North America</ST1:PLACE>
had withstood levels of inflation and indebtedness that would have ruined any
European country. His answer:"The future which we discount so freely
honors our drafts on it. Six months [of] restraint avails to set us right, and
our credit creations, as anticipations of future product of labor, become
solidified." </font>
<p class="MsoBodyText"><font face="Verdana">In other words, the country was so
productive that the losses engendered by these excesses were quickly made up. He
went on:"We often boast of the resources of our country, but we did not
make the country. What ground is there for boasting here? </font>
<p class="MsoBodyText"><font face="Verdana">The question for us is: What have we
made of it? No one can justly appreciate the natural resources of this
country until, by studying the deleterious effects of bad currency and bad
taxation, he has formed some conception of how much, since the first settlers
came here, has been wasted and lost." </font>
<p class="MsoBodyText"><font face="Verdana">The unseen again. Let us begin with
geography and resources, to which Sumner alludes. The lower 48 states are
entirely in the temperate zone. Apart from the desert states of the southwest,
all receive ample rainfall. Most of the land is fertile, and it is abundant. The
country teems with natural resources.</font>
<p class="MsoBodyText"><font face="Verdana">Then there are the people. Until
very recently, the United States enjoyed a low density of population, which
meant high wages and low land prices. And for centuries, the population has been
one of the hardest working in the world, creating an infrastructure to build on.
Then there is the culture. Largely because of the influence of Christianity, the
debilitating sin of envy has no social standing here, unlike the <ST1:PLACE>
Third World</ST1:PLACE>
where it is perhaps the chief impediment to wealth-creation and development.</font>
<p class="MsoBodyText"><font face="Verdana">Also, for the same reason, there is
little bribery, which also impedes growth. Finally, there is the tradition of
law, respect for private property, tradition of profit, and contractual freedom.
These institutions—and not the fallacious ideas, corrupt institutions,
and bad policies named above—form the core of American prosperity.</font>
<p class="MsoBodyText"><font face="Verdana"><span class="555424312-26072004">____________________________</span></font>
<font face="Verdana">Historian Scott Trask is an adjunct scholar of the Mises
Institute. </font><font face="Verdana">hstrask@highstream.net</font><font face="Verdana">.
See his </font><font face="Verdana">article
archive.</font><font face="Verdana"> Discuss this article on the blog.
(Note: This speech was delivered before the July meeting of the <ST1:CITY>
<ST1:PLACE>
St. Louis</ST1:PLACE>
</ST1:CITY>
Discussion Club, <ST1:DATE Year="2004"
Day="14" Month="7">
14 July 2004</ST1:DATE>
.)
</font></span></font>
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