David R. Henderson  

No, Ben Bernanke, He Wasn't

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Hamilton was without doubt the best and most foresighted economic policymaker in U.S. history.
So writes former Fed chairman Ben Bernanke.

Monetary economist and fellow UCLA grad Lawrence H. White disagrees. Larry writes:

Now that the controversy has cooled we can take a more informed perspective. There is no denying Hamilton's importance and influence, or that his life story is compelling, as evidenced by the sold-out hip-hop musical Hamilton currently running on Broadway. But the wisdom of his policy advice, and the merits of the First Bank of the United States (BUS), are another matter.

To describe Hamilton's Bank accurately, one should note that Congress owned one fifth of its shares, and chartered it exclusively, that is, made it the only bank allowed by law to branch nationwide. (State governments chartered banks, but each state denied entry to banks with charters from other states.) The BUS monopoly franchise was among the chief of the objections of Jefferson and Madison, and deservedly so. One nationwide bank is better than none, but many is better than one. Creating a legal monopoly where open competition could and should prevail is hardly a mark of good or foresighted economic policy.

Larry continues:
Many modern-day historians miss this point, and laud Hamilton as a man of unerring financial genius. Robert E. Wright and David J. Cowen, in their 2006 book Financial Founding Fathers: The Men Who Made America Rich, write of Hamilton's "creative genius, as he became the architect and chief advocate of a powerful national bank." They claim that "Hamilton's thought was often far in advance of that of most of his contemporaries," as when he was early to advocate a national bank. They quote Hamilton's 1781 statement that "in a National Bank alone we can find the ingredients to constitute a wholesome, solid and beneficial paper credit," and add: "He was correct." They call Hamilton's 1790 Report on the Bank "a masterpiece that cogently explained the importance of banks in a capitalist economy." They credit Hamilton with the following argument, as though it made good sense: "Next, he stressed that all the great powers of Europe possessed public banks and were indebted to them for successful trade and commerce. The implications of the comparison were clear: if young America wanted to join the ranks of the elite powers, it too would have to create a banking infrastructure." In much the same way, Hamilton would elsewhere argue that if the leading European nations have protective tariffs, we should have them too. The error should be plain.

Wright's and Cohen's last sentence above, which Larry responds to with his tariff analogy, reminds me of what I call "the best question your mother ever asked you." Namely, "if your friends want to jump off a cliff, is it a good ides for you to jump off a cliff too?"

The great tragedy of U.S. monetary policy in the 19th century was that the United States was saddled with regulations that caused us to have a fairly primitive banking system, a system that led to panics. The solution was not a banking monopoly.

By the way, Jeff Hummel has an excellent comment on Larry's article laying out one interesting aspect of one of Hamilton's policy proposals.

You might wonder why I'm blogging about this a year after the earlier discussion. Answer: I didn't then, it's still relevant, and it's an important issue.

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CATEGORIES: Monetary Policy , Money , Regulation

COMMENTS (11 to date)
RohanV writes:

"if your friends want to jump off a cliff, is it a good idea for you to jump off a cliff too?"

I find xkcd's rebuttal pretty convincing.

David R. Henderson writes:

LOL. :-)

Daniel Klein writes:

David, you quote Larry saying:

To describe Hamilton's Bank accurately, one should note that Congress owned one fifth of its shares, and chartered it exclusively, that is, made it the only bank allowed by law to branch nationwide. (State governments chartered banks, but each state denied entry to banks with charters from other states.)

I'm a little unclear on whether the fact that no non-BUS bank had trans-state operations was the doing of Congress, and, likewise, whether that was something Hamilton favored and promoted. The way that block quote reads I wonder whether Congress/Hamilton simply authorized BUS to operate in all states and did not say or do anything to forbid other banks from doing so (that is, that that evil came from the states themselves). In that case maybe Hamilton shouldn't be faulted for the fact that there was only one bank operating trans-state.

I haven't checked Larry's piece. Other text you quote from Larry suggests that Congress/Hamilton did do the dirty deed of forbidding non-BUS banks from operating trans-state, but I don't feel 100% certain. Clarification would be much appreciated.

ThaomasH writes:

Surely you cannot blame Hamilton for states not allowing banks from other states to have branches in their borders. LIkewise, it was the fault of the Supreme court not to apply the logic of the Lerner Theorem to extend the Constitutional prohibition on expert taxes to import taxes too.

There's an excellent discussion of the difference between Canada's and the U.S. banking systems in Calomiris and Haber, Fragile By Design.

In short, Canada has a system that would appeal to Hamilton, and it has been much more stable than ours.

Here's a pretty good short summary of the differences between Canada and the U.S. from the Richmond Fed.

Zeke5123 writes:

I don't know the history of banking, but one would think the dormant commerce clause and Gibbons V. Ogden would've applied to any banking kerfuffle. That is, Marshall presumably would've held that state government could not discriminate in business against individuals from other states.

Lawrence H White writes:

Not recognizing other states' charters was the state governments' doing. Not letting more than one bank have a federal charter, bestowing the ability to branch across state lines, was Hamilton's plan and the doing of the Congress under the control of Hamilton's party.

David R. Henderson writes:

@Dan Klein,
I asked your question of Jeff Hummel and here is his answer:

The answer to Dan’s question is that Congress indeed had nothing to do with the failure of state banks to branch across state lines. It was the result of the privileges state legislatures put into the charters of the state banks. Bear in the mind this is not a period of general incorporation, which didn’t fully emerge in the U.S. until the 1840s, and even then not in many of the slave states. Up until the passage of general incorporation laws, every single corporation of any type whatsoever required a special legislative act, and these acts usually included monopoly privileges for the chartered corporation often along with a time period after which the charter would expire unless the legislature rechartered the corporation. Bank charters were a particularly important source of state revenue in this period. Sometimes the banks paid for the state charter, or the state owned shares in the banks, or both. In any case, the public-interest justification for these state banks was to provide services to residents of the state, so the legislatures had no reason to encourage their chartered banks to branch across state lines at the same time they wanted to protect their state banks from out-of-state competition. A good number of state legislatures did allow their state banks to branch within the state; some did not. Now you might well ask why didn’t non-corporate business go into banking. And to some extent they did, but nearly all states prohibited the issue of banknotes by any person or institution except chartered banks.

Does this vindicate Hamilton, given that the First Bank of the U.S. branched across state lines, despite his initial reservations (which I point out in my comment to Larry's post). Not significantly. As Larry points out, the efficient and libertarian policy would have been to allow anyone who met some minimal requirements to get a national bank charter and engage in branching. Instead, the B.U.S. was given a monopoly, along with special privileges enjoyed by no state bank, including that its banknotes could be used to pay taxes to the U.S. government. Not until the Civil War, with the National Banking Acts, did the national government apply the principle of general incorporation to nationally chartered banks, at the same time that it imposed its first prohibition on branching, either interstate or intrastate, although the restriction applied only to national banks. Yet the majority of the states at this time had already moved to general incorporation of banking, but under so called “free banking laws” that also tended to prohibit any branching.

Daniel Klein writes:

Thanks very much Jeff, Larry, and David. I've now read Larry's post and the comments, great stuff.

Robert E. Wright writes:

Oh, c'mon surely you have heard of a second best world scenario. Hamilton did, arguing in the Report on Mgs. that free trade would be best but since free trade didn't exist it was pointless to pretend it did. Taking the world "as it is" was part of his policy genius.

The BUS faced competition in each of its markets so its national "monopoly" was as much a bugaboo then as now. Given the state of technology, few banks would have found interstate branching worthwhile, which is why so few early banks asked their states for even intrastate branching rights and some that did, like the Manhattan Company, came to regret it. The government deposit subsidy covered the BUS's extra costs imposed by the diseconomies of scale it suffered. (Recall that AH was at first opposed to BUS branches on efficiency/stability grounds but he did not run the institution, Thomas Willing did.)

Hamilton's thought is greatly misunderstood because it is usually analyzed by historians who don't understand economics or economists who don't understand history (context or how to read primary sources). I've heard tell, though, that Cowen and Dick Sylla are close to finishing a sort of guide to key Hamilton policy papers that should set the record straight once and for all. Columbia University Press I believe, in 2017.


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