International Economics.docx

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THE GREAT DEBATE IN THE UNITED STATES:

ALEXANDER HAMILTON AND THE TRIUMPH OF THE NATIONALIST ECONOMICS IN THE THIRD WORLD STATE he issue having been joined between the mercantilists, on one hand, and the free traders, on the other hand, the main arena of battle shifted from Europe to the Third World which the American continent was then.

As mentioned earlier, Smith’s Wealth of Nations, by some historic coincidence, appeared on the very year of the American Declaration of Independence. America was at that time was preponderantly agricultural country; as such, the economic interest that ruled and prevailed there were the farmers, plantation owners and traders. Upon his assumption to the presidency, President Washington appointed as his Secretary to the Treasury a man had brilliantly served him as a military aide during the war for independence. The name of that aide was Alexander Hamilton. Hamilton was directed by the Congress in 1971 to submit a plan for the second economic development of the American Union. By that time, the Wealth of the Nations, which had been published in 1976, was already circulating widely and had entered the consciousness of American opinion. In the preparation of his famous “Report on Manufactures,” Hamilton was confronted by two choices: one was to follow the line of the Mercantilist, with which he was well acquainted; and the other was to opt for the line of Adam Smith’s Wealth of the Nations which had proposed free trade and, specifically, for America to keep her economy agricultural (see discussion on the last chapter) No country could have been more favorably disposed towards the line of Adam Smith and the physiocrats than America at that time. Hers was an agricultural economy without any significant industry. She lived on foreign trade with the more advanced and sophisticated economies of Europe, notably, England, to whom she shipped her agricultural products and from whom she imported manufactured goods. In that atmosphere, it was courting popular hostility to advocate industrialization. Since the population of the country was then predominantly agriculture and economic theories condemning industry were popular, the problem of writing convincing report in favor of stimulating manufacturers is a delicate one. 1

But Hamilton, having served as a military aide to Washington, had been vividly impressed by the military and the naval prowess of England, a tiny island-state across the 1

Thomas C. Cochran, Introduction to the Chapter on “Report on Manufactures,” in An American Primer, ed. Daniel Boorstin (New York: New American Library, 1966) p. 196

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Atlantic. In the war for independence, Hamilton knew that had it not been for the extensive financial and military assistance extended by France to the American revolutionaries, the thirteen colonies might easily have lost their war. France has spent more than $ 200 million supporting the American revolutionaries. That was one of the reasons why France went bankrupt, and that bankruptcy in turn help precipitate the French Revolution. Hamilton knew that behind England’s military and naval prowess was an economy that had advanced far beyond the agricultural stage, and which was fast turning to manufacturing on the basis of her economic strength. And Hamilton realized that unless the young American Republic likewise turned to industries, its independence would never be secure from the aggression of countries with comparatively powerful economies like England. Hamilton then made his fateful decision: America, like England, must become a manufacturing economy, as for this she must pursue mercantilist policies. Free Trade, Hamilton perceive, would continue to flood America’s comparatively backward economy with the manufacture goods of Europe, particularly England’s, and that would stifle the potential of the young republic to become an industrial nation. The future, Hamilton saw, lay not on agriculture, but in manufacturing and commerce. America, he said, would turn to free trade only after she shall have become like England a great industrial power. A classic biography of Hamilton recounts the intellectual process by which that architect of American industrialization and economic power reach the conclusion that Adam Smith’s free trade should be rejected: If Hamilton’s plans looked forward to the day when the United States would become a great commercial and industrial nation, the method by which he proposed to attain this goal looked backward to mercantilist. In this sense, he owed more to Colbert, the exponent of mercantilism, that to Adam Smith, the apostle of Laissezfaire It was natural that Hamilton, seeking union, wealth and power for his country should turn to mercantilism, “the economic first-thought of self-conscious nationalism.” XXX It was time enough, he added, to think of free trade when the United States had firmly establish its industries and attained with Great Britain a commanding position in world trade.2 2 John C. Miller, Alexander and the Growth of the New Nation(New York: Harper Torchbooks, 1959) p. 292

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Let us trace (through his own words) how that far-sighted American statesman demolished the arguments of Adam Smith and the free traders. First, Hamilton raised the point that the system advocated by Adam Smith “is far from characterizing the general policy of nations.” He pointed out that free trade was not the practice in the real world and that for the U.S. to adopt it would place her to great disadvantage. As he said: If the system of perfect liberty to industry and commerce were the prevailing system of nations, the arguments which dissuade a country, in the predicament of the United States, from the zealous pursuit of manufacturers, would doubtless have great force. But the system which has been mentioned is far from characterizing the general policy of nations. The prevalent one has been regulated by an opposite spirit. The consequence of it is that the United States are, to a certain extent, in the situation of a country precluded from foreign commerce. 3

At the onset, Hamilton reminded the U.S. Government that free trade, which Smith advocated, is not what nation-states actually is practice. They practice, Hamilton stressed, exactly the opposite, which was mercantilism. If the U.S. therefore were to practice free trade, she would decidedly be at the disadvantage because she would be admitting without restraint the goods of other states which made it a policy to restrain their importation of foreign goods. This point is relevant to the contemporary national debate on the issue of import liberalization. Those who oppose import liberalization argue that import restrictions characterize world trade and that for the Philippines to admit imports liberally is to go against international practice. They same may be said for what is happening to the U.S. Since the end of World War II, the U.S. has followed, in the name of free trade, a comparatively liberal import policy in the hope that others would follow her example. But no one has. Her major trading partner in Europe and Asia has vigorously controlled their imports. As a result, the U.S. is in deep trouble.

3 Alexander Hamilton, “Report on Manufactures” in An American Primer, supra, p. 199