Forging American Capitalism

After over a month of faffing around, Prospect has finally published my review of the late Thomas McCraw's The Founders and Finance (Harvard UP, 2012). It's here. Sadly, their editor hacked it up some. So here's what I actually wrote.

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In the winter of 1781, the army of revolutionary America was near breaking-point: ill-equipped and under-nourished to the point of mutiny, encamped in snow-bound New Jersey. George Washington wrote, ‘it would be well for the troops, if like chameleons, they could live upon air.’ Then in May that year, Congress appointed Robert Morris to take charge of the financing and supply of the war. This was a desperate measure: they gave Morris wide-ranging powers over army employment and supply contracts. What was his plan? A radical austerity package. Morris would ‘reduce the expenditures as nearly as possible to what in reason and justice they ought to be,’ and thereby restore public credit.

This is not a story that Thomas McCraw tells in The Founders and Finance. Fortunately for the rebels, Washington persuaded Morris to hold off on his austerity plans and fund just one more campaign – to besiege the British in South Carolina. By the end of the year, Cornwallis surrendered at Yorktown and the war was effectively won. The part we learn in this book is how Morris ‘almost miraculously procured the necessary funds,’ even contributing his own money. After all, he might have said to the near-starving men as they marched southward through Pennsylvania, we’re all in this together.

Although Morris gets a potted biography in chapter six, he isn’t one of the major protagonists of The Founders and Finance. He died in disgrace after bankrupting himself on land speculation and serving a term in debtors’ jail. Instead, McCraw’s account is built around very conventional biographies of two much more acceptable heroes. This is a book in a long, grand, and profitable tradition – admiring portraits of the so-called founding fathers, the elite white men who signed the Declaration of Independence, wrote the Constitution, and served in the first governments of the United States.

David McCullough’s Pullitzer-winning John Adams, with its attendant HBO series, is the most successful recent example of this genre, and can be credited with reinvigorating it for the twenty-first century. Since then, one prominent trend has been to pick out ‘lost’ or ‘forgotten’ examples, like Aaron Burr, the dissolute Vice-President accused of treason by Thomas Jefferson, or Noah Webster, the ill-tempered dictionary compiler. These figures may stretch the definition of ‘founder,’ but the purpose of these books isn’t to question the category so much as to fill it fit to bursting.

Thomas McCraw, the Harvard business historian whose earlier books were paeans to twentieth-century liberal capitalism, has picked two pretty sure-fire winners in his own foray to the founding era. These are the Treasury Secretaries whose statues now grace the Treasury building in Washington D.C.: Alexander Hamilton and Albert Gallatin. As the title neatly encapsulates, The Founders and Finance is a high-concept marriage of two presently-powerful themes. It promises to offer a little of McCraw’s moderate perspective to the Tea Party set who love their founders, but also to bring some wisdom from down the ages for those reeling in the current crisis.

As if being money-men wasn’t alluring enough, McCraw also ruminates on his heroes’ status as immigrants in America. Hamilton was born on the Caribbean island of St Croix, part of the Danish empire; Gallatin in Geneva; Morris in Liverpool. Is there a significance here worth noting? McCraw toys with the notion that these men are something like ‘money doctors’ or the IMF, experts who bring dispassionate, surgical knowledge to needy economies. Yet ‘at bottom’ the comparison fails, he tells us. What really matters here is simply the exotic, cosmopolitan patina that immigrant status confers.

Like Joseph Schumpeter, the subject of an earlier McCraw biography who surfaces several times here too, Hamilton and Gallatin are supposed to embody the creativity, freedom, and brilliance that both drive McCraw’s idea of capitalism and thrive under it. This is a book about ‘financial wizardry,’ in which the pyrotechnics of individual heroism divert attention from the structural underpinnings of finance, politics, and society. What McCraw has set out to do here is rebuild the screen that separates us from the messy back-stage glimpsed in the financial crisis, to renormalize finance and politics and close down moves for radical reform.

In this process, The Founders and Finance turns on an appeal to moderation. Yes, McCraw tells us, Hamilton and Gallatin were opponents. In the habitual symbology of the American founding, Hamilton stands for a strong central government and the manipulation of national debt as a policy tool; Gallatin, by contrast, stands for laissez faire and deficit reduction. William Hogeland, whose new book Founding Finance (Texas University Press, October 2012) will be a helpful corrective to this one, has recently exposed  the ways both left and right make use of this crude dichotomy. But for McCraw, it was the ‘fusion’ of the two that ‘came to constitute the basic capitalist framework’ of America. He frames contemporary capitalism as a middle course between two extremes, and thus of course, the only reasonable option.

Behind all this wizardry there is a real framework to American capitalism, which does not appear in this book but is worth more historical attention. When The Founders and Finance discusses how ‘the development of the American West’ was the centrepiece of Gallatin’s economic strategy, it pays scant notice to the violent removal of Native Americans. This ‘genocide’ is named as such, but literally in a footnote to ‘the American Dream.’ Meanwhile the regressive taxation on which Hamilton built his financial system, which lined the pockets of public investors with the scant surpluses of rural farmers, is also passed over. McCraw instead presents the Whiskey Rebellion, a major insurrection resisting these taxes, as a political battle between his two heroes. His is a history as if only the policy elite existed.

Of course, that policy elite is made up of the men who drew up the institutions of federal government in the United States. In that respect, their influence can’t be denied: they really were founding fathers. But just what they founded is something of a different story. Far from the champions of democracy and equality that we sometimes imagine bestriding the American Revolution, men like James Madison and George Washington, as well as Hamilton and Gallatin, were instrumental in entrenching American capitalism. The constitution they wrote didn’t guarantee voting rights for citizens, but it did guarantee that democratic legislatures wouldn’t break contracts with investors, or print money to inflate away public debt.

The two primary conceits of The Founders and Finance – immigrants’ role and the ‘long-term merging’ of Hamilton and Gallatin’s policies – are both harnessed to McCraw’s defence of the ideological and economic status quo. By telling the life-stories of these two men as if they were the story of finance in early America, McCraw imagines a world where individuals hold the reins of the economy, determining the future wellbeing of millions through the genius of their ideas. By telling these stories as heroic tales of trial and sacrifice, conflict dissolving into consensus, he informs us that our involvement is unnecessary and unwarranted. The founding father industry consistently warns that politics is best left to demigods. McCraw adds finance as well. We should sit back and let the magicians work.