Alexander Hamilton May Rule Broadway, But He Was No Banking Genius
Larry White, avatar of the libertarian tradition of advocacy and scholarship regarding "free banking," takes the enormous revival in popularity of Broadway sensation and founding father Alexander Hamilton as a teaching moment about how state monopoly banking wasn't a genius innovation of its time.
None other than former Federal Reserve chieftain Ben Bernanke (who tends to overrate the historical wisdom and necessity of the central banking he served and is as stained by politics as can be) avers, "Hamilton was without doubt the best and most foresighted economic policymaker in U.S. history." Why? Partly because he helped shove through "the chartering in 1791 of the First Bank of the United States, which was to serve as a central bank and would be a precursor of the Federal Reserve System."
The tricky thing about that First Bank, says White from his free banking perspective, is that it was granted a state monopoly on interstate branch banking. (States at that time did not let out-of-state banks operate branches in their state.)
White insists that "Creating a legal monopoly where open competition could and should prevail is hardly a mark of good or foresighted economic policy."
Even the evidence potentially available to Hamilton at the time would have indicated aspects of his error:
A more wholesome, solid, and beneficial credit system could be observed in Scotland at the time, with free entry into nationwide branch banking. Hamilton's "masterpiece" was oblivious to the benefits of competition in banking, much less the separation of banking and state. In his banking policy views, as in his tariff policy views, Hamilton was a retrograde mercantilist.
Adam Smith knew the score, and Hamilton should have gotten the point from him, as per this from Wealth of Nations:
The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. … By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.
Some of Hamilton's academic cheerleaders note that he had read Smith, so obviously "Hamilton either didn't understand Smith's policy message — the more banks competing the better — or rejected it as not helpful to his own mission of empowering the federal government, for which his chosen means was to forge an alliance between the government and a new privileged financial elite."
Hamilton, as great a showman as we now know he was, was in fact not far-seeing but behind the times in "pushing for an exclusive nationwide bank with a sweetheart government deal. He was…a persuasive second-hand dealer in discredited mercantilist ideas.
A quick explanation on how and why too many mainstream economists and historians overprivilege the wonders and necessity of central banking of the sort of which Hamilton is a patron saint.
