The richest countries climbed to prosperity by methods they now forbid everyone else to use. Hamilton, List, Carey and Polanyi, four economists explained why those methods work and why abandoning them ends badly.
Four economists, writing across a century and a half and three continents, would have found it hilarious. Alexander Hamilton built a credit system for a bankrupt republic. Friedrich List, an exile who learned his lesson in America, made his experience into a theory of national development. Henry Charles Carey, a Philadelphia publisher turned economist, argued that a country should keep its farms and factories within shouting distance. And Karl Polanyi, writing as the Second World War ground on, explained why treating land, labour and money as ordinary commodities keeps disaster in store.
Part I: Building the Scaffolding, 1790–1944
None of the 4 economists was an oracle. Each was wrong about something, occasionally spectacularly, and this article will say where. But as a timeline of what works, their ideas make a surprisingly reliable compass, and the episodes where governments ignored them make a surprisingly consistent crash log. The first part of this series covers the building years, while the second covers what happens when the builders decide the scaffolding is embarrassing.
1790–91: A Bankrupt Republic Discovers Credit
In January 1790 the United States was a debtor of dubious reputation, owing money at home and abroad with no clear date for paying it. Alexander Hamilton’s remedy, the Report on Public Credit, was almost insultingly simple: honor the national debt in full, and have the federal government take over what the states still owed from the war.
Congress giddily swallowed it after a famous bargain that moved the capital to the Potomac. In February 1791 the first Bank of the United States received its charter, over the objections of Thomas Jefferson and Edmund Randolph, who thought it unconstitutional. Hamilton answered with the doctrine of implied powers, and Washington signed.
The result was the closest thing to a financial miracle the eighteenth century offered. American bonds, lately regarded as a gamble, became prized in London and Amsterdam, and the foreign debt was cleared by 1795. Hamilton’s follow-up, the Report on Manufactures of December 1791, went further: tariffs, subsidies and public works to make the country industrially independent of Europe.
Now to the caveat, which must always arrive. Congress passed only very modest tariffs, and most of the grand industrial plan stayed on paper. Many contemporaries saw the whole program as a gift to northern financiers, and the assumption scheme was as much about tying creditors’ loyalty to the federal government as about arithmetic.
Still, the irony is hard to miss. The United States entered history as a debtor that behaved like a state-builder, then spent much of the time since persuading other debtors to behave like clients.
1832–37: The Bank War, Firing Your Own Fire Brigade
Congress chartered the Second Bank of the United States in 1816, after the War of 1812 had shown what a country without a national bank looks like. Andrew Jackson regarded the institution as a privilege machine for the wealthy. He vetoed its recharter in 1832 and, in 1833, moved federal deposits into favored state banks that critics promptly dubbed “pet banks.” Freed from the old supervisor, private banks expanded their note issue, and speculation followed. Expectedly / unavoidably, by 1837 the bubble had burst.
Historians still argue over how much of the Panic of 1837 belongs to Jackson and how much to forces beyond his control, including conditions abroad. What is hard to dispute is that removing the country’s central financial institution made recovery harder, and that the republic then stumbled through an age of wildcat banking and recurring panics, without a central bank again until 1913. Jackson sold the war as a triumph for ordinary people. Ordinary people, as usual, received the invoice.
The Hamiltonian lesson is not that banks are lovable. It is that credit is public infrastructure, and abolishing the public version does not abolish credit. It merely hands the job to worse operators.
1834–41: The Exile Who Read Hamilton
Friedrich List was thrown out of Württemberg for his politics, spent 1825 to 1832 in the United States, absorbed Hamilton, published his own Outlines of American Political Economy in 1827, and came home in 1834 as an American consul in Leipzig.
That year saw the foundation of the Zollverein, a customs union under Prussian leadership, on 1 January. Bavaria, Württemberg and Saxony were inside the system. For decades, Hanover, Hamburg and Bremen were omitted, lacking direct access to the North Sea.
List had been describing the customs union and the railways as twin engines of German modernization.
His 1841 National System of Political Economy rejected the notion that what is sensible for an individual merchant is automatically sensible for a nation. The nation, he argued, is the unit that matters, and a young manufacturing sector needs shelter until it can face an established rival, in his day Britain.
Universal free trade was a destination for equals, not a point of departure for the unequal. He never actually used the phrase “infant industry,” and he exempted agriculture from his protectionism, a fact seldom mentioned by those who invoke him.
Watch the structure: inside, free trade. Outside, a fence. Germany was unified in 1871 and Bismarck later turned to tariffs to appease both industry and landowners. By 1914 German firms dominated the world trade in dyes and chemicals.
The caveat: List’s patriotism was not innocent. Some of his writing floated expansion into the Low Countries and toward the Black Sea. A ladder is a tool, not a moral philosophy.
1861–65: The Tariff, the Greenback and the War That Built a Country
Henry Charles Carey began as a free-trade man and ended as the American school’s loudest voice for protection. His 1851 Harmony of Interests argued that farming, manufacturing and commerce prosper together when they sit close, and that making farmers ship produce across an ocean to feed a distant factory impoverished everyone involved.
His multivolume Principles of Social Science, published 1858 to 1860, elaborated the theory, to the open contempt of John Stuart Mill, who counted it among the worst works of political economy he had ever endured.
History, nevertheless, cooperated. The Morrill Tariff, drafted with Carey’s advice, was signed on March 2, 1861, and protection then remained American policy until 1913. When the Southern states seceded, they took the Democrats’ veto with them. The country that went into the Civil War had no national currency, no national banking system, no federal income tax; the country that came out of it had all three. The greenbacks were issued under the Legal Tender Act of 1862. By the end of the war there was some $450 million in circulation. Then in 1863 came the National Banking Act.
The Homestead Act, the Pacific Railroad Act and the land-grant college law also arrived in 1862. They all are worthy of deep study by all experts concerned with finding solutions of such a southbound financial system as the one we all live through, not to literally mimic, but to detect the strong and weak points, the solutions and the problems, or the solutions that were abandoned, or were forbidden to most of the world’s countries.
To put it more precisely, the Union financed a war with its own money and its own tariff wall, won, and then industrialized behind that wall for half a century. The same country now explains patiently to everyone else why this cannot be done.
The caveats are due. Greenbacks gave rise to genuine fears of inflation and constitutional doubt. Historians consider his diagnosis of low tariffs as the cause of the Panic of 1857 as disputed. And his doctrine of the perfect harmony of capital and labour didn’t survive the gilded age strikes.
So, could one say, keep Carey’s geography, the farm beside the factory, but discard his sentimentality? We better leave the answer to the experts and resume our exploration.
1925–36: The Fetish Restored
Karl Polanyi’s contribution was less a policy than a diagnosis. A market economy, he argued, must treat land, labor and money as if they were goods produced for sale, though none of them is. Land is nature, labor is people, and money is a social claim. Push all three fully into the market and society reacts with protective laws, unions and regulation, a “double movement” in which the market advances and the community pushes back, sometimes democratically, sometimes with jackboots.
The interwar gold standard was his laboratory. By 1925 roughly 60% of countries had returned to gold, and by 1928 to 1930 almost all did. Then came the strain: Austria’s banking crisis, the Smoot-Hawley tariff of 1930, Britain’s exit from gold in September 1931. The pattern documented by Barry Eichengreen and Douglas Irwin is a delicious case study.
Countries that stayed on gold raised trade barriers sharply to defend it, while countries that left added only marginal restrictions and, in general, recovered earlier. A 2020 study of thirty countries points the same way, crediting a change in expectations. The United States left gold in 1933, and in 1934 Congress passed the Reciprocal Trade Agreements Act to start lowering tariffs again.
Hold the applause. Defenders of gold dispute this causal story, and Polanyi’s claim that monetary rigidity helped bring fascism is an argument, not a law.
But the irony survives: the most devoted guardians of market freedom proved to be protection’s best customers. Isn’t that the most accurate diagnosis?!
1944: Bretton Woods, Polanyi Becomes Policy
However, in July 1944 when the outcome of the Second World War was far from settled, at Bretton Woods the IMF and World Bank were established, currencies were fixed to the US dollar which was in turn fixed to gold at $35 per ounce, but most importantly, capital controls became explicitly allowed.
As the political scientist John Ruggie would subsequently label the deal “embedded liberalism” inspired by Polanyi, liberalization of international trade, in return for freedom to ensure full employment and welfare at home. The 1950s and 1960s were decades of unprecedented economic growth, that the world never witnessed since.
Capital controls were the unglamorous hinge. They let a government set interest rates for the economy it actually governed without being punished by money fleeing across borders, and they let trade open without letting speculation write national policy.
Well, then what exactly went wrong?
The Scoreboard So Far
Tally it up. Public credit in 1790, a customs union in 1834, a national currency and tariff in 1861 to 1863, and embedded finance in 1944 each coincided with a country or a continent building real capacity. The two big failures on the list, Jackson’s demolition of the national bank and the interwar devotion to gold, were not failures of too much state. They were failures of too little. You see it now?
It is not a perfect score. Hamilton’s manufacturing dream mostly missed, List’s patriotism had a nasty edge, Carey’s harmony was wishful thinking, and Polanyi’s expectation that the self-regulating market was finished proved premature.
But the pattern is consistent enough to be inconvenient. The bigger punchlines are coming up in Part II: the Americans who wrote capital controls into the rulebook later made them heresy, and the anchor was cut loose within three decades. And that’s the main HUGE problem.
To be continued in part 2…
Tamer Mansour, Egyptian Independent Writer & Researcher
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