The American system fueled global wealth — time to reclaim it
For the past half century, American policymakers, along with many of the economists who have advised them, have operated with an obsolete understanding of economic development. Instead of the perpetual process of technological progress and responsive productive renewal that it is, development has been understood as a one-time achievement. ‘Underdeveloped’ countries become ‘developed’ countries and then coast ever after.
This view of development stems from Cold War competition for influence over underdeveloped countries from the 1950s to the early 1990s. Walt Rostow, an economist with the early 1960s National Security Council (he worked at the CIA’s predecessor before that), dubbed this the ‘takeoff’ theory of economic development, which he did more than anyone to propagate. But it’s a view that is far out of step with our own national development’s Hamiltonian roots.
Hamiltonian development is nicely captured by an old Bob Dylan line: “He not busy being born is busy dying.” Economies are like that. They move forward or become backward — there is no treading water, only swimming or drowning. And the only way for a country of 330 million citizens to swim is to do so in coordinated, concerted fashion. You cannot move forward as a country if the lanes in the pool are not clearly marked. And that is precisely what Hamilton’s development program did.
By strategically investing in what were then the industries of the future, Hamilton’s Treasury Department, First Bank of the United States and Society for the Promotion of Useful Manufactures signaled to the market of his day what the infrastructures and industries of the following days would be. Duly tipped off, private sector investors and entrepreneurs knew where to focus their energies — and their capital. The result was a growth miracle that came to be known — and imitated — worldwide as ‘the American System,’ later redubbed ‘the National System’ by America’s imitators. All subsequent growth miracles, from Germany’s through Japan’s to those of the ‘Tiger Economies’ and China, self-consciously followed the American System.
Ironically, the U.S. is the one major world economy that does not now follow the American System. It follows the one-off course mapped by Rostow. And so, instead of swimming, we’re drowning. Over 440,000 Americans have now died of Covid. And yet we are told that we won’t all be vaccinated till autumn! Meanwhile would-be suppliers complain of potential syringe shortages, mask shortages, hospital bed shortages …in short, everything shortages.
One would be hard pressed to imagine anything more un-American — unless it was an armed attack on the nation’s Capitol. How, then, can we become American again? How can America rediscover and update the original Hamiltonian American System first to reverse the pandemic, then to get on with its own inclusive and sustainable modernization?
I believe I have a way. And it doesn’t require any new federal instrumentalities, just rediscovery and renewal of the original missions of our existing instrumentalities — instrumentalities that, after all, Hamilton himself bequeathed us. My colleagues at New Consensus and I call it the InvestAmerica Plan.
Start with the Cabinet of the President. This comprises the heads of all of the nation’s principal executive agencies with jurisdiction over the nation’s primary infrastructures and industries. Why not form, then, a National Reconstruction and Development Council of all of these Cabinet members, along with the Fed chair and Treasury secretary presiding and assign it the task of formulating and regularly updating a complete and coherent National Development Strategy? The latter would be analogous to the National Defense Strategy annually formulated and updated by our defense agencies, and the council itself would be a bit like the Financial Stability Oversight Council, which combines our multiple finance regulators into one oversight body with an integrated, not siloed, view of the nation’s financial system.
Next, in furtherance of the National Development Strategy, the council would identify particular industries, regions of the country and even congressional districts in need of significant startup development financing. At that point, a financing arm of the council would get to work doing the detailed planning and arranging the funding. And guess what — this instrumentality, like the Cabinet, already exists too!
The Federal Financing Bank within the Treasury Department already manages all Treasury intakes and outflows. It is effectively our Treasury Department’s bank. Currently the FFB is funded only by congressional appropriations and Treasury bond sales and does its work solely through lending and credit support for federal agencies. But a single tweak to each side of this balance sheet would endow the FFB with massive Hamiltonian transformative capacity.
First on the inflow side — along with current funding sources — include additional public and private sector capital raised through special purpose trusts that can fund diversified portfolios of eligible council-designated national development projects. And second, on the outflow side — along with current credit support to federal agencies — include debt, equity and hybrid investments in both sub-federal units of government and private sector firms and consortia of private sector or public-private sector firms designated as eligible by the council.
Through these simple and minimal tweaks — forming a development planning council out of already existing Cabinet offices and adding to the current inflow and outflow streams associated with the already existing Federal Financing Bank — we will have fully restored the American System’s institutional architecture. (A few changes to current Fed practice inspired by the new facilities introduced last April, which I’ll leave for another column, would round out the picture.)
Then we can not only “build back better,” but build back better forever.
Robert Hockett is Edward Cornell professor of law and Finance at Cornell University and on the Boards of the Digital Fiat Currency Institute and the Public Banking Institute. He regularly advises federal and state legislators on monetary and other financial initiatives and moonlights at Westwood Capital, a boutique Manhattan investment bank. He has previously worked at the Federal Reserve Bank of New York and the International Monetary Fund.