201512

December 31, 2015 1:46PM

COOL Repeal Is One Victory in a Larger Fight against Regulatory Protectionism

After years of embarrassing trade litigation and the threat of imminent sanctions by Canada and Mexico, Congress has finally repealed federal country of origin labeling regulations for meat.  Disguised as a way to help consumers, the COOL law was actually designed to protect a small segment of the U.S. cattle industry at the expense of everyone else.  But as this unfortunate episode comes to an end, it’s important to remember that disguised regulatory protectionism remains a major problem in the United States.

In the olden days, uncompetitive U.S. industries seeking protection from import competition would just lobby Congress for higher tariffs.  It works differently than that today in part due to international trade rules but also because there’s a broad consensus among economists and intellectuals that trade barriers harm our economy.  Still, our government is run by politicians who will always be willing to sacrifice the good of the public to help special interests.

Since transparent pleas for protection have gone out of vogue, businesses achieve the same aim by lobbying in favor of public interest regulation that disproportionately disadvantages their competitors.  This dynamic where altruistic motivation meets rent-seeking cronyism can be a powerful driver of public policy.  And when the biggest losers are foreign businesses, there’s very little organized resistance. 

The consequences of disguised regulatory protectionism are the same as imposing tariffs—higher prices and less variety for consumers, less opportunity and lower wages for workers.  While it may be impossible to count up all instances of regulatory protectionism, the pernicious nature of the problem can be seen clearly if we look at a few high-profile examples.

Dolphin-Safe Fraud

American consumers rely on “Dolphin Safe” labels to ensure that their tuna purchases don’t contribute to harmful fishing practices.  By defining what “dolphin safe” means, the federal government ostensibly ensures that the label is reliable.  In reality, the regulations benefit three major U.S. tuna companies by making it nearly impossible for their Mexican competitors to sell tuna in the United States. 

Hidden within the regulations is a double standard that gives those U.S. companies access to the label without having to meet stringent reporting or verification requirements.  It also prohibits the Mexican tuna companies from using any label that makes claims about how their fishing methods impact dolphins.  The law actually makes it illegal to provide consumers with information that some special interests don’t want them to have.

Big Tobacco’s Favorite Anti-Smoking Law

The 2009 Family Smoking Prevention and Tobacco Control Act greatly expanded federal control over people who smoke.  One of the law’s key features was a ban on flavored cigarettes, which anti-smoking activists claimed were designed to entice “children” to take up smoking. 

At the time the law went into effect, there were in fact only two kinds of flavored cigarettes on the market—menthols, which are predominantly made in the United States by American companies, and clove cigarettes, which come from Indonesia.  The law exempted menthols from the ban, so that the only cigarettes taken off the market were foreign.  The flavored cigarette ban actually benefited the very same tobacco companies that campaigners constantly malign by cementing their dominance of the flavored cigarette market.

To get a sense of just how senseless the menthol exception is from a tobacco control standpoint, it’s worth noting that 30% of American smokers regularly smoke menthols, while cloves are a niche product with miniscule market share.  Every other country with a ban on flavored cigarettes has included menthols.

Both of these protectionist regulations have been the subject of international disputes at the World Trade Organization.  In fact, just like with COOL, the United States lost these cases.  The threat of retaliation from Canada and Mexico prompted Congress to fix the worst parts of its court-of-origin labeling law, but the prospects are not as bright for the others.  Indonesia lacked the economic clout to impose sanctions on the United States, so when Washington refused to comply, Indonesia agreed to “settle” the case by dropping its complaint in exchange for nothing.  The WTO will soon determine the level of sanctions Mexico can impose in retaliation since the United States refused to comply in the tuna case.

Crony Catfish

Perhaps the most obvious example of disguised protectionism in recent years has been the process of moving catfish inspection from the Food and Drug Administration to the U.S. Department of Agriculture.  Why does this matter?  Because the USDA’s inspection service would place a moratorium on catfish imports until it certifies individual farming facilities.  That inspection can take years.  Consumers would face drastically higher prices.  And there’s no evidence that this new catfish inspection regime will improve the safety of catfish, which are not especially unsafe. 

Aside from the lack of scientific justification, what makes the catfish regulations a particularly obvious example of protectionist regulation is that its most ardent supporters are politicians from states with lots of catfish farms.  Those catfish farmers don’t like having to share the U.S. market with their Vietnamese and Chinese counterparts, and they’re willing to undergo more rigorous testing of their own facilities if it keeps out the competition. 

The good news is that the Obama Administration may have solved the catfish problem by agreeing to allow a grace period for Vietnamese catfish as part of the as part of the Trans-Pacific Partnership negotiations.  The grace period will let catfish imports continue for 18 months while the inspections take place.  This significantly reduces the possibility of a “catfish cliff” that would’ve caused a dramatic disruption for U.S. consumers and retailers.  It may also prevent the United States from having to defend another ridiculous regulation in a WTO dispute settlement case, which it would likely lose.

Finding a Solution

Unfortunately, these examples show how political forces are naturally aligned to disadvantage consumers.  When companies are asking Congress to regulate their own industry, you can be certain the result will not benefit consumers.  Trade negotiations and dispute settlement can surely help eliminate some forms of regulatory protectionism, but the results are mixed. 

Regulatory protectionism will persist until the public develops a greater skepticism for regulatory solutions to problems better dealt with in a free market.  Labeling laws impose a monopoly on definitions where competition among different labels would be more beneficial.  Paternalistic product bans are more likely to force consumers to expend extra energy to get what they want than to alter behavior.  And consumers are in a much better position than governments to respond reasonably to potential food safety scares.

As Sallie James and I wrote in our 2012 Cato Policy Analysis about the threat of regulatory protectionism:

Policymakers, commentators, and the public must be more willing to look past altruistic defenses of regulatory proposals to find the true winners and losers. When the winner is not consumers, then it must serve other ends; when the end is consumers, the regulation is probably unnecessary anyway.

December 31, 2015 1:40PM

Upcoming Book Forum: Blood Oil: Tyrants, Violence, and the Rules that Run the World

On Wednesday January 13 at noon, Leif Wenar will be at Cato to discuss his new book, Blood Oil: Tyrants, Violence, and the Rules that Run the World. The book explores one of the great moral challenges of our time. That is, the massive benefits from development and global connectedness—in which we are all inescapably complicit—also enriched, enabled, and emboldened people who systematically made the lives of others desperate and miserable.

This cycle rolls on seemingly unabated. Indeed, the world’s dependence on oil and other natural resources continues to fuel violent conflicts and fund a large fraction of the world’s autocrats. But Wenar provides hope. After detailing the myriad negative consequences of resource wealth, Blood Oil outlines how “citizens, consumers, and leaders can act today to avert tomorrow’s crises — and how we can together create a more united human future.”

An important and timely book, Blood Oil has caught the eye of highly distinguished scholars. Angus Deaton of Princeton University and the 2015 Nobel Prize Winner in Economics, stated that “Wenar has written the indispensable guide, combining politics, economics, and ethics to tell us just how and why we are all involved, and what we ought to do to make the world a better place.” Harvard’s Steven Pinker, author of The Better Angels of Our Nature, called Blood Oil “one of those rare manifestos that awaken people to a pressing ethical issue by changing the way they see the world.” And while noting that “philosophers rarely write big books that could change the world," Princeton's Peter Singer finds that "Blood Oil is such a book."

Wenar, who is Chair of Philosophy and Law at King’s College, will be joined by Bruce W. Jentleson of Duke University and the Library of Congress, and my Cato colleagues Ian Vasquez and Christopher Preble. The forum is open to public, and we hope that you can join what is sure to be a lively and informative discussion.

Click here to register or to learn more.

December 31, 2015 11:08AM

Debating U.S. Grand Strategy in Asia (and Elsewhere)

Last week, The National Interest (Online) published a critique of U.S. grand strategy in Asia by my friend and colleague John Glaser. Harry Kazianis, a former editor at TNI who now divides his time between the Potomac Foundation and the Center for the National Interest, posted a rejoinder and Glaser has since responded here.

Together, the pieces reveal a useful debate over primacy, writ large, and all three are worth a careful read.

Calling Glaser's idea "Unthinkable," Kazianis asked:

And what’s so bad about America’s so-called primacy in Asia in the first place? Glaser, at least in my view, makes it sound like the Asia-Pacific is some large American vassal state that it should relinquish control of. It should be clear for anyone to see that Washington is the provider of many important net public goods—like those all-important security alliances, nuclear umbrellas and protected sea lanes that allow trade to thrive.

His clinching argument, it seems, is that we should continue with our present grand strategy in Asia (and elsewhere, implicitly) because it’s the strategy that we have, and it’s worked fairly well. Why change now?

Kazianis quotes former Under Secretary of Defense for Policy Eric Edelman who, in 2010, offered up this fairly typical defense of U.S. grand strategy. “The concept of Primacy,” Edelman wrote, in a paper (.pdf) for the Center for Strategic and Budgetary Assessments:

has underpinned U.S. grand strategy since the end of the Cold War because no other nation was able to provide the collective public goods that have upheld the security of the international system and enabled a period of dramatically increased global economic activity and prosperity. Both the United States and the global system have benefitted from that circumstance.

I would take issue with two of Edelman’s claims, and, by extension, those of Kazianis and other of primacy’s defenders:

1) Correlation is not causation. While it is true that the long peace has coincided with U.S. primacy, that does not prove that U.S. primacy was the sole (or even main) cause of it. Some attempt should be made to account for the other possible explanations for the absence of great power war since 1945, e.g. nuclear weapons, economic interdependence, and the end of formal empires.

2) Circumstances change. Even if it were true that U.S. primacy was the main factor explaining the security of the international system during the last quarter century, to describe what we have done for the roughly 25 years since the end of the Cold War does not, by itself, justify what we should do for the next 25 years, or more. The U.S. share of global economic output has fallen sharply since the end of the Cold War. When looking at GDP by Purchasing Power Parity in the IMF’s most recent data set, for example, the U.S. share stood at 22.5 percent in 1989; the estimate for 2015 is 15.9 percent. Whatever statistic one chooses to use, it is clear that the burden is growing heavier on a single country. And those trends are unlikely to reverse themselves. The U.S. share is expected to dip below 15 percent by 2020.

I will stipulate that no single country could have done what the United States did in terms of providing global public goods in 1995 -- or 1975 or 1955, for that matter. I doubt that a single country -- including the United States -- can do it forever. Forever is a long time.

It may be true that some number of countries -- be it 5 or 10 or 50 -- might be able to collectively muster comparable capabilities in the future to ensure that the burdens of global governance don’t fall exclusively on the shoulders of American troops and American taxpayers.

We are unlikely to reach that possible alternative future of greater burden sharing, however, if the United States clings to its present grand strategy and continues to discourage other countries from defending themselves and their core interests.

December 30, 2015 5:33PM

Free Speech Doesn’t Depend on the Eye of the Beholder

By Ilya Shapiro and Jayme Weber

Nearly 40 years ago, the Supreme Court held in Wooley v. Maynard (1977)—the famous “Live Free or Die” case from New Hampshire—that the First Amendment protects against being compelled to convey a message displayed on a state-issued license plate. Nevertheless, the Denver-based U.S. Court of Appeals for the Tenth Circuit recently held that someone could not object to an image on Oklahoma’s license plate of the Sacred Rain Arrow statue, which depicts a young Apache warrior shooting an arrow into the sky as a prayer for rain.

The court’s decision turned on drawing a line between speech in the form of words and other kinds of expression. Keith Cressman had objected to the Oklahoma tag because of the history and origin of the Sacred Rain Arrow statue. The Tenth Circuit held that Cressman’s objection was not entitled to full First Amendment protection because images are not “pure speech” and must be analyzed under the less rigorous “symbolic speech” test.

The term “symbolic speech” may be an unfortunate misnomer—it doesn’t mean speech via symbols—but the Supreme Court has only ever used the phrase to refer to “expressive conduct.” That is, “symbolic speech” is conduct that conveys a message, such as burning one’s draft card in protest of war.

The Supreme Court has always regarded non-conduct forms of expression as “pure speech.” And that’s exactly as it should be: Government has no more ability to ban bumper stickers displaying a cross than ones referencing “John 3:16,” and the same must be true for ones depicting Da Vinci’s painting “The Last Supper.” Despite the Court’s consistency on this point, lower courts are split. While the Ninth Circuit has extended full First Amendment protection to tattoos and even the process of making them and the business of tattooing, other circuits have suggested that “pure speech” is limited to words. And of course the Tenth Circuit has now said that the First Amendment protects as symbolic speech at best.

But the Tenth Circuit’s ruling did even more harm to the First Amendment than that, because the court also held that, regardless of what kind of speech the image was, the First Amendment didn’t support Cressman because he didn’t object to the actual message Oklahoma was sending; his understanding of the image didn’t align with the state’s. That holding is particularly problematic when the speech at issue is visual art, which is inherently open to interpretation and has no authoritative interpretation.

Consider, for example, Cloud Gate—better known as the Chicago Bean—whose sculptor sought to convey themes of immateriality, spirituality, and the tension between the masculine and the feminine. But most people who take selfies in front of the Bean have no idea what it’s meant to convey, or might think it has to do with distorted reflection and the like. The freedom of speech—even the freedom to think—would be threatened if compelled-speech cases hinged on whether plaintiffs “really” disagreed with the “actual” message the government was sending and thus could be compelled to speak because they opposed it for their own “wrong” reasons.

In the quintessential compelled-speech case, West Virginia State Board of Education v. Barnette (1943), the Supreme Court held that the First Amendment protected Jehovah’s Witnesses having to salute the American flag and recite the Pledge of Allegiance. Surely the Constitution would have likewise protected an atheist who opposed the flag salute because the stars represent the heavens and man’s divine goal—even though most people today don’t know that history.

But the Tenth Circuit’s decision said otherwise: The First Amendment would have protected Cressman if he objected to Oklahoma’s Native American message but did not protect him when his objection was based on what it considered to be a misunderstanding about the Sacred Rain Arrow statue. As in religious-freedom cases, courts shouldn’t evaluate the reasons behind an objection to compelled speech.

Mr. Cressman has asked the Supreme Court to review his case, and Cato has filed an amicus brief making the above arguments in support of that petition. 

December 30, 2015 2:30PM

Americans Should Aid Syrian Refugees Here and Abroad

BEIRUT—“Syrians are everywhere,” an aid worker told me. “Everybody is poor now.” Well over a million Syrians are scattered across Lebanon, many in small “tented settlements.” Almost half live in sub-standard housing; many lack fuel and warm clothes for winter.

Jordan hosts even more Syrians at greater cost. (So does Turkey, though it is much larger and wealthier.) Six of every seven refugees live in poverty.

Almost five years of civil war have killed a quarter of a million Syrians, wrecked the country, created economic catastrophe, displaced millions, and left virtually no one unaffected. As many as five million people have fled to surrounding countries.

Thus, the stampede of Syrian migrants to Europe should not surprise the rest of the world. Americans traditionally have offered sanctuary to those fleeing repression and war. But, apparently, not now.

Private relief groups offer the best means for Americans to help Syrians in need. There are many worthy organizations. Earlier this year, I traveled with International Orthodox Christian Charities to Lebanon and Jordan to view several aid projects. Since 2012, the charity has helped more than 3.2 million Syrians throughout the Middle East.

Much of IOCC’s work is conducted in Syria. More than half Syria’s population now is estimated to require outside aid.

Assistance runs the gamut, starting with emergency food, infant care, clothing, and bedding. IOCC repairs sanitation and water systems, helps provide shelter, and supports education.

Alas, the longer the war rages, the greater the destruction. One aid official lamented: “Buildings can be rebuilt. You cannot rebuild human beings.”

In Lebanon, I visited a project focused on mother-child nutrition, from conception up to five years of age. The “public health system was overwhelmed by refugees,” explained Rana Hage of IOCC.

Children are screened, regularly measured and weighed, and provided with nutritional supplements, high-protein foods, and milk. Tens of thousands of children have been screened and hundreds have been rescued from malnutrition.

I visited a community kitchen, one of two that helps feed 1750 people. IOCC underwrote a large, efficient cooking facility and hired local women to cook. Pots of food are distributed to needy refugee and resident families.

The charity also runs the Water, Sanitation, and Hygiene program (WASH) at two refugee encampments with more than 7,500 people. I went to one of the settlements where IOCC is seeking to develop efficient and safe water and waste systems.

The agency also was establishing water/wash facilities while providing hygiene education to reduce disease. Here, as elsewhere, the IOCC hires staff from areas being served. Unfortunately, the job is never done. Another aid worker said that the camp is “constantly changing as more people come.”

Jordan may be less fragile than Lebanon, but it suffers greatly as well. Some 80,000 people are crowded into Jordan’s Zaatari Refugee Camp, sitting only a few miles from Syria.

IOCC runs a program to prevent and treat lice, especially affecting children. The charity has distributed anti-lice kits to more than 20,000 kids. There’s nothing glamorous about this sort of work, but it meets a critical need. Health coordinator Samer Makahleh explained: “To fill gaps we go to outside partners like IOCC.”

With most refugees living outside the camps, IOCC works outside as well, even making home visits for those unable to travel. The group provides everything from school uniforms—required to attend Jordanian schools—to infant supplies and household items. IOCC also provides vocational training and English instruction.

IOCC’s identity is Christian, but it serves the needy without discrimination. In the Middle East, the charity mostly aids Muslims.

Of course, even the best humanitarian efforts can only do so much. One top IOCC official worried: “Funding is going to diminish next year. Donors are not going to be there.”

As I wrote in Forbes: “Unless more Americans and other people of good will around the world step up to address Syria’s humanitarian disaster. Centuries ago Christ called on his listeners to help the ‘least among us.’ We must meet that challenge today.”

(WASH)

December 30, 2015 9:59AM

Middle East Christians Are Victims of Republican Party Policies

Christians in America remain free to celebrate Christmas, but not tens or perhaps hundreds of millions of believers abroad. Murder by groups such as the Islamic State and Boko Haram topped pervasive persecution and discrimination in many nations.

On Christmas Eve, senator and presidential contender Marco Rubio penned an article decrying the lack of “attention paid to the plight of these Christian communities in peril.” He criticized the Obama administration and called for action.

Undoubtedly, Rubio’s concern is genuine. However, the GOP’s policies have hurt and will continue to hurt Christians around the world.

No single action was as injurious to Middle Eastern Christians as the invasion of Iraq. American intervention triggered a sectarian conflict which displaced hundreds of thousands of Christians, spawned a new al-Qaeda organization which morphed into the Islamic State, and tolerated ruthless Shia rule which encouraged Baathists and Sunnis to support ISIL. Absent George W. Bush’s Iraq folly, backed by Rubio and most of his competitors, the Islamic State wouldn’t exist.

Most of the usual GOP suspects, starting with Rubio, also backed the Obama administration’s decision to intervene in the Libyan civil war. This misbegotten policy left two competing governments and multiple armed militias in its wake. Worse still, it left a vacuum partly filled by the Islamic State, which publicly murdered Egyptian Copts who were working in Libya.

Syria is engulfed by a hideous civil war. Bashar al-Assad is a secular dictator who uses fear of potential religious persecution for his political benefit. But Christians and other religious minorities have good reason to be terrified about Syria après Assad. After all, many of them fled Iraq where they’ve seen the ending of the movie: it isn’t pretty.

Should Rubio & Co. succeed in ousting Assad, the likely fate of Christians is grim. The State Department noted: In Syria “ISIL required Christians to convert, flee, pay a special tax, or face execution in territory it controls, and systematically destroyed churches, Shia shrines, and other religious sites.”

On a recent trip to Jordan and Lebanon, I met with several Christian aid workers active in Syria. Most complained about U.S. policy targeting Assad. One said simply, “You Americans don’t know what you are doing.”

Washington’s reflexive support of ruthless Islamic regimes throughout the Middle East--endorsed by Rubio and the rest of the GOP presidential gaggle--is almost as bad. For instance, despite complaining about foreign blasphemy laws, Rubio declared that the U.S. must “reinforce our alliances.” Some of his Republican competitors are even more insistent.

Yet Saudi Arabia is essentially a totalitarian state, without a single operating church (or synagogue or temple) for non-Muslims. The State Department wrote, “the government harassed, detained, arrested, and occasionally deported some foreign residents who participated in private non-Muslim religious activities.”

Coptic Christians remain victims of persecution, discrimination, and violence in Egypt, even after the military ouster of the Muslim-dominated government of Mohamed Morsi.

I wrote in Forbes, “Americans should remember the plight of Middle East Christians. At the same time, voters should remember that Republican support for promiscuous military intervention and Islamic dictators did much to bring down disaster upon Middle Eastern Christians.”

Unfortunately, doing more of the same in the Mideast, as Rubio proposed, would only yield the same result. He should put helping persecuted Christians before promoting misbegotten neoconservative crusades.

December 30, 2015 9:32AM

Alexander Hamilton, Banking Mercantilist

In this past summer’s controversy over whether Alexander Hamilton’s image should be replaced on the $10 bill, outraged commentators made many extravagant claims on behalf of Hamilton’s wisdom in matters of money and banking policy. For example, Ben Bernanke blogged that “Hamilton was without doubt the best and most foresighted economic policymaker in U.S. history,” citing among other evidence that “over the objections of Thomas Jefferson and James Madison, Hamilton also oversaw 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.”

Now that the controversy has cooled we can take a more informed perspective. There is no denying Hamilton’s importance and influence, or that his life story is compelling, as evidenced by the sold-out hip-hop musical Hamilton currently running on Broadway. But the wisdom of his policy advice, and the merits of the First Bank of the United States (BUS), are another matter.

To describe Hamilton’s Bank accurately, one should note that Congress owned one fifth of its shares, and chartered it exclusively, that is, made it the only bank allowed by law to branch nationwide. (State governments chartered banks, but each state denied entry to banks with charters from other states.) The BUS monopoly franchise was among the chief of the objections of Jefferson and Madison, and deservedly so. One nationwide bank is better than none, but many is better than one. Creating a legal monopoly where open competition could and should prevail is hardly a mark of good or foresighted economic policy.

Many modern-day historians miss this point, and laud Hamilton as a man of unerring financial genius. Robert E. Wright and David J. Cowen, in their 2006 book Financial Founding Fathers: The Men Who Made America Rich, write of Hamilton’s “creative genius, as he became the architect and chief advocate of a powerful national bank.” They claim that “Hamilton's thought was often far in advance of that of most of his contemporaries,” as when he was early to advocate a national bank. They quote Hamilton’s 1781 statement that “in a National Bank alone we can find the ingredients to constitute a wholesome, solid and beneficial paper credit,” and add: “He was correct.” They call Hamilton’s 1790 Report on the Bank “a masterpiece that cogently explained the importance of banks in a capitalist economy.” They credit Hamilton with the following argument, as though it made good sense: “Next, he stressed that all the great powers of Europe possessed public banks and were indebted to them for successful trade and commerce. The implications of the comparison were clear: if young America wanted to join the ranks of the elite powers, it too would have to create a banking infrastructure.” In much the same way, Hamilton would elsewhere argue that if the leading European nations have protective tariffs, we should have them too. The error should be plain.

Hamilton modeled the Bank of the United States after the Bank of England. But in truth, the monopoly privileges of the BOE and other national banks of Europe were badges of mercantilism, and drags on financial and economic activity by comparison with free competition in banking services. 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.

Wright and Cowen note that in drafting his plan for the Bank, “Hamilton also drew on Adam Smith's seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, where financial matters, including the advantages of banks and bank money, were amply and ably discussed. Hamilton must have brimmed with excitement as he read Smith declare that ‘the trade of Scotland has more than quadrupled since the first erection of the two publick banks at Edinburgh.’” They should also have noted that in his able discussion Smith — the penetrating Scottish critic of mercantilism — did not defend monopoly privileges in banking, but argued for free competition (see below). The “publick” banks of Edinburgh were chartered non-exclusively (note that Smith refers to the two earliest; later there would be a third plus dozens of non-chartered joint-stock banks that were similarly sized and equally branched nationwide), and were completely privately owned. Nor were they great engines of the state, as the Bank of England was according to Smith. Unlike the BOE or the BUS, which were created in large part to lend the national government money, the Bank of Scotland was actually prohibited by its 1695 charter from lending to the government.

The policy conclusion of Smith’s chapter on banking (Book II, chapter II of the Wealth of Nations) bears quoting here:

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.

In light of Smith’s clarity and correctness here, it is actually a telling criticism of Hamilton to note that he read Smith on banking, because it means that he ought to have known better when he promoted monopoly privileges. Although Hamilton’s Report on the Bank alludes to Smith’s understanding of how banking promotes the wealth of a nation, 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.[1] Smith’s policy here was wise, and Hamilton’s not.

In brief, contrary to what is nearly the conventional wisdom, Alexander Hamilton was not “far in advance” of contemporary thinking on banking. He was decidedly retrograde in pushing for an exclusive nationwide bank with a sweetheart government deal. He was not a creative policy genius so much as a persuasive second-hand dealer in discredited mercantilist ideas.

____________________________
[1]
Here I draw upon a dissertation chapter, unfortunately not available online, by Nicholas Curott.

[Cross-posted from Alt-M.org]