Alexander Hamilton was recently voted the best Cabinet member in American history in a poll conducted by the National Constitution Center. Among his greatest accomplishments in his service as Secretary of the Treasury under President George Washington was the preparation of three great reports to the Congress. Two of these — on public credit and a national bank — are well known and covered in most American History survey courses. The third report, which concerned the development of “manufactures” in this country, is less discussed by historians, but was of the utmost importance for the future of American business.
Congress had requested Treasury Secretary Hamilton to prepare a report on “promoting [manufactures] as will tend to render the United States, independent [of] foreign nations, for military and other essential supplies.” Hamilton took nearly two years to research and prepare his “Report on the Subject of Manufactures,” which was dated December 5, 1791.
Hamilton’s first task was to justify promoting the business of manufacturing in view of the dominant position of agriculture in the United States of his day. Southern planters and political leaders, in particular, saw manufacturing as a breeder of cities and a sower of the vices created in such venues. Thomas Jefferson himself looked upon farmers as “the chosen people of God,” and likened “the mobs of great cities” to “sores” on the human body.
To rebut this viewpoint, Hamilton began by listing seven advantages of what he called “manufacturing establishments.” Four of these are particularly noteworthy. He argued that promoting manufacturing would actually assist agriculture in two ways. First, manufacturing would supply additional employment to the family of farmers, particularly wives and children. He pointed out that in England four of every seven workers in British mills were either women or children. Second, Hamilton contended that manufacturing creates “a more certain and steady demand, for the surplus produce of the soil.”
Hamilton also argued that promoting manufacturing would also encourage “emigration from foreign nations,” which would benefit the United States because positions would be opened for “ingenious and valuable workmen” from Europe. At a time when the United States was both underpopulated and in need of additional trained craftsmen, this would be a significant byproduct for a growing country. His fourth point was more general, pointing out that more enterprise would result in “the addition of a new energy to the general stock of effort.”
Hamilton continued his arguments in favor of promoting manufacturing by observing that a failure to develop a strong domestic manufacturing capacity would lead to “a state of impoverishment, compared with the opulence to which [the United States’] political and natural advantages authorize them to aspire.”
Turning next to the identification of various obstacles to the promotion of manufacturing in the United States, Hamilton observed that the “greatest obstacle” was the existence of “bounties, premiums and other aids” granted by other nations to their manufacturing entities which, if not matched by the United States, would constitute a significant barrier to building a domestic manufacturing capacity. In addition, he pointed once again to the scarcity of skilled laborers and the additional scarcity of capital which was needed to invest in starting up new manufacturing facilities as significant obstacles. Here, Hamilton contended that the country had a shortage of people in large towns and corresponding room for skilled workers. He also argued that the lack of capital could be addressed by a combination of new banks, which were then just beginning in the United States, augmented by foreign investment and public debt.
In a lengthy section of his report, Hamilton then reviewed in detail several steps taken by other countries to encourage the growth of manufacturing. In the course of that review, he identified several methods which seemed particularly promising if applied to American manufactures. First, the imposition of duties or tariffs on foreign goods would permit domestic companies to “undersell” their foreign competitors, while also raising revenue for the federal government. While this method was already in use, Hamilton suggested that it be recalibrated to permit foreign goods which were necessary for manufacturing to be imported more easily by reducing tariffs on such goods, while imposing or increasing tariffs on other goods which would be competitive with domestic manufacturing facilities which the government wished to encourage and protect. This was the only major suggestion made by Hamilton which Congress actually followed.
In Hamilton’s view, “one of the most efficacious means of encouraging manufactures, and…in some views, the best” was the grant by the government of direct subsidies or what he called “pecuniary bounties” to manufacturers of products needed for the domestic economy to prosper. Hamilton believed that such bounties had a direct and immediate effect in promoting growth, but acknowledged the need to exercise great care in granting such subsidies in order to avoid favoritism and other abuses. In a particularly creative approach, Hamilton suggested that the revenues obtained from new duties placed on foreign manufacturers be utilized to fund these bounties so as not to increase the public debt. Although Hamilton strongly urged that Congress implement this approach to facilitate the development of several key products and industries, including coal and cotton, Congress rejected this approach.
Hamilton also supported the concept of paying “premiums” to the manufacturers of specific products such as coal and domestic wool in order to reward “some particular excellence or superiority” in an industry where quality was sporadic. Again, as with bounties, Hamilton warned that such premiums should be “dispensed only in a small number of cases.”
Hamilton went on to identify additional approaches that had been taken in other countries which might be adapted to the American economy. First, he urged that rewards and privileges be granted to Americans who came up with new inventions, as well as to those who introduced into the country “foreign improvements” which had been successfully utilized abroad. He felt that such rewards and privileges were “among the most useful… aids, which can be given to manufactures.” Second, he called for the enactment of “a judicious and uniform system of inspection” for manufacturing commodities in order to assure product quality as well as preventing fraud. Hamilton considered this to be “one of the most essential” means to promote “the prosperity of manufactures.” Third, given his previous work on public credit and a national bank, Hamilton called for the “facilitating of pecuniary remittances from place to place” and the “facilitating of the transportation of commodities” through internal improvements such as public roads and canals, as well as improvements to inland navigation. Finally, Hamilton opposed the imposition of taxes on manufacturing profits or capital on the grounds that such an approach would discourage investment.
Before concluding his report, Hamilton presented an exhaustive review of the raw materials whose production needed to be encouraged, suggesting which of the methods he had previously reviewed would be appropriate in each particular case. The raw materials he reviewed included iron, copper, lead, coal, cotton, wood, skins, grain, flax and hemp, silk, glass, gunpowder, paper, printed books, and refined sugars and chocolates. The case of iron, with which Hamilton began his detailed analysis, demonstrates his overall approach. Hamilton saw that iron had universal use and value and, as such, “the manufactures of this article are entitled to preeminent rank.” Among the approaches he suggested to encourage further development of iron were the imposition of duties on foreign iron goods to discourage and slow their importation; purchases of military weapons, including those made by home manufacturers, by the federal government; and a system of inspections because of significant cases involving “carelessness and dishonesty” in the making of some iron products, including nails and spikes which were sometimes “family manufacture[d].”
At the end of his report, Hamilton emphasized the necessity of counterbalancing the increased public expenditures from bounties, premiums, and other supports granted to manufactures and the diminution in revenues from the reduction or abolition of some duties on foreign imports by enacting “a competent substitute” for these lost revenues. He suggested that new duties could be imposed to create a surplus, which in turn could be utilized to fund bounties and premiums which would be awarded by a special commission established to encourage inventions and improvements which would facilitate manufacturing. Should such duties be insufficient to create a surplus, Hamilton contended that “the public purse must supply the deficiency of private resource.”
Hamilton’s Report on the Subject of Manufactures was a visionary document which analyzed economic incentives, tax policy, the proper use of private and public debt, immigration policy, employment opportunities, agricultural and manufacturing interests, tariff policy, safety and quality inspections, inventions and improvements, transportation needs, and financial resources. All of this was done by an immigrant orphan who was then only 36 years old.
Hamilton’s work laid a foundation for the future growth of American business, even while its particular recommendations were in large part ignored in the eighteenth century. It would only be in the nineteenth century that many of Hamilton’s recommendations would be embraced by the Whig Party of Henry Clay and Abraham Lincoln in Clay’s American Plan, and the Republican Party of the post-Civil War era, which pursued a program of encouraging internal improvements and enacting high tariffs to protect American industry. Hamilton thus provided the blueprint for American business development on which future political leaders would construct the house of American business.
Alexander Hamilton, “Report on Manufactures,” in Alexander Hamilton: Writings (New York: Library of America, 2001), 647-734.