Saturday, February 12, 2011

The Economic Legacy of Lincoln

On Wednesday Ron Paul chaired his first hearing of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. One of the key witnesses asked to testify was Loyola professor of economics Thomas DiLorenzo who has published scores of scholarly articles in peer-reviewed journals. He was critical of the Federal Reserve's policy of monetary inflation and this did not sit well with Paul Krugman, who attacked both he and Paul in both his blog and his column at the New York Times. He noted that, in addition to his work on economic theory and policy, DiLorenzo has also written two books (you might want to sit down for this) critical of Abraham Lincoln.  A good analysis of Krugman's attacks has been written by my friend, William L. Anderson.

Since the issue of Lincoln has been brought up by Krugman and since today is Lincoln's birthday, it seems not inappropriate to consider the legacy of Lincoln's economic policy. Regardless of what one might think about Lincoln in general, it should be understood that his economic legacy was decidedly negative. This is one of the points historian Richard Gamble makes in his essay, "Rethinking Lincoln" in the book The Costs of War, edited by John Denson.

Gamble notes that Lincoln was a staunch supporter of Henry Clay's "American System," a collection of policies that included national banking, internal improvements, and trade protectionism. As Gamble rights, "under the political and social opportunities afforded by the war, the Republicans crafted, and Lincoln approved, a raft of nationalist legislation, including a large public debt, an income tax, subsidies to railroads, the bureaucratic Department of Agriculture, and protective tariffs for American business nearing 48 percent."

Perhaps the most damaging specific economic policy of his administration was the passage of the National Banking Act in 1863. In his annual report to the Congress in December 1862 he asked for a national banking system with an more easily inflatable paper currency. In 1863 he got it.

The National Banking System provided for a much more centralized banking system that was inflationary, created financial crisis after financial crisis, and paved the way for the creation of the Federal Reserve. As Murray Rothbard explains in his The Mystery of Banking:
National banking destroyed the previous decentralized and fairly successful state banking system, and substituted a new, centralized and far more inflationary banking system under the aegis of Washington and a handful of Wall Street banks. Whereas the greenbacks were finally eliminated by the resumption of specie payments in 1879, the effects of the national banking system are still with us. Not only was this system in place until 1913, but it paved the way for the Federal Reserve System by instituting a quasi-central banking type of monetary system. The “inner contradictions” of the national banking system impelled the U.S. either to go on to a frankly central bank or to scrap centralized banking altogether and go back to decentralized state banking. Given the inner dynamic of state intervention, coupled with the common adoption of a statist ideology after the turn of the twentieth century, the course the nation would take was unfortunately inevitable.
As John Klein summarized in his Money and the Economy,
The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

The public reaction to the panic of 1907 was great enough to provide support for the formation of the Federal Reserve and we all know what has happened to the value of the dollar since then. When Krugman entitled his above-mentioned op-ed "Abraham Lincoln, Inflationist" he was more accurate than he knew.

1 comment:

  1. American System creates prosperity in USA, Germany, Japan and Russia but the British system created unemployment, trade war with China -India, destruction of industries in Bengal, real wars.