The premise of the plan is so simple that I can sum it up in four words: “Put American manufacturing first.” This is done by giving American industries subsidies—or what Hamilton called “bounties”—to be globally competitive, and then protecting those industries by putting high tariffs—or taxes—on any new imports from foreign countries. The key to a good trade policy, just as in any business model, is to sell more stuff than you buy. So protect your sellers, and restrict the buying of things elsewhere if you can instead make them yourself. That was the basis of Hamilton’s plan.
This plan wasn’t anything new. Hamilton borrowed it from King Henry VII’s “Tudor Plan,” enacted in the fifteenth century to turn England into an economic powerhouse. And King Henry borrowed it from the Dutch, who borrowed it from the Romans, who borrowed it from the Greeks thousands of years ago. It’s a tried-and-true method for economic prosperity that has existed for thousands of years.
By the 1900s, the United States was emerging as an economic powerhouse in the global market, realizing Hamilton’s plan for producing and exporting more goods than we buy abroad.
A trade surplus of roughly $500 million in 1900 ballooned to $10 billion through the 1940s and ’50s. Thanks to Hamilton’s plan, the United States had built up an enormous manufacturing base that was able to sustain tens of millions of high-paying blue-collar jobs to produce the world’s goods—from refrigerators to clothes to cars.
In addition, the Wagner Act of 1935 guaranteed Americans the right to form a union and bargain collectively with their corporate employers in these now booming manufacturing plants. Prior to the Wagner Act, unions were practically unheard of. Even attempting to unionize in the workplace would get you fired, at best. At worst, it could get you killed.
But with these new protections in place, union membership grew from single-digit percentages to nearly a third of all American workers. And with the growth in unions, middle-class wages grew, too, and so did the middle class’s share of total national income.
The middle class thrived on a sturdy manufacturing base and strong labor unions negotiating fair wages.
Step Four: Rules in the Marketplace
The final step to securing a middle class is to set rules for the marketplace in order to keep the Royalists in business from getting too powerful and to prevent them from misbehaving.
For example, there was the Sherman Antitrust Act of 1890, which was intended to limit the size of corporations.
In response to the Robber Baron monopolies, Presidents Howard Taft and Woodrow Wilson went trust-busting.
Most notably, Taft would take a hacksaw to John D. Rockefeller’s Standard Oil Trust, cleaving it up into thirty-three separate companies. And the American people loved Taft for doing it.
But being too big wasn’t the only sin. Operating against the best interests of the public as a corporation could get you shut down, too. Our nation has a long history with the “corporate death penalty.” Beginning in the early 1800s, laws were passed in several states to make it easier for legislators to revoke corporate charters if businesses were operating against the public’s interest. And this routinely happened.
In Ohio, Mississippi, and Pennsylvania, banks were shut down for being “financially unsound.” In New York and Massachusetts, the corporations that ran the turnpikes were given a corporate death sentence for not keeping the roads in good repair.
By 1825, twenty states had amended their constitutions to make it easier for the state to “revoke, alter, or annul” corporate charters whenever a corporation “may be injurious to citizens of the community.”
And in just one year, 1832, the state of Pennsylvania sentenced ten corporations to death, revoking their charters for “operating contrary to the public interest.”
This continued into the late 1800s, when whiskey trusts, sugar corporations, and oil corporations were all put to death in several states across the nation. In New York, workers petitioned the state supreme court to slay the beast that is Standard Oil for labor abuses. In 1894, the court obliged and revoked Standard Oil’s corporate charter in that state.
And after the stock market crashed in 1929, FDR turned to the banks. He created the Securities and Exchange Commission (SEC) to regulate, for the first time, the purchasing and selling of shares on the stock market. He also created the Federal Deposit Insurance Corporation (FDIC), which insured people’s bank deposits. And with the Glass-Steagall Act, FDR built a wall between commercial and investment banking to make sure the banksters couldn’t use your checking account deposits to place risky bets on the stock market.
With these new reforms, Wall Street’s delirium was held in check. And for nearly sixty years, America went without a catastrophic economic crash. It was the longest such period of stability in the nation’s history.
But rules in the marketplace needed to be coupled with rules in the political arena. That meant taking Teddy Roosevelt’s advice: “We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains.”57
In 1907 Teddy passed the Tillman Act (still on the books today), which banned corporate contributions in political elections. Violators of the law could face prison time, and corporations violating the law could be shut down.
The effect of all this government involvement in the workplace led to the greatest period of sustained growth in our national history, and gave rise to the golden age of the middle class through the middle of the twentieth century.
But just as the United States has had two great eras of a middle class, it has also had two dark eras of Economic Royalist rule, in which the middle class was mowed down by corporate behemoths. The first was the Gilded Age after the Great Crash of 1857 and Civil War, which put an end to the first era of the American middle class.
Monopoly Endgame
There’s an easy way to understand why a strong middle class with a lot of good-paying jobs and purchasing power is also good for economic stability.
Consider the game Monopoly. If your opponent scoops up Boardwalk, Park Place, North Carolina Avenue, Pacific Avenue, both utilities, the four railroads, and an array of other properties on the board—that’s it, the game’s over.
The other players, who were once middle-class property owners, will go bankrupt as they are forced to pay higher and higher costs for rent and services, utilities, and transportation. Eventually, one player has all the money, and the losers are left standing out in the cold.
But what if the Monopoly game didn’t end there?
What if the once-middle-class-but-now-broke players kept rolling the dice and kept going around the board, using their credit cards and lines of credit to stay in the game?
While they’re running up massive personal or small-business debt, the monopolist who owns everything is finding it harder and harder to collect income from the increasingly impoverished players. They can’t afford to pay rent, they can’t pay utilities, and they can’t ride on the railroads.
Eventually, when the consumers run out of both cash and credit and can no longer spend any money, even the monopolist goes broke. Then not only is the game over, but the game is over in a massive disaster.
This is remarkably similar to how real-world economics works when it’s deprived of a stable middle class.