Many of the world’s wealthiest jurisdictions are part of the Anglosphere. But why? Is there something special about the United Kingdom that produces prosperity? And why are many of the nations settled by the English rich as well?
The answers to those questions do not involve Anglo-Saxon DNA. Instead, the roots of prosperity in the Anglosphere trace back several hundred years. The wealth of nations such as the United Kingdom and United States was made possible by economic liberalization.
In England, the Whig Revolution was a series of events – the successful invasion of William of Orange to dethrone James II in 1688, the selection of George I to succeed Queen Anne in 1714, and the selection of Robert Walpole as the first Prime Minister in 1721 – that created the Westminster parliamentary system in which the monarch remained the head of state, but the prime minister, serving at the pleasure of the House of Commons, was the head of government.
Most important, the Whig Revolution also created the institutional and legal framework that transformed England into a modern capitalist economy and sparked the Industrial Revolution.
The adoption of Dutch commercial law, the creation of the Bank of England, and the circulation of its bank notes monetized the English economy. English courts abandoned the medieval “just price” doctrine, which let judges nullify contracts after the fact based on the concept that all goods and services had an objective value and any deviation from this just price should therefore be unlawful. Instead, English courts held that “it is the consent of the parties alone that fixes the just price of anything, without reference to the nature of things themselves, or to any intrinsic value.”
Traditional guilds collapsed. Entrepreneurs were free to create new firms, determine output and prices, borrow from banks, and issue stock. New manufacturing firms lured workers away from the estates of the landed gentry to rapidly growing English cities with wages paid in paper currency. A rising urban middle class challenged the economic and social position of the rural gentry.
Rapid economic, political, and social change inevitably produced a reaction led by the arch-Tory Henry St. John, the First Viscount Bolingbroke. Before the Whig Revolution, Bolingbroke held that England had been a stable society in which a monarch governed and everyone else deferred to their betters and knew their place. Agriculture was dominant, gold and silver coins were the only money, and the trades were justly regulated.
To Bolingbroke, the Whig Revolution corrupted England through “ministers and money.” Paper currency had disrupted the semi-feudal order that favored the rural gentry. Bolingbroke rejected the legal and political reforms that created a modern capitalist economy. Instead, Bolingbroke wanted to restore a governing monarch, abolish banks and paper currency, and return to an idyllic past that had never really existed.
But he failed to turn back the clock.
Before the Revolutionary War, the American colonies also had pre-capitalistic, quasi-feudal economies similar to England before the Whig Revolution. Outside of New England, land ownership was highly concentrated – about two-thirds of all land was owned by less than one-tenth of all free white males. Moreover, land ownership qualifications in all colonies except Pennsylvania, where all taxpayers could vote, disenfranchised more than one-half of all free white males. The upward mobility that had existed in the colonies in the 17th century steadily diminished in the 18th century. Wealth and political power were increasingly concentrated in the hands of a small oligarchy composed of a few intermarried families in each colony.
The Whig Revolution, which had allowed England to develop a modern capitalist economy, did not immediately cross the Atlantic. Royal governors, responsible to London, not colonial legislatures, were headed colonial governments.
In the 1770s, colonial legislatures still regulated the prices for many goods and services and forbade arbitrage and speculation. Colonial courts still accepted “just price” doctrine, allowing judges, all whom were members of a small oligarchy, to overturn contracts when market prices moved against colonial elites. And when crops failed or prices fell, colonial legislatures frequently declared “debt holidays” to prevent creditors from seizing the property of the colonial oligarchs.
Those colonists, who were not oligarchs, Native Americans, or slaves, were mostly subsistence farmers that bartered any excess crops for goods from local merchants. Debts were settled and taxes were paid in crops, not gold or silver coins or paper currency.
Most of the America’s founders were from the small, wealthy elite in the colonies. Identifying with the English gentry rather than the rising middle class, Bolingbroke greatly influenced most of the founders’ views of economics and politics. Most founders, especially Thomas Jefferson and James Madison, agreed with Bolingbroke about the primacy of agriculture, shared his fears of banks and a paper currency, and dreaded industrialization. Most founders accepted Bolingbroke’s policy recommendations with the exception of a ruling monarch.
Alexander Hamilton was different than other founders. Born in Nevis outside of wedlock, abandoned by his father at age 2, and orphaned by his mother at age 13, Hamilton proved to an exceptionally talented clerk at Beekman and Cruger, an international trading firm, on St. Croix. Winning a scholarship to King’s College (now Columbia University) in New York, Hamilton immigrated to America in 1773. Serving as General George Washington’s aide-de-camp, Hamilton observed how a weak Continental Congress imperiled the war effort.
Consequently, Hamilton had a very different prospective from other founders with the notable exceptions of Washington and John Marshall. Hamilton wanted America to become a dynamic meritocracy. Observing the plantation system in the Caribbean, Hamilton understood that (1) land ownership is the only source of wealth in agricultural societies, and (2) any such societies would eventually become static with a few landowning haves and the rest perpetually poor have-nots. Hamilton wanted poor, but talented individuals like himself to have avenues other than land ownership to earn wealth.
Moreover, Hamilton rejected slavery because it prevented slaves from their full economic potential and made masters indolent and lazy. Moreover, Hamilton rejected racism. “The contempt we have been taught to entertain for the blacks, makes us fancy many things that are founded neither in reason nor experience.” During the Revolution, Hamilton proposed emancipating slaves that agreed to fight in Continental Army. Later Hamilton founded the New York Society for the Manumission of Slaves.
Instead of Bolingbroke, Hamilton embraced the Whig Revolution and wanted to bring its economic benefits to the United States. As Secretary of the Treasury, Hamilton sought to monetize America to change it from a semi-feudal economy to a modern capitalist economy.
From his study of the English economy, Hamilton understood when a government faithfully services it debt, its bonds becomes “as good as gold.” Then, government bonds can as bank reserves. Hamilton wanted U.S. debt to become as respected as Britain’s. Then, U.S. debt could serve as the reserves for a national bank that could issue paper currency.
Hamilton’s plan had several parts. First, Congress would assume the Revolutionary War debt from states. Congress would then impose tariffs and excise taxes to service the enlarged federal debt. Congress would create a mint and charter a Bank of the United States, modeled after the Bank of England, to issue a nationally circulating currency. With the support of President Washington and over the opposition of Secretary of State Jefferson, Hamilton persuaded Congress to enact his plan although Hamilton had to agree to move America’s capital from New York City to what would become Washington, D.C.
Money replaced barter as the primary means of exchange. The Bank of the United States along a newly established stock and bond exchanges helped Americans entrepreneurs to start new manufacturing and trading businesses that were not dependent on land ownership.
While some future policymakers misused Hamilton to justify their protectionism, Hamilton was not a protectionist in the modern sense. Hamilton recognized potential benefits of free trade, but he believed in reciprocity. So long as the United Kingdom, the world’s leading economic power, practiced mercantilism, a peripheral economy, as the United States was then, would not, in Hamilton’s mind, benefit from unilateral free trade.
In a world in which income and value-added taxes had not been invented, the major sources of government revenue were tariffs, property taxes, and the profits from government monopolies. Hamilton opposed government ownership of any enterprise except for “manufactories of all the necessary weapons of war.” Hamilton favored a revenue tariff that averaged about 10 percent over a property tax to fund the federal government. Hamilton sought to maximize the federal government’s revenue and provide a modest margin of protection to domestic manufacturers rather than to block imports. Indeed, Hamilton argued: “It is a signal advantage of tax on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed – that is an extension of the revenue.” The United States did not establish protective tariffs until after the War of 1812.
Moreover, Hamilton was staunch defender of property rights even when it was politically costly to him. As a lawyer in New York City, he successfully argued for the restoration of property of Englishmen and Loyalists that had been seized after the Revolutionary War in violation of the Treaty of Paris and the law of nations.
There is a debate in some circles regarding who among America’s founders was the most consistent advocate for free markets and economic liberty. Today most Americans would incorrectly identify Thomas Jefferson. However, it was Jefferson’s rival, Alexander Hamilton, that did more than any other founder to give the United States a free market economy.
Jefferson opposed Hamilton’s policy innovations as a threat to the ideal of a republic of yeomen farmers led by gentlemen planters. Yet as President, Jefferson could not undo Hamilton’s work. The American version of the Whig Revolution endured and the United States was on the path to great prosperity.
The author of this article, who goes by the name “Hamilton” is a senior U.S. economist who frequently writes under a nom de plume.