This paper argues that while government regulation should be minimized due to the self-governing nature of the free market, capitalism and democracy are deeply intertwined. The checks and balances within each system ensure that neither can dominate the other. The constant changes in fiscal and monetary policy, driven by inequality and shifts in the labor market, aim to supply skilled workers with new technology. These policy changes have significantly shaped democracy, as evidenced by the annual GDP growth from the American Revolution and economic inequality statistics from the U.S. Census (Dickinson; U.S. Census). The results demonstrate that capitalism directly influences democracy and intertwines with an ideology of freedom through capital gain.
The quote, "The astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds," alludes to Voltaire’s satirical character, Dr. Pangloss, and his philosophy in Candide. This quote reflects Keynes’ dark humor about U.S. economics, while government regulation should be minimized because the free market governs itself. Capitalism and democracy shape each other as fiscal and monetary policy frequently change, and the labor market shifts constantly to supply specialized labor. GDP measures a country’s total well-being, offers insight into an economy's essence, and allows us to analyze its history (Dickinson). Economic inequality reflects the difference between the observed Lorenz curve and a fully equal income distribution (U.S. Census). Using these two statistics, we can evaluate how capitalism and democracy have shaped each other in balancing government oversight, regulation, and a free-market system. These ideologies continually evolve, and by analyzing early U.S. history, starting with the American Revolution, we can show how they influenced each other.
After the war, the real test of independence began. Taxation in the United States differed in 1776 compared to today, with no income, company, or labor taxes. Instead, tariffs and excise taxes generated income for the American Colonies (Olson). The newly formed country adopted the name “United States of America” under the Articles of Confederation. A recently elected government focused on creating the economy, paying off debt, restoring currency value, and lowering inflation (Hill). The American Revolution, a pivotal historical moment, set the stage for the economic structure we see today. In 1790, the first Treasury Secretary under the Constitution, Alexander Hamilton, proposed a national bank to address funding concerns. Based on the Bank of England's charter, his concept claimed that the United States should distinguish itself by printing paper money, serving as a secure depository, enabling commercial banking, and collecting taxes to support payments (Hill). Andrew Jackson, however, resented banks and opposed the concept. Early financial difficulties from speculation and bank credit constraints fueled Jackson’s concerns about the Bank's currency stability (Independence Hall Association in Philadelphia). Jackson’s distrust of the government stemmed from his professional and financial ambition, showing that capitalism's ideology would impact U.S. democracy. A capitalist democracy lets us govern capitalism and its markets by eliminating excessive policies influenced by biased leaders. Jackson's distaste for politics caused the first banking system to fail, forcing a quick rewrite of U.S. capitalism and democracy after the Revolutionary War.
Jackson sympathized with Western “soft money” followers who wanted easy credit experiences with the banking system (Independence Hall Association in Philadelphia). Hamilton advocated for a strong central government, and Jefferson envisioned an agrarian economy without banking, commerce, and manufacturing. Jefferson argued that the government should avoid creating enterprises or a national bank. Nonetheless, Washington signed the bank into existence (Hill), and Philadelphia launched the first American central banking system on December 12, 1791, followed by banks in Boston, New York, Charleston, and Baltimore in 1792, and later by Norfolk, Savannah, Washington, D.C., and New Orleans in 1805. The new central bank adopted British mercantilism, but it faced failure without mechanisms to enforce government policy.
Thomas Willing, the 25-director bank's president, started with $10 million, $2 million from the government and $8 million from private investors (Hill). Non-voters were uneasy about foreign investments, distrusted government involvement, and were influenced by the effects of British mercantilism. This distrust did not only stem from Jackson's obsession with it; anyone who owned capital feared government control despite the protection that state involvement could bring. Memberships sold rapidly after establishing the First Bank of the United States, sparking fierce bidding in the secondary market when commercial investment rose, and some investors missed out (Levy 116). The establishment of the First Bank of the United States profoundly impacted the U.S. economy, sparking a surge in commercial investment and economic growth. By 1811, state banks feared competition and authority from a national bank (Hill), but those opposing the bank in 1790 argued that its charter should expire, which it did in 1816. The Smithian commercial multiplier increased the commercial economy by more than 1.5% of GDP per capita, making the U.S. the fastest-growing (Levy 116). Between 1820 and 1836, the U.S. money supply grew by an annual rate of 7 percent (Levy 141).
In his book Democracy in America, written in 1840, Alexis de Tocqueville argued that democracy meant more than just formal political institutions; it also meant a country's ethos. In the United States, this way of thinking was based on commerce (Levy 115-16). Capitalists created the first United States to exploit workers without government interference. This failed because democracy pushed back with fiscal and monetary policies that protected workers and formerly enslaved Americans from institutional slavery. The U.S. went from being a society that relied on manufacturing to one that relied on a highly creative, highly skilled workforce thanks to the American ideal of freedom made possible by capital accumulation. In every external and internal conflict, our work has powered independence. Economic equality for those who visit our shores has a long history, dating back to the American Revolution and continuing into the present day. The American dream is not measured through capital accumulation in the monetary sense but in our ethos of fair trade in pursuit of happiness, a testament to the power of democracy in shaping our national character.
Matthew Nichols ECN #211 - #33559 | Fall 2022 | October 06, 2022 Dr. Erik Thor Huntsinger
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