AMERICAN POLICYMAKERS, foreign policy experts, and business leaders remain attached to a eupeptic view of history that has its origins in the end of the Cold War. The received view is that, since democratic capitalism was what won the Cold War, future policy should focus on the twin goals of reorganizing modern democratic society around free-market-oriented principles and exporting this program to the rest of the world. Putting aside the fact that capitalism alone is not what brought down the Soviet Union, this worldview was flawed from the outset: basing society around market principles, a drive toward efficiency, and the atomization of the individual could only result in government austerity, deregulation, and the erosion of shared values. Cost-benefit analyses became king, prompting policymakers to outsource what were once core government roles, including defense. The state came to be seen as merely an enabler of market economics, to be minimized wherever possible. Moreover, that which it defended came under attack as well. Borders? A roadblock to economic efficiency. National identity? Otiose in a globalized world of a universal market. Other examples abound.

The result: a hollowing out of state capacity, a collapse of the political center’s legitimacy, and boundless internal division. Economic inequality has grown dramatically, trust in politicians and institutions has fallen, and government is seen as unable to build anything. An Axios-Ipsos poll from earlier this year found that 79 percent of respondents agree with the notion that the country is “falling apart.” Any doubts concerning the current state of affairs were lain to rest with what will in coming years be known as, to borrow Asian naming style, the January 6 Incident—a protest-turned-riot that resulted in the breach of the Capitol building in Washington, DC as the 2020 election vote was being certified. This close personal encounter with political instability should spur policymakers to address the grave reality: our current problems are so severe that domestic insurrections are no longer an abstract impossibility. Political, economic, and social reform are needed urgently.

No doubt the United States has faced eras of worse internal division, hardship, and yes, political violence. These are the Confederation Period (following the American Revolution), the Civil War era, and the Great Depression. If America is to find its way through its current troubles, we must look to our past and draw inspiration from the efforts of our forebears. It contains many salutary lessons which Congress and the Biden administration, along with future ones, would do well to draw upon.

DURING THE Confederation Period, fledgling America was a deeply divided country in the midst of a severe economic crisis. States competed with each other for commerce. The rural countryside was neglected. The gap between the rich and poor widened. The war’s end, according to a working paper for the National Bureau of Economic Research, led to a collapse in per capita income that was as severe “as the 1929–33 drop into the Great Depression.” Wartime spending in critical industries—everything from gunsmiths and shipbuilders to salt and market crops—disappeared, driving entire towns out of business. Economic activity was down. Inflation was up. Revenue from taxes collapsed.

Not that the government, such as it was, could do much about it. The Articles of Confederation, which governed the thirteen states until 1789, were totally inadequate. The Congress of the Confederation lacked any way of compelling states to pay taxes, and had, in the words of economic historian C. Donald Johnson, “no authority to regulate trade; rather, each state regulated its own trade, imposing such duties as desired—not only on foreign products but also on those of its sister states.”

Take New York. It supported its public finances (and the interests of its local elites and investors) through a 5 percent tariff imposed on imported British goods. As the main commercial port of entry for this part of the country, the state thereby managed to secure tax revenue on British imports that should have gone to its neighboring states of New Jersey and Connecticut. Furthermore, New York later extended this tariff to produce entering New York from New Jersey and Connecticut. These states responded in turn: New Jersey refused to pay taxes to Congress so long as New York’s tariffs remained in place (Congress had no enforcement capability, so it couldn’t do anything) while Connecticut’s merchants banded together to suspend all trade with New York.

Not only did Congress lack the power to collect taxes and duties and regulate trade, but it was also helpless to prevent foreign powers from taking advantage of the situation by flooding America with cheap, high-quality manufactured products while creating strict barriers for domestic products. British imports to the United States tripled in volume shortly after the war, but London opted to close the West Indies to American products, Newfoundland and Nova Scotia to American whaling and fishing ships, and England itself to U.S. fish, whale oil, and salted meats. So harmful was this flood of imports on local industry—already suffering from the end of demand following the Revolutionary War—that, according to the early twentieth-century economic historian Victor S. Clark, “town artisans and manufacturers experienced enough distress to create the sentiment behind the New England and Pennsylvania tariff laws of 1785 and 1786.” Contemporary observers may feel inclined to compare this case and our present situation: cheap Chinese imports flooding the United States, trade barriers preventing American goods from entering China, and shrinking domestic manufacturing driving politicians to advocate for tariffs and other forms of protectionism.

Then there was the matter of Revolutionary War debt. Simply put, securing independence was anything but cheap. The United States, lacking money, had gone into debt, and now it was time to pay up. In Unruly Americans and the Origins of the Constitution, Woody Holton describes the situation in stark terms:

[Between 1781 and 1790,] Americans were hit with taxes that averaged three or four times those of the colonial era. The principal purpose of the levies was to pay interest on state and federal government securities, many of them bought up by speculators. In the mid-1780s, most states earmarked at least two-thirds of their tax revenue to pay foreign and domestic holders of the war-related debt bonds. The tax burden was magnified by a shortage of circulating coin.

In other words, state governments were forced to resort to what are known today as austerity measures. Taxation was more onerous than it was before the war, but the money was not flowing towards desperately needed public spending on infrastructure, domestic manufacturing, and anything that could help the economy get back on its feet. Instead, between 75 and 80 percent of state budgets, on average, was going to servicing debt. This was held by other countries and, domestically, by wealthy speculators. Well before the existence of modern-day vulture funds, these individuals earned fabulous, double-digit returns by acquiring bond certificates and pressuring state governments to pay forth what is owed. In other words, the rich got richer at a time when the economy was in shambles and starved for investment.

Perhaps it should come as no surprise that the Confederation Period saw populist unrest and minor attempts at secession. The culmination of this crisis was Shay’s Rebellion, in which, to quote Christian Parenti, “indebted middle-class farmers in the western mountains fought debt-owning coast elites and the state government they controlled” in Massachusetts. James Madison captured the national mood in a letter to Thomas Jefferson: “Most of our political evils may be traced to our commercial ones.”

It was abundantly clear that the Confederation was on the verge of disintegration at the hands of internal trade war, foreign embargo, and debt. The only way forward was a painful but realistic and holistic assessment of young America’s circumstances, followed by the implementation of a program that could balance out competing political and domestic interests. Achieving this would require a sufficiently strong national government, with the power to tax states, regulate trade, issue coinage, and more. And creating such a government would require a constitution.

The aim of the founding fathers was to form a federal government that could create a “more perfect union,” ensure “domestic tranquility,” and “promote the general welfare” because the Confederation was tearing itself apart. It seems fitting then that the first major piece of legislation passed in Congress was the Tariff Act of 1789, which protected domestic manufacturing industries and secured revenue for the federal government’s operation and debt servicing. Other measures soon followed. The Northwest Ordinance of 1789, for example, granted 160-acre plots of land to settlers and farmers in what would eventually be the states of Ohio, Indiana, Illinois, Michigan, and Minnesota. The territories also prohibited slavery and speculators, thus preventing the emergence of large estates owned by a wealthy minority. In 1794, an act “for the erecting and repairing of Arsenals and Magazines” was passed out of a desire to break free from a dependence on foreign arms manufacturers, thus “providing for the common defense.” And, as Michael Lind lucidly explains in Land of Promise: An Economic History of the United States, these arsenals were purposely distributed geographically in order to encourage economic development. 

Then there was Alexander Hamilton, America’s first Secretary of the Treasury. Having grappled with the logistical nightmare of keeping the Continental Army fed, armed, and supplied during the Revolutionary War, Hamilton was well aware of the thirteen colonies’ relative economic weakness and their dependence on foreign imports (including weapons), along with the importance of national creditworthiness. He formulated an elaborate strategy to address these shortcomings. In early 1790, he submitted his First Report on the Public Credit, which argued that the country should organize its national debt and establish creditworthiness by paying domestic securities at face value and consolidating the debt of states under the newly created Treasury Department. The former helped win the “moneyed men” of the country over to the cause of the new government, securing a source of credit for the future while the latter provided the new federal government with essential power. This was followed by the 1791 Report on Manufactures—a highly-detailed assessment for how the U.S. federal government could support the development of American industry, enable the young fledgling nation to resist threats from European powers, and provide for the necessities of a growing population. This included a litany of proposals: setting high tariffs on imported goods that competed with domestically produced goods, low tariff rates for raw materials needed for domestic manufacturing, “pecuniary bounties” (subsidies) for infant manufacturing, the active introduction of new inventions, a national bank, and more. Though not all of the ideas were adopted, Parenti writes that Hamilton’s scheme,

…achieve[d] its stated aim of improving economic conditions for the vast majority by lowering the overall tax burden and increasing economic growth. The new federally anchored credit system broke the vicious deflationary cycle … The money supply expanded. Interest rates declined. The costs of debt servicing declined. All of this revived investment and economic growth. As a result, the overall tax burden on common people declined significantly.

In short, the Crisis of the Confederation was defused through the creation of a central government that could balance competing economic and political interests and redistribute resources so as to engender the growth and development of infrastructure and manufacturing. A key part of this effort was convincing the nation’s investor and financier class that their long-term interest lay in accepting a reduction in short-term gains in exchange for America being granted the opportunity to survive, grow, and thrive.

THE NEXT great climacteric in American political-economy arrived with the Civil War. There was a strong socio-economic dimension to the conflict. Consider the analysis of Henry Carey, a nineteenth-century economist and President Abraham Lincoln’s economic advisor, who delved into this topic in his 1853 work, The Slave Trade, Domestic and Foreign: Why It Exists & How It May Be Extinguished. Carey found that due to economic development between 1824 and 1833, “mills and furnaces increased in number, and there was a steady increase in the tendency toward the establishment of local places of exchange; and then it was that Virginia held her convention at which was last discussed in that State the question of emancipation.” The boon in productive efficiency enabled by industrialization was rendering slavery—a financially expensive institution—obsolete. The sheer expense forced political elites in individual states to consider whether or not it was time to turn to emancipation.

The situation changed, however, with the administration of President Andrew Jackson. For starters, he pulled federal funds from the Second Bank of the United States (the successor to Hamilton’s national bank), eventually leading to its collapse. While Jackson was certainly right in noting that the bank had been captured by merchants and speculators, was biased towards coastal and urban states, and did not fund expansion opportunities for Western territories, the institution nonetheless served an important role by stabilizing the American economy via its many services, including regulating the lending practices of state banks. Its demise, rather than an effort at reform, led to economic instability (starting with the Panic of 1837), wildcat banking, a weakened currency and credit system, and greater financial speculation. One particularly harmful consequence of this was that investment that would have otherwise fueled Southern industrialization ground to a halt.

Then came the administration’s abandonment of protectionist policies, which Carey notes in detail:

In 1833, however, protection was abandoned, and a tariff was established by which it was provided that we should, in a few years, have a system of merely revenue duties; and from that date the abandonment of the older States proceeded with a rapidity never before known, and with it grew the domestic slave trade and the pro-slavery feeling. Then it was that were passed the laws restricting emancipation and prohibiting education; and then it was that the export of slaves from Virginia and the Carolinas was so great … resulted in a reduction of the price of Southern products to a point never before known; and thus it was that the system called free trade provided cheap cotton. Slavery grew at the South, and at the North; for with cheap cotton and cheap food came so great a decline in the demand for labour, that thousands of men found themselves unable to purchase this cheap food to a sufficient extent to feed their wives and their children.

Overall, policy changes such as these resulted in southern industry opting to specialize in the production of raw goods (particularly cotton) via cheap labor, which could only come from slavery. Financial firms of the time had an interest in maintaining this arrangement, as it proved quite profitable. However, the South’s lack of economic development could only result in economic vassalization, most likely by northern U.S. states. In his inaugural address Confederate president Jefferson Davis declared,

An agricultural people, whose chief interest is the export of a commodity required in every manufacturing country … There can be but little rivalry between ours and any manufacturing or navigating community, such as the Northeastern States of the American Union. It must follow, therefore, that a mutual interest would invite good will and kind offices. If, however, passion or the lust of dominion should cloud the judgment or inflame the ambition of those States, we must prepare to meet the emergency and to maintain, by the final arbitrament of the sword, the position which we have assumed among the nations of the earth.

Carey was even more explicit in an Aug 26, 1867 letter to Congressman Henry Wilson following the end of the war, stating that “…free trade gave us sectionalism, and promoted the growth of slavery, and thus led to rebellion.”

The urgency in unifying the country once more by addressing inequalities and passing radical reform measures was noted by Abraham Lincoln and his Republican allies in Congress. They went far beyond merely raising tariffs (though Lincoln did so twice in three years), with the result being that, according to American Compass research director Wells King, “the American home market was the most protected in the world” until World War II.

In his first annual message to Congress, for example, Lincoln noted that,

Agriculture, confessedly the largest interest of the nation, has not a department nor a bureau, but a clerkship only… annual reports exhibiting the condition of our agriculture, commerce, and manufactures would present a fund of information of great practical value to the country. While I make no suggestion as to details, I venture the opinion that an agricultural and statistical bureau might profitably be organized.

A few months later, on May 15, 1862, Lincoln formally established the U.S. Department of Agriculture, calling it the “people’s department.”

A wave of groundbreaking and nation-changing legislating and creations soon followed. Five days later, on May 20, Lincoln signed the Homestead Act into law, granting up to 160 acres of federally-owned land to any citizen(s) willing to live and farm/develop said land for five years (to measure the impact of this, consider that “a quarter of all U.S. adults alive in 2000 were descendants of Homestead recipients”). On July 1, he signed the Pacific Railway Act, which helped finance the transcontinental railroad and the spread of telegraph lines, further opening up the American West to expansion, settling, and development. The next day, on July 2, Lincoln signed the first of the Morrill Land-Grant Acts, distributing federal land to states and other localities for the purpose of creating colleges dedicated to the teaching “branches of learning as are related to agriculture and the mechanical arts… in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions of life.” The effort would eventually lead to the creation of the state university system, Cornell University, the Massachusetts Institute of Technology, and other institutions, transforming American education and turning the country into a leader in technical training and learning.

Then there were the changes in finance and banking. Like Hamilton, the early Republicans grasped the importance of centralizing control over the nation’s finances and directing credit towards productive ventures. Lincoln was keenly aware of the danger of unregulated financial interests pursuing profit through speculation, as was unleashed following the collapse of the Second Bank of the United States. Lincoln stated, “Labor is the superior of capital, and deserve much higher consideration,” and that “Nothing is better calculated to engender heartburnings and to enlist the enemies of the most hostile character against a bank than for the community to entertain the belief that the institution is used for the benefit of the few to the exclusion of the many.”

Rather than reviving the centralized Bank of the United States though, the Republicans opted for a different approach. It centered on the Legal Tender Act of 1862, which created a uniform paper money known as “the Greenback,” named after the color of the ink on the back of the bills. This money, backed by federal debt, was issued by the Treasury Department itself rather than by local banks, and could be used to pay taxes and fund new investments, especially in infrastructure development. This was followed by the National Banking Acts of 1863 and 1864, which created a national system by re-chartering many existing banks. In exchange, these banks were required to buy long-term U.S. Treasury bonds (backed by taxes and tariffs) and then deposit them with the Treasury Department as a security. The Treasury Department, in turn, issued greenbacks for the banks to circulate. In addition, the acts created the Comptroller of the Currency to regulate this new system.

In the end, this initiative brought the nation’s previously chaotic banking system under relative control and pumped much needed money in various localities. As Robert D. Hormats summarized in Harvard Business Review, reformers were successful in “pushing for legislation that created a decentralized but federally regulated national banking system.”

The early Republicans under Lincoln understood the positive role that government could play in developing and strengthening a nation’s economy. As Lincoln argued in his 1861 Independence Day speech to Congress, the “leading object [of government] is to elevate the condition of men; to lift artificial weights from all shoulders; to clear the paths of laudable pursuit for all; to afford all an unfettered start and a fair chance in the race of life.” By the Centennial Exposition in 1876, the results of American reform policies and innovation were apparent: the Sholes and Glidden typewriter, Alexander Graham Bell’s telephone, Thomas Edison’s phonograph, Cyrus McCormick’s reaper. The inventions, and others, were physical manifestations of what Lincoln spoke of. They were made possible by government creating the right conditions for industry and proper competition, and opened the way to a brighter future for all.

IN THE early 1900s, even before the Great Depression, America was unstable—far more than most today would like to remember. This was, at least since the end of World War I, the era of political absolutism: nations across the breadth of Europe fell to dictatorship of one ideological stripe or another. Like today, there was a collapse in the belief that democracy could survive as a system of government. An editorial at the time for The Christian Century stated that “the hope of democracy will revive when it learns how to do the things that need to be done as efficiently as autocracy does them.”

These views could be found in the highest reaches of government, even in the military. Walter Lippmann, one of President Woodrow Wilson’s advisors, wrote a 1925 book entitled The Phantom Public which argued that democracy was unviable. A U.S. Army Training Manual from 1928 asserted that democracy leads to “demogogism, license, agitation, discontent, anarchy.” Wilson’s presidency was characterized as “an era of lawless and disorderly defense of law and order, of unconstitutional defense of the Constitution, of suspicion and civil conflict—in a very literal sense a reign of terror.” Three-time Treasury Secretary Andrew Mellon and numerous U.S. business leaders praised Benito Mussolini, saying that in Italy “the Bolshevik menace was met and vanquished;” that Il Duce had not only rescued his country “from any possible danger of economic and social collapse,” but had “improved the well-being of the people and of the country,” since it “operated in accordance with established economic laws.” Meanwhile, the Germanophile president of Columbia University, Nicholas Murray Butler, instructed his freshman class that totalitarian governments produced “men of far greater intelligence, far stronger character, and far more courage than the system of elections.”

Then there was the economy. Matt Stoller, author of Goliath: The 100-Year War Between Monopoly Power and Democracy, observes that the end of World War I resulted in the empowerment and concentration of financial and industrial interests. “The war induced so much demand for steel, coal, oil, explosives, aluminum, and credit that big business came out stronger at the end than the beginning.” Andrew Mellon stands out as emblematic of the era: a banking and industrialist mogul, and owner of various Fortune 500 companies, who was appointed to run the U.S. government’s finances while still in control of his business empire. With government in the hands of men such as Mellon, socio-economic inequality exploded and financial interests ran rampant lacking any form of restraint. Stoller paints a vivid picture:

By 1928, the top one percent of the population received a quarter of all the income. This excess income flooded into the stock market, and into speculation. At the same time, the Federal Reserve, which was created by Wilson to give the public control over banking, was instead controlled by shortsighted private bankers who could not or would not stop speculative bubbles. It was a dangerously unstable system.

That system “broke” with the Wall Street Crash in 1929, which spread to the banking system (which had lent heavily to speculators), leading to a wave of defaults and bank closures. Fewer banks meant less credit, less lending, and less economic activity, leading to more business defaults and thus even more bank closures, and so on. Washington was clueless as to what to do. Poverty and desperation led to unrest and political radicalism. The Communist Party saw a surge in membership and marched on factories, while the U.S. military prepared contingency plans in case of a domestic uprising.

Such an environment could have easily resulted in an authoritarian turn, if not civil war, were it not for the efforts of Franklin D. Roosevelt (FDR) and his like-minded allies in the Democratic Party. His views were quite well outlined in his pre-election speeches. In his 1932 Commonwealth Club Address he declared that to protect the property of individuals, including their savings, “we must restrict the operations of the speculator, the manipulator, even the financier, I believe we must accept the restriction as needful, not to hamper individualism but to protect it.” Similarly, if financial elites and their political allies “ever use [their] collective power contrary to the public welfare, the government must be swift to enter and protect the public interest.” In his 1936 re-nomination acceptance speech, he thundered that “For too many of us the political equality we once had won was meaningless in the face of economic inequality,” and the financial elite “complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power.”

Once in office, FDR immediately set out to bring the crisis under control. He issued Proclamation 2039, suspending all banking transactions, and then quickly passed the Emergency Banking Act, which quickly sorted banks into three categories: those that were fiscally sound, those that could open again with an infusion of capital, and those that would have to close. FDR gave the first of his famous fireside chats, explaining the measures he had taken and restoring a measure of confidence in the banking system. Within a week, the Federal Reserve notes, “banks controlling 90 percent of the country’s banking resources had resumed operations and deposits far exceeded withdrawals.” Economic activity began once more.

These actions merely staunched the bleeding. FDR and his allies then had to grapple with the true challenge: the reassertion of the authority of the state over matters of finance and industry, along with the creation of a national credit system that would serve the interests of the public rather than just the rich, powerful, and connected. The first step was taking back sovereign control over the United States’ currency and credit. Reserve Banks at the time were legally required to hold gold reserves equal to 40 percent of the paper currency they issued—in other words, the creation of credit in the U.S. economy depended on the nation’s gold supply. If financial interests opted to sell their gold to overseas buyers, then America’s credit supply would shrink. In other words, private financial interests could determine the amount of available credit in the United States.

In response, as part of Proclamation 2039, transactions in gold were also suspended and the Treasury Department obtained the authority to regulate its price. Then, on April 5, FDR issued Executive Order 6102, “forbidding the hoarding of gold coin, gold bullion and gold certificates within the continental United States.” In the words of historian Arthur Schlesinger, this “meant that American monetary policy was no longer to be the quasi-automatic function of an international gold standard; that it was to become instead the instrument of conscious national purpose.”

A flurry of additional reforms would follow. The Banking Act of 1933 (also known as the Glass-Steagall Act) established the National Deposit Insurance Corporation (FDIC) and separated commercial banking from investment banking, as the mixing of the two led to risky speculation and the cause of the Great Depression. The follow-up Banking Act of 1935 made the FDIC permanent and “transformed the Federal Reserve into a public entity ensconcing power over the economy in the hands of a publicly run central bank.” The Revenue Act of 1937 cracked down on tax evasion, closed loopholes, and assured the public that wealthy individuals would pay their fair share. Additionally, the administration prosecuted bankers that had violated the law, with officials informing the New York Times that “if the people become convinced that the big violators are to be punished it will be helpful in restoring confidence.”

FDR also sought to break up non-financial monopolies and entrenched businesses, as he recognized that a democratic society cannot survive if economic and political power is concentrated in the hands of a commercial elite. The advent of World War II reinforced this view, as a number of American companies had international cartel agreements with Nazi German industry—including GE, DuPont, Alcoa, Dow Chemical, and others. Established monopolies were also broken up thanks to the U.S. government creating and financing competing enterprises. World War II saw the Roosevelt administration create the Defense Plant Corporation (DPC), the Defense Supplies Corporation, the Metals Reserve Corporation, the Rubber Reserve Corporation, and so on. The DPC was particularly important, as it essentially created the U.S. military aircraft and machine tool industries. These various industries were distributed across the country, creating new industrial hubs and bridging the geographic-economic divide.

Finally, the Roosevelt administration invested heavily in infrastructure. The Public Works Administration, created in 1933, resulted in the creation of millions of jobs, as workers built everything from roads, bridges, schools, and parks to massive projects, such as the Hoover Dam, New York’s LaGuardia Airport, and more. In total, according to Nick Taylor’s American-Made: The Enduring Legacy of the WPA, the agency “covered the U.S. with 650,000 miles of road, built 78,000 bridges, erected 125,000 civilian and military buildings, and constructed or improved 800 airports.” These programs put an unemployed nation back to work and built the foundation for future economic growth and productivity. Moreover, these projects developed parts of the nation that had otherwise been neglected in the pre-FDR years. The Tennessee Valley Authority transformed entire states that had previously been impoverished and disease-ridden. Cheap electricity was introduced in regions where companies had considered it unprofitable to expand into. New dams meant that periodic floods ceased to be a recurring problem for many. 

FDR and Congress, by reasserting government authority over economic affairs, not only rescued the nation from the greatest economic depression in history but set the stage for what is still considered to this day to be the “Golden Age of Productivity.” The institutions that arose during the period still play an essential role in modern America, and provide a guide for what today’s leaders should aspire to achieve.

WHAT LESSONS, then, can be drawn from these previous crises in American history? And what sorts of reforms are necessary in modern America? Three themes stand out. 

First, there is the question of finance and its influence over the rest of the economy. If there is a dominant recurring theme to the previous three great crises, it is that an under- or unregulated financial system is an endless source of troubles. Though finance plays an essential and unique role as the originator of credit for the wider economy, this also means that it can have a disproportionately negative impact if such influence is not deployed carefully. This is particularly the case if the sector grows too big and concentrated, since, in the words of James K. Galbraith, “the singular feature of big finance is that it is predatory, speculative, unstable, and a drain on resources to no good social end.” If the financial sector pursues short-term oriented profit through financial engineering and speculation—stock buybacks, leveraged first-to-default notes, power options, range accrual notes, high valuations on unprofitable tech startups, etc.—rather than long-term investment in productive ventures, then the only result will be self-enrichment at the expense of the public.

A recent report by Oren Cass from American Compass presents a picture of the current reality. Out of $200 billion “invested” into the United States last year through foreign direct investment, only a mere $4 billion was into greenfield investments (i.e., new ventures). The other $196 billion or so were merely acquisitions. Though from 2009 to 2017 the United States required an estimated $22.9 trillion to actually maintain growth, investment in that time period was only $19.6 trillion. A 10 percent decrease in available capital may not sound like much; it is actually very significant: 

A pattern of wealth accumulation emerged in which nearly all gains go to the already-wealthy who hold capital. From 1989 to 2019, the liquid financial assets of households in the bottom 50% of wealth rose by $172 billion (+39%) while the top 10% gained $29 trillion (+291%). Factor in consumer credit, and the gains for the top 10% remain virtually unchanged while the bottom 50% find themselves with $1.5 trillion less liquid net worth than 30 years ago.

It is clear that a large segment of the public views the financial industry with antipathy, if not open contempt. The post-2008 Tea Party movement, the Occupy Wall Street movement, the support for socialist politicians (including Senator Bernie Sanders), and President Donald Trump’s 2016 election victory can all be attributed to this sentiment.

The financial sector’s prioritization of short-term profit over patient long-term investment and development has broader consequences. A lack of opportunities and too much financial/income inequality is a material-demographic basis for political and economic radicalism. More concerningly, if a large segment of the population feels perpetually disenfranchised, disengaged, and disappointed, why would this lot see any inherent value in maintaining social systems they feel no relation to? If the U.S. government will not tackle the issue of economic inequality, then won’t the public decide to take it upon itself to redistribute wealth on its own terms, all while expressing open contempt for modern capitalism? As Julius Krein has noted in American Affairs, $1 trillion in annual share buybacks (which serve no purpose other than further enriching asset holders),

…calls into question the viability of the free market capitalist system itself. After all, the entire social justification of free enterprise is that the private sector is the most capable of finding productive investments and deploying capital effectively. But when the corporate sector itself admits that it has no use for vast and ever-increasing amounts of capital, then someone else must find a use for it.

Yesterday, that meant trying to vote in politicians who promised to do as much. Today, it means taking advantage of technologically-enabled communications and democratized financial tools to deliberately target financial institutions, as the January 2021 short squeeze of GameStop and other companies’ equities so amply demonstrated. What will it be tomorrow?

Policymakers should deconsolidate the existing financial system by decentralizing it, and reduce gaping socio-economic inequality with carefully targeted redistributive efforts. This includes not just banks, investment funds, private equity firms, and so on, but also technology giants, as the latter have been expanding into this realm in recent years. Possible reforms include a return of Glass-Steagall, the creation of state-level public banks following North Dakota’s model, adding labor representation to the Federal Reserve’s Board of Governors, the closure of tax loopholes that disproportionately benefit capital interests, increasing liability on private equity firms, a budget increase for the IRS, and more.

Second, there is the role of manufacturing in the economy. Aside from providing tens of thousands of jobs, and the fact that it is essential for translational research—i.e., “learning by doing,” with innovation and improvements occurring as a result of work and experimentation on the assembly line—a strong manufacturing capability is critical for U.S. national security. Hamilton wrote in his 1791 Report on Manufactures that a domestic industrial base was essential so that America could be “independent on foreign nations for military and other essential supplies” and compete in global markets. The Union arguably won the Civil War because of its industrial capability. FDR in his time learned of the importance of manufacturing and supply chains in winning World War II. Manufacturing jobs are critical to restoring social stability, enabling the formation of families, and providing a viable path from the working class to the middle class. The loss of these jobs and the resulting unemployment are a recipe for social calamity. To quote Don Peck from The Atlantic, 

The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.

Decades of free trade-informed policy and business decisions, cheered on by the financial sector, have hollowed out the United States’ manufacturing capabilities. This has grave implications for America’s national security, military capacity, and ability to project power abroad. On January 14 of this year, the Pentagon released its Fiscal Year 2020 Industrial Capabilities Report, which “transcribes the defense department’s priority industrial base risks and vulnerabilities.” The findings are astounding. It asserts that,

... a U.S. business climate that has favored short-term shareholder earnings (versus long-term capital investment), deindustrialization, and an abstract, radical vision of “free trade,” without fair trade enforcement, have severely damaged America’s ability to arm itself today and in the future. Our national responses – off-shoring and out-sourcing – have been inadequate and ultimately self-defeating, especially with respect to the defense industrial base.

It must be emphasized that this isn’t the view of the usual free-trade critic, but rather of the Department of Defense itself.

What is to be done? One promising idea would be to establish a National Manufacturing Foundation, as proposed by Sridhar Kota and Tom Mahoney. This institution, modeled on the National Science Foundation, would make targeted-but-heavy investments, create a series of new research centers in public-private partnerships, “restore geographic diversity to manufacturing by building on regional technical and intellectual strengths,” support new manufacturing investment funds, support small- and medium-sized manufacturing firms, and more. Additional proposals include the standard lower corporate tax rates on companies that manufacture domestically; the use of targeted tariffs; the passage of the National Apprenticeship Act of 2020—which would invest “nearly $3.5 billion over five years to expand the scale of apprenticeship opportunities; promote apprenticeships in new, in-demand industries; and streamline the process of access to apprenticeship opportunities for employees and employers”—and a variety of other proposals.

Third, there is the matter of infrastructure. In all three of the previous crises, the construction of infrastructure served two purposes. First, these projects physically and materially united the nation with the goal of preventing internal political division. Second, they laid a foundation for future economic growth and expansion.

American infrastructure is an embarrassing mess. A 2016 report from the American Society of Civil Engineers estimated that the U.S. economy will lose around $7.04 trillion in business sales between 2016 and 2025 due to deteriorating infrastructure, with that number skyrocketing up to around $29.30 trillion between 2026 and 2040. This represents a $3.96 trillion loss in GDP for 2016–2025, and $14.2 trillion for 2026–2040. Millions of jobs will be lost. A separate report by the American Road & Transport Builders Association finds that more than 47,000 bridges (one in three bridges) across the country are in poor condition and in need of replacement or urgent repairs. Data from the Department of Transportation reveals that, on average, 49 percent of the nation’s roads are in shoddy condition.

The Biden administration has proposed an American Jobs Plan to tackle infrastructure needs. However, parts of the plan are rather questionable—particularly what the administration calls “soft infrastructure,” such as spending on child care, family tax credits, and the like. This is not infrastructure spending, but rather a sleight-of-hand aimed at incorporating social welfare proposals and pushing a broader societal transformation. Though there is certainly room to argue the pros and cons of such items, they will not address physical realities that enable daily economic activity. Family tax credits will not, for example, do anything about the recent massive crack on the Hernando de Soto I-40 bridge over the Mississippi River, which could take months to repair. This may sound like a provincial concern, but as the recent obstruction of the Suez Canal by the container ship Ever Given has demonstrated, economic activity depends on such strategic infrastructure. The de Soto bridge crack could put a block to the American Midwest’s entire on-water agricultural export economy at a time of rising food prices. What other markets are at risk because of failing key infrastructure?

Policymakers must take a bolder and more focused approach towards dealing with urgent infrastructure needs. A good start would be to pass the National Infrastructure Bank Act of 2020, put forward by Representatives Danny Davis and Seth Moulton. The bill proposes “the establishment of a United States public deposit money bank [that] would provide direct loans and other financing of up to $4,000,000,000,000 [four trillion dollars] for qualifying infrastructure projects.” This, the bill’s authors argue, “would be adequate to finance all of the United States identified infrastructure needs, in all parts of the country, according to strategic plans.” Additionally, a thorough upgrading of the country’s energy grid should be given priority. Not only can it be made more efficient, but a dramatic shift towards cleaner energy sources would go a long way towards tackling climate change. The passage of the American Nuclear Infrastructure Act—which aims to reinvigorate the U.S. nuclear industry and relevant industry supply chains, streamline licensing processes, and more—is of particular interest. Finally, given the climate change crisis, there exists a compelling case to focus on the issue of water security and management, as forest fires in California, water shortages in the South- and Midwest, and contaminated/corroded waters pipes across the nation (including Flint, Michigan) amply demonstrate. Citizens who live in these areas and suffer from the consequences feel neglected by their government. Perhaps the moment has arrived to revisit grand ideas like the U.S. Army Engineering Corps’ proposed North American Water and Power Alliance, or other ambitious proposals that could increase the available water supply and its effective management—large desalination plants, upgrades to piping systems, and more.

THE REFORMS necessary to rescue the United States will face numerous obstacles, particularly from entrenched interests that prioritize short-term gains. Recent events, however, have laid bare the risk of not undertaking necessary reforms. Look no further than the social upheaval being wrought by political populists who call—with broad support—for radical economic transformation. Modern capitalism itself is arguably in peril, as too many business models today are primarily organized around financial engineering rather than material productivity and development—and all to the benefit of the few rather than the many. If this is what constitutes “capitalism” in the minds of the public, then it is no surprise that many will want to tear the system down.

Ultimately, policymakers, experts, and the public must remember that America’s founding policy, as written in its constitution, is a commitment towards economic progress and supporting the public welfare. If the United States as a nation cannot defend this founding policy, and by extension, its citizenry, then it has, for all intents and purposes, abdicated its reason for existing. It is time to do better.

Carlos Roa is the senior editor of the National Interest.

Image: Clayton Cardinalli.