Fear of political corruption trumps government economic regulation

Wallis claims that economists' distrust for government traces back to a practice of European monarchies and ministers who would limit access to markets by imposing rents (fees) and then use the resulting revenue to buy off politicians. The financial policies proposed by John Adams, Alexander Hamilton, and other Federalists in the late 18th and early 19th centuries raised a specter (or scepter) of monarchic rents among Republicans such as Thomas Jefferson and James Madison. As Wallis writes:            

"Tarring Adams and the Federalists with being closet monarchists played well to some voters, but it was the fear of executive influence in the legislature, wielded by Prime Minister Hamilton through the coordinating mechanism of the Bank of the United States and the national debt that posed the greatest threat. It was a threat that resonated with a century of British political writing and the decades of American paranoia over corruption in the Britain. The negative political implications of the Republicans['] existence as an organized political party were minimized by stressing the rightness of their cause.... If the Republicans were truly right, then their cause was not a partisan one but a righteous one, and when the country came to see the wisdom of their position there would no longer be a need for competing parties." 

We all know how that end-to-competing-parties thing went.

Corruption was a central theme of the Presidential election of 1824 contested between John Quincy Adams, Henry Clay, William Crawford, and Andrew Jackson. Jackson won a plurality of the popular and electoral votes, but Clay ultimately supported Adams, who was elected and subsequently appointed Clay Secretary of State. Jackson's successful Presidential campaign of 1828 was predicated on his promise (made soon after the result of the 1824 election) to end such corruption: "So you see, the Judas of the West [Clay] has closed the contract and will receive thirty pieces of silver. His end will be the same. Was there ever witnessed such a bare faced corruption in any country before?”[8]

According to Wallis, this rift was the genesis of political factionalism in the U.S., and its inherent corruption:            

"The Democratic party built to elect Jackson did not disappear after 1828; competitive party politics became a permanent part of American politics and raised the specter of corruption, faction, and party. Finally, the opposition party that emerged during Jackson’s first term, what became the Whig party headed by Henry Clay, chose to contest Jackson in the arena of economic policy. The first defining question for Whigs and Democrats was whether the national government should renew the charter of the Second Bank of the United States. The question boiled to down to whether a national bank was an instrument of systematic corruption."            

As stated above, Wallis credits state constitutions enacted in the mid-19th century as providing the solution to systematic corruption in government. Whether or not his claim has any validity, the fact is political and economic corruption were far from eliminated. In the late 19th and early 20th centuries, corporate corruption reached unprecedented levels, giving rise to the Progressive movement. However, Wallis believes the Progressives had it all wrong:            

"When a small number of unprecedentedly large corporations sprang into being during the merger wave, the national and state governments responded to the public perception that corruption was again a problem in American politics. But they responded much differently in the first decades of the twentieth century than they did in the nineteenth century.... In classic commonwealth political theory, increasing government regulation raised as many red flags as did special corporate charters. Regulation created the opportunity for creating rents and rent creation created the possibility for political manipulation of the economy."

Conversely, deregulation in the late 20th century allowed the financial industry to exert unprecedented influence over all aspects of federal and state governments.


[8] Remini, Robert V. Andrew Jackson and the Bank War. New York: W.W. Norton, 1967.