How Congress Would Anger Alexander Hamilton

When Alexander Hamilton (wisely) supported the legal purchases of Revolutionary War financial speculators, his position was called unfair. Opponents of the recently proposed ART Act could face similar criticism.

Where are we going? To the requisites of a market system.

Supporting the Speculators

Our story starts in 1790. Because the U.S. government said it would fund its Revolutionary War debt, bond prices soared.

The problem though was an unpopular policy decision from Secretary of the Treasury Alexander Hamilton who said the current owners of the bonds were the legal owners of the bonds. As a result, they and only they could benefit from higher bond prices. Yes, the original buyers had helped the war effort through their purchases. And yes, many original buyers had sold their bonds to (slippery) speculators when the price was low.

But Hamilton believed a contract is a contract. So, even if the U.S. government had boosted bond prices with a funding plan that enriched the speculators, it would do far more harm if it bestowed any rights to previous bondholders. I suspect Hamilton felt his position was fair because it preserved the clearly defined and dependable contractual rights that a sound financial system requires.

The ART Act

Congressional supporters of the newly proposed ART Act sound like Hamilton’s opponents. Called American Royalties Too (ART), the legislation gives rights to artists after their work is sold. As Congressman Nadler explained, “if a young artist sells a work of art for $500 at the beginning of his or her career, and the same work is later sold for $50,000, the original artist gets nothing.  It is the purchaser, not the artist, who benefits whenever the value of the artist’s work increases.” To remedy the problem, the law would require a five percent royalty, capped at $35,000 for every work sold at public auction.

Like the original Revolutionary bond purchasers who received a pittance, struggling artists get little for a painting that years hence could be sold for much more by a rich speculator. Also echoing the War bond debate, Nadler used the words “fair” and “moral.”

I wonder though whether the ART Act is eroding a contractual right that is basic to the market system.

Our Bottom Line: Market System

Describing a market system, Adam Smith supported a laissez-faire policy through which government provides a monetary system, a court system, the military and a legal system that enables supply and demand to function freely. When government moves beyond those parameters, the tradeoffs affect the requisites of the market system.