What's So Bad About Cronyism?. Jay Cost

perilous finances by linking the financial and commercial elite to the new government. Yet it was a breeding ground for cronyism, as those with insider knowledge of the bank’s activities enriched themselves. Jefferson and Madison were outraged and hotly opposed the bank during the 1790s, but the demands of modernization were too pressing for them to dismantle it. As president, Jefferson kept the bank in place, and Madison even chartered the Second Bank in 1816. This, too, was prone to cronyism, as bank managers rewarded their political friends at the expense of the nation’s financial well-being. Meanwhile, state governments chartered corporations left and right – not only banks, but also new companies to build canals, bridges, and railroads. Insiders made vast fortunes on their political connections, making state-based cronyism even more pernicious than the federal variety.

      The problem was that the government’s new economic ventures typically supported public ends through private means. In such undertakings, the distinction between the two often becomes blurry. Those who make a private fortune from a public undertaking are compelled to invest a portion of their subsidies into the political process to protect their benefits. For instance, the First Bank secured the nation’s finances via the Northeastern elite, who used their profits to influence the government. Jefferson warned George Washington that Hamilton’s Treasury was distributing bank shares to create “an influence of his department over the members of the legislature” in order to keep the bank’s charter from being altered or revoked. Meanwhile, Madison predicted, “the stock-jobbers will become the pretorian band of the Government, at once its tool and its tyrant; bribed by its largesses, and overawing it by clamours and combinations.”

      Jefferson and Madison were striking at an essential aspect of modern cronyism. It is a conflict of interest, which directly relates to the scope of the government’s purpose. In his veto message for the Second Bank, Jackson praised a government that would “confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor.” Such a night-watchman state would likely not fall prey to cronyism, but it also would not do many tasks we take for granted, including developing the economy. When the government does that – by chartering corporations, imposing protective tariffs, subsidizing exports, or whatever – it inevitably distributes benefits unequally. These may be public-spirited measures to grow the economy, but they use some faction for that purpose. In theory, everybody benefits at least a little bit from such initiatives, but those whom the government directly employs benefit more. They are naturally prone to become cronies to protect their subsidy.

       The Boston Tea Party would be a milestone in America’s path to independence. It was also one of the nation’s first experiences with cronyism.