Even though the Fourth of July is officially in the rearview mirror now, the country is still basking in the glow of Two-Hundred-And-Fifty. The United States declared independence 250 years ago. Britain recognized that independence eight years later, 242 years ago. Our current governing document, the US Constitution, was ratified 238 years ago. All three could be called our “founding,” but July 4 has stood in for all three. Good enough, as it were, for government work.
The Declaration of Independence enumerates twenty-seven grievances against the British Crown, reasons for seeking independence. Many were political, juridical, even economic, concerns.
Whatever the reasons, “a ragtag volunteer army in need of a shower somehow defeats a global superpower.” Ask your average fellow American, and I imagine their constructed timeline runs something like this:
Declare Independence → Defeat the British → George Washington becomes president.
This, of course, glosses over the Articles of Confederation, which was adopted by the Continental Congress in 1777 and governed America from March 1, 1781 until the Constitution replaced them on March 4, 1789.
School children are taught hardly anything about the Articles of Confederation. The typical narrative is that it was an ineffectual document that caused an economic crisis immediately after the Revolutionary War, necessitating its replacement with the eventual Constitution. The stronger, centralized but limited government formed by the new document saved the republic, the story goes, creating a foundation for prosperity in a way the Articles never could.
Economists Murray Rothbard and Patrick Newman tell a different story. Their research demonstrates that, whatever political virtues the US Constitution contains, it was a step backward in several areas of economic freedom, compared to the Articles.
First, the myth of the Articles causing an economic crisis must be dispelled. There was, indeed, an economic crisis following the War. That is not in dispute. It can hardly be laid at the feet of the Articles, though.
As Newman notes, “strong evidence suggests that the American economy did not return to its pre-war levels until the beginning of the nineteenth century.” The reason for this lies in at least three places. One, industries needed time to recover from the destruction caused by the war. Infrastructure needed to be rebuilt, and until it was, output was going to suffer. Second, American industry was in competition with Great Britain again once the war was over. In many instances, Great Britain produced higher quality and lower-priced goods, goods that came back to the US once the war ended. This meant a readjustment period was needed for the American economy as it settled into its place in the global economy.
Finally, our displaced rulers chose to restrict American exports back to the motherland, exacerbating the pain of readjustment.
This situation was met with raising taxes and money creation by states as they attempted to pay off their war debts. Massachusetts, for example, raised its taxes to the point of consuming 10 percent of the average citizen’s income, when it had previously landed at two percent. States like Georgia and New York chose to just print more money. For these reasons, Newman concludes that “the depression inevitably resulted from a destructive war and government policies — foreign trade legislation, high taxes, debt monetization, and bank inflation. A stronger central government would not have been able to change any of these factors.”
If the Constitution was not created to save the Republic from ineptitude, then, what were its economic goals? Further consolidation of economic power. The federal government granted itself independent taxing power, control over national commerce, and Hamilton’s new national financial system.
Under the Articles, the Congress had no taxing power. That authority stayed at the state level, causing Congress to be financially dependent upon the states for revenue. Given that any proposed amendment required unanimity from the states for ratification, attempts to grant Congress taxing power failed. Without means of coercively gathering wealth from the states, the federal government found itself incapable of much growth in size, unable to enter deeply into the economic realm.
This was changed under the US Constitution. Article I, Section 8, Clause 1 gave DC the power to “Lay, and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”
A big reason for this was the phrase “to pay the Debts.” The federal government assumed the states’ Revolutionary War debts. While seemingly noble, by this point the debt was owed to speculators who purchased the claims at pennies on the dollar — speculators begging the federal government to bail them out when state governments struggled to. By assuming the debts, wealthy creditors and speculators found themselves tied to the federal government.
This choice, of course, simply shifted the debt burden to taxpayers. The federal government has no means of generating revenue, except euphemistically. Every dollar it gave to speculator Paul it had to take from citizen Peter. The result was a massive wealth transfer from the average American to a small group of speculators. As noted by Murray Rothbard, by 1790, “the top seven percent of all subscribers [in Massachusetts] owned 62 percent of the federal debt, while the lowest 42 percent of holders owned less than 3 percent of the debt.” Not only did the Constitution facilitate this wealth transfer, it created the tax mechanism that led to the rapid expansion of the federal government the country has seen.
Next there was the federal control over commerce. One area of dispute in the early years of the country was tariff policy. Without the congressional power to set a uniform rate, states found themselves in competition for trade. Southern rates were often lower than Northern rates, much to the chagrin of Northern manufacturers. The Constitution “amended” this “problem,” allowing Northern manufacturers and shippers to “outlaw state competition and set one large net to ensure uniform protection” for themselves. Here we see one of the consequences of granting Congress taxing power: the snuffing out of market competition to enrich Northern businessmen at the expense of the average American. An average tariff rate rose from 12.5 percent in 1790 to 30 percent by 1800.
To watch over this new financial situation, we were given a central bank. This centralized the control of money in the capital, making it an invaluable tool for domestic policy and those connected with the government. The proposed “limited” government suddenly was partnered with the ever-centralizing financial sector. With the power to tax and regulate commerce, protectionism through tariff and subsidy policy entered the entire American economy.
The Constitution’s broad language like “general welfare” and “necessary and proper” allowed for such economic interventions well beyond what the Articles of Confederation could have ever allowed. It was precisely the weakness of the Articles that kept the federal government at bay. It was for this reason, as Rothbard and Newman explain, that there was fierce opposition to the US Constitution from Founding Fathers like Thomas Jefferson, Patrick Henry, Samuel Adams, and George Mason.
In the economic realm, the Constitution gave us a central government with the power to tax, regulate commerce, impose tariffs, subsidize industry, and pay off public debt to benefit speculators. Compared to the Articles, granting the political elites fiscal, commercial, monetary, and legal tools to use against the entire nascent country cannot be seen as anything but a step backward for economic freedom.
