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Founding Choices: American Economic Policy in the 1790s

Founding Choices: American Economic Policy in the 1790s

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The political decisions made by the founding fathers were crucial to the success of the early republic. But the economic decisions they made were just as pivotal, ensuring the general welfare and common defense of the United States for decades to come. Founding Choices explores these economic choices and their profound influence on American life, westward expansion, and influence abroad. Among the topics covered are finance, trade, and monetary and banking policy, with a focus on the factors guiding those policies and their end result. 

This book redresses the relative neglect of the economic achievements of the founders. It will be essential reading for historians and economists alike.

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Product Details

ISBN-13: 9780226384757
Publisher: University of Chicago Press
Publication date: 01/15/2011
Series: National Bureau of Economic Research Conference Report
Edition description: New Edition
Pages: 368
Product dimensions: 6.00(w) x 8.90(h) x 0.90(d)

About the Author

Douglas A. Irwin is the Robert E. Maxwell ’23 Professor of Arts and Sciences in the Department of Economics at Dartmouth College and a research associate of the NBER. Richard Sylla is the Henry Kaufmann Professor of the History of Financial Institutions and Markets and professor of economics at New York University and a research associate of the NBER.

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Founding Choices

American Economic Policy in the 1790s

The University of Chicago Press

Copyright © 2011 National Bureau of Economic Research
All right reserved.

ISBN: 978-0-226-38475-7

Chapter One

The Constitutional Choices of 1787 and Their Consequences Sonia Mittal, Jack N. Rakove, and Barry R. Weingast

1.1 Introduction

The choices made in the creation of a constitution have immediate political results and, often enough, lasting economic consequences. That, at least, is the overall thesis of this book, which examines the economic significance of the Federal Constitution drafted in Philadelphia in the late spring and summer of 1787. The Constitution occupies so large a place in our collective understanding of American history and politics, and is so vital a symbol of national identity that it is difficult to recall that the American federal republic might easily have evolved along alternative paths. Of course, it is well known that some matters were hotly contested in 1787, such as the disputes over representation that dominated the first seven weeks of debate at Philadelphia, and that others, notably the absence of a declaration of fundamental rights, became objects of public controversy as soon as the Constitution was submitted to a sovereign people for ratification. But to emphasize the big dramatic issues—the purported "great compromise" over representation, the assuaging of Anti-Federalist doubts with the proposal of a "bill of rights"—is still only to confirm what a heroic episode it all was. Other contingent choices that set the Convention on its course, or that gave the Constitution its essential ability to endure, remain obscure.

In this chapter, we treat three interrelated issues involving the constitutional choices of 1787. First, we examine various defects of the Articles of Confederation, including basic institutional failures and their consequences for public policy. Several features of the Articles made enforcement of federal measures virtually impossible, and thus hindered the capacity of the national government to adapt to unforeseen circumstances. An array of crises emerged under this political system, many associated with states that had incentives to shirk their federal obligations and pursue their self-interest at the expense of the common good. The lack of reliable and independent sources of revenue left the national government financially dependent on the states. Similar problems emerged in other policy domains: foreign relations, internal trade barriers, and paper money. Congress under the Articles also failed to solve other problems, such as enforcing the Treaty of Paris, the British closure of its Caribbean ports to American ships, and asserting control over the western frontier. Retiring the public debt and establishing public credit remained major difficulties. Even as these problems became clear, the Article's institutional constraints prevented their resolution. The unanimity rule necessary to revise the Articles rendered amendment and adaptation of its institutions impossible. Try as they might, advocates of greater powers for the national government could not convince every state to go along.

Second, we emphasize that the dramatic paradigm shift inherent in the adoption of the Constitution—from a federal union premised on the voluntary compliance of the states with federal measures to one in which two governments would each act legally on their common citizenry—was not inevitable. Instead, it was one choice among many. The Founders could easily have followed a less risky strategy by proposing more limited though still significant adjustments within the framework of the Articles. That they did not ultimately pursue this path reflects their understanding of the Articles' failures and the drastic change needed in any future constitutional solution. Equally important, the framers' success was not inevitable. Institutional innovations incorporated into the Federal Constitution of 1787 were new and untested. Although it is easy for us to believe that more than two centuries of relative political stability means that success was inevitable, the history of previous confederations and republics suggests otherwise. A stable republican constitution capable of governing a society as large as the United States, for example, had never existed.

Finally, we examine how the Constitution's features allowed Americans both to solve the wide range of policy problems and to adapt policy and institutions as circumstances required. The new Constitution had effects on policies on two levels: directly, reflecting the national government's addressing various problems under its new authority; and indirectly, reflecting the states acting to address other problems within the context of the newly created market-preserving federalism. For our purposes, two of the most important institutional innovations include the replacement of the unicameral consultative Continental Congress by a true bicameral legislature, and the shift toward a centralized federalism to replace the decentralized system of the Confederation. In contrast to the Articles, the new constitutional system proved remarkably adaptable, allowing the nation to confront new challenges. As an illustration of both the successes and limitations of this system, we discuss the persistent problem of slavery in the antebellum years.

This chapter proceeds as follows. In section 1.2 we reconstruct the larger realm of constitutional choice that shaped the deliberations of 1787, and then reflect on the lasting significance for American economic development of key decisions that were taken. In section 1.3, we turn to the consequences of the Constitution, both direct and indirect. This discussion begins with the new policies chosen to address the various policy dilemmas under the Articles, turns to the consequences of the new centralized federalism, and then ends with the long-term consequences of the ability to adapt, including a special look at the ongoing difficult problem of slavery within the republic. Section 1.4 concludes.

1.2 The Road to Philadelphia

Once past the opening words of the preamble, the Constitution is a prosaic text. Most of its clauses are devoted to allocating different powers and duties among the great departments of government, sketching the relationship and boundaries between national and state governments, describing the modes of appointment of particular officers, and detailing their terms of service. Yet the larger enterprise of constitution-making cannot be wholly reduced to the sum of these provisions. Or rather, these provisions, properly construed, illuminate the multiple dimensions of the American constitutional project of the late 1780s. Four dimensions deserve particular notice.

First, the immediate occasion for the calling of the Convention was the perceived need to establish a new framework within which key public policy and public goods problems of the 1780s could be adequately addressed and satisfactorily resolved. Those problems were primarily consequences of the war for independence and the immediate aftermath of the treaty of peace (Edling 2003; Marks 1986; Rakove 1979).

A short list of these specific policy concerns include at least the following:

• Providing the national government with independent and reliable sources of revenue to meet its basic expenses.

• Funding or retiring the public debt accrued during the war, thereby enabling the United States to have future access to credit markets at home, but especially abroad.

• Developing effective strategies for responding to the twin economic threats to postwar prosperity: the flooding of American markets with European goods, and the closure of British harbors, particularly in the West Indies, to American merchantmen.

• Enforcing key provisions of the Treaty of Paris relating to the rights of British creditors seeking payment of prewar debts and loyalists seeking recovery of confiscated estates.

• Securing effective control of the new national domain above the Ohio River and maintaining the political loyalty of trans-Appalachian settlers more generally, especially after Spain closed the Mississippi River to American navigation in 1784.

Many of these problems stemmed from the incentives of states to shirk their duties rather than cooperate. Insufficient coercive power under the Articles led to shirking by the states. States, for example, faced free-rider incentives to limit their tax collection for the national government. The national government had no means to ensure cooperation or to punish states that shirked. Similar problems arose in other areas, such as honoring treating obligations, internal trade barriers, and paper money.

Together, these five clusters of issues defined the issue space within which questions of public goods and public policy began to converge with issues of constitutional authority and institutional design. Absent these specific concerns, there would have been no occasion for anything like the Federal Convention to be held. But even with them, the putative reformers favoring a stronger federal union had to ask whether their optimal strategy was one of piecemeal amendment or wholesale revision of the Articles of Confederation. Until early 1786, political prudence favored the idea of gradual change; by the close of the year, political desperation tipped the calculation toward comprehensive change. Yet, had the delegates who straggled into Philadelphia in May 1787 acted more cautiously, many contemporaries would have applauded their good judgment in not making the best the enemy of the good.

A second major dimension of the constitution-making project of the late 1780s is that it involved a substantial rethinking of the republican assumptions that informed the drafting, a decade earlier, of both the initial state constitutions that replaced the ancien regime of colonial government and the Articles of Confederation. This rethinking is what gives the constitutional debates of 1787 to 1788—both the deliberations at Philadelphia and the broader public discussion that followed—their dramatic character and intellectual significance. To draft the Constitution and to secure its ratification, the framers and their Federalist supporters had to challenge basic premises under which the revolutionaries had acted a decade earlier (Wood 1969). Part of that challenge was directed, of course, to such classic questions as the optimal size of republics or the degree of virtue necessary to their preservation. But a substantial part focused on basic matters of institutional competence and constitutional design—that is, to the real stuff of the practical constitution-making enterprise.

Third, that enterprise was also a negotiated compact among a preexisting set of established polities. Whether the original states are better described as fully sovereign entities or, more narrowly, as autonomous jurisdictions for purposes of internal governance, their delegates at Philadelphia and the subsequent ratification conventions did not operate behind any veil of political ignorance when it came to assessing how adoption of the Constitution might affect vital interests. The Convention's compromises over the composition and election of the political branches were only the most obvious examples of the bargaining process that went into constitution-making. The Constitution also operated as a mutual security pact among the existing states, sharply limiting their capacity to threaten each other militarily. Equally important, the Constitution also collectively assured the territorial integrity of the states against separatist movements within their claimed boundaries (Onuf 1983; Hendrickson 2006).

But, in the fourth place, those states—or rather, their governments—were no longer the sole or even primary parties to the federal compact being renegotiated. Nor was the Constitution simply an agreement to be promulgated by a group of dignitaries once they had resolved all the questions their deliberations had raised. For the Constitution to become fully constitutional, it also had to be ratified by the people themselves, acting through popularly elected conventions in each of the states. The relative ease with which this new rule of ratification was adopted and applied, and the Federalist success in restricting the true decisions of these conventions to up-or-down votes on the Constitution in its entirety, guaranteed that the new system of government would begin its operation with a remarkable measure of legitimacy (Rakove 1996; Siemers 2002). As passionately as Americans would soon begin debating the meaning of particular clauses, their disputes never denied the legitimacy of the constitutional revolution of 1787 to 1788. That was not an outcome that could have been taken completely for granted when the movement for constitutional reform risked the calling of a general convention, or even after the luminaries at Philadelphia finished their work.

To survey these multiple facets of constitution-making is to identify one final aspect of the great enterprise of 1787. No obvious, transparent agenda was destined or predetermined for the Convention to pursue; but, instead, a range of possible outcomes existed among which choices had to be made. The otherwise rich documentary record of the debates of 1787 to 1789 is strikingly thin when it comes to knowing what either the delegates themselves or the American public initially expected the Convention to accomplish. The one great exception to this is the evidence we have for James Madison's preparations for Philadelphia, and given his key role in setting its agenda, that evidence goes far toward explaining why the Convention took the course it did.

Even so, it is important to stress that multiple paths of constitutional reform were available in 1787. The Convention could have easily pursued a more prudent path. Nor should one forget that the logic of radical reform in 1787 also rested on the perceived "imbecility" of the Articles of Confederation, especially as manifested in the absurd rule requiring the unanimous approval of the state legislatures for its amendment. Had any of the amendments to the Confederation previously proposed surmounted that obstacle, the case for an extraordinary plenary convention might never have been made, much less prevailed at that time. The American Union could then have evolved along any number of counterfactual paths. But the fact remains, the contingencies of historical action did break one way, not another, and fundamental choices were made. Not least among them was the decision to abandon the framework of the Confederation and to proceed with radically different notions of the institutional structure and legal authority of the Union.

1.2.1 The Initial Agenda of Constitutional Reform

Drafted in 1776 to 1777, the Articles of Confederation reflected the dominant republican assumptions that also shaped the first state constitutions. Overall coordination of the struggle for independence belonged to Congress; the states would implement its decisions, acting not as sovereign judges of the propriety of its resolutions, but as administrative auxiliaries with superior knowledge of local conditions and the representative political authority to rule by law. This understanding accorded well with American experience. Governance in colonial America had always been highly decentralized; the authority of the empire never penetrated into the countryside, and there was no national administrative apparatus to speak of. Congress itself was a badly undermanned institution. Its members typically served some months during a yearly term or two before insisting that others bear the burden of long absences from home and family. It made completely good sense to expect the states to do the real work of mobilizing the country's resources for war.

This expectation that the states would strive to do their duty also rested, Madison rightly recalled, "on a mistaken confidence that the justice, the good faith, the honor, the sound policy, of the several legislative assemblies would render superfluous any appeal to the ordinary motives by which the laws secure the obedience of individuals" (Madison 1787). The first American federalism was thus grounded on the public-spirited values of republicanism, and those values were sorely tested by the duration of a bitterly fought war and the enormous strain it placed on both the capacity of the states and the virtue of their citizens.

By 1780 the discouraging results of this test were apparent. Such efforts as the states made to levy taxes were clearly inadequate to meet the open-ended demands of the war. One response to this continuing shortfall was to rely on the customary methods of currency finance, printing money and trying to withdraw it from circulation before it depreciated too badly. But depreciation occurred regardless, and in 1779 the specie value of the continental dollar fell to 20:1. In that year, Congress made the painful decision, first to stop printing money, and then to adopt a new requisitioning system of "specific supplies" to be demanded from particular states (Rakove 1979). The fits and starts of that conversion, compounded by the worst snowfalls in decades, made the winter of 1780 the absolute nadir of the war effort.


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Table of Contents


The Significance of the Founding Choices: Editors’ Introduction
Douglas A. Irwin and Richard Sylla

I. Politics

1. The Constitutional Choices of 1787 and Their Consequences
Sonia Mittal, Jack N. Rakove, and Barry R. Weingast

II. Policy

2. Financial Foundations: Public Credit, the National Bank, and Securities Markets
Richard Sylla

3. Revenue or Reciprocity? Founding Feuds over Early U.S. Trade Policy
Douglas A. Irwin

4. Monetary Policy and the Dollar
Peter L. Rousseau

5. Federal and State Commercial Banking Policy in the Federalist Era and Beyond
Howard Bodenhorn

6. The Other Foundings: Federalism and the Constitutional Structure of American Government
John Joseph Wallis

III. Business Organization and the Factors of Production

7. Rise of the Corporation Nation
Robert E. Wright

8. U.S. Land Policy: Founding Choices and Outcomes, 1781-1802
Farley Grubb

9. Free Labor and Slave Labor
Stanley L. Engerman and Robert A. Margo

10. Looking Backward: Founding Choices in Innovation and Intellectual Property Protection
B. Zorina Khan

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