Economic Forces in American History The Constitution: An Economic Document

Economic Forces in American History

The Constitution: An Economic Document


Root Causes of Economic Success

Though it’s virtually impossible to quantify the economic impact of adopting the U.S. Constitution, much statistical research links international differences in economic success primarily to “institutional” frameworks – more important than education, infrastructure, capital, natural resources ...

Key institutions linked to economic success include– the rule of law/independent judiciary security of property

– market-based/capitalistic economic system/openness to trade

– “open access” non-hierarchical society/individual autonomy

Tale of two countries: Japan vs. Korea in the 1800s


The Record of American Economic Growth

The U.S. has enjoyed long-term economic growth which has given Americans the highest average incomes in the world for the past century.

Growth began during the colonial period and was initially driven largely by overseas trade tied to exports of surplus agricultural commodities.

Theme: Wars harm economies and people.

GDP per capita

(in 2012 $)

1650 $770

1720 $1180

1774 $1620

1781 $1390

1793 $1490

1800 $1695(Source: McCusker)


The Articles of Confederation:Their Logic, Successes and Failures

Basic Purpose – achieve independence

Major Premise – “Each State retains its sovereignty, freedom and independence” (Art. II)

Key problem facing the

national government

– funding the war effort.


Art. VIII: “All charges of war, and all other expenses that shall be incurred for common defense or general welfare … shall be defrayed out of a common treasury, … bla bla bla bla…. The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled.”

Art. IX: Congress has the power to “make requisitions from each State for its quota … which requisition shall be binding …”


But … each state had little incentive to pay for its share of the defense.

Lacking estimates of wealth, Congress used population estimates – giving poorer states room to claim an unfair burden.

Congress couldn’t make states pay.

The “free rider” problem of public goods: if a good (like defense) is non-excludable (i.e. you can benefit even if you don’t pay), there is a tendency to avoid paying and “free ride” on the contributions of others.

Why did anyone pay at all?

Dougherty finds that contributions (manpower and monetary) came mainly when there was a local benefit, especially when the fighting was nearby.


War Funding

Printing money (40%) – led to rapid inflation

Other sources– Loans = 18%

– State debt issues = 18%

– Property seizures = 17%

– Handful of other sources – lotteries, bake sales (kidding)

Thus, states contributed a small percentage.

Articles finally ratified in 1781

First attempt to amend sought power for Congress to levy a 5% import tariff – but Rhode Island blocked.


Weakness of the National Government Harmed the Post-War Economy

Standards of living slowly recovered.Annual Growth Rate of Income/person (McCusker)

1720-1774 0.6%

1774-1781 -2.3%

1781-1793 0.7%

1793-1800 1.9%

Exports hit an all-time low as a share of GDP and were well below potential – meanwhile the U.S. was flooded by imports.

Colonies no longer had the advantage of protected markets under the Navigation Acts.

A mercantilist world required a strong central government to negotiate trade arrangements with foreign powers. Negotiations required the threat of unified retaliation.

States’ tariffs weren’t uniform, so foreign ships often went to the freest ports, which led states to contemplate taxing each other’s exports.


Adopting the Constitution and the Goals of the Founders

Primary issue: shall we have a stronger national government? (But not too strong.)

A strong government needs money.

Lesson of recent events: Taxation without representation is bad; representation without taxation is bad too.

Founders feared factions that would radically redistribute wealth (too much taxation) – designing checks and balances against this.


Key Economic Components of the Constitution: 1. Taxation

“The Congress shall have power to lay and collect taxes, duties, imposts and excises … but all duties, imposts and excises shall be uniform throughout the United States” (Article 1, Sec. 8). “No tax or duty shall be laid on articles exported from any state” and “No capitation or other direct tax shall be laid, unless in proportion to the census” (Art. 1, Sec. 9).

These provisions made it difficult for the national government to fund growth-enhancing internal improvements. Political coalitions would only work if projects benefitted all regions somewhat equally because funding had to be uniform.

States stepped in to fund projects, e.g. Erie Canal; private sector’s infrastructure role expanded after states’ mistakes.

Provisions also made it harder for the national government to enact growth-retarding, redistributionist policies.



Key Economic Components of the Constitution: 2. The Commerce Clause

“Congress shall have power … to regulate commerce with nations, and among the several States …” (Art. I, Sec. 8, No. 3). – “No preference shall be given by any regulation of commerce or

revenue to the ports of one state over those of another,

– nor shall vessels bound to or from one state be obliged to enter, clear or pay duties in another” (Art. 1, Sec. 9).

– “No state shall … lay any imposts or duties on imports or exports” (Art 1. Sec. 10).

These provisions created a free trade zone, which became the largest in the world, allowing an increasing regional division of labor, specialization, and efficiency – unleashing entrepreneurship.


The Commerce Clauseand Judicial Interpretation

In Gibbons v. Ogden (1824) the Commerce Clause helped destroy monopoly power – “emancipation proclamation for commerce.”

Battles over state “protectionism” continued to the late 1800s –Webber v. Virginia (1880) struck down licensing fees on out-of-state sellers like Singer Sewing Machine.

Justice Stephen Field: “It was against legislation of this discriminating kind that the framers of the Constitution intended to guard, when they vested in Congress the power to regulate commerce among the several states.”

Minnesota v. Baber (1890) struck down local inspection laws aimed against companies like Swift and Armour.


Key Economic Components of the Constitution: 3. The Contract Clause and Property Rights

“No state shall pass any … law impairing the obligation of contracts” (Art. I, Sec. 10). “No … ex post facto law shall be passed” by Congress or the states (Art. 1, Sec. 9 and 10). “No person shall be … deprived of life, liberty or property without due process of law nor shall private property be taken for pubic use, without just compensation” (Amends. V and XIV)

Founders: Property rights are human rights.

These provisions secured property rights, allowing resources to be put into their highest valued uses. Considerable research shows that countries with more secure property rights have much stronger economic growth.

Property rights are only really secure if there is an independent judiciary and the Constitution achieved this too.

But … sometimes things get dicey in time of crisis: e.g. Home Building & Loan Association v. Blaisdell and this can hamper economic growth.




Key Economic Components of the Constitution: 4. Currency and Debts

“Congress shall have power … to coin money, regulate the value thereof …” (Art. 1, Sec. 8, No. 5). “No state shall … coin money, emit bills of credit” (Art. 1, Sec. 10).

These provisions (and memories of the Continental dollar) helped keep the country on the metallic standard (except during the Civil War era) into the 20th century – avoiding destructive inflation.

“All debts contracted … before the adoption of this Constitution shall be as valid against the U.S. under this Constitution as under the Confederation.” (Art. VI).

But … some of these debts were selling for 25 cents on the dollar at the time of Washington’s inauguration, so the first big task was to enact taxes that could pay for these debts.


Market-Preserving Federalism

Under the Constitution, power is not concentrated at the national level, allowing states to experiment.

States that adopt more effective policies grow and attract migrants/investors from other states, who are compelled to adopt more effective policies too.

Example: Banking

Most states began by chartering only a few banks run by politically-connected elites.

Massachusetts discovered that it earned more from taxes on smaller banks than from dividends from the large partly state-owned bank, so it sold its interest and stopped limiting entry into the banking sector.


Other Economic Components of the Constitution

Power to establish post offices and post roads.

Promotion of science and arts via patents/copyrights.

Setting the standard of weights and measures.

Bankruptcy law.

All designed, in part, to encourage commerce.

Protection of slavery .


Hidden (Implicit) Institutions: English Legal System

Judge-made Common Law – research suggests that common law countries grow faster than civil law countries – partly because common law is more flexible in dealing with new contingencies (e.g. railroads). All U.S. states (except Louisiana) adopted the common law.

Vast police power in the hand of the sovereign (state governments)


Concluding Thoughts

Though it’s virtually impossible to

quantify the economic impact of

adopting the Constitution, much

statistical research links international

differences in economic success

primarily to “institutional” frameworks.

Telling cases:

Hong Kong and Singapore

West Germany v. East Germany

Puerto Rico v. Cuba

Texas v. MexicoNorth Korea v. South Korea


Suggested Reading

Robert McGuire, To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. New York: Oxford University Press, 2003

Sonia Mittal, Jack N. Rakove, Barry R. Weingast, “The Constitutional Choices of 1787 and Their Consequences” in Founding Choices, edited by Douglas Irwin and Richard Sylla, 2011.

Documents

Economic Forces in American History The Constitution: An Economic Document