ALL COMMONLY ACCEPTED KNOWLEDGE IS WRONG, part 4,732

Rethinking the Articles of Confederation (H.A. Scott Trask, August 18, 2003, Mises.org)

If your children attend a public or private university in this country, they will be taught that President Roosevelt "saved" capitalism from itself with his New Deal legislative program in the 1930s. They will also be taught as unquestionable truth that the Federalists rescued the fledgling national economy from imminent collapse during the decade following the War of Independence (1780s), a decade ominously described by statist historians (are there any other kind?) as "the critical period." They learn that these years were a tumultuous and tragic follow-up to the Revolution. Without a strong central authority, the country was convulsed and confused by violent internal rebellion, economic stagnation, the petty rule of "bad men" (i.e. local-minded and self-interested), and national weakness in the face of predatory commercial rivals. Into this despairing void, stepped a shining band of broad-minded, far-seeing, disinterested, nationalist leaders who realized the impotent and inept government of the Confederation had not the powers to deal with the crisis or guide the country into the regulated, centrally managed future. Consequently, they led a constitutional revolution which discarded the Articles of Confederation and replaced it with a broad charter of national power, falsely described as federal, that by taxing, regulating, and promoting (i.e. subsidies!) rescued the economy and laid the solid foundation for America's future growth and prosperity. Students graduate thinking that were it not for the federal Constitution, we would all be sitting on the front porch of our cabin spitting tobacco, drinking home-made whiskey, and kicking our dog Blue.

The prevailing historical interpretation of the country under the Articles of Confederation is an example of the harm that has resulted from the ignorance of economics among generations of historians. Let us consider the work of Richard B. Morris, the Columbia University historian, whose book The Forging of the Union, 1781-1789 (1987) is considered the standard history of that decade. Morris ascribes the postwar depression (1784-88) to four causes: the "dumping" of low-cost British goods upon the American market (imagine the gall of those sneaky Brits; you beat 'em in war and then they do this to us?); the closing of the British West Indies and other foreign markets to American goods; an unregulated money supply (it is not clear if Morris thinks the problem was too much, or not enough, money; apparently, he seems to think that only the Solons and Greenspans destined to run the federal government knew the right amount); and the lack of a national government with national taxing and regulatory powers (the horror, the horror).

For Morris, the calling of a constitutional convention was a necessity recognized by nearly all. "Businessmen, mechanics, and artisans witnessed a Confederation government incapable of controlling the money supply, of paying interest on the public debt, or of regulating and encouraging foreign and domestic commerce. Little wonder that these groups recognized the grim necessity for setting up a stronger central government."

The economy was beginning to thrive again in 1788, the year the Constitution was ratified, and Morris naturally awards credit to the new government for the change. "The ratification of the federal Constitution seems to have laid a basis for economic recovery." It never occurs to him that the recession was bound to end sometime, or that its end was due to causes unrelated to the creation of a new national authority.

Our best guides to the critical decade of the 1780s are two of the few American historians who understand economics and are true liberals-William Graham Sumner and Murray Rothbard. Although Sumner was a nationalist and antidemocrat who favored the new constitution for other reasons, he understands as well as Rothbard that the depression of the 1780s was not due to the lack of a powerful central government. Both explain that after the war, there was a great pent-up demand for British goods, which were preferred to all others, including domestic, both for their quality and their cheapness.

There was also an abundance of specie in the country, due to French and British disbursements, the Havana trade, and French and Dutch hard-money loans. However, there was also a large quantity of paper money still afloat. As the paper money was serving as the principal circulating medium, the merchants shipped much of the nation's specie abroad to help pay for their large importations of capital and consumer goods. Lacking credit cards, the American consumer was soon "tapped out," and merchants found themselves holding large stocks of unsold merchandise.

At the same time, there were many manufacturers and mechanics whose businesses had been profitable only during the autarkic wartime conditions. Now that peace and commerce had resumed, they were in trouble. An additional negative factor was the British decision to place the Americans on the outside of their colonial system after the war. The Americans found the British West Indies closed to them, the North Atlantic fisheries forbidden, and the British home market tightly restricted. (Of course, the British hurt themselves by these restrictions, for the Americans could not buy from them if they could not sell to them; but they were acting according to the logic of mercantilism and probably revenge.) A final factor was the capital losses sustained and the debts incurred during the war. The capital losses had to be made up and the debts paid.

In summation, the Americans were suffering the natural aftereffects of a long war financed by debt and inflation, and exacerbated by the continuing circulation of inconvertible paper currency. As Sumner records, "misery was great throughout the country, owing to paper money and debt and the losses of the war." The postwar depression was a necessary period of hardship during which Americans readjusted to new trade patterns and economic realities, paid debts, and repaired the damage and neglect wrought by war. No government could have legislated or regulated away these facts of life.

Americans, flush with soaring hopes unleashed by the Revolution, wanted to believe otherwise, but there was no political substitute for hard work, reconstruction, self-denial, and patience. Regrettably, as is the case so often in our history, many sought political panaceas to escape economic realities. Mechanics and manufacturers petitioned their state legislatures for protective tariffs to exclude lower cost British-made goods. Ship builders and owners lobbied for navigation laws to exclude British shipping from American ports, and southern exporters and northern merchants pleaded for retaliatory legislation to force open closed British markets. Farmers demanded that paper money be issued and lent on the security of land. Only a few years after independence, Americans were trying to replicate the main features of the British colonial and mercantile system from which they had just freed themselves.

With his usual perspicuity, Sumner observes how the collapse in prices and the prostration of business following a period of currency inflation led to a movement for protective tariffs, setting a recurring pattern. Here was the first time, but by no means the last, "in which currency errors become intertwined with errors as to foreign trade, a junction which has run through all our history to the present moment [1876] and which has been productive of mischief."

Even if a period of consolidation and centralizatioon was necessary to stabilize and preserve the nascent Union--and we're willing to assume it was--the Anti-Federalists nonetheless had the better argument in the long run. Posted by Orrin Judd at August 18, 2003 5:29 PM