Mises Daily

Rethinking the Articles of Confederation

An assumption that dominates American historical studies is that the wealth and prosperity of the country would be much less without the existence of a powerful central government. This theme is but part of a larger, and now international, orthodoxy that larger political jurisdictions, as long as they are “democratic,” foster liberty and economic growth while smaller ones stifle it.

In Europe, elites hold up an all-European government as the golden road to a brighter and wealthier future. Others go further, such as Atlantic Monthly correspondent Robert D. Kaplan, and argue that eventual “world governance” by “global elites” is both inevitable and desirable. Kaplan, whose books are read by high-ranking government officials and journalists, believes that free markets, democracy, and liberty shall thrive under a world regime.

The truth is far different. All of history attests that the centralization and concentration of power breed despotism. In the history of European civilization, liberty and civilization have thrived when political power has been dispersed and checked. Contrast the Greek city states with the polyglot Alexandrian empire, the Roman Republic with the world-sprawling Roman Empire, medieval Europe with 20th century Europe. The nature of man being what it is, irresponsible, unchecked power has been, and always will be, abused, and there is no better way of rendering state power oppressive than by concentrating rather than dispersing it.

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.”  The panic and depression of 1819 would give birth to a protectionist movement culminating in the high tariffs of 1824 and 1828. The panic of 1837 and the depression of 1839–43 would revive protectionism again, leading to the tariff of 1842.

Sumner also observes that whenever the economy has floundered, many blame foreign trade for somehow draining the country of its wealth. For instance, James Madison warned in 1786 of “the present anarchy of commerce.”  He blamed the “unfavorable balance” of trade for “draining us of our metals” and furnishing “pretexts for the pernicious substitution of paper money.”  Madison had it exactly backwards. It was the habit of using paper money that was driving the nation’s specie abroad, as coin would not circulate alongside paper of similar denomination. Madison’s solution to commercial “anarchy” was a national government with the power to regulate commerce and the money supply. Not surprisingly, Madison would be one of the authors of the tariff of 1789. As president he would sign the tariff of 1816 and the charter for the second national bank.

State Mercantilism during the 1780s

In 1785 and 1786, New Hampshire, Rhode Island, Massachusetts, and Pennsylvania passed tariffs averaging 15 percent on foreign manufactures. They also levied taxes on imported “luxuries” to slow the drain of specie. During the next two years, they extended duties to more products and raised rates as high as 25 percent. Sumner’s comment on such legislation is devastating and perceptive:  “At the return of peace, [new American manufactures] were prostrated, and a cry began to be made . . . that the country could not stand free trade, and that it must do as England had always done, that is, imitate the old restrictive system. The real demand was that some way should be found by law to continue upon the American people, by their own act, the evils which the war had inflicted upon them.”  The evils to which he was referring were high prices and restricted markets.

When discriminatory duties failed to revive the flagging northern economy, supporters blamed their lack of uniformity and application across the confederation, for the southern states had very low tariffs and their citizens continued to buy cheaper and better-made British goods. The economic historian Curtis P. Nettles, who was a good historian but a bad economist, noted with reproach that the southern legislatures “did not impose adequate protective duties for the benefits of the exports of the northern area. It followed, therefore, that only a federal tariff law could provide the kind of protection sought by many manufacturers.” 

There is ample evidence that northern manufactures supported the federal Constitution because they hoped through uniform national tariffs to capture the southern market. Alexander Hamilton’s early correspondence as treasury secretary under Washington is full of complaints that Americans continued to buy from abroad and pleas for duties. Thus, while the Constitution set up a free-trade zone within the states, it also created a closed or captive market, in which Americans would be free to buy within but not without.  

Historians like Morris and Nettles contend that without a federal Constitution trade between the states would have been hindered by a multiplicity of restrictive state tariffs and commercial regulations. Rothbard was one of the few to see that such could not have been the case due to geographical proximity, as well as cultural, linguistic, and ethnic ties among the states. The American confederation was destined to become a free-trade area, even without a consolidated union. Hamilton, in Federalist No. 12, all but admitted, and complained, that such would be the case. He worried that the multiplicity of state jurisdictions would keep tariffs too low and variable for the raising of sufficient revenue or the provision of industrial promotion.

The relative situation of these States; the number of rivers with which they are intersected, and of bays that wash their shores; the facility of communication in every direction; the affinity of language and manners; the familiar habits of intercourse—all these are circumstances that would conspire to render an illicit trade between them a matter of little difficulty and would insure frequent evasions of the commercial regulations of each other. The separate States or confederacies would be necessitated by mutual jealousy to avoid the temptations to that kind of trade by the lowness of their duties. (Hamilton)

In other words, under the Confederation government, no one state, or even a group of states, could raise tariffs very high on imported goods or inter-state goods for fear of provoking smuggling or losing trade to other states. For instance, if New York City raised the cost of imported goods too high through tariffs, Connecticut could buy such goods from Boston, and  New Jersey could buy from Philadelphia. However, under a central government empowered to lay uniform national rates, tariff rates could be tripled without consequence.

It is therefore evident, that one national government would be able, at much less expense, to extend the duties on imports beyond comparison, further than would be practicable to the States separately, or to any partial confederacies. Hitherto, I believe, it may safely be asserted, that these duties have not upon an average exceeded in any State three per cent. In France they are estimated to be about fifteen per cent, and in Britain they exceed this proportion. There seems to be nothing to hinder their being increased in this country to at least treble their present amount. (Hamilton)

The futility of enacting mercantilist legislation within a confederated polity was also demonstrated with regard to the navigation laws. In 1784, northern legislatures began penalizing British shipping by laying additional duties upon goods imported in British bottoms. New Hampshire, Massachusetts, and New York doubled tariffs on goods arriving in British ships while Rhode Island tripled them. To make sure that a British ship would be as rare a sight in their port as a Chinese junk, New Hampshire, Massachusetts, and Rhode Island went so far as to prohibit British ships from transporting American exports. However, despite their severity, none of these laws proved effective, and within two years of their passage the states moved to repeal them. Nettels explained why such laws “proved to be defective when used by only a few states.” 

Apparently, it encouraged British shippers to go to nearby states and use them as bases for distributing European goods and for obtaining American produce. The readiness of Connecticut to receive British vessels without subjecting them to penalties forced Rhode Island virtually to suspend its act, lest it lose trade to its western neighbor. So also the assembly of New Hampshire moved to suspend its law until New York and Connecticut should adopt similar acts. Otherwise, much of New Hampshire’s trade would be diverted from Portsmouth to the Connecticut River route. Massachusetts repealed its law in July, 1786, because, as Governor Bowdoin explained, other states, refusing to cooperate, had tried to use it for one-sided advantage. (Nettles)

In other words, under the Confederation, navigation laws were fruitless. Sumner believed this realization furnished a powerful motive for northern shippers to support the new constitution. “The Eastern States wanted the Constitution chiefly in order to get such a law [i.e. a uniform navigation law].” 

Funding the Federal and State Debts

The War of Independence saddled the country with an enormous debt. In 1784, the total federal debt was nearly $40 million. Of that sum, $8 million was owed to the French and Dutch. Of the domestic debt, government bonds, known as loan-office certificates, composed $11.5 million, certificates on interest indebtedness $3.1 million, and continental certificates $16.7 million. The certificates were noninterest bearing notes issued for supplies purchased or impressed, and to pay soldiers and officers. To pay the interest and principal of the debt, Congress had twice proposed an amendment to the Articles granting them the power to lay a five percent duty on imports, but amendments required the consent of all thirteen states. Rhode Island and Virginia rejected the 1781 impost plan while New York rejected the 1783 revised plan. Without revenue, except for meager voluntary state requisitions, Congress could not even pay the interest on its outstanding debt. Meanwhile, the states regularly failed, or refused, to meet the requisitions requested of them by Congress.

While most historians have seen these failures as evidence of the imbecility of the Confederation government and the selfishness of the states, at least one, Sumner, regarded the “no” votes as justifiable and praiseworthy. In his view, the opposition believed that Congress could not be trusted to use its new revenue only to pay interest on the debt and gradually retire the principal. They believed that much of the funds would go to the building up of an unnecessary civil service bureaucracy. “Between 1783 and 1789, the Continental Congress year by year demanded of the people sums of money for a peace establishment far beyond what was necessary, and . . . the people, by refusing the funds, forced the retrenchment or abandonment of the main features of a great civil establishment, which in fact was not needed.”  Hurrah.

Due to the delay and uncertainty of final payment, the value of the certificates depreciated significantly. The loan-office variety fell to as low as 20 cents on the dollar while the continental certificates fell to ten cents. Most Americans who had received the certificates were farmers, storekeepers, small merchants, and veterans of modest wealth. They needed cash to run their businesses or farms, to feed a family, or just survive. Holding them for “a rise” was simply not an option. They had to sell them for whatever they could get. Hence, by the mid-80s, a few wealthy speculators held most of the continental certificates. A far larger percentage of the loan-office certificates remained with their original owners, but even they tended to become concentrated in fewer hands.

Although public security holders had a direct and obvious monetary interest in a new national authority with the authority to raise funds to pay the interest and principal in specie, historians have vigorously debated the significance of this motive in the movement for a national Constitution. The progressive historian Charles A. Beard shocked, shocked, the nation in 1913 with the publication of his Economic Interpretation of the Constitution of the United States. He pointed out that those who wanted a new national government were personally interested in the outcome, standing to benefit financially if it was ratified. Beard pointed out that “large and important groups of economic interests were adversely affected by the system of government under the Articles of Confederation, namely, those of public securities, shipping and manufacturing, money at interest; in short, capital as opposed to land.”  After failing to strengthen the Articles through amendments, the leaders of these groups united behind an effort to institute a new government with the powers to raise taxes, fund the debt, enact tariffs and navigation laws.

One would have thought that Beard had simply stated the obvious truth of the matter, however obscured until then by iconography and mindless patriotism. The correspondence of Alexander Hamilton, one of the leading men behind the movement for a national constitution, alone would seem to confirm Beard’s thesis. In a 1781 letter to Robert Morris, he contended that “a national debt . . . will be to us a national blessing. It will be a powerful cement of our union.”  As treasury secretary of the new government in 1790, he advocated the federal assumption of outstanding state debts on the grounds of “its tendency to strengthen our infant government by increasing the number of ligaments between the government and the interests of individuals.” 

Furthermore, besides seeing this political benefit, Hamilton believed funding the revolutionary debts at full value, and assuming those of the states, would create “a capital in the public obligations which was before dead, and . . . convert it into a powerful instrument of mercantile and other industrious enterprise.” Sumner ridicules Hamilton’s idea that funding the government debt would create capital in the form of bonds. Such bonds represented nothing but the government’s promise to draw upon the real capital of the country through taxation.

Hamilton was not only a nationalist but an Anglophile mercantilist who believed that England’s funded debt, national bank, protective tariffs, and navigation acts were the foundation of that kingdom’s commercial, manufacturing, and naval prosperity. He wanted to replicate not only the key features of the British constitution but the entire edifice of British mercantile, fiscal and financial architecture. Sumner concluded that Hamilton’s writings “show a remarkable amount of confusion in regard to money, capital, and debt, in the mind of a man who has a great reputation as a financier.”

The last two generations of historians have rejected Beard’s thesis as conspiratorial and simplistic. One of the best of them, Forrest McDonald, a neo-Federalist, even wrote an entire book, We the People (1992) supposedly refuting Beard and vindicating the disinterested, generous, noble intentions of those behind the writing and ratification of the Constitution. While McDonald succeeds in pointing out where Beard overstated his case or failed to account for the full complexity and mixture of motives behind the nationalist movement, he utterly fails to discredit the Beard thesis. Rather, his research tends to confirm it at many points. Security holders were a major force behind the Constitution in Connecticut, Massachusetts, and other eastern states.

Meanwhile, social democratic historians, finding economic history to be boring and hard, and primary research rather time consuming, would rather spend their time projecting their egalitarian fantasies upon the framers, whom they contend were really closet feminists and abolitionists who cleverly slipped a “loaded” constitution upon the unsuspecting but charmingly credulous nation. They created an “Alien-like” document that in time could be used to force racial and gender equality, and welfare programs, upon a profoundly evil, patriarchic, and racist society, a kind of Bolshevik-style revolution from above.

Nettels summarizes the five benefits that Hamilton and his fellow national mercantilists believed would accrue from long-term government bonds. (My critique follows in italics.)  First, the bonds would provide a secure, interest bearing investment. True, but only at the price of diverting capital from private enterprise to public projects. Second, businessmen could use them as collateral for loans. True, but their very security would encourage less circumspection on the part of lenders and of course obligate the taxpayer to recoup the losses from bad loans. Third and fourth, they could be used to buy capital goods and discharge debts abroad. Yes, but so what?  Bills of exchange and specie could do the same, and could do so without obligating taxpayers to pay the sum involved. Fifth, by serving as a substitute currency for large payments, they would increase the supply of currency at home. Here is the seeming ineradicable fallacy that multiplying currency increases wealth and prosperity.  

Rothbard began but never completed the fifth volume to his American history series Conceived in Liberty. In the fascinating and brilliant fragment that remains, he suggests that the confederation Congress should have divided up the federal debt among the states according to their population. He cites the historian E. James Ferguson who points out, “The idea was supremely practical,” and “it accorded with [confederal] nature of the Union and the predilections of the States.” It even began to be carried out in practice. By the end of 1786, New York, Pennsylvania and Maryland had assumed nearly $9 million of federal securities (by exchanging them for state securities), almost one-third of the total. The nationalists were not about to consent to such a resolution, for it would deprive them of the support of the investor classes. Ferguson again: “Congress would have been left with depleted functions and little reason to claim enlarged powers. Creditors would have attached themselves to the states, and no ingredients would have remained to attract the propertied classes to the central government.” 

Rothbard writes: “By the end of 1786, then, the Nationalist program was in full rout.”  Congress had failed to secure a federal impost or a navigation act. “Its requisitions were failing and its eagerly assumed public debt was rapidly being whittled away by the states, and it could not even meet any of the payments on its $10 million of foreign debt. Lacking independent federal revenue, the natural course would have been the disintegration of federal credit and power, and a full resumption of the decentralized policies that had been the initial consequence and the long-range promise of the American Revolution.”

Some have pointed to the likelihood that had the states assumed the federal debt many would have retired it at its depreciated, current market value, for some states (e.g., Virginia) were retiring their state debts this way. They contend that this would have been unjust to the original creditors. Yet, as Rothbard points out, most of the continental debt was no longer in the hands of its original owners. Funding at its full face value would simply have conferred a vast subsidy upon the wealthy investor classes. In other words, it would have constituted an enormous transfer of wealth (through taxation) from the mechanic and agrarian classes to the merchants and speculators who had bought up the debt for a fraction of its face value. The farmer and soldier who had been paid for his capital and labor with a depreciating certificate, which they would have to sell to live, would then be doubly wronged, first by confiscation, then by taxation. Only the original owners of the loan-office certificates were entitled to full compensation.

Shay’s Rebellion and the Ratification of the Constitution

Alas, the nationalists took advantage of a propitious rebellion, that of Daniel Shays, a former Continental Army officer. Shay and other local leaders led an uprising of distressed farmers from western Massachusetts groaning under the load of heavy taxes assessed to pay the interest and principal (at face value in specie) of the state’s wartime debt. During an economic depression, with farm prices low and foreign markets closed, the state government was taxing the farmers (payable in hard money only) to pay wealthy eastern creditors who had lent depreciated paper (accepted at full face value) to the state government for bonds during the war.

The farmers either could not or would not pay, and when they failed to do, state judges were quick to confiscate their farms. The farmers organized into a militia and marched on the courts, which they closed. Seeing an opportunity, the nationalist leaders were quick to misrepresent the grievances and aims of the insurgents. They claimed that the Shaysites, and similar groups in other states, were radical inflationists, communists, and levelers out to defraud their creditors and redistribute property, instead of being, what in truth they were, property-owning, anti-tax rebels who wanted to keep their farms.

Obviously, the nationalists wanted to scare the country into supporting a more vigorous government. George Washington was terrified. “We are fast verging toward anarchy and confusion,” he wrote. His nationalist friends did their best to heighten his terror. Henry Knox wrote Washington of the Shaysites that “their creed is that the property of the United States” having been freed from British exactions “by the joint exertions of all, ought to be the common property of all.”  This was utterly false, but it did the trick. Washington agreed to be the presiding officer at the constitutional convention. Later, Madison in Federalist No. 10 warned that without the strong arm of a vigorous central government, the states would be vulnerable to movements motivated by “a rage for paper money, for an abolition of debts, for an equal division of property” and for other “improper or wicked project[s].”  The Massachusetts historian Mercy Otis Warren, a contemporary of these events, warned of “discontents artificially wrought up, by men who wished for a more strong and splendid government.” 

We know the consummation. The nationalists were able to exploit the situation sufficiently to secure a federal convention to be held in Philadelphia during the summer of 1787. Exceeding their instructions (which were only to draw up a few amendments), the delegates decided to throw out the Articles altogether and write a new national constitution which was subsequently ratified by the states (but not without considerable opposition and probably a national majority opposed to it). Rothbard described it as the triumph of “a radically nationalist program that would recreate as much as possible the pre-liberal situation existing before the Revolution. . . . In short, they were able to destroy much of the original individualist and decentralist program of the American Revolution.”  We live with the consequences today.

Thus do we see how the period of the Articles of Confederation was not characterized by chaos and increasingly bad economic times, as historians tend to assume. Rather, the Articles proved themselves to be a perfectly viable structure for a free society, encouraging trade and prosperity and adherence to the highest ideals of 1776. The driving forces for the creation of the central government with the Constitution involved economic imbalances and debts leftover from the war with Britain. The federalists, ideologically attached to protectionist and nationalist theories, exploited both real and false fears in the hope of resolving these imbalances, but they ended up by recreating what the founding generation had struggled so hard to overthrow ten years earlier.

The strong central authority they created would in time reproduce every statist feature of the British system—political corruption, perpetual debt, debilitating taxation, consolidated power, and a global empire. Such was not the promise of the Revolution.


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