Our Republic's First EconomistTags Money and BanksU.S. HistoryMoney and Banking
On the fourth of July we pay homage to our Founding Fathers — the men who gave us our freedom. One of the greatest of these 18th century "giants" was our Nation's first economist, Pelatiah Webster.
Webster was more than an economist. He was also an ordained minister, a preacher, a teacher, a merchant, and statesman. He understood, more than most men of his day and most men since, the interrelationship of moral and economic law.
Webster, was among the first, if not the first, to see the need for our present Constitution, His early writings, setting forth many principles later adopted, led his admirers to call him the father of that document.
His analytic insight into the economic fallacies of his troubled times brought from one historian the compliment that "Webster was the American Adam Smith of that epoch on all the great questions touching economics and currency."
This great economist was born in 1726 at Lebanon, Connecticut. Twenty years later, on graduation from Yale, he became a student of theology. He was ordained a minister in 1749, and preached for six years at Greenwich, Massachusetts. Then, because of necessity rather than inclination, he became a merchant in Philadelphia, and in his spare time, taught school at Germantown Academy.
When the Declaration of Independence was signed, Webster was a mature man of fifty and a keen observer of the Continental Congress. He noted with fear the first printing of Continental notes in 1775. He saw that many people were carried away with the idea that the Revolutionary War could be financed entirely by printing Continental paper money.
So, in the fall of 1776, Webster published his first pamphlet on money. He warned that our Continental currency might become worthless. Much of what he said then is pertinent today. To fight inflation, he urged "good economy in bringing the burden equally on all, in proportion to their abilities; but then I feel it very necessary that they should pay as they go, as near as may be."
He felt that the use of unbacked paper money was a dangerous expediency because it created more money "than is necessary for a medium of trade." Inflation, he felt, would discourage trade because "nobody will import goods and sell them. For in that case profits may be nominal, the loss will be real."
He wrote that there were only three ways to reduce and control the quantity of Continental notes in circulation. The first was to destroy them. The second was to export them but no other country would take them. The "third and, in my opinion, the only practicable way of lessening the quantity is by a tax, which can never be paid so easy as when money is more plenty than goods, and of course, the very cause which makes the tax necessary, facilitates the payment of it. The tax ought to be equal to the excess of the currency, so as to lessen the currency down to that quantity which is necessary for a medium of trade."
In April, 1777, while en route to Boston with a cargo of flour and iron, he and his ship were seized by the British. He was held prisoner for several weeks in Newport, Rhode Island, before being permitted to return to Philadelphia.
One night in February, 1778, he was again arrested by the British "on account of his order in the patriotic cause." He was imprisoned for four months and a large part of his property was confiscated for the King's stores. His only son served in the Continental Army.
The war so destroyed his business that he found himself with considerable leisure. He devoted most of the war years to studying "the original, natural principles" of economics and "to suffer my mind to be drawn on without bias or any incidental prejudice, to such conclusions as those original principles would naturally lead, and demonstrate." He saw that the war created "new problems which America had never seen before and, of course, knew not how either to obviate or solve them."
After mastering the principles of economic life, Webster started writing about them. His arguments on "the danger of too much circulating cash" are still pertinent. He argued strongly in favor of taxes rather than loans to support the war. After writing one paper on the dangers of inflation, he wrote seven essays on Free Trade and Finance. The first of these essays appeared in July, 1779, and said:
Freedom of trade, or unrestrained liberty of the subject to hold or dispose of his property as he pleases, is absolutely necessary to the prosperity of every community, and to the happiness of all individuals who compose it….All experience shows that the most effective way to turn a scarcity into a plenty, is to raise the price of the articles wanted…In times of danger, distress, and difficulty every man will use strong endeavors to get his goods to market, in proportion to the necessity and great demand for them; because they will then bring the best price, and every man is fond of embracing golden opportunities and favorable chances….In times of scarcity, every man will have strong inducements to bring all he can spare to market, because it will then bring the highest price he can ever expect, and consequently the community will have the benefit of all that exists among them, in a much surer manner than any degree of force could extort it, and all to the entire satisfaction of buyer and seller…"
Restraint of property and limitation of prices will hurt any community….Every man will make his goods for market a bad quality, or at least not the best, for they must all go at the limited price, and he therefore gets nothing for any special care or skill he may bestow on his goods. ... In times of danger, distress, and difficulty no man will be induced to any great efforts to supply the market; for the additional danger makes an additional expense upon the goods; and he must take the limited price and no more; he will not consequently combat or risk an increase of danger and expense without any chance of compensation. When things grow scarce, every man will endeavor to lay in great stores if he can do it without an increase of price, and will not think it necessary to retrench his expenses, whilst he thinks his stock will last through the scarcity; the consequence of which is, that all the scarce articles at market will be scrambled up by a few hands, who will have no inducement to parsimony in the expenditure of them, by which the scarcity and distress are increased, and many must be wholly destitute; and as far as this respects the necessities of life; the consequences must be dreadful. ... The difficulties which must attend the execution of such an act of limitation, may perhaps furnish not the least objection to it. ... Must he have his house searched from top to bottom for concealments? Even the lodging-rooms of his wife and daughters!..."
It is not possible to form a limitation of prices which shall be just, and therefore the whole scheme necessarily implies injustice. ... Another mischievous consequence of this fatal measure, and not the least, I conceive to be its unhappy tendency to corrupt the morals and integrity of the people. ... These are arguments grounded on plain fact, they have their foundation in the laws of nature, and no artifice or force of men can prevent, elude, or avoid their effects; their operation is uncontrollable, and therefore I conceive all opposition to them is the height of absurdity, and dangerous in the highest degree."
In 1779 the second Free Trade and Finance pamphlet again urged taxes as a means of reducing the number of Continental bills which had flooded the country. He opposed further war financing by printing press inflation because "this method brings the burden beyond due proportion, on the most virtuous and useful of our people such as by prudence and economy have made money and got a good command of cash ... and at the same time operates in favor of the most worthless men amongst us, the dissipating, slack, lazy and dilatory sort, who commonly keep themselves in debt and live on the fortunes of others. These contemptible, useless characters pay (only a fraction) of the debt they contracted with the frugal and industrious. ... The burden comes very heavy on the most helpless part of our people, who are most entitled to the protection of the State, and ought not to have their burdens increased; such as widows, orphans, and old men, whose principal dependence is on legacies, money at interest, etc.
In 1780 his third free trade essay said, "I beg leave to propose one thing more, viz., to take off every restraint from our trade. Let every man be at liberty to get money as fast as he can; and let the public call for it as fast as public exigence requires. Limitations of our trade have been so often tried, so strongly enforced, and have so constantly failed of the intended effect, and have, in every instance, produced so much injustice and oppression in our dealings, and excited so many quarrels, so much ill-will and chagrin among our people, that they have, in every instance, after some time of most pernicious continuance, been laid aside by a kind of general consent, and even most of their advocates have been convinced of their hurtful tendency, as well as utter impracticability."
The Madison Papers, published in 1841, cite Pelatiah Webster as the author of the 1781 pamphlet, which suggested that "The authority of Congress at present is very inadequate to perform their duties, and this indicates the necessity of calling a Continental Convention for the express purpose of ascertaining, defining, enlarging, and limiting the duties and powers of their Constitution."
In February 1783, Webster published his most famous pamphlet, A Dissertation on the Political Union and Constitution of the Thirteen United States of North America, Which is necessary to their Preservation and Happiness; humbly offered to the Public. This pamphlet, written four years before the Constitutional Convention, proposed a new Constitution to provide three separate and distinct departments, a legislature of two chambers, and a judicial system based on the supremacy of Federal law. The new Federal Government was to be one of delegated powers with the residuum remaining in the States.
A Yale biographer of Webster reports that "It is a matter of tradition that Members of Congress, especially the Connecticut delegates, were in the habit of passing evenings with him, to consult him on financial and political concerns." Among his friends in the Continental Congress were such youngsters as Madison, Pinckney, Randolph and Hamilton—the men who were later to write his ideas into our Constitution.
In editing a collection of his pamphlets in 1791, Webster wrote, "It is probable that politicians and statesmen who may be involved in these inquires, might find benefit in an attention to American experience. ... We have an opportunity of learning wisdom from it. ... Most people at the time were wrought up to such a passionate attachment to the American cause, that they had no patience to examine and consider coldly the means necessary to support it."
Those who lived through our Revolutionary era profited from their experience. They read and understood the facts and fallacies exposed by Webster, the Republic's first great economist. The follies of inflation and price control were lessons well learned unto the third and fourth generation. Our own generation might well profit by the many wise words of Pelatiah Webster.
But as he said: "The great Creator has not given to all men equal discernment; some politicians are short-sighted, and cannot see the distant ill consequences of measures which yield a present advantage, but he must be a stupid blockhead who cannot see such effects when they stare him in the face, and stand in full fact before his eyes."
[Reprinted from Christian Economics, July 4, 1951.]