Founding Choices American Economic Policy in the 1790s
edited by Douglas A. Irwin and Richard Sylla
University of Chicago Press, 2010
Cloth: 978-0-226-38474-0 | Paper: 978-0-226-38475-7 | Electronic: 978-0-226-38476-4
DOI: 10.7208/chicago/9780226384764.001.0001
ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

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.

AUTHOR BIOGRAPHY

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.

REVIEWS

“In Founding Choices, Douglas Irwin and Richard Sylla have brought together an impressive and accomplished list of economic historians to examine the long-run importance of the economic decisions made in the Founding Era, decisions which helped foster sustained economic growth and development in the United States. There is a tremendous amount of useful and important information contained in these essays.”

— Mark V. Siegler, Sacramento State University

TABLE OF CONTENTS

Acknowledgments

- Douglas A. Irwin, Richard Sylla
DOI: 10.7208/chicago/9780226384764.003.0001
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I. Politics

- Sonia Mittal, Jack N. Rakove, Barry R. Weingast
DOI: 10.7208/chicago/9780226384764.003.0002
[national government, Constitution, Articles of Confederation, political opportunism, economic growth, founding]
This chapter explains how the founders of America in 1780 sought by means of the Constitution to replace an ineffective national government with one that they hoped, but could not really know, would be much more effective. The text explains how the new Constitution provided ways of solving many problems that remained unsolved under its predecessor, the Articles of Confederation, as well as accommodating adaptations of policies and institutions. As a result of the Constitution and the manner in which its provisions were implemented by the founding and later generations, the United States put in place a governmental system that proved to be highly compatible with, and in many ways supportive of, modern economic growth. National and state governments provided a secure environment for investment with a relative absence of political opportunism or the threat of expropriation. Thus, significant specialization and exchange resulted, producing long-term economic growth. (pages 25 - 56)
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II. Policy

- Richard Sylla
DOI: 10.7208/chicago/9780226384764.003.0003
[economic success, articulated financial system, Washington administration, Alexander Hamilton, economic success, modernized finances]
This chapter provides an overview of how a second key ingredient of economic success, that is, a modern articulated financial system, quickly emerged in the Washington administration. According to historians, Alexander Hamilton was the founder most responsible for the financial revolution of 1790. This chapter states that Hamilton, who became a student of financial history while an officer on General Washington's staff during the War of Independence, realized that financial modernization was needed both for effective government and economic growth. With the cooperation of Congress, Hamilton implemented the federal revenue system the Constitution authorized, restructured the national debt and placed it on a sound financial footing, argued for, and obtained, a national banking corporation, and defined the new U.S. dollar and provided for its coinage by calling for a federal mint. Hence effective government and modernized finances, two key ingredients of economic success, were realized very quickly in 1790. (pages 59 - 88)
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- Douglas A. Irwin
DOI: 10.7208/chicago/9780226384764.003.0004
[import duties, federal government, revenue, national debt, Hamilton, funding, U.S. exports]
This chapter studies import duties as the key method by which the new federal government raised revenue to fund its operations and pay the national debt. The national government had no authority over trade policy so it could not retaliate against other countries for discriminating against U.S. exports. According to this chapter, Hamilton was aware that the American public would resist many domestic excise taxes, so he had to rely on import taxes as the principal revenue-raising device for the government. By funding the debt, Hamilton improved the country's creditworthiness; by nationalizing the debt, Hamilton allowed states to reduce the burden of their local taxes, thus increasing support for the Constitution. Keenly aware of the country's financial fragility, Hamilton desperately wanted the United States to remain neutral in any European conflict. (pages 89 - 120)
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- Peter L. Rousseau
DOI: 10.7208/chicago/9780226384764.003.0005
[Constitution, monetary system, specie-dollar base, Continental Currency, levy taxes]
The United States developed as a nation considerably during 1790 after the Constitution ended the colonial and 1780 monetary system which had allowed provincial and then state governments to issue their own fiat paper currencies, and replaced that system with the new specie dollar and currency union of all the states. Under this new system, banks would provide most of the nation's money stock by issuing deposits and bank notes convertible into specie-dollar base. The “Continental Currency” issued by Congress essentially had collapsed by 1779/1780 because Congress lacked the authority to levy taxes to be paid in Continentals. States had powers of taxation, and their currencies during and after the war fared better than Continentals because states were reluctant to levy unpopular taxes. Under the new system, money was created not by government officials printing it to finance public spending, but by banks issuing it to finance trade, investment, and entrepreneurial innovation. (pages 121 - 150)
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- Howard Bodenhorn
DOI: 10.7208/chicago/9780226384764.003.0006
[founding choices, banking system, Bank of North America, Hamiltonian innovation, governance, provisions, Hamilton's charter]
This chapter describes the founding choices with respect to the banking system in the United States. The chapter shows that Robert Morris's Bank of North America, the nation's first bank which had been chartered in 1781–1782 (by Congress and also several states), exemplified the first approach. It was made accountable to the federal government which, in a Hamiltonian innovation, owned 20 percent of the Bank's stock, and its governance provisions balanced the interests of large and small stockholders. Hamilton's charter allowed the Bank to open branches throughout the United States. Founding choices about the sort of banking Americans should have now seem eerily relevant in the aftermath of the banking and financial crises of the early twenty-first century. Reforms embodying stricter regulation of U.S. banking and financial services are therefore at the top of legislative agendas. (pages 151 - 176)
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- John Joseph Wallis
DOI: 10.7208/chicago/9780226384764.003.0007
[Constitution, accommodative government, federal government, economic infrastructure, revenues, national government]
After the Constitution provided a stable and accommodative government at the national level during 1790, most of the interactions between political and economic development took place at the level of the states. The chapter explains that it was difficult politically for the federal government to maintain a presence in banking or to play much of a role in the development of the nation's economic infrastructure; for example, improvements in internal transportation. Dividends and other revenues states obtained from investment in banks and corporations as well as toll revenues on state-owned canals would be greater if there had not been so many banks, corporations, and canals. Within a stable framework of national government, many states rewrote their own constitutions to disentangle their governments from banks and corporations, and to provide more open access to both by enacting free banking and general incorporation laws. (pages 177 - 214)
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III. Business Organization and the Factors of Production

- Robert E. Wright
DOI: 10.7208/chicago/9780226384764.003.0008
[business corporations, corporation nation, business organization, corporate entities, entrepreneurship]
This chapter highlights the dramatic rise in the chartering of business corporations during 1790. Only eight such corporations had been chartered in the long colonial era, and another twenty-one during 1780. During 1790, 290 more corporations, ten times as many as before in colonial and U.S. history, appeared. But the appearance of a “corporation nation” in 1790 was just a beginning; the chapter notes that by 1860 the country would have some 20,000 corporations, far more than any other nation. According to the chapter, the increased availability of the corporate form of business organization stimulated entrepreneurship by broadening the menu of organizational-form choices available to entrepreneurs. Finally, the appearance of so many corporations so early in U.S. history meant that Americans more or less had to learn how to govern and manage complex corporate entities. (pages 217 - 258)
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- Farley Grubb
DOI: 10.7208/chicago/9780226384764.003.0009
[land rich, Constitution, revenue, national government, land sales, financial reforms]
The U.S. government became “land rich” even before the Constitution when the original states with claims to land between them and the then-western border of the country, the Mississippi River, began to cede those claims to the national government. Under the Constitution, Congress opted to survey the lands and sell them gradually as the nation expanded and the population grew, and to pledge the revenue from future land sales to debt retirement via the sinking fund that Hamilton had created as a part of his financial reforms. The chapter estimates that at prevailing land prices, the federal government's holdings of land in 1790 had a value well in excess of national debt. Even if that value could not have been realized had the land been sold quickly, it served to give domestic and foreign creditors of the government confidence in its ability to honor its obligations in later years and decades. (pages 259 - 290)
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- Stanley L. Engerman, Robert A. Margo
DOI: 10.7208/chicago/9780226384764.003.0010
[free labor, slave labor, in-migration, slave policy, slave labor stock]
This chapter focuses on how the abundance of land in America implied a shortage of labor, which was mitigated not only by rapid natural increase, but also by the immigration of free labor, indentured labor, convict labor, and slave labor. During the Constitutional era, in-migration of indentured labor began to decline and an independent United States rejected convict labor from Europe. The Constitution also said little about factors affecting the stock of human capital, such as education, training, health, and internal labor mobility. The chapter discusses the effects of slave policy choices in comparison with options not adopted. The ban on slave imports, in comparison with no ban, raised the price of slaves, and especially of female slaves, the only remaining source for expansion of the slave labor stock. (pages 291 - 314)
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- B. Zorina Khan
DOI: 10.7208/chicago/9780226384764.003.0011
[intellectual property protection, copyright protections, Constitution, American patents, novel institutions]
The American system of patent and copyright protections authorized by the Constitution, as implemented by legislation in 1790 and after, illustrated a departure from European precedents in directions that were conducive to economic growth. American patents were for “first and true” inventors and for new and original inventions, not merely ones imported from another country or copied from another inventor. Application fees for patents in the United States were lower than in Europe, and were intended to cover administrative expenses rather than enhance government revenues. Property rights were strong; those granted patents were not restricted in how they could exploit them. The system was open and transparent; with an inventor's rights protected, knowledge of new inventions was made widely available, as was knowledge that patent protection had expired. The purpose of the patent was “to promote the progress of science and useful arts” by means of granting temporary exclusive rights for novel inventions. (pages 315 - 342)
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Contributors

Author Index

Subject Index