THE COUNTRY THAT DECLARED its independence on July 4, 1776, had many advantages in the military struggle with Britain that was already under way. Finances, however, was not one of them.
The United States was fighting on its home ground and could react quickly. Britain had to fight from a distance of three thousand miles and with a communications time lag of at least three months, often four. The American military commanders and politicians were intimately familiar with that ground; their British counterparts were often profoundly ignorant. Most of all, the United States had only to avoid losing the war until the British government and people tired sufficiently of the struggle and its mounting costs. Britain had to defeat and pacify a vast country awash in rebellion.
But Britain had virtually unlimited financial resources; the Americans had hardly any. Because of those resources it could deploy the largest and best navy in the world (although it had been allowed to decay considerably since the end of the Seven Years’ War). The British army was second to none in training and equipment, and could be easily augmented with hired foreign troops. The Americans had to scratch together what forces they could, using state militias and privateers as much as if not more than the Continental Army and Navy.
They also had to scratch together a means of paying for the war. That was not easy, especially as there was, in a very real sense, no national government. The thirteen states, having thrown off British control, were not willing to cede much of their new-gained sovereignty to a central government. The Second Continental Congress had no power to tax. Instead it had to estimate its revenue needs and then call on the states to provide the money. With their own war efforts to fund, few did, and only about 6 percent of total revenues came from taxes.
The rest had to come from borrowing, some from wealthy Americans committed to the cause, but mostly from France and Holland, who were both, of course, far more interested in humbling Britain than in helping the Americans. Along with money, they also supplied about 60 percent of the gunpowder used by American forces, as they did most of the uniforms and firearms. Even the British, quite unintentionally, provided much military matériel for the American forces. During the course of the war, American privateers seized some two thousand British vessels, worth, together with their cargoes, some 18 million pounds.
Beyond borrowing, the only source of revenue was the printing press. Beginning in 1775 the Continental Congress issued negotiable bills of credit, called continentals. By the end of 1779 it had issued bills with a face value of no less than $225 million, a huge sum relative to the size of the American economy at that time. This ballooning of the money supply (made still worse by states and even counties doing the same) inevitably caused a huge inflation. Prices doubled in 1776 and doubled again the next year and the next. From early 1779 to early 1781, prices rose nearly tenfold. Congress tried to stem the spiral by revaluing the continentals already in circulation at 2.5 percent of their face value. They quickly depreciated into near worthlessness. The phrase “not worth a continental” would be part of the American lexicon for more than a hundred years.
Many farmers had no choice but to accept quartermaster and commissary certificates—which also circulated as money—at whatever value the requisitioning officers chose to place on them at the time they forcibly purchased supplies. Fortunately, the British sometimes acted even more arbitrarily, seizing livestock and grain as spoils of war.
And because the Continental Congress had no experience in administering a large bureaucracy (the quartermaster’s department of the Continental Congress had more than three thousand employees at one point), chaos, corruption, and inefficiency reigned. Only when Robert Morris, a highly successful Philadelphia merchant, took charge in 1781 did some semblance of order come to government procurement and finances.
Most important, Morris was able to arrange financing to allow Washington to move the Continental Army from New York State to Yorktown, Virginia. There, with the French fleet acting as the stopper in the entrance to the Chesapeake Bay, cutting off relief, Lord Cornwallis was forced to surrender the main British army in North America.
If the British war effort was to continue, London would have to raise, equip, and transport a new army. With the national debt increasing rapidly (it was already well over 200 million pounds at this point), there was little political support for doing so. The British began negotiating a peace treaty that resulted in formal recognition by Great Britain of American independence in 1783.
The United States had won by not losing.
BUT IT HAD PAID A FEARFUL PRICE. Much of the Carolinas and parts of Virginia had been devastated by British troops destroying farms and plantations. Large numbers of slaves were taken by the British as well. The British blockade had seriously disrupted commerce, as had British occupation of some of the major ports.
New York was occupied by British forces from the fall of 1776 to November 25, 1783 (celebrated as Evacuation Day in New York for a hundred years). That is the longest period of time in which a city in the Western world has been held by an occupying power in modern times. During the occupation, two fires had broken out that destroyed half the buildings in Manhattan. The city’s population had fallen by half in these years. Many of the city’s merchant elite, hopelessly compromised by dealing with the British, evacuated with them.
And the coming of peace also brought British commercial retaliation. The British West Indies, previously a huge market for American foodstuffs and lumber, were closed to American ships. Favorable tariff treatment, such as for indigo, ended.
But Britain remained by far the largest customer for American goods and the largest exporter to the United States. British merchants, anxious to reestablish their position in the lucrative American market, offered generous terms. And with the end of the war, the American economy soon began to recover, if patchily. South Carolina remained largely mired in depression, while the mercantile economies of the Middle Atlantic states rebounded. And if markets such as the British West Indies were lost (temporarily, it turned out), new ones opened up. Northern Europe, closed by the British Navigation Acts, now welcomed American products. Foreign goods that previously had to come through Britain could now come directly at lower cost. And the Far East, once the zealously guarded monopoly of the British East India Company, opened up to American merchants. In 1784 the Empress of China cleared New York harbor, bound for the Orient, the first ship in what would be a growing armada. It carried a cargo of furs and ginseng root—much prized in China as a cure-all—that was bartered for tea, silks, china and porcelain, exotic plants and birds, and other luxury goods. When it returned fifteen months later, it disposed of its cargo at a profit of between $30,000 and $40,000.
New York City itself recovered from its devastation at the hands of the British with astonishing speed. By the end of the decade its population had not only recovered but reached new highs, thirty-three thousand in the census of 1790.
BUT IF THE COUNTRY’S ECONOMY was slowly recovering, its finances were not. The states had finally agreed to a basic frame of government, the Articles of Confederation, in 1781, to replace the ad hoc administration of the Second Continental Congress. But it proved woefully inadequate to the job at hand. Most power was still vested in Congress, whose members were appointed by the state governments and served at their pleasure. More, it lacked the power to tax, and instead had to requisition funds from the various states, many of which did not pay on time and some of which simply did not pay at all. Under the Articles of Confederation, the government of the United States much more closely resembled the present-day United Nations than a real government.
An attempt to give the national government a secure income through a 5 percent impost on imports failed when New York imposed so many conditions that Congress declined to accept them. Without unanimous consent from the states, the measure failed.
As a result, the national government was unable to fulfill its obligations. The navy was disbanded and the army reduced to a nullity, with only eighty privates. In 1785 the government stopped paying interest on its debts to France. Two years later it stopped paying on the principal as well.
Knowing the powerlessness of the United States, foreign powers treated it with increasing contempt. Britain encouraged separatist movements in the Northwest and Vermont, and refused to evacuate its forts in what was now United States territory. Spain refused to recognize United States sovereignty west of the mountains and south of the Ohio River, and closed the Mississippi, whose mouth it controlled, to American commerce. With settlers pouring over the mountains into the fertile lands that became Kentucky and Tennessee, this was a major problem. These people needed to export their increasing agricultural output to survive, and the Mississippi was the only outlet to the sea. Spain hoped to earn their allegiance, and it might well have gotten it. In 1784 George Washington described these people as standing on a pivot. “The touch of a feather would turn them any way.”
Domestic creditors as well as foreign ones were unable to collect either interest or principal. The great mass of bills of credit and commissary certificates continued to circulate at rates that were only a tiny fraction of their face value.
The biggest problems with the Articles of Confederation—the national government’s lack of power to fund its operations through taxes, and to regulate commerce among the states—were obvious. How to fix the problems, especially given the reluctance of the states to cede aspects of sovereignty, was not. But, pushed by James Madison, the Virginia legislature invited the other states to meet at a convention to consider “how far a uniform system in their commercial regulations may be necessary to their common interest and their permanent harmony.”
This resulted in the Annapolis Convention in September 1786. But only five states showed up, and all they accomplished was to call for another meeting in May 1787, “to take into consideration the situation of the United States, to devise such further provisions as shall appear to them necessary to render the constitution of the Federal Government adequate to the exigencies of the Union.”
The nationalists, as those who favored a stronger central government were called, then got a stroke of luck. Just as the Annapolis Convention was meeting, Shays’s Rebellion broke out in Massachusetts. In the western part of the state, many farmers were in extremis with debts and had no way to pay them. But the Massachusetts legislature, thoroughly under the thumb of the Boston merchant establishment, adjourned without acting on petitions to issue paper money and to provide debt relief by staying foreclosure proceedings.
By November Daniel Shays, an army captain during the Revolution but now a destitute farmer, was leading a force of twelve hundred men. The Massachusetts government, thoroughly alarmed, sent General William Shepherd with six hundred men to guard the arsenal at Springfield and authorized General Benjamin Lincoln to raise a force of forty-four hundred men. Shepherd, armed with artillery against muskets and pitchforks, made short work of the men who attacked Springfield on January 24, 1787, and Lincoln finished off the rebellion by an attack on its forces at Petersham on February 4. Shays fled to Vermont.
Massachusetts pardoned everyone involved (even including, the next year, Daniel Shays himself). Sympathizers with Shays’s Rebellion won the legislative elections that spring and quickly passed legislation exempting such things as household goods, clothes, and the tools of one’s trade from foreclosure proceedings.
Although it collapsed quickly, Shays’s Rebellion added greatly to the public perception that things were seriously amiss with how the country was being governed and that fundamental change was needed. This prepared the way for the Constitutional Convention that met in Philadelphia late that spring to quickly decide to throw out the Articles of Confederation and start afresh. Referring to the changes in the debtors’ law brought about by Shays’s Rebellion, a Boston newspaper snootily noted in May 1787 that “sedition itself will sometimes make laws.” In a very real sense, Shays’s Rebellion helped make a constitution.
MASTERPIECES CREATED BY A COMMITTEE are notably few in number, but the United States Constitution is certainly one of them. Amended only twenty-seven times in 215 years, it came into being just as the world was about to undergo the most profound—and continuing—period of economic change the human race has known. The locus of power in the American economy has shifted from sector to sector as that economy has developed. Whole sections of the country have risen and fallen in economic importance. New methods of doing business and economic institutions undreamed of by the Founding Fathers have come into existence in that time, while others have vanished. Fortunes beyond the imagination of anyone living in the preindustrial world have been built and been destroyed. And yet the Constitution endures, and the country continues to flourish under it.
By no means the least of the lucky breaks that the United States has had in its history was the time at which it came into existence and established its fundamental laws. In one of history’s great coincidences, Adam Smith published The Wealth of Nations in 1776. It destroyed the intellectual underpinnings of the mercantilism on which the economic policies of Western nations had been based for two hundred years.
It showed in example after example, each more powerfully argued than the next, that unfettered trade, both within and without the country, and a government that did not take sides as individuals competed in the marketplace resulted in greater prosperity for all and thus greater power for the country as a whole. Many of the Founding Fathers had read Smith, and all knew the thrust of his arguments.
Because the United States was new, it did not have long-established monopolies and systems of privilege to be dismantled. It had no immensely wealthy British East India Company or entrenched aristocracy that dominated the country’s politics. It had no ancient royal grants, such as the rights to collect local tariffs that abounded in prerevolutionary France. Thus it was much easier for the United States to inculcate the ideas of Adam Smith into its economic system and politics than it was for the other major Western nations. This gave it immense advantages in the new economic world that was being born as the Founding Fathers met in Philadelphia.
In The Eighteenth Brumaire of Louis Bonaparte, Karl Marx wrote that “Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past.” That is very true, almost tautological. Marx, however, never visited the United States. (For that matter he never visited a factory—all Karl Marx knew of the proletariat he claimed to champion was what he read in books written by his fellow intellectuals.) Had Marx ever ventured to the New World, he would have seen a country that, because of circumstances, did make its history as it pleased far more than any other Great Power.
To be sure, the United States did not create a purely Smithian economy. People in government will always try to help those who are powerful at the expense of those who might become so. What-is can always wield influence that what-might-be cannot match, regardless of any campaign finance laws that may be in place. The power of what-is made the abolition of slavery—by the 1780s widely seen as immoral and inefficient—politically impossible. Indeed, what-is was able to force a provision in the new Constitution that counted the disenfranchised and powerless slaves at three-fifths their actual numbers for determining the distribution of seats in Congress, greatly increasing the political power of the states with large slave populations.
But the United States has consistently come closer to the Smithian ideal over a longer period of time than any other major nation. The results can be seen wherever one looks in the United States and, indeed, around the world.