The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Economic Liberalism the Beginnings
• 1: The Stoic Origins of Liberalism
• 1: The Consequences of Stoicism
• 2: Zeno and the Moral Sage
• 3: The Modifications In Stoicism
• 4: Epictetus
• 5: Cicero
• 6: The Stoic Legacy
• 2: The Mercantilists As Liberals
• 1: National Power and Full Employment
• 2: The Means to Full Employment
• 3: The Market
• 4: The Political Ideas
• 5: The Economic Setting of Mercantilist Policy
• 6: Comment On the Commentaries On Mercantilism
• 3: The Origins of American Liberalism
• 1: The Constitutional Convention
• 2: The Ideology of the Federalists
• 3: Economic Policy of the Federalist Party
• 4: Republican Economic Policy

1

The Constitutional Convention

The reason most often advanced for calling the convention was the necessity of “regulating commerce,” this being the term for what today is called economic policy. Regulation, over all of the colonies taken together, had not been an issue of long standing. The Americans did have experience with particular regulations in particular colonies and they were familiar with the history and practice of economic policy in Britain. But they had not had any significant experience with the problems of making, executing, and obeying policy for their own country in its entirety. After 1763 Parliament for the first time seriously tried to regulate the economic life of the colonies. The following twenty-five years, until 1787, were all the Americans had in which to become familiar with economic policy. In the first thirteen of the years—to 1776—what they learned best was how to evade and resist the law, a lesson that was useful to them as rebels but served them badly when the law was their own. The following seven years did not provide much experience that was useful in peacetime, and when the Revolutionary War ended in 1783 a depression began from which the country did not fully recover until the Constitution was ratified in 1789. Even if their experience had been more instructive it could not have taught them much in so short a time as twenty-five years. Moreover, the men who were most influential in making American policy were comparatively young when the convention met. Madison was thirty-six and Hamilton was thirty. Jefferson was in France, as ambassador, during the convention. Franklin and Washington had an important part in it but their role was less to initiate than to mediate and unify.

Nor were the delegates merely young and inexperienced, which in the great world are regarded as handicaps. They set to their work in a climate of disillusionment. In 1776 the Americans had believed that once their country was independent, it quickly would find a lucrative place in world trade. But in 1783 they discovered that Europe was not eager to trade with America, and if there was to be a flourishing commerce it would have to be obtained on American initiative and European terms. The principal commercial city of the United States was Philadelphia, where the convention was held. Its distressed condition was described by Mathew Carey, the pamphleteer:

The depression affected all of the states and frequently was advanced as the reason why they should ratify the Constitution. To every doubter in the Virginia ratifying convention, Francis Corbin said:

The economic crisis however was probably no more important in securing ratification than the deeply felt need for a government of greater authority than the Articles of Confederation permitted. Although the Americans had been made suspicious of power by their experience with the considerable authority of Parliament, they nevertheless acknowledged the need for a more commanding government than they had. The need was made urgent by several challenges to the Confederation, the leading one being the rebellion of the Massachusetts farmers under Daniel Shays. Madison said it had “a very sensible effect on the public mind.”4 Hamilton excited support in New York for ratification by his frightening references to the disorders in North Carolina and Pennsylvania in addition to those in Massachusetts.5 “Toward the prevention of calamities of this kind, too many checks cannot be provided,” he said.

The need for more political and economic authority was before the delegates when they met. They had to create a government with enough power to maintain domestic peace, to make the independence of the United States secure, and to assist the economic growth of the nation. And they wanted to do all of this without greatly restricting individual liberty.

“THE REGULATION OF COMMERCE”

On the need for more economic power, all of the delegates agreed. The consensus is disclosed in their numerous proposals to “regulate commerce.” Some of the men who made them were Hamilton, Madison, Franklin, Edmund Randolph and Richard Henry Lee of Virginia, James Wilson of Pennsylvania, and Charles Pinckney of South Carolina. The power was written into the first draft of the Constitution, and the agreement is reflected in the fact that the official journal of the convention does not mention any debate but merely records that the power was adopted. The point receives less mention than the vote to establish the post office.6 During the ratification period, some of the opponents of the Constitution, like George Mason of Virginia, indicated there was a clear feeling in favor of regulation. Others opposed the Constitution but did not oppose regulation, stating it could have been incorporated in the Articles of Confederation.7 After the Constitution was adopted, the agreement was expressed as clearly as before. In one of his first messages to Congress, Washington said the interest of a free people required Congress to “promote such manufactures as tend to render them independent of others for essential, particularly military supplies,” and the house replied, “We concur with you. . . .” Jefferson in a presidential message in 1802 said the government had a duty to “maintain commerce and navigation; to foster our fisheries; and protect manufactures, adapted to our circumstances.” Monroe in 1818 urged the protection of manufactures.8

The consensus proves one point: that the founders believed economic policy was an important part of the work of government. In addition, it suggests they knew something about economic affairs and held opinions about how they should be regulated. That, however, is all the consensus proves. It does not prove there was any agreement on how the economy should be regulated. An enterprise economy is “regulated” (by competition which in turn can be enforced by the government), fascist, communist, and socialist economies are regulated, and so is a mixed economy. What separates them is the kind of regulation and its purpose. If these simple considerations are not attended to, one is likely to believe that because the word “regulation” was used so commonly it must have had a common meaning. It is, moreover, easy to move from the word “regulation” to “control,” then to “power,” and finally to conclude that the delegates gave the Federal government the power to control the economy in detail, from which it follows that they must have been hostile to the idea of laisser faire. Some such free association must be the explanation for those writings that contend the constitutional convention meant Congress to regulate the economy in whatever way it thinks necessary.

Actually in the proposals to regulate commerce there were four different kinds of economic policies implied. (a) Regulation meant to some only the establishment of uniform trade relations among the states and the removal of barriers to interstate trade. (b) To another group it meant that Congress should use the tariff and other controls over foreign trade in order to advance the international power of the United States. (c) To a third group, it meant the use of tariff duties as the major source of Federal revenue. (d) To a fourth group, it meant the Federal government should assist the economic development of the nation in particular ways, that most often proposed being “the encouragement of manufactures.”

(a) The first view was held by the delegates who insisted on state sovereignty and by those who believed in complete laisser faire in the customary sense, i.e., no interference by the government other than to assure free domestic and international trade. Among the delegates holding this first view were Elbridge Gerry and Hugh Williamson, and they defended it more by political than by economic reasoning.9 They believed the Federal government would acquire an alarming amount of power if it were able to create corporations, grant monopoly rights, pay bounties, and protect manufactures.

(b) Regulation in order to strengthen the international power of the United States was the least important of the four positions advanced in the convention. But it became more important shortly afterwards. James Iredell said that Congress needed regulatory powers in order to secure favorable terms of trade from other countries.10 The many proposals for a commercial policy of reciprocity were expressions of this position, which was the position of the Republican party until 1805.

(c) That revenue should be the purpose of regulation was contended by many, and they later insisted that such was the meaning of the clause of the Constitution which gives Congress the power to regulate commerce. In one of the papers of the Committee on Detail of the convention is the statement: “That the United States in Congress be authorized . . . to pass acts for the Regulation of Trade and Commerce as well with foreign Nations as with each other to lay and collect taxes.” The delegates from Connecticut maintained the principal revenue source would be the tariff, and their opinion was repeated in one of the broadsides addressed to the citizens of King’s County in New York. Charles Pinckney had wanted regulation to mean more than revenue but after the convention he said that revenue was all it had come to mean.11

(d) That the economy should be regulated in order to hasten its industrial development was the position of Hamilton, Madison and of others whom hindsight shows to have been the leading members of the convention. They did not, however, rule it, and one must be cautious in appraising their influence.

Hamilton on August 18 proposed that the government be empowered to charter corporations where the public good required them, but the proposal was not discussed at the time. It raised the issue of how much economic power the Federal government should have. The issue was raised again on September 14 when Franklin—dropping for a day his role as peacemaker—proposed that the power to establish post offices and post roads be enlarged to include “a power to provide for cutting canals where deemed necessary,” which implies public enterprises. Madison then moved that Franklin’s proposal be enlarged to include the power of incorporation, which would have given the Federal government power over private as well as public enterprises. What is interesting is that the proposals—all of them controversial, almost provocative—should have been made only a few days before the convention adjourned, when unanimity was urgently needed and when many delegates were trying heroically to find compromises that would produce it. Proposals such as that made by Madison had been made earlier in the convention. That they were made again so near the time adjournment suggests that their advocates were making a last great effort to write broad economic powers into the Constitution. Perhaps they prevailed upon Franklin in the belief that his great authority would be decisive. But they were defeated. One can obtain some notion of how the delegates reacted to the proposals from the following entry in Madison’s journal (he was both the leading participant in the debates and their principal recorder):

The vote settled an issue that was raised on the first day of the convention when Edmund Randolph in presenting the Virginia plan included in regulation “the establishment of great national works—the improvement of inland navigation—agriculture—manufactures—and a freer intercourse among the citizens.” The vote on Madison’s amendment was a rejection of both Hamilton’s proposal of August 18, and of the proposal of Robert Morris to include in the Constitution a provision for a national bank. Finally, the vote rejected not only Madison’s amendment but the more formidable proposal he had made earlier—also on August 18, possibly a day set aside for economic planners—to give Congress the power “to establish public institutions, rewards, and immunities, for the promotion of agriculture, commerce, trades, and manufactures.”13 The very extensive powers proposed by Randolph, Morris, Franklin, Hamilton, and Madison were reduced to the limited provisions of Section 8 of Article I, which include the power to tax, borrow, regulate commerce, pass uniform bankruptcy laws, coin money, establish post offices and post roads, and grant patents.

The only other form of economic control considered was the regulating of consumption or sumptuary control. It was proposed by George Mason of Virginia and was defeated. Gouverneur Morris spoke against it, stating it would create a landed nobility “by fixing in the great land-holders, and their posterity their present possessions.”14

It is instructive to consider the forms of control that might have been adopted. They can be deduced from the controls which the governments of France and England exercised or tried to exercise during the period of mercantilism, from the sixteenth to the middle of the eighteenth century: the fixing of prices, wages, and interest rates, prohibitions of forestalling and engrossing, regulating the quality of goods, licensing of labor, programs to increase the population, sumptuary control, monopoly grants and other exclusive rights, incorporation, state enterprise, and the control of foreign trade and finance including the protection of domestic industries. The convention considered only four: monopoly and other exclusive rights, control of foreign trade, state enterprise, and sumptuary control. The last two were rejected. The granting of monopoly rights was restricted to patents and copyrights. The control over foreign trade was left in an ambiguous state, except for the prohibition of export taxes. Although not made explicit, the Constitution allowed some power to increase the population, because the Federal government could offer free land as an inducement to immigration.

Not even proposed were the powers to control prices, wages, interest rates, the quality of goods, the conditions of their sale, and the allocation of labor. All of these powers were cherished by the practitioners (although not the theorists) of mercantilism, and could they have been asked for an opinion of the Constitution they would have said it provided a feeble economic policy indeed. Those who today believe the Federal government has extensive economic authority to exercise, if it will, cannot support their belief by the records of the constitutional convention (nor the Constitution of course), because the delegates were not agreed upon the issue.

However the Federal government usually has exercised more power than is explicitly given it by the Constitution and has in fact exercised powers which were explicitly rejected by the convention delegates, as when it established the Bank of the United States, a semipublic corporation in 1791, only four years after the convention. One reason for the government’s action is that certain disputed issues, like incorporation and protection, were left in an ambiguous state. Another is the great influence in the formative years of the country of men like Hamilton who believed the government should have substantial economic power. A third reason is that less than twenty years after the Constitution was written almost all of the leading men acknowledged that the national interest required the exercise of considerably more power than they had believed was necessary.

THE AMBIGUITY ABOUT POLICY

When the convention ended, some of the delegates believed a limited mercantilist government had been established. Of those who did, not all approved it. Hamilton did not believe the Constitution did this, although he was determined to make the most of what it did do. Other delegates believed the government had only those few economic powers which the Constitution explicitly enumerates. Still others were uncertain about what had been decided on particular points, if in fact anything had been decided at all. They believed the Constitution was ambiguous, perhaps contradictory, in these matters.

It was. However, it is doubtful that the delegates could have made it any better. As the convention went on, their differences became more apparent and more profound, and the decision that they made, although unclear and contradictory, probably was the only alternative to no decision at all, in which event the thirteen states might have tottered along to collapse under the Articles of Confederation.

The ambiguity and contradiction are apparent in the fact that there were four different ideas about what policy should be, that is, of what was meant by the phrase, “the regulation of commerce.” It produced a continuing controversy, and the controversy was sharpest over the powers of protection and incorporation. Even though the former was neither accepted nor denied and the latter was expressly rejected, some of the delegates left the convention believing both powers were implied in the Constitution, others believing neither was implied, and still others believing that the issues had not been settled. Hamilton and Madison believed (they said) that the Constitution empowered Congress to levy a protective tariff and also to create public corporations with monopoly power. Madison was candid in saying the powers were not made explicit, and explained they could not have been made so at the time without evoking unwarranted hostility and an unfounded suspicion that they would be abused. He seems to have meant that the public outside the convention, and not the delegates, would be hostile and suspicious. What he said about the public seems to have been quite true. About forty years after the convention, when the issues still were being debated, he said that if Congress had not had the powers of protection and incorporation that fact would have been made known when the first Congress discussed the issues. In it were many delegates to the constitutional convention and to the state ratifying conventions.15 This, however, is slim evidence when set against Madison’s own record of the convention in which he noted the defeat of his proposal to give Congress the power of incorporation. The defeat implied a rejection also of his proposal for the encouragement of manufactures.

The delegates actually may have favored Madison’s motion but defeated it because they thought such powers would prevent the Constitution’s being ratified. If so, the public and not the delegates determined the content of the Constitution, in which case one cannot assert that the powers of protection and incorporation are certain. At most they are only possible (if public opinion changes). The powers in fact were used later, but the constitutionality of incorporation was never wholly acknowledged and that of protection was extensively questioned down to the Civil War.

There is ambiguity also in the “general welfare” clauses of the Constitution—in the preamble, which declares the intention to “promote the general welfare,” and in Section 8 of Article I in which Congress is given the power “To lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States. . . .” Those who believe the premise of constitutional government is limitation argue that the welfare clauses do not confer any discretionary powers on Congress. They believe a constitution enumerates particular powers (which the welfare clauses do not) and prohibits general powers; that if Congress can do what it believes is essential for the general welfare, then it possesses general powers and the Constitution is thereby made meaningless. They explain the appearance of the term “general welfare” in the preamble as a part of a statement of intention which is specified in the body of the Constitution and the term there as being directly related to the enumerated powers which precede it. In this interpretation, Section 8 of Article I means that taxes, duties, and imposts are to be used in order to provide for the general welfare, and does not mean that Congress can provide for the general welfare by other means than such levies; it cannot, in this view, create corporations, grant monopoly rights, subsidize manufactures, etc., in the interest of the general welfare.

Against this interpretation is the view that the welfare clauses, particularly that in the body of the Constitution, empower Congress to use its discretion in order to provide for the general welfare, which means that it can use methods that are not enumerated or clearly implied in the Constitution. If the view were carried to its logical conclusion, Congress could do anything it wished and would be the supreme power in government. The Constitution then could not serve to limit the authority of Congress. The view hardly ever is carried so far and therefore has escaped the criticism to which a consistent statement would open it. Those who hold the view can, however, find support in the fact that Congress has exercised powers which are not enumerated or implied, in the fact that the Constitution was not interpreted strictly even in the early years of the nation, and in the fact that it must be viewed flexibly if the government is to meet the problems which changing conditions present.

The welfare clauses are noted here in order to describe a source of ambiguity in the Constitution and hence to suggest an explanation of the controversy over economic policy. My purpose is not to explain the issue in constitutional law, which I am not able to do. I do however feel able to appraise the issue according to the criteria of the political and economic doctrine of the period. The logical implication of the second interpretation is an unlimited government and is wholly inconsistent with the ideas of the founding fathers. Their doctrine does, however, make possible the exercise of powers which are not enumerated because the doctrine itself is not entirely consistent.

THE CONTRADICTIONS IN POLICY

In addition to ambiguity, there was contradiction in the Constitution. Export taxes were prohibited, but the tariff was not. A protective tariff was neither acknowledged nor explicitly denied. A tariff for the purpose of revenue was admitted, even by those delegates who believed in complete free trade. Most of them were from the South and they accepted a revenue tariff in return for a guarantee of slavery. Yet if the South had wanted no restriction whatever on exports, it also should have opposed any restriction on imports. Not much economic sophistication is needed to see that if imports are reduced, exports probably will be also. After the tariff had been in effect, the South understood the connection very well.

Another contradictory feature of the Constitution was the prohibiting of special preference to any state and yet permitting the tariff. The revenue might have been used in the general interest, but the tariff’s effect on resource allocation (especially the effect of a protective tariff) was to favor particular sections of the country at the expense of others. The provision for patents and copyrights perhaps did not wholly contradict the many expressions of hostility to monopoly. On the other hand, it was not consistent with them either, and the provision surely has created many monopoly problems.

Rather than being called ambiguous and contradictory, the Constitution usually has been called a structure of compromises. But “compromise” is not quite the word to describe the more fundamental provisions. It hardly does for economic policy. It also is not appropriate for the major political decision which was made—the distribution of power between the Federal government, the state governments, and the people. Did the founding fathers create a federal government or a national government? Madison thought it was national. Hamilton thought the issue had not been decided. Others thought a federal government had been created. Hamilton probably was right, as he was about many other matters. The major political issue, like the issues of economic policy, had to be decided as the nation lived under the Constitution, grew and confronted problems, and settled them. The convention in 1787 was a remarkable assembly, but it did not solve in a certain, clear, and straightforward way the principal political and economic problems before the country. No one was more aware than the delegates themselves of the fact that their work was imperfect and that their achievement, although great, was limited. The convention was one phase of an evolving movement which had the result of creating and enlarging the national power of the United States.

The next phase was the discussion and debate (which are not the same thing) from 1787 to 1815. The issues then were defined more clearly and met more directly. The most remarkable feature was the substantial agreement reached on the economic powers of the Federal government. It was not, however, reached until each group had made its ideas known and opened its policy to the critical examination of the opposition. The economic policy of each group. Federalist and Republican, had a political premise, and the policy was justified by the premise. The first to develop a distinctive political and economic doctrine was the Federalists.

[2] Mathew Carey, The New Olive Branch (2nd ed., Philadelphia, 1821), pp. 15-16.

[3] Francis Corbin to the Virginia ratifying convention, in The Debates of the Several State Conventions on the Adoption of the Federal Constitution, etc., ed. Jonathan Elliot (Washington, 1836), III, 104-105.

[4] “Madison to Jackson,” in The Records of the Federal Conventionof 1787, ed. Max Farrand (New Haven, 1911), III, 449.

[5]The Federalist, 6. (The number in all citations of The Federalist refers to the number of the paper and not the page.)

[6] “Journal of the Federal Convention” (Aug. 16), Elliot’s Debates, I, 245.

[7] Farrand’s Records, III, 336.

(Richard Henry Lee), “Observations on the System of Government Proposed by the Late Convention. By a Federal Farmer,” in Pamphlets on the Constitution of the United States, etc., ed. Paul Leicester Ford (Brooklyn, 1888), p. 301.

[8] Elliot’s Debates, IV, 353.

[9] “King’s Journal [of the constitutional convention]” (Sept. 15), Farrand’s Records, II, 635.

Williamson’s speech before the House, Feb. 3, 1792, Farrand’s Records, III, 365-366.

[10] (James Iredell) “Observations on George Mason’s Objections to the Federal Constitution. By Marcus.”, Ford, op. cit., p. 358.

[11] “Committee of Detail, VII,” Farrand’s Records, II, 157.

“Sherman and Ellsworth to the Governor of Connecticut,” ibid., III, 99.

“A Flatbush Farmer to the Inhabitants of King’s County,” reproduced in Broadsides Relating to the Ratification of the Constitution (Washington, n.d.), photostatic copy, no. 26. Charles Pinckney, “Observations on the Plan of Government Submitted to the Federal Convention, etc.,” Farrand’s Records, III, 116.

[12] “Madison’s Journal” (Aug. 18), ibid., II, 325.

“Madison’s Journal” (Sept. 14), ibid., II, 615-616.

[13] “McHenry’s Journal” (May 29), ibid., I, 26.

Ibid., III, 375-376.

“Official Journal” (Aug. 18), Elliot’s Debates, I, 247.

[14] “Madison’s Journal” (Aug. 20), Farrand’s Records, II, 344.

[15] “Madison to Professor Davis” (1832), Farrand’s Records, III, 477, 478, 518.