With the adoption of the Constitution, the power to tax was firmly delegated to the federal government, which was empowered to pay a portion (10-20 percent face value) of past debts, including those incurred by the states. The assurance that public debts will be honored has proven critical to the development of a sound capital market in the United States. There have been failings—as in the late 1830s, when several states defaulted on loans—but even today, the United States benefits from this institutional heritage and is viewed as a haven by major investors seeking safety for their capital (Economic Reasoning Propositions 3, incentives matter; and 4, laws and rules matter).
The Constitution also gave the central government the sole right to mint coins and regulate coinage. States were not allowed such rights, and the Constitution also banned states and their legislatures from issuing paper money. States, however, were left empowered to charter private banks who could issue paper money.
Both these powers, to tax and to regulate money, brought into sharp focus the founders’ concerns over conflicting factions, the limits of majority rule, and the ability to redistribute wealth and income by governmental means.32 Consequently, federal taxes had to be uniform among all the states and, of course, U. S. dollars had to be exchangeable throughout the states. The concerns urging barriers to prevent significant and radical changes in the distribution of wealth through government formed the basis for a major section of the Fifth Amendment: “nor shall any person _ be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.”
Another matter of great political and economic significance was the regulation of trade among the states. Although no substantial barriers to interstate commerce had emerged in the 1780s, the possibility for them was evident. Under the Constitution, the states were forbidden to enact tariffs, thus ensuring the toll-free movement of goods. The important “interstate clause” established a great national common market that reduced the potential of local monopolies and increased the gain from regional specialization and trade; in later decades, it also permitted the extension of federal authority to many areas of interstate economic activity.
The Constitution promoted trade and economic specialization in other ways. It authorized the federal government to maintain an army and navy, establish post offices and roads, fix standards of weights and measures, and establish uniform bankruptcy
Laws. It also gave Congress the authority to set laws on patents: “To promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” With greater assurances to the gains of their own ideas and creations, creative people would hasten technical change.
Another transfer of authority to the federal government was that of foreign affairs. The federal government alone could negotiate treaties or set tariffs. The power to regulate tariffs became a powerful lever in negotiations with foreign nations to reduce or eliminate duties on American goods abroad, as it remains today in the global negotiations within the World Trade Organization (WTO). Before this shift of power, competition among the states minimized the possibility of this leverage, and U. S. tariffs were very low. Once they were centralized, however, tariffs became the chief source of federal revenues throughout most of the nineteenth century.
For the delegates at the Philadelphia convention (and the individual states) to voluntarily release such powers to the central government was unprecedented—made possible only through compromise, which was epitomized in the question of slavery. The Constitutional compromise allowed slavery to continue but limited the importation of slaves to only 20 years, ending in 1808. A tax of up to $10 per imported slave was allowed. Furthermore, each state was ordered to recognize the laws and court orders of other states; thus, runaway slaves escaping to another state were to be returned, like stolen property (Economic Reasoning Propositions 3, incentives matter; and 4, laws and rules matter). Was a slave merely property, or was a slave a person? Oddly, the Constitution viewed slaves in two respects: First and foremost, slaves were property, just as in colonial times; second, each slave was counted as three-fifths of a person for the purpose of determining each state’s membership in the House of Representatives, which was based on population.
The debates of the convention focused carefully on the question of state versus national interests, and it was temporarily left implicit that powers not delegated to the federal government or forbidden to the states were reserved to the states (or the people). To strengthen these reserved rights, the Tenth Amendment was added to the Bill of Rights, ensuring the states’ powers to set local and state laws such as licensing, regulation of business, taxes, zoning laws, civil conduct, and the like, and to use police powers to enforce them.
In respect to relations among people, the new nation preserved the treasured English Common Law. This long string of rules based on court decisions had worked well for centuries, and the First Continental Congress of 1774 had formally proclaimed the Common Law of England as the right of Americans.33 Many states repeated this claim, and legal interpretations were left to the states as long as their legal statutes and interpretations were consistent with the Constitution, the supreme law of the land. Any conflict or challenge was to be adjudicated by the courts and, if necessary, ultimately by the Supreme Court.
The Constitution laid the foundation of the private property rights we enjoy today. It curbed the arbitrary powers of government and fostered personal security required for the pursuit of all varieties of productivity-enhancing activities. Amazingly brief and clear, the Constitution has proven flexible through court interpretation and, on 16 occasions since the Bill of Rights, through amendment.
Probably no single original source exists from which the essential concepts of the Constitution were derived. And yet, in 1776, the same year that the Declaration of
This painting of the formal dosing of the Philadelphia convention and sending the Constitution to the states for ratification highlights the hot work of the delegates through the months of late July, August, and September before the age of air conditioning.
Independence rang its message of political freedom around the world, an odd-looking Scot, whose professorial mien belied his vast knowledge of economic affairs, offered a clarion rationale of economic freedom. The Wealth of Nations ultimately became a best-seller, and Adam Smith became admired and famous. Educated people everywhere, including American leaders, read his great work, marveling at the lucid language and its castigation of mercantilist constraints on economic processes. It does not diminish Adam Smith’s great influence to say that he was the articulate commentator on forces that existed long before he began to write. Chief among these forces were a growing regard for the advantages of private property arrangements and an abiding conviction that law and order were essential to the preservation of property rights and to the opportunity for all people to acquire the things of this world. It follows, therefore, that matching the political guarantees of the Constitution with their ultimate assurance of personal freedoms would be norms, customs, and other laws establishing fundamental economic guarantees of protection of private property and enforcement of contracts, essential to a viable market economy. The United States was especially well tailored to Smith’s concept of an economic order, directed by self-interest, that limited governmental rules and regulations but ensured the domestic tranquility and freedom from foreign interference that only a strong central government could provide.
World History
