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A just war,
in Murray Rothbard’s view,
“exists when a people tries to ward off the threat of coercive
domination by another people, or to overthrow an already-existing
domination.” Like all wars, a just war is laced with dangers
beyond the inferno of the battles, especially if war funding relies to a
significant degree on the printing press. The American Revolution is a
case in point.
On June 22, 1775 the colonial delegates assembled in Philadelphia, under the
inspiration of Gouverneur Morris [1], decided to
print $2 million in “bills of credit” called Continentals.
The plan was to begin redeeming them in 1779, not with hard coin, but by
levying taxes in the Continentals themselves, which would then be
retired. So appealing was the idea of printing money that by 1779 a
total of $227 million had been issued. The bills were everywhere, and everywhere despised. In a letter to
John Jay, president of the Continental Congress, George Washington complained that
“a wagon load of money will scarcely purchase a wagon load of
provisions." By December 1779 the Continental had fallen to 42-1
against specie, and by spring of 1781 the currency was virtually worthless.
Individual states were also printing money to finance the war, and the
British too adopted the printing press as a war strategy, printing
Continentals and using Tories known as “shovers
” to shove the imitations into circulation
and thus accelerate the currency’s depreciation.
Inflationists in Congress accepted the depreciation
as a clever way to impose the necessary taxes to pay for the war, though Gouverneur Morris thought it was too bad that
Washington’s soldiers would suffer the most from this tactic. As
the value of the currency rapidly approached zero, the Continental army
turned to direct theft (“impressment”) to acquire their provisions
when merchants balked at trading goods for something worthless.
The Continental was allowed to die without redeeming it, but in 1779 Congress
began emitting “loan certificates” that were also used as
money. A big chunk of this money hung around after the war as a
peacetime public debt. Robert Morris, the leader of the nationalist
faction, pushed for its redemption at par in specie as a means of stuffing
the pockets of associates who had purchased the certificates at highly
depreciated prices.
Redemption was also a way of rallying support for taxing power in
Congress. Under the Articles of Confederation and perpetual Union, which
was ratified on March 1, 1781, the United States of America was considered a
“league of friendship” rather than a central government, with
each state retaining “its sovereignty, freedom, and
independence.” Although the Articles recognized the obligation of
Congress to pay all debts incurred before ratification, the Articles did not
give Congress the authority to coerce such payments from the states.
To the nationalists, the lack of taxing power and other alleged deficiencies
made the Confederation government “the laughing stock of the Atlantic
world,” as historian Leonard L. Richards notes in his masterpiece, Shays’s Rebellion: The American
Revolution’s Final Battle. [2] Throughout the 1780s, they tried fruitlessly to get
enough of them together to replace the Articles. In modern parlance,
what they needed was a “New Pearl Harbor,” a major crisis that could be propagandized for political ends.
In 1786, Shays’s Rebellion provided the break
they needed.
Shays’s Regulators
As the official story is told, indigent farmers in western Massachusetts were
unable to pay their taxes, so the courts were sending them to jail and seizing
their farms. To avoid the penalties for defaulting on their debts, the
story continues, Daniel Shays and a few other “wretched officers”
from the Revolution led backcountry rabble to shut down the courts.
Massachusetts Governor James Bowdoin called out the militia to put a stop to
the uprising. When most of them sided with the rebels, he turned to
wealthy Bostonians to fund a temporary army. Led by General Benjamin
Lincoln, the army prevented the insurgents from seizing the federal arsenal
at Springfield in late January 1787, then crushed the rebellion permanently a
week later in a surprise attack at Petersham.
Though the top rebel leaders fled to other states, most of the others
eventually returned to their farms. Bowdoin agreed to pardon the rebels
if they signed an oath of allegiance to the state, which the vast majority
did.
As Richards argues compellingly, the standard story of Shays’s
Rebellion as an uprising of debtor farmers does not wash. Richards had
discovered by accident that the Massachusetts archives had microfilmed the
signatures of the 4,000 men who signed the state’s oath of
allegiance. Since many of the insurgents also included their
occupations and hometowns, he was able to gather more information about them
with the help of town archivists and historians. For example:
- At
the time of the rebellion Daniel Shays owed money to at least 10
men. Of those 10, three were rebel leaders. For every rebel
who went to court as a debtor, another went as a creditor.
- Colrain, the most rebellious town, had 12 families
involved in debt suits during 1785 and 1786. Yet only four of
these families provided men to the town’s total of 156
rebels. Their leader, James White, who led the assault against the
Springfield arsenal, was convicted of high treason. He was also one of Colrain’s
creditors.
- In
1786 creditors in Connecticut took over 20 percent of the state’s
taxpayers to court. Yet there was no comparable revolt in
Connecticut.
It wasn’t debt that triggered the rebellion,
Richards concludes, it was the new state government and its attempt to enrich
the few at the expense of the backcountry.
Like other states, Massachusetts had issued notes to help fund the
Revolutionary War. Immediately upon issue they depreciated to about
one-fourth par, and later declined to about one-fortieth of their face
value. Many soldiers were paid in these notes, then
later unloaded them to speculators at high discounts. Speculators
bought roughly 80 percent of the notes, of which half were owned by just 35
men. Every one of these 35 had served in the state house during the
1780s or had a close relative who did.
The legislature voted to consolidate its war notes at face value and praised
the speculators as “worthy patriots” who had come to the
state’s aid in its time of need. But these men did not buy the
notes directly from the government; they bought them for a song from farmers
and soldiers, who were now being taxed to redeem them at full value.
The speculators, most of whom had stayed home during
the war, were seeking to benefit at the expense of veterans.
Poll and property taxes were to account for 90 percent of all taxes.
The poll tax placed a fine on every male 16 years or
older. Thus, a regressive tax ensured a wealth transfer from farm
families with grown sons to the pockets of Boston speculators.
Nationalist versions of the insurgency spread throughout the states and upset
many elites, including George Washington, who was enjoying a peaceful
retirement at Mount Vernon. According to Washington’s trusted
friend and former artillery commander General Henry Knox, who was planning to
build a four-story summer home on one of his Maine properties, the insurgents
wanted to seize the property of the rich and redistribute it to the poor and desperate. David Humphreys, one of
Washington’s former aides living in New Haven, told him the uprising
was due to a “‘licentious spirit among the people,’”
whom he characterized as “levelers” determined “’to
annihilate all debts public & private.’”
The “rebels,” for their part, saw themselves from the very
beginning as Regulators whose
purpose was “the suppressing of tyrannical government in the Massachusetts
State.” The Shays Regulators drew upon the success story of
Vermont in the 1770s in which Bennington farmers, in a dispute with New York
land speculators, had stopped courts from sitting and terrorized surveyors
sent on behalf of the speculators.
On March 19, 1787 Knox wrote Washington hinting that he would be given the
president’s chair at the Philadelphia convention in May. Knox
stressed that Washington would not be presiding over some middling conference
of tinkerers amending a defective document but instead would be leading a
prestigious body of men as they created a more “energetic and judicious
system.”
Nationalists at the Constitutional Convention that spring wanted a stronger
central government - an elective monarchy, in Alexander Hamilton’s view. Though
they didn’t get the results they pushed for, the nationalists and their
intellectual heirs of today have shown that their lust for a more
“energetic” government will not be thwarted by words on
paper.
Hamilton’s Funding Proposals
As Rothbard notes, there were two ways to fund the
debt: One way that was compatible with the decentralized nature of the
union under the Articles was to apportion the Congressional debt among the
states and let them raise taxes to pay their share. The other way was
crucial to “the cherished principles of national
aggrandizement”: Give Congress the power to tax so it can do the
funding. [3] Article I, Section 8, Clause 1 secured
this power.
In January 1790 the 34-year-old Hamilton, as Treasury Secretary,
presented his plan to Congress for retiring the Revolutionary War debt. The $54 million federal debt would be funded at par
and the federal government would assume responsibility for the states’
$25 million war debts. The plan called
for converting federal debt into bonds that would mature after an assigned
period of time, paying 4 percent interest on long term bonds and 6 percent
interest on those of shorter duration. The new government would pay the
principal on the debt from a sinking fund established
through the post office. Revenue for the fund would come from an import
tariff and an excise tax on what Hamilton labeled “pernicious
luxuries” that included whiskey. His plan was not to pay off the
debt, but to recycle it. When bonds came due he would have new bonds
issued to replace them. As long as interest payments on the debt could
be paid, the government’s credit was assured.
Among those opposing his plan was Hamilton’s former Federalist Papers
ally, James Madison, who argued that repaying the debt at par to current
bearers was stiffing war veterans and farmers for the benefit of wealthy
“stockjobbers.” He favored a plan of discrimination,
wherein the government would pay the original bearers the face value of the
certificates and the current bearers the highest market value plus
interest.
Aside from the near impossibility of finding the original bearers, Hamilton
opposed discrimination on the grounds that it amounted to a “breach of
contract” if the government did not pay to the bearer on demand the
full value of their certificates. How else would the government
“justify and preserve their confidence”? The buyer of a
depreciated security, Hamilton argued,
is not even
chargeable with having taken an undue advantage. He paid what the commodity
was worth in the market, and took the risks of reimbursement upon himself. He
of course gave a fair equivalent, and ought to reap the benefit of his
hazard; a hazard which was far from inconsiderable, and which, perhaps,
turned on little less than a revolution in government. . . .
In funding wealthy speculators in this manner,
Hamilton was well aware this would concentrate investment capital in
relatively few hands and would encourage them to make further investments in
the federal government. This was a critical part of his agenda: to
strengthen the union at the expense of the individual states.
Senator William Maclay, one of Hamilton’s
most vocal critics, brought the public into the debate with a scathing article he
wrote for a Philadelphia newspaper in February, 1790. Assumption,
he argued, was a means of reducing state governments to insignificance and of
establishing a “pompous Court,” by which he meant an arrogant and
powerful central government. “The people will be meddling with
serious matters unless you amuse them with trifles,” he said
caustically. A pompous Court in partnership with a pliant press would
keep the people amused as it goes about its task of having the citizenry
subsidize New York’s monied class. The
Treasury will grow in influence, and thus
shall the capital of the United States [New York] in
a few years equal London or Paris in population, extent, expense and
dissipation, while for the aggrandizement of one spot, and one set of men,
the national debt shall tower aloft to hundreds of millions.
As the debate
raged throughout the spring and early summer, Hamilton, sensing defeat,
turned to Secretary of State Thomas Jefferson for help. Jefferson
invited Madison and Hamilton over for supper and together they cut a
deal. In exchange for the needed votes, Hamilton would agree to
relocate the nation’s capital from New York to Philadelphia for 10
years, then finally to a place on the Potomac, where it would be next door to
Virginia, more accessible to the South generally, and removed from Hamilton’s
power base. The arrangement was consummated when the Residence Act narrowly
passed both houses in early July, and the Funding Bill became
law on August 4 by a slim margin.
Still, the issue did not die. On December 16, a date
immortalized by the Boston Tea Party in 1773, Virginia’s General
Assembly issued a formal protest. Unlike many heavily-indebted northern states,
Virginia had already imposed taxes to redeem a large part of its debt and had
expected the balance to be extinguished in the near future.
Hamilton’s plan of assumption would benefit the more profligate states
while imposing heavy taxes on Virginians for which the Assembly had no way of
providing relief. Furthermore, since no clause of the Constitution gave
Congress the authority to assume the debts of the states, and given that obedience
to the law of land was held as a “hallowed maxim,” Virginia could
not “acquiesce in a measure” that was clearly
unconstitutional. As the perpetuation of debt in England has threatened
everything that relates to English liberty, the Assembly noted, the same can
be expected in the United States if assumption is not repealed.
It wasn’t.
The eight Massachusetts men in the House had been badly split on many issues
regarding the new government, but on assumption they were united, since the
debt would be funded by means other than direct taxes. According to
Governor John Hancock, the consolidated debt of Massachusetts was $5,276,955,
of which $5,055,451 ended up in Hamilton’s program. Institutions
claimed $347,097 of this amount, while the remaining part belonged to 1,480
individual citizens. Included in this group were speculators living in
or near Boston who would be awarded almost 80 percent of the monetary
total. [4]
State leaders in Massachusetts had tried to pay off the state’s war
debts by 1790, and for this they had imposed an onerous tax scheme borne
mostly by farmers in the west. Hamilton’s plan removed this
burden. Since many of them were subsistence farmers, rarely buying
anything from the outside world, the new taxes amounted to almost no tax at
all. The federal debt thus had little effect on their everyday lives.
The taxes that drove them to shut down the courts in 1786 were gone.
Conclusion
Hamilton’s funding proposals were step one in a fiscal policy that
later included a rudimentary central bank and a proposal to protect favored
American industries from foreign competition. By hijacking the legal
system Hamilton did indeed manufacture a “revolution in
government,” one that overturned the revolution of 1776.
Though ostensibly constrained by the new constitution, he reinterpreted key
clauses in such a way that the government could do almost anything, as long
as it was declared to be in “the public interest.”
Somehow, ordinary Americans found themselves to be the public whose interests
required subordination to the decrees of the government. The Whiskey Rebellion of 1794, in which Hamilton joined President Washington and
13,000 conscripts and officers from the creditor aristocracy of the eastern
seaboard to crush penny-ante tax protestors in western Pennsylvania,
dramatized this point. So did the War to Prevent Southern
Independence and every war
or crisis since. So did the Sixteenth Amendment, the Seventeenth Amendment, the Federal Reserve Act, the Current Tax Payment Act of 1943 (Withholding), the Patriot Act, the National Defense Authorization Act . . . I leave it to the reader to fill in the
rest. Today, with Hamilton’s “implied powers”
interpretation of the Constitution deeply ingrained in public rhetoric, a
major political figure like Nancy Pelosi can respond contemptuously to a
question about ObamaCare’s constitutionality
without fearing congressional censure.
As the U.S. national debt continues its
ascent to the heavens with the blessings of leading economists, the massive tower of IOUs sways to and fro at the
mercy of political currents. Will Asians continue to buy the
debt? Will the Fed be pressured to monetize more of it?
Will the Fed say “Enough!” and let interest rates soar?
Will the government, with its dedication to endless war and
cheap money, take over the task of obliterating the dollar so it can fulfill
the grandiose dreams of
the political class?
Or will people finally say “Enough!” and remove the government
from monetary affairs altogether? References:
1. Conceived in Liberty, Volume IV, Murray Rothbard,
Mises Institute, Auburn, AL, 1999, p. 379
2. Shays’s Rebellion: The American
Revolution’s Final Battle, Leonard L. Richards, University of
Pennsylvania Press, 2003, p. 25
3. Conceived in Liberty, pp. 394-395
4. Shays’s, p. 157
George Smith, author of The Jolly Roger Dollar: An
Introduction to Monetary Piracy.
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