Adam Smith Essay Research Paper The new

Adam Smith Essay, Research Paper

The new United States emerged from the Revolution sovereign but in a state

of fiscal chaos. The Continental Congress had been forced to resort to printing fiat

money, the so-called continentals that sank quickly into worthlessness. The various

states had borrowed heavily to meet the demands of the war.

The central government under the Articles of Confederation was financed

solely by contributions from the various state governments (just as the United

Nations is funded today) and had no power to tax or borrow on its own authority.

Because the state governments had pressing needs of their own (as governments

always do), their contributions were often late and sometimes nonexistent

(Cummings). As a result, the central government had grave difficulties meeting

even its current obligations.

It was this financial crisis that helped force the drafting of the new

Constitution in 1787. The document that the Founding Fathers created that

summer in Philadelphia–the desperate poverty of the old government all too fresh

in their minds–put remarkably few restrictions on the new government’s power to

spend, tax, and borrow (McCarty).

The federal government is required to maintain such things as the post office

and the census, which necessarily require spending, and Congress may not make

military appropriations extending more than two years. But it is empowered to

appropriate money for the “general welfare,” a term left undefined. In the twentieth

century it has come to be construed so broadly as to encompass a museum

dedicated to the memory of Lawrence Welk(Cummings).

Taxes merely had to be uniform throughout the United States and could not

be laid on the exports of any state. The power to borrow, meanwhile, was entirely

unlimited, one of the very few powers granted by the Constitution that had no

checks or balances.

What did limit the fiscal powers of the new government was the universal

consensus, among ordinary citizens and the political elite as well, about the proper

and prudent way for a government to act when it came to taxing, spending, and

borrowing. This consensus was best summed up, as you might expect, by Adam

Smith in THE WEALTH OF NATIONS. “What is prudence in the conduct of

every private family,” he writes, “can scarce be folly in that of a great kingdom.” In

other words, governments should finance current expenditures out of current

income, save for a rainy day (or, more properly, allow the people to do so by

lowering taxes when the budget is in surplus), borrow only when inescapably

necessary, and pay back borrowed money as quickly as possible.

Alexander Hamilton, appointed by President Washington to be the first

Secretary of the Treasury, moved swiftly to put the new government’s fiscal house

in order (McCarty). Taxes were laid. Mostly excise taxes on products like whiskey

and duties on imports, these were intended both to fund the new government and

provide a revenue stream to service and reduce the new national debt. This debt in

turn funded the redemption of the old Revolutionary War debt on a sound basis.

At the beginning the national debt amounted to $80 million, something on

the order of 40 percent of the gross national product of the day. But as the

government found its fiscal feet after 1795, it ran a deficit only twice until the War

of 1812 (McCarty). As the country’s economy rapidly expanded, the debt declined

in both relative and absolute terms. By 1811 the total debt was only a little more

than half what it had been in 1795.

The war, of course, sharply reversed matters. Federal government outlays in

1811 were a little more than $8 million. By 1814 they were more than $34 million.

Meanwhile revenues suffered as the ever-tightening British blockade cut sharply

into import duties, the main source of government income at the time. In 1814

outlays exceeded revenues by 211 percent.

Hamilton had intended that the Bank of the United States, which he

established, should finance deficits incurred by the government, but its charter had

expired in 1811, the victim of politics (McCarty). The government now found

itself hard pressed to raise loans to finance the war, because the country’s financial

markets

were still in their infancy and unable to handle the large sums required.

The country’s affluent were approached directly, and many responded. John

Jacob Astor, already America’s richest citizen, subscribed to $2 million worth of

government paper. (He drove a very hard bargain, buying the bonds only at a steep

discount from their face value. The government, of course, had little choice but to

go along with the demands of someone who could easily single-handedly fund 2

percent of the entire national debt.)

The publication in 1776 of his book ‘An Inquiry into the Nature and Causes

of the Wealth of Nation

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