To celebrate America’s 250th birthday, I will publish a series of 12 essays exploring milestone events that shaped the American economy into what it is today – from the adoption of the Declaration of Independence to the Marshall Plan. I’ll pay particular attention to the country’s formative decades and tell the stories of ideas, policies, and innovations that helped build the world’s strongest economy.
While U.S. history classes mostly focus on how the U.S. Constitution has shaped American politics and government, it’s also had monumental consequences in another area: the nation’s economy.
By constraining and balancing the powers concentrated in the hands of elected leaders and legislatures, the Constitution gave the American people greater economic freedom than any other society had ever seen. In economic terms, the Constitution took up where the struggle for independence from British rule left off. Independence had allowed America’s economy to escape the shackles imposed by Britain’s restrictive imperial policies as well as its premodern social attitudes.
The Constitution went further. It reflected a vital insight by the nation’s founders – that democratically elected legislatures are just as capable of imposing illiberal, backward-looking, counterproductive measures as imperial authorities across the sea. More than just establishing a strong federal government, the Constitution gave rise to a remarkably innovative federal system that countered such tendencies.
Sept. 17 marks Constitution Day – the date in 1787 when 39 of the 42 delegates present at America’s Constitutional Convention in Philadelphia signed off on their radical plan for a strong new federal government. The Constitution became official in June 1788, when New Hampshire became the ninth state to ratify it. The first Congress convened in March 1789, and George Washington took office as America’s first president a month later.
Since then, economic freedom – people’s liberty to make their own decisions regarding work, business, and consumption without undue interference by political authorities – has been the secret sauce that has made America the world’s wealthiest economy and continues to give the nation a decisive edge over other countries.
Independent America before 1787
John Quincy Adams – who would later become the nation’s sixth president – said in an address at his Harvard University graduation in mid-1787 that America faced a “critical period” and was “groaning under the intolerable burden of accumulated evils,” as historian Gordon S. Wood describes in his book The Creation of the American Republic, 1776-1787.
Adams wasn’t referring to the economic conditions of the moment: The new nation’s economy had been growing strongly since the end of the Revolutionary War four years earlier. Rather, he was highlighting the dysfunctional performance of America’s political and legal institutions under the Articles of Confederation, which had functioned as the country’s governing charter since 1777.
Young John Quincy Adams was not alone in his concerns. George Washington, Alexander Hamilton, and James Madison were among the many American leaders who believed that, if political trends underway at the time continued, they would undermine basic liberties as well as the nation’s economic future.
The Confederation Congress in Philadelphia, dependent on cash contributions that the 13 state governments had agreed to but increasingly weren’t paying, had no stable source of revenue. Congress was consequently unable to service the nation’s Revolutionary War debts, impairing its credit in international as well as domestic markets. Congress’ financial dependence on the states was “sufficient to work the eventual destruction of the Union,” Hamilton wrote.
Weak central government also meant the nation had little ability to defend itself in a dangerous world – one in which European powers motivated by mercantilist ideas sought to strengthen their own economies by undermining the exports of other countries. Britain, for instance, refused to permit Americans to carry goods through Canada on the Saint Lawrence River, a vital route for producers west of the Appalachians. This occurred despite British promises in the 1783 agreement ending the war to keep the river open.
Illiberal state legislatures
Illiberalism also flourished in America’s 13 state governments. Legislatures, no longer subject to constraints imposed by powerful royal governors, passed one populist measure after another. Some of these policies threatened what most Founders viewed as basic liberties and key foundations for a successful economy. They included measures to confiscate the property of specific individuals without compensation, suspend ordinary debt collection, and reverse court decisions that went against favored constituents.
Some legislatures even passed sweeping laws prohibiting involvement by the legal system in matters relating to private contracts or land titles, as legislatures wanted to decide such issues “democratically.” Legislatures also engaged in rampant money printing, fueling ruinous inflation throughout the country.
In addition, state governments were busily erecting trade barriers against neighboring states to protect well-connected local producers. Hamilton warned that this trend, if unchecked, would turn the United States into a North American version of the old Holy Roman Empire, where more than 250 separate principalities in what is now Germany maintained a dizzying web of trade barriers and squabbled incessantly over economic disputes.
State governors in the early republic held little authority, and courts were almost powerless. In each state, the legislature was “drawing all power into its impetuous vortex,” Madison wrote in the 10th edition of the Federalist Papers, the 85-essay series published by Madison, Hamilton, and John Jay to promote ratification of the federal Constitution between late 1787 and mid-1788.
State actions often amounted to arbitrary rule by democratically elected majorities inclined to disregard the liberties of unpopular minorities.
“Measures are too often decided not according to the rules of justice and the rights of the minor party but by the superior force of an interested and overbearing majority,” Madison famously wrote in Federalist No. 10. Republican government, it turned out, could empower a majority to “sacrifice to its ruling passion or interest both the public good and the rights of other citizens.”
Throughout the Federalist Papers, Madison rejected the proposition that the decisions of a democratically elected majority were by definition just. His argument was a dramatic break with the conventional wisdom of his time. Revolutionary leaders since the 1760s had generally held that elected legislatures should be free to enact any policies they desired without interference by royal governors or courts and that people could trust elected majorities to preserve basic liberties.
Many leaders of the time came to agree with Madison’s rejection of this view.
“So many legal infractions of sacred rights – so many public invasions of private property – so many wanton abuses of legislative authority!” the Massachusetts scholar Noah Webster wrote. The Vermont Council of Censors published a report blasting the “uncontrolled dominion” of Vermont’s legislature.
According to Gordon Wood, Madison and his allies were among the first thinkers anywhere to come to terms with the inherent conflict between democratic majority rule and individual rights. In particular, they came to understand that the American republicanism of the time was “essentially anti-capitalistic,” in Wood’s words.
Most voters, they had discovered, were uncomfortable with the dynamic social changes taking place as America’s bustling private sector grew. Government, many believed, should step in to prevent any person from rising above any other. “Let individuals be poor and the state rich,” a New Hampshire clergyman declared in 1784.
Madison and other Founders understood that this path promised economic disaster in the long term. They recognized that effective institutions to enforce contracts and protect private citizens and firms against arbitrary confiscation of their property by the state would be essential to the nation’s future prosperity and growth.
The Federalist movement
By 1786, the concerns of leaders like Madison, Hamilton, and Washington coalesced into a nationwide movement to strengthen America’s central government and address these problems.
Popular accounts of the period often suggest that the key event leading to the Constitutional Convention was the Confederation Congress’ weakness in the face of Shay’s Rebellion, a 1786 antitax uprising in western Massachusetts, but Wood shows that this was a secondary factor. The chief aim of the nascent Federalist movement was to contain the untrammeled power and illiberal policies of the country’s state legislatures.
The Federalists concluded that part of the answer should be strengthening the executive and judicial branches of state governments as offsets to legislative power. This idea ran entirely counter to views that had helped fuel the Revolution in 1776, when patriot leaders aimed to empower the nation’s elected legislatures by removing British governors and judges appointed by the imperial authorities.
The Federalists also judged that America’s challenges called for establishing a much more effective federal government. Their conclusion partly reflected their focus on strengthening the nation’s capacity for defending its interests against foreign nations. But another central goal was to set up a powerful counterweight to state legislatures.
Some leaders thought balancing state and federal powers would constrain the ability of either level of government to encroach on basic liberties. Madison’s thinking went further.
He argued, before the Convention and then in Federalist No. 10, that it would be politically harder to form oppressive majority coalitions across a large, continental republic than within smaller states, since the former would have a more diverse set of self-interested groups in the mix than the latter and it would be harder to coordinate a durable alliance among them. Madison’s utterly novel argument reversed the prevailing view, articulated most famously by the 18th century French political philosopher Montesquieu, that republican government could work in small nations but not large ones. Madison’s position meant that a national government spanning the union would pose less threat to people’s liberties than America’s state governments.
The rise of the Federalist movement provoked a counterreaction by other respected leaders who viewed the possibility of a stronger federal government with dismay. But even leading Antifederalists like Richard Henry Lee and George Mason of Virginia agreed with Madison on the problem posed by the state legislatures, disagreeing only on how to contain them.
Between mid-1786 and early 1787, the Federalists convinced the Confederation Congress and 12 of 13 states to call the Constitutional Convention, which met from May 25 to Sept. 17, 1787. (Rhode Island declined to participate.)
The Constitution and America’s economy
The proposed charter signed by all but three delegates on Sept. 17 envisioned a vigorous federal government empowered to act across a wide range of economic issues. The federal Congress would have the power to issue currency, borrow money, and levy taxes. It would have authority to regulate foreign as well as interstate commerce, to build roads, and to protect inventors through patents. Fully eight of the 18 clauses enumerating Congress’ explicit powers addressed economic issues, while six covered national defense, and two dealt with the justice system.
The Constitution also explicitly set limits on the powers of state legislatures. Under the proposed system, the nation would prohibit states from issuing money, passing measures impairing the obligation of contracts, or implementing ex post facto laws – that is, legislation that retroactively changes the legal status of actions taken before the law was passed. The goal of the Constitution’s framers was to prevent laws “contrary to the first principles of the social compact,” as Madison wrote in Federalist No. 44.
In The Federalist Papers, Hamilton, Madison, and Jay based their case for ratification primarily on two arguments: that the new system would strengthen America’s ability to defend itself and that it would help ensure the nation’s long-term economic growth. National defense would depend not only on building an effective army and navy but also on creating stable revenue sources for the new federal government and establishing its creditworthiness. Financial strength would also ensure the government’s capacity to make vital infrastructure investments supporting future growth. These arguments became the basis for Hamilton’s economic policies after he became America’s first secretary of the Treasury, as I recount in another “Milestone Moments” essay.
The Federalist authors also argued that their proposed system of government, with its elaborate checks and balances, would ensure a high degree of economic freedom, also fueling future prosperity and opportunity. In Federalist No. 11, Hamilton wrote that the new government, more friendly to commerce than any political system in history, would fit the “adventurous spirit” and “commercial character” of the American people. European powers, he said, were interested in “clipping the wings by which we might soar to a dangerous greatness,” but the new government would “baffle all the combinations of European jealousy to restrain our growth.”
Ratification turned out to be a drawn-out process, requiring a tremendous yearlong campaign by top Federalists across the country. Many state legislators bitterly resisted giving up the sweeping powers they had exercised over the previous several years. But the arguments advanced by Hamilton, Madison, and Jay proved persuasive, and their push for a new constitution prevailed.
A radical idea with immense economic consequences
In Gordon Wood’s view, the Constitution – not the Declaration of Independence – signaled the end of what he called the era of “classical politics” in the United States. The hallmark of that period, stretching from the early 18th century through 1787, was the idea that a well-constructed government led by virtuous leaders could identify and pursue a coherent “public interest” and establish political harmony among an organically connected people.
The Constitution represented a different and entirely new way of thinking about politics. In Madison’s formulation of this new mindset, political and economic liberty would inevitably give rise to a wide array of competing interests as well as economic inequalities among citizens. Americans, he argued, needed to acknowledge these realities and construct a system of government that would protect essential liberties, ensure key public goods like national defense and infrastructure, and mitigate the worst side effects that would invariably accompany a free society. Modern republican government would have to manage the inevitable conflicts arising among citizens, rather than wish them away, and ensure that no self-interested majority coalition could wield the power of the state to extinguish the liberties of other people and groups.
The “great object,” Madison wrote in Federalist No. 10, was “to secure the public good and private rights against the danger of such a faction, and at the same time to preserve the spirit and the form of popular government.”
The constitutional system the Federalists devised could not – and did not – resolve every issue dividing Americans. Its system of checks and balances was, by design, an “invitation to struggle,” as the constitutional scholar Edwin Corwin described it in 1940. America would go on to experience countless conflicts between state and federal authorities. Within the federal government, the Constitution gave rise to perpetual struggles among the legislative, executive, and judicial branches rather than cleanly dividing powers among them in ways everyone could agree on.
The Constitution’s framers also had to make ignoble compromises to win ratification across America’s 13 states, principally on the issue of slavery. The Constitution protected the “property” rights of slaveholders through several constitutional measures, even though most northern leaders like Hamilton and Jay detested the institution. The Constitution did call for ending the importation of enslaved people after 1808, a hint of possible emancipation at some long-distant future date.
But the Constitution and the unique system of government that arose in the United States after 1787 played a crucial role in the rise of American-style democratic capitalism and America’s position as the world’s wealthiest major nation, which it reached by about 1900.
It created an effective federal government positioned to pursue a long series of pro-growth policies. In this series, we’ve highlighted the rise of America’s world-leading financial system following Hamilton’s years at Treasury, the nation’s distinctive patent system, its unprecedented protection for people’s right to go into business, transformational infrastructure investments like the Erie Canal and the Transcontinental Railroad, and the emergence of mass higher education during the Civil War era.
And crucially, the Constitution – plus a long series of subsequent constitutional decisions by the U.S. Supreme Court – created the best system of protections for private rights and liberties against public sector encroachment the world has ever known. Together, America’s constitutional system and the policies pursued under its aegis set the United States up for 250 years of growing prosperity and opportunity.
Happy Constitution Day!
