For many Americans, even lovers of American history, myself included, there are certain blank spots and gaps in knowledge. While we can appreciate that history can be and is used propagandistically to affirm certain narratives—usually by emphasis and deemphasis—it is also often the case that time constraints and desire to focus on other events helps create these gaps. One common gap is the period between the American Revolution and the Philadelphia Convention.
The commonly-accepted—but little-scrutinized—view of this period is that the Americans won their independence, but that lack of strong national government created chaos. However, the situation was remedied by the Constitution and its new form of government. Obviously, tacit acceptance of such a narrative defaults to the implicit assumption that liberty and decentralization lead to destructive disorder, but centralization of power creates much-needed order and stability.
Instead, it is more accurate and precise to argue that the problems faced during the Revolution and afterward were consequences of war and statism, not the effects of too much liberty, decentralization, and independence. Certain statist strategies and policies were employed during the Revolution that had consequences during and after the war. In response to the consequences of statist strategies and policies, nationalist centralizers were all too eager to offer nationalization and more centralized control as the solution to problems created by prior interventions. A key lesson to be derived here is that intervention begets intervention. One such example of this is the depression of 1784.
The Causes of the Depression
A critical driver of centralization was the financial chaos left in the wake of the Revolutionary War. During the war, both the individual states and the Continental Congress had inflated fiduciary notes—essentially fiat paper money—to finance military operations. These notes had depreciated dramatically, creating widespread economic dislocation.
In order to fund and support the Continental Army in the style of a regular army—rather than as a guerilla force or forces—taxation was out of the question. The Continental Congress did begin to discuss borrowing (with the plan to repay through future taxes) in June 1775. That seemingly left one option—“coercive but seemingly painless, a device the British colonies had pioneered in the western world, the issue of paper money.” On June 22, 1775, Congress issued $2 million paper “bills of credit” (“Continentals”), but this would soon expand greatly. Rothbard explains the nature of this inflation,
Paper issues fraudulently pretend to be equivalent to units of specie and are used by the issuer to bid away resources in society from the producers and consumers, in the process depreciating the money itself. Its nature and consequences are equivalent to the process of counterfeiting.
In a letter to Jean Nicolas DéMeunier—commenting on his article concerning the US in DéMeunier’s Encyclopédie Méthodique—Thomas Jefferson wrote (June 22, 1786),
Every one thro[ugh] whose hands a bill passed, lost on that bill what it lost in value, during the time it was in his hands. This was a real tax on him; and in this way the people of the united states [sic] actually contributed. . .millions of dollars during the war, and by a mode of taxation the most oppressive of all, because the most unequal of all.
Both the Confederation and the individual states “went heavily into the printing business.” By the time the original $2 million Continentals were ready, Congress had already decided it would not be enough and authorized another $1 million by the end of July. Before the end of 1775, a total of $6 million of inflated money was either printed or authorized. For context, the total money supply of the previous year was about $12 million, therefore, this issuance represented a 50 percent increase of the money supply in less than a year. G. Edward Griffin continues the story,
By the end of the [1775], another $3 million. In 1776, another $19 million. $13 million in 1777. $64 million in 1778. $125 million in 1779. And still more: the Continental Army issued its own “certificates” for the purchase of supplies totalling $200 million. A total of $425 million in five years on top of a base of $12 million is an increase of over 3500%. And, in addition to this massive expansion of the money supply on the part of the central government, it must be remembered that the states were doing exactly the same thing. It is estimated that, in just five years from 1775 to the end of 1779, the total money supply expanded by 5000%. By contrast, the amount raised in taxes over the five-year period was inconsequential, amounting to only a few million dollars. (emphasis added)
That was the inflation and credit expansion leading to the post-war depression. However, there were other factors that warped the structure of production during the war, which created the need for a painful correction when peace arrived. Writing in Cronyism, Patrick Newman explains more fully the factors involved in this particular post-war depression,
After the Revolutionary War, the country faced an economic crisis. . . Difficulties in the early 1780s came from the war’s aftermath, and postwar interventions delayed recovery. . . . First, industries had to recover from wartime destruction and rebuild damaged infrastructure. Second, manufacturers needed to experience a harsh but necessary correction: when peace arrived, Great Britain’s better quality and lower-priced manufacturing exports returned to American shores. Consequently, Americans had to reallocate labor and other resources away from eastern manufacturing and back to agriculture and westward settlement. Third, Great Britain now restricted its purchases of American exports, forcing a redirection of exports to continental Europe and Asia. All three of these factors—recovering from wartime destruction, reallocating resources used in wartime production, and suffering from coercive foreign trade legislation—produced a postwar depression in 1784. . . . Postwar tax and monetary policies aggravated this depression and hampered a quick recovery.
Rothbard likewise writes about the inflationary credit expansion of the Bank of North America, as well as the Bank of Massachusetts and Bank of New York. The Bank of North America was a federally-chartered bank established in 1781 and linked government finance, public debt, and privileged banking. It was an important precursor to Hamilton’s financial system. It was the first national bank in US history. Although less inflationary than the Continental paper-money regime, the Bank of North America still expanded the money supply through fractional-reserve banking and established a precedent for government-supported monetary inflation.
On this and other factors, Rothbard wrote,
In the first place, as we have seen above, many manufacturers were artificially expanded during the war and with the resumption of peace these businesses now had to compete with the more efficient British, who at the same time restricted American exports. In addition, there was inflationary credit expansion by the Bank of North America, . . .and by two new banks which sprang up in 1784 to take advantage of the large profits of this new-found occupation: the Bank of Massachusetts in Boston and the Bank of New York in New York City, the latter organized mainly by large public creditors.
Describing how inflation and artificial credit expansion causes boom-bust cycles, Rothbard applies this logic to the depression of 1784,
Inflationary expansion of bank credit leads bank clients to believe that they have more real money than they actually possess, and this leads to an artificial expansion of imports, which must be paid for in specie. The consequent drain of specie from the expanding banks, and increased calls for payment of their notes and deposits in specie, inevitably creates difficulties for the banks and forces them into hasty contraction, which in turn leads to deflation and depression. It is this boom-bust cycle of bank credit expansion and contraction that occurred in the immediate postwar period and brought a depression in mid-1784 and 1785. (emphasis added)
Due to these factors, the states faced an economic crisis and, as usual, “postwar interventions delayed recovery.”
The Call for Centralization
The economic disruptions caused by the war, especially through key policy interventions, became one of the greatest arguments for and acceptance of political nationalization. In Crisis and Leviathan, Robert Higgs writes,
In American history the most significant crises have taken two forms: war and business depression. At the outbreak of war a suddenly heightened demand for governmental provision of military activities leads immediately to displacement of market-directed resource allocation by greater taxation, governmental expenditure, and regulation of the remaining economy.
Post-Revolution America experienced both war and economic depression, which means it should not be surprising that greater centralization followed. In fact, we should probably be surprised that—given the disruptions caused by interventions before, during, and after the war—that America remained as decentralized as it did for as long as it did. Unfortunately, the American Revolution—though a great movement toward liberty—was no exception to the process described by Higgs.
From an Austrian economics perspective, the depression of 1784 was partly the inevitable correction following years of wartime inflation, paper-money expansion, and credit creation. While postwar adjustments and renewed British competition contributed to the downturn, the bust also reflected the liquidation of distortions created by the Revolution’s inflationary war economy.
The post-war economic crisis created conditions that facilitated further national consolidation, however, this centralization did not prevent economic future depressions. In fact, the US government under the Constitution would shortly facilitate the first true, national boom-bust cycle in the Panic of 1819 and all other boom-bust cycles to this present day.
