The Birth of the Laissez-Faire Constitution

Ok, folks, I’m back to writing long-form essays. Apologies for the delay since the last one, but life has been, well, complicated. Please know that I’m back in the saddle and have returned to regular programming.

William Gladstone once famously said of the American Constitution that it was “the most wonderful work ever struck off at a given time by the brain and purpose of man”? I agree. The creation of the Constitution and the Bill of Rights was the culmination of the most innovative period of constitutional statesmanship ever known to man before or since. I also think the Constitution played a major role in creating the freest society in world history. Its principles and institutions and its forms and formalities came together to create what I call the world’s first laissez-faire constitution—a constitution and a form of government limited in its power to coerce people. In other words, the new Constitution created a government that set men and women free to pursue their highest aspirations.

Although the new constitution did not institutionalize a complete separation of economy and State, church and State, and school and State, it did create a government about as close as any in history to achieving that ideal. The greatest virtue of the new federal government is that, for the most part, it got out of the way of America’s individualistic and enterprising population.

The 15-year period of the American founding—from the Declaration of Independence (1776) to the ratification of the Bill of Rights (1791)—marked a turning point in the moral, political, and economic history of the United States. In 1780, Samuel Adams saw revolutionary America in the image of a “Christian Sparta.” Fifty years later, Tocqueville described a highly individualistic society where the love of wealth creation and voluntary associations had redefined social relationships. In the years after the ratification of the Constitution there was an explosion of individual creative energy, a release of human productive potential unlike anything ever seen before.

How are we to account for this extraordinary transformation? What happened in America to launch this moral-social-economic revolution?

Some scholars believe that the formation of the United States Constitution had little to do with this sudden release of moral energy and productive enterprise. Instead, they argue, “it is people, lots of them, who create economic ‘miracles,’ not political leaders or legal institutions.” These commentators are partly right and partly wrong. There can be no doubt that the moral-social-economic revolution that took place in America beginning in the 1790s was the result of a bottom-up social revolution that unleashed millions of enterprising Americans, many of whom were new to this country, to move westward settling, building, and innovating along the way. I do not think this cultural revolution would have been possible without the creation of a certain kind of legal-constitutional framework conducive to unleashing all the untapped energy of the pioneer and enterprising spirit. In the ten decades after 1790, a hustling and bustling entrepreneurial society unlike anything ever seen before was created precisely because a constitution of liberty created new spheres of social and economic freedom that liberated millions of people from the restraints, burdens, and remnants of the ancien regime. Simply put, the new government got out of the way.

This much is generally conceded by most observers of economic activity: there is an intimate series of inter-connected, two-way relationships between legal systems, constitutions, and political institutions on the one hand, and the ethos and moral habits of work necessary to achieve economic prosperity on the other. More to the point, we now know that protecting private property, upholding the sanctity of contracts, and encouraging freedom of exchange has the effect of creating a value system that fosters the virtues of rationality, independence, justice, frugality, temperance, creativity, and productivity.

More fundamentally, a socio-moral revolution was launched by the political revolution of 1776 that accepted both the naturalness and the salutary nature of self-interest. In the long history of human behavior, this transformation represented a moral earthquake. Moral virtue had for centuries been equated with the sacrifice of one’s selfish interests for the benefit of the common good. From Plato and Jesus to St. Just and Marx, philosophers and theologians have condemned the moral standing of self-interest. By contrast, the founders accepted, at the very least, the natural and necessary self-interestedness of human beings, but they went further and laid the groundwork for a much more positive view of what Alexis de Tocqueville would come to call “self-interest rightly understood.” To do this, they needed a new legal-constitutional order that would expand the spheres of human liberty.

Broadly speaking, my aim in this essay (and in the two to follow) is to consider the connection between a liberal constitutional order and moral virtue. To that end, I will illustrate, first, how and why the founding generation instituted a liberal constitutional order that gave priority to private property, the sanctity of contract, and the free exchange of goods in a market economy; second, how and why the constitutional restructuring of 1787 was the necessary catalyst—the formal cause—that unleashed an explosion of economic production and commerce in nineteenth-century America; and third, how and why the institutionalization of a private property order by the framing statesmen at the Constitutional Convention in 1787 and the subsequent preservation of that order by the Marshall Court fostered a distinctive kind of human character—America’s new-model man of bourgeois virtues and sensibilities. The new Constitution had, I will argue, moral effects on the character of the American people.

Chronologically, these essays will trace three moments in the development of America’s laissez-faire constitution. The first will examine how and why American revolutionaries in the 1780s determined that they had to reconstitute America’s constitutional system. The second will identify and examine the principles, structures, and institutions of the Constitution of 1787 that define its character as a laissez-faire constitution. The third will conclude with a few thoughts from Tocqueville on how this new American science of politics generated a world revolutionary society and fostered a new-model man.

To truly understand the nature and purpose of the Constitution of the United States, it is necessary to know why and how it was created. Without this knowledge it is not possible to know its true nature and deepest meaning.

The Articles of Confederation and Justice

Before the Constitution there was the Articles of Confederation and Perpetual Union, which established America’s first national government. The Articles was approved by the Second Continental Congress in 1777 and was subsequently ratified by all the states in 1781. The government created by the Articles served as a political league uniting the thirteen states mostly for purposes of defense and diplomacy. The Articles of Confederation was, in effect, a treaty of alliance between thirteen sovereign states, each of which had its own government. The confederation government created by the Articles lasted until 1789 when it was replaced by the newly created federal government under the Constitution

The guiding purpose of the Articles was to preserve the sovereignty and independence of the states under the protection of a national union. Article 2 of the Articles made clear the decentralized nature of the Confederation: “each State retains its sovereignty, freedom, and independence, and every power, jurisdiction, right, which is not by this confederation expressly delegated to the United States, in Congress assembled.” For all intents and purposes, political power in the United States percolated down and throughout the thirteen state governments. This fact was both the virtue and the vice of the Confederation.

The creation of a weak central government was meant to mirror the Americans’ ideal image of how the British Empire should have been governed during the years of the imperial crisis, namely, that the King and Parliament were to govern the external affairs of the empire whilst leaving the internal affairs of the colonies to their provincial assemblies. The domestic powers of the confederation government under the Articles were therefore uncertain and weak. The Confederation congress did not, for instance, have the power to tax, which meant that even its very limited powers were largely paralyzed. The real locus of power in America during the confederation period of the 1780s rested with the state governments.

Life in America under the Articles was a qualified success. Despite a serious post-war recession in 1784 and 1785, the American economy was, given the circumstances, doing reasonably well and it certainly began to show signs of recovery and returning prosperity by 1786. As Benjamin Franklin noted, “America never was in higher prosperity, her produce abundant and bearing a good price, her working people all employed and well paid. . . ; and our commerce being no longer the monopoly of British merchants, we are furnished with all the foreign commodities we need, at much more reasonable rates than heretofore. Except for the momentary convulsion in Massachusetts that was Shays’s Rebellion  (August 1786 to February 1787), civil society in the states was relatively stable. In fact, the country was about to go into a socio-economic boom that saw tens of thousands of people begin a westward migration over, through, or around the Appalachian Mountains in search of new opportunities. Population growth in America, a sure sign of economic health, was exploding. As Charles Thomson, secretary of the Continental Congress, told Thomas Jefferson in 1786: “Population is increasing, new houses building, new settlements forming, and new manufactures establishing with a rapidity beyond conception.” By early 1787, the economic future looked bright for the new nation.

            Given this improving state of affairs, the obvious question is: why and how did revolutionary Americans scrap the Articles of Confederation after seven years and replace it with a brand-new constitution in 1788—a constitution that was radically different from its predecessor? What happened during the intervening years that caused so many Americans to abandon their duly constituted form of government and their general hostility to centralized political power to adopt a strong national government?

The truth of the matter is that it was not so much the failure of the Articles of Confederation that led to its being replaced with a new constitution, but rather that it was its very success that led to its demise. There can be no doubt that the Articles and the government it created were structurally flawed. For instance, each state, regardless of the size of its population, had an equal vote in the confederation congress, thereby giving tiny Rhode Island an equal vote to a much larger, more populous state such as Virginia or Pennsylvania. Super majorities of nine states were required to pass certain kinds of laws, which tended to paralyze what the government could do. Most debilitatingly, the confederation congress lacked an independent taxing power to pay its debts. In effect, the Confederation was dependent politically and financially on the states, which meant that it was constantly underfunded. These vices could have been reformed, however, without creating a powerful central government. As Thomas Jefferson told John Adams in 1787, “Three or four new articles might have been added to the good, old and venerable fabric” to fix its problems.

Nonetheless, the Articles were successful in doing what they were supposed to do, which was to keep most domestic political powers with the state legislatures. And therein lay the problem. By early 1787, America’s primary troubles were not caused by the Articles of Confederation per se; the source of the problem was with the state legislatures and the kinds of laws they were passing. In other words, the immediate political problem in America during the 1780s was not caused by too little government, but rather by too much—at least at the state level. The Continental Congress was only indirectly the cause of the political problems afflicting the United States in that it did not have the power to overrule the unjust laws that were being passed at the state level.

To fully understand why some of America’s leading thinkers and statesmen wanted to discard the Articles of Confederation and create an entirely new constitutional system, we must take a closer look at what was happening with the state governments. The problem is that some of the laws being passed by various state legislatures during the 1780s were more unjust than those that had been passed by British Parliament during the 1760s and 1770s. To the point, many of the economic policies enacted by state and local governments in the 1780s threatened the fundamental rules of justice, namely, the right to private property and the sanctity of contract.

How and why did this situation come about?

One of the unintended consequences of the Revolution is that it launched the political careers of a new generation of men who had been formerly excluded from political power during the colonial period when the provincial governments were, to one degree or another, under the authority of the King, Parliament, and the local aristocracy. Prior to the break with Great Britain, America’s colonial governments and legislative assemblies typically consisted of men from the social and intellectual elite—a relatively disinterested patrician gentry who stood above the political marketplace, acting as impartial umpires over competing economic interests. After 1776, America’s state legislatures became highly democratized in three ways: first, the size of the voting electorate was expanded; second, the number of representatives sitting in the legislatures was expanded; and third, terms of office were shortened, which meant that the frequency with which elections were held was increased. The result was a significant change in the kinds of men who were elected to public office. Thus, the socio-demographic profile of the new legislators tilted toward ordinary men of middling professions, middling fortunes, middling educations, and middling abilities.

These revolving-door assemblies were filling up with all kinds of special-interest legislators—e.g., farmers, merchants, artisans, and small manufacturers—all of whom were scrambling for government-issued, special-interest favors. Debt-ridden farmers wanted low taxes and paper money. Merchants wanted high land taxes and free trade. Artisans wanted price regulations on agricultural goods and tariff protections. Manufacturers wanted special loans, subsidies, privileges, and monopolies. Everyone was grasping for something that was not theirs by right. New laws were being passed at an alarming pace. In fact, more laws were passed in the decade after Independence than during the preceding hundred-and-fifty years. Politically, the whole thing was a chaotic mess.

With eyes bigger than their stomachs, these new legislators were willing to use the coercive power of their state governments to pass unjust laws that took from Peter to pay for Paul. As though the Revolution were all for naught, the despotism of George III and the British Parliament was now being replaced by a new kind of despotism—the democratic despotism of the ordinary men who were now sitting in the state legislatures. Much of this contending, special-interest legislation violated one of the fundamental tenets of a free society, namely, the rule of law. As Jefferson put it in his Notes on the State of Virginia, an “elective despotism was not the government fought for.”

How, precisely, were these democratic majorities (the poor many) using the coercive force of the State to usurp the private property of individuals and minorities (the wealthy few)?

The single most flagrant abuse of the right to private property and settled contract by democratic majorities involved state issuance paper money. During the Revolutionary War, state governments resorted to paper money emissions to pay for wartime goods, services, loans, and taxes. And in the years immediately following the Treaty of Paris (1783), state governments began issuing “bills of credit” or promissory notes—redeemable in specie at some future date—to pay off their wartime debt. Because these bills of credit were not redeemable on demand, they soon depreciated and their value became worthless over time. By 1786, seven states had started the printing presses and others were about to.

Paper money legislation was soon followed by more oppressive and unjust laws to enforce and legitimize the paper medium. Because public trust in the value and propriety of paper currency had collapsed, the depreciated currency needed the coercive force of state governments to back its efficacy. Consequently, various state legislatures passed various punitive laws to compel acceptance of the devalued currency to prop-up it up. Most common were laws that made paper currency legal tender in payment of debts. Additional laws were passed that allowed debtors to pay their debts in specific property instead of hard currency (usually at a valuation higher than the market price), while some states passed “stay” laws, which granted a postponement of debts or their payment by installment. The worst of all state governments was the Rhode Island assembly, which passed a law allowing debtors to discharge their debts to local judges if creditors would not accept their paper money at par. It was the first instance in American history when creditors were hunted by their debtors. These unjust laws were violations of both private property and contractual rights. Unjust laws are immoral laws.

The ominous excesses of democratic politics culminated in Shays’s Rebellion. One of the principal objects of the Massachusetts uprising was to prevent courts from sitting, thereby stopping the collection of unpaid debts. As a result, by the mid-1780s, many of America’s leading men were convinced that the same kind of tyrannical legislation they saw issuing from the British Parliament was now coming from America’s very own democratic legislatures. They were forced to confront a painful truth: the property rights of Americans were less secure during 1780s than they had been during the colonial period. As Thomas Jefferson put it in reference to these state legislatures, “173 despots would surely be as oppressive as one.” The state legislatures and the men who were filling them were the source of America’s maladies and the Confederation government could do nothing to fix it.

James Madison and the Problem of Justice

            As the 1780s unfolded, the revolutionary statesman who saw this problem most clearly was James Madison, who became genuinely alarmed at the violation of property and contract rights by popular legislatures. In his pre-convention essay “Vices of the Political System” (1787), Madison found that, in every state, the number of laws being passed by governments far exceeded what was necessary for just and orderly government. Indeed, the failure of the states to provide “more effectually for the security of private rights, and the steady dispensation Justice,” Madison declared on June 6 from the floor of the constitutional convention, “had more perhaps than any thing else” produced the Constitutional Convention.

Madison soon came to understand that it was not justice which motivated these democratic assemblies. Instead, it was the grasping and predatory interests of various individuals and factions that often-guided public policy. At the constitutional convention, Madison described how the political entrepreneurship of conniving land speculators was the origin of many unjust state laws. “It has often happened,” remarked Madison on July 26, “that men who had acquired landed property on credit, got into the Legislatures with a view of promoting an unjust protection agst, their Creditors.” It was as if the moral principles that animated American colonists in the 1760s and 1770s had now been suspended.

Of even greater concern to Madison, however, was the threat to the rules of justice and the rights of property when special-interest majorities were empowered to determine laws concerning private debts, tariff legislation, and the apportionment of taxes. This issue is the burden of Madison’s justly famous tenth Federalist essay. According to Madison, the kind of legislation that was being passed in the states violated a fundamental rule of liberal justice, that “No man is allowed to be a judge in his own cause.” But that was precisely what was happening in many state assemblies. In fact, the magnitude of the violation was more invidious when a majority faction assumed the role of “both judges and parties.” What Madison was describing here is classic cronyism and rent-seeking behavior. Federalist 10 went to the heart of the issue: “What are many of the most important acts of legislation,” Madison asked, “but so many judicial determinations, not indeed concerning the rights of single persons, but concerning the rights of large bodies of citizens; and what are the different classes of legislators, but advocates and parties to the causes they determine?” He was also identifying the timeless socio-economic conflict between the poor many and the wealthy few that Aristotle analyzed in the Politics. Madison’s primary concern was with the requirements of justice, and because “justice ought to hold the balance” between competing factions, the “regulation of these various and interfering interests forms the principal task of modern legislation” (Federalist No. 10).

America’s post-revolutionary statesmen became progressively alarmed throughout the 1780s at the fundamental injustice of special-interest legislation and the invidiously destructive moral affect it would have on the virtue and habits of the people. The most obvious consequence was the rise of a new class of grasping political entrepreneurs who were exploiting the system by speculating through insider information on the orgy of political spending and plunder. This morass of conflicting and constantly changing legislation, Madison wrote in the Federalist, became “jobs in the hands of enterprizing and influential speculators, and snares to the more industrious and less informed part of the community” (No. 44), and “Every new regulation concerning commerce or revenue, or in any manner affecting the value of the different species of property presents a new harvest to those who watch the change and can trace its consequences; a harvest reared not by themselves but by the toils and cares of the great body of their fellow citizens (No. 62).” In debates in the Virginia ratifying convention, Madison argued that the “vicissitude of laws” being passed in the state legislatures allowed “sagacious men” to take advantage of “industrious farmers and tradesmen, who are ignorant of the means of making such advantages.”

Not only were these state laws unjust and causing unnecessary socio-political conflict, but they were also eroding the moral virtues and habits of the American people. The nation’s most astute statesmen saw that the unintended consequences of paper money legislation was eroding the moral relations between people. “The pestilent effects of paper money,” Madison wrote in Federalist No. 44, were destroying “the necessary confidence between man and man,” and they were eroding “the industry and morals of the people.” Likewise, John Marshall, the future Chief Justice of the United States Supreme Court, observed during the ratification debates in Virginia that the Confederation took away “the incitements to industry by rendering property insecure and unprotected.” Thirty years later, Chief Justice Marshall neatly summarized the moral hazard that had been created by rent-seeking political actors in his famous dissenting opinion in Ogden v. Saunders, which is worth quoting at some length:

The power of changing the relative situation of debtor and creditor, of interfering with contracts, a power which comes home to every man, touches the interest of all, and controls the conduct of every individual in those things which he supposes to be proper for his own exclusive management, had been used to such an excess by the state legislatures, as to break in upon the ordinary intercourse of society, and destroy all confidence between man and man. This mischief had become so great, so alarming, as not only to impair commercial intercourse, and threaten the existence of credit, but to sap the morals of the people, and destroy the sanctity of private faith.

What Marshall described with the benefit of hindsight in 1827 is precisely what Madison saw in real time. Without question, “the most deplorable effect of all,” according to Madison in Federalist 62,

is that diminution of attachment and reverence which steals into the hearts of the people, towards a political system which betrays so many marks of infirmity, and disappoints so many of their flattering hopes. No government any more than an individual will long be respected, without being truly respectable, nor be truly respectable without possessing a certain portion of order and stability.

The situation could not be sustained, and what can’t go on forever, won’t. To America’s thinking revolutionaries, the logic of the increasing instability of the state governments, the growing insecurity of private rights and the ensuing social and political chaos, all pointed to the imminent collapse of their experiment in self-government. Something had to be done to remedy the situation. Revolutionary statesmen such as James Madison and John Marshall were therefore forced to reevaluate and rethink the foundations of republican government. Looking back from the vantage of 1827, Chief Justice Marshall described the situation with unusual insight:

To guard against the continuance of the evil, was an object of deep interest with all the truly wise, as well as the virtuous, of this great community, and was one of the important benefits expected from a reform of the government. To impose restraints on state legislation, as respected this delicate and interesting subject, was thought necessary by all those patriots who could take an enlightened and comprehensive view of our situation; and the principle obtained an early admission into the various schemes of government which were submitted to the convention.

And this is precisely what drove many of America’s founding fathers to call for a constitutional convention to revise or scrap the Article of Confederation. In a letter to Thomas Jefferson is 1787, Madison described the laws infringing on contractual obligations as having “contributed more to that uneasiness which produced the Convention . . . than those [frustrations] which accrued . . . from the inadequacy of the Confederation to it immediate objects.”

Very quickly, though, Madison came to see that simply revising the Articles was an inadequate solution to the maladies of the American system. Something more was needed. Madison’s remedy for the defects of the existing system pointed to a fatal flaw in the structure of the Confederation government, a flaw that was noticeable by its absence in the Articles, namely, the lack of power to do anything about the injustices being committed by the state legislatures. By scrapping the Articles of Confederation and reconstituting the federal government on an entirely new basis, America’s framing statesmen hoped to provide a new constitutional structure that would improve the political incentives of the state legislatures and that would reinforce and restore the republican morals and habits of the people.

Madison’s goal in calling for a new constitutional convention was nothing less than to save the meaning and legacy of the Revolution.

My next essay will examine the actual U.S. Constitution to determine precisely how and why it deserves to be described as “The Laissez-Faire Constitution.”