Founding Choices: American Economic Policy in the 1790s

Published by EH.NET (July 2011)

Douglas A. Irwin and Richard Sylla, editors, Founding Choices: American Economic Policy in the 1790s.? Chicago: University of Chicago Press, 2011.? ix + 353 pp.? $35 (paper), ISBN: 978-0-226-38475-7.

Reviewed for EH.NET by Ben Baack, Department of Economics, Ohio State University.

Edited by Douglas A. Irwin and Richard Sylla, this volume is a collection of papers given at an NBER conference in May 2009.? The object of the conference was to bring together eminent scholars to examine the choices made regarding both the formation and the effects of economic policies adopted by the new American government under the Constitution particularly during the 1790s.? This period of policy formation is not only historically important for a variety of reasons but is also relatively neglected, thus, the rationale for the conference.

I must say this is a very good book. The essays are focused, thorough, and each includes a treasure trove of references.? As a collection, the essays suggest that the ?founding choices? that were made gave the United States a policy framework highly conducive to economic growth.

Following the editors? introduction, the ten contributed essays of this book are organized into three sections with the titles Politics (Chapter 1), Policy (Chapters 2-6), and Business Organization and the Factors of Production (Chapters 7-10).

In Chapter 1, Sonia Mittal, Jack N. Rakove, and Barry R. Weingast offer an incisive discussion of the reasons for and economic consequences of the adoption of the Constitution.? They begin by assessing the institutional failures of the Articles of Confederation and then pursue how these failures influenced the choices made by the delegates at the 1787 convention in Philadelphia.? Once done, the authors provide a very convincing narrative on how the Constitution having emerged from these choices established both an institutional framework conducive to economic growth and a stable government that, unlike its predecessor, was capable of adapting to changing economic circumstances over time.???

Part II of the book is made up of chapters 2 to 6 each of which addresses a particular aspect of government policy once the Constitution was in place.? The first four chapters in this part deal in one way or another with monetary or financial issues.? Chapter 2 is in essence a narrative by Richard Sylla on how Alexander Hamilton orchestrated a financial revolution during the three years 1790 to 1792 that laid the financial foundations of the United States.? Sylla relates how Hamilton hatched his plan for a financial revolution during the financial upheavals of the Revolutionary War and then implemented it after he was appointed Treasury Secretary.

Chapter 3 by Douglas A. Irwin examines trade policy.? After making the case that trade issues were a major reason for holding the Constitutional Convention, Irwin examines how a new issue emerged in Congress once it acquired the power to impose tariffs and regulate commerce under the Constitution.? The question was whether tariffs were to be viewed primarily as a source of revenue as advocated by Hamilton and the Federalists or more as a tool of reciprocity as sought by Jefferson and Madison.? In this well-written essay, Irwin informs us how this all played out in the years prior to the Jefferson administration.

Chapters 4 and 5 continue the discussion of the financial revolution articulated by Sylla in Chapter 2.? In Chapter 4 Peter l. Rousseau explains the fundamental reasons why the adoption of a new specie dollar together with the banning of state issued currencies under the Constitution formed the basis for an emerging currency union that was a considerable improvement over its colonial, Revolutionary War, and Articles of Confederation predecessors.? The focus of Chapter 5 by Howard Bodenhorn is on the pivotal role the charter of the Bank of the United States — especially its features of charter term limits, partial government ownership, branch banking, and internal voting rules — played in the subsequent development of state bank charters.?

In essence Chapter 6 by John Wallis compliments the work in Part I of this book in that it is about constitutional choice.? As Wallis points out, from the ratification of the Constitution to the Civil War most constitutional development occurred at the state level.? While national government policies remained static, state governments initiated a variety of new policies that affected their economic development, which in turn affected their political development.? This essay is not only about the evolving interaction of politics and economics at the state level but also the process of how Americans were learning how democracy worked.

Part III of the book is made up of chapters 7 to 10 with the theme being business organization and factors of production.? Chapter 7 is an essay by Robert E. Wright showing how prior to the Constitution the number of corporations formed was few, while afterward the number increased dramatically.? His explanation, while using a cost-benefit perspective, is based fundamentally on the notion that the Constitution relative to the Articles provided political stability, supportive public goods, and a reduction in uncertainty all of which unleashed entrepreneurial energies.

In Chapter 8 Farley Grubb offers a very informative essay on the development of U.S. land policy during the founding era.? One outcome of achieving independence was that the United States acquired a vast quantity of land from the Appalachian Mountains to the Mississippi River.? Grubb examines the extent of the conflicting claims to this territory and the decision-making process that led to the land becoming federally owned.? Subsequently, choices were confronted as to what was to be done with the land.? As Grubb demonstrates, the choices made were to have a lasting impact on the nation.

In Chapter 9, Stanley L. Engerman and Robert A. Margo examine the role of policies, legislation, ubiquitous land, and natural forces, as well as the Constitution upon the settlement of the United States.? It turns out that the Constitution, the exception of addressing the slave trade, had little to say about labor issues.? That being the case, the authors speculate as to what would have happened in the economy if the Constitution had banned slavery.?

Part III concludes with Chapter 10, an essay by B. Zorina Khan on patent and copyright protection in the United States. The essay covers the European, colonial, and state precedents of the protection articulated by the Constitution.? Khan argues subsequent legislation developed a system of protection that for a century, when compared to the rest of the world, was very strong for patents, relatively weak for copyrights, and more conducive to economic growth.
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Ben Baack has recently published articles relating to the Revolutionary War, Articles of Confederation, and the Constitution.? The references are to be found in his “Economics of the American Revolutionary War,” EH.Net Encyclopedia, edited by Robert Whaples. November 13, 2001 (updated August 5, 2010). URL?? http://eh.net/encyclopedia/article/baack.war.revolutionary.us

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