What is the economy? Has anyone ever defined this mysterious entity that holds so much power over life and thought? Is it a government construct, a creation of the Federal Reserve or of Wall Street?
Whatever it is, “the economy” seems pervasive but invisible, like god, or some peoples’ god. It is powerful yet abstract, composed of numbers, heavily dependent on “jobs.” The “global economy” is even more elusive. How many people are directly affected by fluctuations in the economy? It seems as though it is like the weather, constantly changing yet generally remaining within some livable limits.
Careful reading of the US Constitution reveals that it is an economic document that presumes all citizens are federal government property. It provides a structure for supervising them through laws, executive, legislative, and judicial branches, and for collecting taxes. It takes control of “economic narrows,” such as rivers and roads, and grants the federal government a monopoly on money management. When people tell you, “It’s all about the money,” they are right. It is.
It’s hard to imagine what the 18th century world was like. The Western Hemisphere was an economic bonanza for resource-hungry Europeans. North America offered abundant land and natural resources, limited only by those Native Americans who refused to be enslaved. The British compensated by importing Negroes from Africa. Its colonies in the West Indies became enormously profitable by the use of slave labor on sugar, timber, and other plantations. In North America, most slaves came through the Northern ports of New York and Boston but were sold in the South, which had the land and climate for large-scale agricultural production. Through the use of slave labor, the South became the main source of agricultural products for use in the North and for export to Britain, which prohibited its colonies from trading with anyone else. Britain profited from slavery in direct and indirect ways, from taxes and from re-sale of commodities like tobacco and cotton.
The Declaration of Independence, dated July 4, 1776, lists the abuses colonists felt they suffered under the king and parliament. It cites multiple perceived tyrannical acts by the King of Great Britain, including disrespect for or denial of colonial laws, dissolving representative houses, impeding elections, controlling judicial appointments, increasing bureaucracy, housing standing armies in people’s homes, impeding trial by jury, and other acts deemed despotic.
The Revolutionary War had already begun, on April 19, 1775, and several of the Declaration’s signers remained ambivalent about the drastic step of breaking away from the “mother country.” Loyalists (Tories) remained entrenched in places like New York and the Northeast. In fact, New York City fell on September 15, 1776, just three months after the Declaration was signed, and remained in British hands for the next five years.
Between 1776 and 1787 the thirteen states functioned under the Articles of Confederation, which had no taxing authority. The “Continental dollar” and war bonds became virtually worthless, and many of Washington’s soldiers had given up on ever being paid. The war had been financed by debt, much of it from foreign investors. After the Treaty of Paris was signed on September 3, 1783, American notables like John Adams and Thomas Jefferson were sent to Britain and France to negotiate credit and loans for the emerging country.
By 1787, a group of bankers, lawyers, financiers, and landowners had decided the Articles of Confederation were too weak to support a centralized government. What became the Constitutional Convention was billed as a meeting to amend the Articles of Confederation. It occurred while John Adams and Thomas Jefferson were in Europe. Convention delegates were sworn to secrecy, virtually locked in Independence Hall for three months, and not allowed to adjourn until they had drafted a constitution to replace the Articles. The new Constitution was ratified by special assemblies convened for that purpose, and thus by-passed state legislatures.
Concurrently with the Declaration, in 1776, Adam Smith in the UK had published his Wealth of Nations, which instantly became a huge success. In it, the “Father of Modern Capitalism” referred frequently to the “late war,” meaning the Seven-Years’ War (in North America called the “French-and-Indian War”) which had ended in 1763, and the UK debt resulting from it. Wealth explores different taxing mechanisms used by various rulers to generate revenue. Smith refers repeatedly to “stocks” and describes various banking systems. Both the banking system and the stock market were growing in importance and influence at the time, spurred by the growing British shipping empire and the industrial revolution. The British government had become increasingly dependent on the London Stock Exchange to finance its perpetual wars.
History substantiates the notion that the Constitution’s “Framers” wanted to create a centralized taxing authority and strong military to subsidize the financiers, industrialists, and elite. Both George Washington and the first Treasury Secretary, Alexander Hamilton, believed in a strong central government. Hamilton, especially, personified the Federalists’ ambitions for Northern dominance, industrialization, and government “over the people.” As Treasury Secretary, he also laid the groundwork for a military empire.
Hamilton was an admitted Anglophile and a tool of the elitists, if not an actual British agent, as some claimed at the time. He had already established the private Bank of New York in June, 1784, for his brother-in-law, John B. Church, and for Jeremiah Wadsworth; and Hamilton was a board member. The day after being confirmed as Treasury Secretary, Hamilton arranged a $50,000 loan from the Bank of New York to the federal government to pay Washington’s and Congress’ salaries. He then arranged a loan from the First Bank of North America for another $50,000. The First Bank of North America had been started by Robert Morris, signer of both Declaration of Independence and Constitution, and a Hamilton financial mentor.
On December 13, 1790 Hamilton presented legislation for a tax on whiskey. The next day, December 14, 1790, he offered a plan for a central bank. The bank proposal generated substantial controversy, largely along North-South lines, with Thomas Jefferson and James Madison arguing that it was unconstitutional. Hamilton, who made liberal use of the constitutional clause about promoting “the general welfare,” argued that a central bank would do that. He interpreted the Constitution to mean that the federal government could do anything that was not specifically prohibited, under the “implied powers” clause.
Under his proposal, the central bank would be capitalized at $10 million, with the government contributing $2 million and the rest held in the form of stocks by private investors. The government would appoint five of twenty-five directors, with investors choosing the remaining twenty. He dismissed Jefferson’s argument that this would lead to wild speculation, but he later had to bail the bank out when the initial offering of bank scrip did just that. He did this by asking the cashier of the Bank of New York to buy $150,000 of government securities, in order to stabilize the market.
William Duer, who had been Hamilton’s first deputy treasury secretary, was blamed for single-handedly causing the nation’s first financial panic, the Panic of 1792, by stock speculation, borrowing heavily and driving up prices, then not paying on his loans. It is believed he caused losses of $3 million and impoverished people of all classes.
This financial panic led to the beginning of the New York Stock Exchange on May 17, 1792, with the so-called “Buttonwood Agreement,” signed under a buttonwood tree on Wall Street. Here, twenty-four stock brokers agreed to trade only with each other, and to charge a commission of one-fourth percent on trades. The first trades were of bank (First Bank of North America, First Bank of the United States, and the Bank of New York) and insurance stocks, and of “Hamilton bonds,” meaning Revolutionary War debt.
The First Bank of the United States soon became the largest corporation in the United States. Its role was to accept deposits, issue bank notes, make loans and purchase securities. Hamilton had argued that it should be largely private, to insure it would not be politicized by government finagling. Critics complained the bank favored foreign investors and Northern states. In fact, its initial stock was only offered in New York, Boston, and Philadelphia. Thirty shareholders were US Congressmen, well over one third of the 80-91 members of the First United States Congress.
Those who believe the United States was founded on democratic principles need only remember that the Constitution, not the Declaration of Independence, is the law of the land. While the two documents are often confused, and we celebrate “Independence Day” on July 4 every year, the Constitution, which was signed eleven years later, on September 17, 1787, negated that independence. It claimed the nation’s inhabitants, resources, waterways, and products under a financial monopoly--backed by military might--that the federal government, banking industry, and New York Stock Exchange still enjoy today.