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After the Founding: The Demise of Laissez Faire in America

By Dr. Jerome Huyler

April 6, 2024

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When it is said that free enterprise has failed

my answer is that we have not permitted it to work.

—Samuel Pettengill in Jefferson: The Forgotten Man, 1938

 

The essence of America’s founding philosophy was summed up in John Locke’s Second Treatise of Government:

“The State of Nature has a Law of Nature to govern it and reason which is that law teaches all mankind who will but consult it that being all equal, no one ought to harm another in his life, health, liberty or possessions. ”

There is nothing more evident than that creatures promiscuously born to the same advantages of nature and use of the same faculties should be equal one amongst another without subjection or subjection (Second Treatise, §6 and §4, emphasis added).

Now, as Jefferson’s Declaration of Independence declared, “Governments are instituted among men deriving their just powers from the consent of the governed.” But there is only so much to which the people can consent. Since no one has a right “to harm another in his life, health, liberty or possessions” no number of men can cede to government such an awful power. If all men are created equal then no one is entitled to anything that someone else will have to pay for. What one earns, one owns. Whether as a wage, a salary or a business profit, it does not belong to society. Congress may not take away and give away as much as it pleases. It may not “lawfully” do what no number of individuals may lawfully do, “harm another in his life, health, liberty or possessions.” Government is thus rendered a PROTECTOR. It must protect individuals in the enjoyment of what is theirs, their lives, liberties and possessions. The possibility of government’s becoming a PROVIDER was thus constitutionally foreclosed. It cannot provide anything to anyone without depriving others of what is rightfully theirs. And that had to violate the precept of equality. Locke was explicit on this point:

For nobody can transfer to another more power than he has in himself; and no Body has an absolute Arbitrary Power. . . over any other, to. . . take away the Life or Property of another…and having in the State of Nature no Arbitrary Power over the Life, Liberty or Possessions of another, but only so much as the Law of Nature gives him to the preservation of himself; …this is all he doth, or can give up to the Commonwealth. . . so that the Legislative can have no more than this (Second Treatise, § 135).

This full measure of liberty finds economic expression in the politics of laissez faire capitalism. The arrangement was ably depicted in Adam Smith’s masterwork, The Wealth of Nations (1776).  Laissez faire capitalism grants to every individual an absolute right to gain, keep, use, trade or otherwise dispose of his freely-acquired possessions. That is what follows once government is reduced to the role of protector. That language, however, was not inserted into the Constitution.

The Bill of Rights stipulated that no one may be “deprived of life, liberty or property without due process of law.” That stipulation proved woefully inadequate.

The Bill of Rights stipulated that no one may be “deprived of life, liberty or property without due process of law.” That stipulation proved woefully inadequate. The courts eventually decided that “substantive” due process (i. e., the strict prohibition on government’s interfering in the operations of the free market or redistributing wealth) was less than absolute. The wall separating state and market was thereby breached.   Substantive due process was replaced with procedural due process. As long as all due political “procedures” were followed, the violation of rights, redistribution of property and interference in the economy could proceed apace.

This certainly did not end in totalitarian tyranny. What followed bore little resemblance to the founders’ vision of liberty or Adam Smith’s laissez faire model. Yet, more men were freer and presented with a greater range of opportunities to make it in the world than at any other place or prior period in human history. Millions were left free to find their fortunes in a virgin, resource-rich wilderness environment. Some settled on fertile farmland and brought it under cultivation or became well-to-do cattle ranchers. Others opened modest general stores or sold dry goods from horse-drawn carts, eventually building their businesses into thriving national brand outlets (augmented by widely circulated mail-order catalogs). Many struck it rich in mining or patented, made and marketed some revolutionary, labor-saving gadget (like a bicycle, sewing machine or alarm clock) or improvised a new industrial process (e. g , interchangeable parts or complex assembly-line operations). Opportunities for success were limited only to the human imagination and a fast-fading resistance to change.

American government could lawfully “lay and collect taxes” and imposes tariff duties, but only for purposes of protecting the lives, liberties and possessions of the citizenry. The moment government confers any benefit, privilege or immunity on some, it thereby denies equal protection under law to all. As Jefferson would urge, witnessing the sordid acts of Congress in his later years, “Our legislators do not know the limit of their power, to protect our natural rights and take none of them from us.”

In the fullest sense the founders’ principles did not survive the American founding era. If liberty is consumed in labor and the fruit of one’s labor is one’s property, then any political act that results in some benefiting at others’ expense is an act of theft under cover of law.   The first breach of founding principle, the first act of legal plunder came when the 2nd bill passed by Congress was signed into law by the nation’s first president.

The Tariff Act of 1789 did not impose trade-crippling tariff schedules. It was primarily concerned with raising revenue. And the Constitution specifically authorized Congress to impose tariffs for that purpose. The Constitution did not, however, authorize Congress to impose tariffs “for the encouragement and protection of manufactures,” as the 1789 Act stipulated. The duties, which would grow greater as time went on disadvantaged those who had to sell their goods in a politically-unprotected market, taking whatever the law of supply and demand allowed, but had to purchase tools, utensils, textiles, arms and much more in a politically-regulated market. Nor could farmers and planters take comfort in the decline in demand for their crops owing to the drawdown of international trade. Nor could tariff protection benefit shipbuilders, seaport merchants and thousands employed in the maritime and carting trades. They, too, would face a reversal of fortune. In time, successively higher tariff duties would raise general prices and visit hardship on consumers and all those who relied on a brisk transatlantic trade for their livelihood.

Protective tariffs formed the first species of corporate welfare.

Protective tariffs formed the first species of corporate welfare. Other forms followed in turn. They had to. For, once the nation decided that some of its citizens had a right not to go out and get, but to lobby Congress and be given, it unavoidably faced two daunting questions:  Who else should be given?  And just how much should everyone get? There was only one answer: politics.

The Tariff Act of 1787, in itself, did not do terrific damage to the economy. But it was the opening wedge, the foot-in-the-door. The nation’s first Treasury Secretary, Alexander Hamilton, was not about to stop there. He also saw to Congress’ passage of laws to (1) retire the national debt at full face value, (2) assume the remaining debt incurred by the states during the late Revolution and (3) charter a Bank of the United States. The BUS would be a “public/private” enterprise with the national government holding a fraction of the institution’s shares of stock.

Hamilton was not a crook, but he was personally unacquainted with Locke’s natural rights teaching. He was a pragmatist. His strategic design was to see the investment capital placed in the far-sighted hands of the nation’s respectable manufacturing and “moneyed” interests.   That capital would fuel much-needed industrial growth and assure the nation’s safety in an ever-threatening, international climate. And, if in attaching themselves to Hamilton’s agenda, the moneyed interest made money, well, then their attachment to the noble experiment in republican liberty would be assured – a win-win, in Hamilton’s mind.

Ultimately, Hamilton’s fiscal plans proved economically ruinous. Hamilton cannot be held directly responsible for the financial bubble that burst in April, 1792. The trigger was the financial collapse of the “House” of Duer. As it turned out, William Duer was Assistant Treasury Secretary under Hamilton and, as such, was fully apprized of Hamilton’s financial plans well in advance of their execution. Duer used the “insider information” he gleamed to manipulate the financial markets. Enlisting a long line of wily investors who knew a “sure bet” when they saw one, he struck pay dirt, but only for a while. Debt certificates, “not worth a continental,” at the moment, would soon be redeemed “at par.” All holders would see their certificates paid off at face value. Greedy speculators naturally itched to hitch their horses to Duer’s promising wagon, bought up the then worthless debt certificates for pennies on the dollar and cashed in.

First day issues of Bank of the United States shares and subsequent rumors of pending BUS mergers and acquisitions fueled wild bouts of market speculation. When the bubble burst, Duer and much of the nation ended up broke. No one ever said that greed isn’t contagious.   But what shouldn’t be overlooked is the causal connection between public corruption (Duer’s untoward doings) and what is too casually considered the private sector’s “boom-and-bust” business cycle. Recovery came after a while, but hard times persisted for thousands. It is worth reprising Jefferson’s deep lament, at the time:

“Ships are lying idle at the wharfs, building is stopped, capital withdrawn from commerce, manufactures, arts and agriculture, to be employed in gambling, and the tide of public prosperity, unparalleled in any country is arrested in its course and suppressed by the rage of getting rich in a day. “[1]

Protective tariffs would raise prices and restrict world trade, and National Banks would be the spark setting off repeated bouts of speculative excess and creating market bubbles that would periodically burst.   But the real engine of future economic “progress” would come in the form of “Internal Improvements.” A long line of private enterprises would get to enjoy generous cash subsidies and be given title to vast tracts of “public” land for building turnpike roads, canals and in time, railroads. Here was a far-sighted vision of public/private partnerships working in harmony for the common good, as the Constitution put it, the “general welfare.” But where was the specific Constitutional clause authorizing Congress to proceed in such fashion?

The long succession of panics and crashes [were] caused not by free market activities, but by a bevy of corporate welfare policies.

Proponents of internal improvement would need a persuasive rationale for embarking on such worthy national projects. The founders’ Constitution was not yet a “living or breathing” piece of parchment. For Thomas Jefferson, much closer to the spirit of ’76 in his declining years, the prospect of such “partnerships” would be disastrous. As he argued, in a letter to Washington on Hamilton’s BUS plan:

“To take a single step beyond the boundaries thus specially drawn around the powers of Congress is to stake possession of a boundless field of power, no longer susceptible of any definition. ”

What was the result? The long succession of panics and crashes caused not by free market activities, but by a bevy of corporate welfare policies, alone, created the need and demand for social welfare reform from the Progressive Era, to the New Deal and beyond.

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[1] Jefferson to Edward Rutledge, August, 29, 1791, quoted in Schachner, Founding Fathers, p.  182.

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