Adam Smith Essay Research Paper The new

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Adam Smith Essay, Research Paper The new United States emerged from the Revolution sovereign but in a state of fiscal chaos. The Continental Congress had been forced to resort to printing fiat money, the so-called continentals that sank quickly into worthlessness. The various states had borrowed heavily to meet the demands of the war. The central government under the Articles of Confederation was financed solely by contributions from the various state governments (just as the United Nations is funded today) and had no power to tax or borrow on its own authority. Because the state governments had pressing needs of their own (as governments always do), their contributions were often late and sometimes nonexistent (Cummings). As a result, the central government had grave

difficulties meeting even its current obligations. It was this financial crisis that helped force the drafting of the new Constitution in 1787. The document that the Founding Fathers created that summer in Philadelphia–the desperate poverty of the old government all too fresh in their minds–put remarkably few restrictions on the new government’s power to spend, tax, and borrow (McCarty). The federal government is required to maintain such things as the post office and the census, which necessarily require spending, and Congress may not make military appropriations extending more than two years. But it is empowered to appropriate money for the “general welfare,” a term left undefined. In the twentieth century it has come to be construed so broadly as to encompass a

museum dedicated to the memory of Lawrence Welk(Cummings). Taxes merely had to be uniform throughout the United States and could not be laid on the exports of any state. The power to borrow, meanwhile, was entirely unlimited, one of the very few powers granted by the Constitution that had no checks or balances. What did limit the fiscal powers of the new government was the universal consensus, among ordinary citizens and the political elite as well, about the proper and prudent way for a government to act when it came to taxing, spending, and borrowing. This consensus was best summed up, as you might expect, by Adam Smith in THE WEALTH OF NATIONS. “What is prudence in the conduct of every private family,” he writes, “can scarce be folly in that of a great kingdom.” In

other words, governments should finance current expenditures out of current income, save for a rainy day (or, more properly, allow the people to do so by lowering taxes when the budget is in surplus), borrow only when inescapably necessary, and pay back borrowed money as quickly as possible. Alexander Hamilton, appointed by President Washington to be the first Secretary of the Treasury, moved swiftly to put the new government’s fiscal house in order (McCarty). Taxes were laid. Mostly excise taxes on products like whiskey and duties on imports, these were intended both to fund the new government and provide a revenue stream to service and reduce the new national debt. This debt in turn funded the redemption of the old Revolutionary War debt on a sound basis. At the beginning the

national debt amounted to $80 million, something on the order of 40 percent of the gross national product of the day. But as the government found its fiscal feet after 1795, it ran a deficit only twice until the War of 1812 (McCarty). As the country’s economy rapidly expanded, the debt declined in both relative and absolute terms. By 1811 the total debt was only a little more than half what it had been in 1795. The war, of course, sharply reversed matters. Federal government outlays in 1811 were a little more than $8 million. By 1814 they were more than $34 million. Meanwhile revenues suffered as the ever-tightening British blockade cut sharply into import duties, the main source of government income at the time. In 1814 outlays exceeded revenues by 211 percent. Hamilton had