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On a conservative site last week, the editor wrote this:

While the Constitution has been largely ignored over the last 80 years, the document is very real, and its purpose is clear: to limit greatly the powers of the federal government.

Having said this, he went on to a conclusion:

If Congress proves unwilling to force indiscriminate cost reductions on government then it should apply constitutional principles to the budget whereby government functions not enumerated in the Constitution are abolished, privatized, or passed to the states.

When we begin with a myth, we have a tendency to expect miracles. Let me explain.

The Constitution was established in order to strengthen the powers of the Federal government. It strengthened them vastly beyond what the British had attempted to impose on the colonies in the early 1770s.

Before the American Revolution, the British level of taxation was in the range of 1%. There were sales taxes on imported goods, but most people, then as now, bought domestically produced goods. There were taxes on paper after 1765. This affected mainly lawyers and newspaper publishers. By alienating these two influential groups, the Parliament stirred up a hornets’ nest. When professional talkers and writers get squeezed by the government, the public gets an earful. “The end of liberty is nigh!” On the contrary, the end of a debt-free colonial governments was drawing nigh.

Revolutions must be financed. They are always financed with debt and fiat money. Creditors buy the IOUs with good money, then weaker money, and then — at the end of the revolt — worthless money. Then they have a supreme political goal: to get the new government to pay off the worthless IOUs at face value in gold or silver. In the 1780s, it was silver.

The Constitution was deliberately designed to centralize power vastly beyond what the legitimate constitution — the Articles of Confederation — allowed. The Federal government in 1787 was weak. In 1788, it was vastly stronger.

The newly created Federal government immediately did two things. It accepted responsibility to pay off state debts. This was Alexander Hamilton’s proposal. He proposed it specifically to centralize the government by granting enormous profits to the investment class that had bought state debts for practically nothing.

The Wikipedia article on this consolidation of Federal debt is accurate in its discussion of Hamilton’s motives.

Hamilton’s economic plan had multiple goals. First, the debts and honor of the nation would be secured. Hamilton felt that the Federal government would not be able to borrow money from anyone in the future if these debts were not paid. By selling bonds to pay the debt, bondholders would have a direct financial interest to help the new United States government survive and thrive. Creditors who purchased the bonds could use them as collateral for loans, stimulating the economy even more. The plan would also create a bureaucracy of agents across the country who would be tied to the Federal government instead of the individual states. Assuming the debts of the states would likewise couple financial elites in those states to the national government and less so to state governments, thereby reducing the risk of secession. Hamilton’s scheme was called “debt assumption plan,” and it was a radical idea in 1790. Hamilton’s Report supported ideas of war debt assumption, redemption of Confederate securities at face value, and funding of new national securities as a permanent national debt. Hamilton reasoned that creating a large financial structure, which wealthy citizens would support and belong to, would enhance the revenue and fiscal system of the national government and bring prosperity to the Federal government. He also reckoned that failure to establish the creditworthiness of the Federal government would weaken the United States, and called a permanent, reasonably-sized public debt “the powerful cement of our Union.”

Hamilton’s statements at the time were quite frank about all this.

When Madison and Jefferson opposed the plan, Hamilton bought them off by promising to support the swamp today known as Washington D.C. as the nation’s Capitol. This was done at a private dinner with only the three in attendance. Jefferson later wrote about it.

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Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North