Washington’s Folly

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As many of Advisor Perspective’s readers and contributors can testify, direct experience with the laws and regulations governing fiduciaries often leads to the conclusion that these rules were of, by and for the financial interests of the lawyers who made them. That legislation can be biased in favor of full employment for the legal profession is hardly surprising; after all, the large majority of elected officials throughout American history have been members of the Bar. Some writers have even suggested that the ultimate purpose of the law is to look out for the lawmakers. Congress was, in Mark Twain’s opinion, the only “distinctly native American criminal class”.

Yet, where the American political economy is concerned, far, far greater damage has been done not by crooked legislators but by the persistent efforts of thoroughly honest lawyers. In three centuries of growth and development before World War I, the former colonies of the Dutch, English, French and Spanish empires combined financial innovation and enterprise to create a world of faster, cheaper and more reliable commerce. What remains largely hidden under the last century of compulsory education is how much that economic development depended on the rule of law that was not made by lawyers.

The attorneys who attended the Constitutional Convention in Philadelphia in May 1787 had been educated in the common law, either in the colonies or at the Inns of Court in London. However, precisely because they were successful revolutionaries, the lawyer delegates were determined to produce, on ink and parchment, a complete blueprint of the formal specifications for their new republican government. (It helps to remember that, in 1787 as much as in 1775, to be a radical was to be “republican”. That is why Jefferson and his fellow Virginians organized themselves into a political party as Republicans.) The lawyers had already done this once before, with the Articles of Confederation; what brought everyone to Philadelphia was the near unanimous agreement that a redraft was needed.

During and immediately after the war, Congress had authorized and issued nearly half a billion dollars in legal tender: $207.8 million in currency and approximately $250 million federal certificates – the IOUs issued by the Continental Army when it requisitioned supplies (the exact figure is unknown). Contrary to the story that Alexander Hamilton’s national debt bailed out the states, the legislatures of the former colonies had already assumed more than half of the total war debts. They had voted to accept the federal certificates in payment of their own state taxes. They had done so because those certificates were the only official promises to pay that had any exchange value against coins. The continentals – the currency directly issued by Congress – had evaporated into nothing. Even the legal expediency of a mandated default had failed. Congress had passed a law authorizing a formal exchange of bills in the ratio of 40 old to 1 new; but the even new money had been discounted to nothing.

Commerce itself had not died. People were still ready, willing and able to deal in credit. They had simply abandoned all belief in the credit of the national government. As a government the Congress of the former colonies – they called themselves the Confederacy of Perpetual Union – they found themselves beyond legally bankrupt. In the judgment of the market, they had forfeited the right that the common law had given to every sovereign – the authority to issue currency.