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
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 intended that the Bank of the United States, which he
established, should finance deficits incurred by the government, but its charter had
expired in 1811, the victim of politics (McCarty). The government now found
itself hard pressed to raise loans to finance the war, because the country’s financial
were still in their infancy and unable to handle the large sums required.
The country’s affluent were approached directly, and many responded. John
Jacob Astor, already America’s richest citizen, subscribed to $2 million worth of
government paper. (He drove a very hard bargain, buying the bonds only at a steep
discount from their face value. The government, of course, had little choice but to
go along with the demands of someone who could easily single-handedly fund 2
percent of the entire national debt.)
The publication in 1776 of his book ‘An Inquiry into the Nature and Causes
of the Wealth of Nations’ established Adam Smith as the single most influential
figure in the development of modern economic theory. With exceptional clarity he
described the workings of a market economy, the division of labor in production,
the nature of wealth in relation to money, the inability of governments to manage
economies, and the difference between productive and nonproductive labor.
Smith was probably born early in 1723 in Kirkcaldy, Scotland, since his baptismal
date was June 5 of that year. In 1737 he entered the University of Glasgow and
became a student of moral philosophy. Three years later he transferred to Balliol
College, Oxford, and remained there until 1746. In 1748 he began delivering a
series of public lectures in Edinburgh on wealth and its increase, or as he described
it, “the progress of opulence.”
In 1751 Smith was appointed professor of logic at Glasgow, and the next
year he became professor of moral philosophy. His subject matter included ethics,
law, rhetoric, and political economy (now called economics). His first book, ‘The
Theory of Moral Sentiments’, was published in 1759. After this book he began to
turn his attention toward law and economics. This is evident from student notes
taken at his lectures about 1763.
The silhouette proudly displayed on Joint Economic Committee (JEC)
material is that of Adam Smith (1723-90), the Eighteenth Century economist who
founded the classical economic school of thought (McLean). Smith laid the
intellectual framework that explained the free market and still holds true today as
we approach the 21st Century. Adam Smith is most often recognized for the
expression the invisible hand,’ which he used to demonstrate how self-interest
guides the most efficient use of resources in a nation’s economy, with public
welfare coming as a by-product. To underscore his laissez-faire convictions, Smith
argued that state and personal efforts, to promote social good are ineffectual
compared to unbridled market forces.
Born in Kirkcaldy, Scotland in 1723, Smith had a relatively normal
childhood, with the exception of being taken by gypsies and returned with some
difficulty at the age of three. As a young man, he went on to attend Oxford
University and became a professor of moral philosophy at Glasgow University.
Unlike many great thinkers, he gained wide recognition during his lifetime for a full
gamut of lectures and, most importantly, the publication of two major works:
Theory of Moral Sentiments (1759) and (the JEC’s favorite) The Nature and
Causes of the Wealth of Nations (1776). In The Wealth of Nations, Smith argued
against the mercantilist ideology of the day, suggesting that trade protectionism,
high tariffs, and high taxes designed to lower trade deficits inhibited economic
Smith believed that the “wealth” of a nation was made up of the productive
energies of its people. Two hundred years after his death, Adam Smith’s principles
of free markets, low taxes, respect for private property, and stable money serve as
a linchpin for JEC initiatives in the 104th Congress.
Adam Smith was born in Kirkcaldy, Fife, Scotland. The exact date of his
birth is unknown, however, he was baptized on June 5, 1723. Smith was the
Scottish political economist and philosopher, who became famous for his
influential book “The Wealth of Nations” written in 1776.
In 1751 Smith was appointed professor of logic at Glasgow university,
transferring in 1752 to the chair of moral philosophy. His lectures covered the field
of ethics, rhetoric, jurisprudence and political economy, or “police and revenue.”
In 1759 he published his Theory of Moral Sentiments, embodying some of his
Glasgow lectures. This work was about those standards of ethical conduct that
hold society together, with emphasis on the general harmony of human motives
and activities under a beneficent Providence.
Smith moved to London in 1776, where he published “An Inquiry into the
Nature and Causes of the Wealth of Nations,” which examined in detail the
consequences of economic freedom. It covered such concepts as the role of
self-interest, the division of labor, the function of markets, and the international
implications of a laissez-faire economy. “Wealth of Nations” established economics
as an autonomous subject and, launched the economic doctrine of free enterprise.
In 1778 he was appointed to a post of commissioner of customs in
Edinburgh, Scotland. He died there on July 17, 1790, after an illness. At the end it
was discovered that Smith had devoted a considerable part of his income to
numerous secret acts of charity.
In the 1760s he traveled in France, met some of the Physiocrats, and
started to write his masterpiece, An Inquiry into the Nature and Causes of the
Wealth of Nations, published in 1776. Smith postulated the theory of the division
of labor and emphasized that value arises from the labor used in production. He
believed that in a laissez faire economy the impulse of self-interest would bring
about the public welfare. Although opposed to monopoly and the concepts of
mercantilism, he admitted that restrictions on free trade (such as the Navigation
Acts) were sometimes necessary. Although some of Smith’s theories were voided
by the experience of the Industrial Revolution, his influence on later economists
has never been surpassed (Kates).
He left Glasgow to become tutor to the duke of Buccleuch, with whom he
traveled for two years on the Continent .There he met some of the more prominent
theorists in politics and economics, including Jacques Turgot, Jean le Rond
d’Alembert, and Francois Quesnay. Smith then returned home to England and
spent most of the next ten years writing his book ‘The Wealth of Nations’. In 1778,
two years after its publication, he was appointed commissioner of customs and
went to live in Edinburgh. He remained there until his death on July 17, 1790
Cummings, Jeanne. ?Wealth of a Nation,? SIRS. 28 November 1993:A-27
Kates, Don and Napper, George. ?Adam Smith? U.S. News
and World Report. 5 May 1989: Volume 4, A-29
McCarty, Pat. ?Wealth of Nations,? World Wide Web.
McLean, Jim. ?Joint Economic Committee.? Capital Journal. 20 February 1997
March 20, 1998
President of the United States of America
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