Posted by: captainfalcon | December 26, 2011

Economic Regulation in Antebellum America and its Limits: State Weakness, not Laissez-Faire

I mentioned Lawrence Friedman’s A History of American Law two or so posts ago. In addition to its discussion of Samuel Chase’s impeachment, its section on economic regulation during the early Republic — 1776-1850 (he paints with a broad brush!) — is quite good. Its foil is the proposition that this period was “the high noon of laissez-faire” (Friedman, 177). Not so, Friedman argues, in the course explaining any appearances to the contrary.

Friedman first adduces evidence of economic interventionism. While it is true that the federal government did not typically regulate the economy (with the notable exception of constructing a National Road), the states were not shy about asserting themselves. Their regulations divide into two kinds.

I Regulating the preconditions of a market economy, or “the skeletal frame of economic life” (Friedman, 180)

Economic ideology in the first half of the 19th century centered on “the promotion of enterprise. Policy aimed — in Willard Hurst’s phrase — at the release of creative energy” (Friedman, 177). But this did not imply laissez-faire.

(1) States subsidized road and rail, including through the exercise of eminent domain. For example, Baltimore financed the B&O Railroad, and, in 1837, Ohio “promis[ed] support in the form of matching funds to any internal improvement company (railroad, canal, or turnpike) that met certain standards” (Friedman, 181).

States also used eminent domain to seize land for the construction of railways, toll roads, grist mills (open to all), and other “public uses.” Then, as now, eminent domain required a taking to be “justly compensated.” Then, courts applied this proviso parsimoniously. “In many places . . . the doctrine of “offsetting” values was in effect. This meant that if a canal company took my land, worth $5,000, it was entitled to take account of the benefits I would get from the canal. If the canal would raise the value of the rest of my land by $3,000, this could be subtracted from my compensation” (Friedman, 182).

(2) States also regulated the money supply through a combination of direct investment, special bank charters and general banking laws.

Direct investment: Pennsylvania owned one third of the Bank of Pennsylvania (Friedman, 179).

Special charters: “[At first] states chartered their banks one by one . . . at this crucial point, the state could (in theory) exert critical control by forcing clauses into the charter. There was, in fact, a good deal of variation in bank charters; and many of them had provisions which were designed to tie the hands of the bank in this or that way” (Friedman, 180).

General laws: Special charters were inefficient, so states switched to general banking laws. Representative example: “In 1829, New York passed a safety-fund law. Under this law, banks had to contribute a portion of their capital to a general fund which would be use to insure payment of the notes of insolvent banks” (Friedman, 180).

II Regulating the market

In addition to “market-making,” states also regulated various extant markets. Such regulations were a hodgepodge of tradition and felt-necessity. As Friedman puts it:

Outside of transport and finance, state regulation was rather random and planless. Not that a massive ideology dictated limits . . . [Rather], economic law was practical and promotional . . . tailored to specific needs (Friedman, 183).

States imposed quality control regulations on export commodities and local staples alike. Massachusetts passed a consumer protection law requiring that only unadulterated sperm oil be “sold under the names of sperm, spermaceti, lamp, summer, fall, winter and second winter oils” (Friedman, 183; quoting the statute). In 1819, Massachusetts also provided for the conservation of pickerel (Friedman, 183). Finally, Michigan developed a primitive form of zoning (Friedman, 184).

III Explaining limits on economic regulation

True, early American government engaged in unabashed economic regulation, but there is also data that could arguably support the view that laissez-faire ruled. The federal government did not usually interfere in the economy. Even at the state level regulations were routinely underenforced, and it was usually up to private citizens to enforce them through lawsuits.

Friedman argues that the explanation for these limits on economic regulation is not the ideology of laissez-faire, but the fact that early American government was weak. “Two pillars of the modern state were missing: a strong tax base and a trained civil service. Without these two, and perhaps without a firmer grip on economic information, the state could not hope to master and control behavior in the market” (Friedman, 185).

The tax base was limited because currency was scarce and people were unaccustomed to high taxes. As a consequence, states had to raise what money there was through the comparatively ineffectual fee system: “Litigants paid judges for their lawsuits; bride and groom paid for their marriage licenses. Local users had to pay assessments for local roads [etc.]” (Friedman, 186).

The civil service was amateur because “[t]hat every man could aspire to high office was part of the democratic faith . . . the principle of rotation was [even] written into some of the early constitutions. Men like Jefferson and Jackson considered high turnover no evil, but a positive virtue in government. Jackson, especially, felt that government jobs called for basic, fungible skills: any man of intelligence and honor could hold office” (Friedman, 187). This attitude suffused government at all levels.

These two factors (combined, at the federal level, with a strong commitment to federalism) mutually reinforced regulatory under-enforcement. Because states were poor and the civil service untrained, “the law let private citizens enforce what regulation there was. If no one brought a lawsuit or complained to the district attorney about some violation, nothing was done” (Friedman, 187). But, again because states were poor and so relied on fees, lawsuits were costly, and enforcement further discouraged.

The upshot was that while the “economy had an unquenchable thirst for infrastructure . . . at the critical time the power of government fell short of the demand; and control of the infrastructure passed into private hands. Laissez-faire, it may turn out, was more powerful as practice than as theory, even in the 19th century” (Friedman, 188). But 19th century America suffered no ideological commitments vis-à-vis economic regulation as such.

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