Early US History Markets

Market in Early Republic James Henretta is a history professor for the University of Maryland. In his article about the market in the early republic, Henretta (1998) outlines the structure of the market during that time period. He opens by pointing out that at the time there were two competing views of what the market should look like. One view, that of Hamilton and the Federalist party, was to "use the power of the state to assist monied men .. to pursue a capitalist path of domestic commercial development" (p.290).

Such an approach would focus on building a strong banking industry to support the capitalists. The other approach, as advocated by Jefferson, Madison and the Democratic-Republican party, preferred a model that supported farmers, artisans and other small businesses. Incentives would be offered for these to produce for export markets, a "subsistence-plus" model that allowed people the means to survive while having opportunities to earn extra and grow their businesses from the ground up (p.290).

Each approach would differ in terms of how the market would be structured, and how the legal environment would support market activities. The author notes that the development of the market during the early republic was characterized by frequent conflict of these two ideals. The government owned most of the land, and was therefore heavily involved in land markets, making the issue of economic structure an inherently political one.

The author supposes that political involvement in land distribution promoted the subsistence-plus market system, which in turn delayed the arrival of a price-based exchange system. Many Americans lived subsistence lifestyles, which in turn left only limited time and energy for other pursuits, the argument being that it may have been more economically efficient had people moved into other such pursuits at an earlier stage.

The demise of the rural barter system and emergence of a cash economy took a long time, and many companies had to be creative with respect to finding cash, as capital markets were usually underdeveloped in rural areas in particular. Another supporting point in Henretta's thesis is the idea that the money used for domestic commerce, which was fixed in amount, controlled by the state, inhibited the move to a cash economy.

The first reason is that the government could print money without any reasonable basis -- thus, it could become inflationary. Henretta is perhaps using today's understanding of economics in his argument here. He juxtaposes this form of money with the use of gold -- a common argument today among certain circles -- to argue that such money was inflationary, but he is also imposing today's understanding of fiat currencies on what was not even a serious attempt at a fiat currency.

The token money used for exchange in the early republic was correctly interpreted as risky by the capitalists of the time, not so much because it was fiat, but because there were no meaningful control mechanisms in place to prevent inflation. There was no central bank, and the government could without any effort at all disrupt the market for the token money, in ways that are impossible to do today. There were good reasons not to trust the value of token money.

A weak spot in the article is the author's inability to recognize inconsistencies in his own arguments. On page 293, he makes the point that government intervention in the form of the Relief Act was bad fiscal policy and brought about a distortion in the optimal allocation of land through the market system.

The author fails to recognize that the government handing out land to speculators to sell through the market system is itself a distortion -- those speculators having obtained the land through their government connections and not acquiring the land via any free market mechanism. Yeoman farmers seizing law via squatting is more free market than the means by which the capitalist speculators obtained that land in the first place. That the author chooses a one-sided framing of the issue reveals his bias, and to substantial detriment to his argument.

When the author is beginning with a conclusion a priori, a logical fallacy. It is interesting, however, to look at how these discussions parallel some of the discourse today. In the early republic, it is clear that political sides were drawn in terms of supporting those who already have wealth and power, on the idea that they can create more, something found in "trickle-down economics" and its modern-day derivatives.

The opposite side to this is an economic structure that allows people to build themselves up, paralleling today's political rhetoric about helping small businesses. What is interesting is that today, there is some conflation between what politicians promote as being good for business as somehow being good for all business. This was not the case when these arguments were being made in the early republic. There was a clear difference between what was viewed as good for capitalists and what was good for everybody else.

Farmers and artisans, in order to gain a measure of their own financial independence in the economy, needed a structure that would allow them to survive (subsistence) while having some opportunity to produce surplus that could help them build wealth. The argument that Henretta makes that this is economically inefficient is half-hearted., and not supported by evidence The reality is that economic efficiency in creating wealth can be examined in the short-run or the long-run.

Systems designed to help capitalists can be efficient in the short run, because there is no learning curve with respect to.