Even in fighting a war for American independence, war was already planting the seeds of big government. War and the state are symbiotic; war is truly the health of the state. Even under the most ideal circumstances, and even if a war might be justified, the very nature of war itself is such that it centralizes power, especially political power. While we can appreciate much about the “Spirit of ’76,” this knowledge should temper our celebration of the 4th of July.
How did America move from one of the smallest governments in history to one of the largest?
While there are many answers to this, and while the question does not imply a monocausal answer, undoubtedly, war would have to be one of the major causes, even in the American war for independence. In Crisis and Leviathan by Robert Higgs, he writes,
In American history the most significant crises have taken two forms: war and business depression. At the outbreak of war a suddenly heightened demand for governmental provision of military activities leads immediately to displacement of market-directed resource allocation by greater taxation, governmental expenditure, and regulation of the remaining economy.
Unfortunately, the American Revolution was no exception.
War and Taxes
As mentioned in a previous article, the pre-Revolution American colonies benefited from an incredibly low tax burden, even relative to Britain. Alvin Rabushka wrote in his impressive Taxation in Colonial America that, “[On the eve of the Revolution], British tax burdens were ten or more times heavier than those in the colonies” (p. 867). With a higher standard of living per capita, the tax burden on Americans was about 1 percent of that of the British taxes in the decade prior to the Revolution, as Rabushka documents (p. 729),
[From 1764 to 1775,] the nearly two million white colonists in America paid on the order of about 1 percent of the annual taxes levied on the roughly 8.5 million residents of Britain, or one twenty-fifth, in per capita terms, not taking into account the higher average income and consumption in the colonies. (emphasis added)
The statements of historian Paul Johnson are worth repeating on this subject, “the American mainland colonies were the least taxed territories on earth. Indeed, it is probably true to say that colonial America was the least taxed country in recorded history. Government was extremely small, limited in its powers, and cheap” (emphasis added). One reason that American standards of living had risen so high was, in part, because of this low-tax environment. Johnson explains further,
Until the 1760s at any rate, most mainland colonists were rarely, if ever, conscious of a tax-burden. It is the closest the world has ever come to a no-tax society. That was a tremendous benefit which America carried with it into Independence and helps to explain why the United States remained a low-tax society until the second half of the twentieth century. (emphasis added)
As concerns the Revolution, taxes get plenty of attention as a cause—“no taxation without representation”—although the issue was more related to the regulatory regime, principles, constitutional issues, etc. than the pure amount of taxation itself. That said, the salient point here is that the taxes Americans paid increased after the war. Writes Rabushka,
Historians have written that taxes in the new American nation rose and remained considerably higher, perhaps three times higher, than they were under British rule. More money was required for national defense than previously needed to defend the frontier from Indians and the French, and the new nation faced other expenses. (emphasis added)
In the terse analysis of Gary North: “So, as a result of the American Revolution, the tax burden tripled.” Thankfully, federal taxation only consumed, on average, around 3 percent of national income until about 1929 (with the states consuming about 7 percent of national income), however, it should not escape our notice that war for independence was followed consequently by higher taxes.
Doubtless many will argue that this was now taxation with representation. Without fully exploring the Spoonerian critique that both the acceptance of the Constitution and the subsequent election of representatives were based on a majority vote of those with the right to vote at the time and who voted, not the consent of every individual, nor the “majority,” a good case can be made that the Americans were more exorcised about taxes than representation. The lesson is that war, even the American Revolution, leads to higher taxes.
Monetary Inflation, Price Inflation, & Price Controls
War encourages centralization and artificial expansion of the money supply, and the ability to engage in monetary inflation and credit expansion enables war and other government projects.
States get into wars, run short on revenue, cannot long maintain the support of the people if they were to levy heavy taxes, so they resort to inflation. Symbiotically, once political states have this option of inflation, they are tempted to continue using it instead of or alongside taxation, especially for war. An additional benefit for governments is that inflation does not have the same direct “sting” of taxation. Inflation taxes by expropriating purchasing power without production to earlier printers/spenders from later-receivers/spenders who experience lowered purchasing power and uneven price increases. Generally, the people do not blame the government and its allies in the banking system for the effects of the policy of inflation. Instead, they blame other factors that have been affected also (e.g., price gougers, speculators, etc.). With inflation, the government is able to tax secretly and others take the blame, which means political elites pay no cost and are virtually unaccountable. Unfortunately, the American Revolution is no exception.
In order to fund and support the Continental Army in the style of a regular army—rather than as a guerilla force or forces—taxation was out of the question. The Continental Congress did begin to discuss borrowing (with the plan to repay through future taxes) in June 1775. That seemingly left one option—“coercive but seemingly painless, a device the British colonies had pioneered in the western world, the issue of paper money.” On June 22, 1775, Congress issued $2 million paper “bills of credit” (“Continentals”), but this would soon expand greatly. Rothbard explains the nature of this inflation,
Paper issues fraudulently pretend to be equivalent to units of specie and are used by the issuer to bid away resources in society from the producers and consumers, in the process depreciating the money itself. Its nature and consequences are equivalent to the process of counterfeiting.
In an excellent and informative article by Pearcy Greaves—a student of Mises—“From Price Control to Valley Forge: 1777-78,” describes the 1775 inflation and its effects and is worth quoting at length,
Our Continental Congress first authorized the printing of Continental notes in 1775. The Congress was warned against printing more and more of them. In a 1776 pamphlet, Pelatiah Webster, America’s first economist, told his fellow men that Continental currency might soon become worthless unless something was done to curb the further printing and issuance of this paper money.
The people and the Congress refused to listen to his wise advice. With more and more paper money in circulation, consumers kept bidding up prices. Pork rose from 4¢ to 8¢ a pound. Beef soared from about 4¢ to 100 a pound. As one historian tells us, “By November, 1777, commodity prices were 480% above the prewar average.”
The situation became so bad in Pennsylvania that the people and legislature of this state decided to try “a period of price control, limited to domestic commodities essential for the use of the army.” It was thought that this would reduce the cost of feeding and supplying our Continental Army. It was expected to reduce the burden of war.
The prices of uncontrolled, imported goods then went sky high, and it was almost impossible to buy any of the domestic commodities needed for the Army. The controls were quite arbitrary. Many farmers refused to sell their goods at the prescribed prices. Few would take the paper Continentals. Some, with large families to feed and clothe, sold their farm products stealthily to the British in return for gold. For it was only with gold that they could buy the necessities of life which they could not produce for themselves.
On December 5, 1777, the Army’s Quartermaster-General, refusing to pay more than the government-set prices, issued a statement from his Reading, Pennsylvania headquarters saying, “If the farmers do not like the prices allowed them for this produce let them choose men of more learning and understanding the next election.”
These are just a few examples to which many more could be added—a boom-bust cycle, conscription, debt and debt assumption, a push toward central banking, and violations of the rights and liberties of dissidents (e.g., Loyalists, etc.). While the American war for independence was considered a just war by Rothbard and many libertarians, we should at least temper our celebration of the 4th of July with the realization that war itself always centralizes government power and all that comes with it.