America’s War of 1812

I am anti-war, but if war there must be, then the people should be honest about its financing, and pay for the war while it goes on rather than pushing the finance to future generations.  The War in Iraq was fiscally dishonest in that the costs were not in the official federal budget, and it was paid for by borrowing.  The World Wars and Civil War were also paid for in large part by with war bonds and money creation.  As this year is its bicentennial, it is worth looking at how the War of 1812 was financed.

At first, Congress doubled the tariff to pay for the war, but since trade shrunk during the war, tariff revenue shrank rather than grew.  The US Constitution empowers Congress to levy a direct tax if it is apportioned by state population.  So Congress levied a direct tax on property, mostly on real estate.  The states could take a 15 percent discount if they collected the taxes themselves and transferred the revenues to the federal government.  Most states took advantage of this, which spared the federal government the expense of assessing the real estate and taxing the landowners.  Another federal tax was levied in 1815 to pay for the war of 1812, and then the federal property tax terminated.

Adam Smith wrote that wars should be paid for by taxes rather than borrowing, so that the people would not favor a war unless it was needed such as to defend against foreign aggression.  If the War in Iraq had been finance by taxes, it would most likely not have started!

The use of real estate taxes for the War of 1812 is a lesson for public finance.  If taxes there must be, then instead of a national sales tax or flat-rate income tax, the federal government could tax the states rather than the people.  Let the states pay, at their option, their share of the budget based on their share of population.  This works best if there is a federal tax on land value rather than on income or goods.  If all states did this, there would not have to be any federal tax bureaucracy.

Unfortunately, as Hegel observed, people and governments do not learn the right lessons from history.  At least libertarian candidates should learn from the War of 1812.  Two hundred years ago, the federal government was able to pay for national defense without an intrusive income tax.  We don’t need stinking taxes on wages and goods.  Let the states finance the federal government.  Let the states then have whatever public finance system they want. Political power would then flow back from the federal to the state level, and this decentralization would be good for liberty.  Remember the War of 1812!

14 thoughts on “America’s War of 1812

  1. Fred: I’m afraid you are woefully mistaken about the financing of the War of 1812. While the U.S. government did double the tariff and impose a direct tax on the states, as you report, it also imposed excise taxes and a stamp tax. But all these combined were insufficient, so the bulk of the cost was covered by massive borrowing. The national debt, which had fallen to $45 million before the war, soared to $127 million. Some of this borrowing initially involved short-term Treasury notes, a few not even bearing interest, that were acceptable for tax payments and, hence, closely resembled government paper money. But most was borrowed from the state-chartered banks, which over-expanded to purchase government debt and as a result induced wartime inflation and suspended specie payments outside of New England. In short, the primary way the War of 1812 was financed was with privately issued fiat money. The national government on the eve of peace was also considering income and inheritance taxes.
    –Jeff Hummel

  2. Jeff, thanks for the information. So the banks created fiat money to lend to the federal government? Nevertheless, the attempt to partially finance from direct taxes paid by the states is a model that could be copied today to replace the income taxes. Was the suspension of specie payments a provision of the contract between the banks and the depositors? I wonder if such fiat borrowing could happen with free banking.

    • Alas, the War of 1812 suspension of specie payments, as with nearly all subsequent suspensions, was NOT a provision of the deposit contract. Copying a practice developed in the U.K., it was instead permitted by the state or sometimes the national governments. Indeed, American state bank charters almost universally prohibited such option clauses for bank notes. So the private fiat money of the War of 1812 arose only through a legally mandated breach of contract.

      As for the direct tax on states, the provision permitting it was put into the Constitution as a way of enforcing the kind of requisitions on the state governments that the Continental Congress had employed to finance the American Revolution. After the absence of a bill or rights, it was the most universal objection of the Anti-Federalists to ratification. The direct tax has only been used three times in American history since the Constitution’s adoption: during the undeclared Quasi-War with France under president John Adams, during the War of 1812, and during the Civil War by both the Union and Confederacy.

      During the Quasi-War, as in the subsequent War of 1812, the direct tax was accompanied by excise and stamp taxes, including stamp duties on legacies and probates, qualifying as the U.S. government’s first inheritance tax. The Quasi-War direct tax even inspired a violent tax revolt in eastern Pennsylvania, known as Fries Rebellion.

      The Civil War direct tax was levied by the Union on both northern and southern states, proportionate to their population, as the Constitution mandated. Obviously, the Confederate states did not pay the tax during the war, so afterwards they were required to come up with money, with a 50 percent penalty. Not considered a very lucrative source of revenue, the direct tax was never imposed again.

  3. Enjoyable read as I strongly agree war should be paid for by the generation engaged in it. I especially enjoyed the exchange that followed.

    I would note that war bonds are a form of borrowing as the bond must be paid and money creation dilutes a currency which is the equivalence to a hidden tax as the value of the bond repayment potentially becomes less than the original bond.

    Also, unlike in the past, tariffs would be beneficial to the U.S. They failed in the past because we had large trade surpluses so the tariff hurt us more than those we traded with. Now the roles have been reversed. As such we would now benefit especially since the dollar is now the trade currency.

    • If tariffs help an economy, then California should have tariffs against imports from New York and Texas. Does an international versus domestic border have any economic significance?

    • It is widely assumed the U.S. Constitution does not allow tariffs among the respective states under the commerce clause though it does not specifically specify it.

    • Yes the Constitution is always relevant but in the case of your question then I’ll look past that and re-answer.

      Your question seems flawed as I don’t see a point by maybe this will answer what you were trying to ask; Smoot Hawley was a case that proves tariffs will work against the party with the trade surplus yet for the party with the trade deficit. We are now operating with tariffs and the equivalent of tariffs against us and now we have massive trade deficits with major trade “partners.” If we were wise we would enact targeted tariffs and incentivize manufacturing that draws its materials from internal suppliers much as many other nations do.

      We’re being played for the fool and volunteering to wear the goofy hat.

    • The reason the US has a big trade deficit is that US taxes make exports more expensive. Most other countries have big value added taxes, which get subtracted from export prices. WTO rules allow for the deduction of VAT but not of income taxes from exports. If the US shifted from income taxes to either VAT or LVT (land value taxation), the trade deficit would largely disappear.

      But given current taxes and WTO rules and the trade deficit, high tariffs on imports would destroy US comparative advantages, artificially boosting high-cost industries. The US would have to abandon the WTO, and other countries would retaliate with tariffs against the US.

      If California has a big trade deficit with New York, would a tariff against imports from NY help? If not, then a tariff against China is likewise counterproductive. The law of comparative advantage works regardless of borders. I have a big trade deficit with my local grocery store; I import their food and they get no products from me, only a money asset. Would a tariff on the food store’s exports help me? Sure I would buy less of their food, but I want their food, and I want it cheap!

    • VAT is a nightmare that stunts economic activity domestically in many of the nations using it. WTO rules do not prevent the U.S. from acting in its own best interest.

      For your analogy purpose CA tariff would only help if imports from NY exceed exports to NY. Thus the analogy works for China.

      Your food store analogy is ridiculous as you don’t have a trade structure conducive to the comparison.

  4. 🙂 It’s not so important how governments are empowered as it is what they are allowed to do to individual liberty. Tyranny at the state level is not necessarily better than tyranny at the federal level. The power to create money out of nothing to pay for wars or anything else is destructive of property and freedom.

  5. Seems to me, any significant war brings on fiscal and economic fraud proportionate to its magnitude. And as typical in government, the fraud persists long after the causal conflict…

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