Articles of Confederation ( ) League of Friendship between states Reaction to British Rule. States had sovereignty and could establish own laws, currency, and tariffs States had all domestic power, central government had little or no power. Congress dealt with foreign issues and debt. Congress had no power to tax and could only ask for donations. 1 state = 1 vote regardless of size or population 13 out of 13 states had to approve changes No judicial branch to judge and no executive branch to enforce congressional laws The states under this arrangement could act only on their self interest

Articles of Confederation ( ) States voluntarily donated money but still enjoyed the protections of the central government regardless if they donated. Rhode Island donated a grand total of $0.00 States did not have to contribute but still enjoyed the external benefits- classic “free rider” problem In terms of a repeating prisoner’s dilemma the states that did donate realized that it wasn’t worth supporting all of the states and of course would seek their self interest. states not donatedonate not1, 15,0 states donate0, 53, 3

Articles of Confederation ProblemsCausesSolution States did not follow Central Government’s laws That Central Government had no enforcement power Increase Central Power The Central Government had no money. It couldn’t pay debts. The Central Government had no power to tax Give the Central Government power to tax Inflation Over printing by both the Central Government and state governments National Currency Disputes and division among states States created inter-state tariffs, taxes and navigational rights disputes National court system, central control of inter-state trade No trade or treaties with foreign nations and no reprisals against nations that hurt trade The Central Government had no power to enforce Make it easier for the Central Government to act Instability both economically and politically No Central PowerIncrease Central Power Resources were not allocated to their most useful purpose. The number one dagger in the heart of a free market society is instability.

1776 Dec. of Independence Thomas JeffersonDivision of Power Inspired by Locke Constitution Wealth of NationsDivision of Labor Adam Smithand Specialization Economies of scale