Economics of American Revolution

Economics of American Revolution

Was Revolutionary motivated by Economics?

1. No popular sentiment for independence. One estimate is 1/3 population pro Brisith. 1/3 for independence and 1/3 indifferent. Colonial elite were in favor of independence not common man.
2. All evidence suggest colonial economy grew both in overall size and per capita.

Navigation Acts

Passed in 1630s

1. All trade must be carried in ships built in Britain or colonies. Crew had to ¾ british or colonial
2. All foreign trade came through Britain
3. Enumeration- certain goods could only be exported to England tobacco sugar cotton indigo but was expanded latter.

However, membership in the British Empire had both benefits and Costs

Benefits

1. Military protection ie reduction of piracy Cost to British was about 400,000 pounds (British National income was about 130 million pounds in 1770.
2. Protected markets for some goods like colonial shipping
3. Subsidies for some goods like indigo

Costs

Taxes which were low

1.Taxes in the Colonies were not high relative to those in Britain.

The level of taxation in Britain was high relative to the rest of the world and its colonies.

Taxes
GB / 100
Ireland / 26
Maryland, penn, mass / 4
NY / 3
Conn, Virginia / 2

1. Enumeration increased the cost of some imports and exports

1. prohibition of manufacturing

How burdensome were these?

Thomas (1965) employed a counterfactual analysis to assess what would have happened to the American economy in the absence of the Navigation Acts.

Enumeration is like an excise tax. If it were reduced increases the producer surplus on American exports and increases the consumer surplus on amercian imports.

Thomas estimated the loss of both consumer and produce surplus to the colonies as a result of shipping enumerated goods indirectly through England.

These burdens were partially offset by his estimated value of the benefits of British protection and various bounties paid to the colonies.

Supply of colonial exports would have been higher in Europe, price lower in Europe greater but price in colonies higher , quantity greater, producer surplus greater. Thomas estimates price in Va for tobacco would have been 33% higher without enumeration.

For imports, removing enumerations would increase supply from Europe, decreasing price and increasing consumer surplus.

The outcome of his analysis was that the Navigation Acts imposed a net burden of less than one percent of colonial per capita income. A number of questions about the prices Martin used but regardless of how you make the estimate the burden is small, but not equally shared.

What explains Revolution?

1763 French and Indian War expensive for British started to increase taxes.

Sugar act, stamp act, tea act. Colonist boycotted and protested taxes were reduced or repealed.

However, on the same day it repealed the Stamp Act, Parliament passed the Declaratory Act stating the British government had the full power and authority to make laws governing the colonies in all cases whatsoever including taxation. Policies not principles had been overturned.

The second involves Land policy

With the acquisition from the French of the territory between the Allegheny Mountains and the Mississippi River the British decided to isolate the area from the rest of the colonies. Under the terms of the Proclamation of 1763 and the Quebec Act of 1774 colonists were not allowed to settle here or trade with the Indians without the permission of the British government. These actions nullified the claims to land in the area by a host of American colonies, individuals, and land companies. The essence of the policy was to maintain British control of the fur trade in the West by restricting settlement by the Americans.

May be concern for future taxes and restrictions motivated revolution.

Regardless of why War breaks out in 1775-1782. War at sea is emphasize most by the British. Try to Blockade ports.

What is the economic impact? To understand this have to understand how the war is financed.

Continental Congress does not have a lot of power. Limited ability to tax.

Naval war is wage through privateers- They get to keep what they capture. Quite effective- British lost 18 billion in shipping.

1. Disruption of Trade-
2. Does not effect small farmers producing for themselves or local market. Some benefit because they sell to the highest bidder
3. Not as large an effect on South as might expect they are able to evade British blockade.

Price controls- Set maximum price farmers could charge continental army. Largely responsible for Washington’s disastrous winter at Valley Forge. Figured out that this did not work.

Printed Money- Lots of Money ¼ of billion dollars, states also printed money. Initially planed to redeemed with specie but clearly could not, value of continental $ driven to 0 by end of war.

War ends in 1782, Goldin estimates that percapita income growth declined .34% annually between 1774-1793.

Some winner, price of tobacco increased 50% by 184 but down to 1790 to prewar levels. No British protection for shipping. New England shipping industry suggers, indigo farmers in South loose out.

Institutional Change in Early National Period

Articles of Confederation replace Continental Congress in 1781.

1. Fed gov does not have power to tax depends on revenue sharing with states.

1785 billed the states 3 million $ by 1787 received less than 4%

To impose tariff needed approval of all 13 states.

Cannot pay war debt. Cannot pay public goods.

Trade is also unstable

Frontier issues

Lead to Constitutional Convention of 1787. Agreement that national government needed the power to tax in order to pay government debt, provide for national defence and judiciary and to in some way regulate interstae and international commerce but

1. Federal system with a stronger national gov but preserving states rights

1. National system with strong federal government and limited state rights

Latter system won out.

Two questions? What role did economic interest play in writing the constitution? What was the effect of constitution on economic growth.

Charles Beard- 1913 the first to suggest that the delegates to the constitutional convention wrote a documents that maximized their personal selfinterest. Attacked in popular press and by academics at the time.

What were their interests:

Occupations were

24 lawyers

8 merchants

4 farmers

6 planters

1 minister

1 printer who? (Benjamin Franklin)

29 owned public securities avg value $2,900

24 lawyers

8 merchants

4 farmers

6 planters

1 minister

1 printer who? (Benjamin Franklin)

29 owned public securities avg value $2,900

12 owned private securities avg value 9,000

18 owned slaves avg 95 slaves

5 owned more than 100 slaves which was quite a lot.

What would these interests care about:

Supporters of strong gov

Creditors (bond holders) control inflation, pay debt (Constitution gave Fed monopoly on note issue)

Merchants- Fed has control of interstate commerce,

Western land speculators, want fed to be able to defend frontiers and expand them

Supports of weak fed gov

1. Debtors , inflation is in their interest, avoid taxes (maybe land holders as well()
2. Slave Owners afraid fed gov dominated by Northerners would end slavery

Too Simple- Delegates had to take constituents interests into play- also vote trading

McGuire and Ohsfeldt first too correlate voting behavior with variables designed to represent personal interest (age, English ancestors, officer in war), Economic interests (slave, net worth in land, wealth, debt etc) and constituents interests both personal and economic.

Found that when both delegates and constituents interests were the same tended to explain voting best, in general consituents interests were the better variable.

What did constitution do for economic growth? Does it tell us about strong vs weak?

Growth increased but other things were partially responsible.

Tax and pay debts are key to gov ability to provide public goods. (Like roads and canals)

Some things in constitution that Fed can do

1. provide for common defense
2. regulate foreign and interstate commerce power to fed gov to impose tariffs and quota not state
3. postal service
4. weights and measure
5. dispose of western land
6. control money supply- state cannot issue notes

Perhaps the most important part of the constitution is

In section 10

Clause prohibits states from enacting any law impairing the obligation of contract”

Sets the stage for modern contract law under which individual parties who agree to a contract are essential law maker. The create a legal regime or organization which unless it violates some part of the constitution the states cannot over turn. This is available to anyone, not just a select few.

3 branches of gov, executive, legislative wider representations

Checks and balances written into the constitution make it more difficult for groups to set up a system of property rights that promote their interests over the groups. Placed constraints on behavior.

Not clear the exact results growth occurred in colonial era with decentralized government.