Revolution: Impact on the Economy

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Revolution: Impact on the Economy

In the decade prior to the American Revolution, the value of annual imports to the thirteen mainland colonies exceeded exports by £1 million per year. At the same time, the British colonies of North America were undergoing rapid economic growth, thus overshadowing any apparent negative aspects of the continuing trade deficits. As a result of both immigration and natural population growth, the population of the colonies rose from approximately 1 million in 1750 to nearly 2.5 million by 1775, thus rapidly increasing the availability of needed labor, both free and bound. The value of land and resources, through fast and steady improvements, also increased, spurring the development of a domestic market for locally produced agricultural and manufactured goods. Indeed, not only were the thirteen mainland colonies generally prosperous, their domestic economy was growing more rapidly than any other sector of the British Empire.

Despite this growth, the colonies were not self-sufficient. The prosperity of the colonies remained in every way dependent on their collective position within the British mercantile system. First, the colonies relied on trade with other parts of the British Empire, including the home country, the West Indies, Canada, Scotland, Ireland, and the Indian subcontinent. Goods obtained through trade allowed the colonies to concentrate on those areas of economic development that would benefit them the most—subsistence and cash-crop agriculture, mineral extraction and processing, craftwork for local markets, shipbuilding and the carrying trade.

Second, the colonies benefited from immigration during the 1760s and early 1770s precisely because they were part of the British Empire and thus havens of economic growth and opportunity. Servant and slave populations poured into the colonies in this period because their labor was required to increase economic development. Third, the colonies relied on British entrepreneurs. Although domestic capital was becoming more readily available for investment, British investors supplied a vital proportion of the monies and credit necessary for commercial and industrial development in the colonies. Trade deficits aside, in the 1760s the mainland colonies, particularly because of the greater availability of land, for the first time rivaled the West Indies as a growth area for future profits.

Despite attempts to avoid unwanted regulation and taxes, most American colonials realized that continued association with Britain was to their economic advantage. For their part, neither Parliament nor English merchant-manufacturers saw any reason to share economic power with the American colonies. By 1775, a war that was not economically advantageous to either side became unavoidable. The American economy was particularly hard-hit, and it was only the tremendous potential of the former colonies that allowed for the reestablishment of a vibrant economy within a decade after the Revolution.

immigration and labor

From the outbreak of war in the spring of 1775 until 1781, immigration to the thirteen rebellious colonies by both free and bound fell to a trickle. Natural increase during the war raised the free population by over 200,000, but far more British regulars arrived in the colonies than migrating settlers. Although natural increase among slaves continued during the Revolution, the evaporation of new imports plus the escape of slaves and some emancipations caused the slave population to decline by nearly 1 percent a year. Shortages of servant labor were more acute. Nearly all servant indentures required four to five years of service; approximately 20 percent of all servant indentures expired each year. Without immigration, the normal replacement pool of servants was not available. As a result, by 1780 the servant population was less than 20 percent of what it had been five years earlier.

Also, approximately 20 percent of all servants and slaves used the upheaval of the Revolution to attempt escape from bondage, and nearly half of them were ultimately successful. Even unsuccessful flight, however, deprived masters of labor for a period of time. Because bound labor was vital to production and the stability of the economy, the decline in new arrivals signaled an inevitable decline in the economy. The absence of free peoples migrating to the new United States also severely limited economic expansion.

war production and military service

The war placed an enormous strain on the economy. The population, cut off from supplies formerly obtained through imports, was pressed to support a wartime economy without the immediate means to do so. Armies needed to be supplied while the colonial labor force was declining. Militias called up men to serve, and the newly organized Continental Army offered bounties for enlistment to attract both free men from among common laborers and servants and slaves who saw service in the military as an avenue toward freedom. Thus the workforce necessary to carry on war production was drained to create a fighting force to carry on the war itself.

agriculture and industry

Nearly half of all men between the ages of sixteen and forty-five served in some capacity during the war. This put a tremendous burden on women, who for long periods had to manage their own farm labor while taking on as much of the work of absent males as they could handle. Their burden was especially heavy given the shortage of servants and slaves due to reduced immigration. Agricultural production could not keep up with demand.

Industry faced similar problems. Despite the fact that the Continental Congress and individual states exempted industrial workers from military service so as to maintain production, at least 20 percent of workers from mills and ironworks turned up on muster rolls for the militia and Continental Army. Moreover, before the Revolution servants or slaves made up over 40 percent of the full-time workforce; the rapid decline in the availability of these workers between 1775 and 1781 not only impeded industrial production of supplies, but also caused the failure of a significant proportion of businesses.

wage and price controls

Labor and production shortages as well as imminent inflation led the Continental Congress to attempt to set wage and price controls. With these measures they hoped to stabilize work and prevent profiteering. Congress also recommended that local assemblies ensure that needed goods were produced at fair prices and made available to the army. In the spring of 1776, however, the Albany committee of correspondence, one of several anti-British bodies throughout the colonies, questioned the concept of fair pricing: Were fair prices to be determined in relation to prewar prices or within the context of the war? Lacking the power to impose universal wage and price controls, Congress left it to the assemblies themselves to set restrictions while continuing to strongly suggest them.

Initially, assemblies followed a general plan that allowed for wages and prices to inflate slowly, based on the rates of 1774. By early 1777 New England states had tentatively agreed to hold the wholesale costs of imported goods to approximately 250 percent of their 1774 prices, with retail prices held to 20 percent above wholesale. Wages were to be limited to 20 percent above the 1774 rates. Despite the initiatives, the states had little capacity to enforce these controls. Beginning with payments to skilled workers, wages quickly rose beyond the limits, and prices rose even faster.

In New York in 1777 representatives from the mid-Atlantic, Maryland, and Virginia gathered for a convention intent on imposing a coordinated series of wage and price controls. All proposed plans, however, were rejected. This did not end attempts to impose controls, but none were effective. Mainly because of spiraling inflation caused by the overdistribution of paper currency and its subsequent devaluation, by 1779 assemblies were trying to put limits on wages and prices that were only fifteen to sixteen times higher than in 1774. There was a universal distrust of the common currency and uncertainty in anything but a barter value for goods and services.

taxation

The Second Continental Congress in May 1776 took what power it could onto itself to carry on the war. But there were many things the Congress simply could not do without the acquiescence of the individual colonies. One of the key powers it lacked was the power to tax; it could only request funds from the colonial assemblies. It was up to the individual assemblies to decide whether and how much to tax so as to meet the needs of Congress.

Supporters of the Revolution and Loyalists alike had been force-fed a philosophy of "no taxation without representation" for nearly a decade. In this tax-aversive climate, few people wished to take on wartime tax burdens. Members of each colonial assembly had to weigh their desire to hold on to their seats against the need to impose new taxes. For the first year of the war, not only was victory uncertain but independence was not even the goal; most colonists simply sought a redress of grievances. Taxing a divided people to support a war whose goal was, in 1775, at best vague was a difficult proposition.

Acting cautiously, colonies (and later states) initially imposed new taxes that would raise barely half of what Congress asked—if in fact they were all collected. Assemblies seemed to pass tax bills that matched congressional requests only when it was understood that a large proportion of the taxes would never be paid.

currency

With no treasury to draw from, no power to tax, and no initial credit on which to borrow, the Continental Congress was faced with the nearly impossible task of financing the rebellion. In June 1775 the Congress determined to create, print, and issue a national currency—legal tender for the payment of debt—to pay the debts Congress itself incurred. Beginning that month, a total of $2 million was issued, and thereafter Congress essentially had monies printed and issued as needed—but backed by nothing. In the crisis of war, Congress tried to exercise as much fiscal responsibility as possible, but budgetary concerns were secondary to the primary task of paying for needed supplies. By the time Congress ceased new issues of currency, nearly $250 million had entered circulation in the form of Continental dollars, all of it virtually worthless. In a perverse twist, Congress had imposed acceptance of the currency through desperation: if farmers, manufacturers, carters, craftspeople, soldiers, and common laborers were to be paid for goods and services at all, they had to take the rapidly depreciating continental dollars and hope they would be worth something after a not-too-certain victory. In 1781, because it took $146 in continentals to buy what $1 had purchased in 1775, even victory in the war could not reverse the devaluation.

At the end of 1781 even the most ardent rebels questioned the economic state of the fledgling nation. Could the new nation ever fulfill the potential it had shown in 1775? The situation looked grim as the peace talks in Paris began.

property: confiscation and destruction

The most obvious tax-evaders from the very beginning of the war were Loyalists. Although at least half the colonial population did not support the war, most of these people were neutral rather than in opposition. They may have questioned new tax burdens and refused to pay some or all of them, but they were not necessarily trying to undermine the war effort. Loyalists, however, viewed any effort to confront Great Britain militarily as treason and were not about to support such an effort financially.

For a time, Loyalists who were not vocal in their protest faded in with other tax evaders. But by 1777 Loyalists were being targeted to have their taxes collected; they faced imprisonment if they refused. In 1778 individual states began to pass confiscation acts that initially centered on the seizure of Loyalist property for nonpayment of taxes, but these acts quickly became another method to finance the war. Loyalists were labeled traitors to their states and to the new country to which they had never sworn allegiance; agents of the state assemblies confiscated their properties and auctioned it off to raise money for support of the Revolution.

The confiscation of Loyalist property did not adversely affect Loyalists alone. The process of claims against individuals for treasonous actions took time, and many personal grudges took on the aspect of loyalty tests. Many business owners were harassed by competitors and workers over other issues, but questioning the loyalty of someone who had taken a neutral stance in the war often resulted in boycotts and physical attacks on individuals and property. Such activity slowed production and negatively affected the economy.

Confusion over ownership and use-rights also caused production delays and economic distress. For example, in 1774 George Taylor, an ironmaster who leased the Durham Iron Company in Bucks County, Pennsylvania, renewed his lease of the operation from the chief shareholder of the Durham Company, Joseph Galloway. In 1775 Taylor was the first ironmaster in the colonies to agree to the manufacture of ball and shot for the Continental Congress. The Durham Company produced ammunition for the Continental Army for two years, until the British invaded Philadelphia and the surrounding countryside. British soldiers attacked and damaged the Durham furnace, which remained out of operation for over a year until the British abandoned Philadelphia.

In the meantime, Joseph Galloway had declared his loyalty to Great Britain and fled Philadelphia with the British army in June 1778. When Taylor returned to Durham and attempted to get the ironworks operating again in the service of the United States, he found that Galloway's property had been confiscated under orders of the Supreme Executive Council and was to be inventoried and sold at public auction. It took Taylor nearly a year to plead his case through piles of red tape in order to begin operations and produce the supplies the rebel armies so desperately needed.

Destruction of property was a common consequence of the war. The coastlines of New York, New Jersey, Delaware, Maryland, and Virginia were the scenes of continuous raids by both rebels and the British, with both sides attacking and destroying the properties of their enemies—wharves, warehouses, ships, and mills. As the zones of battle moved through the states, destruction in the countryside followed. In New Jersey, eastern Pennsylvania, and Delaware, both armies scavenged for food and destroyed the farms, fields, fences, and livestock of those they determined to be supporters of the other side. The American armies usually distributed scrip (paper currency for temporary use) or continentals to pay for what they took from farmers (for what it was worth), but the British typically confiscated what they needed and moved on. When the war moved to the South, the Carolinas and Virginia were ravaged, particularly by the British under Lord Cornwallis, who, in frustration, instituted a scorchedearth policy against supposed rebels. The destruction of cities like Norfolk, Virginia, caused both immediate and long-term economic distress.

debt

The American Revolution was a time of severe economic hardship. The war left a legacy of economic problems that lasted for a dozen years after its conclusion. In late 1781, as the war wound down, the new United States could begin to calculate the price of independence. The debt to France, including direct subsidies and credit extended for supplies, was approximately £12 million, with interest accruing. Another £500 thousand was owed to the Dutch and Spanish. Congress had sold $3,330 million in bonds to private citizens at between 4 and 6 percent interest; with an empty treasury, it had no immediate means to meet its postwar obligations. Congress was indebted to the suppliers of goods and services to the army for scrip written by quartermasters to the tune of more than $100 million.

The debt situation in the states was just as bad. Most states had printed their own currencies to pay for supplies locally, and by 1781 over $200 million in state-issued paper was in circulation. Although locals usually trusted their own state's currency more than the overly inflated continentals, most paper currency had lost at least 75 percent of its value, led by Rhode Island's issues, down about 87 percent. The states collectively were in debt to private citizens for over £5 million in unredeemed bond issues, which were accumulating interest at rates between 8 and 18 percent.

the aftermath of independence

In short, the economy of the new nation in 1781 was a shambles. The United States had combined debts of nearly £40 million, no national treasury, and a national government, under the Articles of Confederation, with no power to tax. It had no international credibility to borrow monies against. Its devastated countryside, including a manufacturing base that even at its previous best had supplied 10 percent of consumer needs, would take several years to recover. It was at least temporarily barred from its place within an international commercial network on which it had been dependent for 150 years.

The United States has a remarkable ability to rebound from disaster. Based on the state of the economy in 1781, the Revolution would likely have destroyed the future of most peoples. Little more than one decade later, because of the immediate efforts of Robert Morris, the superintendent of finance under the Articles of Confederation, and the fiscal vision of Alexander Hamilton, the constitutional United States was on the verge of two centuries of unprecedented growth.

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Michael V. Kennedy

Encyclopedia of the New American Nation