Why were the colonies economically important to England?

Written by: Alp Doğan Yel

Introduction

The American Revolution holds a prominent place in the American psyche and consequently has been a subject of debate and inquiry. The earliest explanation for the American Revolution, the Whig explanation, analyzed the Revolution within an ideological framework, presenting it as “the inevitable response of colonists united in love of liberty to a King and parliament bent on tyranny”[1]. Mirroring the Declaration of Independence, the explanation has since become popular among the public discourse of the United States, tying into the notion of American exceptionalism and the importance of values such as liberty and freedom. However, like any other revolution, American Revolution was not a sudden spark, but more so the cumulative result of a vast complex of socio-economic and political forces, lying dormant and accumulating behind the scenes. Although political and ideological differences – such as the colonists’ disdain towards the stagnant nature of the British ruling elite (Andrews 1926) and preferences for freedom, certainly played a role in instigating revolt – evidence overwhelmingly points towards burdens of British rule as being the primary culprit of the Revolution (Egnal and Ernest 1972, Nettels 1952, Reid 1978).

A substantial portion of the literature on British mercantilism and its effects on the American colonies has focused on measuring the costs of economic burden of British mercantilist policies (Harper 1942, Thomas 1965, McCelland 1969, Walton 1971, Broeze 1973) and growth within the colonies (Mancall and Weiss 1999); however, to best of my knowledge, there has not been any studies that explicitly inquire into whether the colonists were better off being independent. In this paper I will attempt to fill this void. Building upon the estimates and results from prior literature, I argue that the combination of direct and indirect costs incurred in order to gain independence were overshadowed the gains from independence, making the colonists better off being a part of the British Empire in the short run.

The first section of the paper will discuss the gains to be obtained from independence by looking at the burdens of British mercantilist policies on the 13 Colonies. The second section will look into the costs incurred to obtain independence. The third and final section will discuss whether the 13 Colonies were better off under British rule in light of the results from the preceding sections.

I: Gains from Independence

Instigated by mercantilist imperatives, the British colonies in the Americas existed solely within the mercantilist framework where they were expected to serve the interest of the English nation and promote its wealth and power. As part of this mercantilist framework, the British attempted to regulate economic activity within the colonies, restricting colonial manufacturing in order to promote the export of British manufactures into the colonies (McCusker 1996). However, given that most of the manufacturing during the period took place in small settings – like households –  it was unfeasible to enforce restriction meaningfully on manufacturers in a cost-effective fashion. Even when it took place in larger settings – such as mills – restrictions were loosely enforced, exemplified by the fact that despite the further restrictions on iron production placed in 1750, 25 iron mills were established over the following 25-year span in the Pennsylvania and Delaware alone. In the end, the British regulations on the economic life of the colonists ended up being either superfluous, ignored, or inconsequential (Walton and Rockoff 2010), a minor nuisance at best.

For the British, the primary goal was promoting English trade and English merchants in the colonies while limiting others. Passed in mid-17th century, the Navigation Acts sought to minimize the role of foreign merchants in the colonies (McCusker 1996) would become the most economically consequential legislation enacted in the colonies (Thomas 1965).The greatest element of burden laid upon the colonists by the Navigation Acts came not from the taxes assessed, but instead from increased cost of shipment due to the provisions requiring England to be used as an entrepot (Harper 1942) thus increasing the cost of both imports and exports. Yet, even under exaggerated assumptions, the cost of British interference in colonial overseas trade via the Navigation Acts was at most 3% of the colonial GNP (McCelland 1969), illustrating the insignificance of burdens of British mercantilism.

Although the colonies clearly stood to gain economically from independence, they also stood to lose in other ways. The subordinate position of the colonies to the British metropole within the mercantilist framework does imply that the British were sole beneficiaries of this relationship. Despite their subordinate position, the colonists benefited from British rule by receiving subsidies and imperial protection. As Nettels (1952) and Thomas (1965) points out, the benefit of the British imperial protection were by far the greatest before 1763 since prior the expulsion of the French and Spanish from the Americas following the Seven Years’ War, the only other realistic alternative to British rule was domination by another European colonial power, most likely Spain or France. Even though the threat of French or Spanish invasion seceded following the Seven Years’ War, the colonies still benefited from the naval protection of the British royal navy. In addition to the military protection, the colonists also received bounties on goods such as tobacco, rice, and indigo which were perceived to be strategic by the British, helping sustain production that have otherwise been infeasible (Harper 1942).

Given that the colonists both benefited and suffered from the British rule, we need to look at the net burdens incurred in order to determine the gains from independence. Estimates by Thomas (1965), summarized in Table 1, suggest that the net burdens of British rule averaged to be $480,000 per year over the decade between 1763-1772 and $885,000 for the single year of 1770, which corresponds to $0.26 per capita per year and $0.42 per capita per year respectively. Under the most pessimistic estimates for average per capita income estimates for the period of 1763-1772  – which Walton (1971) suggests being as low as $65 –  the net per capita burden of British mercantilism equates to be 0.4% of average per capita income. To put it in other words, under the most pessimistic income estimates, the colonists stood to increase their per capita income by 0.4% if they break free of the British Empire.

II: Cost of Independence

The greatest and most direct cost incurred by the Thirteen Colonies to obtain Independence was the actual cost of the War of Independence on the colonial economy. Given the disruptions to record keeping during the initial years of independence, brought forth by the War of Independence and the replacement of the highly potent British imperial bureaucracy, we are unable to get precise estimates on the actual cost of the War of Independence (McCusker and Menard 1991); however, using income estimates for the 13 Colonies before and after the independence war, we can get an upper bound estimate on the cost of independence, including the cost of War of Independence. Improving on the previous estimates by Jones (1970), the most recent income estimates for the 13 Colonies by Lindert and Williamson (2011) indicate that the real gross personal income per capita measured in 1840 prices declined from $74.02 to $59.19, corresponding to a -0.86% per annum growth. Lindert and Williamson (2011) associate the decline in real income between 1774 and 1800 into three main factors: destruction of war, disruptions to overseas trade, and “crisis at the top”.

The first factor that contributed to decline in real income per capita, as identified by Lindert and Williamson (2011) is the effects of the War of Independence on the economy. As with all wars fought on domestic soil, the War of Independence posed severe physical destruction to the U.S. capital stock. However, as McCusker and Menard (1991) point out, physical destruction was not the only adverse economic impact of the War of Independence. Alongside the physical destruction from the war, capital goods from the private sector, such as sailing ships, were reallocated and repurposed to serve the war effort, contributing to decline in the capital stock. Furthermore, the war had adverse effects in the labor market as the labor supply declined due to workers being called into service. In addition to the effects in capital stock and labor supply, the physical activity of production in agriculture and manufacturing was also affected by the war due to disruptions caused by troop movements and military operations.

Alongside the direct effects in reduction to the capital stock, labor market, and the disruptions to the production process, the War of Independence also had severe indirect effect on the monetary side of the economy. The War of Independence differed from other wars involving the U.S. due to the unique challenge of setting up governmental institutions and raising revenue while also fighting the well-funded, formidable military force of the British (Baack 2001). In theory, a government has three options for raising revenue: taxation, borrowing, and printing money (seigniorage). As Baack (2001) points out, early on in the War of Independence, the Continental Congress lacked both the bureaucratic machinery to collect taxes as well as the political capital to impose them –  seeing as a stance against British taxes was a major rallying cry during the Revolution. Since Congress lacked a tax base to derive and was an entirely new entity with no credit history, it was effectively barred from utilizing loans to fund its military endeavor. As such U.S. Congress was left with only one viable option to raise revenue: printing money.

As can be seen from Table 4, which illustrates revenue received by Congress between 1775-1781, broken up by source, 66.9%[2] of the revenue raised by Congress during the Independence War came from currency emissions, leading to rapid inflation and reducing the real value of Continental dollar, seen in Figure 5. Both the direct effects of the war, destroying capital stock and reducing labor supply, and the indirect effects, instigating a hyperinflation that lasted nearly two decades, contributed to decline in real income between 1774 and 1800.

 The second factors that contributed to decline in real income per capita identified by Lindert and Williamson (2011) are the disruptions to trade that occurred between 1774 and 1800. The first negative shock to trade came during the War of Independence where the British blockade severely hindered all sea-based activities, including trade. Although the decrease in imports had the upside of fostering the growth and diversification of domestic industries and fruitful privateering endeavors helped recoup some of the lost income, these positives were far outpaced by the steep decline in earnings from the export sector (McCusker and Menard 1991). Although Shepherd and Walton (1976) estimate that the real value of total exports recovered following disruptions to trade during the War of Independence and even rose by 37% above pre-war levels by 1790, as shown in Table 7, this increase was overshadowed by an approximately 80% increase in population during the period, which indicates towards an extensive growth resulting from the increase in population rather than an intensive, export driven growth. The second shock to trade during the period came after 1793 with the Napoleonic Wars ravaging main trade partners of the U.S. and pitting them against each other. As can be seen in Figure 6, despite being overshadowed by the more drastic reduction following the Continental Blockade and the Jefferson Embargo, the volume of U.S. exports fell in the latter half of the 1790-1800 decade as a result of the Napoleonic Wars (O’Rourke 2006)

The third and final factor that contributed to the decline in real income per capita identified by Lindert and Williamson identify (2011) is what they call “Crisis at the Top”, which refers to summarize the overall demographic changes in the U.S. as a result of independence. According to Lindert and Willamosn (2011), the severed ties between the colonies and Britain resulted in many skilled and well-connected British loyalists eventually departing the U.S. with most of them moving to British Canada. In addition to the loss of a high-skilled base of labor, the urban centers in the colonies experienced severe devastation as a result of the war, triggering a mass move back to farming, which has a lower labor productivity than their previous occupation.

Given that nearly all of the major causes of the decline in real income per capita between 1774-1800 identified by Lindert and Williamson (2011) are directly correlated to the act of attaining independence, Lindert and Williamson’s (2011) estimate that the real incomes declined by 0.86% per annum can be used as an upper bound on the cost of independence in the short run. Even though the disruptions to trade due to Napoleonic Wars –  which were mostly independent of the colonists decision to attain independence –  are included in our estimate for the cost of attaining independence and therefore constitute a upward bias, the case can be made that these disruptions represent an indirect cost of forgoing imperial protection offered by the British, given that the impact of blockades and the volatility of trade during the Napoleonic Wars was smallest for the British due to the size and might of their navy (O’Rouke 2006).

Conclusion

Under British rule, the colonists benefitted from the protection of the royal navy, lower barriers of entry into the British market as well as its colonies, and obtained bounties on tobacco, indigo, rice, and naval stores. These came at the cost of surrendering their sovereignty over trade and their trade partners, which amounted to at most 3% of the colonial GNP (McCelland 1969) under exaggerated assumptions. It is important to note that not all of the incidence of British rule fell on to the colonies; the subjects of the metropole also bore some of the costs of this mercantilist relationship as indicated by lower tax burden in the colonies compared to the metropole (Davis and Huttenback 1982). Results from Thomas (1965) and Walton (1971) indicate that the net burdens of the mercantilist relationship between Britain and the colonies amounted to a loss of 0.4% per capita income, thus the economic gains from independence can be defined as 0.4% increase in per capita income.

In order to gain independence, the colonists had to tradeoff between 0.4% increase in per capita income and a lower growth in the economy for the short run, which ex post ended up being a decline in real income per capita equivalent to 0.86% per annum. Through independence the colonists not only incurred the costs of a destructive independence war and the hyperinflation as a result of funding the war through currency emissions, but also made itself more vulnerable to external shocks by forgoing the size of being within the British Empire and the protection it received from the British Royal Navy.

Despite losing the shackles of British interference in exports, the colonists did not experience export-led growth, yet they made themselves more vulnerable to external shocks to trade such as the disruptions during the height of the Napoleonic Wars. Given that the gains from independence amounted to a 0.4% increase in per capita income and the cost of attaining independence was a decrease in real income per capita amounting to 0.86% per annum between 1774-1800, I suggest that the 13 Colonies were better off being part of the British Empire in 1774; the 0.4 %increase in income per capita to be gained from independence did not make up for the short run sacrifice of 0.86% per annum contraction in real income per capita to obtain it.

[1] Reid, J. (1978). Economic Burden: Spark to the American Revolution? The Journal of Economic History, 38(1), 81-100
[2] Obtained directly by adding value of currency emissions in both phases and dividing up by the total revenue raised during the war in Table 4

References

Andrews, C. (1926). The American Revolution: An Interpretation. The American Historical Review, 31(2), 219-232. 

Baack, B. (2001). Forging a Nation State: The Continental Congress and the Financing of the War of American Independence. The Economic History Review, 54(4), 639-656.

Broeze, F. J. A. (1973). The New Economic History, the Navigation Acts, and the Continental Tabacco Market, 1770-90. The Economic History Review, 26(4), 668-678.

Davis, L.E. and Huttenback, R. (1982). The Cost of Empire, in Roger L. Ransom, et al (eds): Explorations in the New Economic History: Essays in Honor of Douglass C. North, New York: Academic Press, pp. 41-69

Egnal, M., & Ernst, J. (1972). An Economic Interpretation of the American Revolution. The William and Mary Quarterly, 29(1), 4-32.

Harper, L.A. (1942). Mercantilism and the American Revolution. The Canadian Historical Review 23(1), 1-15

Jones, A. (1970). Wealth Estimates for the American Middle Colonies, 1774. Economic Development and Cultural Change, 18(4), I-172.

Lindert, P. and Jeffery G. Williamson. 2011. American Incomes Before and After the Revolution. Forthcoming Journal of Economic History. Earlier version: NBER working paper 17211 (2011; revised February 2013)

Mancall, P., & Weiss, T. (1999). Was Ecomomic Growth Likely in Colonial British North America? The Journal of Economic History, 59(1), 17-40.

McClelland, P. (1969). The Cost to America of British Imperial Policy. The American Economic Review, 59(2), 370-381

McCusker, J., & Menard, R. (1991). Economic Growth, Revolution, and the Consequence of Independence in The Economy of British America, 1607-1789 (pp. 351-378). Chapel Hill; London: University of North Carolina Press.

McCusker, J. (1996). British Mercantilist Policies and the American Colonies. In S. Engerman & R. Gallman (Eds.), The Cambridge Economic History of the United States (Cambridge Economic History of the United States, pp. 337-362). Cambridge: Cambridge University Press.

Nettels, C. (1952). British Mercantilism and the Economic Development of the Thirteen Colonies. The Journal of Economic History, 12(2), 105-114

O’Rourke, K. (2006). The worldwide economic impact of the French Revolutionary and Napoleonic Wars, 1793–1815. Journal of Global History, 1(1), 123-149

Shepherd, J.F. and Walton, G. M. Economic Change after the American Revolution: Pre-War and Post-War Comparisons of Maritime Shipping and Trade. Explorations in Economic History 13 (1976): 397-422

Reid, J. (1978). Economic Burden: Spark to the American Revolution? The Journal of Economic History, 38(1), 81-100.

Thomas, R. (1965). A Quantitative Approach to the Study of the Effects of British Imperial Policy upon Colonial Welfare: Some Preliminary Findings. The Journal of Economic History, 25(4), 615-638

Walton, G. (1971). The New Economic History and the Burdens of the Navigation Acts. The Economic History Review, 24(4), new series, 533-542

Walton, G. and Rockoff H. (2010). “Three Crises and Revolt” in History of the American Economy (pp 90-103). Mason, Ohio: South-Western/Cengage Learning.

Why were the colonies important to England's economy?

How did England benefit from its colonies?

How did colonies benefit economically?

Why did England rely on the colonies?