Download Economics of the American Revolution

Economics of the American
Revolution
Was Revolutionary War motivated by
economics?
• Not much popular sentiment for
independence
– Best estimate is 1/3 population pro Brisith, 1/3 for
independence and 1/3 indifferent.
– Colonial elite were in favor of independence,
probably not common man.
• All evidence suggest colonial economy grew
both in overall size and per capita.
Popular View
• Revolutionary War was a response to policies
of the British government towards its empire,
specifically tax
– Taxes were high
– Taxation without representation
• Is this view true?
British Empire,
Colonists point of view
• Both costs and benefits of membership in the British
Empire
• Consider the Navigation Acts
– Passed in 1630s
– All trade must be carried in ships built in Britain or colonies.
Crew had to ¾ British or Colonial
• Benefitted New England ship building industry
– All foreign trade came through Britain
• Increased price of imported goods in colonies
• Reduced price of exported goods
– Enumeration- certain goods could only be exported to England
• Originally tobacco, sugar, cotton, indigo but was expanded latter.
• Reduced price that colonial producers received
– Subsidized production of some goods
Benefits of membership in Empire
• Military protection
– Reduction of piracy. Cost to British was about
400,000 pounds (British National income was
about 130 million pounds in 1770.)
• Protected markets for some goods like colonial
shipping
• Subsidies for some goods like indigo
Costs of membership in British Empire
• Taxes
• The level of taxation in Britain was high
relative to the rest of the world and its
colonies.
• Great Britain
100
Ireland
26
MA, PA, Maryland
4
NY
3
CN, VA
2
Other costs
• Enumeration increased the cost of some
imports and reduced the price received for
some exports
• prohibition of manufacturing
• How burdensome were these?
Counterfactual Analysis
• What would have happened to the American
economy in the absence of the Navigation
Acts?
• Thomas (1965)
• Enumeration like an excise tax
Enumeration Costs
• Thomas estimates of costs and benefits.
Overall he finds the burden less than 1 % of
GDP. Highest estimate is about 3% of GDP.
• However, burden is not shared equally.
– Price in VA for tobacco would have been 33%
higher without enumeration.
Events that change expectations
• French and Indian War in 1763
• Expensive for British (Colonial taxes do not cover the costs)
– Increase in taxes
– sugar act 1764, stamp act, 1765, Townshend duties 1767, tea act,
1773
• Colonist boycott and protest and taxes were reduced or repealed.
• 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.
– Concern after Townshend duties that taxes would be collected, but it
is repealed in 1770
– Tea Act tips the scale over to war
Events that change expectations
• Land policy after French and Indian War
– British acquire territory between the Allegheny
Mountains and the Mississippi River
– The Proclamation of 1763 and the Quebec Act of
1774 forbid colonists to settle there or trade with
the Indians without the permission of the British
government.
• maintain British control of the fur trade in the West
• Reduce conflict with native Americans and reduce
British defense expenditures
Causes of Revolution
• Restrictions on settlement
• Concern for future taxes
• Colonial elites especially in the southern
colonies are harder hit by trade restrictions
• War breaks out in 1775. Ends in 1782
Economic Impact of Revolutionary War
• Disruption of Trade
• British emphasize war at sea. Try to Blockade
ports.
– Does not effect small farmers producing for
themselves or local market. Some benefit as price
increases from demand from both sides.
– Not as large an effect on South as might expect
they are able to evade British blockade.
•
• Americans are able to counter even though
Continental Congress has limited ability to
tax.
• Naval war is fought through privateers.
– They get to keep a percentage of what they
capture. (incentives matter)
• Quite effective- British lost 18 billion pounds
in shipping.
•
Financing of Revolutionary War
• Continental Congress does not have a lot of
power. Limited ability to tax.
• Price controls. Set maximum price farmers
could charge Continental army.
– Largely responsible for Washington’s disastrous
winter at Valley Forge.
– Quickly realize that this does not work.
– Why doesn’t it work?
Supply and demand analysis
The demand curve
shows how much
consumers want to buy
at a given price.
P
$3
D
5
Q
If the price is $3, then
consumers want to buy
5 units.
Demand curve is
downward sloping
Supply and demand analysis
S
P
$3
The supply curve shows
how much producers
want to produce at a
given price.
If the price is $3, then
producers want to sell
15 units.
15
Q
Supply curve is upward
sloping
Supply and Demand Analysis
P
S
$5
D
10
Q
The equilibrium price
is $5. At that price
the Qd is equal to the
Qs, 10. There is not
pressure on the price
to change. What
happens if the price
is higher than $5.
Supply and Demand Analysis
P
S
$7
$5
D
5
10
15
Q
If the price is $7,
quantity firms want
to produce is 15,
but consumers
only will purchase
5. Inventories will
build up and firms
will reduce price to
sell goods.
Supply and Demand Analysis
P
S
$5
D
5
10
15 Q
If price is set at $3,
quantity demanded is
15, but the quantity
produced is only 5.
There is a shortage.
Continental Congress
passes a price control
law that sets the price
of food and supplies at
a level below
equilibrium price.
Farmers and
merchants will not sell
to Continental army at
that price.
Financing of Revolutionary War on
land
• Printed Money
– Lots of Money. About ¼ of billion dollars.
– States also printed money
– Initially planed to redeemed with specie, but
could not without power to tax
– Value of continental $ driven to 0 by end of war.
Economic Costs
• War ends in 1782. Goldin estimates that per
capita income growth declined .34% annually
between 1774-1793.
• Some winners– tobacco price increases
• Some losers
–
–
–
–
New England shipping industry
Indigo farmers in South
No British protection for shipping
US manufactured goods cannot compete with British
Institutional Change in Early National
Period
• Question is how strong should the federal
government be compare to state government?
• Articles of Confederation replace Continental
Congress in 1781.
• Fed gov does not have power to tax. It depends on revenue
sharing with states.
• In 1785 billed the states 3 million $ by 1787 received less
than 4%
• To impose tariff needed approval of all 13 states
• Could not police frontier or resolve international trade issues
Why does the state exist?
What determines the policies of the state?
• Economist answer is the state exists to provide
public goods
–
–
–
–
MC of one more person using the good is zero
Cost of excluding users is high
Government can tax and force all to pay
Many are necessary for the market to function
• National defense, property rights etc
– What determines what kind of goods are provided?
Clearly some states provide public goods that
encourage economic growth and some do not.
American case
• Federal government’s inability to collect taxes
makes it unable to provide public goods
• Leads to Constitutional Convention of 1787
– Delegates were appointed by state governments
who were elected by voters
– General consensus in America that rivalry would
take place through democratic process
Issues at Constitutional Convention
• Agreement that national government needed
the power to tax in order to pay government
debt, provide for national defense, judiciary
and to in some way regulate interstate and
international commerce
Issues at Constitutional Convention
• Two systems proposed:
– Federal system with a stronger national gov but
preserving states rights
– National system with strong federal government
and limited state rights
Strong Government Supporters
• Creditors (bond holders) wanted gov to
control inflation, pay debt
– Needed Fed gov to control note issue
• Merchants wanted Fed gov with control of
interstate commerce
• Western land speculators wanted Fed gov to
be able to defend frontiers and expand them
•
Weak Government supporters
• Debtors - inflation is in their interest, avoid
taxes
– Landowners may also want to avoid tax
• Slave Owners- afraid fed gov dominated by
Northerners would end slavery
• National system adopted but does not resolve
all the tension between states rights and
rights of federal government
What was the effect of constitution on economic
growth? What does it tell us about strong vs
weak gov?
• Growth increased during early national period
but there are other factors responsible as well
as change in government
• Tax and payment of debts are key to gov
ability to provide public goods which are
necessary to economic growth
Constitution allows government to:
• provide for common defense
• regulate foreign and interstate commerce
– fed gov can impose tariffs and quotas not states
•
•
•
•
•
postal service
weights and measure
dispose of western land
control money supply- states cannot issue notes
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 makers
– Available to anyone, not just a select few.
– Allows for institutional change when change will
increase efficiency
Economic interests of individuals vs
the economy as a whole?
• 3 branches of gov, executive, legislative and
judicial
– Placed constraints on behavior of both elected
and appointed officials
• 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 economy as
whole
• Growth did occur during colonial period but
Britain was provided national defense
• Some government is necessary to growth