Transcript Lecture 2: The Colonial Legacy

The Colonial Legacy,
the Crisis of the Colonial Regime
and the Seven Years War
Colonial Economy: Labor, Capital, and Land
• Labor: populating the
colonies with free settlers,
indentured servants, and
slaves
– Population 1700---160,000
– Population 1750---1,177,000
– Population 1770---2,132,000
(largest city Philadelphia with
40,000)
• Rural and thinly populated:
2nd U.S. Census 1800:
– U.S.: 5,308,483
– New Jersey: 211,149---so with
8722 sq.m.
=24 people per sq mile
– Today, NJ: 8,724,560 with
1,134 people per sq. mile
(most densely populated
state)
The Colonial Economy
• Capital: buildings, ships and animals for energy
(horses)
• Land: royal policy---initial huge land grants but
growth of smaller holdings, fee simple
• Large plantations and small farms, small towns
and cities
• Agriculture (70-80% of economy): tobacco, rice
and indigo in the South, the breadbasket of the
Middle Colonies; mixed farming in the Northern
colonies plus shipping, naval stores, shipping,
and sea products
• Artisan and home manufactures—no factories.
• No Banks or Financial Institutions permitted
GDP in 1790
•
•
•
•
•
•
Nominal GDP $180 million
Real GDP (year 2000 $) $3.65 billion
Population 3,929,000
Nominal GDP p.c. $46
Real GDP p.c. $929 or twice medieval levels
In 2004, U.S. GDP p.c. is $36,956
2006
1998
1990
1982
1974
1966
1958
1950
1942
1934
1926
1918
1910
1902
1894
1886
1878
1870
1862
1854
1846
1838
1830
1822
1814
1806
1798
1790
$12,000.00
Real GDP per capita
1790-2008, (year 2000 $)
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00
The Colonial Regime: Governance
• Colonies established as
– proprietorships
– royal colonies
– some delegation of legislation to colonial
assemblies—propertied males.
• Appointed Governor can veto.
• Board of Trade (in Britain) determines
constitutionality of American laws.
Economic Policy: Mercantilism
• Mercantilism---the dominant theory of economic
policy
• Mercantilists argued that a strong state required
heavy intervention in the economy.
• Key issue was money---to sustain armies and
navies.
• Aim to stimulate overseas trade---get an export
surplus---gold inflow.
• A zero-sum, predatory world. Gold in king’s
treasury and merchants was gold denied to
others.
• Ban export of specie (gold and silver coin) from
Britain
Mercantilism and the Colonies
• Colonies should provide supplies to Great
Britain, not be a burden or help enemy
• Frustration with American colonies. In 1660,
colonies trading heavily with the enemy—the
Netherlands and France.
• Result: Navigation Act of 1660 and 1663 and
Admiralty Courts to enforce in 1696:
Enumerated export products (tobacco, cotton,
indigo, sugar) must be carried on colonial or
English ships and must first land in British ports.
• Trade restrictions and discriminatory tariffs
exacerbate colonial trade deficit.
Annual Balance of Payments
1768-1772 (£ sterling thousands)
Debits
Commodity Exports
Commodity Imports
3,920
Sales of Ships
Shipping, Insurance
Indentured Servants
80
Slaves
200
Taxes to Britain
40
Military & civil expenditures
Credits
2,800
140
600
450
Balance Financed by specie flows or debt of 30
Consequences for (1) Monetary
System and (2) Financing Enterprise
• For the Monetary System
– Estimated annual deficit of £20,000 to
£40,000 (av £30,000 must be paid by specie
or borrowed)
– No gold or silver mines---hence monetary
scarcity
• For Financing Enterprise
– Some short-term debt, merchants credit,
increasing indebtedness, especially tobacco
planters.
– No long-term investment, except from savings
(2) Financing Consequences
The Modern Flow of Funds
Financial Markets
Borrowers
Savers
Financial Institutions
Flows
Returns
The Colonial Flow of Funds:
Consequences for Growth?
Financial Markets--non-existent
Borrowers
Savers
Financial Institutions--almost non-existent (a few
land banks)
Flows
Returns
(1) No Banks, No Paper Money and a shortage
of Gold and Silver….so…..
• Barter---what’s the
problem?
• Wampum---legal tender
for private debts in
Massachusetts until 1661.
• Tobacco—in Maryland
and Virginia. Quality?
Government
warehouses—tobacco
notes. Crop dependent.
• Other—furs, hides, nails,
musket balls
How well do these types of
money work?
• Money has three functions
–Unit of account
–Means of exchange
–Store of Value
Payment of Taxes
• In 1682, Governor Cranfield listed the articles
to be taken in payment and their prices for
tax payments:
–
–
–
–
–
–
–
Pine Boards at any convenient landing place,26s
White Oak Pipe Staves, at 50s
Red Oak Pipe Staves, at 35s
Beef,2d. per lb. Pork,3d.
Indian Corn,3s per bush., Wheat,at 5s
Pease,5s, Malt,3s Ffish, at price Curr't.
And whosoever shall pay ye Rates in money
shall be abated one third part."
Colonial Coinage?
• Parliament prohibits private export of English coin
• Parliament prohibits establishment of a royal mint in the
colonies.
• Colonies try and then are fobidden. (In 1652, the first mint
in English America was established at Boston. Pine Tree
Shilling below.)
• Colonies used foreign monies, especially coins minted in
Spanish America—notably Mexico, which had silver mines.
• But each colony had its own unit of account---there were
New Jersey pounds, shillings and pence and so forth.
Colonial Coinage
• Parliament expected colonies
to rely on foreign coins--especially Spanish dollar of 8
reales, subdivided by
eighths---”pieces of eight”.
• A Spanish dollar if melted
down and delivered to
English mint would have
yielded in British money 4
shillings, 6 pence. The
exchange rate was thus,
$1.00 = £0.225 or $4.44 =
£1.00
NOTE:
1 pound (£)=
20shillings (s) = 240
pence (d)
and then 1shilling = 12
pence
How to handle balance of payments
deficit and money scarcity?
• Colonial governments wanted to entice Spanish
coin into their colonies so they overvalued it.
Equivalent to a devaluation of Colonial pounds.
• In 1642 Massachusetts set the exchange rate at
5 shillings
• In 1645 Virginia set rate at 6 shillings
• In 1672 New York set rate at 6 shillings.
• Objective to expand the coinage in circulation
and solve the balance of payments problem—
how does it fix this?
What’s the balance of payments issue?
• Assume price of tobacco is same throughout
world in Britain, Spain, and Virginia: 4s.6d.
British pounds sterling or ($1) one Spanish
dollar per pound of tobacco
• Exchange rate: 1lb.tobacco = 4s.6d. Colonial =
$1 = 4s.6d.British sterling
• Virginia . Two options if there is a balance of
payments deficit.
– (1) Coin Outflow. Prices fall. Deflation. So 1lb.
Tobacco = 4s colonial. Now $1 or 4s.6d.British buys
more tobacco---increases sales, corrects balance of
payments. (fall in price of 22%)
– (2) Virginia proclaims that a Spanish $ is now worth
5s colonial ($worth 11% more). So $ buys more
tobacco---increases sales, corrects balance of
payments. Devaluation of Colonial pound
• Why does Virginia prefer #2---debtors yell
Consequences
• Like a modern currency devaluation
(depreciation)---value of debts in colonial
pounds falls in value.
• British merchants who lent to colonists
furious
• In 1704 Queen Anne issued a
proclamation that limited overvaluation to
133% of value.
• Stops efforts to correct balance of
payments!
What to do about the Scarcity of Money?
• Benjamin Franklin, “A Modest
Inquiry into the Nature and
Necessity of a Paper Currency”
(1729—age 23). In favor of
mortgage-back currency issue by
land banks. Increase medium of
exchange, no inflation if credibly
backed by land or future taxes.
• Adam Smith, “Wealth of Nations”
(1776): “a prince who should enact
that a certain proportion of taxes
should be paid in a paper money of
a certain kind, might thereby give a
certain value to this paper money,
even though the time of its final
discharge and redemption should
depend altogether on the will of the
prince.”
Social Savings of Money
• By increasing real paper money the government
allows individuals to conserve specie.
• If paper money is superior as a medium of
exchange then it increases welfare by lowering
transaction costs.
• Opportunity for government to increase real
balances by issuing paper money—a tax.
• But need to credibly commit to back with specie
or taxes or land.
(1) Bills of Credit
• Issued by a colony’s
treasury to pay for
expenditures----mostly
wars with Indians or
French. Issue specific
amount, pledged to be
retired out of future
taxes, up to 20 years.
(1) Bills of Credit
• “Backed” by future taxes—meaning that they
will be redeemed by specie in the future.
• Massachusetts first issues bills of credit to
pay soldiers in 1690.
• Maryland collected export tax on tobacco to
redeem outstanding currency.
• Value of notes fluctuated with credibility of
legislature. Some colonies terrible offenders:
New England before 1750, and South and
North Carolina---kept notes in circulation or
increased quantity.
New Jersey Bill of Credit
(2) Loan Office Notes
• Currency issued by government loan offices.
These “loan offices” or “land banks” did not
accept deposits.
• Loans granted to residents of colony with real
estate as collateral. Collateral usually 2 times
value of the loan. Notes are “backed” by land.
• Aim to help purchase land. Set maximum loan
£25 to £100 and up to 12 years to repay and low
interest.
• Interest on loans pays expenses of colonial
government.
• Repayment with currency is then used to retire
notes or make new loans.
• Stability of Value depends on credibility of land
bank.
Late Colonial Monetary System
• Money=gold and silver coins & currency (bills
of credit and loan office notes)
• Problems?
Smith (1984): Colonial Massachusetts
• Two periods: (1) 1720-1750 (2) 1751-1776
• Currency—both bills of credit and loan
office notes.
• Other New England colonies currency
legal tender.
• Small quantity of specie in circulation.
Conclusion for the first period, 1720-1750?
Debtors and Creditors
• Most colonies want to expand money supply.
Planters and farmers borrow (debtors) and
sell crops.
• English merchants were creditors---Key
question for them: would they have to accept
colonial pounds or pounds sterling?
• Colonial pounds and pounds sterling
exchange rates varied. Problem of colonial
depreciation.
• Board of Trade permitted currency to pay
taxes and repayment of loans but NOT to pay
private debts—that is to make it legal tender.
The British Response
• Currency Act of 1751—Parliament sides with English
merchants. New England colonies prohibited from
issuing new bills of credit and land banks prohibited.
• The act forced the New England legislatures to
finance deficits with sale of interest bearing treasury
notes with 2 year maturities in peace and 5 years in
war. Notes convertible into specie on demand.
• Act had a sweetener---the British government agreed
to reimburse New England colonies for expenses of
war with Canada—King George’s War (against
French and Indians 1740-1748). Paid in specie.
Massachusetts uses specie to reduce its tax
anticipation notes.
Conclusion?
Why?
The Crisis of the Seven Years War
Seven Years War
War of the Spanish
Succession
War of the
Austrian
Succession or
King George’s
War
Seven Years’ War
• British send thousands of troops
• British pay salaries and expenses in
specie.
• Colonies asked to bear a share. They
raise local militia, led by officers below
rank of general. (Washington was a
colonel.)
• Parliament promise to reimburse colonies
for part of their costs.
Seven Years War 1756-1763
• The total war expenditures by colonies
were £2.5 million, of which the British
Parliament paid £1 million or 40%. The
cost represented about 3% of annual
income per year.
• The colonies banned from issuing fiat
currency. They financed war largely by
issuing bills of credit or debt that was then
rapidly retired by high postwar taxes.
• Burden disproportionate
Massachusetts
• Massachusetts borrows £700,000 at 6% of its
total expenditure of £818,000.
• Currency Act of 1751 stipulates all treasury
notes must include rigid schedule of taxation
designed to eliminate debt in 5 years. Huge
increase in property and estate taxes,
especially in Massachusetts.
• Total tax revenue rises from £10,000 to
£60,000 p.a. even with £352,000
reimbursement from Parliament.
• Huge burden on Massachusetts population
Other Colonies
• Virginia and Pennsylvania pay with currency but
lower taxes and slower phase out.
• New York gets ½ of expenditures covered by
Parliament. Only finishes retiring rest by taxes
over rest of 1760s.
• New Jersey spends £200,000 but Parliament
only grants ¼ for reimbursement. Does not
raise enough taxes. Only in 1765 is a plan put in
place that reduces this currency over 15 years.
Post-Seven Years War
• London merchants fear that colonial courts will side
with debtors and press the Board of Trade.
• Board of Trade persuades Parliament to pass
Currency Restraining Act of 1764 extends 1751 act to
all colonies.
• Act of 1764 forbids issue of new new currency that
included legal tender provisions.
• Colonial outcry. Colonial legislatures force governors
to submit legislation to Board of Trade under threat of
no salary.
• Board rejects SC and NY, but in 1770 allows PA and
NY with legal tender for public only transactions.
After effects of Seven Years War
• Seven Years War---1756-1763
• Result higher military expenditures—colonists
must provide support: Sugar Act 1764, Stamp
Act 1765, Declaratory Act 1766, Quartering Act
1765, Townshend duties 1767, Tea Act 1773,
“Intolerable” Acts of 1774, Quebec Act 1774
• Lawrence Harper (1942): “As a mother country,
Britain had much to learn. Any modern parents’
magazine could have told George III’s ministers
that the one mistake not to make is to take a
stand and then yield to howls of anguish.”
At end of colonial period
• 1773 Parliament
votes for act to
allow currency
issue as legal
tender at face
value for public
but not private
payments.
The End of the Colonial Regime
• War for Independence 1775-1783 cost 15
to 20% of annual GDP, similar to Civil War
and World War I (World War II 40%)
• Heavy reliance on money finance
(seigniorage) instead of bond finance---the
dominant feature in later wars.