Economic History of the US

The Colonial Era, 1607-1776Lecture #4

Peter AllenEcon 120

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Mercantilism: Gold flows only to London

Economic subordination

Parliament did not allow

colonies to bop surplus

Kept colonies from

solving capital shortage

Specie money, Money

supply can increase if

gold comes in

Severely limited…

1. economic growth

2. Economic development

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Monetary system limited Colonial Economies

Persistent shortage

All currency based on specie

… limited ability to earn net. cash from trade under mercantilism…

Parliament forbade export of English

coin

Refused a royal mint in colonies.

No mines

No banks

₤, but…

Liquidity, unit of account, store of value

Early types of money used:

Barter

wampum

“Inspection notes” on tobacco

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Tobacco Inspection Note

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Colonial Money

Specie that did appear came from trade with other European colonies in Americas …especially Spain

8 Reales Silver Coin, called a “Dollar” or “piece of 8”

1 dollar, units of 8 Reales or “bits,” 1 bit = 12 ½¢

Equivalent to ₤0.225 (4s2d)

Minted usu. in Mexico City or Lima, Peru

Colonies experimented with paper currency Most colonial govs. issued “Bills of credit”

Only paper currency in the world at the time…

Widely used, backed by gold or silver

English merchants accepted, but complained

Parliament, Currency Acts of 1751 & 1764 limits on colonies ability to issue fiat currency

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New Jersey Bill of Credit

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Virginia Bill of Credit

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Modern Economic Theory…

Supply of money need to grow for

economy to grow… Quantity Theory, MV = PY

Specie systems…

…means bop surplus, i.e. gold “in”

Economic growth requires… Money set aside, i.e. “capital”

To build new businesses

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“New Order,” 1763

British wins French and Indian War,

1754-63

Parliament adopts new NA policy

Tightened Mercantilism rules…

1. Increase colonies’ rate of Tax, including

payment for defense

2. Blocked western settlement

3. Clamp down on colonial manufacturing

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Financial Crisis of the Seven Years War

Seven Years War

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“New Order,” 1763

English residents had one of highest rates of tax

in the world

NA colonists one of lowest, 20-25% of avg. Brit.

Parliament said:

“fair to ask colonists to help pay for garrisons on the

frontier” (cost ≈ ₤350K annually)

Sugar Act, 1764 designed to cover 10% of cost

Stamp Act, 1765 of frontier garrison

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Proclamation of 1763

Parliament flips on westward

settlement by colonies Prevent trouble with locals

Sell land for cash

Crown takes control of

western land.. Royal Proclamation of 1793

Reserve for Indians and for land-

sales to wealthy English settlers

Quebec Act, 1774

“Containment” of original

colonies on the seaboard

Withdrawal of cheap,

unsettled western land

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Map 6.1 Colonial Land Claims

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Map 6.2 Reassignment of Claims

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First Crisis, 1763-66

Franklin made 2 arguments

1. Parliament levying an internal-type, rather than external-type, of tax

2. Taxes levied without colonists having a vote in Parliament

Colonists’ boycott of English/West Indian exports was successful

…Parliament repealed the Stamp Act in 1766

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Second Crisis, 1766-70

Economic sanctions of colonies worked to

pressure British exporters, but…

Political pressure did not…

Parliament re-asserted its “supremacy” Declaratory Act, 1766

Quartering Act, 1765

Townshend Duties, 1767 (tea, glass, paper, pigment for paint) (form of tax switched from tax to tariff, or “external-type”)

Colonists again boycott British exports 1769, colony imports dropped by approx. 2/3

English exporters lost money, pressured Parliament

Townshend Duties repealed, 1770 (ex. Tea)

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Third, Final, Crisis, 1773-76

Tea Act, 1773: English East India Company allowed to

ship tea straight to NA, eliminating colonial importers

Boston Tea Party,

Intolerable Acts, 1774 Closed Boston Port

Accused British officials to be tried elsewhere

Charter of Mass. Revised to extend power of local British governor

Troops to be quartered in Boston

First Continental Congress, 1774 Demand, Parliament repeal all post-1763 laws

Too late

Quarrel over economic relations, taxes and trade became moral and political

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“New Order,” 1763

1. French and Indian War, 1756-63

2. English gov. preoccupied internally

English revolution 1625-51

Deposition of last Catholic King, victory of Parliament, 1690

3. Prior to 1763… English gov. lax on colonial affairs

Colonies governed themselves, esp. in economic matters

Encouraged westward expansion of colonies

Parliament allowed colonies to “free ride” on defense

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