Economic Growth and Revolutionary Might-Have-Beens

 

All political revolutions have significant economic causes. The immediate impetus for the French Revolution, for example, was the effective bankruptcy of the French state. This precipitated King Louis XVI’s fateful decision to issue an edict convening the Estates-General in 1789.

France’s long standing economic problems, which dated back to Louis XIV’s long years of war, had been exacerbated by his great-great-great grandson’s choice to lend significant financial and military support to the American revolutionaries, secretly in 1776 before becoming open about it in 1778.

We will never know if a decision by France against supporting America’s revolutionaries would have resulted in a political outcome that maintained some formal links between the American colonies and Britain. What we do know is that non-economic factors—sympathy for some of the American revolutionaries’ ideals and a desire to diminish British power—overrode economic considerations and proved to be decisive in Louis XVI’s choice to go to war. A similar point underlies the conclusion of Vincent Geloso and Antoine L. Noël’s argument that America’s revolutionaries recognized that there would be significant economic costs associated with declaring their independence. But they went ahead anyway.

Counterfactuals are always speculative exercises. Yet Geloso and Noël illustrate, convincingly in my view, that economic growth in America was likely slowed down by the American colonies’ exit from the British Empire. To this analysis, however, two broad glosses can be made which shed further light on their conclusion.

During the years before and after the American Revolution, Britain and its imperial possessions began, albeit slowly, to move away from the mercantile arrangements that had dominated the European world since the sixteenth century. Had the American colonies remained within the empire, they would likely have benefited from these developments instead of being locked out, as Geloso and Noël note, by the establishment of trade barriers across the Atlantic following the Revolution.

A prominent example of Britain’s liberalizing trend was the Free Ports Act. Passed by Parliament on June 6, 1766, it established free trade ports in the British Caribbean: two on the island of Dominica and four ports in Jamaica. The Act also reduced the scale of trade regulation between Britain’s North American possessions as well as British, French, and Spanish colonies in the West Indies.

The Free Ports Act was always a limited liberalization. It contained compromises that maintained some mercantilist regulations in place. But as Gregory M. Collins notes, the Act did represent a “conscious movement in the direction of freer commercial intercourse”[1]—including for Britain’s American colonies. Edmund Burke, who had played a major role in the Act’s drafting and passing, pointed out “The trade of America was set free from injudicious and ruinous Impositions—its Revenue was improved, and settled on a rational Foundation—Its Commerce extended with foreign Countries; while all the Advantages were extended to Great Britain.”[2]

After the American Revolution and William Pitt’s appointment as prime minister, there were further successful efforts to lower tariffs. Pitt was a great admirer of Adam Smith and had thoroughly absorbed Smith’s insight that reducing tariffs would diminish the price of goods, reduce smuggling, and likely increase tax revenues. Early in his administration, Pitt worked to reduce tariffs on goods ranging from tea and spirits to raw materials. Then in 1786, the Pitt administration signed a commercial treaty with France. Known as the Eden Agreement, this further reduced duties on silk, linen, and other goods highly desired by Britain’s growing class of industrial manufacturers.[3] 

The treaty was abrogated when war broke out between Britain and Revolutionary France in 1793. What is not in doubt, however, was a momentum towards trade liberalization and the growing sway of Smith’s ideas upon elite political opinion in Britain. Had the American colonies remained with the Empire, it is reasonable to speculate that they would have benefited from this.

There is, however, another side to this question: that which concerns the economic consequences of decisions agreed upon by leaders of the newly independent United States following the drafting and ratification of the U.S. Constitution.

Estimating growth levels in the pre-revolutionary American colonies is a hazardous exercise, given the limits of existing data. But estimates by historians of the era range from zero to 0.3-0.5 percent annually.[4] After 1790, there was an upward tick in growth. The lowest estimate is about 1 percent annually for the decade; the highest is 3 percent. These are no small shifts, and it is worth reflecting upon possible causes.[5]

The trade situation remained difficult for America for the first half of the 1790s. War between Britain and France created new impediments for American merchants. The Treaty negotiated by John Jay between the United States and Britain and ratified by the Senate and President George Washington in 1795 resulted in the former being granted “most favored nation” status from the latter; yet it also limited America’s commercial access to Britain’s prized Caribbean possessions.[6]

Between the end of the Revolutionary War and 1790, the most important political change was the replacement of the Articles of Confederation in force between 1781 and 1789 by the U.S. Constitution. From this flowed a number of economic consequences that, we may suppose, contributed to the expansion of economic growth in this decade. We can also surmise that, absent the American Revolution, these changes may not have occurred.

Perhaps the most important effect was the establishment within the United States of a common market. This facilitated a greater division of labor and specialization throughout America.[7] Indeed, a spirit of entrepreneurship swept the country after the Constitution’s ratification, dwarfing that which existed in colonial America.[8]

The Constitution itself did not create an entrepreneurial, competitive economy. But it did confer powers upon the Federal Government which allowed it:

These powers needed to be executed. Article I, Section 8, of the Constitution gave Congress the responsibility “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers.” But policymakers had to decide how to exercise these powers in areas ranging from trade to taxation, public finance, capital markets, bankruptcy, and property rights.

Among the decisions made by Congress, under the guiding hand of Treasury Secretary Alexander Hamilton beginning with his 1790 landmark Report on Public Credit, were the institution of a national currency and national Mint, the creation of a national bank, and the consolidation and funding of a public debt. As a collective whole, those political choices provided an institutional framework for the development of financial markets (much of which occurred at the state level) that took the United States from having a premodern financial system to one which by 1800 rivaled those of financial superpowers like Britain and the Dutch Republic.[10]

Laws to protect intellectual property rights and establish clear bankruptcy procedures were also passed in the 1790s. This reduced the costs involved in closing down failed businesses and diminished the incentives for politicians to bail out such companies.[11]

A good example of the growth-enhancing changes enhanced by the political conditions prevailing after 1789 concerns corporations. Robert Wright has detailed the dramatic rise in chartered corporations in the 1790s. During the colonial era, he notes, a mere eight corporations were chartered. That, Wright states, owes something to the sheer complexity of British imperial regulations and corporate law that imposed high costs on those seeking to incorporate. Only 21 corporations emerged in America in the 1780s. In the 1790s, however, 290 corporations were added to this number.[12]

Wright argues that the reduction of political uncertainty following the Constitution’s ratification produced a growing willingness to invest in large scale capital-intensive enterprises. Obtaining a charter became simpler and less-expensive, thus making it easier for entrepreneurs to obtain the benefits of limited liability, transferable shares and other legal privileges associated with corporations.[13] 

Many of these decisions were actively disputed at the time. Their acceptance required persuasion of legislators and powerful social and economic groups via carefully drafted formal state papers as well as highly polemical newspapers and pamphlets.

The vital point, however, is that it is unclear whether these developments would have occurred without the American Revolution and the subsequent decision to take what was essentially a loose Confederation of States and turn them into the republic produced by the U.S. Constitution. In that sense, the choice to take up arms against Britain and declare independence in 1776 had unintended positive consequences for growth in America that may have offset the effects of reduced access to European markets.

[1] Gregory M. Collins, Commerce and Manners in Edmund Burke’s Political Economy (Cambridge: Cambridge University Press 2020), p. 238.

[2] Edmund Burke, A Short Account of a Late Short Administration. The Writings and Speeches of Edmund Burke, Vol. II. eds. Paul Langford et al. (Oxford: Clarendon Press,                     1766/1981), p. 55.

[3] See W.O. Henderson, “The Anglo-French Commercial Treaty of 1786,” The Economic History Review 10 (1957): 104–112.

[4] See J.J. McCusker and R.R. Menard, The Economy of British American, 1607-1789 (Chapel Hill: University of North California Press, 1985). 

[5] See Richard Sylla, “Financial Foundations,” in Founding Choices: American Economic Policy in the 1790s, eds. Douglas A. Irwin and Richard Sylla (Washington DC: National               Bureau of Economic Research, 2011), 82-83

[6] See Jerald A. Combs, The Jay Treaty: Political Battleground of the Founding Fathers (Berkeley, Los Angeles: University of California Press, 1970). 

[7] See Sonia Mittal, Jack N. Rakove, and Barry R. Weingast, “The Constitutional Choices of 1787 and Their Consequences,” in Founding Choices, 40. 

[8] See, for example, Thomas Doerflinger, A Vigorous Spirit of Enterprise: Merchants and Economic Development in Revolutionary Philadelphia (Chapel Hill, NC: University of North           Carolina, 1986).

[9] See The Constitution of the United States: A Transcription, accessed July 4, 2023, https://www.archives.gov/founding-docs/constitution-transcript

[10] See Richard Sylla, “Comparing the UK and U.S. Financial Systems, 1790-1830,” in The Origins and Development of Financial Markets and Institutions, from the Seventeenth Century to the Present, eds. J. Atack and L. Neal (Cambridge: CUP, 2009), 209-239.

[11]  See Mittal et al., “The Constitutional Choices of 1787 and Their Consequences,” 41. 

[12] See Robert Wright, “Rise of the Corporation Nation,” in Founding Choices, 220-221

[13] See ibid., 219-220.