Engerman S.L., Gallman R.E. The Cambridge Economic History of the United States, Vol. 1: The Colonial Era

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The

Revolution,

Constitution,

and New Nation 367

their loans to local authorities rather than to Congress; many states in turn

began to issue great quantities of IOUs to these merchants in anticipation

of tax revenues to pay the state debts. In numerous rural areas, taxes rose

to two to six times higher than prewar levels. As states like Connecticut,

New Jersey, and New York tried to supply nearby armies and hold down

the rate of inflation, local groups of farmers and shopkeepers resisted

paying the taxes that would help to retire outstanding currency emissions

and, simultaneously, demanded more paper money. Other regional inter-

ests argued that the vast tracts of unsettled land in their former colonial

domains could provide the sinking fund for land banks as well as for

militia veterans' pay. Georgia, North Carolina, New York, Pennsylvania,

and Virginia were especially well endowed with western tracts, and all of

the states had large contingents of advocates for state control over their

currency and debts. Although colonial governments that found themselves

in serious deficit-spending spirals typically resorted to hard currency poli-

cies,

many of the new states responded favorably after 1777 to myriad

local interests clamoring for more paper money, legal tender laws, and

higher agricultural prices.

Meanwhile, Congress's monetary system slowly collapsed. By 1777, it

took 3 dollars in Congressional bills to buy goods that cost

dollar in gold

or silver. By 1778, the ratio increased to 7:1; by 1779, it was 42:1; by

1780,

it was

100:1;

and by April 1781, it took about $147 of Congres-

sional bills to purchase what one dollar in silver specie obtained. Congress

received a loan of $6 million in specie from France in 1778, which it set

aside as security for a Continental Loan Office that dispersed $27 million

in government certificates to domestic investors who expected to earn

interest at over prewar market rates (normally 4 percent to 5 percent in

northern cities in 1774). Military need, however, prevented timely repay-

ment of this government debt and diminished the credibility of Congress

when it sought further loans during the later months of the war.

By March 1780, there was still $200 million of Congressional currency

and certificates in circulation, and delegates requested the states to tax

some of the national currency out of circulation at the rate of one silver

dollar for every forty paper continentals. Devaluation at such a steep ratio

increased speculative activities throughout the states; over 1781 and

1782,

Americans in all walks of life with even small amounts of specie

accumulated Congressional bills of credit, at the rates of 80, 100, and

even 120 to 1. Those who accumulated the bills cashed them in at state

locations for double or triple their investment. This plan redeemed $120

Cambridge Histories Online © Cambridge University Press, 2008

368 Cathy Matson

million in continental currency at a cost of about $3 million in specie. A

small number of speculators held most of the remaining $71 million of

Congressional issues in the hope that political independence would pave

the way for policies supportive of their full redemption at face value.

The second legacy of colonial-era policies appeared beginning in early

1777,

as Congress recognized the difficulties of uniting the new states in

order to conduct the war; given the enduring localism of the states,

Congress urged them to assume neomercantile responsibilities for regula-

tion, promotion, and production of wartime necessities. Some states re-

sponded to this mandate enthusiastically by creating new enterprises,

channeling domestic resources into import substitutes, and promoting

greater wartime production in traditional economic areas. Furnaces,

forges, and rolling mills that dotted the countryside of New

Jersey,

Penn-

sylvania, Maryland, Delaware, and Virginia since the 1750s increased the

size of their operations during the war, and some produced higher-quality

pig and bar iron and higher-quality finished goods. Greater quantities of

bar iron were "put out" to independent craftsmen for finishing into pails,

nails,

and horseshoes. Ambitious farmers responded to state government

appeals to open up new tracts of land for grazing sheep for wool, which did

not require as much labor in clearing and tilling as grain and vegetable

crops.

States aided farmers in getting sheep and cattle closer to armies and

urban markets by offering commissions to appointed drivers. They also

offered state payments for (1) wool to convert into army blankets and

clothing, and (2) the services of butchers, coopers, carters, and weavers.

Further, the states promoted increased use of cereals in making beer and

whiskey, which lessened dependence on imported wines and West Indies

rum. In addition, states hired skilled workmen to make and repair thou-

sands of barges, bridges, barracks, and wagons.

Various states also resorted to wage- and price-fixing schemes. "Unwor-

thy" as these laws might be in "infant republics," noted Congressional

delegates, they had "become necessary to supply the defect of public

virtue" unleashed by the Revolution.? Delegates from the New England

states had met in late 1776 to set prices for goods produced and traded

domestically. The following year, a meeting took place in Hartford for

similar reasons but added wage guidelines for farm laborers and artisans as

well. New Englanders were asked to limit prices for both agricultural

products and finished crafts to 75 percent over 1774 specie prices, al-

Feb. 15, Nov. 22, Dec. 20, 1777

Journals ofthe Continental

Congress,

VII:i24,1X1953-7, 1043-7,

quote at 1046.

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The

Revolution,

Constitution,

and New Nation 369

though certain urban trades were limited to a mere 25 percent increase. By

early

779» regional conventions had discussed, and individual state legis-

latures had enacted, an impressive array of import and export duties; wage

and price ceilings, laws against forestalling; limits on profits of

percent

to 40 percent; embargoes on foodstuffs; and, in some northern states,

requisitions of

wagons,

horses, and forage.

Not all urban and rural inhabitants believed that wage and price fixing

was wise. Rather, the issue helped draw lines of economic interest be-

tween, as well as within, groups of commercial farmers and urban produc-

ers more sharply, preparing the way for post-Revolutionary discussions

about the role of state governments in the economy. Current research

suggests that inhabitants who provided needed services and scarce supplies

to the state militias and Continental Army were sometimes in a position

to inflate prices for their labor and commodities far beyond what state

legislation permitted. Sterling prices of grain, for example, rose 200 to

600 percent in the first 2 years of the war around at least Hartford,

Providence, and Philadelphia. Despite state price-fixing legislation, Mary-

land salt appreciated in value 3,900 percent between 1777 and 1780;

wheat appreciated

5,000

percent in the same period. Despite state embar-

goes of exports from the major ports, exports of flour continued, and the

price of flour rose 100 to 300 percent in Philadelphia and Wilmington by

1779.

Merchants trading on their own credit, local producers, appointed

wagonmasters, rations masters, deputy quartermasters, and overland hunt-

ers and herders were among the growing number of creditors of military

suppliers.

Few rural inhabitants became prosperous from these activities, and

nowhere did the countryside experience uniform benefits from wartime

opportunities. Indeed, beyond the ribbon of settlement along the northern

coastline, rural Americans may have experienced significant short-term

hardship. Military recruitment took away a significant proportion of farm

laborers and livestock. Worn-down equipment was virtually impossible to

replace as long as the war effort absorbed new production of wood crafts,

earthenware, and metalware. Many farmers claimed that prices of farm

commodities did not keep up with urban black-market prices of

shoes

and

clothing for their families. Farmers who suffered economic distress

through the war often complained that state

financing

schemes were reck-

less,

that embargoes deprived them of markets, and that army officials

seized their grain and paid for it well below market prices. State officials

compounded their fears by fixing farm prices at unacceptably low prices,

Cambridge Histories Online © Cambridge University Press, 2008

370 Cathy Matson

while peddlers and domestic retailers charged them steeply rising prices

for necessities produced in coastal towns. Rural seasonal and day laborers

joined commercial farmers in protesting state policies because their own

fixed wages diminished in purchasing power as prices rose for basic needs

that they had to obtain from towns.

Urban craftsmen and small retailers were more supportive of price-

fixing measures in Massachusetts, New York, New Jersey, Rhode Island,

Connecticut, and Pennsylvania, where local populations at times resorted

to "taxation populaire," or the community's efforts to enforce customary

pricing and marketing. In 1779, for example, a crowd in Philadelphia

seized a merchant suspected of exporting flour that was needed at home.

After forcing him to sell the flour to them at prices they were willing to

pay, a public meeting proceeded to post prices - both wholesale and

retail

—

for over thirty commodities that civilians and soldiers required.

Boston and New York experienced similar actions, and fishermen's wives

in small ports periodically forced local merchants to lower their markups

on imports as well.

Conflicts in the states over currency

finance

and myriad economic regu-

lations should not obscure the significant degree to which the new sover-

eign states met pressing war needs. Moreover, certain kinds of local pro-

duction received an impetus from wartime need to expand and mature.

Home manufacturing provides an important example of widespread pro-

ductive energies that were applauded by state governments and that flour-

ished in the absence of any concerted efforts by the states to foster new

technology or a new division of

labor.

As they flourished, home manufac-

tures promoted new connections between city and country, merchants and

rural villagers. In some regions, Americans responded to military de-

mands by simply producing greater quantities of agricultural commodi-

ties,

such as hemp, linen, and woolens, with traditional household meth-

ods.

Independent rural artisans owned their own tools and raw materials,

worked largely for a local market with relatively stable demand, did not

require complex merchandising or credit operations, and may have weath-

ered the vagaries of markets with informal and often noncash arrange-

ments. This form of protoindustrialization, the most traditional and slow-

est to change, often involved females of

household between adolescence

and old age spinning - and weaving, once the Revolution skimmed off

itinerant skilled males - for local storekeepers, who provided the linkage

to customers. Farmers in near-western Massachusetts, and skilled slaves

and free whites in Virginia and Maryland, produced large quantities of

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The

Revolution,

Constitution, and New Nation 371

yarn and somewhat less cloth for local markets. Although New York and

Massachusetts made periodic experiments with "factories" that clustered

large numbers of spinners and weavers under one

roof,

the more prevalent

form of production was the single independent craftsman who responded

to local demand.

In other

areas,

more mature commercial agriculture and nearby commer-

cial ports combined in ways that promoted some reorganization of textiles

production before the advent of factories. At Philadelphia, Wilmington,

Newport, Salem, and other northern coastal cities, merchant-manu-

facturers who were dependent on foreign or major urban markets and

sources of credit assumed responsibility for putting out raw and semi-

finished materials to

cotters,

who lived in the countryside or small villages

and usually owned spinning wheels and sometimes their own looms, but

relied on the merchant for raw materials, collection of the cloth, and its

subsequent marketing. In addition to market and credit needs, merchants

involved in this system required fairly large numbers of local rural laborers

to be successful. Sudden outmigration, or dramatic changes in crop prices

that demanded more intensive farming and less attention to by-employ-

ments in textiles, adversely affected the merchant's labor supply. How-

ever, where textiles production expanded during the Revolution, it linked

women who performed a traditional household activity to the far-flung

requirements of the Revolutionary war and challenged extant values associ-

ated with female domestic labor. New patterns of production and distribu-

tion based on household manufacturing prepared a way for more capital-

intensive investments and factories in later years.

Many wartime economic experiments taught Revolutionary leaders that

governmental regulation and protection of the domestic economy were

essential for Americans' success - their critique of mercantilism notwith-

standing

—

and that international commerce could be forsaken only at the

peril of the new union. They believed that the new rural enterprises could

not be accomplished by self-interested economic agents in self-regulating

markets. They further charged that

new

state legislatures vied among them-

selves for scarce resources and funds, and failed to provide the states with

sufficient revenue from taxation. However, even when these critics articu-

lated the necessity for greater central government control over the domestic

economy, they expressed the hope that international commerce would

be less

encumbered with regulations in the future. Revolutionaries like John Jay

predicted that political independence would make "the whole world open to

us,

and

shall

at liberty

purchase from

those who will

sell on the best

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372 Cathy Mat son

terms"

and perhaps make possible "a prohibition of all laws in restraint of

trade" only in the context of restored international commerce.

By 1781,

disgruntled army officers, frustrated Congressional and state leaders, and

many urban residents who had not yet recovered from wartime dislocations

all began to identify with

group known as the

Nationalists,

who called for

familiar remedies to economic

dislocation:

healthy international commerce,

sound credit based on the reputation of

commercial elite, and specie-based

currency.

THE CRITICAL PERIOD

Nationalists did not represent a majority of Americans between 1781 and

1784,

but their numbers grew. Many urban inhabitants joined merchants

in celebrating a great flurry of commercial importation in response to

pent-up consumer demand, from the end of active war in 1781 to the

beginning of 1784. Eager to replenish depleted inventories and make

quick profits, American merchants placed orders with former correspon-

dents in British ports. As before, British imports were cheaper, of higher

quality, and of greater variety than those of any other foreign country.

Despite increased domestic productivity during the war, Americans could

not supply enough of the woolens, Irish linens, and hardwares and

housewares to satisfy demand after 1781, which further underscored their

reliance on international commerce. The bitterness of war did not com-

pletely overwhelm Americans' long-standing cultural ties to Britain. Com-

mercial correspondence with British firms resumed; prices and terms of

sales were communicated easily in familiar channels.

Outside the ranks of

Nationalists,

many observers insisted that postwar

commerce would flourish best if it was linked to the expanding domestic

economy and independent of European connections. Optimism about mu-

tual interest in commerce and the internal economy often arose in the

ranks of state leaders, of merchants and overland traders who prospered

during the Revolution, and of commercial farmers who looked forward to

internal improvements and rising demand for their surpluses. In a wide-

ranging public discussion of America's prospects, they described how

commerce aided initiatives in state banking and brokerage, as well as

John Jay to Robert R. Livingston, Paris, Nov. 17, 1782, in Francis Wharton, ed., Tie

Revolution-

ary Diplomatic

Correspondence

of the

United

States,

6 vols. (Washington, DC, 1889),

VI:

11-49, quote

at 31.

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The

Revolution,

Constitution,

and New Nation 373

recovery of shipbuilding and shipping services, on which urban growth

depended. Rapid resettlement of farms and rising land values throughout

the western reaches of the new states were portrayed as the natural con-

comitant of successful commerce. The same optimists noted that commer-

cial policies ought to be linked to the "civilizing tendencies" of small

farmers and planters, who hoped to earn additional income from by-

employments related to the production and transport of exportable sur-

pluses. Higher incomes would make consumption of more imported goods

within reach of most Americans in the near future, argued these writers.

They also noted natural interregional dependencies: commercial centers

would be most successful in their manufacturing when they could draw on

sources of both rural surplus foodstuffs and necessary raw materials like

lumber, hides, wool, and stone. By the end of the war, they reminded

readers, small producers could provide great quantities of necessary com-

modities and move them over long distances to markets. What was not

consumed in coastal settlements could be exported, in turn attracting

foreign coin and correcting the persistent shortages of

specie.

Some state

leaders added that public education, promotional societies, and wide-

spread experimentation in agriculture and technology would prepare the

ground for interclass and interregional cooperation and teach Americans to

avoid the dangers of expensive luxury imports. Internal migration to

western lands and immigration to coastal towns and cities would provide a

necessary pool of labor. Recent estimates of what observers in the 1780s

only roughly beheld show that the total American population grew from

1.2 million in 1750 to 2.3 million in 1776; it increased to 3.9 million by

1790.

Two sets of circumstances dampened this postwar enthusiasm and reori-

ented public and private views toward the Nationalists. The first was

troubled international commerce. After 1783, governments in England

and other nations enacted laws that interfered with Americans' ability to

compete freely for foreign markets, thereby worsening the effects of a mid-

decade depression in American port cities. The second set of circumstances

was the centrifugal, contentious economic interests rising among the

states.

Together, international and domestic economic crises underscored

that American hopes for rapid recovery and new development after the

Revolution might be misplaced; many Americans who were initially opti-

mistic about political and economic arrangements in the new state govern-

ments began to turn to Nationalists for different solutions after 1785.

Aggressive British actions against American trade were initiated begin-

374 Cathy Matson

ning on July 2, 1783, despite the policy of open British ports negotiated

at the time of the peace treaty that same year. British Orders in Council

decreed that England would no longer tolerate the presence of American-

built ships in trade to the British West Indies, a measure that sharply

curtailed business for American shipbuilders and their artisans and halted

West Indies exports of rum, molasses, sugar, cocoa-nuts, ginger, coffee,

and pimento to northern ports. By mid-1785, additional legislation

banned American meat and salted fish from British Caribbean possessions

and placed heavy duties

American whale oil, rice, tobacco, naval stores,

pig and bar iron, and certain kinds of peltry going to Britain. By 1784,

Britain cut off the Newfoundland and Nova Scotia whale and fishing

traffic to American vessels and prohibited American fish, whale oil, and

salted meats from entering England. The combined losses of ship sales and

services, declining commerce in fish and dressed meats, and steep duties

on American whale oil and naval stores traded directly to Britain hit New

England hardest. But southern exporters also faced the longer-term pros-

pects of stagnating markets for tobacco and rice due to high duties. Even

without legislation, however, New York and Pennsylvania merchants en-

countered obstacles to grain exporting to England and British West Indies

possessions because of fluctuating price levels and periodic foreign gluts

between mid-1784 and early 1787.

American observers noted uniformly that the Orders seriously damaged

American economic interests; as John Adams wrote, "They [the West

Indies] can neither do without us, nor we without them."

In fact, Ameri-

cans sold one-third fewer

finished

vessels to West Indies buyers from 1784

to 1787 than in the final colonial years; they also experienced dramatically

reduced demand from West Indians for American shipping services over

these years. At first, American merchants were able to shift some trade

toward the French West Indies, building on experiences during the Revo-

lution. However, France and Spain also passed mercantile restrictions

against American trading of fish and beef with their West Indies posses-

sions.

In July 1784, Spain also closed the lower Mississippi River to

American traffic, which raised serious concerns among southerners about

their access to the transmontane hinterland.

Trade with other

areas

the

world

was

not sufficient to offset the losses in

traditional American exports or in the valuable benefits that Americans had

enjoyed as members of the British Empire. In fact, increased imports of

* John Adams to Robert R. Livingston, July 14, 1783, in ibid., VI:54O—2.

The

Revolution,

Constitution,

and New Nation 375

European and for eastern goods called forth renewed fears of exotic luxuries

and their corrupting effect on the American consumer. Until American

policy makers sanctioned the invasion of Tripoli in 1805, the Mediterranean

trade was threatened by Barbary pirates. The wine, olive oil, slave, and

spice trades with Madeira and the Canary Islands revived slowly after the

Revolution, reaching prewar levels only about 1800. Commerce with the

Low Countries and France revived in part very quickly - especially under

the auspices of the mid-Atlantic states' merchants who were active in the

war

years

- but did not

reach

prewar

levels

until the Napoleonic

Wars.

New

arenas of commerce after 1784, especially the East Indies and China trades,

replaced many of England's reexport items, such as spices, textiles, dried

fruits,

and medicinal herbs. But their value as a portion of all American

imports

was

small before the 1840s, and the extent of their consumption by

the American population is still uncertain.

Commercial instability reached its heights during the mid-17

80s

depres-

sion. It began as a serious credit crisis, not unlike the one Americans had

experienced as recently as 1772. Everywhere, consumer spending had risen

precipitously in 1783-4, prompted by generous long-term credit from

English firms that permitted Americans to assuage pent-up demand. But

by late 1784, many state governments lowered private purchasing power by

raising taxes, making further purchases and repayment of current debts

problematic. Americans imported goods valued at about 2.75 million

pounds sterling from England per year in 1784 and 1785, compared to the

2.5 million pounds sterling of American imports from England per year

over 1772 to 1774. In 1784, New England merchants purchased British

goods valued at £600,000 sterling, which was approximately the annual

amount they imported over the mid-i76os to mid-i77Os.

Even if merchants and shopkeepers had not imported

heavily immedi-

ately after the Revolution, the declining and temporarily dislocated export

trades would have accounted for many mid-decade hardships. Exports to

Great Britain and British West Indies possessions over 1771 to 1773

averaged $7.5 million per year. While Americans exported a total value of

about $10.7 million in 1775, they exported only about $5.8 million per

year over 1785 to 1787, and the export total recovered to only $11.6

million in 1787. From 1781 to 1783, northern farm prices began to

recover, only to fall below prewar levels by mid-1784. Between mid-1784

and mid-1789, wholesale commodity prices at Philadelphia and Charles-

ton declined about 25 percent and 12 percent, respectively. This decline

was perhaps clearest in near-coastal areas, especially for semiprocessed

376 Cathy Matson

farm goods that were exported to the West Indies. Export prices for flour,

timber products, cheese, and shoes fell fester than the prices of European

imports. In addition, there were increased domestic land and property

taxes.

Moreover, lower prices for rural and village consumers' agricultural

surpluses resulted in delays in repaying debts and lower levels of consump-

tion until the depression abated after 1786 (1787 in areas of western New

York and frontier New England). Most urban craftsmen fared better dur-

ing these years, because prices of necessary commodities remained stable at

relatively high levels, as did consumer demand for their goods.

By mid-1784, it was clear that foreign firms remained reluctant to

extend enough credit to American merchants to satisfy pent-up wartime

demand for their imports; nor did merchants in the northern states have

sufficient specie to pay debts to foreign creditors. Observers in Massachu-

setts estimated only £150,000 in specie in circulation there, and the chain

of unpaid debts stretched far into the countryside, into the regional court-

houses and homes of western Massachusetts farmers, until the outbreak of

violence associated with Daniel Shays in September 1786. But the pattern

of crisis and reaction was similar in most states that had both active

commercial ports and populated hinterlands. Debts connected to land

usage and improvements increased everywhere. Three new commercial

banks,

in Philadelphia, New York, and Boston - which issued IOUs,

held deposits, made loans, and discounted foreign currencies - served the

merchant populations of those

cities.

Few middling and lower-class Ameri-

cans shared the benefits of

these

new institutions. Moreover, through the

1780s, bank note issues were greatly surpassed by the traditional forms of

mercantile business, primarily the use of bills of exchange drawn on a

merchant's private reputation. Larger-scale enterprises that required more

capital outlay than commercial ventures, such as sugar refining and candy

making, distilling, paper making, tobacco refining, or glass and pottery

working, were hit hard with bankruptcies by 1785, as were most peltry

and lumber exporters. Plans to initiate new manufactures were discussed

only rarely between 1785 and 1787.

The South may have suffered postwar setbacks in international com-

merce even more than New England, and these persisted long after north-

ern agricultural recovery began. Tobacco, the staple export of greatest

value before the war, would never reach prewar levels again. Although the

volume of southern tobacco exports to England and Europe steadily rose

until 1786, it declined thereafter. Even more important, British duties on

tobacco imports, higher warehousing fees in England, and lower consumer