Economy of Colonial America: Growth, Trade, and Taxation

Early Colonial Economic Development

Any thorough study of the economy of colonial America will necessarily take into account a vast number of subjects and issues. This paper does not set out to cover all those topics, but it does attempt to examine many key economic aspects of that period.

In May 1607, colonists landed at Jamestown, Virginia, but starvation and disease reduced the original 105 settlers to only 32, according to The Almanac of American History (Schlesinger, 1983, p. 30). However, in 1608, new provisions arrived and a self-supporting project of raising corn was instituted — likely the first significant economic development in the colonies. Those same early Jamestown settlers brought skills at glassmaking with them and produced crafts, including beads, which were used in trade with Native Americans.

Also in 1608, the London Company sent glass experts to Jamestown to build glass furnaces for future production (p. 32). Jamestown's Captain John Smith learned how to cultivate corn from the Indians; he planted 40 acres of corn, which helped avoid continuing starvation and laid the groundwork for an agricultural industry.

Virginia was not the only colony receiving assistance from the Indians (Bidwell, 1925): in 1630, Massachusetts Bay colonists purchased "100 bushels [of corn] from Indians on Cape Cod," and in 1634 they bought 500 bushels from the Narragansetts (p. 41). At Hartford on the Connecticut River in 1637, the supply of corn in the hands of the natives was considered so important that the trade was forbidden to individual colonists.

Scholarly Perspectives on the Colonial Economy

In 1609, the English Crown (p. 32) granted "joint stock company" status to the Virginia Company (formerly the London Company), providing much-needed capital for ongoing colonial ventures.

To gain an intelligent historical perspective on the many dimensions of colonial economic development, it is extremely helpful to first consult available scholarly literature and authoritative texts covering that period. A key question that must be addressed is: how viable was the American economy just prior to the War of Independence? There are conflicting answers. Richard Buel's research indicates that the colonial economy was weak and largely dependent upon the British (Chu, 2000), while Margaret Ellen Newell's view is that the colonial economy of New England was "sufficiently strong to place it on a collision course with that of Britain" (Chu, 2000).

Chu's piece in The Journal of Interdisciplinary History (Summer 2000) points out that, according to Newell's research, Puritanism helped shape a culture that encouraged "material profit" through "specific incentives." Puritanism, which most casual readers of history associate with spiritual values, succeeded in this effort by establishing a "regulatory impulse" which in turn "produced a moral framework that gave rise to a dramatic commercial change."

These commercial changes, according to Chu's reading of Newell, "redirected" the colonists' focus toward local economic expansion. Over time, as the British manipulated colonial currency to adjust "the chronic imbalance of payments," those acts spawned protests and boycotts. These protestations, combined with the adaptation of Puritan culture "to a pattern of consumption and economic development" that appeared less desirous of "luxurious lifestyles and moral corruption," led to the development of a political economy. In short, Newell argues that capitalism emerged in the colonies as an outgrowth of individualism, driven forward by Puritanism, domestic manufacturing, and the concurrent boycotting of British goods.

Buel's approach to explaining the emergence of a capitalistic system in the colonies is to link, according to Chu, the "culture of grain production, British naval activity," and the young nation's balance of trade with the enormous task of creating a national economy. The strength of the British navy put the colonial economy "in irons," to use Buel's naval phrase.

Furthermore, because wheat has a longer shelf life than corn or rye, the military preferred wheat, which stimulated a dramatic increase in its production — and in turn "encouraged the development of larger, more centralized flour mills." As colonial shipbuilders produced vessels that were smaller and quicker (to evade the British blockade), yet carried smaller cargos, this dynamic raised the price of wheat at a time when colonists needed revenue to buy imports.

While Buel and Newell disagree on key events that led to the development of an independent and capitalistic economy, "both authors" (Chu, 2000) observe that the drive for independence from England "rearranged legal and commercial relationships." Moreover, the separation from England "compelled the reconsideration of economic relationships." Newell argues that the Revolution "was not so much an intellectual breakthrough" as it was "a refinement and extension of earlier ideas about material prosperity, diversification, manufactures, government oversight and commercial access."

Notwithstanding Buel's "culture of wheat" concept and the presumption of many scholars that America's capitalistic economy sprang from the agricultural productivity of early New England, an article in The Wilson Quarterly (Wood, 1999) asserts that a new genre of scholarship is advancing the idea that "colonial farmers, particularly New England farmers, did not possess a capitalistic mentality after all." Indeed, Wood points out — while relating the views of "social" or "moral economy" historians — that "capitalistic practices and values were not central" to the lives of North American colonists prior to 1750.

Rate of Economic Growth in the Colonies

Most of the output from farmers, Wood continues, was "not for sale in the market" but rather for "family or local consumption." Family farmers sought to satisfy their children's needs, and they looked to obtain more land "not to increase their personal wealth" but to provide estates for their "lineal families." In this regard, farmers were "enmeshed in local webs of moral and social relationships" which, by their nature, "inhibited capitalistic behavior."

To meet their needs, farmers produced their own goods and traded goods and services within their community structures. The debits and credits that accompanied the swapping of goods and services were handled in "book accounts" — networks based "largely on mutual trust." This trust, according to Wood, led New England farmers into a moral and communal culture, rather than a capitalistic one.

In reviewing the actual growth of colonial economies, it is useful to turn to The Economy of British America, 1607–1789 (McCusker et al., 1991), a text rich in charts, facts, time-frame comparisons, and data. This work presents several strategies for observing economic growth during this period. If one assumes "that the colonists produced goods and services at the same level per person in 1770 as they had in 1650" (p. 53), and thus increased output at the same rate as population growth, then the colonial economy "multiplied about twenty-five times" over that 120-year window. That breaks down into an annual growth rate of 2.7% for "British America" and 3.2% for "British North America" — that is, the northern colonies.

Another formula for determining economic growth (p. 59) uses a "more conservative 0.3% per capita yearly growth rate." Applying this formula and converting figures to 1980 dollars, per capita income for "free" colonists in 1650 was $572; in 1720 it was $826; and by 1774 it had risen to $1,043, according to McCusker's research. There was a dramatic disparity between wealth in the "Upper and Lower South" and the New England and Middle Colonies (Table 3.3, p. 61). Specifically, the "Net Worth per Free White Person" in New England in 1774 was £33; in the Middle Colonies it was £51; but in the Upper and Lower South it was £132. One reason New England lagged behind (p. 92) was that those settlers "lacked a major staple commodity to export" to the cities, and "yet they needed to import countless things from abroad."

McCusker identifies two distinct "growth spurts" (p. 60) during the colonial period. The first, "and more rapid," spurt occurred in each "colonial region during the time of settlement as new inhabitants established working farms." The second came during the 1740s and "lasted to the Revolution," driven by "a burgeoning metropolitan demand for American products and a widening domestic market."