Economic history of the United States

The economic history of the United States is about characteristics of and important developments in the U.S. economy from colonial times to the present. The emphasis is on economic performance and how it was affected by new technologies, the change of size in economic sectors and the effects of legislation and government policy. Specialized business history is covered in American business history.

Colonial economy to 1780s

Shipping scene in Salem, Massachusetts, a shipping hub, in the 1770s

The colonial economy differed significantly from that of most other regions in that land and natural resources were abundant in America but labor was scarce.

From 1700 to 1775 the output of the thirteen colonies increased 12 fold, giving the colonies an economy about 30% the size of Britain's at the time of independence. Population growth was responsible for over three-quarters of the economic growth of the British American colonies. The free white population had the highest standard of living in the world. [1] [2] There was very little change in productivity and little in the way of introduction of new goods and services.

Under the colonial system Britain put restrictions on the type of products that could be made in the colonies and put restrictions on trade outside the British Empire.


Initial colonization of North America was extremely difficult and the great majority of settlers before 1625 died in their first year. Settlers had to depend on what they could hunt and gather plus what they brought with them and on uncertain shipments of food, tools and supplies until they could build shelters and forts, clear land and grow enough food and build gristmills, sawmills, iron works and blacksmith shops to be self-supporting. They also had to defend themselves against raids from hostile Indian and French forces. After 1829 population growth was very rapid due to high birth rates (8 children per family versus 4 in Europe) and lower death rates than in Europe, and immigration. [3] The long life expectancy of the colonists was due to the abundant supply of food and firewood and the low population density that limited spread of infectious diseases. The death rate from diseases, especially malaria, was higher in the warm, humid southern colonies than in cold New England.

The higher birth rate was due to better employment opportunities. Many young adults in Europe delayed marriage for financial reasons. Also there were many servants in Europe who were not permitted to marry. [4] The population of white settlers grew from an estimated 40,000 in 1650 to 235,000 in 1700. In 1690 there were an estimated 13,000 black slaves. The population grew at an annual rate of over 3% throughout the 18th century, doubling every 25 years or less. [5] By 1775 the population had grown to 2.6 million, of which 2.1 million were white, 540,000 black and 50,000 Native American, giving the colonies about one third of the population of Britain. The three most populated colonies in 1775 were Virginia, with a 21% share, and Pennsylvania and Massachusetts with 11% each.

The economy

The colonial economy of what would become the United States was pre-industrial, primarily characterized by subsistence farming. Farm households also were engaged in handicraft production, mostly for home consumption, but with some goods sold. [6]

The market economy was based on extracting and processing natural resource and agricultural products for local consumption, such as mining, gristmills and sawmills, and the export of agricultural products. The most important agricultural exports were raw and processed feed grains (wheat, Indian corn, rice, bread and flour) and tobacco. [7] Tobacco was a major crop in the Chesapeake Bay region and rice a major crop in South Carolina. Dried and salted fish was also a significant export. North Carolina was the leading producer of naval stores, which included turpentine (used for lamps), rosin (candles and soap), tar (rope and wood preservative) and pitch (ships' hulls). Another export was potash, which was derived from hardwood ashes and was used as a fertilizer and for making soap and glass.

The colonies depended on Britain for many finished goods, partly because laws prohibited making many types of finished goods in the colonies. These laws achieved the intended purpose of creating a trade surplus for Britain. The colonial balance trade in goods was heavily in favor of Britain; however, American shippers were able to offset roughly half of the goods trade deficit with revenues earned by shipping between ports within the British Empire. [8]

The largest non-agricultural segment was ship building, which was from 5 to 20% of total employment. [9] About 45% of American made ships were sold to foreigners. [6]

Exports and related services accounted for about one-sixth of income in the decade before revolution. [10] Just before the revolution, tobacco was about a quarter of the value of exports. Also at the time of the revolution the colonies produced about 15% of world iron, although the value of exported iron was small compared to grains and tobacco. [11] The mined American iron ores at that time were not large deposits and were not all of high quality; however, the huge forests provided adequate wood for making charcoal. Wood in Britain was becoming scarce and coke was beginning to be substituted for charcoal; however, coke made inferior iron. [12] Britain encouraged colonial production of pig and bar iron, but banned construction of new colonial iron fabrication shops in 1750, but the ban was mostly ignored by the colonists. [13]

Settlement was sparse during the colonial period and transportation was severely limited by lack of improved roads. Towns were located on or near the coasts or navigable inland waterways. Even on improved roads, which were rare during the colonial period, wagon transport was very expensive. Economical distance for transporting low value agricultural commodities to navigable waterways varied but was limited to something on the order of less than 25 miles. [14] In the few small cities and among the larger plantations of South Carolina, and Virginia, some necessities and virtually all luxuries were imported in return for tobacco, rice, and indigo exports. [15]

By the 18th century, regional patterns of development had become clear: the New England colonies relied on shipbuilding and sailing to generate wealth; plantations (many using slave labor) in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo; and the middle colonies of New York, Pennsylvania, New Jersey, and Delaware shipped general crops and furs. Except for slaves, standards of living were generally high—higher, in fact, than in England itself. [16]

New England

The New England region's economy grew steadily over the entire colonial era, despite the lack of a staple crop that could be exported. All the provinces and many towns as well, tried to foster economic growth by subsidizing projects that improved the infrastructure, such as roads, bridges, inns and ferries. They gave bounties and subsidies or monopolies to sawmills, grist mills, iron mills, pulling mills (which treated cloth), salt works and glassworks. Most important, colonial legislatures set up a legal system that was conducive to business enterprise by resolving disputes, enforcing contracts, and protecting property rights. Hard work and entrepreneurship characterized the region, as the Puritans and Yankees endorsed the " Protestant Ethic", which enjoined men to work hard as part of their divine calling. [17]

The benefits of growth were widely distributed in New England, reaching from merchants to farmers to hired laborers. The rapidly growing population led to shortages of good farm land on which young families could establish themselves; one result was to delay marriage, and another was to move to new lands farther west. In the towns and cities, there was strong entrepreneurship, and a steady increase in the specialization of labor. Wages for men went up steadily before 1775; new occupations were opening for women, including weaving, teaching, and tailoring. The region bordered New France, and in the numerous wars the British poured money in to purchase supplies, build roads and pay colonial soldiers. The coastal ports began to specialize in fishing, international trade and shipbuilding—and after 1780 in whaling. Combined with growing urban markets for farm products, these factors allowed the economy to flourish despite the lack of technological innovation. [18]

The Connecticut economy began with subsistence farming in the 17th century, and developed with greater diversity and an increased focus on production for distant markets, especially the British colonies in the Caribbean. The American Revolution cut off imports from Britain, and stimulated a manufacturing sector that made heavy use of the entrepreneurship and mechanical skills of the people. In the second half of the 18th century, difficulties arose from the shortage of good farmland, periodic money problems, and downward price pressures in the export market. In agriculture there was a shift from grain to animal products. [19] The colonial government from time to time attempted to promote various commodities such as hemp, potash, and lumber as export items to bolster its economy and improve its balance of trade with Great Britain. [20] [21]

Urban centers

Historian Carl Bridenbaugh examined in depth five key cities: Boston (population 16,000 in 1760), Newport Rhode Island (population 7500), New York City (population 18,000), Philadelphia (population 23,000), and Charles Town (Charlestown, South Carolina), (population 8000). He argues they grew from small villages to take major leadership roles in promoting trade, land speculation, immigration, and prosperity, and in disseminating the ideas of the Enlightenment, and new methods in medicine and technology. Furthermore, they sponsored a consumer taste for English amenities, developed a distinctly American educational system, and began systems for care of people meeting welfare. The cities were not remarkable by European standards, but they did display certain distinctly American characteristics, according to Bridenbaugh. There was no aristocracy or established church, there was no long tradition of powerful guilds. The colonial governments were much less powerful and intrusive than corresponding national governments in Europe. They experimented with new methods to raise revenue, build infrastructure, and solve urban problems. [22] They were more democratic than European cities, in that a large fraction of the men could vote, and class lines were more fluid. Contrasted to Europe, printers (especially as newspaper editors) had a much larger role in shaping public opinion, and lawyers moved easily back and forth between politics and their profession. Bridenbaugh argues that by the mid-18th century, the middle-class businessmen, professionals, and skilled artisans dominated the cities. He characterizes them as "sensible, shrewd, frugal, ostentatiously moral, generally honest," public spirited, and upwardly mobile, and argues their economic strivings led to "democratic yearnings" for political power. [23] [24]

Numerous historians have explored the roles of working-class men, including slaves, in the economy of the colonial cities, [25] and in the early Republic. [26]

There were few cities in the entire South, and Charleston (Charles Town) and New Orleans were the most important before the Civil War. The colony of South Carolina was settled mainly by planters from the overpopulated sugar island colony of Barbados, who brought large numbers of African slaves from that island. [27] [28]

On the eve of the Revolution, 95 percent of the American population lived outside the cities—much to the frustration of the British, who were able to capture the cities with their Royal Navy, but lacked the manpower to occupy and subdue the countryside. In explaining the importance of the cities in shaping the American Revolution, Benjamin Carp compares the important role of waterfront workers, taverns, churches, kinship networks, and local politics. [29] Historian Gary B. Nash emphasizes the role of the working class, and their distrust of their betters, in northern ports. He argues that working class artisans and skilled craftsmen made up a radical element in Philadelphia that took control of the city starting about 1770 and promoted a radical Democratic form of government during the revolution. They held power for a while, and used their control of the local militia disseminate their ideology to the working class and to stay in power until the businessmen staged a conservative counterrevolution. [30]

Political environment

Mercantilism: old and new

The colonial economies of the world operated under the economic philosophy of mercantilism, a policy by which countries attempted to run a trade surplus in order to accumulate gold reserves. The colonial powers of England, France, Spain and the Dutch Republic tried to protect their investments in colonial ventures by limiting trade between each other's colonies.

Spain clung to old style mercantilism, primarily concerned with enriching the Spanish government by accumulating gold and silver. The Dutch and particularly the British approach was more conducive to private business. [31]

A mercantile policy that affected the British American colonies was the Navigation Acts, which were passed by the British Parliament between 1651 and 1673.

Important features of the Navigation Acts are:

  • Foreign vessels were excluded from carrying trade between ports within the British Empire
  • Manufactured goods from Europe to the colonies had to pass through England
  • Enumerated items, which included furs, ship masts, rice, indigo and tobacco, were only allowed to be exported to Great Britain.

Although the Navigation Acts were enforced, they had a negligible effect on commerce and profitability of trade.

On the eve of independence Britain was entering the early stage of the Industrial Revolution, with cottage industries and workshops providing finished goods for export to the colonies.

Free enterprise

The domestic economy of the British American colonies enjoyed a great deal of freedom, although some of their freedom was due to lack of enforcement of British regulations on commerce and industry. Adam Smith used the colonies as an example of the benefits of free enterprise. [32] Colonists paid minimal taxes.

Some colonies, such as Virginia, were founded principally as business ventures. England's success at colonizing what would become the United States was due in large part to its use of charter companies. Charter companies were groups of stockholders (usually merchants and wealthy landowners) who sought personal economic gain and, perhaps, wanted also to advance England's national goals. While the private sector financed the companies, the king also provided each project with a charter or grant conferring economic rights as well as political and judicial authority. The colonies did not show profits, however, and the disappointed English investors often turned over their colonial charters to the settlers. The political implications, although not realized at the time, were enormous. The colonists were left to build their own governments and their own economy.


The colonial governments had few expenses and taxes were minimal.

Although the colonies provided an export market for finished goods made in Britain or sourced by British merchants and shipped from Britain, the British incurred the expenses of providing protection against piracy by the British Navy and other military expenses. An early tax was the Molasses Act of 1733.

In the 1760s the London government raised small sums by new taxes on the colonies. This occasioned an enormous uproar, from which historians date the origins of the American Revolution. The issue was not the amount of the taxes—they were quite small—but rather the constitutional authority of Parliament versus the colonial assemblies to vote taxes. [33] [34] New taxes included the Sugar Act of 1764, the Stamp Act of 1765 and taxes on tea and other colonial imports. Historians have debated back and forth about the cost imposed by the Navigation Acts, which were less visible and rarely complained about. [35] However, by 1995, the consensus view among economic historians and economists was that the "costs imposed on [American] colonists by the trade restrictions of the Navigation Acts were small." [36]

The American Revolution

Americans in the Thirteen Colonies demanded their rights as Englishmen, as they saw it, to select their own representatives to govern and tax them – which Britain refused. The Americans attempted resistance through boycotts of British manufactured items, but the British responded with a rejection of American rights and the Intolerable Acts of 1774. [37] In turn, the Americans launched the American Revolution, resulting in an all-out war against the British and to independence for the new United States of America. The British tried to crush the American economy with a blockade of all ports, but with 90% of the people in farming, and only 10% in cities, the American economy proved resilient and able to support a sustained war, which lasted from 1775 to 1783. [38]

Revolutionary era cartoon showing US sawing of the horn of a cow (symbolizing a break from British commerce) with a distressed Englishman watching as other European powers wait to collect milk. The cartoon represents the commercial status of the US during the Revolution.

The American Revolution (1775–1783) brought a dedication to unalienable rights to "life, liberty, and the pursuit of happiness", which emphasize individual liberty and economic entrepreneurship, and simultaneously a commitment to the political values of liberalism and republicanism, which emphasize natural rights, equality under the law for all citizens, civic virtue and duty, and promotion of the general welfare.

Britain's war against the Americans, French and Spanish cost about £100 million. The Treasury borrowed 40% of the money it needed and raised the rest through an efficient system of taxation. [39] [40] Heavy spending brought France to the verge of bankruptcy and revolution.

Congress and the American states had no end of difficulty financing the war. [41] In 1775 there was at most 12 million dollars in gold in the colonies, not nearly enough to cover existing transactions, let alone on a major war. The British made the situation much worse by imposing a tight blockade on every American port, which cut off almost all imports and exports. One partial solution was to rely on volunteer support from militiamen, and donations from patriotic citizens. Another was to delay actual payments, pay soldiers and suppliers in depreciated currency, and promise it would be made good after the war. Indeed, in 1783 the soldiers and officers were given land grants to cover the wages they had earned but had not been paid during the war. Not until 1781, when Robert Morris was named Superintendent of Finance of the United States, did the national government have a strong leader in financial matters. Morris used a French loan in 1782 to set up the private Bank of North America to finance the war. Seeking greater efficiency, Morris reduced the civil list, saved money by using competitive bidding for contracts, tightened accounting procedures, and demanded the federal government's full share of money and supplies from the states. [42]

Congress used four main methods to cover the cost of the war, which cost about 66 million dollars in specie (gold and silver). [43] Congress made two issues of paper money, in 1775–1780, and in 1780–81. The first issue amounted to 242 million dollars. This paper money would supposedly be redeemed for state taxes, but the holders were eventually paid off in 1791 at the rate of one cent on the dollar. By 1780, the paper money was "not worth a Continental", as people said, and a second issue of new currency was attempted. The second issue quickly became nearly worthless—but it was redeemed by the new federal government in 1791 at 100 cents on the dollar. At the same time the states, especially Virginia and the Carolinas, issued over 200 million dollars of their own currency. In effect, the paper money was a hidden tax on the people, and indeed was the only method of taxation that was possible at the time. The skyrocketing inflation was a hardship on the few people who had fixed incomes—but 90 percent of the people were farmers, and were not directly affected by that inflation. Debtors benefited by paying off their debts with depreciated paper. [44] The greatest burden was borne by the soldiers of the Continental Army, whose wages—usually in arrears—declined in value every month, weakening their morale and adding to the hardships suffered by their families.

Starting in 1776, the Congress sought to raise money by loans from wealthy individuals, promising to redeem the bonds after the war. The bonds were in fact redeemed in 1791 at face value, but the scheme raised little money because Americans had little specie, and many of the rich merchants were supporters of the Crown. Starting in 1776, the French secretly supplied the Americans with money, gunpowder and munitions in order to weaken its arch enemy, Great Britain. When France officially entered the war in 1778, the subsidies continued, and the French government, as well as bankers in Paris and Amsterdam loaned large sums to the American war effort. These loans were repaid in full in the 1790s. [45]

Beginning in 1777, Congress repeatedly asked the states to provide money. But the states had no system of taxation either, and were little help. By 1780 Congress was making requisitions for specific supplies of corn, beef, pork and other necessities—an inefficient system that kept the army barely alive. [46] [47]

The cities played a major role in fomenting the American Revolution, but they were hard hit during the war itself, 1775-83. They lost their main role as oceanic ports, because of the blockade by the British Navy. Furthermore, the British occupied the cities, especially New York 1776-83, and the others for briefer periods. During the occupations they were cut off from their hinterland trade and from overland communication. When the British finally departed in 1783, they took out large numbers of wealthy merchants who resumed their business activities elsewhere in the British Empire. [48]