1783-1815: Business and the Economy: Overview
1783-1815: Business and the Economy: Overview
Colonies and Empire. Before the Revolution, Americans benefited from being part of the British Empire. England’s command of the seas gave American merchants access to markets in Europe, the Mediterranean, and the Caribbean. Chief American exports—salted fish, rice, wheat and grain, and tobacco—were carried throughout the world by American ships. England’s growing industries made manufactured goods available to American consumers. The Seven Years’ War (1756–1763) gave Britain complete control of the North American continent at a tremendous cost. The British government needed to raise taxes at home to pay for this expensive war and also decided to pay closer attention to the colonies, which were sources of wealth. Most British colonial policy had focused on the sugar-producing colonies of the West Indies, which generated more wealth than the North American colonies, and on India, which the British East India Company had recently conquered. In the 1760s England decided to regulate colonial trade so that the wealth of her colonies would flow to London rather than Paris. The British government enforced its laws against smuggling and required that colonial trade pass through London. When the British government insisted that it had the power to make the colonists pay taxes on goods they imported, such as tea, and when the British granted a monopoly on the American tea trade to the British East India Company, the colonial merchants responded with boycotts, resistance, and revolution. The colonial merchants would pay taxes to support equitable laws to protect their commerce, but they would not support monopolies or what they considered unreasonable restraints on their right to trade freely.
Postwar Depression. While the American Revolution freed American merchants from British restrictions, it also denied Americans British protection and brought American traders into direct conflict with British trade policies. Before the Revolution 75 percent of American exports went to England, Ireland, and the West Indies. After the Revolution, Britain and her colonies would buy only 10 percent of America’s exports. The successful Revolution brought on a depression in the United States, as England closed her markets to American trade or raised her tariffs on American goods and poured manufactured goods into American markets, selling these goods at far lower prices than American manufacturers could charge. With no central government to make trade policies, the United States could not respond to this economic warfare.
Constitution and Trade. Before the United States could respond to England’s commercial warfare, the American states had to agree to cooperate. But England was not the only competitor for American merchants. Merchants in each state competed with one another and would pressure their own state legislatures to impose tariffs on merchants from other states. New York taxed New Jersey and Connecticut merchants, and Rhode Island merchants did a swift business in smuggling goods into Massachusetts. The states, meanwhile, would not support the U.S. Congress, which had no power to impose taxes. In order to pay off the U.S. debt, Congress needed to raise revenue but could only do so by asking the states for money. Not surprisingly, the states were more intent on paying their own debts and reducing their own citizens’ taxes than on paying the U.S. debt. In 1785 the United States had to default on its loan from France, and only John Adams’s patient and effective diplomatic skill maintained American credit with Dutch bankers. Clearly, the United States was in trouble. English policy, to shut out American trade, was calculated on the young republic failing. Business and political leaders, such as Robert Morris, Alexander Hamilton, George Washington, and James Madison, worked to give more power to Congress to raise revenue, but the states blocked their attempts. In 1785 a group of commissioners from Maryland and Virginia met at George Washington’s home to discuss their trade problems in the Potomac and Chesapeake; they decided to call a meeting of delegates from other states in the region to discuss general trade problems, and in September 1786 five states were represented at Annapolis. They reasoned that solutions to the country’s economic problems could be found only if the political structure was changed, giving the U.S. government more power, and they called for a general convention of all the states to meet in Philadelphia in May 1787. The Constitution which emerged from this convention gave Congress the sole power to tax imports; regulate international trade and trade between the states; and forbid the states from repudiating debts, voiding contracts, coining money, or issuing paper money. While the Constitution established a political system, it also allowed the federal government to make commercial policy for the entire country.
Mercantilism and Free Trade. It was not clear what the United States commercial policy would be. In 1776 two remarkable events occurred. One was the American Declaration of Independence; the other was the publication of Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations. The Americans had declared independence from the power of England’s king and Parliament; Smith’s influential work argued against centralized economic power. For centuries European nations had followed a policy of mercantilism, a form of economic warfare against one another. All nations sought gold, which they saw as the basis of wealth. In order to obtain gold the nations of Europe established colonies, forcing all colonial trade through the home capital—London, Paris, Lisbon, or Madrid. In addition, nations restricted trade with their rivals, imposing high tariffs and other barriers on foreign trade. In this mercantilist system the government took a leading role in promoting and protecting trade, which in turn would enrich the nation. Smith argued that this policy, though it seemed to have enriched the European countries following it, was not the best way to promote national wealth. Instead, Smith argued for a policy of free trade, with no restrictions in the form of tariffs. He saw in the American colonies examples of merchants who had sought out markets and wealth, not because government policy directed them to do so, but because they were self-interested traders. If governments would lift trade barriers, Smith predicted, merchants would seek out the best markets. In addition, Smith insisted, gold was only a measure of wealth, not the source of wealth. Real wealth came from agriculture and trade in agricultural goods. Though Spain controlled much of the world’s gold resources, Spain had lost economic ground to England and Holland, which had more merchants and traders able to bring Spain goods she would exchange for gold.
Hamilton and Mercantilism. Many Americans embraced the ideas of Smith, holding that agriculture was the real producer of wealth and that commerce would enrich the nation if it were left free of government interference. Others believed the United States could best achieve economic independence by developing industries of her own. These were the two sides of a debate over what was then called political economy, with Thomas Jefferson and James Madison holding with Smith’s view that agriculture was the basic producer of wealth and that the proper policy for the American government was to find or open markets for American goods. On the other hand, Hamilton saw the proper role for the U.S. government in encouraging capital accumulation and economic development. As first secretary of the treasury, Hamilton made it a priority to achieve national economic independence. The best way to do this, Hamilton believed, was by restoring public credit and by encouraging manufacturing.
Restoring Public Credit. To restore public credit, Hamilton called for the federal government to pay the states’ Revolutionary War debts. These debts circulated as certificates, payable at a certain date, usually ten years after the war, issued to veterans and creditors at the close of the war. Many veterans, needing cash to pay taxes or support their families, had sold these certificates for a fraction of their face value. Investors, believing that the government ultimately would pay off these notes, had bought them up. As Congress debated assuming the state debts, speculators set out for South Carolina and Georgia to buy up the state notes, hoping they would be redeemed. Hamilton proposed that the U.S. government pay off all these certificates at face value, thus enriching these speculators. While some veterans and politicians questioned the ethical principle of rewarding speculation, Hamilton argued that the new government needed the support of these investors and that this redemption of debt certificates would align the business community with the new national government.
The Paterson Experiment. Hamilton had a bold vision for restoring public credit and establishing economic independence. To further promote economic growth, Hamilton launched the Society for Establishing Useful Manufactures, chartered by the New Jersey legislature, which proposed building a factory city at the falls of the Passaic River. Named for New Jersey governor and later Supreme Court Justice William Paterson, this planned industrial city would include, according to Hamilton’s proposal, thirteen factories to produce shoes, textiles, potter, wire, thread, carpets, and blankets. Funded by private capital, and helped by loans from the Bank of New York, which was assured by Hamilton that it would continue to be a repository of federal funds if it extended credit to the Paterson venture, the society built factories at Paterson. But a financial panic in 1792 and the inability to find workers doomed the enterprise, which collapsed finally in 1795.
Jefferson and the Fisheries. Jefferson fundamentally disagreed with Hamilton’s approach. Jefferson was determined to build American independence on the existing strength of the nation rather than through creating industries in imitation of Europe. Jefferson had traveled through New England in early 1784, en route for his assignment as minister to France, and learned of the plight of Nantucket’s whale fishermen. British policy had closed off markets for whale oil; the Nantucketers were being pressured by economics to move to Nova Scotia. In France, Jefferson worked with the Marquis de Lafayette to open French markets for American whale oil. Similarly, he pressed France to open her markets to American tobacco. As secretary of state, Jefferson proposed a similar policy of encouraging existing American industries, fishing, and agriculture by pressing other nations to open their markets to American goods. Since France had done so, Jefferson believed the United States should reciprocate, as it would for other nations adopting favorable trade policies toward the United States. Jefferson also proposed a bounty for exports of American fish, to encourage the growth of this industry.
Madison’s Policy. Madison and Jefferson believed Hamilton’s debt-financing system rewarded speculators and would put an unfair burden on other Americans. Madison also saw Hamilton’s system of encouraging manufactures as a violation of free-trade principles; instead, Madison believed national economic policy should take advantage of the nation’s real wealth, which came from farms, not factories. Madison believed that England and other European countries would come to depend on American grain to feed their factory workers. It would be a grave mistake, he believed, to turn independent American farmers and their wives and children into factory workers, because it would both destroy their own health and welfare and destroy the real source of American wealth. To challenge England or any other country, Madison did not believe in direct competition by building manufacturing centers in America. Instead, Madison proposed a tariff policy which would set high rates on goods coming from England or any country which did not grant Americans free trading privileges. This form of commercial coercion was not designed to promote domestic manufactures; instead, it was designed to influence international affairs.
Mixed Results. Hamilton believed Madison’s proposal somewhat naive; however, in 1793 when England and France went to war, demand for American grains jumped dramatically, and for the next ten years American farmers could not keep up with the demand for their crops, nor could American shipbuilders keep up with the demand for ships to carry American grain abroad. With England and France at war, American merchants came to control much of the carrying trade between Europe and the Americas and also had a significant presence in Asia. Neither Hamilton nor Jefferson and Madison would be satisfied that their policy had been completely adopted. Hamilton would succeed in establishing a bank and securing public credit, but his manufacturing city in Paterson did not emerge until much later, and in much different form. The Republicans would sweep Hamilton and his Federalists out of office, but as Jefferson remarked, they would “never get rid of his financial system.”
Yazoo Land Fraud. The United States remained an agricultural nation, but agriculture was tied inextricably to international markets. Buying land, in itself, became a vital economic activity, and throughout the 1790s land speculation was a source of both wealth and corruption. To buy land in order to resell it at a higher price drove some of the most prominent men of the day, including financier Robert Morris and Supreme Court Justice James Wilson, deeply into debt, and ultimately, for Morris, to debtor’s prison. In 1795 almost the entire Georgia legislature was bribed to sell its western territories, including what is today Alabama and Mississippi, to New England land speculators. The speculators were not interested in settling the land, which was still occupied by the Choctaws, Chickasaws, and Creeks. Instead, they were determined to sell it to other speculators, who in turn would sell it to others. Georgia’s citizens, outraged by this corrupt land swindle, turned their legislators out of office; the new legislature rescinded the act selling the land. This satisfied Georgians who had not been part of the deal, but in New England men and women who had bought the land in good faith now owned worthless pieces of paper. Jefferson’s administration tried to settle the issue, but Republicans in Congress, determined not to reward corruption, blocked the settlement; the Supreme Court ruled that Georgia could not void a contract, and in 1815 Congress voted some compensation for holders of now-worthless land in Mississippi.
Bankruptcy Law. The increased speculation in land led to increased questioning of what kind of nation the United States was becoming late in the 1790s. For the Republicans, economic development was tied to agriculture. But if selling land made more profit than farming it, how to restrain citizens from increasing their wealth? In 1792 Congress began debating a national bankruptcy law to protect debtors who had overextended themselves. Republicans opposed the law because this kind of policy was for states, not the federal government, to enact, and also because it seemed to reward speculation and signaled that the United States had become a commercial rather than agricultural nation. Republicans saw that in time the United States would develop into a commercial nation, a prospect they feared less than its developing into an industrial one, as Hamilton’s Paterson scheme would have it do. But Republicans did not want to speed the process, insisting that the United States first settle all its available land before it venture too far into international trade. It would be difficult, though, to restrain Americans eager to trade. Federalists favored a bankruptcy law as a protection of debtors and creditors, and because it signaled the arrival of economic maturity. Republicans, believing nations, like people, were living creatures, saw that after economic maturity would come economic decline and death. Rather than hastening the process, they hoped to slow it. The Bankruptcy Law, passed by the Federalist Congress in 1800, was repealed by the Republicans in 1803, at the same time as the purchase of Louisiana opened more territory to agricultural settlement.
Indian Trade. Before the Revolution, England had controlled migration across the Allegheny Plateau, wanting to keep the Ohio River valley in the hands of the native people who lived in it. This was not an entirely altruistic policy: merchants involved in the fur trade also needed to keep the forests, lakes, and rivers free of farms and settlers in order to allow deer and beaver to flourish and Indians to hunt them. Trading with the Indians had been a significant source of wealth for Europeans in America: France’s empire in Canada was based on the fur trade, and Pennsylvania merchants had also enjoyed a lucrative trade before the Revolution. Traders would venture west with manufactured goods, guns, alcohol, and cloth to trade with Native Americans for furs. In the southeast, firms such as Panton, Leslie and Company in Pensacola, Florida, traded with the Creeks and Choctaws and did not welcome white settlement into Indian lands. Much of the Indian trade was conducted by women, who were the principal agriculturists among most Native American groups. Merchants would secure whatever links or advantages they could with Native American trading partners. One Scottish trader, Lachlan McGillivray, married a Creek woman; their son, Alexander McGillivray, became an important leader of the Creeks in the 1780s. The Indian trade was complicated and lucrative: the Constitution gave Congress the sole power to regulate the trade, and in 1796 Congress decided that it would appoint agents to trade with the Indians, forbidding states or private individuals from doing so. After 1801 the Jefferson administration began to make its goal the removal of Native Americans from their traditional lands and the settlement of those lands by white farmers. The indebtedness of Native Americans, exacerbated by trade and the fluctuations of the fur market, made it easier to force Indians to sell their land. The purchase of the Louisiana Territory, Jefferson believed, would give the United States a place to send Indians removed from east of the Mississippi.
The Pacific Northwest. While the eastern fur trade was being dismantled, a new trade opened in the Pacific Northwest. In 1792 Capt. Robert Gray, sailing on the Columbia, found the Columbia River and claimed this territory for the United States. The Louisiana Territory was still controlled by Spain, which claimed all the land drained by the Mississippi and Missouri Rivers. Yet an American presence began in the Pacific Northwest, where small trading settlements named Salem and Portland formed to trade with the natives for otter skins. Competing with British traders based in Vancouver and Russians based in Sitka, Alaska, these traders carried otter pelts across the Pacific to Canton either for tea or silver, which would be brought back to Salem, Massachusetts, and Boston. This was not exactly a triangular trade, as goods from Massachusetts would be brought by way of Cape Horn to the Columbia River, there traded for otter skins, which would be brought to Canton, and traded there for tea, silks, or silver. By the early nineteenth century New England traders had brought the Hawaiian Islands into this trade network, and came to know the Pacific water routes as well as they knew Massachusetts Bay. A German immigrant, John Jacob Astor, would establish a trading colony, Astoria, on the Columbia River in 1810, and though it was surrendered to a British trading firm during the War of 1812, Astor began one of the nation’s greatest fortunes in the otter trade.
Slave Trade. While only 7 percent of the Africans brought to the New World came to North America, American merchants were involved in the slave trade. Olaudah Equiano was a slave who worked during the 1760s for an American merchant on the island of Montserrat, bringing enslaved Africans to South Carolina and Georgia to trade for rice and beef to feed the slaves of the Caribbean. Rhode Island merchants were also involved in the African trade, and the Narragansett Bay town of Bristol was a center for New England slave traders. While most slaves went to South America or the Caribbean, and the overwhelming majority of slaves brought to North America were taken to the plantation colonies of Georgia, South Carolina, and the Chesapeake, all colonies had slaves, and New Jersey, Connecticut, New York, and Rhode Island had significant slave populations before the Revolution. During the Revolution Virginia had ceased its slave imports, and following the war a movement against the slave trade emerged in America, led actually by Virginia planters such as George Mason.
Antislavery Movement. The 1780s were the high point for the African slave trade, with an average of eighty-five thousand slaves brought to the New World each year. Documentation of the slave trade’s horrors, provided by survivors such as Equiano, who wrote an autobiography in 1789, and by British reformers such as William Wilberforce, Thomas Clarkson, and Granville Sharp, and by American Quakers like Anthony Benezet, produced moral revulsion in many Americans. George Mason proposed at the Constitutional Convention that the United States prohibit the slave trade. Delegates from Georgia and South Carolina protested; they still needed slaves, they said, to produce their rice crops. In the end, Georgia and South Carolina struck a bargain with the delegates from New England: Georgia and South Carolina would support New England on another issue if New England would allow the slave trade to continue until 1807. Mason was outraged and said he would sooner cut off his right hand than use it to sign the Constitution. All states but Georgia and South Carolina had banned the slave trade well before 1807, when Congress, at President Jefferson’s direction, banned slaves from entering the United States.
Internal Slave Trade. While the United States barred its citizens from the international slave trade, nothing would be done about the domestic slave trade. After the invention of the cotton gin in 1793 and the opening of the southwest territories (Mississippi and Alabama), Virginians, whose soil was too depleted to continue growing tobacco profitably, began selling their slaves in greater numbers to the Southwest. The Louisiana Purchase brought a rich sugar-producing region into the union, with a need for slave labor to perform the backbreaking work of harvesting cane and turning it into sugar. Slaves from Virginia and other parts of the South would be sold to Louisiana, and with no foreign sources for slaves, Virginia planters actually became breeders of slaves for sale in these domestic markets.
Embargo. Jefferson would not move against the domestic slave trade because the Constitution did not give the federal government power to do so. However, the Constitution did give the government power to regulate international trade, and when the British and French continued to threaten American commerce in 1807, Jefferson and Secretary of State Madison, who had argued that the United States should use its commercial produce to influence British policy, responded with an embargo on American trade. No American ships were permitted to leave port; American sailors were stranded at sea, and the lucrative American commerce was destroyed. Jefferson’s Embargo was calculated to deprive France’s armies and England’s factory workers of flour and codfish; its real effect, however, was to destroy American trade. The fact that most U.S. government revenues came from tariffs, and thus would amount to almost nothing if imports stopped, greatly alarmed Secretary of the Treasury Albert Gallatin, who did not believe the Embargo would be an effective weapon against England or France. Jefferson and Madison believed it would and further believed that the Embargo would be a Republican alternative to war and would show England that American trade was more powerful than the Royal Navy and Napoleon that American grain was more potent than his army. Better to have American ships safely bottled up in port, Jefferson reasoned, than have them destroyed by British and French ships, and better to protect the tiny American navy by keeping it at home than to risk its destruction by hostile guns. The Embargo, it turned out, was a failure. It did not force the British or French to rescind their hostile policies. Instead, it created great bitterness against Jefferson in New England and severely depleted the American treasury. One inadvertent result of the Embargo was to force Americans to begin manufacturing goods they could not import from England. New England’s international traders, unable to apply their capital on foreign trade, began building the kinds of factories in Rhode Island and Massachusetts that Hamilton had hoped to see rise on the banks of the Passaic. While Jefferson applauded the development of home manufactures and American self-sufficiency, he continued to worry about the long-term consequences of industrialization. Ironically, his Embargo helped spur the process. On the day before he left office, Jefferson signed a bill repealing the Embargo.
Conclusion. Americans had been pushed to rebel against England because of England’s restrictive trade policies. American leaders, once independence was secured, disagreed about the best trade policies the new nation should pursue. Hamilton believed the central government should encourage industrial development and capital accumulation; Jefferson and Madison believed the best policy was to leave merchants and farmers free to find the best international markets and to protect their rights to do so. Hamilton failed to develop an industrial infrastructure, though he did establish the nation’s public credit and a national bank. Jefferson and Madison failed to dismantle Hamilton’s system, yet their policies of free trade and their insistence on paying the national debt inspired the kind of industrial development Hamilton had dreamed of and which the British planners of the 1760s would have found utterly astonishing. By the end of Madison’s administration, with the United States successfully concluding the War of 1812, Americans turned to business enterprise with a new vigor. Fifty years earlier a British monopoly and a tax on tea had driven American merchants to revolution; by 1815 policies of their own republican government allowed American merchants to grow rich by selling tea in Europe, at a lower price than any European trader could match.
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