Some of the Economic Origins of the American Identity Reconsidered

 This is the text of the prepared remarks I made at Villanova's Ryan Center symposia over the weekend. I said many other words, alas unrecorded, during the extensive round table and Q&As. 

Tax rebellion must loom large in any examination of the economic undergirding of the American identity. Without Shays, the U.S. Constitution and federal government would likely look very different. The two Pennsylvania tax rebellions of the 1790s, over whiskey and windows, helped to limit direct federal taxation in peacetime. Moreover, by encouraging federal government reliance on tariffs and discouraging the offsetting excise taxes promoted by Alexander Hamilton, those rebellions steered economic development towards manufacturing. The so-called Tariff of Abominations fomented the Nullification Crisis and tariffs constituted the second most important cause of the War Between the States, which is how many of us Texans refer to what you Yanks call the Civil War. Insert tongue into cheek.

Obviously, taxes have economic implications but they often code for ideological positions as well. Calls for lower taxes, for example, may stem from a desire to increase economic activity or they may be rooted in a desire for smaller government and its obverse, more freedom. Calls to replace tariffs or sales taxes with income taxes might be rooted in efficiency concerns but they can also indicate a desire to redistribute resources from rich to poor. 

Parsing economic from ideological motivation remains fraught, especially because scholars have become so siloed that few seem capable of addressing both sides of the issue and interdisciplinary partnerships face high barriers. As a History Ph.D. who has spent decades teaching undergraduate and MBA courses in economics, and who has spent as long trying to cultivate working relationships with both historians and economists, I am one of the few scholars who might be able to make a credible argument for the primacy of economic or ideological motivations in particular historical instances.

Today, I will argue that the real-world economic effects of Britain’s Imperial fiscal, monetary, and trade policies fomented the Stamp Act rebellion and eventually the American Revolution, but that ideology played the biggest part in the Nullification Crisis, the rebellion that wasn’t. That reverses the consensus, which has long held that the colonists were lightly taxed and hence rebelled over ideas rather than reality, and that the tariffs dug so deeply into Southern pockets that South Carolinians had to saber rattle to obtain relief.

To quickly recap both events, in March 1765 Parliament imposed on the colonists of mainland British North America a tax on the sale of newspapers, legal documents, and sundry then luxury items, including playing cards and dice. American colonists resisted by physically intimidating stamp distributors and boycotting British goods. A so-called Stamp Act Congress composed of representatives from nine colonies met and formally requested repeal. Parliament granted their request in March 1766 but also passed a Declaratory Act that asserted Parliament’s right to tax the colonists as it saw fit. This tax rebellion kicked off a decade of crises that culminated in a long war and a declaration of independence, the 250th anniversary of which we this year celebrate.

Fewer, though, will celebrate the 200th anniversary of the Nullification Crisis a few years hence. In November 1832, a convention of South Carolinians called for the nullification of federal tariffs effective 1 February 1833. They protested the so-called Tariff of Abominations passed in 1828 and its 1832 revision, which kept tariff rates at unprecedentedly high levels. President Andrew Jackson responded to nullification by saying that he would die in the last ditch before allowing a state to nullify a federal tariff, a credible threat to use military force given the source, known to Americans as Old Hickory and the Hero of New Orleans. Kentucky Senator Henry Clay soon brokered a compromise that slowly reduced federal tariffs to 20 percent over a decade. South Carolina backed off Nullification and Congress passed the Force Bill, which empowered Jackson to use the military to enforce the tariff if need be.

The two crises certainly share some key characteristics: both reacted to the taxes of a central authority and led to a special convention. Both times, the central authority reversed policys but reasserted its authority with additional legislation.

Their differences, though, are telling. Resistance to the Stamp taxes was widespread and entailed a degree of physical violence and threats of more by spontaneous rabble action. Resistance to federal tariffs was largely limited to South Carolina and entailed political posturing by polities rather than physical protestation by the populace.

The main reason for those differences, I’ll argue, is that, as abominable as it was, the tariff had little negative effect on the overall U.S. economy while the stamp tax posed an existential threat to colonial economies given the dire macroeconomic situation when imposed. 

I would not go so far, of course, as to deny that ideology played some role in the stamp tax rebellion or to argue that real economic factors played no role in the Nullification Crisis. I am simply saying that they were not central to what transpired.

This point is probably most easily understood by examining the economic effects of the tariffs of 1828 and 1832. Nullifiers correctly noted that by increasing the price of tariffed goods, tariffs helped domestic producers, mostly located in the North, while hurting consumers of tariffed goods throughout the country, especially in the South. 

The size of the effect, though, was quite small. Economist Sonali Garg and I have spent the last year looking for major economic effects of the Tariff of Abominations and its 1832 revision and we have found none. Real per capita output continued to climb over the 1828 to 1833 period, long-term interest rates were almost unchanged, and only Clay’s compromise tariff sent bank and insurance stock prices uniformly and strongly upward as the threat of armed insurrection dissipated.

Moreover, after spiking to almost 62 percent in 1830, the average effective tariff, which is to say total duties paid divided by the total value of imports, dropped below its 1827 level in 1831 and fell further to 43 percent in 1832, the year that South Carolinians threatened nullification. In other words, the economy quickly adapted to the Tariff of Abominations through some combination of the increased smuggling, substitution, or domestic production of tariffed goods. The worst was over before Nullification, which was more rooted in fears that a national government powerful enough to aid one section of the country at the expense of another might meddle with a particular peculiar institution.

Garg and I also calculated the Harberger triangles or deadweight losses produced by the tariff on pig iron. With the tariff at 62 and a half cents per 112 pounds, they were hardly the stuff of rebellion, even when considered along with the litany of other tariffed goods. Many planters in South Carolina faced economic hardships in the late 1820s and early 1830s, to be sure, but their challenges were more due to declining yields and lower world prices for cotton and rice than to tariffs. The largely localized economic pain helps to explain why South Carolina acted alone and why nullification advocates were quick to compromise rather than itching for a fight, as they would be in 1861 when they faced an existential threat.

The macroeconomic situation in 1765, by contrast, was starkly darker and much more widespread than the deadweight loss from high tariffs. Economist Ron Michener and I worked on the post French and Indian war macroeconomic mess, him pretty much full time and me on and off, for almost a quarter of a century. Our argument is not easily understood in a short compass and appeared to some as figments of our theoretical imagination until I stumbled upon a miscatalogued primary source that encapsulated the same argument that we had been making on the basis of hundreds of primary sources that each told only a small part of the overall story.

Although I discovered it in 2008, I published this overlooked overview source only recently, as an appendix to a chapter in an edited collection about the Bubble Act, so you have not likely seen it. I want to explain here what key excerpts mean for our interpretation of the Stamp Act rebellion. Interleaved with another source about the monetary situation in New Jersey in 1786, it was unsigned and undated but I was able to date it to 1768 based on the exchange rates it quoted. Other internal evidence reveals the author to be a resident of the middle colonies, most likely New Jersey, and that the document was intended as a private letter to an unnamed correspondent, likely in Britain, who hoped “to restore that happy flourishing and tranquil State the Colonies formerly enjoyed, so beneficial and glorious to G. Britain.”

The colonist responded at some length, beginning his analysis with the key observation that it was not “the Stamp Act or New Duty Act alone that had put the Colonies so much out of humour tho the principal Clamour has been on that Head but their distressed Situation had prepared them so generally to lay hold of these Occasions, and how they came to be so I must trace back to commencement of the late War. There was then little paper Money in the Colonies, but all Ranks lived frugally within what they got and there transactions and Dealings did not exceed the Currency among them, there Trade to England was small and they made Remittances by their West India Trade for the Country People in general were contented with their own Produce and Manufactures, the Price of Land was so low that they could soon pay for it out of what they raised.” 

Before the French and Indian War, in other words, the colonists used paper bills of credit to settle debts with each other and specie, full bodied gold or silver coins in other words, to settle debts with Great Britain. They exchanged their produce for the coins in the West Indies mostly, the author fails to mention, with French and Spanish counterparties. Sales to British planters in the West Indies were most often settled in bills of exchange, a type of international check, drawn on specie deposits in Britain. 

The author also notes that land prices were low, which means that interest rates were high. It was well understood, even then, that asset prices moved inversely to interest rates.

The French and Indian War, the author continued, brought a “great Change [in] a short Time.” The war necessitated equipping and paying many troops, which the colonial governments financed by issuing paper bills of credit akin to today’s Federal Reserve Notes because “to raise the Sum wanted within the year, or by Loan as in England, was equally impossible, but being secured by the Legislature to be sunk by future Taxes they never depreciated but,” through what economists call the liquidity effect, the new money decreased interest rates and thus raised the price of real estate. 

At the same time, privateering profits and wartime trade, much of it illicit, brought in large quantities of specie from the West Indies, which the colonists used to pay for British imports. “Thus not withstanding the vast Importation of British Manufactures,” the author explained, “our Trade supplied us with ample Remittances.” After 1760, however, “this advantageous Business received a violent check by a most injudicious and ill advised circular Letter to the Governours on the Continent, and by orders to the Kings Ships to seize all Vessels employed in” trading with the enemy. British naval ships “rigorously performed this Order, [while] carry[ing] on the Trade themselves. This was equally a Loss to G. Britain and her Colonies, reduced many Merchants to a low State and gave the first Cause of Discontent.”

The second cause of discontent arose from the fact that when the war, privateering, and trade were winding down, money remained “plenty, both in Specie and Bills of Credit.” As a result, the colonists “were not afraid of entering into deep Engagements equivalent to our Circulation.” In other words, colonists borrowed large sums at low interest rates to buy real estate in the hopes that its price would go higher still.

Due to unexpected changes in British policy, it was not to be. The supply of money shrank “being … called in by Taxes or remitted for Goods.” That “occasioned a sudden Stagnation,” a big jump in interest rates, and a big fall in real estate prices. Most land speculators had borrowed with the full principal due in a year or two, as was customary. Unable to sell due to the collapse in land prices, or to refinance due to the spike in interest rates, they defaulted. A rash of lawsuits, bankruptcies, and sheriff’s sales resulted. “By calling upon and suing one another brought many to ruin,” including incarceration in debtors’ prisons described by other contemporaries as “loathsome cages.”

The extent of the distress was no exaggeration. As with other parts of the letter, Michener and I had already found numerous corroborating sources including, in this instance, an index of sheriff sales that we created from notices in the Pennsylvania Gazette, which has been full-text searchable since the 1990s.

Britain, the author and many other sources indicate, then enacted several policies that prevented colonists from refreshing colonial money supplies. British naval ships “often cramp Trade by stoping and detaining Merchants ships and pressing their Men.” British customs officials became so strict that for a time they even stopped row boats crossing freshwater rivers, the traditional way of supplying Manhattan and Philadelphia with wood and victuals.

“Another capital Greivance and Inconvenience to these middle Colonies,” the author continued, “is being restrained from issuing Notes or Bills of Credit … to recount our Distress for want of this Medium were Endless or by what unaccountable Policy G. Britain acts in the Restriction.” He referred, of course, to the well-known 1764 Currency Act that effectively banned colonies from issuing new bills of credit or extending the time in circulation of existing ones. Too often pooh-poohed by scholars, the restriction stripped the ability of colonial legislatures to augment their colonial money supplies, all of which shrank dramatically.

The want of a final means to settle debts was so severe that epistolary squirrel scalp bounties circulated from hand-to-hand as money in Bucks County, north of Philadelphia, in 1765. At a pence apiece, however, there were not enough squirrels or shot to make up for the dearth of specie or bills of credit. The author claimed that as a result many colonists fearful of winding up in debtors’ prison retreated “to the Wilderness. They acquire Land but give up every other Convenience, contract savage and brutal Dispositions, are too far Distant to carry their Produce to market, in exchange for European manufactures.”

Other colonists turned their attention to “Manufactories,” including farm families “what make sufficient for their own Families both of Woollen and Linnen many of them keep Looms in their Houses, and make two or three Hundred Yards of different Cloths a year. I am well acquainted with one Family who makes 500 Yards at least yearly, and I am told that two others exceed 1000, all in Jersey. They likewise make great Progress in the Iron Manufactory, and tho their Edge Tools come higher, they are far superior to those imported. We have plenty of Hides for Shoe Upper Leather and Saddler Leather … Shoemakers we have in plenty, as well as Saddlers and chaisemakers. Many other Articles are made among us, but why should this give any Jealousy to Britain. … For it must not be forgot that our Trade to the Spanish and French West Indies was laid under the severest Restrictions, and the Spanish Ships were even prevented laying out their Money in our Ports. O wise Grenville!”

“To this miserable and discontented Situation,” the author continued, “were we reduced about the year 1765 and in November the ever odious and memorable Stamp Act was to take Place, which we look’d upon as equally inexpedient and illegal and which never could have been carried into Execution” for want of the money to pay for the stamps, especially given the number of lawsuits then in progress. Only near the end of his missive does the author mention “the Arguments in the Farmers Letters, which we deduced from sound Whig Principles,” before railing against British customs officers again, especially the way that they “riot in Pomp amidst our Distress.”

“Tho we object to unconstitutional Taxes,” the author continued, “we have always willingly submitted to those levied by our own Assemblies and it is well known how cheerfully in fact we mortgaged both our real and personal Estates during the late War, and to this Day a heavy annual Tax continues on our Lands, live Stocks, personal Estates, Servants, Negroes, Batchelors & Mills, Forges &c. ~~ All these Taxes are raised, managed and applied at a most triffling Expence. how different is the practice in Britain?” In other words, the colonists rebelled not at the level of Stamp tax but at the inefficient mode employed. 

The author implies that all those difficulties – little money, low land prices, high interest rates, numerous sheriff sales, and little interest in trade but much in manufacturing or moving to the frontier -- remained at the time of writing, a fact that Michener and I can also document from numerous other primary sources. Conditions improved a little when southern Europe needed American grain but sank again due to improved harvests there and the 1773 credit crunch.

In short, the long-held belief that colonial resistance was more ideological than economic in nature must be reversed. The Stamp Act was the straw that broke the camel’s back, a bridge too far, a marginal shock that threatened the colonists’ existence.

            Many other formative events of American Identity beg for reconsideration given the findings of economic historians over the last few decades. A very promising avenue is to examine the geographical and socioeconomic dispersion of federal bondholders. I found in my 2008 book One Nation Under Debt that Hamilton’s claim that the national debt would cement the Union was quite credible for the 1790s but the role of federal bond ownership, or rather the lack thereof, in the Hartford Convention, the Nullification Crisis, and Civil War remain unexamined, though the requisite primary sources exist.

            I could go on, but am out of my allotted time. Thank you!