Having assessed the colonies’ balance of payments, we turn now to its impact on the colonial economy. The estimated remaining annual colonial deficit of ?20,000 to ?40,000 was paid either by an outflow of specie or by growing indebtedness to Britain. Temporary net outflows of specie undoubtedly did occur, thereby straining trade and prices in the colonies. Certainly, contemporary complaints of money scarcity, especially specie, indicate that this often happened. But no significant part of this normal deficit could have been paid with precious metals. The colonists could not sustain a permanent net outflow of specie because gold and silver mines were not developed in colonial North America. Typically, then, the outflow of specie to England was matched by an inflow from various sources of colonial exchange earnings. Nevertheless, the erratic pattern of specie movement and the issuance of paper money of uncertain value caused monetary disturbances, as reflected in price movements and alterations in rates of exchange among the currencies. But most colonists preferred to spend rather than to accumulate a stock of specie. After all, limited specie was simply another manifestation of a capital-scarce economy. To the colonists, it was more desirable to receive additional imports— especially manufactures—than to maintain a growing stock of specie.
The final remaining colonial deficits were normally financed on short-term credit, and American merchants usually purchased goods from England on one-year credit. This was so customary, in fact, that British merchants included a normal 5 percent interest charge in their prices and granted a rebate to accounts that were paid before the year ended. And in Virginia, Scottish firms generally established representatives in stores to sell or trade British wares for tobacco and other products. Short-term credit was a normal part of day-to-day colonial exchanges in these instances.
The growth of short-term credit reflected the expanding Atlantic trades and represented a modest amount of increasing colonial indebtedness to Britain. Sizable claims against southern planters by British merchants after the Revolution18 have encouraged some historians to argue that the relationship between London merchants and southern planters was disastrous at that time and even to argue that increasing colonial indebtedness to Britain provided impetus for the Revolution. But was this, in fact, so?
By adding the “invisible” earnings and ship sales to the regional commodity trade deficits (and surpluses), we obtain these rough averages of the regional deficits (—) and surpluses (+) in the colonies:19
New England — ?50,000; Middle colonies — ?350,000; Southern colonies + ?350,000
Clearly, the major deficit regions were north of the Chesapeake Bay area, primarily in the Middle colonies. The southern regions were favored with more than a sufficient surplus in their current accounts of trade to pay for their purchases of slaves and indentured servants.
A fair number of planters availed themselves of greater credit from abroad. Nevertheless, it appears there was no growing indebtedness on average in the South at this time, and British expenditures for military and administrative purposes eliminated the negative New England balance and reduced most of the Middle colonies’ balances as well.20
Nevertheless, England’s claims were real enough, even if exaggerated. But remember that British merchants and their colonial representatives normally extended credit to southern planters and accepted their potential harvests as collateral. Usually, of course, the harvests came in, and the colonists’ outstanding debts were paid. But with the outbreak of the Revolution, this picture changed radically. Colonial credit, which normally was extended throughout the year, was still outstanding at the end of the year because agents or partners of British firms had retreated home before the crops were harvested and the debts were paid. But the mere existence of these debts did not indicate growing indebtedness—nor did it provide motivation for colonial revolt.
The capital inflows that did occur were rarely channeled directly into long-term investments in the colonies, and British merchants held few claims on such investments. Nevertheless, because commercial short-term credit was furnished by the British, colonial savings were freed for other uses: to make long-term investments in land improvement, roads, and such physical capital as ships, warehouses, and public buildings. For the purposes of colonial development, British short-term credit represented a helping hand, and its form was much less important than its amount.
However, with the highly important exception of military and civil defense, the colonies apparently were not subsidized by Britain to any great extent. For the most part, the formation of capital in the New World depended on the steady accretion of savings and on investment from the pockets of the colonists themselves. It is impossible to determine precisely how much was annually saved and invested during the late colonial period. According to our estimates, which will be elaborated in chapter 5, annual incomes probably averaged at least ?11 sterling per person in the colonies. Because nearly 2.5 million people were living in the colonies on the eve of the Revolution, if we assume a savings rate of not less than 9 percent (?1 out of ?11), total capital accumulation per year would have exceeded ?2.5 million at that time. Thus, the capital inflow from Britain probably accounted for 1 or 2 percent of capital formation in the colonies.
The sizable estimates of British military expenditures in North America between 1763 and 1775 (Thomas 1988) and of civil and military expenditures for the longer period from 1740 to 1775 (Gwyn 1984) support these general conclusions of small net deficits in the colonies’ balance of payments throughout much of the late colonial period. Only the substantial British expenditures for military and administrative purposes reveal a form of British subsidization or colonial dependency in the decades just before the Revolution.
World History
