1776: The Revolt Against Austerity

Great Financier.jpg
Lewis Walpole Library, Farmington, Connecticut
Detail from The Great Financier, or British Economy for the Years 1763, 1764, 1765, showing British Prime Minister George Grenville holding a balance in which debt outweighs savings, 1765

Was the Declaration of Independence a powerful indictment of British austerity policies? Does America’s founding document need to be seen as part of an economic debate about the British Empire? These questions may seem jarring, almost anachronistic. But eighteenth-century political argument, like that of our own day, often revolved around responses to fiscal crisis. Just as political debates in Britain and the United States today turn in large part on the response to the great recession of 2008, so the events that made the United States were shaped by the British imperial government’s reaction to the debt crisis of the 1760s. What made the Declaration so offensive to British politicians then, and what makes it highly relevant to Europeans and Americans today, is that America’s founders offered a blueprint for a different kind of state response to fiscal crisis.

The controversy over austerity in the British Empire had a long history. Throughout the seventeenth and eighteenth centuries, European governments borrowed huge sums of money to finance their various state-building projects, with Britain setting the pace. These governments faced huge debts with uncertain means of repayment. Until George III’s accession to the throne in 1760, the British government had supported the economic development of the colonies, spending generously on infrastructure and subsidizing the immigration of many politically and religiously persecuted groups to North America. As recently as the 1730s the British state had subsidized the peopling of the new province of Georgia with immigrants from the Scottish Highlands and all across Europe. William Pitt continued these stimulus policies during his joint ministry with the duke of Newcastle in the late 1750s. Pitt, who believed that British imperial prosperity was intimately related to demographic and economic growth in America, refused to tax the colonies during the enormously expensive Seven Years War (also known as the French and Indian War) that began in the mid-1750s. Along with Newcastle, he drew up plans to populate newly conquered territories from Canada to Cuba, and supported bounties that would help the colonies develop new products for export to American and European markets.

By 1763, however, Britain’s national debt had risen to £122 million, or over 150 percent of the Gross Domestic Product, and in the face of growing resistance to high taxes in Britain itself, the British government abruptly changed course. George III’s new ministers blamed the escalating debt and the punishing level of British taxation on Pitt’s aggressive global foreign policy and his unwillingness to have the colonies pay directly for the war effort. George III’s ministers were determined to end what they perceived as economic redistribution to the colonies at the expense of wealthy English landowners and the government itself. Instead of subsidizing immigrants, George III’s Prime Minister George Grenville announced the Proclamation Line of 1763, designed to limit the demographic expansion of the North American colonies. Instead of encouraging the colonies to trade with Spanish America, the ministry instructed the Royal Navy to prohibit any intercolonial trade. Rather than lowering customs duties in order to encourage commercial activity, the ministry passed the 1763 Hovering Act, which made it easier to enforce existing customs regulations. Instead of allowing the colonies to bet on future growth by printing paper money, Grenville passed the Currency Act of 1764, which forbade the colonies to emit any new currency. Finally, in 1765, Grenville ushered the American Stamp Act through the House of Commons, a measure that was designed in part to restrict the colonial land market.

These changes were shocking and dramatic. Americans and their British allies interpreted this austerity program as a complete reversal of British imperial economic policy. By the middle of the 1760s, many Americans and Britons were certain that Grenville’s measures had led to widespread economic hardship. The Bristol merchant Richard Champion thought that the measures had struck “very fatal blows … at the commerce of the Empire.” The wealthy Boston merchant, and prominent signatory of the Declaration, John Hancock thought the new policies “very cruel” and would soon make the Americans “a gone people.” Contemporaries believed that British manufacturing exports to America had declined by three-quarters. Most Americans were certain that the multifaceted economic contraction of 1764-1769 had everything to do with Grenville’s austerity, which the American founders described as a “history of repeated injuries and usurpations.”

What alternative strategy did the authors of the Declaration propose? Today, we tend to regard the practice of using government spending to stimulate economic growth as an invention of John Maynard Keynes in the 1930s. But already in the eighteenth century, self-styled Patriots, followers of Pitt on both sides of the Atlantic, argued that what the British Empire needed if it was to recover from the fiscal crisis was not austerity but an economic stimulus. In the midst of the crisis one journalist wrote that Pitt and the Patriots believed that the burgeoning debt could be reduced by increasing “the national stock,” or Gross National Product, whereas Prime Minister Grenville believed “that an hundred and forty millions of debt is to be paid by saving of pence and farthings.”

The Patriots’ demands depended on policies that encouraged immigration. They followed the radical Whig philosopher John Locke in arguing that, “naturalization is the shortest and easiest way of increasing your people.” Accordingly they were furious when George III reversed Britain’s long-term policy of subsidizing immigration, and instead, as the Declaration put it, “endeavored to prevent the population of these states.” Many of the founders had also come to appreciate that a system of chattel slavery made no economic sense at all, since it would replace potential consumers with unfree laborers who could not purchase goods. From the 1730s on, an increasingly loud chorus of Patriots argued against slavery in general and the slave trade in particular for its immorality and its disastrous economic consequences. Slave societies, they argued, could not be consumer societies.

South Carolinians such as Christopher Gadsden and Henry Laurens, the future president of the Continental Congress, denounced slavery, as did the Virginian tobacco planter William Byrd II. The First Law of Georgia (1732) outlawed slavery. In the view of these southern colonists, slave-based monocultural economies, like sugar, tobacco, and rice, were already in relative decline. Because they did not yet foresee the enormous profitability of cotton, they believed that after a slight economic adjustment the gradual elimination of slavery would create a more diverse and dynamic economy. It was for this reason that the founders complained that George III had “refused to assent to laws” that would have eliminated or severely restricted the importation of slaves into North America.

The Americans’ complaints in the Declaration extended to the king’s commercial policies. Patriots on both sides of the Atlantic were appalled that the British government had restricted the colonies to bilateral trade with Britain, so that all customs revenue would flow directly into the coffers of the British Treasury; the result, they argued was “to cut off our trade with all parts of the world.” The Patriots were convinced that both the imperial and colonial economies would grow much more quickly if the colonies were encouraged to export British manufactured goods and colonial agrarian products to supply the almost insatiable demand of Spanish America. They wanted the British state to devote resources to the creation of free ports along the Atlantic seaboard and throughout the Caribbean—anticipating the free trade zones that were established in many parts of the world in the late twentieth century. They also advocated the development of colonial harbors, colonial roads, and colonial shipbuilding—crucial stimulus spending on infrastructure that would create new opportunities for colonial exports.

Adam Smith provided the Patriots with robust theoretical support on all of these issues when he published his classic Wealth of Nations in 1776. Smith famously sided with the Americans in the crisis that ripped the British Empire apart, arguing that instead of enforcing their austerity measures and extractive policies with military force, Britain should have allowed the Americans “such a number of representatives as suited the proportion of what it contributed to the public revenue of the empire.” Smith celebrated “the natural good effects of the colony trade” of Great Britain because that trade encouraged “manufactures,” but castigated the Ministry’s insistence on constraining colonial exchange through punitive customs assessments and restrictions on trade with imperial rivals. While Smith denounced subsidies for domestic agricultural production, he praised the old Patriot policy of offering bounties to the colonies to offset the start-up costs necessary for development.

Like other Patriots in the 1760s and 1770s, Smith also denounced chattel slavery as an economic system most fit for absolute government. Because wage laborers added so much to the commonweal by their consumption as well as their production, Smith insisted “the work done by freemen comes cheaper in the end than that performed by slaves.” Had the British government pursued measures to support the colonies, rather than austerity policies that retarded their growth, Smith believed, the American economy would have been so dynamic that in “little more than a century” the “seat of the empire would then naturally remove itself” to its most economically dynamic region: North America.

Twenty-first century American politicians routinely draw our attention to our founding moment and founding document, while simultaneously claiming to be inspired by the writings of Adam Smith. But they fail to understand the economic arguments that in large measure shaped what Thomas Jefferson and his colleagues wrote. When Governor Scott Walker of Wisconsin proudly proclaims that “we celebrate the fourth of July and not April 15, because in America we celebrate our independence from the government, not our dependence on them [sic],” he fails to see that our founders blamed George III and his government not for taxing too much but for doing too little to stimulate consumer demand. When Senator Chuck Grassley warns that President Obama’s executive action on immigration violates the limitations expressed in the Declaration, he fails to see that America’s founders, in the Declaration itself, criticized the British king for obstructing immigration to the North American colonies that would encourage growth.

While Senator Ted Cruz is certainly right to repeat the founders’ argument that humans “were endowed by their creator with certain unalienable rights,” he fails to see that the founders also said that “governments are instituted among men” in order to “secure” the right of all to the “pursuit of happiness.” The authors of the Declaration wanted a government that would itself promote the well-being of its citizens, not merely protect their private property. They believed that governments existed to make it possible for all to achieve “happiness” in this lifetime. They were creating a government that “had full power to levy war, conclude peace, contract alliances, establish commerce, and to do all other acts and things which independent states may of right do.”

America’s founding document called for an American state that would promote economic growth just as the British state had done before the shift toward balancing the books. George Washington himself had, since the 1760s, lamented the loss of those “privileges,” those state supports for the colonial economy, and called instead for the British state to support “a more enlarged and extensive” colonial economy. Had George III and his ministers not adopted austerity measures in the 1760s and 1770s, had they chosen to follow Pitt’s policies of economic stimulus, America’s founders might not have needed to declare their independence at all.