The Economic Effects of the American Revolutionary War

The American Revolutionary War began largely over economic pressures, with colonists in the Thirteen Colonies upset over taxation without representation. Unfortunately, America’s economic situation did not improve with the war or its immediate aftermath. The fledgling United States government suffered from lack of revenue, ability to impose taxes, and enforcement of existing taxes. Under the nation’s first governing document, the Articles of Confederation, the federal government could only use tariff revenue as a source of funds. In 1786, however, America’s weak economy and lack of government enforcement almost tore the nation apart with Shays’ Rebellion. A last-minute defeat of the rebellion finally brought Americans around to the idea of an economy with government oversight.

During the American Revolutionary War, the economic situation in the colonies was dire. Although the colonies were surprisingly wealthy in 1774, the War was costly. Unable to pay currency to attract soldiers, the new United States used land grants to pay soldiers. As the war dragged on, with combat ending only in 1781, enough land was needed that reserve districts were created. Also known as bounty land, the size of tracts was based on terms of service and military rank. Ultimately, this allotment of land for Revolutionary War service totaled over a million acres.

The American Revolutionary War ended America’s valuable trade with Britain. Although this trade had been oppressive due to taxation without representation and monopolies on imports, especially tea, it had been very lucrative for colonial businesses. Credit markets collapsed during the war and afterward, as the new United States was considered a risky investment. Foreign trade was complicated by the fact that America’s two Revolutionary War allies, France and Spain, were more motivated by a chance to defeat Britain than a desire to aid the new nation.

Economic Woes Under Articles of Confederation

Upset over taxation without representation, the new United States was created with a minimal allowance of taxation. The Articles of Confederation did not allow the central government, today known as the federal government, to impose taxes directly on citizens. It could only ask the states for tax revenue, which they did not provide. Unsurprisingly, the central government was near bankruptcy during this period and could afford little in the way of services.

Trade was limited under the Articles because the central government could not force states to trade with each other nor adopt standardized units and measures. States also had their own currencies, which made commerce difficult. Both the central and state governments owed money to European powers and investors, but the central government lacked its own money and could not force the states to pay. As a result, credit quickly disappeared as investors were not repaid and would not lend more.

After the American Revolutionary War, many doubted the value of paper money and wanted payment in gold coinage. Massachusetts required citizens to pay taxes in gold, which many could not afford to do. As a result, many lost their property due to non-payment of taxes. Many were also angry at banks for seizing, or foreclosing on, their properties due to default of loans.

In autumn 1786, angry protests grew rapidly in Massachusetts due to little state government response to demands for debt relief. A Revolutionary War veteran Daniel Shays became the leader of this protest movement, which spread across the state. The conflict came to a boiling point in January of 1787, when Shays’ force of roughly 1,500 men attempted to seize the federal armory at Springfield, Massachusetts. Shays was swiftly defeated by a privately-funded army led by Revolutionary War General Benjamin Lincoln at the armory, but fears of future uprisings due to economic woes led to calls for reforms to the Articles of Confederation.

The US Constitution & Economic Reforms

The failure of the Articles of Confederation to maintain a stable US economy was a key reason for the Constitutional Convention of 1787. Originally, the 55 delegates went to Philadelphia to amend the Articles but soon decided to create a new governing document. Authored primarily by James Madison, the new Constitution gave the central government stronger powers to regulate the national economy. In Article I, which listed the responsibilities of the federal legislature (Congress), the central government gained powers related to taxation, international trade, and regulating commerce among the states.

Article I Section 8 of the Constitution gave the federal government the following economic powers: borrow money for the government, regulate all interstate commerce and foreign trade (Commerce Clause), create uniform bankruptcy laws (a nod to Daniel Shays), coin and regulate the value of money, and combat counterfeiting and piracy on the high seas. In Section 9, the federal budget was established as a law, which helped instill faith that the federal government would not spend excessively and potentially ruin its creditworthiness.

The US Constitution directly addressed the lack of central government revenue experienced under the Articles of Confederation. The framers of the new Constitution allowed the central government to impose its own taxes, including on the states. However, since taxation was a sensitive issue due to America’s past complaint of taxation without representation under British rule, the Origination Clause of the Constitution declared that any bill dealing with federal taxes (revenue bills) must originate in the House of Representatives. In the original Constitution, prior to the 17th Amendment in 1913, only US Representatives were directly elected by voters, thus placing taxation closely with the people.

As a result of Article I Sections 8 and 9 and the Origination Clause, the US economy enjoyed greater stability and federal government oversight. Some confusion that increased transaction costs–physical and time costs related to trade–was eliminated by ensuring that states could not have their own currencies, trade laws, and systems of measurement. By simplifying trade among the states, commerce increased.

Economic Effects of the American Revolutionary War in Britain

As with the United States, the American Revolutionary War added significant national debt for Britain. Part of the peace agreement between Britain and the new United States, the Treaty of Paris (1783), involved settling debts between the two countries. For the first decade after the war, economic relations between the US and UK were strained, with the UK interfering with American foreign trade. In 1802, the two nations finally settled all debt claims from the Revolutionary War.

The British economy was not harmed by the Revolutionary War and its aftermath, as Britain had an advantage in foreign trade compared to the thirteen separate US states under the Articles of Confederation. While Britain could hinder US foreign trade, the US could not respond in kind, partially due to its lack of naval power and partly due to the independence of each state. Attempts to limit British trade and benefit domestic firms were often stymied by the British ability to simply sail to more welcoming ports. Southern states, which lacked their own industry, were more accommodating to British trade, as they wanted to avoid reliance on northern states for all finished goods.

During the American Revolutionary War, French military aid led directly to America’s victory and independence from Britain. However, the expense of the war ended up hurting France economically. The new United States sought loans from its three foreign allies: France, Spain, and the Netherlands, but defaulted on repayments to the first two. A growing economic crisis in France in 1788 and 1789 sparked the French Revolution, which was politically influenced by its American predecessor. By 1793, France was at war with Britain once again, and Britain actively sought to disrupt American trade with France by stopping American ships in the Atlantic.

Although more of an economic win for Britain, the smoothing of US trade relations with Britain with the Jay Treaty of 1794, upset the French. France responded by seizing American shipping in the Caribbean, prompting the Quasi-War of the late 1790s. The US suspended debt repayments to France in retaliation, further stressing its economy during the ongoing French Revolution. The French economy only saw an increase in spending in 1799 with the beginning of Napoleon Bonaparte’s war spending.

Economic Effects in the 1790s: Whiskey Rebellion

In 1791, Congress passed an excise tax on whiskey to raise revenue to pay off Revolutionary War debt. Similar to the situation prior to Shays’ Rebellion, most Americans were rural farmers who often used barter rather than currency. This new federal tax required payment in currency, angering farmers who traded primarily in whiskey and crops. Farmers in western Pennsylvania, already angry with the federal government over the supposed lack of support regarding conflicts with Native Americans, refused to pay the tax.

Late in the summer of 1794, a militia of angry farmers began gathering in Pennsylvania. President George Washington used his power as commander-in-chief to put down the rebellion with 13,000 militiamen called in from multiple states. Thus, the precedent was set: citizens would be expected to pay their taxes, even if they disagreed with the rationale.

The Revolutionary War’s victory for the United States re-opened the door to physical and economic expansion. Prior to the Revolution, Britain had banned settlement west of the Appalachian Mountains in the Proclamation of 1763. This upset colonists, who desired to move westward for good farmland. As an independent nation, the United States quickly incorporated the Northwest Territory as its territory in 1787 as one of the few major successes under the Articles of Confederation.

Economically, the Northwest Territory, incorporated in the Northwest Ordinance, was groundbreaking in that it utilized new land surveying techniques to ensure uniformity. This land could be sold to generate revenue for the government or given to veterans instead of cash. New land also offered opportunities for government grants to stimulate infrastructures, such as roads and canals. This began the era of federal government support for infrastructure development as a tool to encourage economic growth.