America’s Revolution: Economic disaster, development, and equality

Peter Lindert, Jeffrey Williamson

15 July 2011

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When did American growth really take off? Did it accelerate only in the 1840s, or was it earlier, perhaps even before the revolution?

This debate over early American growth after the revolution has always been hampered by a lack of data and by the revolution itself. The colonial era covers even more contested territory, marked by little firm evidence.

  • Some see only extensive population increase and land settlement, with no gains in living standards.
  • Others see considerable productivity advance driven by trade with the Atlantic economy.

And if early America reached modern economic growth, we want to know why. Furthermore, since the new institutional view of development views inequality as a barrier to pro-growth institutions and policies (Engerman and Sokoloff 1997), we need to know just how equal were American incomes in 1774.

The American Revolution itself, like the revolutions in France and Russia and the waves of independence in Latin America in the early 19th century and in Africa and Asia after the Second World War, delivered negative economic shocks. How did the magnitude of the revolutionary economic disaster compare with those that followed, and does it hide an underlying leap to what Kuznets called modern economic growth?

Based on more archival data than were available to earlier researchers, we can now offer some answers (Lindert and Williamson 2011). The levels and growth rates of total gross personal income (in 1840 prices) are shown in Table 1 for the three regions used by Alice Hanson Jones (1977, 1980) – New England, the Middle Atlantic, and the South – and for a geographically fixed “nation”, defined by the 13 original colonies in 1774 which became the easternmost 15 states plus the District of Columbia in 1800. What do we find?

Table 1. Real income per capita 1774-1840

Notes: The figures in parentheses are percentages of the all-three-regions average. The 1840 estimates start with Weiss’s (1992, Table 1.2, page 27) national estimates, and derive regional relatives from the state-level relatives in Easterlin (1960, pp. 87-98). The three-region totals are derived from the regional averages.

Growth in early America: The leap to modern economic growth

Table 1 supplies our real per-capita income growth estimates for each of the three regions as well as for the three combined, in 1774-1800, 1800-1840, and 1774-1840.

  • Real per-capita incomes in the three-region “nation” grew very slowly over the entire period, only 0.38% per annum.
  • Between 1800 and 1840, per-capita income in the North grew at a very fast pace, 2.1% per annum in New England, and 1.45% per annum in the Middle Atlantic, rates that are consistent with the 5% per annum industrial output growth centred in the Northeast (Davis 2004).
  • In contrast to fast growth in the Northeast, the South Atlantic grew only 0.43% per annum, which pulled down the American average to a still very impressive 1.26% per annum, well above the 1% per annum criteria needed to make Kuznets’ modern growth club.
  • These rates are far in excess of Western Europe. Between 1801 and 1831, British per-capita income grew at only 0.45% per annum (Crafts 1987), far below the American 1800-1840 rate.

In short, it appears that America was growing at modern growth rates by 1800.

The more tepid growth performance over the longer period 1774-1840 seems to have been driven by two key events:

  • An economic disaster associated with the revolutionary War, and
  • A lagging South

Events we elaborate on below. Over these seven decades, American income per capita grew at only 0.38% per annum, as we have seen. But the per annum rates for New England, 1.24, and the Middle Atlantic, 0.69, were almost two to four times that of the American average, while Southern incomes fell.

The Southern reversal of fortune

In 1774 the colonial South had about twice the per-capita income of New England, even when one rightly counts slaves as in the population. The absolute economic decline of the South Atlantic over the last quarter of the 18th century and its relative decline over the subsequent four decades stand out as an example of what has come to be called reversal of fortune (Acemoglu et al. 2002). By 1840 the South Atlantic was well behind the Northeast, having been well ahead in 1774, and its population share of the original thirteen colonies had fallen too. Furthermore, we can find no evidence that the colonial South had any large army of poor whites in 1774; indeed, Southern free labour had some of the highest wages anywhere in the colonies. Thus, it appears that the ubiquity of poor whites in the South was strictly a nineteenth-century phenomenon, associated, presumably, with post-1774 decades of very poor growth. Why the reversal of fortune for the South? We are still not sure whether it was bad luck in its export commodity markets, institutional failure, or exceptionally severe wartime damage.

The wartime economic disaster

The new estimates imply that America’s real income per capita dropped by about 22% over the quarter century 1774-1800, a decline almost as steep as during the Great Depression between 1929 and 1933, and certainly longer. If the 1790s recorded brisk growth rates (Sylla 2011: pp. 81-3), it follows that the Revolutionary War period could have been America’s greatest income slump ever. That fall may have been 28% or even higher in per-capita terms.

What caused such sustained income losses? There is good initial evidence to suggest that three related negative shocks could have been large enough to cause the deep depression between 1774 and 1790.

  • First was the economic destruction of the war itself as well as the impact of wartime inflation and a dysfunctional financial system,
  • the second was concentrated in the South, and
  • the third was in every coastal city and smaller river town.

This second shock consisted of the disruptions to overseas trade during the revolution and, after 1793, the Napoleonic Wars. Available price and trade data show that the colonies, especially in the Lower South, suffered heavy trade losses as the war deepened, and they recovered only slowly and partially thereafter. In real per-capita terms, New England’s commodity exports rose by a modest 1.2% from 1768/72 to 1791/92, they rose by 9.9% in the Middle Atlantic, but fell by 39.1% in the Upper South, and by 49.7% in the Lower South, yielding a decline of 24.4% for the thirteen colonies as a whole (Shepherd and Walton 1976). The most painful of these shocks was the loss of well over half of all trade with England between 1771 and 1791. In addition, America lost Imperial bounties like those on the South’s indigo and New England’s whale oil. Demand shocks were less evident for products where America had a big influence on European supply. Thus, tobacco and rice revenue losses were smaller since the fall in volume was partially offset by the rise in price.

While these negative demand shocks to American commodity exports were very large, especially for the Lower South, the initial share of exports in regional income was only about 6-7% in the early 1770s (although bigger in the South). Thus, it seems unlikely that the huge depression of 1774-1790 was entirely “export-led” (although more so in the South).

The third major negative shock involved a crisis at the top, and it could have caused much greater income losses. America’s urban centres were damaged by British naval attacks, by their occupation, and by the eventual departure of skilled and well-connected loyalists. New York, Charleston, and Savanna were not free of Loyalists and waves of recriminations until 1783. An estimated 60,000 free persons (3.1% of the free population) and 15,000 slaves (3.6 of the slave population) had left by the early 1790s. Loyalist claims presented to His Majesty for losses in American rebellion came to $1,053,024 or about 0.6% of the 1774 income of the 13 colonies.

To identify the extent of the urban damage, one could start by noting that the combined share of Boston, New York City, Philadelphia, and Charleston in a growing national population shrank from 5.1% in 1774 to 2.7% in 1790, recovering only partially to 3.4% in 1800. There is even stronger evidence confirming an urban crisis. The share of white-collar employment was 12.7% in 1774, but it fell to 8% in 1800; the ratio of earnings per free worker in urban jobs relative to that of total free workers dropped from 3.4 to 1.5; and the ratio of white collar earnings per worker to that of total free workers fell even more, from 5.2 to 1.7. This evidence offers strong support for an urban crisis, and it also supports the view that America had not yet recovered from the revolutionary economic disaster even by 1800.

An egalitarian early America

Incomes were more equally distributed in colonial America than in other places. Among all Americans, slaves included, Table 2 reports that the richest 1% had 8.9% of total income, and the Gini coefficient was 0.46. Without the slaves, among free households the top 1% had 8.5% of total incomes, and the Gini was 0.44. Compare early American inequality with that of the US today, where almost 20% of total income accrues to the top 1%, and where the Gini coefficient is about 0.5 (Atkinson et al. 2011: Table 5, p31). That colonial America was a much more egalitarian place is even more apparent when we compare modern America with New England (Gini 0.35), the Middle Atlantic (Gini 0.42), and, surprisingly, the free South (Gini 0.38). Within any American colonial region, free citizens had much more equal incomes than do today’s Americans.

Table 2. Inequality in the American Colonies 1774

Free American colonists also had much more equal incomes than did west Europeans at that time. The average Gini for the four northwest European observations reported in Table 2 is 0.57, 0.11 higher than the American colonies, and 0.22 higher than New England. Indeed, there was hardly any other place on the planet that had a more egalitarian distribution in the late 18th century (e.g. compare with Milanovic et al. 2011).

If people had far more equal incomes in America than elsewhere, which kinds of colonists were better off than their counterparts in Europe? Figure 1 offers a surprising answer for an Anglo-American comparison. On the horizontal axis each society is ranked from its poorest to its richest, and on the vertical axis their average group incomes are displayed in logarithms. It appears that an American colonist of any rank had a higher income than his or her English counterpart of the same rank until we reach the top 2%. Indeed, it turns out that even American slaves were not at the bottom of the Anglo-American income ladder, although such comparisons fail to account for loss of freedom, longer hours worked, and harsher working conditions. Yet, the top incomes so dominated England that its national product per capita nearly matched that of America. Of course, average English incomes must have surpassed considerably the American average after the revolutionary economic disaster of 1775-1790.

Figure 1.

Early American bottom lines

American colonists had far higher incomes in 1774 than previously thought. Between 1774 and 1800 American incomes rose only very modestly in real per-capita terms, so that the rapid growth in the 1790s appears to have barely made up for a very steep wartime decline. It seems clear that America joined Kuznets’s modern economic growth club sometime after 1790, with the North leading the way, while the South underwent a stunning reversal of fortune. And without the 1774-1790 economic disaster, it appears that America might well have recorded a modern economic growth performance even earlier, perhaps the first on the planet to do so. Finally, and perhaps causally related to its growth performance, free America had much more equal incomes than did England. The colonists had greater purchasing power than their English counterparts over all of the income ranks except at the top 2%.

References

 

Acemoglu, Daron, Simon Johnson, and James Robinson (2002), “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, Quarterly Journal of Economics, 117(4):1231-1294.

Atkinson, Anthony B, Thomas Piketty, and Emmanuel Saez (2011), “Top Incomes in the Long Run of History”, Journal of Economic Literature, 49(1)(March):3-71.

Crafts, NFR (1987), “British economic growth, 1700-1850: Some difficulties of interpretation”, Explorations in Economic History, 24(3):245-268.

Easterlin, Richard A (1960), “Interregional Differences in Per Capita Income, Population, and Total Income, 1840-1950,” in Trends in the American Economy in the Nineteenth Century, Princeton University Press, for the National Bureau of Economic Research.

Engerman, Stanley L and Kenneth L Sokoloff (1997), “Factor endowments, inequality, and differential paths of growth among new world economies”, in S Haber (ed.), How Latin America Fell Behind, Stanford University Press, 260-304.

Jones, Alice Hanson (1977), American Colonial Wealth, Arno Press.

Jones, Alice Hanson (1980), Wealth of a Nation to Be, Columbia University Press).

Lindert, Peter H and Jeffrey G Williamson (2011), “American Incomes Before and After the Revolution”, NBER Working Paper 17211,

Milanovic, Branko, Peter H Lindert, and Jeffrey G Williamson (2011), “Pre-Industrial Inequality”, Economic Journal, 121 (March):255-272.

Shepherd, James F and Gary M Walton (1976), “Economic Change after the American Revolution: Prewar and Postwar Comparisons of Maritime Shipping and Trade”, Explorations in Economic History, 13(4):397-422.

Sylla, Richard E (2011), “Financial Foundations: Public Credit, the National Bank, and Securities Markets”, in Douglas A Irwin and Richard E Sylla (eds.), Founding Choices: American Economic Policy in the 1790s, University of Chicago Press, 59-88.

Weiss, Thomas (1992), “US Labour Force Estimates and Economic Growth, 1800-1860”, in Robert E Gallman and John J Wallis (eds.), American Economic Growth and Standards of Living before the Civil War, University of Chicago Press, 19-78. 

 

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Topics:  Development Economic history Frontiers of economic research Politics and economics

Tags:  US, economic history, American revolution

Distinguished Professor of Economics, University of California – Davis

Laird Bell Professor of Economics, Harvard University and CEPR Research Fellow

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