6 Three Crises and Revolt. Old Colonial Policy Each of the 13 colonies was established under a charter granted by England. While some initially had corporate.

6Three Crises and Revolt

Old Colonial Policy

• Each of the 13 colonies was established under a charter granted by England.

• While some initially had corporate charters (CT, RI), and others had proprietary charters (PA, MD), ultimately all of the colonies operated under Crown charters.

• Crown colonies established forms of government similar to that of England.

• Therefore, there was a two-house legislature and a governor.

• The Crown appointed the upper house and governor while the lower house was locally elected.

Old Colonial Policy

• While the Crown had the ultimate say in whether colonial legislation would become law, due to lags in communication and Crown apathy, for all intents and purposes the colonists ruled themselves.

• This arrangement begins to change in 1690 following the Glorious Revolution in England that transferred political power from the Crown to Parliament.

• Henceforth, all colonial legislation was subject to approval by Parliament.

Old Colonial Policy

• Again, communication lags and apathy allowed much colonial legislation to be effective long before Parliamentary approval if it was approved at all.

• This period of benign neglect has been termed the “old colonial policy.”

• As an example, recall that the Navigation Acts were first passed in 1660 and 1663, but were rarely enforced and when they were, rules were changed to allow any losses to be offset.

Old Colonial Policy

• We might expect that the requirement that certain goods be shipped first to England would be a source of colonial complaint was not so much the case.• Colonists typically dealt with British merchants.

• Duties imposed on colonial exports as they passed through England were sent back to the colonies.

• If the cost to re-export goods priced them out of the market, then such goods would be removed from the list.

• It was permissible to ship some enumerated goods from one colony to another without having to go to England first.

• England was the largest source of colonial imports.

Old Colonial Policy

• British manufacturers did seek Parliamentary protection from competing colonial manufacturers.

• However, given England’s large comparative advantage in manufacturing, this restriction mattered little.

• On the other hand, colonial shipbuilding, an activity highly valued by Parliament, was not restricted.

• Likewise for agriculture and resource-based industries.

• From this we conclude that the deadweight loss from the Navigation Acts was likely small.

Old Colonial Policy

• Growth in colonial income led to greater trade with both England and the West Indies.

• The latter served as a source of sugar and molasses and as a market for colonial goods, especially from New England.

• Over time, the British West Indies proved to be too small of a market and so NE turned to the French West Indies which, due to its high productivity, sold sugar and molasses at a lower price than did the British West Indies.

• British subjects who owned land in the British West Indies lobbied Parliament to prohibit colonial imports from the French West Indies.

Old Colonial Policy

• This lobbying results in the passage of the Molasses Act of 1733.

• The Act imposed a tariff on imports from the French West Indies.

• Colonial merchants who traded with the West Indies did not want to lose this market since it was a major source for their exports of fish, lumber, and rum.

• Thus, they chose to ignore the Act by continuing to trade with the French West Indies. This was achieved via• Smuggling

• Bribing British officials (10% was the going rate)

New Colonial Policy and the First Crisis

• The lax enforcement of commercial policy continues for the roughly 30 years.

• Britain begins to change its stance following the end of the Seven Years’ War (aka French and Indian War) in 1763.

• Although the war was fought in North America, it was financed primarily through taxes imposed on British landowners (taxes doubled during the war).

• Since the British were already taxed at a rate 4 – 5 times that of the colonists, they argued that the colonists should help pay for their own protection.


• To this end, Britain placed some 6000 troops in its colonies at an annual cost of £350,000.

• In order to have the colonist help defray this cost, Parliament passes two laws which in total were designed to cover some 10% of these costs.• Sugar Act of 1764

• Stamp Act of 1765

• While the Sugar Act had a larger economic impact, the Stamp Act had a larger political impact.


• The Sugar Act imposed duties on imports from non-British sources – especially sugar, molasses, and rum from the French West Indies (an “external” tax).

• As such, the Sugar Act was a follow up to the old Molasses Act of thirty years earlier.

• More importantly, the Sugar Act included a system for the strict enforcement of the law so as to guarantee that the duties were in fact collected.

• As an early example of “supply-side” economics, the Act lowered the duty on molasses from 6 pence to 3 pence per gallon in the anticipation that revenues would rise.


• A secondary rationale for the Sugar Act was to once again provide economic protection for British landowners in the West Indies.

• Recall that the colonists had been trading with the French West Indies (even during the Seven Years’ War) much to the dislike of the British.

• As such, the Sugar Act sought to curtail the production of rum in New England which was a direct competitor with rum produced in the British West Indies.


• Additionally, the Sugar Act amended the list of enumerated goods by adding certain raw materials (that were key exports from NE and Middle colonies) that British manufacturers demanded.

• Last, the Act removed the tariff rebates that colonial importers received from European goods that passed through British ports.

• In contrast to the clear intent of the Sugar Act to control the overseas trade of the colonies (and raise revenue while doing so), the Stamp Act was solely designed to be a source of revenue.


• The Stamp Act required the purchase of an official stamp that was to be affixed to various legal documents, contracts, newspapers, pamphlets, playing cards, and dice.

• The colonists strongly argued against what they called an “internal” tax in part because they had no representation in Parliament.

• Here, too, Parliament set forth a mechanism to ensure the collection of these taxes and for their transfer to England.


• Given that the Stamp Act raised the cost of doing business for a wide range of educated colonists, it led to a rapid increase in resistance on their part.

• This change in Parliamentary attitude (from benign neglect to strict enforcement marks the end of the “Old Colonial Policy” and the beginning of the “New Colonial Policy.”

• Between 1765 and 1775, there were alternating periods of colonial rebellion followed by British concession followed by renewed British enforcement.


• One of the earliest examples of colonial rebellion was the Stamp Act Congress of 1765 and it marked the start of the “First Crisis.”

• The Stamp Act Congress organized boycotts of British imports through the creation of “nonimportation associations.”

• In the Middle colonies and the Upper South, these actions were effective since British goods quickly piled up on the docks.

• They were less successful in New England and were absent in the Lower South.


• The economic impact of the boycotts was quickly felt by British exporters and they called upon Parliament to repeal the Stamp Act.

• Parliament agrees and also chooses to lower the duty on foreign imports of molasses from 3 pence to 1 pence per gallon.

• The success of the boycott was a sign that by the mid-1700s the colonies could wield its economic power to force Parliament to accede to its wishes.

• Or so it seemed.

The Second Crisis

• Despite its concessions, Britain continued to believe that it had the right to tax the colonists as it saw fit.

• In particular, there was the ongoing demand of British landowners for tax relief, new Chancellor of the Exchequer (similar to Secretary of the Treasury) Charles Townsend imposes new “external” taxes.

• These included duties on tea, glass, paper, and red and white led used as paint pigments.

• More importantly the Townsend Acts also created Customs Boards to collect the taxes.

The Second Crisis

• Since smuggling had been an ongoing way to circumvent taxation, the Townsend Acts also added Admiralty Courts in Boston, Philadelphia, and Charleston to try smugglers.

• These combined actions once again pushed the colonists to rebel.

• Once again boycotts of British imports took place and were successful enough to reduce British imports by 1/3 by 1769.

Second Crisis

• As before, British merchants responded to the boycotts by calling on Parliament to rescind all of the new taxes save for those on tea.

• By 1770, this was the case.

• Absent the Townsend duties, trade between the colonies and England returned to normal levels.

• General calm continues until 1773.

The Third Crisis

• The source of the Third Crisis was due to Parliamentary action designed to reduce the cost of shipping tea from India to England and then to the colonies.

• The English East India Tea Company held a monopoly on the shipping of tea from India to England.

• Once in England, it was sold (and taxed) to British wholesalers who in turn sold it to shippers who sent it to the colonies where it was in turn sold to colonial wholesalers and then retailers.

• The Tea Act of 1773 eliminated all of the intermediate steps thereby reducing taxes collected in England and transportation costs. Taxes collected in the colonies remained.

The Third Crisis

• Economic theory clearly shows that the Tea Act was beneficial to the colonies since it led to an increase in quantity and a decrease in price.

• However, while the average colonist benefitted, those engaged in the wholesale trade of tea (both legally and illegally) did not.

• In addition, those engaged in the importation of other commodities feared that similar legislation could affect them as well.

The Third Crisis

• Those affected chose to respond by either shipping tea back to England or destroying tea – Boston Tea Party.

• The Boston Tea Party destroyed approximately $1 M (in 2008 prices) of tea and increased the level of anger in Britain against the colonists to a new level.

• The British response was to pass the Intolerable Acts in the summer of 1774.• Closed Boston Harbor until value of destroyed tea repaid

• Allowed British citizens accused of crime of enforcing British laws be tried in England

• Changed MA colony charter to reduce political freedoms

• Placed British troops in Boston

The Third Crisis

• Following their earlier strategy, the colonists begin a third set of boycotts of British imports.

• The First Continental Congress votes to end trade with England and the British West Indies unless Parliament makes concessions.

• The Continental Congress issues a set of official grievances in October 1774.

• It goes on to demand the repeal of all the major laws imposed on the colonies since 1763.

The Third Crisis

• Among the grievances were• Taxation without representation

• Parliament’s claim that it could legislate for the colonies

• The extension of Admiralty Courts’ jurisdiction to the interior

• The various requirements of the Intolerable Acts

• The ceding of interior lands claimed by the colonies to (the now British colony of) Quebec

• Parliament, in contrast to earlier crises, stands firm leading to further economic and political retrenchment from the colonies.

• War breaks out in April 1775; independence declared July 1776.

The Role of British Land Policy

• Prior to 1763, Britain had supported western expansion of the various colonies as a way to limit the expansion of France in the north and Spain in the south.

• After France was defeated in the Seven Years’ War, Britain’s attitudes towards western expansion change

• There was no longer a need to populate these areas, but was now a need to control them which came at a cost.


• To limit colonial access to interior lands, Britain set about doing the following:• Contain colonial population to the coast where political

control was easier

• With the fur trade now under its control, it was viewed as preferable to limit the interaction of colonists and Indians in the interior

• Made western lands available for purchase to wealthy British landowners

• Placing western lands under the control of Parliament provided a ready source of revenue


• The first steps in this direction were part of the Royal Proclamation of 1763 which greatly increased the amount of western lands reserved for Indians (as a way to maintain peace).

• While this arrangement weakened over time, by 1774 the Crown decided to make these restrictions permanent via the Quebec Act which transferred a large area of the interior to the Province of Quebec.

• While such actions were certainly looked upon unfavorably by many colonists, there were also those who gained from them.

Map 6.1 Colonial Land Claims

Map 6.2 Reassignment of Claims


• Colonial families who owned land in the western areas (and typically had large land holding east of the mountains) saw the value of their interior land rise due to the decrease in the supply of western lands.

• Farmers in established areas benefitted in two ways:• They saw the value of their products rise again due to the decline

in the supply of western lands where competing products would have been grown.

• Without these interior lands available for purchase, farm workers could not leave these established farms thereby keeping the supply of farm labor high which limited increases in their wages.


• It naturally follows that those farm laborers who had hoped to tend to their own farms in the western lands were losers from these changes in British land policy.

• Likewise for non-British immigrants hoping to do the same.

• One unintended consequence of these actions was that the who lost the opportunity to buy western lands quickly concluded that they had no particular loyalty to the Crown.

Was the Revolution a Result of Economic Exploitation?

• Did British trade restrictions ultimately lead to the War of Independence?

• Many of the trade restrictions were designed to protect British manufacturers from competition from colonial producers.

• Yet, in nearly all cases, Britain had a comparative advantage in the production of manufactured goods and so most colonists benefitted from them being imported.

• Indeed, many such imports continued after independence.


• To the extent that much legislation was designed to increase the collection of taxes from the colonies, in many cases such laws were either ignored or ineffective until the 1770s.

• Changes in British land policy primarily served to transfer wealth from those who no longer had access to these lands to those that did. As these policies did not change after independence, here too the marginal costs of the policy could not have greatly exceeded the marginal benefit.


• Another form of British economic intervention was the imposition of various types of currency controls.

• In most cases, Parliament legislated restrictions on the issue of paper currency by certain colonies including Virginia (1764) and the New England colonies (1751 – recall the high rates of inflation in this area).

• By limiting the issue of colonial bills of credit, Britain sought to protect its creditors against inflation when debts (not to mention) taxes were paid in local currency.

• Instead, payments had to made in specie which was scarce.


• Here, too, policies post-independence were little different than pre-independence.

• Thus, the economic cost of such currency controls was limited.

• In contrast, certain aspects of the Navigation Acts had non-trivial economic costs.

• Estimates of the deadweight loss created by sending goods through England have been estimated to be on the order of 1% of colonial income.

• On the other hand, the colonies received naval and army protection at little direct expense.


• From these examples we see that there is little evidence to support the argument that the colonies were economically exploited.

• Instead, it appears that the revolution was more the result of the change in how Britain ran the colonies.

• After having played little or no role for nearly 100 years, after 1763 Britain severely tightened its grip on the colonies especially once it began to view the colonies as a potential economic competitor.

• Only in the US did England cede its political power with a war. A lesson learned.

Economic Insight 6.1 The Supply and Demand Effects of the Navigation Acts

6 Three Crises and Revolt. Old Colonial Policy Each of the 13 colonies was established under a charter granted by England. While some initially had corporate.

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