Economic history of the United States
Based on Wikipedia: Economic history of the United States
Here's a puzzle that shaped the modern world: How did a scattering of farms clinging to the Atlantic coastline become the largest economy on Earth?
The answer involves tobacco, slave labor, angry colonists refusing to pay for tea, and a fundamental reversal of the economic relationship between humans and the land they worked. It's a story that begins long before the first European ships appeared on the horizon.
Before the Europeans: An Economy of Trade Networks
For generations, scholars described the indigenous peoples of North America as living in "non-market" economies—a polite way of suggesting they didn't really have economies at all. This turns out to be spectacularly wrong.
Recent research has uncovered vast trade networks crisscrossing the continent. The Mississippi River drainage basin, in particular, was home to something that would have looked surprisingly familiar to any medieval European: settled agricultural communities with large towns, domesticated crops, and sophisticated irrigation systems. These weren't wandering hunter-gatherers. They were farmers who had figured out crop rotation and knew which fields to let lie fallow.
The plains nations, contrary to the Hollywood image of nomadic buffalo hunters, had organized, complex agricultural communities with cleared land and established growing practices refined over centuries. When Europeans arrived, they didn't discover an empty wilderness. They discovered a managed landscape.
The Colonial Equation: Too Much Land, Not Enough People
The colonies that would become the United States faced an economic problem that was the exact opposite of Europe's. In the Old World, land was scarce and labor was plentiful. In the New World, the equation flipped completely. There was more land than anyone knew what to do with, and almost nobody to work it.
This simple fact explains an enormous amount of early American history.
It explains why European colonists came at all, despite the terrifying death rates from unfamiliar diseases. It explains why indentured servitude became common, and why slavery took root so deeply in the southern colonies. It explains why wages for free workers were high compared to Europe, and why the colonies attracted a constant stream of immigrants willing to risk everything for the chance at their own land.
The colonial economy was pre-industrial in the most literal sense. There were no factories. Most families practiced subsistence farming, growing enough to feed themselves and perhaps producing a bit extra for trade. Handicrafts—cloth, tools, household goods—were made at home, mostly for home use. The one thing the colonies produced in abundance for export was raw materials: tobacco, rice, grain, timber, furs.
What the Colonies Actually Made
If you could walk through the colonial economy, you'd see a world organized around extracting things from the land and processing them just enough to ship elsewhere.
Gristmills ground wheat into flour. Sawmills turned trees into lumber. Miners pulled iron ore from the ground. Farmers grew tobacco in Virginia and the Chesapeake region, rice in South Carolina, and grain crops throughout the middle colonies. Along the New England coast, fishermen caught cod and haddock, which were dried, salted, and shipped across the Atlantic.
North Carolina specialized in something called naval stores—products essential for building and maintaining ships. Turpentine lit lamps. Rosin made candles and soap. Tar preserved ropes and wood. Pitch sealed the hulls of ships. In a world where ocean trade was the only way to move goods across long distances, the colony that could supply these materials held a strategic advantage.
There was also potash, and understanding potash tells you something about how thoroughly the colonists were reshaping the landscape. Potash came from burning hardwood trees and processing the ashes. It was used as fertilizer, and in making soap and glass. Every barrel of potash shipped to England represented acres of forest reduced to ash. The colonists weren't just living in the wilderness; they were systematically converting it into exportable commodities.
The Mercantile Straightjacket
Here's the part that would eventually lead to revolution.
The entire colonial world operated under an economic philosophy called mercantilism. The idea seems almost quaint now: countries believed the way to get rich was to accumulate gold and silver by running trade surpluses—exporting more than you imported. Colonies existed to feed this machine. They supplied raw materials to the mother country and bought manufactured goods in return. Actually making finished goods in the colonies? That was forbidden.
The Navigation Acts, passed by the British Parliament between 1651 and 1673, laid out the rules. Foreign ships couldn't carry goods between ports in the British Empire. European manufactured goods headed for the colonies had to pass through England first, where British merchants could take their cut. And certain "enumerated items"—the most valuable colonial exports like furs, ship masts, rice, indigo, and tobacco—could only be sold to Great Britain.
The intended effect was to create a trade surplus for Britain, and it worked. The colonies imported far more finished goods from Britain than they exported to it.
But here's what's interesting: the colonists found ways to make the system work for them. American shippers offset roughly half of the goods trade deficit by earning money shipping cargo between ports throughout the British Empire. They became the truckers of the Atlantic world.
And shipbuilding itself became a major colonial industry—somewhere between five and twenty percent of total employment, depending on the colony and the year. About forty-five percent of American-made ships were sold to foreigners. The colonies might not have been allowed to manufacture textiles or finished iron goods, but building the vessels that carried global trade? That was apparently acceptable.
The Geography of Colonial Wealth
Transportation shaped everything.
Roads in colonial America were terrible when they existed at all. Moving goods by wagon was so expensive that it only made sense for short distances—perhaps twenty-five miles at most—to reach a navigable waterway. This meant that economic activity clustered along the coasts and rivers. Towns that grew up away from water remained small and locally focused. The great plantations of Virginia and South Carolina had their own docks.
In the cities—and by European standards, these were really just towns—and among the wealthy planters, imported luxuries were common. Fine cloth, glass, silverware, books, wine. These were the visible signs of participation in the Atlantic economy. But these urban centers were tiny. In 1760, Boston had about sixteen thousand people. Philadelphia, the largest city, had twenty-three thousand. Ninety-five percent of Americans lived in the countryside.
This geographic distribution would prove crucial when war came. The British Royal Navy could capture every significant port. But without the manpower to occupy and control the vast rural interior, holding the cities meant almost nothing.
New England's Different Path
New England faced a problem. Unlike Virginia with its tobacco or South Carolina with its rice, the region had no major cash crop that could anchor its export economy. The soil was rocky, the growing season short, the land not suited for plantation agriculture.
So New Englanders did something else. They became traders, shippers, and manufacturers. They built ships and sailed them. They developed specialized trades and crafts. They fished the Grand Banks and traded the catch across the Atlantic.
The Puritan work ethic—the belief that hard labor was itself a form of religious devotion—shaped the culture of the region. Colonial governments actively promoted economic development, subsidizing infrastructure projects, offering bounties to encourage new industries, granting monopolies to entrepreneurs willing to build sawmills or ironworks.
Perhaps most importantly, the colonial legislatures created legal systems that protected property rights and enforced contracts. This sounds boring. It was revolutionary. A legal framework that reliably resolved disputes and protected investments created the conditions for business to flourish.
The benefits of this growth were distributed unusually widely. Merchants prospered, yes, but so did farmers and even hired laborers. Wages for men rose steadily before 1775. New occupations opened for women: weaving, teaching, tailoring. When the British poured money into the region during the French and Indian War—building roads, buying supplies, paying soldiers—the effect was like an early stimulus program.
The Iron Problem
Just before the Revolution, the American colonies produced about fifteen percent of the world's iron. This seems impressive until you look closer.
The iron ores available in the colonies weren't particularly high quality, and the deposits weren't large. What the colonies did have was vast forests, which meant an endless supply of charcoal for smelting. In Britain, by contrast, wood was becoming scarce. The British were beginning to substitute coke—processed coal—for charcoal, but coke produced inferior iron.
So Britain actively encouraged the colonies to produce raw iron—pig iron and bar iron—and ship it to Britain for finishing. What they explicitly banned, starting in 1750, was the construction of new iron fabrication shops in the colonies. The colonies could dig up ore and smelt it into raw metal, but actually making things from that metal? That had to happen in Britain.
The colonists largely ignored this ban. But the prohibition revealed the basic logic of mercantilism: the colonies existed to supply raw materials and consume finished goods, not to develop their own manufacturing capacity.
The Cities and the Revolution
Five cities dominated colonial America: Boston, Newport in Rhode Island, New York, Philadelphia, and Charleston in South Carolina. Though small by European standards, they played outsized roles in shaping what came next.
These were the places where new ideas circulated—Enlightenment philosophy, new medical techniques, technological innovations. They developed distinctly American approaches to education and social welfare. They created a market for English consumer goods and, in doing so, developed a taste for the amenities of civilized life.
They were also the places where revolutionary sentiment grew most intense.
Historian Gary Nash has argued that working-class artisans and craftsmen—shipwrights, coopers, blacksmiths, printers—formed a radical element in cities like Philadelphia. These workers distrusted their social superiors and, starting around 1770, began to push for a more democratic form of government. They controlled the local militias and used that power to spread their ideology.
The waterfront workers, the tavern gatherings, the church congregations, the networks of kinship and trade—these formed the infrastructure of revolution. When the break with Britain came, it came from these cities, from these networks, from these working people who had developed a sense that they deserved a voice in their own governance.
The Tax That Changed Everything
For decades, the Navigation Acts had shaped colonial trade, but their actual economic impact was surprisingly small. The consensus among economic historians is that the costs imposed on colonists by these trade restrictions were minimal. Smuggling was rampant—in 1770, illegal exports to the West Indies and Europe roughly equaled legal exports to Britain. The system was leaky, and the colonists found ways to prosper within and around it.
The colonists paid minimal taxes. Colonial governments had few expenses. The British bore the costs of naval protection against pirates and military defense against the French. It was, in many ways, a good deal for the Americans.
Then, in the 1760s, the London government decided the colonists should help pay for their own defense.
The Sugar Act of 1764. The Stamp Act of 1765. New taxes on tea and other imports.
The amounts were tiny. The economic burden was trivial compared to what British citizens paid at home.
But the constitutional principle was enormous. Who had the authority to tax the colonists—Parliament in London, or their own colonial assemblies? The colonists demanded their rights as Englishmen to choose their own representatives and tax themselves. Britain refused.
The Americans organized boycotts of British goods. The British responded with the Intolerable Acts of 1774, stripping the colonies of remaining self-governance. And then came war.
Paying for Revolution
Revolutions are expensive, and the new nation had almost no money.
In 1775, there was perhaps twelve million dollars in gold in all the colonies combined—not nearly enough to cover normal commerce, let alone finance a major war. The British blockade made things worse, cutting off almost all imports and exports.
So the revolutionaries improvised. Militiamen served as volunteers. Citizens donated supplies. Soldiers and suppliers accepted payment in depreciated currency—paper money that lost value almost as fast as it was printed—with the promise that somehow, eventually, it would all be made good.
The Continental Congress issued currency backed by nothing but hope and revolutionary fervor. States printed their own money. The phrase "not worth a Continental" entered the language as a way of describing something completely worthless.
Yet the American economy proved remarkably resilient. Ninety percent of the population lived on farms, producing their own food. When British ships blockaded the ports, the vast rural interior simply kept farming. The economy could absorb the shock in ways a more urbanized, trade-dependent nation could not.
When the war finally ended in 1783, the soldiers and officers who had fought for independence received land grants instead of the wages they'd been promised. It was a fitting resolution for a nation with too much land and not enough people: pay your debts in the one thing you had in abundance.
What Made America Different
Standing back from the details, what made the colonial American economy unusual?
First, the fundamental land-to-labor ratio. In Europe, too many people competed for too little farmland, keeping wages low and rents high. In America, the equation was reversed. This single fact pulled immigrants across the ocean, kept wages relatively high, and created a society where ordinary white families could aspire to own their own land.
Second, the relative freedom of the domestic economy. While Britain restricted colonial trade and manufacturing, it largely left internal commerce alone. Adam Smith, writing his famous defense of free markets, used the American colonies as an example of what could happen when enterprise was given room to grow.
Third, the development of legal and political institutions that protected property rights and resolved disputes. The colonial assemblies, whatever their limitations, created frameworks within which business could operate predictably.
Fourth, something less tangible: a culture that celebrated hard work and entrepreneurship. The Puritan ethic that treated labor as divine calling, the Yankee trader's sharp dealing, the Southern planter's expansionist ambitions—these cultural forces shaped how Americans approached economic life.
From 1700 to 1774, the output of the thirteen colonies increased twelvefold. By the time of independence, the colonial economy was roughly thirty percent the size of Britain's. The free white population enjoyed the highest standard of living in the world.
This wasn't an industrial revolution—that would come later. There was little technological innovation, few new goods or services, not much increase in productivity per worker. The growth came almost entirely from having more people working more land.
But the foundations were being laid. The legal frameworks, the entrepreneurial culture, the transportation networks, the trading relationships—these would all prove essential when the industrial age arrived. The economic history of colonial America is the story of how a collection of struggling settlements became a nation capable of transforming itself, and eventually the world.
The colonists clinging to the Atlantic coast couldn't have imagined what would come. But they built better than they knew.