Economic Depression

Economic Depression During the Revolutionary War, Britain closed its markets to American goods. After the war, the British continued this policy, hoping to keep the United States weak and dependent. Meanwhile, British merchants were happy to satisfy America s pent-up demand for consumer goods after the war. Cheap British imports inundated the American market, and coastal merchants made them available to inland traders and shopkeepers by extending easy credit terms. 

In turn, these local businessmen sold the goods to farmers and artisans in the interior. Ultimately, however, the British merchants required payment in hard currency, gold, and silver coins. Without access to its former export markets, America s only source of hard currency was foreign loans obtained by Congress and what money the French army had spent during the war. 

This was soon exhausted, and America s trade deficit with Britain the excess of imports over exports ballooned in the early 1780s (see Figure 7 2). The result was an immense bubble of credit that finally burst in 1784, triggering a depression that would linger for most of the decade. As merchants began to press debtors for immediate payment, prices collapsed (they fell more than 25 percent between 1784 and 1786), and debtors were unable to pay. 

The best most could hope for was to avoid bankruptcy. In the cities, wages fell 25 percent between 1785 and 1789, and workers began to organize. They called for tariffs to protect them from cheap British imports and for legislative measures to promote American manufacturers. In the countryside, farmers faced lawsuits for the collection of debts and the dread possibility of losing their land. With insufficient money in circulation to raise prices and reverse the downturn, the depression fed on itself. 

Congress was powerless to raise cash and was unable to pay off its old debts, including what it owed to the Revolutionary soldiers. Many state governments made things worse by imposing heavy taxes payable in the paper money they had issued during the Revolution. The result was to further reduce the amount of money in circulation, thus increasing deflationary pressures and forcing prices still lower. Britain s trade policies caused particular suffering among New England merchants. No longer protected under the old Navigation Acts as British vessels, American ships were now barred from most ports in the British trading empire. 

Incoming cargoes from the West Indies to New England fell off sharply, and the market for whale oil and fish, two of New England s major exports, dried up. In the southern states, British policies compounded the problem of recovering from the physical damage and labor disruptions inflicted by the war. Some 10 percent of the region s slaves had fled during the war, and production levels on plantations fell in the 1780s. 

Chesapeake planters needed a full decade to restore the prewar output of tobacco, and a collapse in tobacco prices in 1785 left most of them in the same chronic state of indebtedness that had plagued them on the eve of the Revolution. Farther south, in the Carolina low country, the plantation economy was crippled. War damage had been extensive, and planters piled up debts to purchase additional slaves and repair their plantations and dikes. 

Burdened by new British duties on American rice, planters saw their rice exports fall by 50 percent. By the late 1780s, the worst of the depression was over and an upturn was underway in the mid-Atlantic states. Food exports to continental Europe were on the rise, and American merchants were developing new trading ties with India and China. 

Commercial treaties with the Dutch, Swedes, and Prussians also opened up markets that had been closed to the colonists. Nonetheless, full recovery had to await the 1790s. As the economy stagnated in the 1780s, the population was growing rapidly. There were 50 percent more Americans in 1787 than there had been in 1775. As a result, living standards fell and economic conflict dominated the politics of the states during the Confederation period.