Mercantilism began sometime in the 1400s, rising quickly before beginning a long, slow collapse. Its terminal decline began with the success of the American Revolution (England: 1783) and peaked with the independence of India (England: 1947) and the Democratic Republic of the Congo (Belgium: 1960). Mercantilism was, at root, a parasitical economic system whereby the colonial nations of Europe (England, in our case) sought and achieved dominion over nearly all the internal functions of the American colonies through economic means.
This was managed through restrictions on a colony’s imports and exports. From international trade, mercantilism flowed downstream even to the employer / employee level. A useful understanding of mercantilism can be had by considering the Company Town example.
Company Town: A company town has a single provider: the company. In the company towns of the Appalachian coal belt, the company owned the entire town and all within it. Employees were required to rent residential shacks owned by the company. They could buy needful things only at the company store. In both cases, the company was the sole provider and had monopolistic pricing power; prices were determined solely by the company. As a primary means of enforcement, the miners were paid not with dollars, but with company script redeemable only at the company owned general store. This was sufficiently widespread that it became the subject of a popular song.
Sixteen Tons: The miner’s plight was memorialized in the song “Sixteen Tons”, written and first recorded by Merle Travis. The song was released in 1947 and went gold. In 1955, Tennessee Ernie Ford released his version, which is the recording now preserved in the Library of Congress (lyrics here: https://genius.com/Tennessee-ernie-ford-sixteen-tons-lyrics). As a memory nudge, the chorus is:
“You load sixteen tons, what do you get?
Another day older and deeper in debt.
Saint Peter don’t you call me ‘cause I can’t go,
I owe my soul to the company store”.
That chorus exposes the essence of mercantilism – the guy holding the short end is treated like a rented mule. This applies whether the mule is represented by employees in a company town or the (trade) colonialism imposed on offshore colonies.
Offshore Colonies: Given the limited institutional resources available to the colonists, the American Revolution (1775-1783) was an extraordinary effort. America was, at the time, a British colony and had no independent existence, and thus no committed allies. The Netherlands, Spain, and especially France helped as they could, but their assistance was selective: altruism was not present. Their actions were driven by the diplomatic gains they could receive by limiting the expansionary options of Great Britain, at the time a world power. Any benefits to Britain’s American colonies were largely coincidental. This was not without precedent. There is a maxim that explains the issue: Nations have no friends; they only have interests. When not even one’s own colonies are considered “friends”, but only “interests”, the explanation usually revolves around mercantilism.
Mercantilism: It was the structure of the times: this was the period of mercantilism, when European colonialists (in our case, Great Britain) insured their benefit by (i) requiring their colonies to export raw materials only to Great Britain (the occupying power; the “metropole”), (ii) at prices determined by the metropole, while (iii) the occupying power, from the raw materials received from the colonies, manufactured the high margin items the colony required to survive and (iv) requiring the colonies to import such items from only the occupying power. It was, always and forever, metropole uber alles. It was a four-step process with a one-step benefit.
Mercantilism is “Company Town” writ on the international scale. The colonists noticed and were eventually moved to revolt.
Not only was trade in commercial goods (both exported / raw and imported / finished) controlled by the metropole, the British also controlled colonial institutions.
Institutions: The thing about overseas colonies is that they share necessary social institutions with the metropole. For example, it was to Britain’s interest to insure that America-the-colony had no domestic mint. An obvious effect is that America was assumed to not be capable of revolt because they (we) had no way to pay for the rousing, equipping, and maintaining of a military.
There was some merit to this position. As castrati, America had neither a formal army nor a dedicated navy. Lacking a military presence, we, the colonies, could not protect our cities. There was no national army: one had yet to be gathered, trained, and equipped. We had no navy and had to rely on smuggling to service our nascent manufactories. As we were unable to defend our territorial waters, smuggling quickly became socially acceptable. All of these difficulties would be reduced if we had our own coinage, but we didn’t. Without a mint, the Colonies had to find some other way to pay their bills
Printing Press Currency: Once the war began Britain stopped buying American raw materials. This meant that America-the-colony no longer shared access to England’s (stable) currency. Seemingly overnight the colonies collapsed into what would, in the future, be referred to as “third-world country” status. Goods were no longer freely available. When they were, nobody could tell in advance what the price might be. The economy collapsed, and the most likely way to get things was through barter.
Fiscal Crisis: In the midst of this the colonial governing authority at the time, the Continental Congress, was charged with funding the raising of an army. Never mind the lack of hard money.
While British soldiers were commonly careerists, the majority of colonial soldiers were farmers who might be persuaded to enlist and perhaps miss their short planting season or, possibly, the even briefer harvesting window, but only if compensated. To miss either part of the growing season was effectively to lose the entire year’s crop. If they couldn’t raise their own corn or harvest their own beans, they’d have to buy food from someone who had extra, and nobody could be sure if that would happen or what the cost might be. Most farmer-soldiers could only stick around through the summer campaigning months when they are paid as agreed.
While the Continental Congress was trying to find a way to develop a military presence, the British completed the military occupation of both New York and Boston. This was no small thing: these were the biggest ports in the American colonies . . . and they were stoppered. Excluding the occasional smuggler, goods could neither arrive nor depart. With only limited resupply both military and household reserves were soon exhausted. American products could not be shipped to England, thus business debts owed by one colonist to another were no longer viable. There was simply not enough hard (asset backed) money in circulation to pay the obligations incurred in the normal supply lines. Farmers could not borrow money for seed, spades, or scythes. Wholesalers could not borrow enough money for bulk purchases. Retailers might have bought a little here and there but their customers, having neither shillings nor pence, could purchase from the general store only if terms were offered. The shop keeper could not get credit himself and therefore could not offer credit to his customers.
The economy staggered once, twice, sighed and collapsed. Historians interested in this sort of thing have estimated that the war induced contraction was equivalent to a 40% drop in colonial GDP. As a point of reference, the cumulative GDP loss during the first four years of the Great Depression (1929-1933) was 26.33%. In other words, the colonial economy crashed 50% more in twelve months than it did in the first four years of the Great Depression.
Recourse: Something had to be done. If a teamster ran out of axle grease, he might be forced to use lard or, in extremis, even hard cheese. Same-same with money. If gold or silver-backed money was no longer available, some temporary fix had to be found: the colonies raced towards the printing press. Each colony issued their own currency in the form of paper “script”, supported by neither gold nor silver. A century or century-and-a-half later this concept of paying debts with unsupported script was adopted by company towns.
With every colony issuing separate script, the Continental Congress could see no insurmountable difficulty in doing the same. “Continentals” were printed from 1775 to 1779 to underwrite the costs of government and war. At first the Continentals were backed by Spanish pieces-of-eight or their equivalent value in gold or silver. In the 12 months between the first printing of Continentals and the signing of the Declaration of Independence (1776) the Continental Congress printed so many “Continentals” there was no longer enough gold or silver to back them up, and the script’s value evaporated. The phrase, “Not worth a Continental!” was once a common expression of having negligible value.
Sidebar: The British noted this and hired professional counterfeiters to print fake currency and distribute it throughout the colonies. War takes many forms.
As script lost its claim to immediate conversion, those-who-ran-the-printing-presses thought that bonds, with a promise of future conversion, might still somehow be accepted as money.
Bonds: As Continentals lost value, they were replaced by bonds that almost immediately proved of little value. Soldiers were even paid in bonds, with the principal due in (example) three, five, or seven years. Consider the soldier’s plight. Hypothetically, he has just been paid with a bond with a nominal value of $20, due two-and-a-half years after his enlistment expires. But right now, all the soldier wants is a bar of soap and a tin or two of flea and tick repellant. Both are presently available at the sutlers for a total of 50 cents. What happens when he tries to pay with his $20 bond? How does he take change? Does the sutler offer a total of 5 bars of soap and 3 tins of flea and tick powder in exchange for the entire $20 bond? Does the soldier accept? Obviously, bonds are not a useful currency for small purchases. The soldier could only benefit from his wages by selling his bond to speculators at a heavy discount.
Discount: The discount would be particularly onerous for Continental Congress bonds. Common maturities ranged from one year to five or six. The bonds paid no interest, but were issued at a discount to face value. A bond such as this might sell for dimes on the dollar.
As the war ground on, confidence in Continental currency evaporated and the value of the colonial bonds collapsed. Combined with wartime inflation, by the end of the war Continental dollars were worth less than one-percent of their initial value.
This is what the new Secretary of the Treasury was to face. More, later.
This article is for informational purposes only and is not intended as professional advice. Klarise Yahya is not a financial planner. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate, perhaps Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].