Chapter 3: America on the Eve of Revolution
Summary
This chapter examines the monetary foundations of the colonial economy under English rule. Though
England did follow a mercantilist policy and did not permit the flow of specie into the colonies without
trade, piracy or accumulated indebtedness, there was no shortage of money in colonial America.
Overall, colonial prices rose; they did not fall as they should have if a money shortage existed. Colonists
proved resourceful and turned to the use of fiat money rather than specie as a medium exchange, store
of value, unit of account and means of debt repayment. Fiat money greased the wheels of exchange in
colonial America and, therefore, contributed to overall growth. On the eve of the American Revolution
there is evidence to suggest that the colonists were economically as well off, if not better off, as their
English counterparts. Political considerations are left for discussion later.
Changes in colonial population are also examined in this chapter. Rates of fertility, birth,
marriage and deaths among different demographic groups are discussed, and links between changes in
these rates and overall population growth are made. Of course, the impact of these changes on the
relative costs of labor is investigated.
Key Terms and Concepts
Balance of payments
Bimetallic monetary standard
Birth rates
Capital
Death rates
Devaluation
Economic growth
Fertility
Fiat money
Gresham’s law
Gross Domestic Product (GDP)
Income
Indexed
Inflation
Legal tender
Marriage
Money
Population
Population growth
Productivity
Quantity theory of money
Specie
Standard of life
Velocity
Wealth
Teaching Tips
1. Establish the links between the overall rate of growth in population and the rates of (i) fertility,
(ii) birth, (iii) marriage, (iv) death, (v) immigration and (vi) slave trade. Explain that growth in
population can translate into an increase in the supply of labor when or if the population
reaches working age. This increase in the quantity of labor helps fuel economic growth in a
“country” like colonial America.
2. Using the economic way of thinking, explain why colonists believed a shortage of money could
negatively impact their economy.
a. Use the quantity theory of money (MV  PQ) to explain why
a shortage of colonial money could either lead to negative economic growth (decrease
in Q) or deflation (a decrease in P). Assume velocity (V) is stable or constant.
b. According to the research of economic historians, did colonial America experience
positive or negative economic growth in per capita real GDP under English rule? Did
colonists experience inflation or deflation in the years leading up to the American
Revolution? Does the overall change in real GDP per capita and overall prices support
the claim that there was an actual shortage of money in colonial America?
3. Define the balance of payments, trade deficit and trade surplus. Explain that trade makes it
possible for a country to trade goods and services it can produce at the lowest possible cost for
those that it cannot. Trade makes all trading partners better off. Illustrate with respect to the
colonies.