The Cost of the American Revolution

At the heart of this discussion lies the assertion that the American Founding paved a distinctive route for the United States, ultimately elevating it to one of the wealthiest and freest nations on the globe. However, establishing a causal link between these events demands a significant leap of faith. Few scholars have ventured to explore a counterfactual scenario where America remained a British colony or achieved independence in a manner akin to later British Dominions like Canada, Australia, New Zealand, or South Africa. Serious causal analysis typically calls for extensive datasets to deduce the impacts of pivotal policy shifts or substantial external shocks. For nations, particularly those from a more distant past, this task is even more daunting due to scant data, limited observations, and numerous confounding factors—some might argue it’s an impossible endeavor. An alternative path involves crafting analytical narratives to formulate a theory, outlining assumptions and predictions, and subsequently testing these predictions against both quantitative and qualitative evidence.

Many have sought to apply this method to the American Revolution by investigating what really triggered the Revolution (think burdensome British imperial policies like the Navigation Acts) or pondering how the British Empire might have evolved had they retained the American colonies—most notably regarding the decision to abolish slavery in the West Indies. However, to our knowledge, very few efforts have been made to develop a counterfactual focused on economic growth in the United States without the Revolution. This is a regrettable gap since American prosperity stems not only from revolutionary ideals but also from deeper questions about the roots of the quest for independence. Note that we use “failed” rather than “never happened,” as we are interested in whether the institutional changes emerging from the Revolution’s success were advantageous. Our endeavor here is to create a plausible counterfactual regarding American economic growth leading up to the Civil War.

Ironically, the first move in constructing this counterfactual directs us northward to the Canadian province of Quebec. In 1759, following the defeat of the French army outside Quebec City, the region was still a French colony, characterized by a predominantly Catholic populace. By 1760, French forces surrendered at Montreal, and within three years, the colony was officially ceded to Britain. Notably relevant to our counterfactual analysis is the fact that Quebec’s colonists were invited to join the American Revolution but opted to decline. Thus, we have a case of a group of North American colonists who both became British subjects and chose to remain so.

Recent studies on the economic development of colonial Quebec reveal three salient points that are instrumental in establishing our counterfactual. First, this colony was the poorest region in all of North America, by a considerable margin. Second, it did not see any increase in living standards (wages, incomes) until the 1760s. Finally, it likely experienced only mild economic growth until the 1850s.

This situation starkly contrasts evidence from economic historians concerning growth in the United States before, during, and after the American Revolution. The prevailing consensus suggests that pre-1776 economic growth could not have dipped below 0.05% annually (a notable finding considering the rapid population increase) and not exceeded 0.5% annually across all thirteen colonies (although there were significant regional variations). The documented decline in living standards during the war was substantial, with a reasonable estimate placing income reductions around 20% during this period (with more severe drops in southern states). Consequently, when the war concluded and economic growth resumed, it did so from a lower baseline. From 1790 to 1860, subsequent data indicates that American average income grew between 1.07% and 1.41% per annum (the latter calculated from 1800 to 1860)—remarkably high growth rates for historical standards.

Those constructing a counterfactual might be tempted to assume that pre-Revolution growth rates would have persisted even had the Revolution failed. This notion is depicted in the two upper panels of Figure 1 below, where the dashed lines symbolize the counterfactual (setting incomes in 1700 to 1, meaning a value of 2 on the y-axis denotes incomes twice as high as in 1700). The gap between the counterfactual and actual growth rates—the solid black line—can be interpreted as the “effect” of the Revolution’s success. In that graph, we adopt the 1.07% figure for per capita growth from 1790 to 1860, suggesting that by 1860, Americans were 59% richer than they would have been had growth continued at 0.5% per annum, or 87% richer than if growth had persisted at 0.05% per annum without the Revolution’s benefits.

However, this is the wrong counterfactual, falling prey to the post hoc ergo propter hoc fallacy. A more appropriate counterfactual is represented by the Canadian colony of Quebec. Assuming a mid-range growth rate of 0.6% per annum for Quebec as our counterfactual indicates the trends in the lower two panels of Figure 1. Here, it becomes evident that the “net total effect” of the Revolution is considerably smaller. Rather than being between 59% and 87% wealthier, the figures shift to a range between 39% and 48%. By utilizing Quebec and Canada, we can effectively establish plausible upper and lower bounds for the counterfactual of the United States failing to achieve victory in the Revolutionary War.

The next step involves evaluating the benefits as a residual by subtracting the primary costs of the Revolution from the “total net effect” determined in the first step and illustrated in Figure 1. Fortunately, the proposed costs are relatively few. Most historians tend to agree that slavery would not have ended sooner had the Revolution not occurred. There is some debate regarding the welfare of Native Americans, but given their demographic significance and the disparities in living standards, it is difficult to argue that their welfare incurred a substantial economic cost to the United States as a whole (though it certainly involved significant and varied costs to Native Americans). The remaining costs fall broadly under the category of trade disruption.

Recent research indicates that natural trade barriers imposed by the ocean were not as detrimental to international trade and market integration as previously thought. Instead, trade policy (i.e., tariffs) appears to have been a far more significant determinant. Before the Revolution, there were strong indications of market integration between the colonies and Britain. The period from 1760 to 1775, when Canada, the British West Indies, the thirteen colonies, and Britain were politically united, saw annual price data for wheat suggesting favorable trends in market integration. Unsurprisingly, this period preceding the Revolution is marked by significant gains in shipping productivity and rising trade volumes per capita. The American colonies were essentially already partaking in a global economy. The Revolution’s success, regrettably, led to the implementation of trade barriers. Americans lost their preferential access—under the Corn Laws—to British grain markets. Various goods faced heavy taxation, and trade with the West Indies and Canada became burdened by new tariff barriers. Consequently, trade volumes took a considerable time to rebound to pre-Revolutionary levels.

Canada’s preferential access to British grain markets, alongside the similar transport costs to Britain faced by both the United States and Canada, effectively postponed the First Age of Globalization across the North Atlantic. This initial phase of globalization—where economies became increasingly intertwined—was linked to significant economic growth. The success of the American Revolution, however, meant that the rise in tariff barriers across the North Atlantic delayed this first age of globalization, representing a cost of the Revolution.

Just how substantial was that cost? This is where economic modeling comes into play. However, insights from economic history may provide some rough estimates.

Utilizing data from Mexican grain market integration following railroad expansion from 1880 to 1910, we observe a halving of the coefficient of variation, which is argued to have accounted for half of Mexico’s growth during that period. Given Mexico’s growth rate at the time, this halving of the coefficient of variation is estimated to increase growth by approximately 0.8% per annum. If we transpose this to the American context, the rough doubling of the coefficient of variation within the North Atlantic slowed down growth by about 0.8% per annum. Admittedly, this is a ballpark figure, and future research is needed for a more precise assessment of the benefits of market integration. Nevertheless, even a halving of that estimate to 0.4% per annum indicates a significant cost resulting from the Revolution. In fact, it approximates nearly half of the growth observed in data from 1790 to 1860.

Some may interpret our analysis as an attempt to diminish the significance of the American Revolution by asserting that its economic benefits were less monumental than commonly believed. However, we argue quite the contrary—it serves as a validation of the American Revolution. The revolutionaries understood there would be costs involved. While they may not have foreseen Britain’s tightening of the Corn Laws from the 1790s onward or the engagement of the French Wars across the North Atlantic from 1792 to 1815—factors largely beyond their control—they certainly considered the uncertainty surrounding the potential costs. This implies that despite the apparent risks, the revolutionaries believed the benefits outweighed the costs significantly. We contend that this speaks volumes about the exceptional nature of America’s founding moment.

References

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Egnal, Marc. New World Economies: The Growth of the Thirteen Colonies and Early Canada. Oxford University Press, 1998.
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Endnotes

[1] Probate records—allowing for wealth estimations convertible into income under certain assumptions—suggest per capita growth rates of wealth fluctuating between 0.38% to 0.96% per annum from 1792 to 1835. Enhancements to price indexes (to deflate nominal wealth into inflation-adjusted wealth) imply somewhat slower growth (0.33% to 0.83%). Different estimation techniques from 1822 to 1850 suggest growth rates ranging from 0.17% to 0.53%. Lastly, real wage data for the period indicates gradual improvements until the 1820s, at which point growth plateaued until the 1850s. If wage data is considered as the measure of growth averaged over 1760 to 1850, the growth rate in living standards is estimated to be between 0.36% to 0.72% per year.

This post first appeared at Liberty Matters as the lead essay in the series: Did the American Colonies Pay Too High a Price for Revolution? It has been reposted here as part of Econlib’s celebration of the 250th anniversary of the Declaration of Independence.