Monetary Causes of the American Revolutionary War
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Milton Friedman The Father of Monetarism |
Milton Friedman won the Nobel Prize in Economics in 1976 (more accurately, the Bank of Sweden Prize in Memory of Alfred Nobel), for generating controversial ideas made all the more annoying to his professional adversaries by his knack of asserting memorable slogans. A phrase in question is that "Inflation, always and everywhere, is a monetary phenomenon." Turned around, the converse idea emerged that the great deflation and depression of the 1930s was caused by a global currency shortage. To extend his ideas without his permission, it could equally be argued that British mismanagement of colonial currency had a lot to do with causing the American Revolution.
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| French & Indian War |
Following the French and Indian War, the colonies experienced a major economic depression which seems somehow related to wartime commodity shortages, then post-war surpluses, followed by a need to work off excess inventories. In Milton Friedman's theory, it is the task of any government to maintain stable prices by balancing the amount of currency in circulation with the size of the gross national product. In 1770, the British Exchequer would thus have had to expand and contract the amount of currency in circulation pretty rapidly to maintain economic stability. In the Eighteenth Century there was no understanding of the issues involved. Even if the concept had been crystal clear, there was a thirty-day lag in communication across the Ocean, and comparable lags between the colonies, where differing imports and exports were affected at varying times. So it is a little hard to blame the British for the chaotic result, except to notice that strongly centralized, trans-Atlantic, government was by nature unsuitable for managing a rapidly-changing currency problem. That's what the colonists said, in effect, and their solution for it was Independence.
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| George III |
If you believe Friedman, a shortage of coinage causes a fall in prices, or deflation. To correct that, you need a central banker constantly fine-tuning the currency. But banking in the colonies was too rudimentary to consider such a thing. If you needed a mortgage, you went to a local rich man and borrowed directly from him. That was fine, because prosperous colonists didn't have anywhere to invest their money conveniently, except by loaning money to their neighbors. Indeed, local communities were knit together socially by the mutual assistance of more prosperous farmers directly assisting their less fortunate neighbors. However, pioneer farming
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| Depression-era Farm Family |
communities are far too unsophisticated to remain tranquil when problems arise out of abstractions. Suddenly and without apparent explanation, in 1770 there was no money for anybody to use, and the fellow with a mortgage on his farm couldn't make his payments even though he was otherwise apparently successful. His creditor then couldn't pay his own bills, and eventually even the kindliest ones were driven to foreclose the mortgage. It was said to be common for a farm worth $5000 to be sold to satisfy a mortgage of $100. And in this way, many honest and once-prospering farmers were forced to walk past their old home, now owned and occupied by a formerly friendly neighbor. It all seemed bitterly unfair, no one understood what was happening, evil motives were readily suspected, and old religious and personal grievances were heightened. The country rapidly deteriorated toward class warfare, which is what the division between Tories and Rebels was soon to become, with both sides quite rightly asserting they were not responsible, and quite wrongly asserting the other must be.
From a far distance, it can be perceived that the primitive banking and transportation systems at that time were inadequate to cope with a global empire, and that the only solution readily available was to decentralize the system of governance. It was more the fault of
King George than anyone else, but it would have been hopelessly unreasonable to expect him to understand it, let alone revise his methods of governance to correct it. In the twenty-first century, when the communications, banking, and transportation systems are now almost capable of handling such a situation, we still have many vivid examples of the unwillingness of people to part with power, or for people accustomed to old systems -- to suggest a new one. Even in long retrospect, the American Revolt was nearly inevitable.
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