Economic History of the US
The Colonial Era, 1607-1776
Lecture #2
Peter Allen
Econ 120
The Colonial Era, 1607-1776






Founding
Economic Structure/Activities
Trade
Sources of Econ. Development
Economic sources of Rebellion
Chapters 2-6
European Voyages
 1500-1525
 Commercialization of European economies,
1400s
 Rule of law and investment
 Population growth
 Technology in transportation/weapons
 Capacity for long-distance sailing, late
1400s
 Portugal was first: 1415 captures Cuenta
(North Africa)
 …then Spain, then Holland, France, England
Key Voyages, Americas
 Colombus (Spain), 1492
 Amerigo Vespucci (Spain), 1499-1502
 Vasco Nuňez de Balboa (Spain),
1510-12
 Ferdinand Magellan (Spain), 1520-22
 Hernando Cortez (Spain), 1521
1650 v. 1750
Initial Voyages, Why?
 To make money
1. Trade
 Get to Asia
 Asian goods, esp. spices
 African goods, e.g. sugar
 Circumvent Turk-Venetian lock on Eastern
Mediterranean
2. Exploitation of local resources
 Colonization v. conquest
 Competition of World Powers
Colonization: Spain v. England
 Spain
1. Extract resources esp. silver
2. Conquest to spread Christianity
 Occupying rulers
 Didn’t establish permanent colonies
 Outposts populated by soldiers
 First European colony, Balboa: Santa
Maria de la Antigua del Darien, 1511
 Hernán Cortéz, Mexico 1521
1521, Conquest of the Aztec Empire
Colonization: Spain v. England
 England had a different way to make
money from its NA colonies
 Parliament and investors established
permanent colonies
a. Purpose of colonies…
 market for English manufactured goods, and
 source of raw material, inc. farm products
b. No other option…
 few riches in North America
 Domestication, cash crops
 “business” model
 British had to stay in large numbers
First British Colonies
 Latecomers, compared to Spain, Portugal
 Sir Walter Raleigh, Virginia and North Carolina,
1580s, Lost Colony
 1607, monarchy granted two charters (right to settle,
self-govern)
 London Company, south part of English territory
 Plymouth Company, north
 1607, London (later Virginia) Company settlement in
Jamestown, Virginia
 Plymouth Company settlement in Sagadohoc, Maine,
New England (1620), Boston (1630)
Lessons of Early Industrial Organization
 British colonies started out as economic
collectives…
a.
b.
c.
d.
Virginia Company, directed from London
“planters share;” profit sharing
Expenses covered by colony
Few “free-market” incentives
 Tensions arose between…
a. Those who wanted to improve lands and
production, and
b. “Free-riders”
c. Pressures for reform, privatization
Jamestown Privatization, 1614-1625
 1614 (1607+7) private landholding first allowed
(3 acres)
 1619: Headright system
 50 acres granted to settler who paid their voyage
 Voyage cost ₤9-10 per person = 1.5x average worker’s
yearly income
 1623 (1607+16) all land privately-owned
 1625 Crown Colony status
 All colonies had problems with free-riders and
converted to private holding of land
 1650: privately-owned family farms predominant
Factor Endowment of
British Colonies
1. Land
 Extremely plentiful
 Supply vastly higher than demand
 Low price (relative to Europe)
2. Labor
 Severe labor shortage
 Demand vastly higher than supply (D>S)
 High price, i.e. wage (compared to Europe)
3. Capital
 Anything that cost money was scarce
 No private investment (“I”)
Carrot and stick
Immigrants drawn to the colonies by:
1. Cheap land



Even though most did not have means to buy initially
Most paid for transport with Indenture Contract
Zero hope of acquiring land in England
2. High wages



Most jobs were in agriculture
Competitive market, treatment mostly fair for
Europeans
…access to cheap land (contrast with Europe)
Dominance of Agriculture
 90%+ of population worked in Agriculture
 Regional specialization emerged immediately
 Southern colonies




Maryland, Virginia, Carolinas, Georgia (n=5)
Model of large plantations dominated for 250 years
Big business, lucrative
Slavery
 Middle




Pennsylvania, New York, New Jersey (n=3)
Commercial along coast, Grain (wheat, oats, barley)
Smaller scale, family farms
Indentured workers, slaveholding rare
 Northern/New England




Rhode Island, Mass., Vermont, NH, Maine (n=5)
Subsistence at first
Not viable commercially
People moved into commerce, extraction, homecraft industries
Southern Colonies were
Dominant Economically
 Agriculture was a lucrative business from the start
 Climate, soil conditions suited to cash crops, rice,
tobacco, indigo, cotton (later)
 Slavery
 Monopolistic competition



Business model…large-scale farm production
Economies of scale requires low marginal cost
Slavery = Zero marginal cost of labor
 Comparative advantage

Sold products to England that the English wanted, for
profit, i.e. gold
 Fit Parliament’s economic model
Slavery became an important economic
institution in southern colonies
 Governments of Southern colonies encouraged
big landholdings
1. Tried to attract wealthy immigrants:
 Headright system
2. Encouraged slave holding
 Headright to 50 acres of land for purchase of a slave
 Slave cost ≈ 10-15X annual per capita income
 Primogeniture kept wealth concentrated
 Slaveholding spread rapidly bet. 1650 & 1700
 Generated rapid growth of wealth…
 …but no economic development…
 i.e., greater distribution of income higher Y per capita…
Average Total Cost in the Short and Long Run
ATC in short
run with
small factory
Average
Total
Cost
ATC in short ATC in short
run with
run with
medium factory large factory
ATC in long run
$12,000
10,000
Economies
of
scale
0
Constant
returns to
scale
Diseconomies
of
scale
1,000 1,200
Tons of Rice
Slavery
 Moral v. economic imperatives
 African slaves were not British subjects,
no legal rights…
 …unlike indentured servants
 Colonies made their own laws governing
slaves
“Settlement Approach” Helped Britain
extend control of North America
 England and France were chief competitors
in North America
 France
 Quebec 1608
 expanded east and southward, didn’t colonize
 Louisiana
 England” steady and persistent growth of
settlements
 Enabled British to prevail in frequent wars
over colonies
 French and Indian War (1756-63)
 2 million British subjects in NA v. 60K French