When austerity pushed American colonists to revolution

As the euro area tries to wrestle member states into fiscal submission through bailouts, austerity and capital controls, it would be well advised to consider a historical precedent: the American Revolution.

In the early 18th century, North America held a role in the British Empire that was similar to the one occupied by Cyprus or Slovenia in the euro area today. Americans were slavers, smugglers, rumrunners and fanatics — as “opulent, commercial, thriving” as they were irresponsible and fiscally profligate. But as the empire struggled to stay solvent after the Seven Years War, the government of Prime Minister George Grenville attempted to bring the colonists to heel in the name of fiscal austerity.

“The Circumstances of the Times, the Necessities of the Country, and the Abilities of the Colonies, concur in requiring an American Revenue,” wrote Thomas Whately, a Grenville ally, in 1765.

To be sure, the 18th century British Empire and the euro area are very different. But the similarities are still worth noting: A central unelected body (at least not by North Americans), attempted to solve a fiscal problem by inflicting misguided pain on the periphery.

As the European Commission, the European Central Bank and the International Monetary Fund attempt to hold the euro zone together, they might want to keep the British example in mind. And countries such as Cyprus and Greece might want to look to the model of the nascent U.S., which showed that there is a way out.

In 1765, Britain owed 130.6 million pounds to bondholders and foreign creditors. That’s the equivalent of 9.7 billion pounds ($15 billion) in today’s terms. It might not seem like much, but it was more than 10 times the 1765 British budget of 12 million pounds. It also entailed 4.7 million pounds in annual interest payments.

Meanwhile, British taxes in America were minimal. Direct remittances from the colonies to the Treasury had averaged only 1,900 pounds over the previous 30 years, and had declined further since the war. To make matters “still more ridiculous,” according to Whately, those taxes cost 7,600 pounds a year to collect.

“The whole of this vast revenue is raised in Great Britain, and is paid by the inhabitants of Great Britain,” Whately wrote. The colonies in North America, with 2 million British subjects, he added, contribute “to the national Expense by taxes raised there, no more than seven or eight Hundred pounds.”

Meanwhile, Americans only had about 800,000 pounds in public debt. Surely, Whately argued, they could pay more.

The Grenville ministry had a three-part remedy. First, Parliament banned Americans from printing their own currency, implicitly forcing them onto the silver standard in use in the rest of the empire. Second, it ordered British naval officers to redeploy to strangle American smuggling and increase customs payments. Finally, Americans would be forced, for the first time, to pay taxes in silver that would go straight to the central fisc, the famous “taxation without representation.”

It looked good on paper. To the British, the taxes were light — only about 100,000 pounds a year — less than half what was spent each to year to maintain the British army in America. The protests from American agents and London merchants were dismissed.

Grenville “said we told him we were poor, and unable to bear such Tax; others told him we were well able,” recalled Connecticut agent Jared Ingersoll. “Now, says he, take the Business into your own Hands, you will see how and where it pinches, and will certainly let us know it, in which Case it shall be eased.”

Ingersoll accepted a position as Stamp Collector — a move he would later regret — and returned to Connecticut to begin implementing the new taxes. It was a daunting problem. The taxes infiltrated almost every aspect of American life, including newspapers and pamphlets, legal documents, bonds, and commercial communications.

But when Ingersoll ran the numbers, he found a more pressing issue: Americans — at least in Connecticut — didn’t have enough silver to pay the tax because their wealth was tied up in land, cattle and shipping.

In addition, the silver Americans had was already sent to Britain — not to pay taxes, but to cover the 4 million pounds Americans owed British merchants for tea, coffee and manufactured goods.

The result was a conundrum. Ingersoll expected stamp duties in Connecticut to amount to 4,000 pounds a year. Not much, but enough to bankrupt the colony.

“It was a doubt with me, whether we had even that Sum in the Colony,” Ingersoll wrote.

In other words, Americans were being taxed in a currency that they didn’t control, that they didn’t possess, and were being asked to pay debts they didn’t incur.

They had little choice but to revolt, and they did. The Grenville ministry was kicked out of office and the Stamp Act was repealed. But the damage was done.

As the British economist Arthur Young put it on the eve of America’s victory in the revolution: Grenville’s philosophy was to blame.

“Nothing therefore can be more idle than to say, that this set of men, or the other administration, or that great minister, occasioned the American war,” Young wrote in 1780. “It was not the Stamp Act, nor the repeal of the Stamp Act; it was neither Lord Rockingham nor Lord North, but it was that baleful monopolizing spirit of commerce that wished to govern great nations, on the maxims of the counter.”

Words worth considering today.

[Bloomberg]

(*Andrew Edwards is a PhD student in American history at Princeton University. The opinions expressed are his own.)