Colonial economic systems Summary

  • Last updated on November 10, 2022

During the years from 1607 to 1775, farmers and merchants in colonies on mainland North America developed a market economy and commercial practices that provided the basis for material success comparable to the most advanced nations of Europe and made possible nineteenth century expansion.

The earliest British settlements on the North American continent were business enterprises organized by British corporations expecting to profit from trade. The joint-stock Virginia CompanyVirginia Company–modeled after the East India Company, which had prospered by importing goods previously unobtainable in England–hoped to achieve similar success in the New World. The Pilgrims arrived in the Massachusetts Bay area in 1620, desiring to practice their religion freely, but the London merchants who organized a joint-stock company to finance their move anticipated earning significant profits from trading with Native Americans.Colonies;economic systems


Although the London merchants sought profit, it was not capitalism that ruled the English economy in 1600. The economic theory that justified chartering corporations and founding colonies was based on Mercantilismmercantilist ideas that required state intervention in economic affairs, precisely what Adam Smith, AdamSmith excoriated in his 1776 Inquiry into the Nature and Causes of the Wealth of Nations (Smith)An Inquiry into the Nature and Causes of the Wealth of Nations. Mercantilism stressed the importance of a strong central government and urged subordination of the economy to that goal. It assumed that the strength of a nation was measured by the gold it held, because the monarch could use that gold to raise armies to defeat his enemies and defend his country. Ensuring the flow of gold into the country required a favorable balance of trade in which exports exceeded imports. Government had an obligation to encourage and regulate overseas activities that could provide England with goods it would otherwise import, thereby limiting the movement of gold out of England. Even better than imported goods were commodities that England could resell to other countries for gold.

All European countries that founded American colonies–Spain, France, the Netherlands, and Sweden–were like the English in that they hoped to exploit the new lands according to mercantilist theory. The reality varied, depending on the natural features of the area settled, the composition of the indigenous population, the characteristics of the European settlers, and the degree of control by the home government. Only Spain succeeded in actually finding gold and silver in its colonies to bolster its position in Europe.

English kings did not have money available to support overseas expansion, but English merchants did. To encourage merchants to undertake risky enterprises, the English government granted charters creating limited liability joint-stock companies, guaranteeing each company a monopoly on trading rights to specific areas, and delegating governmental powers to exercise military and political control over distant trading posts.

The model worked well in the East Indies and Africa but less so in North America. Virginia Company stockholders never recovered their investments. The Pilgrims took decades to repay investors, who never realized significant profits. The Puritans took control of the Massachusetts Bay Company, whose charter–by accident or design–did not specify that its controlling board had to remain in London under the eyes of the government. They simply took their charter with them, establishing an autonomous government in the New World, something never contemplated in mercantilist theory.

The major economic factors governing development of the colonies were scarcity of labor and abundance of land. The effects of these factors varied from colony to colony depending on the climate, crops grown, and composition of each colony’s population. Agricultural crops from the southern colonies, where specialized commercial agriculture developed, came closest to fitting original English mercantilist expectations from overseas expansion. The northern and middle colonies, although political successes, were economic anomalies. Only colonial merchants actually thought of themselves or acted like businessmen. Even when involved in international commerce, neither plantation owners nor farmers conceived their activities in strictly economic terms.

Southern Agriculture

The Agriculture;southern coloniesChesapeake region built a flourishing economy based on tobacco. Although the Virginia Company proved an economic failure, it established the system that led to a successful colony. When neither trade with Native Americans nor search for mineral resources proved profitable, the company realized it needed to turn Virginia into a settlement colony. Because land was plentiful and labor scarce, the company offered head rights of fifty acres per person to anyone bringing people to the colony. Those unable to pay their own way could receive the same grants if willing to indenture themselves as laborers for four or five years to repay the costs of their passage. However, the men who had procured large land grants on which they planned to create large plantations found indentured laborers to be an inefficient workforce because these laborers were eager to leave the plantations once they had served out their indentures.

Slavery provided the solution, but the institution developed slowly. SlaverySlavery did not exist as a legal status in English law in August, 1619, when a Dutch ship sold 20 Africans to eager planters. It is thought that they may have been treated in the same manner as European Indentured laborindentured servants, perhaps with longer terms of service. As late as 1651, some Africans who had completed their indentures received grants of land comparable to those offered to Europeans; there were only about 300 Africans then, in a total population of some 15,000. Because Africans were involuntary migrants, improving their treatment would not encourage more to come. Although conditions for European indentured servants improved, the status of Africans deteriorated, and by century’s end, black slavery had been legally defined as servitude for life with the status inherited by children.

This development encouraged imports of Africans and fueled a massive growth in Tobacco industrytobacco production as plantations were created along the sides of navigable rivers where oceangoing ships could conveniently pick up cargo. Despite uneasiness over the health effects of smoking and fulminations against tobacco by King James I, shipments were welcomed in England. Tobacco not only replaced previous imports from Spanish colonies but also could be processed and exported to continental Europe as snuff and pipe tobacco, helping the mercantilist drive for a positive balance of trade. To encourage production, the English government granted American colonies a monopoly on tobacco, forbade growing the plant in the British Isles, and placed heavy duties on imports from outside the empire.

Rice and Rice industryindigo were profitable crops in the southern coastal region running from Cape Fear, North Carolina, to the Altamaha River in Georgia, centered on the port of Charleston. Large plantations staffed by slaves devoted to rice cultivation appeared during the 1690’s. Africans were particularly valuable because a considerable number of them had cultivated rice in Africa and brought with them technical knowledge of when and how to control the water level in the fields. Rice production clearly fulfilled mercantilist expectations. The grain was not only consumed in Great Britain but also exported to northern Europe in significant amounts. The Navigation Acts permitted direct shipment of rice from Charleston to major markets in southern Europe and the Mediterranean.

Indigo, a deep-blue dye stuff much in demand by textile manufacturers, was more strictly channeled to England. Seventeenth century attempts to grow the plant in mainland colonies had failed when faced with competition from more efficient producers in the French West Indies. In the eighteenth century, British subsidies made indigo a profitable plant for growers in the rice districts; mercantilist theory approved of the subsidy on the grounds that keeping production within the empire was more useful to the British economy than getting less expensive supplies of the dye for England’s textile industry. When the subsidy ended after independence, production of indigo declined drastically.

Tobacco, rice, and indigo planters preferred to think of themselves as landed gentlemen rather than businessmen. However, unlike their English models, they could not depend on rents from tenants to sustain a lavish lifestyle. Because financial success depended on rational management of production of an export commodity, ignoring business considerations often meant running up large debts, endangering the future of the plantation and the planter’s family.

Northern Agriculture

The distinguishing characteristics of Agriculture;northern coloniesfarming in the north were family settlement and economic diversification. The Puritans who populated New England, the Presbyterians in New Jersey, and the Quakers and German Protestants in Pennsylvania came in families. Whether settling in cohesive townships in New England or in isolated farmsteads elsewhere, access to land ownership was the great magnet.

Farmers could not be simple businessmen in an age without social safety nets–survival of the family depended on how their farms functioned. Few could equal the boast of the legendary farmer who claimed that, save for salt and bar iron, he produced on his own acreage everything his family needed. However, achieving minimal self-sufficiency was feasible and a vital defensive strategy. Cash crops were a secondary, though highly desirable, consideration. Once established, most families wanted more than minimum subsistence, necessarily involving the farm in commerce. This might mean simply bartering with neighbors for items the farm did not produce, or with a local artisan–a blacksmith or a shoemaker–for needed services. However, the desire for a better quality of life led to a demand for textiles from Britain and for tea, coffee, sugar, and other goods, involving the mostly self-sustaining farmers in international trade and requiring that they raise crops that could be exported to pay for imports.

In Pennsylvania, the predominant cash crop was wheat, which, milled into flour, was in high demand in the West Indies sugar colonies. New England, where farms were less productive than in the middle colonies, found in the fisheries another commodity valued in international trade–dried salt cod was prized all over Catholic Europe. Local merchants became wealthy businessmen, managing commerce among the colonies and with the West Indies. The port cities, Boston, New York, Philadelphia, and Charleston, flourished. These operations violated mercantilist theory because they were in direct competition with the homeland. Wheat could have been grown in Britain rather than the colonies, and the fishing fleets and the colonial merchant marine duplicated British enterprises, yet the imperial government tolerated the competition.

Easy access to land encouraged a diversity of nationalities to come to British North America, except for New England. The close pattern of settlement by townships discouraged outsiders; when the Revolutionary War broke out, the overwhelming majority of New Englanders were descendants of English people who had come during the early seventeenth century. Every other colony attracted significant numbers of Welsh, Scots, and Protestant Irish; each considered themselves distinct nationalities. Protestant refugees driven out of Germany’s Rhineland late in the seventeenth century by the scorched-earth tactics of Louis XIV arrived in New York, where large-scale landowners treated them as easily exploitable laborers on their estates. Word of their mistreatment filtered back to German lands and reinforced the efforts of the Penn family to recruit settlers for their colony. Pennsylvania became the most diverse of all the colonies. Its eighteenth century population was estimated as one-third German, one-third English, and one-third Scots and Irish. Each nationality brought its own skills and distinctive life patterns.

The Backcountry

Settlers in the backcountry, areas that lay beyond the core settlements of the mainland colonies and whose geographic position made marketing their products difficult, developed unique economic systems and living patterns. During the late nineteenth century, these regions would be praised as the great American frontier, where the true American character developed. In the eighteenth century, such areas were despised, reputed to be populated by uncouth, uncivilized people whose lifestyle and farming practices were equally slovenly.

The backcountry economy appeared in Virginia when settlement moved past the river systems that eased marketing of tobacco. It characterized parts of North Carolina between tobacco and rice areas, and appeared in every colony as settlement spread inland. The reactions of English and colonial travelers to this lifestyle were almost universally negative. They viewed the people as crude and uncultured, unable to recognize the superiority of their visitors, and the farming practices as ugly and wasteful, demonstrating willful ignorance of proper agriculture.

Farming methods in the hinterland were indeed untidy and wasteful, but also rational in an area where land was abundant and cheap, labor was scarce, and family survival depended on the work of husband and wife. The labor-saving method of turning forest into cropland was to girdle trees and plant corn (which unlike wheat did not require plowed fields) between the trees to feed the family. After the trees died, they were cut down and burned. Grain and tobacco were useless crops when the cost of carriage exceeded market value. However, cows and pigs could forage for themselves in the forest and be driven to distant markets on their own legs, where they often arrived weak and emaciated, further evidence of incompetent farming practices in the backcountry.

Forest products were an important part of colonial economic systems both north and south, especially, but not only, in backcountry areas. England had been largely deforested before 1600 and depended on importing timber and naval stores from Baltic countries for its navy and shipbuilders. America provided an alternate source of supplies, and England offered bounties when the colonists developed the techniques needed to produce satisfactory pitch, tar, and turpentine, vital in protecting wood and rope from corrosion by salt water. Tall New England white pines made ideal masts for Britain’s Royal Navy, and the sap of southern long-leaf pines proved the best source of pitch and turpentine. Artisans learned to make barrel staves and heads needed to transport tobacco from the Chesapeake region and sugar from the West Indies, also a major market for construction timber. Trial and error led to the discovery that wood ash from the hardwood forests of New York and New England was best for making potash, the most important industrial chemical of the eighteenth century, used in producing glass, soap, drugs, and dyes.


By the mid-seventeenth century, Trade;U.S. with Europecommerce originating in the North American colonies was of sufficient importance for England to begin regulating it in accordance with mercantilist theory. The 1651 and 1660 Navigation Acts of 1651, 1660Navigation Acts, as well as eighteenth century additions, had three major provisions: Certain enumerated products of the colonies could be exported only to England; most goods from Europe and Asia could not be imported directly by the colonies, but had to come through England; and ships engaged in trade with the colonies had to be owned and constructed in England or the colonies, have an English captain, and a crew three-quarters English. The original enumerated commodities were sugar, cotton, indigo, dyewoods, ginger, and tobacco; in 1660, all except tobacco were products of the West Indies. Later additions included naval stores, copper, rice (with an exception for shipments directly to southern Europe, which bought about one-third of the crop), potash, beaver and other furs, and tanned hides. Customs duties were collected on most of these commodities on their arrival in England, providing welcome funds for the royal exchequer. In some years, the import tax on tobacco exceeded the price paid to planters.

Acts to protect specific English economic interests by preventing American manufacturers from selling hats or woolen cloth outside the colony where they were produced were irritants in relations between the colonies and England. Attempts to collect significant duties on sugar and molasses, used to distill rum, the favorite colonial alcoholic beverage, caused major problems when England attempted to actually enforce such laws during the mid-eighteenth century.

Despite these problems, the Acts of Trade created relatively little dissension, primarily because American colonials and American-built ships counted as English under the acts. American merchants demonstrated considerable business acumen in competing on an equal basis with English merchants, although they lacked equal financial resources. Northern merchants dominated intercolonial trade, including shipments to and from the sugar islands, and participated in transatlantic trade. English merchants controlled the lucrative tobacco market, using their monetary power to finance both planters and European customers. Colonial shipping benefited from the services of the Royal Navy; without its protection against Mediterranean pirates, trade with southern Europe would have been much too risky.

Ships and rum were the primary manufactured products that entered international trade. Making barrel staves used to ship tobacco and sugar to England was a useful winter occupation for farm families, but most household production, whether of linen and woolen cloth or iron products from blacksmith’s workshops, was consumed locally.

Shipbuilding flourished in New England, where skilled workmen and cheaper availability of masts, lumber, and naval supplies gave the colonists an economic advantage. American shipyards produced ships of all sizes besides the large warships and specialized great ships intended for the East Indies trade. One-quarter to one-half of the ships were purchased by English merchants. By 1770, about one-third of the ships used in the British coastal, as well as European trade, were made in America.

After 1763, Great Britain, in effect, abandoned the mercantilist system of economic regulations and began using taxes and customs duties to pay salaries of royal officials and costs of armies on the frontier. What had previously been irritations for colonists became major grievances, ultimately leading to demands for independence. By this time, the colonies had developed an economy and society comparable to the most advanced countries of western Europe. Boston, New York, Philadelphia, and Charleston were provincial capitals comparable in size and prosperity to other provincial centers in the British Empire, including Dublin, Edinburgh, and Belfast. American agriculture was productive enough to support nine years of warfare. The rich might not be as wealthy as aristocratic Europeans, but middling citizens shared a comfortable standard of material life, and the poor were infinitely better off. Although the country was overwhelmingly rural (perhaps as much as 90 percent of the population was engaged in farming), the colonial economic systems provided the basis for favorable entry into the Industrial Revolution and creation of the most prosperous nation in the world in the nineteenth century.

Further Reading
  • Eccles, W. J. The French in North America, 1500-1783. Rev. ed. East Lansing: Michigan State University Press, 1998. The classic narrative of the French experience in America brought up-to-date in a new edition.
  • Engerman, Stanley L. “Government in Colonial America.” In Government and the American Economy: A New History. Chicago: University of Chicago Press, 2007. Examines the ways in which governments aided the development of the American colonial economy.
  • Engerman, Stanley L., and Robert E. Gallman, eds. The Colonial Era. Vol. 1 in The Cambridge Economic History of the United States. New York: Cambridge University Press, 1996. Nine articles by major scholars analyze significant aspects of colonial economic systems.
  • Hinderacker, Eric, and Peter C. Mancall. At the Edge of Empire: The Backcountry in British North America. Baltimore: Johns Hopkins University Press, 2003. A concise, readable narrative appraises the role of the backcountry in the expansion of colonial America.
  • Seavoy, Ronald E. An Economic History of the United States: From 1607 to the Present. New York: Routledge, 2006. Four chapters deal with the colonial period. Seavoy argues that farmers, the majority of the population, did not act or think like businessmen.
  • Shorto, Russell. The Island at the Center of the World: The Epic Story of Dutch Manhattan and the Forgotten Colony That Shaped America. New York: Doubleday, 2004. A superb account of New Netherland that includes the history of New Sweden.
  • Wright, Gavin. Slavery and American Economic Development. Baton Rouge: Louisiana State University Press, 2006. Challenges accepted views on the role of slavery in the American economy.

Boston Tea Party

Embargo Acts

French and Indian War

Navigation Acts

Plantation agriculture

Revolutionary War

Royal Charters of North American colonies

Slave era

Slave trading

Stamp Act of 1765

Tea Act of 1773

Townshend Act

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