Chapter 3: America on the Eve of Revolution Summary

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Chapter 3: America on the Eve of Revolution
This chapter examines the monetary foundations of the colonial economy under English rule. Though England did follow a mercantilist policy and did not permit the flow of specie into the colonies without trade, piracy or accumulated indebtedness, there was no shortage of money in colonial America. Overall, colonial prices rose; they did not fall as they should have if a money shortage existed. Colonists proved resourceful and turned to the use of fiat money rather than specie as a medium exchange, store of value, unit of account and means of debt repayment. Fiat money greased the wheels of exchange in colonial America and, therefore, contributed to overall growth. On the eve of the American Revolution there is evidence to suggest that the colonists were economically as well off, if not better off, as their English counterparts. Political considerations are left for discussion later.

Changes in colonial population are also examined in this chapter. Rates of fertility, birth, marriage and deaths among different demographic groups are discussed, and links between changes in these rates and overall population growth are made. Of course, the impact of these changes on the relative costs of labor is investigated.

Key Terms and Concepts

Balance of payments

Bimetallic monetary standard

Birth rates


Death rates


Economic growth


Fiat money

Gresham’s law

Gross Domestic Product (GDP)




Legal tender




Population growth


Quantity theory of money


Standard of life



Teaching Tips

  1. Establish the links between the overall rate of growth in population and the rates of (i) fertility, (ii) birth, (iii) marriage, (iv) death, (v) immigration and (vi) slave trade. Explain that growth in population can translate into an increase in the supply of labor when or if the population reaches working age. This increase in the quantity of labor helps fuel economic growth in a “country” like colonial America.

  2. Using the economic way of thinking, explain why colonists believed a shortage of money could negatively impact their economy.

    1. Use the quantity theory of money (MV  PQ) to explain why
      a shortage of colonial money could either lead to negative economic growth (decrease in Q) or deflation (a decrease in P). Assume velocity (V) is stable or constant.

    2. According to the research of economic historians, did colonial America experience positive or negative economic growth in per capita real GDP under English rule? Did colonists experience inflation or deflation in the years leading up to the American Revolution? Does the overall change in real GDP per capita and overall prices support the claim that there was an actual shortage of money in colonial America?

  3. Define the balance of payments, trade deficit and trade surplus. Explain that trade makes it possible for a country to trade goods and services it can produce at the lowest possible cost for those that it cannot. Trade makes all trading partners better off. Illustrate with respect to the colonies.

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