ECON 2200 Study Guide
Chapter 1: The Late 1500s to 1790s-Colonization, the American Revolution, and the Constitution
Jamestown, Virginia was the first colony to introduce the headright system in 1618. This was an arrangement that gave 50 acres of land to anyone who paid for a settler’s passage to the town.
Indentured servitude was first introduced to the US by the Virginia company in in 1619. The Virginia company established settlements on the coast of North America. By the end of the colonial period, nearly 3/4 of colonists were indentured servants.
Parliament passed the Transportation Act of 1718 to reduce crime in Great Britain. This act allowed Britain to sell its prisoners to the colonies as indentured servants- the majority of which ended up serving tobacco plantations in Maryland and Virginia.
Roanoke, the first English colony, settled in 1578, is an excellent example of the struggles that the first colonists faced. It was populated by 91 men, 17 women, and 9 children and it had limited rainfall and poor resources. It is also known as the Lost Colony because it mysteriously disappeared over a three-year period, while England was at war with Spain and unable to resupply the colony. Don't forget about the age old question of What is the idea that psychological functioning is related to unconscious psychological processes?
Even Jamestown, the first permanent English settlement, faced great hardships. Physical evidence of cannibalism during the Starving Time of 1609 to 1610 was recently discovered by archaeologists.
Most colonization became self-sustainable in the late 1600s because of explorer John Smith's family-based colonization. This type of colonization was a breakthrough success, increasing investors’ expected benefit of funding and therefore increasing the demand for indentured servants.
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Colonial woman helped maintain social structure and promoted specialization within the household. They did activities like weeding and harvesting, making soaps and candles, and preparing food and making clothing. Women could own property and form contracts if they were not married or widowed, but they could not vote in the assemblies, and marriage often transferred their property to their husbands. If you want to learn more check out What are the 3 types of norms?
Eliza Lucas Pinckney of South Carolina was one of the first US female entrepreneurs who introduced indigo to the South during the mid-1700s all by herself. She was only 16 years old when she took charge of her father's three plantations and manage them for 35 years successfully.
Most Blacks came involuntarily from Africa through the slave trade which started during early colonial times. Black slaves often worked on plantations in the South, and in urban areas and ports in New England and the Middle colonies.
The Puritans felt persecuted in England-They received their name because they wanted to purify the Church of England from Roman Catholic influence. The Puritans, ironically, were intolerant of other religions. They believed in Manifest Destiny, a divine mission to spread westward, and pressured many Native Americans to convert. The Puritans became responsible for the 1st reservation system, and relations with Native Americans quickly soured, leading to wars.
The Quakers also felt persecuted in England, but they did not believe in killing and were peaceful. They received their name because they literally quaked in the presence of the Lord.
Jamestown provided an excellent example of how voluntary trade benefited both settlers and Native Americans but later turned sour. The Powhatan Indians traded food and furs with the settlers in exchange for metal tools, copper, glass beads, and other trinkets; however, when investors and James town put pressure on the colony to turn a quick profit, farmers expanded onto Native American land. If you want to learn more check out What are the 6 ways nonverbal cues relate to verbal messages?
This angered the Indians and they surprise attacked the colonists. The Indian massacre of 1622 resulted in nearly ¼ of the colonists dying. England then responded by sending troops and supplies and taking even more of the Native American land. Many people today believe that Indians did not understand or respect property rights, but many wars with Indians resulted because of settlers violating Indians’ property rights.
King Phillips’ War was another bloody conflict and it resulted in the destruction of 12 New England frontier towns. King Phillip led many tribes to rebel and reclaim southern New England territory during 1675 and 1676. The war ended when King Phillip was first captured, then beheaded, and finally drawn and quartered-a common treatment of criminals during that day. Don't forget about the age old question of Who does the extension of copyright laws benefit?
President Andrew Jackson, who had achieved fame by fighting many rival Native Americans during the American Revolutionary War, passed the Removal Act of 1830, enforcing James Monroe’s proposal to move all Native American tribes west of the Mississippi River. Then in 1831, the Supreme Court decision Cherokee Nation v. Georgia stated that Native Americans had no real standing in court, but they had the right to lands possessed through previous treaties. President Jackson did not enforce this decision and used military force to remove a lot of tribes from the East. We also discuss several other topics like What are exocrine glands?
Nearly 1/3 died of exhaustion and disease in the Trail of Tears. The executive branch had illegally disregarded the judicial decision of the 5th amendment that stated that “no person shall be different deprived of life, liberty, or property, without due process of law”.
The Seven Years’ War against France left Britain with high war debts, which King George III felt the colonist should help pay. Within the geographical boundaries of the United States, this war is known as the French and Indian War-the French and hired Indians attacked American colonies. To protect the colonies, the British sent even more troops into America.
Mercantilism was dominant from the 1500s to the mid-1700s, and it states that a country's economic wealth is measured by the precious metals in its treasury, and trade surpluses increase its wealth. Mercantilists believed that the world's total wealth was fixed, so they saw trade as a zero-sum game-the gain of one must equal the loss to the other.
The colonies ran trade deficits, meaning they imported more in value than they exported.
Adam Smith was the first Classical economist who harshly criticized mercantilism, in the famous Wealth of Nations. Classical economists supported Say’s Law, which states that unregulated economies fully utilize resources automatically, maximizing society’s welfare. Classical economists also believed that wealth was measured by production, which was determined by real factors, not by precious metals. These real factors include labor, capital, natural resources, and institutional structure.
Because colonists had few gold and silver coins to use for exchange, called specie, many colonies relied on printing Bills of Credit. These Bills of Credit were in early form of fiat money, much like US dollars today-they were not backed by gold or silver.
As more bills of credit were printed, inflation occurred, and their value fell relative to the British pound. In response, England passed the Currency Act of 1764, which prohibited printing any new Bills of Credit or reissuing existing ones, restarting the money supply.
In 1764 Britain began to enforce the Navigation Acts, which were a series of acts starting in 1651 that restricted commerce between the colonies and England. Imports and exports between the colonies and other countries first
had to go through England and be taxed. This taxation is kind of like an excise tax, or per unit tax, today.
The Sugar Act of 1764 represented a shift in British policy towards the colonies because it attempted to raise tax revenue instead of only regulate trade. It placed new taxes on goods such as sugar, wine, and coffee.
The Stamp Act of 1765 required all colonists to pay a tax on any printed paper, which included legal documents, newspapers, and even playing cards; because nearly all colonists used paper, this tax affected most colonists. The Townshend Acts included a series of acts, starting in 1767, which established that Parliament had the right to tax colonies and increase tax enforcement and collection on certain imported colonial goods. The purpose was to pay governors and judges for their loyalty to Britain with the proceeds.
The Royal Proclamation of 1763 restricted migration west of the Appalachian Mountains, since England wanted to mitigate its military expenses protecting the colonies. The Québec Act of 1774 and large the province of Québec, voiding previous land claims by the colonies and leaving less area for colonists to migrate. These acts upset colonists who were interested in settling into areas with lower-cost farming land. Restricting these areas decreased the supply of available land to colonists, increasing its price.
One major event of the American Revolution, the Boston Massacre of 1770, was an incident in which British soldiers fired upon a rebelling crowd, killing five civilians.
Another well-known event was the Boston Tea Party of 1773, in which smugglers (some disguised as Indians) destroyed a shipment of British tea. Ironically, the sabotage was not in response to higher taxes, but lower ones.
The Tea Act of 1773 allowed the British East India company to dump its tea in the colonies, avoiding export duties (taxes), in attempt to underprice smugglers, which decreased the probability of smuggling. It is counterintuitive as to why the political Tea Party, which developed during the Financial Crisis of 2008, took its name from the Boston Tea Party.
The American Revolutionary War from 1775 to 1783 started when fighting broke out between Massachusetts and British militia in Lexington and Concord. The Second Continental Congress met in Philadelphia, May 1775, to prepare the colonies for war. It sent King George III its Olive Branch Petition, asking him to formulate a “happy and permanent reconciliation”, which the King ignored.
Thomas Jefferson wrote the first draft of the Declaration of Independence, which was officially approved July 4th, 1776. This document argued that men have certain “inalienable rights,” which included “life,
liberty, and the pursuit of happiness.” Slaves and Blacks saw an opportunity for freedom until the constitution's limitations removed all hope.
In 1777, the Continental Congress wrote the Articles of Confederation, which created a weak national government that could conduct foreign relations, mediate disputes between the states, and print money to pay soldiers and purchase supplies. The newly printed money was called Continentals, which funded the Continental Army. Continentals were fiat money; gold or silver did not back them, and they had no intrinsic value. George Washington was appointed as Commander in Chief of this army.
The Loyalists sometimes acted as spies, and they had more Native American allies. The Patriots, colonists who supported the rebellion, enjoyed a long supply line that delayed British communication.
Destroyed productive resources increased the cost of production during the war, and overall production fell. Economists refer to the situation with rising prices but falling output at stagflation. Stagflation is a common occurrence
during any war fought on one’s own soil. Most historians consider the Second Battle of Saratoga, fought in the fall of 1777, the turning point of the war, which favored the Patriots.
The Treaty of Paris was signed on September 3,1783, stating that Britain formally recognized US independence and gave the US all territory West of the Mississippi River between Canada and Florida.
Shays’ Rebellion of 1786 was named after Daniel Shays, a war veteran, who organized farmers in western Massachusetts. Deflation from the trade deficits caused the prices of agricultural goods to fall unexpectedly, lowering farmers revenues.
James Madison, a member of the Virginia legislature and later the 4th president of the United States, contributed significantly to the Constitution. To calm citizens’ fears of a large centralized government, he proposed three branches-a judicial to judge laws, a legislative to write them, and an executive to enforce them. Not only did he consider separation of power by dividing the national government into three branches, he ensured a system of checks and balances, which enabled each branch to defend itself or ally with the others. Even the legislative branch was set up with separation of power in mind-upper house, called the Senate, and a lower house, called the House of Representatives.
The Federalists supported a stronger national government, while the Antifederalists were concerned about its power. The Constitution was ratified on July 26, 1788, after a Bill of Rights was promised to be added to appease the Antifederalists. The Bill of Rights added protections for
inalienable rights and against government tyranny, and 10 of James Madison's amendments were approved in 1791.
The 5th Amendment also adds important economic protections for its citizens. It protects its citizens from government, stating that “no person shall be deprived of life, liberty, or property, without due process of the law.” It also says that the government must pay “just compensation” to individuals if it takes their private property for public use.
Public goods are not goods that governments provide; they are goods that are non-rivalrous, meaning one person's consumption leaves no less for others, and they are non-excludable, meaning one cannot exclude others from enjoying their benefits. Examples are national defense, large fireworks displays, and uncongested highways. Most goods and services are both rivalrous and excludable, making them private goods. Food and clothing are private goods.
Specie acted as the monetary base, and the federal government could provide a common medium of exchange, lowering transaction costs and promoting economic growth. Not only would using 50 different state currencies today be confusing; It would be costly.
The Coinage Act of 1792 declared the US dollar as the base unit of account, founded on a decimal system. Money functions well as a unit of account if prices are easy to measure.
The constitution put the nation on the English common law system, where laws were based on previous court decisions, and the Supreme Court declared the constitutionality of these laws. The common law system gives a limited role to the executive and legislative branches but places more weight on the judiciary. In contrast, the French civil law system places more weight on alleged legislative and executive branches, allowing for the preferential treatment of special interest groups and more corruption.
The 3/5 Compromise stated that 3/5 of a state's slave population counted when determining that state’s representation in Congress, which encouraged southern plantation owners, who also dominated politics, to breed slaves.
Chapter 2: The Late 1700s to 1850s-The First Political Parties, the War of 1812, and the American System
Initially, George Washington did not seek the presidency, but his national reputation made him the most logical choice. After becoming the 1st president of the United States in 1788, he appointed a cabinet to guide him in making decisions.
Alexander Hamilton, the first Secretary of the Treasury, held Federalist views, which were popular in commercial cities of the Northeast and port cities of the South. He wanted a strong central government and believed in broadly interpreting the Constitution, denying the federal government only powers given specifically to the states.
Thomas Jefferson, the first Secretary of State and later 3rd president of the United States, held Democratic-Republican views, which were popular in western and southern agrarian sections of the US. He wanted a weak central government, giving more power to the state governments. He believed in laissez-faire principles, which involve hands-off government, free trade and competition. Unlike Hamilton, Jefferson felt that the US should remain largely agricultural and promote yeoman farmers-independent farmers who are self-sufficient and hardworking and who valued liberty and freedom.
The first federal tariff in US history, the Tariff Act of 1789, allowed Hamilton to secure a tariff of about 8% on imports, also protecting some infant industries. Tariffs were easier to enforce and collect than excise taxes, because tax collectors could monitor cargo as it left ships and required the immediate payment of duties.
Hamilton also secured the federal excise tax in the US- an unpopular tax on distilled spirits, which led to the Whiskey Rebellion of 1791. During this rebellion, many Pennsylvania farmers attacked and barricaded the home of a tax inspector. Around those parts, many farmers use liquor as money, so the excise tax on whiskey directly taxed their medium of exchange.
Hamilton secured the First Bank of the United States, which was chartered by Congress in 1791 for 20 years. This bank was modeled on the Bank of England, and the federal government funded about 20% of its capital. Ironically, the British owned most of the stock. There were four major functions of this bank. First, it could make loans to the federal government, companies, or private individuals. Second, the bank acted as a lender of last resort, preventing financial panics or bank runs. Third, the bank could issue bank notes, increasing the money supply, or store excess money, decreasing it. Last, the bank acted as a tax collecting agency, and transferred money between countries.
Only four years after the French Revolution began in 1793, France and England went to war. President George Washington issued a Declaration of Neutrality, allowing the US to trade with both sides. The US became an exporter of goods, which resulted in a short period of prosperity. Between 1801 and 1803, the boom temporarily disappeared, when England and France were briefly at peace.
President Thomas Jefferson sponsored the Embargo Act of 1807, which prohibited all US exports. This act went against his laissez-faire principles, ironically.
In 1812, President James Madison asked Congress for a Declaration of War against Britain, leading to the War of 1812. He said that the US's rights as a neutral power had now been violated.
In 1814, the British marched into Washington, DC, and burned the White House and Capitol, known as the Burning of Washington. This event gave the US an even greater reason to fight the war, and Democratic-Republican support shifted towards an even stronger centralized government. The Treaty of Ghent officially ended the war in 1814.
Historians considered the beginning of the US's industrial revolution to be Samuel Slater's first industrial mill, built in Rhode Island in 1790. His Rhode Island System employed families that lived in company-owned housing, shopped at company-owned stores, and attended company-owned schools and churches; this system blended well with a new England's family focused lives and customs. Slater's wife, Hannah Slater, even contributed to the Industrial Revolution; she invented two-ply thread and was the first American woman granted a patent in 1793.
Economists define technological advance as an improvement in the “how to” or “method of” producing goods and services.
Early during the Industrial Revolution, unskilled labor, such as the factory workers, and skilled labor, such as the experts, acted as complements of production, meaning that both were used in production. Increasing immigration into the US drove the wages of unskilled labor down, but this increased the demand for skilled labor, which increased the experts’ wages. As workers and exports became substitutes of production, falling wages for unskilled labor decreased the demand for experts, depressing their wages.
When Francis Cabot Lowell decided to vertically integrate all stages of cloth production under one roof of his Waltham mill, he needed to adopt the new technologies of the power loom and dressing frame. These devices, however, were too tall for children to operate, and men in the city generally demanded higher wages, while men from the countryside were tied to their farms. His Lowell system therefore built dormitories and recruited young, single woman from the countryside, offering cash wages paid monthly.
Between the 1820s and 1850s, the largest number of immigrants came to the US from Ireland-the Potato Famine and other crop failures were responsible for this mass migration. To lobby against further Catholic
immigration, the Know-Nothing political party formed in the late 1840s; its name derived from the party members being so secretive, denying knowing anything.
Henry Clay, a Congressman from Kentucky and Speaker of the House, proposed his American System in 1815 because of the War of 1812. His American System stated that stronger economic growth would result from high protective tariffs, subsidies toward transportation, and a national bank to help with funding.
The Tariff of 1816 raised tariff rates to nearly 22%. It was a protective tariff that intended to encourage US production, promote Interstate commerce, and provide revenue to the federal government.
The Tariff of 1828, also known as the Tariff of Abominations by southerners, was the highest protective tariff in history until the Smoot Hawley Tariff of 1930. it increased rates on manufacturing goods up to 45%.
Southern legislators revisited the idea of nullification, in which a state could rule on the constitutionality of a federal law. In November of 1832, South Carolina voted to nullify this tariff, and John C. Calhoun resigned as Vice President of the United States, threatening South Carolina’s secession from the Union. Congress avoided a crisis by passing the Compromise Tariff of 1833, agreeing to cut tariff rates gradually over the next decade.
Thomas Jefferson felt that most government-acquired land should be sold to the people, and he sponsored the passage of the Northwest Land Ordinances of 1783, 1785, and 1787. These ordinances laid out guidelines for privatizing western land and explained how territories could become states. They would provide some revenue to the federal government through sales of land, but they encouraged little western expansion because the government priced the land too high for most pioneers and small farmers, and transportation was costly, with few turnpikes or canals.
The United States nearly doubled its size with the Louisiana Purchase of 1803. This offer presented President Thomas Jefferson, a Democratic Republican, with a dilemma. The Constitution gave Jefferson no right to accept the offer. Nonetheless, the deal was too good to pass up, and Jefferson accepted it. A year later, the Lewis and Clark Expedition traveled west to the Pacific to survey much of the land the US had obtained.
Turnpikes were roads mostly funded by private investors. These investors paid to have turnpikes graded and maintained, collecting a toll for their use.
The discovery of gold in California increased the demand for labor to mine it, and increased the money supply, stimulating short run economic growth. This period was known as the Gold Rush of 1849 and 1859.
Steamboats and natural waterways mostly benefited the North and the South. Before the steamboat, downstream transportation occurred at a reasonable cost, but upstream transportation was costly on foot or on horseback.
In 1807, Robert Fulton built the first steamboat, the Clermont. The Clermont completed a historic voyage of the Hudson River from New York to Albany. Although Fulton attempted to secure a monopoly on his invention, he was ultimately defeated in courts; still he turned a handsome profit before the market became highly competitive.
Rivers are a public good-they are non-excludable and non-rivalrous.
Canals, or man-made waterways, mostly benefited the North. These waterways mainly provided transportation East and West, since rivers provided transportation north and south using steamboats. The most profitable canal was the Erie Canal; its toll revenue far exceeded the
interest costs on its debt. The canal was opened in 1825 between Lake Erie and the Hudson River by Canal Commissioner DeWitt Clinton.
Steam-powered engines later replaced horses, and the train became known as the iron horse.
The Second Bank of the United States acted much like the First Bank of the United States, and the federal government funded approximately 20% of the bank, while private investment from the individuals, firms, and foreigners funded about 80%. It was chartered to help finance debt accumulated from the War of 1812, and it generally contributed to economic growth of the US by issuing national bank notes and expanding credit.
To compensate for its previous over-extension of credit, the Second Bank then pursued severe contractionary policy from 1818 to 1819, causing the Panic of 1819. All prices began to fall as it tightened credit too quickly.
In 1832, Henry Clay proposed to extend the bank’s charter, but President Andrew Jackson vetoed this action. The Whig Party, which opposed Andrew Jackson's policies, formed in 1834. It supported a National Bank, high tariffs to promote US manufacturing, and presidential term limits to reduce the power of the executive branch. Nicholas Biddle, the 3rd president of the Second Bank, was forced to call in loans to keep the second bank operating. All else being equal, calling in these loans contracted the money supply, putting recessionary pressure on the economy.
Ultimately, Andrew Jackson was responsible for the Panic of 1837, which was the worst depression of the century. This depression lasted nearly a decade-from 1837 to mid-1840s! Jackson's Specie Circular of 1836 required that all western land be purchased with only gold and silver specie, rather than previously with specie and bank notes.
Chapter 3: The Late 1700s to 1860-The Antebellum South and Slavery
The Missouri Compromise of 1820 temporarily resolved the issue of whether new states joined the Union as free or slave. Maine joined as a free state on the condition that territory north of the 36° x 30’ line, obtained from the Louisiana Purchase, prohibited slavery.
In 1845, the US admitted the Republic of Texas to the Union as a slave state, which soon led to the Mexican-American War. This is because Mexico considered this area part of its territory. They fought from 1846 to 1848, with the US winning the territories of California and New Mexico at the end.
The Compromise of 1850 aimed to resolve conflict over which states entered as slave states versus free. The largest gain to the South from this compromise was the passage of the Fugitive Slave Act, which federally required that all runaway slaves be returned to their masters. Many in the North were outraged because of the Fugitive Slave Act. Slave catchers kidnapped and sold some northern freeman to the South because so little documentation was required to claim someone as a fugitive slave.
The Free Soil Party opposed the expansion of slavery in the West in 1848. This party consisted of the former Whig and Democratic Party members, who opposed slavery.
Quakers and others opposed slavery on ethical grounds.
In 1854, Congress passed the Kansas-Nebraska Act, which allowed popular sovereignty over slavery. This meant that settlers could decide whether slavery was legal within their territories’ borders. Many in the North were angered by this act, since they felt that the Missouri Compromise of 1820, which had prohibited slavery North of the 36°30’ line, was binding. Southern plantation owners were pleased by this act though. Violence ensued in Kansas between anti-slavery and pro-slavery advocates, leading to the name Bleeding Kansas, and at one time Kansas even had two legislatures.
Three years later, the Supreme Court made its infamous Dred Scott v. Sanford decision. One slave, Dred Scott attempted to sue his master for his freedom, since his master had moved him from a slave to a free State. The Supreme Court ruled that Blacks were not citizens and therefore they had no legal protections or the right to sue in court. Slaves were now considered property. This increased the demand for slaves, since people could legally purchase slaves in the South and then transfer them to northern states were slaves had no legal rights.
At the Constitutional Convention in 1789, the drafters of the Constitution declared that export tariffs were unconstitutional. They said that a tariff on exports disproportionately favors non-exporting states over exporting ones.
When New Orleans became a main port in Louisiana, the cost to ship cotton internationally fell. The invention of the steamboat, by Robert Fulton, lowered the cost to transport cotton upstream to New England. Transportation upstream was costly before steamboats came along, and most people used horses to transport goods.
Eli Whitney's invention of the cotton gin in 1793 greatly increased the productivity of each slave. With the gin, two workers could process nearly 50 pounds of short-staple cotton per day compared to 1 pound per worker without the gin. This is about a 25-fold increase in productivity. In competitive labor markets, a firm's demand for labor depends on the marginal revenue product of labor. This measures the value of output an additional worker produces, which the firm may sell, and depends on the price of the output in the productivity of Labor.
The South, known as King Cotton, produced approximately 2/3 of the world's cotton, and around 80% of the British market, in 1840. As a result, the cotton gin flooded the market for cotton, putting downward pressure on its price.
When two inputs of production are used together, economists call them complements in production. For complements in production, when the price of 1 input falls, the demand for the other input rises.
Larger plantations enjoyed lower costs of producing cotton through economies of scale. This means that the output per slave significantly increased the larger the plantation became.
Plantations with more slaves could better organize their slaves into production units called gangs, and owners carefully assigned slaves to specific tasks.
A monopsony is a monopoly buyer of an input and chooses what amount to pay for that input. In the market for labor, a perfectly price discriminating monopsony pays each worker his or her reservation wage the least each worker is willing to work for. Slave owners could perfectly price discriminate by paying slaves only for their costs of clothing, food and shelter.
Some abolitionists supported the Underground Railroad-a series of networks and safe houses that slaves used to escape bondage. Those who led the slaves were known as conductors, and slaves traveled 10 to 20 miles each night. The stations had caves, churches, and even secret rooms built within the houses. Harriet Tubman was an escape slave, who helped over 70 other slaves escape through the Underground Railroad. She acted as a spy for the Union during the war and struggled for woman’s suffrage after the Civil War. The Reverse Underground Railroad mitigated some gains of the Underground Railroad; this railroad refers to slave catchers who sometimes kidnapped freeman, women and children and sold them back into slavery in the South.
Classical economists had believed for many years that markets regulated themselves and efficiently allocated resources.
Free the Slaves is an international non-governmental organization and lobby group formed in 2001 that fights slavery today.
**All credit goes to the textbook, “Introduction to Economic History of the United States”**