How did mercantilism contribute to the American revolution?

Answer 1

Mercantilism is a theory in political economy which argues that a nation should strive to attain a favorable balance of trade so that the country will accumulate gold and silver. This, it was argued, made the country wealthier and safer.

The principal reason for this belief was the perceived need of the government to have precious metals to fund wars. The heyday of mercantilism was the middle of the 18th Century, after Great Britain had created Bank of England as an instrument for war funding. Under English banking law (and American law by inheritance), banks are allowed to employ "fractional reserve" -- an embezzlement procedure by which banks legally kite checking deposits and, by that practice, create money from thin air. In those days, checks were uncommon, but Bank of England duplicated the procedure by issuing bank notes -- currency similar to a federal reserve note -- and getting Parliament to declare it legal tender. Today, such notes are issued without gold backing, but a private bank could not stay in business in 1750 on that business model. It needed gold reserves to "back" at least a portion of its notes. With gold coming in on a favorable balance of trade, the bank had an increasing supply of actual reserve, allowing it to issue evermore notes. By this, the government bank could stimulate the economy and appear to increase prosperity by creating a banking boom.

The problem with the theory was that it inevitably relied on Britain's trading partners having an unfavorable balance of trade -- the outlying regions (including the colonies) were expected to arrest their own economic growth for the benefit of the mother country. Initially, American colonials accepted the idea that Parliament had the power to regulate "interstate" commerce (trade amongst the empire's members). But, eventually, at least some Americans (Thomas Jefferson among them) came to realize that they were being played for suckers. This induced them to question Parliament's power, the abuse of which was added to American grievances. Jefferson in particular wrote of the inequity of requiring American producers to, e.g., catch the beaver, then send the pelt to England so that an English firm could turn it into a hat. Why, Jefferson wanted to know, could there not be an American hat company in America which would not have to incur the expense of double shipping?

Of course, once Americans started thinking in terms of local control of what was essentially a local economy, there was one less reason for maintaining the closest of ties with England. The general perception that Parliament, if allowed to legislate universally, always would vote to shift costs outside of England while voting to bring all the benefits there was fatal to maintaining the old political ties. Although most Americans still believed that Parliament had the power to legislate over trade, when those abuses were added to the far more inflammatory issue of local taxation, it only aroused colonial outrage over the tax issue all the more. Here was Parliament using its power over trade to impose costs on colonials so it could vote benefits to England, and now it wanted to use systems of direct taxation to accomplish the same end to an even greater degree. This convinced Americans that continuing to support the Crown eventually would strip them of everything they owned and had worked for. At that point, it was time to form a new country.