Anachronism and relevance are in tension. Historians (often) rail against the former and (often) pine for the latter. They can easily manage a bit of relevance by intervening in today’s political and economic debates and offering ‘lessons’ from the past — but at high risk of anachronism. That’s certainly how I view Yale historian Steve Pincus’s intervention in The New York Review of Books, “1776: The Revolt against Austerity“. (Edit: Steve Pincus has replied in the comments section!)
The main thrust of the article is to rephrase a more or less conventional account of the American Revolution in terms of the contemporary language of ‘austerity’ and ‘stimulus’. The American colonies revolted against Britain in the face of tax impositions, constraints on commerce, and restrictions on frontier expansion. I do not dispute the substance of that narrative, but I do object to the uses of the words ‘austerity’ and ‘stimulus’ in that context.
Is my objection merely semantic ? I think not. Pincus rides roughshod over pretty basic distinctions crucial to contemporary debates about the government management of business cycles. He subtracts from, not adds to, popular economic knowledge.
The classic Keynesian prescription is that the state should add to aggregate demand by running large fiscal deficits when there is insufficient demand in the economy, e.g., a recession. Whether the state should actually be doing that has been passionately debated since… for ever but especially since 2008 in both Europe and the United States. Austerity in this context has meant doing the opposite: even though revenue naturally falls as a result of the recession, it is argued, the government should eliminate the deficit all the same.
In other words, ‘stimulus’ is not any kind of government spending at any time and ‘austerity’ is not any kind of fiscal retrenchment at any time. It is certainly not ‘stimulus’ in today’s economic parlance if the government builds roads, canals, and ports while also balancing the budget. It would do rhetorical violence to Keynesian logic to call that stimulus.
Yet the conflation of the demand-side management of business cycles and the supply-side development of the economy is what Pincus does throughout the article, especially near the end: “America’s founding document called for an American state that would promote economic growth…” And below he goes full throttle, giving the impression that European governments accumulated large debts for what we today might call ‘development’ spending or investment :
The controversy over austerity in the British Empire had a long history. Throughout the seventeenth and eighteenth centuries, European governments borrowed huge sums of money to finance their various state-building projects, with Britain setting the pace. These governments faced huge debts with uncertain means of repayment. Until George III’s accession to the throne in 1760, the British government had supported the economic development of the colonies, spending generously on infrastructure and subsidizing the immigration of many politically and religiously persecuted groups to North America. As recently as the 1730s the British state had subsidized the peopling of the new province of Georgia with immigrants from the Scottish Highlands and all across Europe. William Pitt continued these stimulus policies during his joint ministry with the duke of Newcastle in the late 1750s. Pitt, who believed that British imperial prosperity was intimately related to demographic and economic growth in America, refused to tax the colonies during the enormously expensive Seven Years War (also known as the French and Indian War) that began in the mid-1750s. Along with Newcastle, he drew up plans to populate newly conquered territories from Canada to Cuba, and supported bounties that would help the colonies develop new products for export to American and European markets.
But, of course, almost all of these debts were accumulated as costs of war. From John Brewer, The Sinews of Power: War, Money, and the English State, 1688-1783, pg 94 :
As can be seen in the chart, wars were followed by peace-time reduction or stabilisation of the national debt. I’m not disputing that the British state spent on ‘investment’. I’m merely saying the national debt that so exercised 18th century British statesmen in peace time had been the result of war finance.
Another issue which Pincus papers over is timing. Keynesians typically argue austerity in times of slump or weak demand feeds a vicious cycle: as you eliminate the deficit (reduce demand even more), the economy worsens, and revenue falls even more, which prompts more calls for austerity, etc. I’m not saying anything special or insightful here. That has been the logic used against the German insistence on austerity for Greece since the financial crisis began.
Was the economy weak in 1763 ? I suppose I could cite reconstructed GDP estimates, but like Pincus I will just quote from Adam Smith, The Wealth of Nations, Book V, Chapter 3:
At least according to Smith, the British economy was doing pretty well at the conclusion of the Seven Years’ War. The fact that the government after 1763 tried to make the colonies shoulder the burden of war expenses may have incited them to revolt, but I don’t think that can really be called ‘austerity’ as we mean it today.
I also want to comment on several specific statements made by Pincus:
What alternative strategy did the authors of the Declaration propose? Today, we tend to regard the practice of using government spending to stimulate economic growth as an invention of John Maynard Keynes in the 1930s. But already in the eighteenth century, self-styled Patriots, followers of Pitt on both sides of the Atlantic, argued that what the British Empire needed if it was to recover from the fiscal crisis was not austerity but an economic stimulus. In the midst of the crisis one journalist wrote that Pitt and the Patriots believed that the burgeoning debt could be reduced by increasing “the national stock,” or Gross National Product, whereas Prime Minister Grenville believed “that an hundred and forty millions of debt is to be paid by saving of pence and farthings.”
I think the assertion regarding Pitt and Grenville is historically inaccurate. Here is the full quote from the journalist cited by Pincus :
The sinking fund was an account to stash surpluses in during peace time so that the government might draw upon them during wars and incur less debt. This was a fairly big issue in 18th century financial politics. Pitt (the elder) wanted current revenue in peace time to contribute to the sinking fund, whereas Grenville preferred to deposit savings from budget cuts. Either measure would have reduced the total amount of consumption spending in the economy.
In other words, Pitt and Grenville were just debating different forms of what Pincus would describe as ‘austerity’ !
George III’s ministers were determined to end what they perceived as economic redistribution to the colonies at the expense of wealthy English landowners and the government itself.
Actually, in the mid to late 18th century, the most important source of tax for the British exchequer was customs and excise tax. From Floud & Johnson (2004), page 218:
So the 18th century wars partly waged on behalf of the colonies had not been paid mostly by the great landowners of Britain.
[the American] founders blamed George III and his government not for taxing too much but for doing too little to stimulate consumer demand.
Really ? That does not seem true even by the facts Pincus himself presents in the article:
Instead of subsidizing immigrants, George III’s Prime Minister George Grenville announced the Proclamation Line of 1763, designed to limit the demographic expansion of the North American colonies. Instead of encouraging the colonies to trade with Spanish America, the ministry instructed the Royal Navy to prohibit any intercolonial trade. Rather than lowering customs duties in order to encourage commercial activity, the ministry passed the 1763 Hovering Act, which made it easier to enforce existing customs regulations. Instead of allowing the colonies to bet on future growth by printing paper money, Grenville passed the Currency Act of 1764, which forbade the colonies to emit any new currency. Finally, in 1765, Grenville ushered the American Stamp Act through the House of Commons, a measure that was designed in part to restrict the colonial land market.
Almost everything mentioned above refer to tax, duties, restrictions on commerce, acquisition of new land, etc., all of which would have been understood in the 18th century as… tax and restrictions on commerce and property. Pincus certainly shows no evidence that any of those would have been regarded in Keynesian terms.
The Currency Act of 1764, however, could definitely be called a tight money policy for the colonies, although I doubt (but don’t know for sure) if anyone thought about it in those terms. The Act was nonetheless the culmination of a long history of attempts to suppress payments to British merchants in debauched colonial paper money. It was not something new to the Grenville ministry and predates the war. From Green & Jellison :
Finally, this whole business of drawing ‘lessons’ from history must be done with more care. Are the fiscal capacities of mid-18th century European states even comparable with the taxing and debt-carrying capacities of modern industrial economies ? Is there really a lesson in 1763-76 to teach the present ?
Today, industrial economies routinely collect 30-50% of GDP in tax revenue and service quite large national debts, with Japan exceeding 200% of GDP. Yet few industrial economies face significant constraints on further borrowing.
Britain in the 18th century collected up to 20% of GDP in tax during war time, but that was considered an extraordinary expedient. No one knows for sure, but it’s difficult to believe what was still a predominantly agrarian economy could even maintain such a rate in peace, especially via tax on land. There’s a good reason for why early modern states relied so much on customs and excises.
Although they are contested, there are plenty of good arguments that austerity is both unnecessary and counterproductive in today’s environment. But none of that implies that was also true in the 18th century. If Britain was alarmed by the size of the national debt in 1763, it was not necessarily unjustified — even if superficially similar worries today might be. After all a massive proportion of British tax revenue simply went to pay interest. Again from Brewer:
Compare with the current USA, where the interest on the national debt is about 7% of the central government budget.
Pincus says Adam Smith supplied “robust theoretical support on all of these issues”, but Smith certainly worried about the capacity of the state to take on too much debt. At the end of the previously cited passage from The Wealth of Nations Book V, Chapter 3, he concluded:
I suppose the politics of business cycle management inevitably gets mixed up with the larger left-right dispute about how much the state should be involved in the economy at all. But that doesn’t make Pincus’s article a constructive use of history to inform the present. His parallels are too simplistic. His rhetoric effaces the distinctions important to the austerity debate. By mixing up arguments about austerity with other issues, Pincus throws in about eight babies into the bathwater — and harms the public understanding of Keynesianism.