The people who came to control the territory of the thirteen colonies that eventually became the founding states of the United States built themselves homes and forts like those in Europe. Their social, political, and economic systems were copied from those in Europe. They used European tools and utensils, the great majority of which were initially imported from Europe. They dressed like Europeans. Their religions were from the Old World. The governments they created were patterned after those in Europe; ultimately all were based on England’s. In New England they followed the English pattern established in the Feudal period of farmers living in villages. Most of their trade was with England and other European countries, although they also traded with Asia and Africa.

For several decades their survival depended on imported goods, and they were unable to export enough to pay for them.. A century after colonization began in the North American English colonies, they had developed an economy based on the export and imports between themselves and Europe and the Caribbean. New York ultimately became the center of this commerce. In the late colonial period, while the other regions ran trade deficits, the South ran a trade surplus. Unlike the other regions, both the South’s export and import trade was heavily dominated by trade with Great Britain.

The colonial elite: an educated class of men, could and did read Adam Smith’s Wealth of Nations (1776), in which Smith both praised free markets and criticized mercantilism, which was then the type of economic system Western Europe’s colonizing nations employed. Free markets, he argued, caused resources to be allocated to their most efficient uses; mercantilism did not. Mercantilists though trade was like war: for everyone who gained, someone lost. Smith said when trade is voluntary, because people are (generally!) rational and self interested, only transactions that benefit both parties will take place. (In a free market economy, supply and demand determine the price per unit and the number of units produced, and resources move to their most profitable use, which is determined by supply and demand. Competition works to hold down costs and prices and promotes innovation and product improvement.)

The first permanent settlement in the thirteen colonies was in Jamestown, Virginia in 1607. (The Spanish had earlier established a settlement in Florida (St. Augustine), which was not one of the original thirteen states.) At the time of Revolutionary War, tobacco-producing Virginia was the most wealthy and populous of the thirteen colonies, and per capita income in the thirteen colonies possibly exceeded that of the Mother Country, England. On the eve of the revolution, Virginia and Maryland together contained nearly one-third of the colonies’ people and accounted for 60 percent of the colonies’ exports to Britain. (The Revolution was not a conflict between a Third World type colonial dependency and the metropolis. It was a conflict between two nations on a roughly equal level in terms of per capita incomes, with the colonies having about 40 percent of the Mother Country’s population.

Initially, in Virginia and Massachusetts, communist-like systems were installed, however, they were soon abandoned. Single men objected to working to support the families of married men. Married women objected to working to support other women’s children. Because the opportunity to own land was a way to attract immigrants, who were hard to attract, the abandonment of communal economic systems probably increased immigration.

Except for the upper classes, life in the seventeenth century (1600s) was meager and poor, largely because the level of development of material life was low. The great majority of people were farmers. Their diet was so poor that, on the average, they were much smaller than people are today. Most did not live to adulthood. Famine was a constant fear. In 1697, a quarter to a third of the people in Finland died of hunger. Plows, often made of wood, were pulled by oxen. Power on land was supplied by men, animals, and water wheels. At sea it was supplied by the wind. After the early, starving days in the North American colonies, colonists were healthier than their relatives back home, and they had more children; more of whom survived to adulthood.

The cost of land transport was so high that merchandise and farm output was not transported very far on land, and it remained so throughout the colonial period and beyond. Therefore, it is hardly surprising that all the major cities in both Europe and America were port cities. (The thirteen colonies’ largest ports were Philadelphia, New York, Boston, Baltimore, and Charleston.)

England was more developed than the nations on the Continent. Great Britain was the first nation to industrialize, but this did not begin to happen until very late in the colonial period. The first step towards industrialization was when British merchants began to provide merchandise for themselves by riding out from cities and towns to distribute raw wool or flax thread to spinners and weavers who would work the material up on their own spinning wheels and looms in their cottages. This is called the putting out system.

In Christopher Columbus’ day, spices were very valuable because there was no refrigeration, and spices can be used to preserve food. Spices came from the East (Orient). They could either be obtained from Eastern Mediterranean countries or from Asian countries. The monarchs of other European countries sought to break Italians’ grip on the spice trade. Portugal was the first European country to lower the cost of obtaining spices by sailing to the Far East by sailing around Africa. Sailing West and thus avoiding North African pirates or the long trip around Africa was a possible, alternative way to obtain spices. Christopher Columbus found America when he attempted to reach China by sailing West from Spain. (The only way to get to the Far East by sailing West involved sailing around the tip of South America and crossing the Pacific; so sailing West was not an economical way to get there! He didn’t know this.)

In the colonial period, international trade was a very risky venture and required more capital (money) than did any other form of business. To obtain the necessary amount of capital, a new form of organization was developed, the joint-stock company. It was similar to today’s corporations. Colonization was also carried out in this way because it was an expensive, risky venture. Each of thirteen colonies was a privately-financed venture. Ultimately, all of them were abandoned by the companies that founded them, and all of them were turned over to the British government, that is, they became what were called crown colonies.

By the seventeenth century (1600s), the balance of power clearly was shifting to the mercantile elite. (That’s why Smith called the economic system mercantilism!) At the apex of society were companies of merchant adventurers who had organized large ventures for global trade. The rise of substantial international trade led to the emergence of first form of capitalism. This form of capitalism differed from later forms in that it primarily sought profits from trade, rather than from the production of goods and services, as the money made by merchants engaged in the putting out system was dwarfed by what they made in the international trade in spices, metals, and slaves. Another difference was the much greater relative importance of monopolies.

To gain their support, kings granted some people monopolies because this would enable them to make more money. The more money a nation’s exporters earned, the more money the king could obtain by taxation and borrowing. (A nation’s exports would sell at higher prices if there was only one exporter of a given product. If there were several domestic exporters competing to sell to a foreign buyer, price would be forced below what a monopolist could get away with charging.)

According to those advocating mercantilistic policies, a country becomes rich and, therefore, powerful by acquiring gold and silver (money). Trade was one way gold and silver could be acquired, that is, a nation would sell its goods to other nations for gold or silver. Acquiring colonies that had deposits of them was another way to obtain specie. The Spanish hit the jackpot relative to the latter. The English and the Dutch did the best via the former method. The English and Dutch also got some gold and silver by their pirates taking Spanish “treasure” ships carrying specie to Spain from Latin America.

There are two reasons for a nation to trade: to get essential goods it cannot produce for itself (like spices) and to make it possible to specialize, rather than be self sufficient in order to take advantage of the greater collective output of nations if they specialize on the basis of comparative advantage. They should specialize on the basis of comparative advantage so that world production takes place with maximum efficiency (least use of resources). Specialization also means production can be carried out on a larger scale; thus maximum economies of scale can be obtained, that is, unit cost is minimized.

The method of inheritance prevented New England farmers from obtaining the economies of scale Southern farmers obtained. In New England the land was divided among a farmer’s sons. In the South, the oldest son inherited the land. So, average farm size steadily fell in New England. A small farm can be operated by a family. A large farm like a Southern plantation can efficiently employ additional workers. Rather than have farm laborers work on an individual basis as took place after the Civil War in the South when sharecropping was turned to, in the colonial period these workers were usually organized in gangs, which is thought to have been the more productive method.

In order to accumulate gold and silver through trade, a country had to run a trade surplus, that is, sell more (export more) than it bought (import). In order to maximize the size of a trade surplus, a nation had to minimize its imports and maximize its exports. The more self sufficient a country is, the less it has to import from foreign countries. Acquiring colonies can make a country self sufficient if they are able to produce things the mother country cannot. They also provide a market for the mother country’s exports. A nearby nation is unlikely to make a country more self sufficient, because what it is able to produce, and what it is the most efficient producer of, is likely to be pretty much the same things; so the best colonies were nations located far away from the mother country.

Obviously, every country cannot run a trade surplus! This leads to conflict between countries.

Although many of the first settlers in Virginia starved to death, conditions improved pretty rapidly. The Southern colonies fitted in best with England’s mercantilist-determined needs. The Middle colonies fit in with England’s needs less well. Their main cash crops were wheat and barley In Virginia and the other Southern colonies and in the Middle colonies farming could be carried on as it was in England. A variety of crops from England and native crops like corn and tobacco the Indians grew were cultivated. Cash crops in the South were crops that could not be grown in England: tobacco, rice, and indigo

Although the Northern and Middle English colonies in North America produced the same products England did, due to their different climate and geography, the Southern colonies produced things England could not produce. But, although the Southern colonies were more valuable than their peers to the North, they were less valuable to the Mother Country (England) than its sugar-producing colonies in the Caribbean.

The stony and infertile fields of New England imposed a severe economic handicap on the people who settled in this region. Agriculture as the colonists knew it in the old country was impossible in this inhospitable terrain; so they adapted and innovated in order to be able to support themselves. Even before the Revolution, much of New England had to import food. This was not true of the other colonies.

Many New Englanders turned away from farming, at least as a full time occupation. Some became fishermen. This led to the creation of a ship building industry. Others turned to foreign trade, taking American goods abroad and trading them for foreign goods or slaves mostly sold to Southerners and trading goods acquired in one foreign country for goods from another.

The Middle colonies: New York, New Jersey, Pennsylvania, etc. had a good deal of good farm land. New York City and Philadelphia became leading colonial commercial centers. (Some consider Maryland a Southern colony, others consider it a Middle colony.) Iron making began in this region in the 1700s. This region was known as the colonies’ bread basket. It also produced shoes, glass, pottery, and leather and wood goods. Cottage industry in the colonial period set the stage for the later development of factories, which were were concentrated in the North. Pennsylvania ultimately became the chief destination of white emigrants.

While in the Middle and New England colonies colonists handled much of the import and export business, in the South British citizens dominated this business.

An unfavorable balance of trade drained gold from the colonies. Due to this and the fact that, unlike some of Spain’s colonies in Latin America, little gold was found during the Colonna period in the thirteen colonies, gold was in short supply. Therefore, in Virginia tobacco was drafted to serve as a medium of exchange (money). Paper money was issued in some of the colonies and produced inflation (a rise in the price level). Most of the specie circulating in the thirteen colonies was coined in Latin America and was obtained by trading with this region.

England’s government opposed the colonies issuing paper money and manufacturing of products in the colonies that were also produced in England. Besides not desiring colonial manufactured goods competing with the Mother Country’s, in order to maximize its wealth, England wanted to specialize in producing for export higher-value-added manufactured goods to the colonies and importing lower-value-added raw materials from the colonies. (Value-added refers to the greater value of output of a productive process than (hopefully) the inputs necessary to its production. )

Although wheat could be grown in the Southern colonies, its opportunity cost was high. In the coastal area of Virginia where farmers specialized in growing tobacco, growing tobacco was the opportunity cost of growing wheat, that is, if a farmer chose to grow wheat, he could not grow some other crop, and the profit he gave up by not growing tobacco the was the greatest profit he gave up by planting wheat. Because the profit from growing tobacco exceeded the profit he would earn from growing wheat, wheat did not cover its opportunity cost; so, assuming he was a profit maximizer, he should plant tobacco.

World output will be higher if each country determines what products to specialize in producing on the basis of where their comparative advantage lies. Virginia’s comparative advantage lay in growing tobacco. In coastal New England its comparative advantage lay in fishing. (If in that day it had been possible to produce tobacco there, far more resources would have been required (greenhouses, etc.) than in Virginia.)

Even if one colony could have produced everything using fewer resources than another could (It had an absolute advantage over the other colony.), it would still be advantageous for each of them to specialize in what they had a comparative advantage in and trade for what they did not produce. So, specialization requires trade. Trade can be conducted either by barter or with money. To make money payments, one must sell some of his or her output for cash.

A cash crop is one grown to be sold, rather than be consumed by the farmer and his family. Tobacco was a cash crop in Virginia. In South Carolina rice was. Cash crops are grown because cash is needed to buy things the farmer cannot provide for himself .(The great majority of the colonists were farmers.) Cash was needed to pay for essential items that had to be imported. Most crops were shipped to England; in part because, in conformance with the principles of mercantilism, England restricted who the colonists could trade with.. Tariffs were used to restrict imports, and subsidies were used to encourage exports.

Mercantilist policy was to sell exports for cash, rather than to barter them because this is, if the monetary system is a good one, a more profitable way to conduct trade. Because everybody would accept gold or silver for whatever it is that a nation imported, but everybody will not accept other commodities a nation could earn through barter, at least not unless it agreed to offer to pay more, specie served as money. Gold and silver are called commodity monies because, unlike paper money, they have value as commodities. (As paper, paper money had very little value!)

Paper money issued in the colonies often very quickly depreciated. This was due to over issue, which caused the prices of goods when bought with this kind of money to rise rapidly; thus reducing the purchasing power of this money. This caused the exchange rate between this money and commodity money to fall (depreciate).Therefore, people choose to spend the paper money and hold onto commodity money. Thus, as Gresham Law’s forecasts, in the colonies bad money (paper money) drove good money (commodity money) out of circulation.

The importation into Europe of gold and silver by Spain assured that the price level in Europe would not fall. (It actually rose.) The price level falling can be very harmful, as producers have to buy their inputs before they have output to sell. If the price level falls, they may not be able to sell the output for enough to cover the cost of inputs and go bankrupt. (On the other hand, an increase in the money supply can cause a harmful level of inflation.) Because the money supply times the velocity of money equals the average price per transaction times the number of transactions and velocity could not be speeded up much, without American gold Europe might have had output rising much faster than the money supply did; thus the price level could have fallen–significantly.

Labor–particularly skilled labor– was in short supply in the thirteen colonies throughout the colonial period and long afterwards. Skilled labor was in such short supply that the wage level for skilled labor was higher than in Europe. Because labor was in such short supply, indentured servants and slaves were resorted to. Labor was in short supply because of the high ratio of natural resources to population.

Most trade was conducted by water. Roads were inferior to the miserable ones in England. Because they were so poor, the cost of transporting goods by them was high. Therefore, farmers living very far from a river or a port were subsistence farmers, that is, they did not produce for the market.

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The settlers created a bustling economy based on communities of independent farm families in New England and the mid-Atlantic colonies and plantations owned by wealthy planters and worked by English indentured servants and African slaves in the Southern colonies.

It is estimated that 1.5 million blacks were transported from Africa to England’s American colonies, over 80 percent of whom were shipped to the West Indies. Planters found that for only a somewhat higher initial cost, they could purchase a slave rather than the services for a few years of an indentured servants services. Also, a lower standard of living could be imposed on a slave. Most slaves were purchased from traders in Africa. Middlemen in Africa gathered the slaves in the interior, delivered them to the coast, and distributed the goods they received in exchange in the interior. Apparently about one-half the slaves were prisoners of war, and about one-quarter were snatched by raiders. The slave market was very competitive, and their prices were determined by supply and demand.

Indentured servants would eventually be free. Slaves had to buy their freedom. Few were able to. This type of labor was resorted to as a result of a labor shortage in America. Because labor was in short supply, labor saving, rather than natural-resource saving methods of production were favored. This put upward pressure on the wages of free labor. On the other hand, slave labor put downward pressure on the wages of free workers doing the same kind of work.

Give us the context of the question and the issues where you’re stuck. It’s hard to know what you mean by “European settlement” and “traditional economy” without that context.