The recession of 1762 was the first truly American recession affecting all the colonies. It was a classic type of recession, created by war and inflation, and one that would be repeated throughout the centuries. This economic crisis was caused by the clash of two empires over the assets of the New World.
By the middle of the 18th century, Great Britain was in control of the coastal colonies of America, and France controlled Canada and the western territories of the Mississippi Valley; the Ohio territory was claimed by both countries. The real crisis was over who would control the fur trade and the rich bottom land of the Ohio Valley. The governor of Virginia formed the Ohio Company, headed by a young colonel, George Washington, to explore and lay claim to land in the Ohio Valley. A small, deadly encounter between Washington and his troops and a French force in the Ohio territory would launch a world war in 1753. The resulting Seven Years’ War was fought in America and Europe. The war debt acquired by the colonies and Brittan was staggering. Massachusetts alone ended up owing over £500,000, which represented five times the annual revenues of the colony.
This war drained colonial and British treasuries. To continue to pay for the war, colonial governments created an excess of paper money that was not backed by gold or silver. This fiat currency, paper money printed without being backed by physical commodities that have a value, ended up creating war inflation as too much paper money drove up the price of the goods available for purchase. Inflation during the war was at its highest in commercial Massachusetts, which sold treasury bonds that paid 6 percent interest to raise money to finance the war. Prices for New England commodities, such as molasses, rum, and fish, increased 44 percent from 1755 to 1762. The war would be one of the world’s most costly for a century.
The war initially created an economic boom in the colonies. The colonists generally profited from the war by selling their wares for higher and higher prices, while the colonial governments sunk into deep debt. But the colonial governments’ use of unbacked paper money and deficit spending created an inflationary spiral while the war spending continued. The end of the war in 1762 brought a con-traction in the colonial economy. War spending stopped, and the paper money in circulation began to depreciate. In addition, Great Britain wanted the colonies to pay more for the costs of the war. To accomplish this, Britain imposed more taxes and enforced the earlier Navigation Acts, such as the Molasses Act, more severely. Great Britain’s quest to pay off its war debt by taxing the colonies would become the economic background for the Revolutionary War.
The British colonies themselves imposed heavy real estate taxes to help pay their debt to the king. North Carolina added a liquor tax as well. Several colonies issued paper money and notes, and others used deficit spending by supplying IOUs to Great Britain. Virginia was originally the only colony that refused to increase taxation to pay for the war, preferring to use deficit spending. However, deeply indebted to Great Britain after the war, Virginia levied additional taxes on tobacco planters to pay its share of war debts, creating a depression in which many planters were left bankrupt.
Some Virginia planters, such as George Washington, switched to wheat production, which was free of British rules and fees. However, the demand for grain decreased at the end of the war. In addition, by the end of 1762, there was a major drought in the colonies, which required them to import expensive grain from Europe. The story was similar for South Carolina and its rice planters. And because both of these colonies were dependent on Great Britain to finance their plantations, planters experienced a credit crisis. Great Britain was not anxious to make loans to colonies that could not repay their previous debts. Not surprisingly, these Virginia and South Carolina planters would be supporters of the decision to break away from Great Britain a decade later.
The recession of the 1760s lasted most of the decade. Possibly the worst hit was Massachusetts. Having issued treasury bills redeemable in coin and paying 6 percent interest, the colony had heavy war debts to repay. The payments had to be made in coin—actual gold or silver—which increased the burden on the colonial government. After the war, Massachusetts imposed huge taxes on the population. Real estate taxes in Boston were raised to more than 60 percent.Britain would soon launch a number of new governmental acts, imposing new taxes on the colonies to pay for the war just as the colonies were in the middle of this deep recession. The combination of high taxes and economic recession made this postwar period very painful for New England traders, craftsmen, and shop owners as well as the planters of the southern colonies. This colonial middle class would never fully recover and would be part of the movement supporting independence in 1776.
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