Thursday, July 4, 2019

How Economic Regulations Almost Killed the American Revolution—Until Free Markets Saved It

Click here to read the original Cautious Optimism Facebook post with comments

4 MIN READ - On this July 4th holiday the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff asks readers to thank economic deregulation for saving the Revolutionary War and securing America’s independence.

Most students of American history are taught that the winter of 1777-78 was the darkest period of the American Revolution; when General George Washington’s army of 12,000 men camped at Valley Forge after retreating from yet another defeat at the Battle of Germantown (just north of Philadelphia).

The Continental Army sojourned in Valley Forge for six months, enduring harsh winter conditions, the constant threat of enemy attacks, and a chronic shortage of food and supplies which in turn created environmental conditions conducive to disease outbreaks such as typhoid, dysentery, influenza, pneumonia, and typhus. After long marches many men literally had no boots or clothes. Blankets were in short supply. Food deliveries were inconsistent.

The General Marquis de Lafayette later recalled in his memoirs that “the unfortunate soldiers were in want of everything; they had neither coats, hats, shirts, nor shoes; their feet and legs froze till they had become almost black, and it was often necessary to amputate them."

George Washington himself wrote to the President of the Continental Congress “we have no less than two thousand eight hundred and ninety-eight men now in camp unfit for duty, because they are barefoot and otherwise naked…. I am now convinced beyond a doubt, that, unless some great and capital change suddenly takes place, this army must inevitably be reduced to one or other of these three things: starve, dissolve, or disperse in order to obtain subsistence in the best manner they can."

In all 1,500 horses died, 1,700-2,000 of Washington’s men succumbed to exposure or disease, and of the surviving men over a third (about 4,000) were unable to fight due to hunger and their weakened condition.

Yet somehow the circumstances reversed themselves in the summer of 1778 and the Continental Army went on to win a string of victories. Why the dire winter, and what caused the sudden turnaround?

Well the less well known story is what caused ration and supply deliveries to be so lacking and inadequate in the first place: government price controls.

In 1775 the Continental Congress authorized the printing of fiat paper Continental notes to finance the war. As is nearly always the case, overissue quickly gave rise to inflation and by the time the Continental Army settled in Valley Forge commodity prices were already six times the prewar average and rising.

Seeing the state of Washington’s army the legislature of Pennsylvania unfortunately decided to aid the revolutionary cause by implementing limited price controls—limited meaning applied only to those commodities needed by the army. It was thought this would ease the burden of high prices and lift any shortfall of food and supplies. 

But as history has consistently demonstrated for four thousand years, the new price ceilings simply reshaped the problem from inflation to something even worse: shortages. Any government-mandated price level set below the previous market-clearing equilibrium stimulates higher demand and, particularly in the case of 1777-78, reduces supply and the predictable result is chronic shortages; just as Richard Nixon's price controls created the gas lines of the 1970's, or price ceilings in the Soviet Union and Venezuela led to empty store shelves.

Farmers and suppliers, themselves dealing with the problem of near-hyperinflation, simply stopped selling their commodities at what they viewed as moneylosing prices. Some even quietly sold their food and supplies to the British who not only paid market prices above the artificial ceiling but also settled in gold coin instead of increasingly worthless Continental notes. 

In February of 1778 the legislature tried authorizing commissioners of every Pennsylvania city “the power to seize, at stated prices, all provisions necessary for the army.” But as is usually the case when governments are authorized to seize food and supplies from the public, even fewer of those goods and supplies are produced and what few are often mysteriously disappear.

The Continental Army was on the cusp of extinction thanks to severe shortages brought about by very economic regulations that were enacted to help it. 

As the late Professor Percy Greaves tells us, “Valley Forge taught George Washington and the Pennsylvania advocates of price control a very costly lesson. They had hoped for plenty at low prices. Instead they got scarcity and indescribable misery.”

Fortunately the delegates of the Second Continental Congress, many of whom were students of economics and readers of Adam Smith and the French physiocrats such as Quesnay, Turgot, and Montesquieu, were more enlightened on the subject of price controls and took counteraction. On June 4, 1778 the Congress overrode Pennsylvania and other likeminded state legislatures with a decree that:

“Whereas… … it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likely productive of very evil consequence… … resolved, that it be recommended to the several states to repeal or suspend all laws or resolutions within the said states respectively limiting, regulating or restraining the Price of any Article, Manufacture, or Commodity.”

Almost immediately the food rations and supplies reappeared and by June 28th the Continental Army, benefiting from Prussian General Baron Friedrich von Steuben’s training, was engaging a larger British force at the Battle of Monmouth in a standoff that officially resulted in a draw, but which demonstrated the revitalized American army could now hold its own against what was previously thought to be a superior enemy.

With France’s entry into the war the rest is history. The revolution’s victory was eventually sealed with General Cornwallis’ surrender at Yorktown three years later.

So on this July 4th let’s all give thanks to deregulation and a pivotal dose of free market capitalism for saving the American Revolution. Had the state regulators maintained their way the Continental Army as well as the new republic would have been handed to King George’s armies on a silver platter. And far from cooking hot dogs and celebrating our independence on July 4th we’d probably be reciting our oaths of loyalty to the Queen and Church of England instead.

To learn more about the Valley Forge price controls crisis read Percy Greaves’ 1952 article at:

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