Why Did the United States Have Economic and Other Problems Following the Revolutionary War?

Replacing the Continental with the Dollar helped relieve economic depression.
... Jupiterimages/Goodshoot/Getty Images

The end of the American Revolution brought both triumph and tragedy to the newly formed United States. On the one hand, the nation earned its independence and successfully ratified its Constitution. On the other hand, the Revolution brought severe economic hardship and financial ruin. The war's disruption of trade, currency problems, burdensome public debt and the loss of Britain's economic connection all contributed to a weak U.S. economy in the 1780s.

1 Trade Disruption

While breaking ties with Great Britain gave the United States political freedom, it also earned the country significant economic isolation. Before the Revolution, the American colonies relied on Britain for the vast majority of their economic activity. Britain purchased most American exports, and subsidized Americans with cheap British imports. Furthermore, American merchants had access to the numerous bounties of the British empire, including Caribbean sugar and rum and East Indian tea. When the American Revolution ended, Great Britain retaliated by restricting American access to its colonial resources. With British demand for American goods virtually severed, the U.S. economy fell into a slump. Worse, without the defensive powers of the British Royal Navy, American ships had trouble establishing new trade routes in the Mediterranean or elsewhere where pirates wreaked havoc on merchants.

2 Currency Crises

The newly formed American government also contributed to the economic crisis of the 1780s. During the Revolutionary War, the Continental Congress in Philadelphia needed to purchase supplies for the Continental Army. As such, it issued the first nationwide paper currency, known as the Continental. Unfortunately, the new currency was only backed by the promise that future tax revenues would pay off the currency's value. Because the nation was involved in a war with an uncertain outcome, "future revenues" were purely hypothetical. As such, most Americans viewed the Continental with skepticism. By the 1780s, the Continentals still in circulation were virtually worthless, which led to enormous inflation for everyday products. At the same time that the economy was in a slump, prices were rising, which only complicated the post-Revolution crisis.

3 State Policies

At the same time that the Continental Congress created the Continental to finance its part in the war, individual states were reacting to the policy. In response to hyper inflation, New England states enacted price controls that limited the price at which goods could be sold. This, unfortunately, led farmers and other producers to simply produce less. Farm production in New England rapidly declined, and once price controls were lifted, this led to even more inflation in the price of agricultural goods. Worse, individual farmers often had to take out debt during the price control era to remain financially solvent. The impact of all these problems snowballed and led to an economic slump that lasted as late as 1800. Some estimates suggest that real per-capita income fell by over 20 percent between 1774 and 1800, a drop that rivals only the Great Depression.

4 Social Unrest

A poor economy led to other problems for early America. As is often the case, poor economic fortunes led to social unrest. The most famous example is Shay's Rebellion, a crisis in the 1780s that severely threatened American political stability. Farmers in Western Massachusetts were buried in debt thanks to policies like futile paper money and high post-Revolution taxes. While some states passed "pro-debtor" policies that helped relieve the burden of debt, Massachusetts did not. As such, a man named Daniel Shay led a series of farmers in Western Massachusetts to protest government policies. When this led to a full-scale revolt that included occupying courthouses, Massachusetts Governor Bowdoin led an armed force to squash the rebels.

Kevin Wandrei has written extensively on higher education. His work has been published with Kaplan, Textbooks.com, and Shmoop, Inc., among others. He is currently pursuing a Master of Public Administration at Cornell University.