Praxeology: The causes of the depression of 1784 in the American colonies

 What were the causes of the post‑Revolutionary War slump of the 1780s? The Treaty of Paris ended the war in 1783, and much of the United States experienced a severe adjustment crisis roughly from 1784 to 1787.

Praxeological restatement

• Actors: Individuals (farmers, merchants, creditors, debtors, legislators) sought to remove felt uneasiness by using monetary and legal means to attain ends such as solvency, tax payment, or commercial gain.
• Context: A wartime, inflation-distorted monetary order shifted abruptly toward peacetime exchange and debt settlement under scarcity, time, and uncertainty.
• Means: Media of exchange (specie, paper notes), credit contracts, tax laws, tender and stay laws, and trade relationships.

Relevant praxeological categories

• Monetary calculation and indirect exchange; changes in the quantity and distribution of money.
• Intertemporal choice, credit, and the coordination of production over time.
• Costs as foregone alternatives; debt contracts fixed in nominal terms.
• Uncertainty and the role of legal rules in facilitating or impeding market clearing.
• Methodological individualism: all “state” actions occur through individuals enacting policies.

Deductive implications and their application to the 1780s

1. Wartime inflation → postwar liquidation is inevitable.

   • The Revolution was financed by large emissions of paper (Continental currency and various state notes), which necessarily distorted relative prices and misled actors about real scarcities.
   • From the axiom of action and the role of money in calculation, it follows that when inflation ceases and paper is retired or repudiated, earlier price signals are revealed as illusory; entrepreneurial plans made under distorted signals must be revised. Losses, bankruptcies, and idle factors are the necessary form of this re‑coordination.

2. Sudden increase in the demand for specie (taxes and debt settlements) tightens money and raises the purchasing power of money.

   • States sought to service war debts with high, often specie‑payable taxes. Private creditors also demanded specie repayment.
   • Praxeologically, a higher demand for money (and/or a reduced money stock) implies higher money’s marginal utility and thus lower nominal prices and wages. With nominal debts fixed, this raises real debt burdens and forces asset liquidations, which are necessary consequences of the contract structure given the monetary change.

3. International specie outflows reflect underlying price‑money relations and induce further domestic adjustment.

   • Americans eagerly imported British goods postwar; combined with limited export markets, specie flowed out to settle balances.
   • Praxeologically, an external drain that shrinks the domestic money stock does not “cause depression” per se; it compels a domestic price‑wage adjustment. Where legal or social rigidities impede downward adjustments, unemployment and bankruptcies necessarily appear during the transition.

4. Legal interventions that impair contracts, prices, and calculation exacerbate discoordination.

   • Many states oscillated between hard‑money tax demands and debtor relief via paper emissions, legal‑tender/stay laws, or court closures (e.g., Rhode Island’s paper‑money regime, various stay laws; Massachusetts’s stricter specie regime that helped trigger Shays’ Rebellion).
   • From praxeology, legal‑tender coercion and impediments to contract enforcement distort exchange ratios and increase uncertainty, hampering market clearing and prolonging adjustment.

5. Banking/financial reorientation tightened credit.

   • The shift from emergency finance to attempts at specie discipline (e.g., Bank of North America operations, retrenchment of emissions) necessarily contracted nominal spending relative to wartime peaks.
   • Given prior inflationary malinvestment, praxeology implies the liquidation phase must reallocate resources toward lines sustainable under voluntary saving, not forced money creation.

Thymological/historical particulars (illustrative, not praxeological)

• Hyperinflation and collapse of the Continental (“not worth a Continental”) severely redistributed wealth and credibility of paper.
• British mercantile restrictions reduced access to West Indies markets, compressing export opportunities and compounding the specie squeeze.
• States’ divergent policies created cross‑state frictions; Massachusetts’s heavy specie taxes and aggressive debt collection fed unrest culminating in Shays’ Rebellion (1786–87).
• Rhode Island’s 1786 paper‑money and tender laws provoked commercial boycott and litigation, illustrating the calculational chaos from coercive money.

Praxeological conclusion

• Necessarily, an inflationary wartime monetary regime followed by curtailed emissions and heightened specie demand yields a painful but unavoidable readjustment: falling nominal prices/wages, elevated real debt burdens, bankruptcies, and idle resources during reallocation.
• Attempts to “paper over” the adjustment via legal‑tender laws, stays, or new emissions cannot avoid real scarcities; they only worsen calculational uncertainty and delay re‑coordination.
• The 1780s downturn is thus best understood as the liquidation of war‑induced distortions under a contracting money environment and rigid nominal obligations, compounded by legal impediments to market clearing and by reduced export avenues.

Sources

• Ludwig von Mises, Human Action (1949/1966), esp. Part One–Three on the logic of money, calculation, and intervention.
• Ludwig von Mises, Theory and History (1957), on the distinction between praxeology and historical interpretation.
• Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (esp. chapters on colonial and Revolutionary finance and the 1780s).
• Murray N. Rothbard, The Mystery of Banking (1983), on inflation, credit expansion, and necessary readjustments.
• E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776–1790 (1961), on war finance, taxation, and debt in the 1780s.
• Forrest McDonald, We the People: The Economic Origins of the Constitution (1958), on the fiscal-monetary strains of the Confederation period.
• Standard narratives of Shays’ Rebellion and postwar trade restrictions in early U.S. economic histories (e.g., discussions in Douglass C. North, The Economic Growth of the United States, 1790–1860, for broad context).