The discovery, settlement, and subsequent development of America were an integral part of the over-all expansion and growth of the Western World. It was English and European capital and immigrants who exploited the resources of the New World and European markets that provided a growing demand for colonial tobacco, rice, indigo, shipping, and other exports. The American Revolution severed the political ties with Britain; it also cut off the new states from their favored position within the orbit of the British Empire and subjected them to the navigation laws and other policies designed to implement British commerce at the expense of competitors. In consequence, American exports and shipping suffered during the years of confederation, and, indeed, the value of exports in 1789 had still not reached the level attained during the years immediately prior to the Revolution. Lord Sheffield's views appeared justified when he said:

. . . Great Britain will lose few of the advantages she possessed before these states became independent, and with prudent management she will have as much of their trade as it will be her interest to wish for, without any expense for civil establishment or protection. The States will suffer -- they have lost much by the separation. We shall regret the money that has been squandered, but it is certainly not probable our commerce will be much hurt, and it is certain the means of employing and adding to our seamen will be greatly increased, if we do not throw away the opportunity.

However, in 1790, the United States was on the threshold of an era of expansion which was initially to be induced by our international economic relations and was eventually to result in an economy that would be increasingly independent of this international context for sustained expansion and, indeed, would achieve such significance in the world economy as to make it a critical influence in the growth and stability of much of the rest of the world.

However, before we examine the way in which this came about, it is essential that we sketch out the ways in which the international economy may influence United States development (and vice versa) and outline the analytical framework which we shall employ to examine this interrelationship over more than a century and a half of time.

Interdependence between economies results (1) from the flows of goods and services, (2) from the movement of productive factors (labor, capital, entrepreneurial talent, to which we should add the acquisition of land), and (3) the flows of ideas.

Under conditions where there are no obstacles to the flow of goods and services between countries (i.e., no tariff barriers or import-export quotas) and where transport costs are negligible, the result will be that the principle of comparative advantage will obtain, and countries will devote their resources to producing the goods and services that they can do most efficiently and import those in which they have a relative or absolute disadvantage in producing. It is the unequal distribution of the quantity and quality of productive factors that results in the patterns of international trade. Countries which have relative abundance of a factor such a land, and, therefore, a low cost for such a factor, will produce goods employing a great deal of land. The quality of the factor obviously enters in, since if most of the land is arid desert devoid of mineral wealth, then in reality the country does not have abundant land at all. Moreover, the varying conditions of soil, climate, and geological structure will influence the kinds of goods that will be produced within the broad category of extractive industry which is land-intensive.

The movement of productive factors between countries may, in the case of capital, simply reflect the discounted, expected rate of return on capital (which in turn would be related to its relative scarcity in different countries). However, the movement of people will usually be influenced by other considerations than simply relative real wage levels as between countries. It will certainly be influenced by employment opportunities. Moreover, considerations such as the degree to which peoples are motivated by economic opportunities, religious freedoms, etc., all may play a part. Yet, for our purposes here, relative income and employment opportunities are a good first approximation for the period covered by this discussion. While the same conditions influence the movement of entrepreneurial talent, the acquisition of land is primarily governed by political and military considerations, and we may consider it here as exogenous to our framework.

The significance of the free flow of ideas is that changes in technology become freely available to all countries. This was particularly important in United States growth since we were followers in the process of industrialization and in the far more fundamental beginnings of scientific development which underlay the rapid technological change of the nineteenth century.

When we move from this first approximation, which assumes no international barriers to these flows and complete mobility of goods, services, productive factors, and ideas, to the actual world of the nineteenth and twentieth centuries, we of course find that government barriers, transport costs, and many noneconomic considerations in fact modified the purely economic pattern that we should expect. However, for a large part of the nineteenth century something roughly approximating these conditions did exist, and the changes that resulted from these frictions and artificial barriers were only minor modifications of the underlying pattern.

Therefore, clearly the logical way to examine United States international economic relations during this century and a half is to look at the evolving structure of the world economy with the United States as an integral part during this period. The resulting international patterns of trade and factor movements will then become intelligible as we modify our conditions by whatever friction and barriers developed, and it should then be possible to appraise the significance of the international economy for the development of the United States. . .