John Adams, Thomas Jefferson, and the Barbary Pirates: AnIllustration of Relevant Costs for Decision Making
Dennis Caplan, Assistant Professor
Iowa State University.
The concepts of incremental cost, opportunity cost, sunk cost,and cost allocation are identified and discussed in the context ofearly U.S. foreign policy. The case is derived from an authenticexchange of views between Thomas Jefferson and John Adams about howthe United States should protect its merchant shipping against theBarbary pirates. Both men compare the cost of waging war againstthe Barbary States with the cost of paying ransom for captured U.S.seamen and bribes to protect future shipping. Adams quantifies theopportunity cost associated with not taking any action. Jeffersonarticulates an incremental costing argument, on the assumption thatthe U.S. should build a navy regardless of U.S. policy toward theBarbary States. The case constitutes a brief introduction tomanagement accounting by illustrating various cost concepts. Thecase lends itself to a discussion of how cost information can bechosen to support a particular course of action, and it can alsoprompt a discussion of the historical origins of managementaccounting.
The Barbary Pirates Throughout the seventeenth and eighteenthcenturies, the North African Barbary States of Morocco, Algiers,Tunis, and Tripoli engaged in piracy of European merchant shipping.The Barbary pirates routinely captured and confiscated ships andcargo, and enslaved or ransomed their crews and passengers.England, France, and Spain entered into treaties with the BarbaryStates, in effect, paying ìprotection moneyî for their merchantshipping. These powerful European nations preferred bribery to war,in part because they perceived an economic benefit from the threatthe pirates posed to the merchant shipping of other Europeannations. John Adams, Thomas Jefferson, and the Barbary Pirates: AnIllustration 267 Issues in Accounting Education, August 2003 Untilthe Revolutionary War, merchant ships from the American Colonieswere protected by the British Navy and by treaties between Englandand the Barbary States. American shipping lost this protectionafter the war. Within three years of the Treaty of Paris, whichformally ended the war in 1783, three American ships were captured,one by Morocco and two by Algiers. Morocco soon freed the Americancrew in exchange for a ransom of 5,000 pounds sterling (about$25,000).1 The crews held by the Algerians were captive throughout1786 and for some time thereafter. See Exhibit 1. HistoricalBackground The capture of American ships by the Barbary piratescreated an early and important foreign policy crisis for the UnitedStates. The U.S. response to the Barbary crisis was stronglyinfluenced by two factors: one military and the other financial.The military consideration was that the U.S. had no navy. TheContinental Navy of the Revolutionary War was disbanded in 1784,and the navy was not reestablished until the Navy Act of 1794.During the intervening years, the U.S. had minimal naval power.Disbanding the Continental Navy was primarily a cost-savingsmeasure. However, there were also important nonfinancial argumentsfor and against the navy. Some Americans who favored reestablishingclose ties with England feared that the presence of a U.S. navy onthe high seas would lead to confrontations with the British Navy.Other Americans, including John Adams, viewed a strong navy as thebest national defense against foreign threats. Many Americanspreferred the prospect of building a navy over an army due to theirgeneral distrust of standing armiesóthe result of their experiencewith the British occupation in America during the latter part ofthe Colonial Era. The financial factor that influenced the U.S.response to the Barbary pirates was that any effective responsewould require a significant expense relative to the governmentísavailable funds. The U.S. government found itself in a precariousfinancial condition in the years immediately following theRevolutionary War. The Continental Congress and individual statesborrowed over $40 million to finance the war, including about $6million from France. From 1781 to 1788, the period during which theUnited States operated under the Articles of Confederation, thefederal government did not have the power to tax its citizens, levytariffs, or regulate commerce. The cost of operating the governmentduring this time was about $500,000 annually, not including fundingthe debt (Hicks et al. 1970, 103). Some income was generated by thepost office and from sales of public lands, but the two principalrevenue sources available to the government were requesting supportfrom the states and issuing paper money. State contributions to thefederal government constituted only a small fraction of what wasneeded, and issuing paper money was an inflationary measure thathad already been used extensively during the Revolutionary War. Thefinancial plight of the new nation was sufficiently acute thatduring this period, the government borrowed from foreign sourcesjust to meet the interest obligations on existing foreign debt. Theratification of the Constitution in 1788 greatly enhanced thepowers of the federal government and allowed the new Congress tolevy and collect duties and taxes. However, the ability of the newgovernment to actually enact and enforce revenue-generatingmeasures was untested, and evolved over time. In 1786, during theConfederation period, and again in 1794, during Washingtoníspresidency, popular opposition to taxation led to civil unrest. Thefirst incident, Shaysí Rebellion, arose in Massachusetts when theState Legislature levied taxes to pay off the war debt. The secondincident, the Whiskey Rebellion, occurred in Western Pennsylvaniawhen the federal government imposed an excise tax on distilledliquor. Also, although the federal government had more potentialresources under the Constitution than under the Articles ofConfederation, it soon had more obligations. In 1790, under a planadvanced by Secretary of the Treasury Alexander Hamilton, thefederal government assumed the remaining war debts that were owedby the individual states. However, despite financial tribulationsat both the state and federal levels, economic conditions in theUnited States during this period were generally good. A shortrecession that occurred after the Revolutionary War was followed bya period of economic growth. The strong economy led to increasedfederal revenues, and that fact, combined with the success ofAmerican leaders in keeping the nation out of the growing conflictbetween England and France, enabled the government to becomecurrent on its obligations under the national debt duringJeffersonís administration. THE ADAMSñJEFFERSON CORRESPONDENCE In1786, John Adams was the leading U.S. diplomat in London, andThomas Jefferson was the U.S. ambassador to France. A few yearsearlier, in 1784, the Continental Congress had authorized Adams andJefferson to negotiate treaties with the Barbary States (Kitzen1993, 10). Consequently, the responsibility to negotiate therelease of the captured American seamen, and to establish U.S.foreign policy that would protect U.S. shipping in theMediterranean, fell largely to these two men. Against thisbackdrop, Adams sent Jefferson a letter that included the followinganalysis: Adams to Jefferson Grosvenor Square June 6. 1786 Dear Sir... The first Question is, what will it cost us to make Peace withall [of the Barbary States]? Set it if you will at five hundredThousand Pounds Sterling, tho I doubt not it might be done forThree or perhaps for two. The Second Question is, what Damage shallwe suffer, if we do not treat. Compute Six or Eight Per CentInsurance upon all your Exports, and Imports. Compute the totalEXHIBIT 1 Timeline Government under Articles of WashingtonísAdamsís Jeffersonís Madisonís Confederation Presidency PresidencyPresidency Presidency 1781ñ1788 1789ñ1797 1797ñ1801 1801ñ18091809ñ1817 1783: Treaty of Paris 1793: Algiers 1797: U.S.S. 1801:Start of 1812: Jefferson ends the Revolutionary seizes moreConstitution Tripolitan and Adams War ships and launched War resumehostages correspondence 1784ñ1785: Jefferson 1798ñ1801: 1803ñ1804:after 12-year hiatus joins Adams in Europe; 1794: Quasi-WarHeaviest they are authorized Congress with France naval action1812ñ1814: to negotiate with the passes Navy of the war War of 1812Barbary States; Morocco Act and Algiers seize three 1805: 1815:Naval merchant ships; 1795ñ1797: Tripoli action against ContinentalNavy Algiers signs signs treaty Algiers disbanded treaty, favorableto hostages U.S. 1786: Morocco signs released treaty John Adams,Thomas Jefferson, and the Barbary Pirates: An Illustration 269Issues in Accounting Education, August 2003 Loss of all theMediterranean and Levant Trade. Compute the Loss of half your Tradeto Portugal and Spain. These computations will amount to more thanhalf a Million sterling a year. The third Question is what will itcost to fight them? I answer, at least half a Million sterling ayear without protecting your Trade, and when you leave off fightingyou must pay as much Money as it would cost you now for Peace. TheInterest of half a Million Sterling is, even at Six Per Cent,Thirty Thousand Guineas a year. For an Annual Interest of 30,000 £st. then and perhaps for 15,000 or 10,000, we can have Peace, whena War would sink us annually ten times as much. (Cappon [1959]1988, 133ñ134) In the last paragraph of the excerpt, Adams statesinterest expense in terms of guineas. A guinea was worth about onepound sterling. Jefferson responded to Adams a few weeks later:Jefferson to Adams Paris July 11. 1786 Dear Sir ... I ask a fleetof 150. guns, the one half of which shall be in constant cruise.This fleet built Ö will cost 450,000 £ sterling. Its annual expenceis 300 £ sterl. a gun, including every thing: this will be 45,000 £sterl. a year. Ö Were we to charge all this to the Algerine war itwould amount to little more than we must pay if we buy peace. Butas it is proper and necessary that we should establish a smallmarine force (even were we to buy a peace from the Algerines,) andas that force laid up in our dockyards would cost us half as muchannually as if kept in order for service, we have a right to saythat only 22,500 £ sterl. per ann. should be charged to theAlgerine war. (Cappon [1959] 1988, 142ñ143) Correspondence betweenAdams and Jefferson tapered off in the early 1790s, when theirpolitical differences became increasingly irreconcilable, andceased altogether shortly after Jefferson defeated Adams in thePresidential election of 1800. However, beginning in 1812, afterboth men had retired from public life, they renewed theirfriendship and began an active correspondence that would continuefor the rest of their lives. Adams and Jefferson both died on July4, 1826, the fiftieth anniversary of the signing of the Declarationof Independence. One of the letters from this latter period isrelevant to the current discussion, because it reveals Jeffersonísattitude toward the navy, and more specifically, his assessment ofthe economic life of a ship: Jefferson to Adams Monticello Nov. 1.1822. Dear Sir ... Yet a navy is a very expensive engine. It isadmitted that in 10. or 12. years a vessel goes to entire decay;or, if kept in repair costs as much as would build a new one. Andthat a nation who could count on 12. or 15. years of peace wouldgain by burning itís navy and building a new one in time. (Cappon[1959] 1988, 584ñ585)
questions:
5- Adams advocates negotiating with the Barbary States, andJefferson argues in favor of fighting them. In comparing Adamsísletter to Jeffersonís 1786 letter, where do these men agree, andwhere do they disagree? How does each man present cost data in away that supports his position? Your analysis should distinguishbetween differences in underlying cost assumptions, and differencesin the types of costs that each man proposes are relevant. Do youconsider either man more ìcorrectî in his analysis?
6. A complete analysis of the alternative courses of action forresponding to the pirates requires a consideration of noneconomicfactors. What noneconomic factors can you identify that you thinkAdams and Jefferson should consider in weighing the pros and consof fighting the pirates?
