John Adams, Thomas Jefferson, and the Barbary Pirates: an Illustration of Relevnat Costs for Decision Making

Topics: United States Navy, American Revolutionary War, Federal government of the United States Pages: 7 (2285 words) Published: August 30, 2011
John Adams, Thomas Jefferson, and the Barbary Pirates:

An Illustration of Relevant Costs for Decision-Making

Dennis Caplan

Iowa State University

Most Recent Update: August 7, 2002

John Adams, Thomas Jefferson, and the Barbary Pirates:

An Illustration of Relevant Costs for Decision-Making

ABSTRACT

The concepts of incremental cost, opportunity cost, sunk cost, and cost allocation are identified and discussed in the context of early U.S. foreign policy. The case is derived from an authentic exchange of views between Thomas Jefferson and John Adams on how the United States should protect its merchant shipping against the Barbary Pirates. Both men compare the cost of waging war against the pirates with the cost of paying ransom for captured U.S. seamen and bribes to protect future shipping. Adams quantifies the opportunity cost associated with not taking any action against the pirates. Jefferson articulates an incremental costing argument, on the assumption that the U.S. should build a navy regardless of U.S. policy towards the Barbary States. The case constitutes a brief introduction to management accounting by illustrating different cost concepts, and also lends itself to a discussion of the historical origins of management accounting.

The beginning of wisdom in using accounting for decision-making is a clear understanding that the relevant costs and revenues are those which as between the alternatives being considered are expected to be different in the future. It has taken accountants a long time to grasp this essential point.

(R. H. Parker (1969, 15)

BACKGROUND

The Barbary Pirates
Throughout the 17th and 18th centuries, 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 and cargo, and enslaved or ransomed their crews and passengers. England, France and Spain entered into treaties with the Barbary States, in effect, paying “protection money” for their merchant shipping. These powerful European nations preferred bribery to war, because they perceived an economic benefit from the threat the pirates posed to the merchant shipping of other European nations.

Until the Revolutionary War, merchant ships from the American Colonies were protected by the British Royal Navy and by the treaties between England and the Barbary States. American shipping lost this protection in 1783, and within the next two years three American ships were captured, one by Morocco and two by Algiers. Morocco soon freed the American crew in exchange for a ransom of 5,000 pounds sterling (about $25,000).1 The crews held by the Algerians were captive throughout 1786 and for some time thereafter.

Historical Background
The capture of American ships by the Barbary pirates created an early and important foreign policy crisis for the United States. The U.S. response to the Barbary crisis was strongly influenced by two factors, one military and the other financial. The military consideration was that the U.S. had no navy. The Continental Navy of the Revolutionary War was disbanded in 1784, and the navy was not reestablished until 1798. During the intervening years, the United States had minimal naval power. Disbanding the Continental Navy was primarily a cost-savings measure. However, there were also important non-financial arguments for and against the navy. Some Americans who favored reestablishing close ties with England feared that the presence of a U.S. navy on the high seas would lead to confrontations with the British Navy. Other Americans, including John Adams, viewed a strong navy as the best national defense against foreign threats. Many Americans preferred the prospect of building a navy over an army due to their general distrust of standing armies—the result of their experience with the British occupation in America during the latter part of...
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