ISSUES IN ACCOUNTING EDUCATION

Vol. 18, No. 3

August 2003
pp. 265-273

John Adams, Thomas Jefferson,

and the Barbary Pirates:
An Illustration of Relevant Costs
for Decision Making
Dennis Caplan
ABSTRACT: The concepts of incremental cost, opportunity cost, sunk cost, and cost
allocation are identified and discussed in tlie context of early U.S. foreign policy. The
case is derived from an authentic exchange of views between Thomas Jefferson and
John Aclams about how the United States should protect its merchant shipping against
the Barbary pirates. Both men compare the cost of waging war against the Barbary
States 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. Jefferson articulates an incremental costing argument, on the assumption that
the U.S. should build a navy regardless of U.S. policy toward the Barbary States. The
case constitutes a brief introduction to management accounting by illustrating various
cost concepts. The case lends itself to a discussion of how cost information can be
chosen to support a particular course of action, and it can also prompt a discussion of
the historical origins of management accounting.

Dennis Caplan is an Assistant Professor at Iowa State University.

5 thank Skip Hughes and Sue Ravenscroft foi using this case in their classrooms. I thank participants at a concurrent session
of the 2002 AAA Annual Meeting, and the discussant, Dale Flesher. The manuscript was much improved by suggestions
from two reviewers and the associate editor, Bruce Behn. I thanlc Skip Hughes and Gary Hackharth for sharing their
expertise about naval history, Adam Bormaim and Faith Griffin for research assistance, and Janea Triplett and Laura Hart
for help with the illustration. I acknowledge my former colleagues at Columbia University, especially Nahum Melumad and
Amir Ziv, for providing me considerable latitude with the content and delivery of Columbia's core management accounting

265
266 Caplan

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 seventeenth and eighteenth centuries, the North African Barbary States of
Morocco, Algiers, Tunis, and Tripoli engaged in piracy of Etiropean merchant shipping. The Bar-
bary 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, in part because they perceived an economic benefit from the threat the
pirates posed to the merchant shipping of other European nations.

Issues in Accounting Education, August 2003

John Adams, Thomas Jefferson, and the Barbary Pirates: An Illustration 267

Until the Revolutionary War, merchant ships from the American Colonies were protected by the
British Navy and by treaties between England and the Barbary States. American shipping lost this
protection after the war. Within three years of the Treaty of Paris, which formally ended the v/ar in
1783, 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).' The crews
held by the Algerians were captive throughout 1786 and for some time thereafter. See Exhibit 1.

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 the Navy Act of 1794. During the intervening years, the U.S. had minimal naval
power. Disbanding the Continental Navy was primarily a cost-savings measure. However, there were
also important nonfmancial 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 the Colonial Era.
The financial factor that influenced the U.S. response to the Barbary pirates was that any
effective response would require a significant expense relative to the government's available fimds.
The U.S. government found itself in a precarious fmancial condition in the years immediately
following the Revolutionary War. The Continental Congress and individual states borrowed over
$40 million to finance the war, including about $6 million from France. From 1781 to 1788, the
period during which the United States operated under the Articles of Confederation, the federal
govemment did not have the power to tax its citizens, levy tariffs, or regulate commerce. The cost of
operating the govemment during this time was about $500,000 annually, not including flmding the
debt (Hicks et al. 1970,103). Some income was generated by the post office and from sales of piublic
lands, but the two principal revenue sources available to the govemment were requesting support
from the states and issuing paper money. State contributions to the federal govemment constituted
only a small fraction of what was needed, and issuing paper money was an inflationary measure that
had already been used extensively during the Revolutionary War. The financial plight of the new
nation was sufficiently acute that during this period, the govemment borrowed from foreign sources
just to meet the interest obligations on existing foreign debt.
The ratification of the Constitution in 1788 greatly enhanced the povrers of the federal govem-
ment and ailovred the new Congress to levy and collect duties and taxes. However, the ability of the
new government to actually enact and enforce revenue-generating measures was untested, and evolved
over time. In 1786, during the Confederation period, and again in 1794, during Washington's
presidency, popular opposition to taxation led to civil unrest. The first incident. Shays' Rebellion,
arose in Massachusetts when the State Legislature levied taxes to pay off the war debt. The second
incident, the Whiskey Rebellion, occurred in Westem Pennsylvania when the federal govemment
imposed an excise tax on distilled liquor. Also, although the federal govemment had more potential
resources under the Constitution than under the Articles of Confederation, it soon had more obliga-

' To provide a sense of the value of the dollar at that time: the U.S. Navy Office of Information reports that the cost to
construct the U.S.S. Constitution in 1797 was approximately $300,000, which is equivalent in purchasing power to
approximately S4 million today. Obviously, the Constitution is not comparable to a modem warship; the cost to build a
Ticonderoga class Cruiser is about SI billion.

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268 Caplan

EXHIBIT 1
Timeline

Government under
Articles of Washington's Adams's Jefferson's Madison's
Confederation Presidency Presidency Presidency Presidency
1781-1788 1789-1797 1797-1801 1801-1809 1809-1817
1783: Treaty of Paris 1793: Algiers 1797: U.S.S. 1801: Start of 1812: Jefferson
ends the Revolutionary seizes more Constitution Tripolitan and Adams
War ships and launched Wai- resume
hostages correspondence
1784-1785: Jefferson 1798-1801: 1803-1804: after 12-year hiatus
joins Adams in Europe; 1794: Quasi-War Heaviest
they are authorized Congress with France naval action 1812-1814:
to negotiate with the passes Navy of the war War of 1812
Barbary States; Morocco Act
and Algiers seize three 1805: 1815: Naval
merchant ships; 1795-1797: Tripoli action against
Contiaental Navy Algiers signs signs treaty Algiers
disbanded treaty. favorable to
hostages U.S.
1786: Morocco signs released
treaty

tions. In 1790, under a plan advanced by Secretary of the Treasury Alexander Hamilton, the federal
govemment assumed the remaining war debts that were owed by the individual states.
However, despite financial tribulations at both the state and federal levels, economic condidons
in the United States during this period were generally good. A short recession that occurred after the
Revolutionary War was followed by a period of economic growth. The strong economy led to
increased federal revenues, and that fact, combined with the success of American leaders in keeping
the nation out of the growing conflict between England and France, enabled the govemment to
become current on its obligations under the national debt dudng Jefferson's administration.

THE ADAMS-JEFFERSON CORRESPONDENCE

In 1786, John Adams was the leading U.S. diplomat in London, and Thomas Jefferson was the
U.S. ambassador to France. A few years earlier, in 1784, the Continental Congress had authorized
Adams and Jefferson to negotiate treaties with the Barbary States (Kitzen 1993, 10). Consequently,
the responsibility to negotiate the release of the captured American seamen, and to establish U.S.
foreign policy that would protect U.S. shipping in the Mediterranean, fell largely to these two men.
Against this backdrop, Adams sent Jefferson a letter that included the following analysis:
Adams to Jefferson
Grosvenor Square June 6. 1786
Dear Sir
... The first Question is, what will it cost us to make Peace with all [of the Barbary States]? Set it
if you will at five hundred Thousand Pounds Sterling, tho I doubt not it might be done for Three
or perhaps for two.

The Second Question is, what Damage shall we suffer, if we do not treat.

Compute Six or Eight Per Cent Insurance upon all your Exports, and Imports. Compute the total

Issues in Accounting Education, August 2003

.John Adams, Thomas Jefferson, and the Barbaty Pirates: An Illustration 269

Loss ofall the Mediterranean and Levant Trade.

Compute the Loss of half your Trade to Portugal and Spain.
These computations will amount to more than half a Million sterling a year.
The third Question is what will it cost to fight them? I answer, at least half ei Million sterling a year
without protecting your Trade, and when you leave off fighting you must pay as much Money as it
would cost you now for Peace.
The Interest 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,
when a War would sink us annually ten times as much. (Cappon [1959] 1988, 133-134)
In the last paragraph of the excerpt, Adams states interest expense in terms of guineas. A |;uinea
was worth about one pound sterling. Jefferson responded to Adams a few weeks later:
Jefferson to Adams
Paris July 11. 1786
Dear Sir
... I ask afleetof 150. guns, the one half of which shall be in constant emise. This fleet built ...
will cost 450,000 £ sterling. Its annual expence is 300 £ sterl. a gun, including every thing: this
v/ill be 45,000 £ sterl. a year. ... Were we to charge all this to the Algerine war it would amount to
little more than we must pay if we buy peace. But as it is proper and necessary that we should
establish a small marine force (even were we to buy a peacefromthe Algerines,) and as that force
laid up in our dockyards would cost us half as much annually as if kept in order for service, we
have a right to say that only 22,500 £ sterl. per arm. should be charged to the Algerine war.
(Cappon [1959] 1988, 142-143)
Correspondence between Adams and Jefferson tapered off in the early 1790s, when their politi-
cal differences became increasingly irreconcilable, and ceased altogether shortly after Jefferson
defeated Adams in the Presidential election of 1800. However, beginning in 1812, after both men
had retired from public life, they renewed their friendship and began an acfive correspondence that
would continue for the rest of their lives. Adams and Jefferson both died on July 4,1826, the fiftieth
anniversary of tbe signing of the Declaration of Independence.
One of the letters from this latter period is relevant to the current discussion, because it reveals
Jefferson's attitude toward the navy, and more specifically, his assessment of the economic life of a
ship:
Jefferson to Adams
Monticello Nov. 1. 1822.
Dear Sir
... Yet a navy is a very expensive engine. It is admitted 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. And that a nation who
could count on 12. or 15. years of peace would gain by burning it's navy and building a new one
in time. (Cappon [1959] 1988, 584-585)

CASE QUESTIONS
1. Adams calculates costs imder three altemative policies: (1) negotiate with the Barbary States;
(2) v/age war against the Barbary States; and (3) do nothing. Under the first two scenarios, his
cost calculation represents projected cash outflows for the U.S. govemment. The "do nothing"
scenario, however, includes some "costs" that would require no cash outlay by either the
govemment or its citizens. What is the relevance of this third cost calculation, and what is the

Issues in Accounting Education, August 2003

270 Caplan

relationship of the cost of "doing nothing" to the other two costs calculated by Adams?
2. How does Jefferson derive the amount of 22,500 pounds sterling per annum, and what does he
mean by the statement: "we have a right to say that only 22,500 pounds ... should be charged to
the Algerine War"?
3. Evaluate Jefferson's reasoning in his 1822 letter. Do you agree with his logic? This letter does
not specifically identify the cost of building the fieet, but it does compare the constmction cost
to the cost of maintaining the fieet. If the U.S. had taken Jefferson's advice, and bumed its fieet
in 1822, the cost to build a new one might have differed from the cost of building the original
fieet. What is the relevance of each of these costs in the decision of whether to bum the fieet?
4. Calculate the atmual cost of fighting the pirates, based on the information Jefferson provides,
using the accounting technique of asset capitalization and depreciation. First calculate the
annual depreciation expense of the fieet by capitalizing the cost of construction, and depreciat-
ing this cost over the useful life of the ships. (Ignore the possibility that the pirates might sink
any ships.) Then add to the depreciation expense the annual operating costs.
5. Adams advocates negotiating with the Barbary States, and Jefferson argues in favor of fighting
them. In comparing Adams's letter to Jefferson's 1786 letter, where do these men agree, and
where do they disagree? How does each man present cost data in a way that supports his
position? Your analysis should distinguish between differences in underlying cost assumptions,
and differences in the types of costs that each man proposes are relevant. Do you consider either
man more "correcf in his analysis?
6. A complete analysis of the altemative courses of action for responding to the pirates requires a
consideration of noneconomic factors. What noneconomic factors can you identify that you
think Adams and Jefferson should consider in weighing the pros and cons of fighting the
pirates?

EPILOGUE
The negotiations between the United States and the Barbary States that began in 1784 continued
through the 1790s. At times, tensions between the U.S. and the Barbary States ran high. Additional
U.S. ships and crews were captured by Algiers in the early 1790s. In 1794, Congress authorized the
construction of six ships—^the birth of the United States Navy—in anticipation of fighting the pirates
(Allen [1905] 1965, 48-50). Construction proceeded slowly, but three frigates were completed in
1797, including the U.S.S. Constitution (Old Ironsides) and the U.S.S. Constellation. In the
meantime, negotiations again gained the upper hand. In 1795, Congress approved a treaty with
Algiers that led to the release of the hostages the following year, but that cost the U.S. nearly $1
million.
Diplomatic efforts ultimately failed. U.S. relations with Algiers, Tunis, and Tripoli deteriorated
in the final years of the eighteenth century, when their leaders became increasingly bold in their
demands and blatant in their disregard of diplomatic protocol. In May 1801, President Jefferson
ordered a squadron to sail for the Mediterranean, and by the time the squadron set out, Tripoli had
already declared war against the United States. The first naval engagement occurred in August 1801,
and the campaign known as the Tripolitan War continued tmtil 1805. The command of the U.S. fieet
in the Mediterranean changed hands several times during the course of the war. The most successful
and active period for the U.S. naval forces occurred under the command of Edward Preble, fi'om
September 1803 to September 1804. Preble achieved several daring and notable victories. In 1805,
Tripoli signed a treaty favorable to the U.S. that ended hostilities with the Barbary States until 1815,
when the U.S. launched a short and successful naval campaign against Algiers. The Tripolitan War
played an important role in the early development of the U.S. Navy. It provided impetus for the
constmction of ships such as the U.S.S. Constitution and training and experience for men like

Issues in Accounting Education, August 2003

John Adams, Thomas Jefferson, and the Barbary Pirates: An Illustration 271

Stephen Decatur and Isaac Hull; men and ships that would later distingiiish themselves against the
British in the War of 1812. Also, it was from the Tripolitan War that the words of the Marines' Hymn
"To the Shores of Tripoli'" were derived.

REFERENCES
Allen, G. W. [1905] 1965. Our Navy and the Barbary Corsiars. Reprint, Hamden, CT: Archon Books.
Cappon, L. J., ed. [1959] 1988. The Adams-Jefferson Letters: The Complete Correspondence Between Thomas
Jefferson and Abigail and John Adams. Reprint, Chapel Hill, NC: The University of North Carolina
Press.
Hicks, J. D., G. E. Mowry, and R. E. Burke. 1970. A History of American Democracy: Volume I, to 1877.
Boston, MA: Houghton Mifflin Company.
Kitzen, M. L. S. 1993. Tripoli and the United States at War. Jefferson, NC: McFarland & Company, Inc.,
Publishers.
Parker, R. H, 1969. Management Accounting: An Historical Perspective. New York, NY: Augustas M. Kelley,
Publishers.

CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Overview of Learning Objectives
The case helps introduce a conceptuai framework for management accounting to students who
have already taken courses in financial accounting and microeconomics by prompting a discussion
of the concepts of incremental cost, opportunity cost, and sunk cost, and the relevance of each of
these cost concepts in a decision-making context. The case also introduces the idea of cost alloca-
tion, and prompts a discussion of how depreciation represents the allocation of costs over time. The
case can be used to initiate a discussion of how cost information can be chosen to suppoit a particular
course of action, and a discussion of the historical origins of management accounting.
Impleraientation Guidance
Three faculty have used this case in three programs at two universities. Two faculty have used
the case in undergraduate, upper-division, managerial accounting courses at two large state schools,
and the third used the case in the core accounting course of the M.B.A. program at one of those
schools. The case as currently written has been used in the classroom six times. I used an earlier
version of the case for four years in the core management accounting course of a top-ten graduate
business program, at both the M.B.A. and Executive M.B.A. levels.^- In total, the case has heen used
in the classroom three times at the undergraduate level, approximately 17 times at the M.B.A. level,
and five times at the Executive M.B.A. level.
A!! tliree faculty who have used the case agree that it is most effectively used on the first or
second day of class. In this regard, an important attribute of the case is that it is simple enough for
students to readiiy grasp the numbers without advance preparation. The case can be covered in 45
minates to one hour, which facilitates its use in the first class session. All three faculty agree that an
important attribute of the case is that it is fun.
Typically, I run the case primarily with overhead transparencies, and I do not provide stodents
with extensive handouts.^ I start with a verbal introduction covering the material in the "Background"

The earlier version of the case consisted of the two letters from Jefferson to Adams and the related learning objectives, but
did not include the letter from Adams to Jefferson and the discussion of opportunity co.sts. Also, the background on early
U.S. history and the historical references to management accounting and economics have been expanded.-
Sometimes I distribute copies of the three letters between Adams and Jefferson, and sometimes I also distribute copies of
the case questions. I distribute a copy of each letter and each case question when we begin the discussion applicable to it.
None of the materials are handed out in advance.

Issues in Accounting Education, August 2003

272 Caplan

section of the case. I then put up overhead slides with the letters between Adams and Jefferson, and
pose the case questions applicable to each letter. I go through the three letters chronologically.
Hence, students are working on one case question at a time, and they do not know what questions are
coming next. After discussion of the last question, I provide a verbal conclusion covering the
material in the "Epilogue." This format allows a great deal of flexibility in the way the case is
conducted. If time permits, I end the case with a brief discussion of the history of management
accounting, focusing on the timing of the events in the case relative to the origins of manage-
ment accounting (see the Teaching Notes).
The case serves an introductory role, and all of the cost concepts raised by the case would
typically be discussed in more detail later in the course. Consequently, successful implementation of
the case depends on developing links to material from previous courses in economics and fmanciai
accounting,'* foreshadowing material that will be discussed later in the current course, raising student
awareness of the potential breadth and scope of management accounting issues, and establishing a
precedent for active student participation. In my experience, successful implementation does not
require obtaining closure for the role of each of the cost concepts identified.

Student Feedback
Students in two sections of an undergraduate, managerial accounting elective completed pre-
case and post-case surveys. Students reported their self-assessment of their understanding of the
relevant cost concepts of sunk cost, incremental cost, and opportunity cost. This student feedback
was anonymous.^ Table 1 reports the results of this survey. There were no significant differences
between the responses by the two class sections, so the two sections are combined in Table 1 and in
the discussion that follows.
Students reported statistically significant improvement for each of the three learning objectives
that were included in the survey.^ Although statistically significant, the magnitude of the improve-
ment was not large, ranging from about 0.5 to 0.75 on the 10-point scale. However, the case takes
only about 60 minutes to cover, requires no advance preparation by the students, and also includes
some additional learning objectives that were not surveyed, so the payback for the time invested
seems reasonable.

The task of developing these links is facilitated when students have recently taken those courses, as is often the case in
M.B.A. and Executive M.B.A. programs. In my experience, these links are more difficult to establish with undergraduate
students when some of those students took economies and financial accounting several years earlier.
In order to conduct a paired t-test comparing prc-case and post-case surveys, it was necessary to be able to match pre-case
and post-case surveys by student. This was accomplished by requesting students to indicate a "fictional name" on the pre-
case survey, and to use the same name on the post-case survey.
Responses to all three questions are significant at the 0.01 level using a one-tailed, paired t-test; and significant at the
0.05 level or better using several nonparametric tests, including the Wilcoxon matched-pairs signed-ranks test.

Issues in Accounting Education, August 2003

John Adams, Thomas Jefferson, and the Barbaty Pirates: Jin Illustration TTi

TABLE 1
Pre-Case/Post-Case Survey
(H = 77)

Pre-Case Post-Case
Mean Mean
For each of the topics below, rate your level of
expertise:
1. Your understanding of the concept of sunk 6.81 7.56
cost, and its roie in a decision-making context.
2. Your understanding of the concept of 5,95 6.48
incremental cost, and its role in a decision-
making context,
3. Your understanding of the concept of 7.46 8.01
opportunity cost, and its roie in a decision-
making context.

Responses are based on a 10.-point scaie, with 1 labeled "novice" and 10 labeled "expert."

ConclusioH
Students are generally receptive to the case in part, I believe, because it is a real-world example.
The events were real, the characters are familiar, and the relevant correspondence between Jefferson
and Adams is authentic. The fact that the case is set in a nonbusiness environment seems to appeal
particularly to M.B.A. and Executive M.B.A. students with nonbusiness backgrounds, but less so to
undergraduates. The nonbusiness setting provides an opportunity to discuss how management ac-
counting issues and techniques apply not only in for-proflt businesses, but also in governmental and
public policy settings and in not-for-profit organizations. The case has a certain shock value that also
seems to appeal particularly to M.B.A. students: they do not generally expeet to discuss 18th century
U.S. foreign policy on the first day of class in a course on management accounting.

TEACHING NOTES
Teaching Notes are available through the American Accounting Association's new electronic pub-
lications system at http://aaahq.org/ic/browse.htm. Full members can use ttieir personalized usemames
and passwords for entry into the system where the Teaching Notes can be reviewed and printed.
If you are a mil member of AAA and have any trouble accessing this material please contact the
AAA headquarters office at office@aaahq.org or (941) 921-11 Al.

Issues in Accounting Education, August 2003