18th-century understanding of the word "colony?"

I'm going to have to go with opinion here, so I won't be able to source/support my opinion as strongly as I prefer.

There is a major shift in these terms tied to economics.

During the mercantilist era (which I'm going to arbitrarily close at the start of WWI), colonies were possessions of the mother country. Colonies were a mercantilist tool that served two purposes.

1. Extractive - colonies had resources that could be shipped to the mother country at an attractive price.

2. Consumptive - Colonies would purchase mother country goods at an attractive price.

Governmental policy generally forbid the colony from trading with anyone but the mother country, or from trading amongst themselves even if the trade would have been advantageous to all. For example, colonists in Georgia could not trade with colonists in Jamaica - they were forced to trade with England, who then traded with Jamaica. This has interesting implications for smuggling.

Mercantilism was a bankrupt idea, but it persists to this day. In general, around WWII, a more laissez faire system dominated, in which trade is less limited. (there are exceptions to this and they are fascinating, but they are not the point I'm trying to make).

Mercantilism is a zero sum game - every ounce of gold that you hold is an affront to my economy. Modern economics is a positive sum game - we can both win through trade.

In general, colonies participated in the economic life of the empire as subordinate partners, but did not participate in the governance of the empire. Each colonial system had a distinct solution to the status of colonials - few gave them full rights, most gave them no rights. (Check Mike Duncan's Revolutions podcast for examples, or Jack Rakove's lectures)

During the 17th and 18th centuries, the British used the term "colony" mostly in your second sense of the word. That is, more or less empty land populated by "settlers."The "natives" either left, died off, or were assimilated by the settlers (e.g. Pocahontas and Squanto). That's why they were also called provinces.

India was the 18th century exception to the rule, in being your first type of "colony." Most of the other British colonies of this type (e.g in Africa), took place in the 19th century. Note, however, that Spanish conquistadors conquered and ruled the first type of colony in Latin America as early as the late 15th century.

This answer is based on the actual colonies possessed by England and Spain at various times.

According to Samuel Johnson's "A Dictionary of the English Language" (6th Edition, 1785), there were two meanings of the word.

Colony [colonia latin]
1. A body of people drawn from the mother-country to inhabit some distant place.
2. The country planted; a plantation.

These seem to correspond to your second defintion of the word.

In general, English speakers in the 18th Century would have used the second of your two meanings; it's the older one, and derives from Latin colonia, which referred to the Roman (and earlier Greek, and also Phoenician) practice of planting settlements in foreign places. Most of what were counted as "colonies" in the 18th Century were colonies in the "settlement of our people in foreign lands" sense.

What I suspect happened is that as Britain began acquiring other countries' "colonies" by force or by treaty (e.g., Jamaica from the Spanish, Dutch colonies like New Amsterdam, French colonies like Quebec), they were folded into the general concept of "colony" -- and administered by the same parts of the government. E.g., after the French and Indian War, Quebec was now ruled by Britain. Although it was of course a French colony and not a British one, it was still a "colony", and it was in North America along with the other British-founded colonies, and so it became one of the "colonies". Following the loss of the thirteen American colonies, the balance of "overseas realms controlled by Britain" shifted more and more towards "conquered/occupied foreign realms", and so the meaning of "colony" shifted toward the first one in your list. (Helped, perhaps, by the tendency of some British people to go out and settle in some of those places.)