Thomas Allen[Editor’s note: Footnotes in the original are omitted.]
The American Revolutionary War began on May 10, 1775 with the scrimmages at Lexington and Concord. In 1776, the colonies formally declared their independence from Great Britain. The following year the delegates of the several states in Congress proposed the Articles of Confederation. These Articles were ratified and became effective in 1781. The war concluded with the surrender of Cornwallis at Yorktown in October 1781 and the Treaty of Paris in 1783.
Before the colonies had formally declared independence, the Continental Congress began issuing paper money, bills of credit called Continental notes or Continentals. It first issued paper money in 1775. This issue was quickly followed by a second issue. Benjamin Franklin, who had earlier been a strong proponent of governmental issued paper money, urged that the bills on the first issue bear interest. For the second issue, he urged Congress to borrow on interest the bills already issued. Congress rejected both recommendations. However, the third issue did bear interest.
The first issue was for $2 million, i.e., two million Spanish milled dollars, one Continental dollar being equal to one Spanish milled dollar. These bills were to be paid in four successive years beginning in 1779 and ending in 1782. Money to pay these bills was to come from taxes levied on the States in proportion to their populations.
If any State failed to pay its share, the other States would pay it. (Congress pledged redemption of these bills of credit because they would not otherwise circulate.) The pledged redemption was not to redeem the bills in specie. It was to accept them in payment of taxes and then retire them. Thus, these bills became a tax “superimposed upon the previous ‘tax’ burden imposed by paper inflation.” However, because of opposition to taxes, most states did not levy taxes until 1780.
As Congress lacked the power to declare its bills legal tender, they were not legal tender when issued. However, in 1777, it asked the States to make its bills legal tender, and they did.
In 1775, Congress authorized a second issue of bills for $1 million before the bills of the first authorization had been issued. This was quickly followed by a third authorization for $3 million before the end of the year. Thus, $6 million were issued in 1775.
Another issue of $9 million was made in early 1776. Before the colonies had formally declared their independence, Congress had issued 15 million Continental dollars.
The Continental Congress had intended to coin gold and silver and eventually to make its bills of credit redeemable in silver or gold. In 1777, it considered establishing a mint to coin gold and silver. After the war, Congress defined the monetary unit, the “dollar,” as the weight of 375.64 grains of fine silver. This was the amount of silver in a new Spanish dollar.
At the beginning of the war, the total money supply of the United States has been estimated to be about $12 million. Thus, Congress more than doubled the money supply within a year.
By 1779, Congress had issued 242 million Continental dollars. In 1781 the Continental had become worthless. Thus, the Continental died about the same time as independence was won.
Table 1 from Dewey summarizes the issuance of Continentals. (Rothbard differs slightly from Dewey. He gives $135 million being issued in 1779 and a total of $235 million. Carson gives $90 million in 1779. Otherwise, the three agree.)
The Continental had begun depreciating against the standard Spanish milled dollar before the signing of the Declaration of Independence. Table 2 shows the depreciation of the Continental dollar (the old currency after 1780) as compared to the Spanish milled silver dollar.
As speculation is commonly blamed for rising prices, some communities prohibited merchants to speculate. The effect of these laws was to prevent merchants from bringing needed supplies into the community. Some States prohibited anyone from buying more goods than the government judged necessary.
As prices rose, States and communities began fixing prices and wages. Some States made withholding goods required by the army or navy illegal. Some made withholding goods needed by the community illegal and allowed breaking open such stores and selling the goods at statutory prices. As these laws quickly created severe shortages, they were soon repealed.
In June 1778, Congress recommended the repeal of all price fixing laws, and the four States that still had such codes soon repealed them. However, some communities in the North continued to enforce their own price codes.
Inflation always harms wage-earners more than any other class, other than those on fixed income, as wages lag behind prices. When price controls are imposed, wage-earners suffer even more. Price controls force businesses to reduce their work force.
About the deleterious effects of price controls, John Eliot of Boston wrote in 1777, “We are all starving here, since this plaguy addition to the regulating bill. People will not bring in provision, and we cannot procure the common necessaries of life. What we shall do I know not.”
About the effects of inflation, George Washington noted, “a wagon load of money will scarcely purchase a wagon load of provisions.”
About currency depreciation, John Adams remarked, “every man who had money due him at the commencement of this war, has been already taxed three-fourths part of that money [that is, has lost it by way of the depreciation of the currency]. . . . And every man who owed money at the beginning of the war, has put three-fourth parts of it in his pockets as gain. The war, therefore, is immoderately gainful to some, and ruinous to others.”
Most people at the time seem to have little understanding of the cause of rising prices and conversely of depreciating currency. White reports the following account about George Washington to illustrate this point:
December 12, 1778, Washington wrote to Reed, the President of Pennsylvania, commending his zeal “in bringing those murderers of our cause, the monopolizers, forestallers and engrossers, to condign punishment. It is much to be lamented.” he continued, “that each State, long ere this, has not hunted them down as pests to society and the greatest enemies we have to the happiness of America. I would to God that some one of the more atrocious in each State was hung in gibbits upon a gallows five times as high as the one prepared by Haman.” Yet he had written, more than a year earlier (September 28, 1777), to John Parke Custis, directing him to see that the rent of certain land and slaves should be so arranged that the payments should have a relative value to the currency. “I do not mean by this,” he says, “that I am unwilling to receive the paper money. On the contrary I shall with cheerfulness receive payment in anything that has currency at the time of payment, but of equal value then to the intrinsic worth at the time of fixing the rent.” Again (October 10, 1778), only two months before he wrote to Reed about hanging monopolizers, forestallers and engrossers, he wrote to Custis advising him not to accept money for a piece of land he was about to sell, but to take other land in exchange for it, because the money might lose its value.Was Washington ignorant or hypocritical? He wanted to punish merchants harshly for doing what he had instructed Custis to do. As Washington was trying to hedge himself against depreciating currency, so were these merchants whom he wanted to punish.
White continues, “Washington was an honest man. It never occurred to that he was doing with his land and slaves exactly what the others were doing with their provisions and store goods.”
Washington finally did realize the destructiveness of forcing depreciating money on people. In 1779, he wrote Lund Washington, his agent, that:
[H]e would no longer accept continental money on contracts made before the war, unless other people did the same. “The law,” he says, “undoubtedly was well designed. It was intended to stamp a value upon, and to give a free circulation to the paper bills of credit, but it never was nor could have been intended to make a man take a shilling or sixpence in the pound for a just debt, which the debtor is well able to pay, and thereby involve himself in ruin. . . . If sacrificing my whole estate would effect any valuable purpose I would not hesitate one moment in doing it. But my submitting in matters of this kind unless the same is done by others is no more than a drop in the bucket. In fact, it is not serving the public but enriching individuals and countenancing dishonesty, for I am sure no honest man would attempt to pay twenty shillings with one or perhaps half of one. In a word I would rather make a present of the bonds than receive payment for them in so shameful a way.”Currency depreciation led to hostility between people living in town and those living in the country. Country folks accused the town people of extortion because of high prices. They threatened to storm the town and take what they wanted. Town folks accused country people of withholding their produce and proceeded to enact laws against withholding.
A major victim of price fixing and currency depreciation was the Continental Army. Farmers refused to accept the double penalty of selling their crops below market price to the Army and for rapidly depreciating currency. They either sold elsewhere or only raised enough for their families.
As the Continental depreciated, real wages of the soldiers fell. They dropped from $7 per month to 33¢ in purchasing power in spite of raises in pay. This depreciation led to mutinies. Before Washington could march to Yorktown, Robert Morris had to borrow hard money from Rochambeau to pay his soldiers.
By the time Washington marched on Yorktown, the Continental had collapsed. Impressment supplied his army. The quartermaster and commissary departments took what they needed and paid for the supplies with paper “certificates.” These certificates quickly became almost worthless.
In March 1780, Congress sought to replace the Continental with a new currency. It declared 40 old units of money to be worth one new unit. That is, Congress would accept payment in paper in place of silver at the rate of $40 in paper to $1 in silver. However, the natural depreciated value was 60 to 1.
To retire the old bills, Congress levied a tax on the States to be paid in old bills. The old bills were to be destroyed and replaced by new bills. The new bills were not to exceed one-twentieth of the face value of the old bills. “The new bills were to be redeemable in specie in five years, to bear interest at 5 per cent., and to be receivable for taxes.”
At this time, $200 million were estimated outstanding. Thus, Congress canceled 195 million Continentals. Instead of having a debt worth $200 million in species, Congress now had a debt of $5 million in species.
This action temporarily halted the depreciation of the Continental. It even rose in value. However, when the States failed to levy the necessary taxes to complete the conversion, depreciation began again.
A major problem that States had in raising the necessary taxes in Continentals was that the people insisted on paying their taxes with impressment certificates. Both the States and the Continental Army had obtained supplies by impressment and paid for them with these certificates. The certificates were worth even less than the Continental. Thus, States could not collect enough Continentals to send to Congress for retirement.
All Continentals were supposed to be retired by June 1781. However, “only 30 million had been taxed and delivered by the states, and only $600,000 of new bills had been issued and even these had already depreciated to 5 to 1 in species.”
The new currency quickly dropped to 6 to 1 while the old currency fell to 500 to 1. It soon reached par with the old money. By May both had ceased circulating in the North. They lingered on several more months in the remote areas of the South. The Continental finally dropped to 1000 to 1 before ceasing to circulate at all.
As often happens with paper money, counterfeiting was a problem. Both the British and Americans counterfeited bills. Because of counterfeiting, Congress called in entire issues of certain dates and declared them uncurrent after a fixed period. The called issues quickly depreciated against other issues.
When the irredeemable Continental paper money ceased circulating, hard money flooded the markets. It came from family savings and from British and French soldiers and sailors. “It was so plentiful that foreign exchange fell to a discount.”
Apparently, enough gold and silver were in the colonies to fight the war without having to resort to irredeemable paper money. It could have been obtained through borrowing or taxing.
However, not being a constituted government until the war was almost over, Congress had no taxing authority. Besides borrowing and issuing bills of credit, it relied on the States to raise revenue via taxation. The States were reluctant to tax their citizens to support the war — especially when Congress failed to ask for taxation at the beginning of the war when enthusiasm was at its height.
So, instead of relying on taxation and voluntary loans to fund the war, Congress relied mostly on forced loans, bills of credit in the form of Continentals. These forced loans accounted almost 60 percent of Congress’ revenue.
As Dewey notes, because of the politics of the situation, Congress may have had little choice but to resort to funding the war with bills of credit. The New England colonies had returned to their old habit of issuing paper money. At the beginning, the popular (and ignorant) belief was that no one would suffer from the issuance of paper money. However, the more astute debtors saw paper money as away to reduce their debts by paying them in depreciated money.
In May 1781, Congress asked the States to repeal their legal tender laws. Those that had not already repealed them quickly did. The States adopted “scales of deprecation” for the settlement of debt. These scales were notoriously incorrect. The payment of debt often resulted in injustices to the lender or borrower or both. About this injustice, W.G. Sumner wrote:
The courts could not do justice because depreciation introduced a fraud into the very essence of the case, and the agent of the fraud was almost always innocent, so far as his intention was concerned. If, therefore, the court undertook to release the victim of the fraud from all effect of the fraud, the injury was simply thrown back on the perpetrator, who being innocent, suffered as much wrong as the victim would have suffered if nothing had been done.Both Congress and the States rejected the notion that they had to pay their bills at par in species and jettisoned their worthless paper money. E. James Ferguson explained:
Currency and certificates were the “common debt”of the Revolution, most of which at war’s end had been sunk at its depreciated value. Public opinion did not view government contracts as sacred and tended to grade claims against the government according to their real validity. Paper money had the least status; the mode of its redemption was fixed by long usage. . . . In any case, the holder had no exemption from the general misfortune, and he was expected to abide by the ordinary process by which money was redeemed.Every holder of Continentals suffered some lost depending on when and how long he held them. However, the last person holding the paper money suffered total lost since he had no one to whom to pass the bills that he held. The last holders of paper money are mostly the poor, old, widows, and the least sophisticated in monetary matters, i.e., those who can least afford the lost.
Congress did, however, decide to pay its loan certificates at a discounted rate. The North held most of this debt.
In 1790, Congress offered to buy back outstanding Continentals at the rate of $100 in Continentals for $1 in specie. Of the estimated $78 million outstanding, only $6 million according to Dewey
Some outstanding bills were used as wall paper. Others were used to make clothes in jest. Much of the remainder was probably lost or destroyed.
About the Continental, Pelatiah Webster, who was a merchant in Philadelphia during this time, wrote, “We have suffered more from this than from every other cause of calamity; it has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemies.”
Webster also wrote:
The fatal error that the credit and currency of the continental money could be kept up and supported by acts of compulsion entered so deep into the mind Congress and all departments of administration through States that no considerations of justice, religion, or policy, or even experience of its utter inefficiency could eradicate it. It seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common sense and even common safety. This ruinous principle was continued in practice for five successive years, and appeared in all shapes and forms, i.e., in tender acts, in limitations of prices, in awful and threatening declarations, in penal laws with dreadful and ruinous punishments, and in every other way that could be devised, and all executed with a relentless severity, by the highest authorities then in being, viz., by Congress, by assemblies and conventions of the states, by committees of inspection (whose powers in those days were nearly sovereign), and even by military force; and though men of all descriptions stood trembling before this monster of force, without daring to lift a hand against it, during all this period, yet its unrestrained energy ever proved ineffectual to its purposes, but in every instance increased the evils it was designed to remedy, and destroyed the benefits it was intended to promote; at best, its utmost effect was like that of water sprinkled on a blacksmith’s forge, which indeed deadens the flame for a moment, but never fails to increase the heat and force of the internal fire. Many thousand families of full and easy fortune were ruined by these fatal measures, and lie in ruins to this day, without the least benefit to the country, or to the great and noble cause in which we were then engaged.Furthermore, Webster declared about the Continental, “It ceased to pass as currency, but was afterwards bought and sold as an article of speculation, at very uncertain and desultory prices, from five hundred to one thousand to one.”
Thomas Jefferson wrote this about the Continental:
It will be asked how will the two masses of continental & of State money have cost the people of the U.S. 72 millions of dollars, when they are to be redeemed now with about six millions? I answer that the difference, being 66 millions has been lost on the paper bills separately by the successive holders of them. Every one, through whose hands a bill passed, lost on that bill what it lost in value, during the time it was in his hands. This was a real tax on him; & in this way the people of the United States actually contributed those 66 millions of dollars during the war, and by a mode of taxation the most oppressive of all because the most unequal of all.Commenting on the sacrifice of the people, Dewey writes:
As to the actual sacrifice by the people measured in the commodities which they gave for the national paper currency which was issued, no exact statement is possible, but various estimates have been made of the specie value of the total issues: Jefferson placed it at $36,367,000, Hildreth at $70,000,000, Bronson at $53,000,000, and Bullock more recently makes an independent calculation and arrives at estimates varying from $37,800,000 to $41,000,000.White writes:
When the final catastrophe came, some of the wise men of the period exclaimed that the continental money was simply a form of taxation, and that it had been paid and cancelled. Franklin consoled himself with this idea, saying that the bills clothed and fed the army and that they operated as a tax, bearing most heavily on the rich, as was proper, since the rich had the most money. Strange that so great a man could have been so deceived. If the continental money was a tax it did not bear heaviest upon those who had the most, but upon those who kept it longest. Those who had money due them at fixed times and could not hasten the payment were taxed not in proportion to their wealth but in proportion to the time the debts had to run. All who depended upon regular interest payments — and most of the charitable and educational institutions of the day were in this category — were taxed at various rates up to 97½ per cent of their entire income. It is a complete subversion of ideas to call this a tax.White also remarks:
One of the striking phenomena of the Revolution was the great display of luxury. Franklin wrote in 1779: “The extravagant luxury of our country in the midst of all its distresses is to me amazing.” Another writer says: “Every form of wastefulness and extravagance prevailed in town and country, nowhere more than in Philadelphia under the very eyes of Congress, — luxury of dress, luxury of equipage, luxury of the table.”Rothbard summaries some of the support of the Continental:
This is not hard to understand. If a man owed $1,000 gold value and was enabled to pay it with $100, he had $900 disposable for other purposes. As this money had not come by hard knocks he would naturally be somewhat free in spending it. He would give good dinners, drive fast horses and buy fine clothes and jewelry for his family. It was the transfer of property from frugal persons to spendthrifts. While it continued it gave a deceitful appearance of prosperity.
The archconservative Gouverneur Morris originated the idea of using government paper to finance the Revolution; and, far from being ashamed of his creation, he trumpeted to the complaining Washington that paper money was a great engine that would mobilize the nation’s resources for the war. He recognized that the paper would depreciate, but he looked forward to this as a tax; the obvious inequity of the tax’s falling hardest on the lowest-paid and the most exploited group in the country, the soldiery, caused him only fleeting regret. These men would simply have to sacrifice their pay as well as their lives to the national effort. As might be expected from the old paper-money enthusiast, Benjamin Franklin hailed paper as a “wonderful machine” that would “pay itself off by depreciation,” which he persuaded himself would fall equitably on the members of society.The experience of the Continental made such an impression on the people of that era that when the Constitution was written, it forbade both the U.S. government and the States from issuing bills of credit. At least the writers of the Constitution were convinced that they had denied the U.S. government the power to issue paper money when they removed that authorization from the draft constitution. Both those who favored granted the government the power to issue paper money and those who opposed such power were convinced that they had denied the U.S. government the power to issue bills of credits with the adoption of the Constitution.
The U.S. government did not issue paper money until President Lincoln declared war on the Constitution and financed his war with unconstitutional U.S. notes, commonly called greenbacks. Later the U.S. Supreme Court twisted the Constitution to give Congress the authority to issue fiat paper money. In making this ruling, the Court ignored the clear intent of the writers of the Constitution that Congress had no such power. Thus, the U.S. Supreme Court proved that it has a bias in expanding the power of the U.S. government as that increases the power and prestige of the Court.
Later Congress would circumvent this prohibition against issuing bills of credit by creating a semi-independent “privately-owned” central bank, which is a quasi governmental agency. It empowered the central bank, the Federal Reserve, to issue bank notes. Congress ended the gold standard and declared federal reserve notes legal tender. Thus, federal reserve notes, which are obligations of the U.S. government and which are secured mostly by U.S. securities, became effectively governmental bills of credit. (Moreover, all earnings of the Federal Reserve above its operating cost goes to the U.S. Treasury.) The country is now in the process of learning what the founding fathers learned from the Continental.
[Editor’s note: The appendix showing the income of the Continental treasury from 1775 to 1783 is omitted.]
1. Hoarce White, Money and Banking (Boston, Mass.: Ginn & Co., 1896), p. 134.
2. Davis Rich Dewey, Financial History of the United States (1922, Rpt. Elibron Classic Replica Edition, 2005), pp. 36, 38; Murray N. Rothbard, A History of Money and Banking in the Untied States (Auburn, Ala.: Ludwig von Mises Institute, 2002, 2005), p. 59. White, p. 134.
3. Murray N. Rothbard, Conceived in Liberty, vol. IV, The Revolutionary War, 1775-1784 (New Rochelle, N.Y.: Arlington House Publishers, 1979), p. 55.
4. Rothbard, Conceived in Liberty, p. 55. White, p. 135.
5. White, p. 135.
6. Edwin Vieira, Jr., “The Forgotten Role of the Constitution in Monetary Law,” Texas Review of Law & Politics 2:1, pp. 94-97. Edwin Vieira, Jr., “What Is a ‘Dollar’? An Historical Analysis of the Fundamental Question in Monetary Policy (1994), pp. 14-18. Edwin Vieira, Jr., “‘To Regulate the Value of Money’ An Analysis of the Power of Government to Create and Set a Value on Money,” 1993, http://www.fame.org/HTM/Vieira_To_Regulate_the_ Value_of_Money_EV-006.H..., May 19, 2008.
7. Rothbard, Conceived in Liberty, p. 55. Rothbard, History, p. 59.
8. Dewey, p. 36.
9. Rothbard, Conceived in Liberty, p. 374.
10. Clarence B. Carson, Basic Economics (Wadley, Ala.: American Textbook Committee, 1988, p. 99.
11. Dewey, p. 36.
12. Dewey, p. 39, 41. Rothbard, History, pp.59-60. Rothbard, Conceived in Liberty, pp. 374, 380.
13. Carson, p. 100.
15. Ibid., p. 101.
16. White, p. 138.
17. Ibid., pp. 138-139.
18. Ibid., p. 139.
19. Ibid., p. 141.
20. Rothbard, Conceived in Liberty, p. 380. White, p. 141.
22. Dewey, p. 40.
23. White, p. 141.
24. Rothbard, Conceived in Liberty, p. 381.
25. White, p. 141.
26. Carson, p. 101.
27. Dewey, p. 41. White, p. 141.
28. White, p. 142.
30. Dewey, pp. 42-43.
31. White, pp. 144-145.
32. Rothbard, Conceived in Liberty, p. 382.
33. Dewey, p. 41.
34. White, p. 145.
35. Ibid., p. 135.
36. Ibid., pp. 139-140.
37. Dewey, p. 41.
38. Howard S. Katz, The Warmongers (New York, N.Y.: Books in Focus, Inc., 1979), pp. 46-47.
39. Dewey, p. 40.
40. White, p. 145.
41. Ibid., p. 147.
42. Rothbard, Conceived in Liberty, p. 379.
Copyright © 2010 by Thomas Coley Allen.
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