Revolutionary War Finance
To finance the Revolutionary War, which broke out in 1775, the Continental Congress early
hit on the device of issuing fiat paper money.
The leader in the drive for paper money was Governor Morris, the highly conservative young
scion of the New York-landed aristocracy.
There was no pledge to redeem the paper, even in the future, but it was supposed to be retired
in seven years by taxes levied pro-rata by the separate states.
Thus, a heavy future tax burden was supposed to be added to the inflation brought about
by the new paper money.
The retirement pledge, however, was soon forgotten as Congress, enchanted by this new, seemingly
costless form of revenue, escalated its emissions of fiat paper.
As a historian has phrased it, quote, such was the beginning of the federal trough, one
of America's most imperishable institutions.
The total money supply of the United States at the beginning of the revolution has been
Congress launched its first paper issue of $2 million in late June 1775, and before the
notes were printed, it had already concluded that another $1 million was needed.
Before the end of the year, a full $6 million in paper issues was issued or authorized,
a dramatic increase of 50% in the money supply in one year.
The issue of this fiat, quote, continental paper, rapidly escalated over the next few
years.
Paris issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million
in 1778, and $125 million in 1779.
This was a total issue of over $225 million in five years superimposed upon a pre-existing
money supply of $12 million.
The result was, as could be expected, a rapid price inflation in terms of the paper notes
and a corollary accelerating depreciation of the paper in terms of specie.
Thus, at the end of 1776, the continentals were worth $1 to $1.25 in specie.
By the fall of the following year, its value had fallen to 3 to 1.
By December 1778 the value was 6.8 to 1, and by December 1779 to the negligible 42 to 1.
By the spring of 1781, the continentals were virtually worthless, exchanging on the market
at 168 paper dollars to 1 dollar and specie.
This collapse of the continental currency gave rise to the phrase, not worth a continental.
To top this calamity, several states issued their own paper money and each depreciated
at Varian Rates.
Virginia and the Carolinas led the inflationary move, and by the end of the war, state issues
added a total of $210 million depreciated dollars to the nation's currency.
In an attempt to stem the inflation and depreciation, various states levied maximum price controls
and compulsory par laws.
The result was only to create shortages and impose hardships on large sections of the
public.
Thus, soldiers were paid in continentals, but farmers understandably refused to accept
payment in paper money despite legal coercion.
The Continental Army then moved to, quote, impress food and other supplies, seizing the
supplies and forcing the farmers and shopkeepers to accept depreciated paper in return.
By 1779, with continental paper virtually worthless, the Continental Army stepped up
The States followed suit with their own massive certificate issues.
It understandably took little time for these certificates, federal and state, to depreciate
in value to nothing.
By the end of the war, federal certificate issues alone totaled $200 million.
The one redeeming feature of this monetary calamity was that the federal and state governments
at least allowed these paper issues to sink into worthlessness without insisting the taxpayers
shoulder another grave burden by being forced to redeem these issues specie at par, or even
to redeem them at all. Continentals were not redeemed at all, and state paper was only
redeemed at depreciating rates, some at the greatly depreciated market value. By the end
At the end of the war, all the wartime state paper had been withdrawn from circulation.
Unfortunately, the same policy was not applied to another important device that Congress
turned to after its Continental Paper had become almost worthless in 1779.
Loan Certificates
Technically, loan certificates were public debt, but they were scarcely genuine loans.
They were simply notes issued by the government to pay for supplies and accepted by the merchants
because the government would not pay anything else.
Hence, the loan certificates became a form of currency and rapidly depreciated.
As early as the end of 1779, they had depreciated to 24 to 1 in specie.
By the end of the war, $600 million of loan certificates had been issued.
Some of the later loan certificate issues were liquidated at a depreciated rate, but
the bulk remained after the war to become the substantial core of the permanent, peacetime
federal debt.
The mass of federal and state debt could have depreciated and passed out of existence by
the end of the war, but the process was stopped and reversed by Robert Morris, wealthy Philadelphia
merchant and virtual economic and financial czar of the Continental Congress in the last
years of the war.
Morris, leader of the nationalist forces in American politics, moved to make the depreciated
federal debt ultimately redeemable in par and also agitated for federal assumption of
the various state debts.
The reason for this was twofold, a, to confer a vast subsidy on speculators who had purchased
the public debt at highly depreciated values by paying interest and principal at par in
specie, and b, to build up agitation for taxing power in the Congress, which the Articles
of Confederation refused to allow to the Federal Government.
The decentralized policy of the states raising taxes or issuing new paper money to pay off
of the Pro Rata Federal Debt as well as their own was thwarted by the adoption of the Constitution,
which brought about the victory of the nationalist program, led by Morris's youthful disciple
and former aide, Alexander Hamilton.