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NOTE 5. Revolutionary War Finance

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Revolutionary War Finance

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To finance the Revolutionary War, which broke out in 1775, the Continental Congress early

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hit on the device of issuing fiat paper money.

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The leader in the drive for paper money was Governor Morris, the highly conservative young

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scion of the New York-landed aristocracy.

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There was no pledge to redeem the paper, even in the future, but it was supposed to be retired

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in seven years by taxes levied pro-rata by the separate states.

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Thus, a heavy future tax burden was supposed to be added to the inflation brought about

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by the new paper money.

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The retirement pledge, however, was soon forgotten as Congress, enchanted by this new, seemingly

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costless form of revenue, escalated its emissions of fiat paper.

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As a historian has phrased it, quote, such was the beginning of the federal trough, one

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of America's most imperishable institutions.

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The total money supply of the United States at the beginning of the revolution has been

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Congress launched its first paper issue of $2 million in late June 1775, and before the

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notes were printed, it had already concluded that another $1 million was needed.

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Before the end of the year, a full $6 million in paper issues was issued or authorized,

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a dramatic increase of 50% in the money supply in one year.

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The issue of this fiat, quote, continental paper, rapidly escalated over the next few

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years.

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Paris issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million

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in 1778, and $125 million in 1779.

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This was a total issue of over $225 million in five years superimposed upon a pre-existing

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money supply of $12 million.

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The result was, as could be expected, a rapid price inflation in terms of the paper notes

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and a corollary accelerating depreciation of the paper in terms of specie.

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Thus, at the end of 1776, the continentals were worth $1 to $1.25 in specie.

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By the fall of the following year, its value had fallen to 3 to 1.

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By December 1778 the value was 6.8 to 1, and by December 1779 to the negligible 42 to 1.

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By the spring of 1781, the continentals were virtually worthless, exchanging on the market

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at 168 paper dollars to 1 dollar and specie.

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This collapse of the continental currency gave rise to the phrase, not worth a continental.

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To top this calamity, several states issued their own paper money and each depreciated

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at Varian Rates.

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Virginia and the Carolinas led the inflationary move, and by the end of the war, state issues

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added a total of $210 million depreciated dollars to the nation's currency.

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In an attempt to stem the inflation and depreciation, various states levied maximum price controls

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and compulsory par laws.

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The result was only to create shortages and impose hardships on large sections of the

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public.

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Thus, soldiers were paid in continentals, but farmers understandably refused to accept

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payment in paper money despite legal coercion.

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The Continental Army then moved to, quote, impress food and other supplies, seizing the

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supplies and forcing the farmers and shopkeepers to accept depreciated paper in return.

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By 1779, with continental paper virtually worthless, the Continental Army stepped up

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The States followed suit with their own massive certificate issues.

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It understandably took little time for these certificates, federal and state, to depreciate

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in value to nothing.

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By the end of the war, federal certificate issues alone totaled $200 million.

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The one redeeming feature of this monetary calamity was that the federal and state governments

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at least allowed these paper issues to sink into worthlessness without insisting the taxpayers

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shoulder another grave burden by being forced to redeem these issues specie at par, or even

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to redeem them at all. Continentals were not redeemed at all, and state paper was only

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redeemed at depreciating rates, some at the greatly depreciated market value. By the end

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At the end of the war, all the wartime state paper had been withdrawn from circulation.

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Unfortunately, the same policy was not applied to another important device that Congress

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turned to after its Continental Paper had become almost worthless in 1779.

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Loan Certificates

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Technically, loan certificates were public debt, but they were scarcely genuine loans.

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They were simply notes issued by the government to pay for supplies and accepted by the merchants

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because the government would not pay anything else.

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Hence, the loan certificates became a form of currency and rapidly depreciated.

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As early as the end of 1779, they had depreciated to 24 to 1 in specie.

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By the end of the war, $600 million of loan certificates had been issued.

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Some of the later loan certificate issues were liquidated at a depreciated rate, but

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the bulk remained after the war to become the substantial core of the permanent, peacetime

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federal debt.

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The mass of federal and state debt could have depreciated and passed out of existence by

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the end of the war, but the process was stopped and reversed by Robert Morris, wealthy Philadelphia

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merchant and virtual economic and financial czar of the Continental Congress in the last

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years of the war.

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Morris, leader of the nationalist forces in American politics, moved to make the depreciated

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federal debt ultimately redeemable in par and also agitated for federal assumption of

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the various state debts.

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The reason for this was twofold, a, to confer a vast subsidy on speculators who had purchased

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the public debt at highly depreciated values by paying interest and principal at par in

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specie, and b, to build up agitation for taxing power in the Congress, which the Articles

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of Confederation refused to allow to the Federal Government.

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The decentralized policy of the states raising taxes or issuing new paper money to pay off

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of the Pro Rata Federal Debt as well as their own was thwarted by the adoption of the Constitution,

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which brought about the victory of the nationalist program, led by Morris's youthful disciple

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and former aide, Alexander Hamilton.