WEBVTT NOTE 10. Paper Money Financing 1 00:00:00.000 --> 00:00:06.000 Volume 4, Chapter 10, Paper Money Financing 2 00:00:06.000 --> 00:00:16.000 Armies, especially European-style armies, have to be systematically financed, and it was up to the Continental Congress, 3 00:00:16.000 --> 00:00:23.000 which had assumed responsibility for the Continental Army, to decide on its financing. 4 00:00:23.000 --> 00:00:32.280 The financing of an activity by any organization may be either voluntary or compulsory, and 5 00:00:32.280 --> 00:00:39.920 the anarchically formed revolutionary bodies in the separate colonies, as well as the Congress, 6 00:00:39.920 --> 00:00:47.520 were now spontaneously constituted bodies, teetering on the edge of becoming governments. 7 00:00:47.520 --> 00:00:52.880 Whether they would become governments or not depended largely on how they would finance 8 00:00:52.880 --> 00:00:59.880 For the mark of government, the feature distinguishing it from all other organs in society is that it finances itself by compulsory levy rather than by voluntary gift or purchase of service. 9 00:00:59.880 --> 00:01:06.880 The Continental Congress, however, was in a bad spot. A purely guerrilla force might well have been naturally financed by voluntary contributions in money and in kind. 10 00:01:22.880 --> 00:01:32.640 But to finance regular armies on a centralized basis from voluntary contributions was completely 11 00:01:32.640 --> 00:01:36.320 outside the can of the world at the time. 12 00:01:36.320 --> 00:01:41.640 On the other hand, it was out of the question for either the Congress or the local revolutionary 13 00:01:41.640 --> 00:01:48.760 bodies to impose taxation, the usual method of financing governments. 14 00:01:48.760 --> 00:01:53.920 Much of the thrust of the revolution, after all, was against taxation, and the spirit 15 00:01:53.920 --> 00:02:00.520 of liberty among the American people was too strong to succumb immediately to similar taxation 16 00:02:00.520 --> 00:02:02.320 at home. 17 00:02:02.320 --> 00:02:07.720 Americans were in the throes of an anarchic uprising against their legally authorized 18 00:02:07.720 --> 00:02:11.780 government and its taxation. 19 00:02:11.780 --> 00:02:17.480 They were not yet prepared to slip on a new tax yoke in the cause of breaking the grip 20 00:02:17.480 --> 00:02:27.440 of the Old. Later, this would occur, but not yet, in 1775. Furthermore, Congress had no 21 00:02:27.440 --> 00:02:35.400 power to tax, no power to impose its will on the separate colonies or the people therein. 22 00:02:35.400 --> 00:02:42.480 One time-honored method of evading and postponing the point of coercion is to borrow the needed 23 00:02:42.480 --> 00:02:51.320 Money, a method seemingly voluntary but resting on the pledge of future coercion taxes to 24 00:02:51.320 --> 00:02:53.880 provide repayment. 25 00:02:53.880 --> 00:03:00.760 The Congress began tentatively in mid-June 1775 to move toward borrowing by appointing 26 00:03:00.760 --> 00:03:08.920 a committee to consider borrowing 6,000 pounds sterling for supply of powder, a loan which 27 00:03:08.920 --> 00:03:12.360 Congress would undertake to repay. 28 00:03:12.360 --> 00:03:19.360 At this fateful crossroads, Congress hit upon a device, coercive but seemingly painless, 29 00:03:19.840 --> 00:03:26.840 a device that the British colonies had pioneered in the Western world, the issue of paper money. 30 00:03:28.340 --> 00:03:35.340 Paper issues fraudulently pretend to be equivalent to units of specie and are used by the issuer 31 00:03:35.340 --> 00:03:43.100 The issuer to bid away resources in society from the producers and consumers, in the process 32 00:03:43.100 --> 00:03:50.860 depreciating the money unit itself. Its nature and consequences are equivalent to the process 33 00:03:50.860 --> 00:03:57.100 of counterfeiting. Historians who believe that paper money agitation is invariably the 34 00:03:57.100 --> 00:04:04.940 product of the lower classes or of impoverished farmers might well ponder the identity of 35 00:04:04.940 --> 00:04:11.580 The man who led the Continental Congress down the primrose path of paper money, a young 36 00:04:11.580 --> 00:04:17.420 Skyon of the New York-landed aristocracy, Governor Morris. 37 00:04:17.420 --> 00:04:23.820 The highly conservative Morris, grandson of Louis Morris, royal governor of New Jersey, 38 00:04:23.820 --> 00:04:29.060 was delegate to the Congress from Westchester County. 39 00:04:29.060 --> 00:04:34.340 Once paper money was decided upon, the next decision was whether each colony would be 40 00:04:34.340 --> 00:04:41.820 be responsible for eventual redemption of its proportion of issues. For everyone recognized 41 00:04:41.820 --> 00:04:48.300 that paper money would only circulate if some sort of redemption were pledged for the future. 42 00:04:48.300 --> 00:04:53.540 This would mean that each colony would stand on its own bottom, and one of the advantages 43 00:04:53.540 --> 00:05:00.300 of continental paper for the northern colonies was inducing the other colonies to take on 44 00:05:00.300 --> 00:05:07.180 some of the former's financial burden. Hence, Massachusetts and New Hampshire, on the firing 45 00:05:07.180 --> 00:05:14.620 line, were understandably eager to foist their expenses onto the shoulders of the other colonies. 46 00:05:15.740 --> 00:05:24.220 Finally, on June 22, Congress decided to issue two million dollars in paper, or bills of credit, 47 00:05:24.220 --> 00:05:28.940 A sum that was soon to be rapidly expanded. 48 00:05:28.940 --> 00:05:35.620 Each colony, it was decided, would be pledged in seven years to redeem a pro rata share 49 00:05:35.620 --> 00:05:42.520 of the common continental issue, based upon its relative population. 50 00:05:42.520 --> 00:05:50.720 But significantly, all the colonies were pledged to redeem any default by a particular colony. 51 00:05:50.720 --> 00:05:57.600 Banking was to begin at the end of 1779. The process, however, was not envisioned as genuine 52 00:05:57.600 --> 00:06:04.660 redemption in specie, but merely the levying of taxes in continental paper itself, which 53 00:06:04.660 --> 00:06:12.320 would then be used to retire the paper. In short, the redemption charted by Congress 54 00:06:12.320 --> 00:06:19.160 would not give hard money backing to the new paper dollars. The bills would not be redeemed 55 00:06:19.160 --> 00:06:21.120 but retired. 56 00:06:21.120 --> 00:06:26.960 The prospect was only of a massive tax burden in a few years, which would be superimposed 57 00:06:26.960 --> 00:06:32.260 upon the previous tax burden imposed by paper inflation. 58 00:06:32.260 --> 00:06:39.920 In short, the seemingly inexhaustible fount of new continental money had begun, and an 59 00:06:39.920 --> 00:06:46.480 insistent clamor soon arose for ever greater shares in the new bonanza. 60 00:06:46.480 --> 00:06:53.400 As Edmund Burnett phrased it, such was the beginning of the federal trough, one of America's 61 00:06:53.400 --> 00:06:57.580 most imperishable institutions. 62 00:06:57.580 --> 00:07:04.660 From the very start, the continentals followed the sociological law that once turned on the 63 00:07:04.660 --> 00:07:11.660 engines of paper inflation accelerate as the clamor mounts for shares in the new cornucopia. 64 00:07:11.660 --> 00:07:41.660 by the time the two million dollars were ready to emerge from the press in a few weeks Congress had already concluded that the issue was insufficient by the end of July another one million of new money was authorized what after all was to be the criterion for halting the money engine before the end of 1775 a full six million dollars in three issues of new paper were issued 65 00:07:41.660 --> 00:07:48.140 were authorized. This issue for the year contrasted with a total money supply of approximately 66 00:07:48.140 --> 00:07:54.060 twelve million dollars at the beginning of the war, a fifty percent increase in the money 67 00:07:54.060 --> 00:08:01.060 supply in less than one year. Congress had no power to make its notes legal tender, compulsory 68 00:08:02.580 --> 00:08:09.580 for creditors to receive in payment of debts, but Rhode Island in 1775 pioneered in making 69 00:08:09.580 --> 00:08:16.220 and Making the Continental Paper Legal Tender for All Debts in the Province. Furthermore, 70 00:08:16.220 --> 00:08:21.620 any person refusing to accept these notes as equivalent to real specie dollars was to 71 00:08:21.620 --> 00:08:26.980 be denounced as an enemy of his country, who should be debarred from all communication 72 00:08:26.980 --> 00:08:33.220 with good citizens. The separate provinces themselves were not to be denied use of the 73 00:08:33.220 --> 00:08:41.500 The New Bonanza, even before Congress acted during May 1775, embattled Massachusetts, 74 00:08:41.500 --> 00:08:46.860 Connecticut and Rhode Island, voted their own paper issues. 75 00:08:46.860 --> 00:08:53.620 At the end of June, the Massachusetts Provincial Congress rashly made not only its own bills 76 00:08:53.620 --> 00:08:57.960 legal tender, but also those of all colonies. 77 00:08:57.960 --> 00:09:04.440 and refusing to accept any of the notes at par with Specie would be deemed an enemy of 78 00:09:04.440 --> 00:09:05.240 his country.