Volume 4, Chapter 67, Inflationary Finance and Price Controls
Crucial to an understanding of the political history of the Revolutionary War era is a comprehension of the way that the war effort was financed.
By the end of 1775, Congress had already increased the nation's money supply by 50% in less than a year,
and state paper issues had already begun in New England.
The Congressional Continental Bills followed what was to become a sequence all too familiar in the Western world, runaway inflation.
As paper money issues flooded the market, the dilution of the value of each dollar caused prices in terms of paper money to increase.
Since this included the prices of gold, silver and foreign currencies, the value of the paper money declined in comparison to them.
As usual, rather than acknowledge the inevitability of this sequence, the partisans of inflationary policies urged further accelerated paper issues to overcome the higher prices
and searched for scapegoats to blame for the price rise and depreciation.
The favorite scapegoats were merchants and speculators who persisted in doing the only thing they ever do on the market.
They followed the push and pull of supply and demand.
In another familiar attempt to deal with the problems of inflationary intervention, they outlawed the depreciation of paper or the rise of prices.
Such attempts to hold back the inevitable results of inflation are invariably about as successful as King Canute's command to the tides.
But the vital difference is that these controls create a great deal of havoc in their wake.
Maximum price controls simply create grave shortages and black markets of the commodity.
The inevitable response of this escalation of controls is ever more vigorous penalties against the merchants and speculators.
And aside from the oppression suffered by merchants, the only result is to make the shortage even more severe.
And so inflation tends to pursue its course until the paper money becomes worthless and controls eventually wither away.
Continental paper was issued by Congress at an accelerating rate in 1775, 6,000,000, 1776, 19,000,000, 1777, 13,000,000, 1778, 64,000,000, 1779, 135,000,000.
This was a total issue of over $235 million in five years, superimposed upon a pre-existing money supply of $12 million.
The state governments were supposed to collect taxes to retire the continental notes,
thus imposing a second burden upon the public after the tax of inflation had done its work.
But opposition by Americans to taxation was too great, and most states levied no taxes at all until 1780. Instead, the states also turned to the printing press for their finances.
Apart from Georgia and Delaware, they offered no security for the notes except a vague pledge of future tax revenues, which was no security at all, and so their notes depreciated, each at a different rate.
The states tried to maintain their notes at par coercively with severe legal tender laws.
The states also tried to finance themselves by issuing interest-paying Treasury notes.
The total of state issues during the Revolution was nearly $210 million.
Virginia led in this inflation by issuing $128 million,
followed by the Carolinas, each with an issue of about $33 million.
Adding federal certificates and loan office certificates, this made a total of about a
fifty-fold expansion of America's money supply in a few short years.
Depreciation of the paper money proceeded inexorably along with the frenzied increase
in its quantity. Thus, in December 1776, the continentals were worth $1 to $1.25 in specie
on the market. In October 1777, the value had fallen to 3 to 1, in December 1778 to
6.8 to 1, and in December 1779 to the negligible 42 to 1. By April 1781 the continentals were
virtually worthless, exchanging on the market at 168 paper dollars to one dollar in coin.
This process of inflation and the subsequent attempts of government to thwart its consequences
led both to the hardships and shortages of supplies suffered by the Continental Army,
particularly at Valley Forge and to the severe mutinies in the latter part of the war.
In the first place, the soldiers were paid in continentals and were bewildered to find
the value of their pay rapidly dwindling.
Farmers understandably refused to accept paper money, preferring hard cash that would not
When the Continental Army moved to confiscate and seize supplies from them, they were embittered,
and often fled the area.
The Continental Army often found that food and other vital supplies became woefully scarce
since the brutal power of the Army to plunder could not extend to farmers remote from the
military camp.
The several states, especially in New England and in the Middle States, also tried to help
matters by imposing maximum price controls.
State and local governments presumed to know what market prices of the various commodities
should be, and laid down price regulations for them.
Wage rates, transportation rates, and prices of domestic and imported goods were fixed
by local authorities, refusing to accept paper, accepting them for less than par, charging
higher prices than allowed, were made criminal acts, and high penalties were set. They included
fines, public exposure, confiscation of goods, tarring and feathering, and banishment from
the locality. Merchants were prohibited from speculating, and thereby from bringing the
and the needed scarce goods to the public. Enforcement was imposed by zealots in local
and nearby committees in a despotic version of the revolutionary tradition of government
by local committees. Price controls made matters far worse for everyone, especially the hapless
Continental Army. Since farmers were thereby doubly penalized, they were forced to sell
They sold supplies to the army at prices far below the market, and they had to accept increasingly worthless continentals in payment.
Hence, they understandably sold their wares elsewhere.
In many cases, they went on strike against the whole crazy quilt system by retiring from the market altogether
and raising only enough food to feed themselves and their own families.
Others reverted to simple barter. Master artisans, forced by price control to sell at a loss, threatened to shut up shop.
And as always happens under price control, hidden price increases were achieved by lowering the quality of goods, again to the detriment of the consumers.
Efforts to enforce price controls during the revolution were frenzied and feudal attempts to thwart the laws of economics.
Shortages of goods in localities or states where enforcement was harsh led to sporadic attempts to fix and coordinate uniform price codes throughout the United States.
The first comprehensive statewide code was imposed by Connecticut in October 1776.
In December, delegates from the four New England states met at Providence and fixed a detailed schedule of wages and prices.
and each state government then enacted it into law.
At the request of Congress, the middle and upper southern states then met at York, Pennsylvania to draft a similar code,
but it was voted down by three of the six states.
In early August 1777, a convention of New England states and New York, called by Massachusetts at Springfield,
resigned themselves to scrapping the whole apparatus of control.
Congress, however, again called for a series of regional conventions to impose uniform price
control in late 1777.
As in the previous year, the Deep South did not respond, but delegates from all the New
England and Middle States met at New Haven in January 1778 and recommended a new code.
Only Connecticut, New York, New Jersey and Pennsylvania passed it into law.
When rebuked for not joining the effort, Massachusetts, no longer enthusiastic about price controls,
wryly announced that the Continental Army had informed it that the code would make it
impossible for the Army to buy supplies for its troops.
This led Congress in June 1778 to advise repeal of all controls.
The four states that had passed the code soon followed the congressional advice.
The collapse of the state programs, however, failed to teach the local despots and vigilantes
of the Pennsylvania, New York and New England towns their lesson.
They tried to enforce local controls, and again all their efforts came to grief.
In 1779, the towns and countries of Massachusetts, but not the state, tried again to frame joint
codes at a statewide convention.
In Philadelphia, the price-fixing committee was told by the town's artillery company
that it would, if necessary, support the committee's decrees with force of arms.
In late October 1779, delegates from New York and New England meeting at Hartford approved
another comprehensive price code. Congress reversed itself again to endorse and recommend
the new code in January 1780. Obediently, the states from New England to Virginia called
a meeting at Philadelphia in early 1780 to establish a general uniform code of regulated
Prices. But delegations from New York and Virginia failed to appear, and the meeting
adjourned in April to wait for these states. The meeting never reconvened. The absurdity
of price controls was being made ever clearer by the enormous depreciation of paper money,
and the states finally abandoned their attempts at enforcement. Only the southern states had
never succumbed to the price control mania. It goes without saying that each successive
price code reluctantly allowed for far higher prices than the preceding scheme, a trend
that should have given pause to the most fanatical of price controllers. Attempts at enforcement
of these controls and regulations were numerous and zealous, especially by local officials
and Committees. One example is the case of Peter Messier, a tea merchant from New York.
In May 1777, Messier's home was invaded by a party led by two soldiers who refused to
pay the price that he charged for tea. Instead, they seized as much tea as they wished, leaving
his compensation whatever amount they considered fair, and this was not enough. Later, several
Several other groups visited him, presuming to search his house in the name of the Committee
for Detecting Conspiracies.
They assaulted Messier and his servants and committed personal acts of vandalism.
As usually happens during inflation and wage price controls, wage rates lagged behind other
prices and especially raw materials.
This added an extra burden upon the wage earners, the poorest strata of the population.
Moreover, as ten entrepreneurial Philadelphia cord-wainers pointed out in mid-July 1779,
the price control over their product, shoes, not only impoverished them, but forced them
to fire their journeyman employees.
They added an impassioned plea for laissez-faire.
Yet the system of price controls is absurd and contrary to every principle of trade.
It will destroy every spring of industry and will make it the interest of everyone to decline
all business.
Trade should be free as air, uninterrupted as the tide, and though it will necessarily
like this be sometimes high at one place and low at another, yet it will ever return of
of itself sufficiently near to a proper level if, in judicious attempts to regulate it,
are not interposed.
Contrary to a general impression, opinion for or against price controls was determined
far more by the state of the person's economic understanding than by his social class, or,
for that matter, by his generally conservative or radical views.
It is simply not true that radicals favored price controls and conservatives opposed them.
The pros and cons cut across both ideological as well as occupational lines.
Thus, while the conservative James Wilson denounced price controls in Congress, there
are certain things, sir, which absolute power cannot do.
The reactionary Samuel Chase defended controls on the ground of necessity.
Pennsylvania provided the sharpest model of conservative radical cleavage on this issue.
Robert Morris joined Wilson in opposing controls, and the Pennsylvania radicals, in their hatred
for these two, were driven to supporting controls.
It must be noted, however, that the radical price control leaders included such wealthy
and eminent merchants and lawyers as General Daniel Robredoux, William Bradford, and Owen
Biddle.
Furthermore, among the radical leaders, Tom Paine, seeing the ill effects of price controls
shifted sharply and permanently in late 1779 from supporting price controls to a strong
opposition to them.
Those radicals who favored price controls also justified this sharp deviation from their
and their commitment to liberty and property rights by alleged wartime necessity much as the Jacobins would do in France over a decade later.
Thus, General John Armstrong, a highly respected jurist and engineer and a leading Pennsylvania radical, though an early patron of James Wilson,
was the most inveterate and zealous advocate of price controls in Congress.
He pleaded that necessity required this exception to the laissez-faire rule.
In a sense, the proponents of price controls had no economic arguments.
Their views were purely superficial and ad hoc.
Prices are going up, they shouldn't, ergo, outlaw, price rises, was the argument form.
In contrast was the sophisticated economic understanding of the opposition,
Leading the opponents of controls was the New Jersey libertarian theorist, the Rev. John Witherspoon. He accurately and prophetically warned Washington that the Army's severe price and wage controls on the commodities and services it purchased would only aggravate the shortages and lead to starvation for the Army.
Army.
No man, declared Witherspoon, can be forced to supply goods in the market at prices he
considered unreasonable, and his concept of what is reasonable is the price proportioned
to demand on the one side and the plenty or scarcity of goods on the other.
And this price that clears supply and demand can only be set on the market by the voluntary
Interactions of Buyers and Sellers, not by any outside politician or government official,
it being impossible for any authority to know all the nuances and variations that enter
into supply and demand and hence into price.
Price control in fact could only hobble commerce and thereby make commodities scarce and more
costly than ever.
The prices of regulated goods, Witherspoon pointed out, had already risen faster than
those of the non-regulated.
The moderate Dr. Benjamin Rush was an able student of political economy, and he pointed
both to economic theory and to the lessons of economic history.
Previous price control efforts had always failed because the true cause of the price
The price rise was not, as the unthinking believed, the wickedness or tory, proclivities of the merchants, monopolizers or speculators.
The cause, he declared, was the excessive quantity of our money.
Only a decrease in the quantity of money, he pointed out, and a rise in the rate of interest would end the disastrous price increases and bring value back to the country's money.
John Adams was also highly knowledgeable and forthright in monetary matters, and he too pointed to the historic failures of price controls.
As early as 1777, he urged a radical and libertarian cure for the inflation, redeeming notes in
gold and silver, and ending paper money issue.
Also outstanding in opposing price controls was the Philadelphia merchant and economic
essayist, Pelletier-Webster.
Webster clearly discerned that the price increases were due to the quantities of paper money,
and that they could not be stopped by the superficial scheme of price controls.
He insisted that freedom of trade, or the unrestrained liberty of the subject to hold
or dispose of his property as he pleases, was essential to property at any time, whether
in war or peace.
On the free market, he pointed out, every seller will produce the greatest quantity
of the best goods for the consumers in order to maximize his income.
The scarcest commodities will have the greatest demand and the highest prices, and this will
stimulate production in these fields as well as impel the most economic allocation of the
scarce goods.
Price controls are unworkable and impose greater administrative burdens.
He further pointed out that price controls could not alter the value of money, which
is determined on the market by the relation between its quantity and the supply of goods
offered in exchange.
He concluded that laws ought to conform to the natural course of things, and therefore
that all fetters and restrictions on the market should be removed.
And less than for price controls do the radical conservative categories explain the differences
of opinion on paper money.
For supportive paper was far more broadly based than for controls.
The arch-conservative, 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
said 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 taxes falling hardest on the lowest paid and the
most exploited group in the country, the soldiery, caused him only fleeting regret. These men
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.
In 1779, another ultraconservative, John Jay, prepared an apologia for the depreciating continental paper. Characteristic was the specious argument offered by inflationists everywhere that true redemption of paper money rests not on gold or silver, but on the industry, trade and soil of the country.
and Country. Even Pelletier-Webster defended the benefits of depreciated paper, although he opposed the state legal tender law. But despite the blithe acceptance by the more sophisticated inflationist of depreciation, the universal outcry over the depreciation and price rise and the frantic attempts to stop them are testimony enough that the vast bulk of the people could not assume so philosophical.
and Attitude.
The havoc wrought in the United States by the distortions in equities, currency breakdowns,
shortages and depreciation caused by the central state and local government policies of wild
inflation and price control was far greater than that imposed by the British troops during
In the war, this is to say nothing of the maleficent heritage of the public debt that
remained for the future economic and political life of the country.
On their own grounds, the cheap money and price control policies burdened rather than
fostered the revolutionary effort.
By 1779, no amount of theorizing, however, could cloak the naked fact of runaway paper
The monetary engine was now seen to be a runaway source of ill, rather than a panacea. Evidently, to preserve any value of the paper, the no-issues had to be stopped. The simplest and least burdensome solution would have been to rescind the dubious retirement clause, which could only inflict tax burdens on society in order to prevent it.
to Retire the Notes. This would have allowed the notes to find their own negligible level,
while permitting the economy to return to gold and silver. But despite the fact that the states
had scarcely paid in any of the requisitions with which to retire the paper notes, Congress failed
to take this easy path. Instead, it searched desperately for a way to retire some of the notes.
As early as April 1778, Congress contemplated forcing the conversion of $20 million to $45 million of paper into loan certificates, which were interest-paying certificates of indebtedness issued by Congress.
Congress finally lacked the courage to do this.
On September 3, 1779, Congress brought itself nearly unanimously to set an absolute limit of $200 million in paper issues.
A sum that left a leeway of $60 million that could still be issued.
The spirit of this resolve was quickly violated as Congress hastened to issue the $60 million
Congress had absurdly believed that the mere stoppage at this late date and after enormous
issues would reverse the depreciation and allow the government to retire all the notes
at par.
It was now disabused of this notion, but it still insisted on levying crippling taxes in
order to retire the notes.
By law of March 18, 1780, Congress decided to have the states tax $15 million worth of
notes per month and deliver them to Congress to retire the paper in 13 months' time.
As the retirement proceeded on its way, new bills, totaling $10 million, were to be issued
by the states.
Not only was this quantity to be considerably less than the old, but the states were to
to pay 5% interest in specie or European sterling bills to be totally redeemed in specie in
six years.
Of the new bills, 40% were to go to Congress' income and 60% to the states delivering taxes
in the old bills.
The old paper was sensibly revalued at 40 to 1 so that the Congressional debt was now
is now worth $5 million in specie instead of $200 million, a sensible step of partial repudiation.
Even at that, however, the paper was overvalued, since in March 1780 its market valuation was closer to 60 to 1.
For a while, continental money stopped depreciating and even improved in value,
But the states found they could not levy the requisite taxes, and the burdensome plan collapsed.
By the end of 1780, only $2 million in old paper had been retired, and the market, seeing
the retirement plan and the official pegging of value fail, lowered Continentals to 100
to 1 by January 1781 and 168 to 1 by April. Meanwhile, the Congress, having stripped itself
of its massive inflationary power, turned to other potential inflationary instrument,
its loan certificates. Loan certificates, before March 1, 1778, had paid 6% interest
in Specie, and hence three $7 million blocks of certificates were highly prized.
But after March, the interest was paid in paper.
After March 1778, these certificates were not genuine loans, but simply notes issued
by the government in payment for supplies and accepted by the merchants because the
government would not pay in anything else.
Since their certificates became a form of currency and they too depreciated, as early
as the end of November 1779, they were selling at 24 to 1 in specie on the market.
Of the post-March 1778 loan certificates, $600 million were issued by the Federal Government
during the war, of which $530 million were issued after September 1779.
Loan certificates were even issued to pay the interest on other loan certificates.
In late 1780, Congress tried to issue one million dollars in species certificates, which
were supposed to be sold only for species to raise some hard money for the government.
But the new notes were simply issued, as were other notes, to pay for the federal deficits.
As the continental currency collapsed, the Continental Army turned to simple impressments,
seizures of goods, to supply itself, and thus scarcely endeared itself to the populace being
confiscated. To pay for the impressments, the Army Quartermaster and Commissary Departments
issued paper tickets or certificates, which then flooded the country. State governments
also turned increasingly to impressment of goods and paid for the seizure with their
own welter of certificates. The Yorktown campaign was financed almost solely by federal and
state impressment certificates. Even apart from state issues, federal certificates issued
during the war amounted to about $200 million in themselves. The certificates, which didn't
and even pay interest, rapidly depreciated to almost nothing.
Naturally, when the states tried to impose taxes in order to retire old continental paper,
according to the scheme of March 1780, Americans balked.
For if they had to pay taxes, surely they were entitled to pay in the virtually worthless state
or federal certificates rather than in the less worthless continentals?
And as the people of the various states insisted on paying their taxes in certificates, the state governments found it impossible to retire the old continentals.
By June 1781, when all the continentals were supposed to have been retired, 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 five to one in specie.
The scheme to prop up and retire continental paper had proved an abject failure.
Pennsylvania and New Jersey decided to fix the value of continentals at their true market value, which soon collapsed completely.
After April 1781, the continentals began to pass out of circulation, and before long they could hardly be found. If they were used, they passed at less than 500 to 1 in specie dollars. It is no wonder that the popular motto arose, not worth a continental.
Despite the strenuous efforts of Congress and the states, they took their natural economic course and passed out of existence.
Their rapid disappearance also relieved the public of a permanent legacy of crippling public debt.
When Congress agreed to accept certificates in payment of the requisitions, some of the worthless paper was drained off.
The legal tender laws were also repealed.
Congress never bothered to pay its promised interest on the small amount of new bills, and this helped depreciate them further.
After August 1780, Congress issued new certificates payable in new bills and bearing interest until redeemed,
and the old certificates were made redeemable in their negligible existing specie values.
Thus Congress and the states jettisoned their worthless mass of currencies, without burdening
the present and future economy with a further debt.
They were not bemused by the notion that these currencies had to be redeemed at par, or indeed
had to be redeemed at all.
As Ferguson explains, 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.
Unfortunately, Congress did not display the same wisdom with the loan certificates.
For these securities, or rather for the security holders, it showed far greater tenderness.
In 1780, Congress decided to reduce the loan certificates to their specie value according
to the depreciation of continentals that had actually prevailed at the time of purchase.
The actual scaling down, however, was much too limited.
The loan certificates issued after March 1780, for example, were liquidated at a rate of
40 to 1 in specie, when depreciation at the time approached 100 to 1.
Furthermore, Congress continued to pay valuable bills of exchange for the interest on the
pre-1778 loan certificates.
Most important, it undertook to redeem the interest and principle on the loan certificates
itself, in contrast to the paper currency which it had been glad to push off onto the
states.
The loan certificates were to become the substantial core and the beginnings of the permanent,
peacetime federal public debt.
Significantly, the bulk of this debt was held in the northern states.
90% of the original subscriptions were held in states north of Maryland, of which people in Massachusetts, Connecticut and Pennsylvania held two-thirds.
Pennsylvania alone originally held one-third of the debt, and its share was expanded by later sales and transfers.
As for the states, they too insisted on retiring their worthless paper through tax receipts,
but at least they agreed to redeem the paper at depreciated values, some at the greatly
depreciated market value of the currency. In Virginia and Georgia, they were as low as
one thousand to one in specie. By the end of 1783, all the wartime state paper had been withdrawn
from Circulation.