5. Revolutionary War Finance

0:00Revolutionary 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.

0:45As 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.

1:42This 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.

2:34This 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.

3:29By 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.

4:32Unfortunately, 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.

5:23The 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.

6:13The 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.