10. Paper Money Financing

0:00Volume 4, Chapter 10, Paper Money Financing Armies, especially European-style armies, have to be systematically financed, and it was up to the Continental Congress, which had assumed responsibility for the Continental Army, to decide on its financing. The financing of an activity by any organization may be either voluntary or compulsory, and the anarchically formed revolutionary bodies in the separate colonies, as well as the Congress, were now spontaneously constituted bodies, teetering on the edge of becoming governments.

0:47Whether they would become governments or not depended largely on how they would finance 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. 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.

1:22But to finance regular armies on a centralized basis from voluntary contributions was completely outside the can of the world at the time. On the other hand, it was out of the question for either the Congress or the local revolutionary bodies to impose taxation, the usual method of financing governments. Much of the thrust of the revolution, after all, was against taxation, and the spirit of liberty among the American people was too strong to succumb immediately to similar taxation at home. Americans were in the throes of an anarchic uprising against their legally authorized government and its taxation.

2:11They were not yet prepared to slip on a new tax yoke in the cause of breaking the grip of the Old. Later, this would occur, but not yet, in 1775. Furthermore, Congress had no power to tax, no power to impose its will on the separate colonies or the people therein. One time-honored method of evading and postponing the point of coercion is to borrow the needed Money, a method seemingly voluntary but resting on the pledge of future coercion taxes to provide repayment. The Congress began tentatively in mid-June 1775 to move toward borrowing by appointing a committee to consider borrowing 6,000 pounds sterling for supply of powder, a loan which Congress would undertake to repay.

3:12At this fateful crossroads, Congress hit upon a device, coercive but seemingly painless, a device that the British colonies had pioneered in the Western world, the issue of paper money. Paper issues fraudulently pretend to be equivalent to units of specie and are used by the issuer The issuer to bid away resources in society from the producers and consumers, in the process depreciating the money unit itself. Its nature and consequences are equivalent to the process of counterfeiting. Historians who believe that paper money agitation is invariably the product of the lower classes or of impoverished farmers might well ponder the identity of The man who led the Continental Congress down the primrose path of paper money, a young Skyon of the New York-landed aristocracy, Governor Morris.

4:17The highly conservative Morris, grandson of Louis Morris, royal governor of New Jersey, was delegate to the Congress from Westchester County. Once paper money was decided upon, the next decision was whether each colony would be be responsible for eventual redemption of its proportion of issues. For everyone recognized that paper money would only circulate if some sort of redemption were pledged for the future. This would mean that each colony would stand on its own bottom, and one of the advantages of continental paper for the northern colonies was inducing the other colonies to take on some of the former's financial burden. Hence, Massachusetts and New Hampshire, on the firing line, were understandably eager to foist their expenses onto the shoulders of the other colonies.

5:15Finally, on June 22, Congress decided to issue two million dollars in paper, or bills of credit, A sum that was soon to be rapidly expanded. Each colony, it was decided, would be pledged in seven years to redeem a pro rata share of the common continental issue, based upon its relative population. But significantly, all the colonies were pledged to redeem any default by a particular colony. Banking was to begin at the end of 1779. The process, however, was not envisioned as genuine redemption in specie, but merely the levying of taxes in continental paper itself, which would then be used to retire the paper. In short, the redemption charted by Congress would not give hard money backing to the new paper dollars. The bills would not be redeemed but retired.

6:21The prospect was only of a massive tax burden in a few years, which would be superimposed upon the previous tax burden imposed by paper inflation. In short, the seemingly inexhaustible fount of new continental money had begun, and an insistent clamor soon arose for ever greater shares in the new bonanza. As Edmund Burnett phrased it, such was the beginning of the federal trough, one of America's most imperishable institutions. From the very start, the continentals followed the sociological law that once turned on the engines of paper inflation accelerate as the clamor mounts for shares in the new cornucopia.

7:11by 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 were authorized. This issue for the year contrasted with a total money supply of approximately twelve million dollars at the beginning of the war, a fifty percent increase in the money supply in less than one year. Congress had no power to make its notes legal tender, compulsory for creditors to receive in payment of debts, but Rhode Island in 1775 pioneered in making and Making the Continental Paper Legal Tender for All Debts in the Province. Furthermore, any person refusing to accept these notes as equivalent to real specie dollars was to be denounced as an enemy of his country, who should be debarred from all communication

8:26with good citizens. The separate provinces themselves were not to be denied use of the The New Bonanza, even before Congress acted during May 1775, embattled Massachusetts, Connecticut and Rhode Island, voted their own paper issues. At the end of June, the Massachusetts Provincial Congress rashly made not only its own bills legal tender, but also those of all colonies. and refusing to accept any of the notes at par with Specie would be deemed an enemy of his country.