The Framers of the Constitution had clear ideas about what was and was not money. As they put it in Article 1, Section 10, “No state shall…coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts…”. This belief that a sound country required a sound currency — one based on something rare and enduring like gold rather than common and infinitely replicable paper — wasn’t just theoretical. They had first-hand experience with paper money and an uncontrolled printing press thanks to the Continental, the first and shortest-lived U.S. currency.
The year is 1775, and the American Revolution has begun. A rag-tag “army” of farm boys (the Colonies were mostly agrarian back then) is about to defy the world’s most powerful empire, and has to be fed and equipped if it is to stand a chance. Levying taxes would, then as now, be complicated and upsetting to a lot of people, so the newly-formed Congress decides to simply print what it needs. As the Founders and Patriots of America website recounts the story:
On the 10th of May, 1775, the first issue of Continental Currency was circulated. The bills were printed by Hall & Sellers in Philadelphia. They were designed with intricate patterns to make counterfeiting difficult and bore a variety of patriotic mottos in Latin on their obverse.
A special paper was used and the image of a real leaf from one of the local trees was imprinted on the reverse; it was felt that no counterfeiter could duplicate the pattern of God’s handiwork. The bill claimed that the bearer was entitled to the designated amount of Spanish milled dollars (the most common coin then in circulation in the colonies) or the value thereof in gold or silver. It didn’t explain how one was to collect the hard money thus promised — there being no hard money in the treasury. There were a variety of denominations and one could come up with an eight dollar bill, a seven dollar bill or even the proverbial three dollar bill.
Hard Money Disappears
At first, the bills were accepted at face value. After all, they were issued by Patriots for Patriots. One ominous result, however, was that almost immediately all hard money disappeared. It was a case of Gresham’s law, which states that bad money will drive out good money. Who wants to spend their guineas when paper is just as acceptable? The trouble was, of course, that paper wasn’t as acceptable and many merchants preferred real money to paper. In fact, this became so frequently the case that Congress had to pass a resolution in January. 1776 that “whoever should refuse to receive in payment Continental bills, should be declared and treated as an enemy of his country and be excluded from inter-course with its inhabitants”.
The sad tale of the Continental Currency thereafter was one of more and more rapid depreciation. As the value of the Continentals dropped, Congress had to print more of them — and as more money flooded the countryside, its value dropped even more rapidly. In November of 1776, $19 million had been issued and one could still buy$1.00 worth of goods for $1.00 in paper. By November of 1778, $31 million had been issued, and it took $6.00 in paper to buy the same amount. By November, 1779 $226 million was in circulation and it took $40.00 in paper to buy $1.00 in goods. After that, it was all down hill. In April 1779, George Washington complained, “A wagon load of money will scarcely purchase a wagon load of provisions”.
Congress tried desperately to stop this depreciation — with disastrous results. Several laws were passed, requiring citizens to accept the paper money on a par with gold or silver. This attempt at price control had the effect of eliminating goods from the market. Who would offer goods of real value in exchange for near-valueless paper? It was just at that time that George Washington and his men were suffering at Valley Forge — suffering, in great part, because no one had any food to sell to his quartermaster — for paper money. Price controls nearly destroyed our army and might have, but for the heroism of the Continental soldiers.
Why did Congress go on printing money for so long a time rather than attempt some sort of taxation? Just as today, there was a mindset among politicians which made them want to avoid the unpleasant. One member of the Continental Congress was quoted as saying: “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer and get a wagon load of money, one quire of which will pay for the whole?”.
One recurring theme of currency crises is coercion. When people stop trusting a currency, the issuing government starts to insist. Here’s more on the subject from the Ludwig von Mises Institute:
It is surely some kind of sociological law that the state always blames actors other than itself for the unpleasant consequences of its own activities. In some situations it even goes so far as to stigmatize people for not wanting to enter into transactions that would make them poorer — as when, for instance, they are expected to accept payment for their goods and services in severely depreciated currency.
“Persons who refused to sell their lands, houses, or merchandise for nearly worthless paper were stigmatized as misers, traitors, forestallers, and enemies of liberty,” wrote Charles Bullock in 1900, “but prices continued to rise, as the inflation of the currency proceeded apace.” George Washington condemned “the monopolizers, forestallers, and engrossers,” who he said should be hunted down as “pests of society” and “hanged upon a gallows.”
In May 1776 Virginia alleged that the depreciation was attributable to people’s refusal to accept the notes, or to the insistence on higher prices in terms of paper money than in coin, or by “other devices”; the following year the Virginia assembly blamed the depreciation on “the pernicious artifices of the enemies of American liberty, to impair the credit of the said bills, by raising the nominal value” of coin. The Massachusetts General Court spoke of “the avaricious conduct of many persons, by daily adding to the now exorbitant price of every necessary and convenient article of life.”
The Connecticut government likewise blamed this phenomenon on “monopolizers, the great pest of society.” It went on to note that “some evil-minded persons, inimical to the liberties of the United States of America, have endeavored to depreciate the bills of credit of this and the said United States,” and that many of its citizens “are so abandoned and lost to all the feelings of humanity as to prey upon the bowels of their country.” According to the legislature of Pennsylvania, “the prices of goods and merchandise are greatly enhanced by the practices and combinations of evil and designing men.”
As the continental depreciated, the states came under pressure to make it legal tender and thus force people to accept it in exchange for goods and services and in payment for debts. The states complied with this request. Rhode Island declared that anyone who would not accept the paper money would “incur the displeasure of the General Assembly; and ought to be held and esteemed as an enemy to its credit, reputation and happiness; and totally destitute of that regard and obligation he is under to his country and the cause of liberty…. [T]he good people of this colony and America ought to withdraw all communication from such person or persons.” The law varied across the states, but in Virginia, for example, refusal to accept the notes amounted to a cancellation of the debt you were owed; other penalties of varying severity were enacted elsewhere. In North Carolina, if you so much as spoke disrespectfully of the paper you were “treated as an enemy to [your] country.”
Naturally, the depreciating continental also led to calls for economic controls in order to contain the upward pressure that the inflation was having on wages and prices. The New England states approved price-control statutes in 1776 and early 1777. The price controls had all the predictable effects, including massive shortages, disruption of the division of labor, and more government moralizing — it was bad people, you see, rather than stupid policy, that was responsible for the economic chaos.
A June 1777 letter from Boston read, “We are all starving here. [P]eople will not bring in provision, & we cannot procure the common necessaries of life.” Two years later, the same person wrote: “We are likely to be starved thro’out Boston. Never such a scarcity of provisions.”
Meanwhile, Continental Congress had repeatedly assured anyone who would listen that the continental currency would one day be redeemed at its face value, and that it was “derogatory” to the Congress’s honor that anyone would spread rumors to the contrary. In March 1780, Congress announced a plan for redeeming the currency at one-fortieth of its face value.
After 1780 the value of the remaining continentals plummeted still further. By early the following year it had reached a ratio of 100 to 1, and in some places it tumbled to 1,000 to 1 — at which point, recalled the New York Herald in 1863, “it expired … without a groan.”
This is the second in what promises to be a long series. See the first, Hyperinflation History: La Terreur, here.