Currency in Colonial America: Then and Now: Making Money in Early America
Byron King recounts the history of Currency in Colonial America, discussing early America’s lack of real money, the barter system, and how the US handled its monetary woes in the wake of the American Revolution.
Since the establishment in 1913 of the Federal Reserve, America’s central bank, the U.S. dollar has lost 98% of its value. While most of the decline did not happen on our watch, we do not want to stand idly by while something truly awful happens to that last 2%.
There is gold, of course, as a remedy. But when you come to the end of something (like the dollar standard), it helps to go back to the beginning and see how it all started.
We’re seeing a currency revolution unfold before our eyes. And one definition of a revolution is a complete cycle, at the end of which a thing returns to where it started. We asked our intrepid correspondent in Pittsburgh, Byron King, to think about revolutions and money. He went back to the beginnings of the nation and found, guess what? A worthless currency. Plus ca change, plus c’est la meme chose.
Later this week, a peek into panicked strategy rooms of the established order, and just how radically flawed the “asset economy” has been come. For now…Byron’s report. Please see below…Dan Denning
Then and Now: Making Money in early America
YOU WOULD HAVE been hard put to find much in the way of real money in colonial America. The Eastern regions of North America had no mineral districts that yielded precious metals, hence gold and silver were scarce in the best of times. The currency most commonly in use in colonial America was the British pound, although Dutch guilders and Spanish pesos were also in common circulation, the latter known as “pieces of eight” because they could be divided into eight pie-like pieces. But each of those coins had to travel a long and dangerous path from mints in England or Holland or Spain. As to the Western frontier, across the imposing Alleghenies and their blanket of almost impassable forest, few coins ever made the trip, and even fewer entered into the stream of commerce.
Much of the economic activity in colonial times was based on barter. People traded services for services, or exchanged commodities drawn from nature. Beaver pelts, otter skins, and deer hides served as tangible currency, as did bushels of wheat or corn, or baskets of coal, or cattle on the hoof. Even used iron nails had value in a society in which refined metal was scarce, and old buildings were often burned down just to recover the nails used in their construction. As for the wood? Well, there were always more trees.
Aside from a few limited experiments in paper currency, real money — the gold or silver kind that was accepted in exchange by almost all people in almost all places at almost all times — was not native to the colonies at all. People had to improvise. In the decades before 1776, pre-Revolutionary currency was issued — out of necessity and usually against the will of the agricultural and mercantile classes — by colonial governments and private banks. These forms of scrip were typically paper notes, supposedly backed by gold and silver reserves allegedly on deposit in a vault.
This latter system of private and state specie had its origins in medieval Europe, where for centuries “gold notes” traded among the merchant classes and were used to clear trade accounts. However, the process led to much abuse and fraud, with many a note rolling off the printing press without any security to back it up. There are historical anecdotes of creditors literally mounting their horses and riding away as debtors approached them with colonial scrip in hand, so as to avoid a legal dispute over whether or not a debt had been repaid by the passing of mere paper currency.
In 1764, in an effort to arrest an epidemic of worthless notes spawned during the just-concluded French and Indian War, Britain barred the North American colonies from issuing paper currency. Despite the many flaws of the paper notes, the lack of it for use in commerce precipitated an economic contraction throughout the region and became a grievance raised in the Declaration of Independence.
During the American Revolutionary War, 1775-1783, the Continental Congress authorized the printing of paper money, named, appropriately enough, “continental” money. The colonies pledged their state credit to deliver sufficient gold and silver to back the currency and as collateral for the redemption of the bills of credit. But as with most such promises by governmental bodies throughout history — to issue honest money for use in commerce and as a store of value — this never happened.
Currency in Colonial America: Forcing People to Use Currency
During the Revolutionary War, continental paper notes were issued in immense quantities despite the fact that they were not backed by any hard asset, least of all gold or silver. It did not help that the British, refusing to recognize the continentals, instead began counterfeiting them. Without any security backing these continental notes, and with immense numbers of them flowing from both American and British printing presses, they became worth barely more than the paper on which they were printed. The value of the continental declined dramatically in the late 1770s. For example, in 1780, a Philadelphia merchant advertised a price of 20,000 continentals for a ham and 10,000 for half a pound of tea, about 40,000 times the posted price five years earlier. Inflation was rampant, such that commerce denominated in continentals ground to a halt. The expression “not worth a continental” became part of American slang for several generations after the Revolution, meaning something that was utterly worthless.
The problem of the young American colonies in revolt was that there were not enough hard assets in circulation available to secure the value of its continental currency. The land itself was rich in natural resources, of course, but it would take many decades of investment and applied human effort to turn the raw, undeveloped potential into capital. Toward the end of the Revolution, the paper continental note was all but worthless as a store of value or medium of exchange.
The colonial congress passed laws forcing people to use the continental currency to settle debts, but most people did not want to do so. In the face of public resistance, the congress at one point resolved that “Who ever should refuse to receive in payment Continental bills, should be declared an enemy of his country,” thus turning peoples’ pursuit of their economic self-interest into acts of sedition. Thousands of people were charged with the “crime” of refusing to take a worthless note in payment for goods and debts, and many were fined, were imprisoned, or lost their property to confiscation or forfeiture.
The Revolutionary War left the national government broke and insolvent, with a reputation for having issued worthless currency and forcing people to use it literally at the point of a gun. Real money, gold and silver coin, was so scarce at the end of the Revolutionary War that the national government could not even pay the troops. Gen. George Washington had to plead with his men to go home without compensation. In lieu of pay, many soldiers took land grants “west of the Alleghenies.” This served to eliminate some small portion of the government debt, as well as to relocate many people with guns to the Western regions of the young nation.
Following the Revolutionary War and its associated financial fiasco, the 13 states were reluctant to give any central government much in the way of financial power. The result was the Articles of Confederation, which provided for a weak central government.
Along with a weak central government, the confederation of 13 former colonies had a monetary system that was essentially useless. The monetary affairs of the new nation fell everywhere along the financial spectrum — from the use of British, Dutch and Spanish coins, usually in coastal cities, to the use of Revolutionary War-era continentals and other state-issued and privately issued paper scrip further inland, to the use of barter in the economies of the Western frontier, where the average person would see no more than a few small coins in the course of a year.
Currency in Colonial America: The US Constitution
The Framers of the U.S. Constitution intended specifically to address the monetary affairs and failings of the young republic. By the end of the Constitutional debate in 1787, the Framers adopted Article 1, Section 8, Clause 4, providing that the Congress shall have the power “to establish…uniform Laws on the subject of Bankruptcies throughout the United States.” This was a critical element in addressing the epidemic levels of bad debt that permeated the U.S. economy of the time, as a direct outgrowth of the use of continentals and other state and private scrip. Congress would have the power to rationalize the many conflicting elements of state law and monetary custom within the 13 states, a prerequisite to fostering economic growth. Absent the ability to consolidate and discharge debt, to free up assets that were otherwise encumbered, and to permit people to make a fresh start in commerce, the national economy would remain stalled.
The Framers also adopted Article 1, Section 8, Clause 5 of the Constitution, which provides that Congress shall have the power “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” The companion to this clause is Article 1, Section 10, Clause 1 of the Constitution, which provides that “no State shall…coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.” The Framers specifically intended that money in the new republic would be based on the use of precious metals, and not on paper currency.
It was that simple, except for the tens of millions of dollars (at least at face value) of continentals and other state-issued scrip still floating about in the economy and the fact that there was little in the way of gold or silver to be had by anyone. The Framers were taking a very bold chance that a constitutional requirement for sound money, and a secure legal framework for commerce, would attract foreign investment and foster the growth of capital.
President George Washington, who recalled not being able to pay the troops, and America’s first secretary of the Treasury, Alexander Hamilton, decided that the nation had to clean up the financial mess left in the wake of the continental notes. Hamilton came up with a proposal that the new federal government assume the underlying obligations of the continentals, originally backed by state governments. In 1790, Congress passed the Assumption Act, by which the federal government assumed the payment of the state debts contracted during the Revolutionary War. Under the act, formerly worthless continental currency and scrip would be “assumed” at face value by the central government.
From the time that Hamilton’s assumption plan was first suggested, the otherwise worthless continental paper had been rising in price as speculators acquired it for pennies on the dollar. As passage of the Assumption Act looked more and more likely, the value of continentals rose toward par. However, in the more remote regions of the country, many people were ignorant of this development. Taking advantage of this situation, the moneyed interests of the East Coast cities, not a few of whom were members of Congress or their relatives and business associates, sent agents into every state and county to buy up the old continental paper before large numbers of people began to understand its value. In order that as few of the continental notes as possible should be left on the table, the speculators employed couriers and relay horses to reach the most isolated areas. The result was a swindle of truly national proportions, which economic historian C.M. Ewing called “the greatest financial atrocity in our national history…The rich were made richer and the poor made poorer.” (He wrote this in 1930, as the Great Depression was beginning to unfold.)
Treasury Secretary Hamilton then proposed that the new federal government raise the revenue necessary to pay for its repurchase of the continentals at face value by levying federal excise taxes. Some of the most significant of these taxes fell on the backs of many of the very same people who had parted with the continental notes at great discount some months before. In particular among Hamilton’s proposals for raising revenue was a tax on whiskey, a staple of life along the Western frontier.
As we will see in another article, this “whiskey tax” compounded the sentiment of many people that the new federal government was simply the replacement of the British king by swindling, moneyed East Coast speculators. In today’s world, in which American taxpayers routinely part with 40-50% of their income in the form of federal, state, and local taxes, it might seem strange that the collection of a tax on whiskey would usher in a defining episode in the history of the United States of America. But absent that tax and the rebellion that it sparked, the United States of America would be a very different nation.
Next…Our intrepid correspondent will explore the implications of the Whiskey Rebellion and how a group of hard-drinking farmers forced a national debate on the future of federal powers.
Warmest regards – and until your next shot of Whiskey,
December 7, 2004