CONTINENTAL CURRENCY. The colonies had no choice but to fund their armed resistance to increased British imperial control by issuing large amounts of paper money. They had had extensive, and largely successful, experience with this form of currency finance during the French and Indian War and chose to ignore the fact that a large part of that success was due to imperial restrictions on their currencies and Parliament's reimbursement (in specie) of much of their wartime expenditures. On 22 June 1775, the Continental Congress voted to issue two million dollars in bills of credit, an amount that turned out to be merely a down payment on the spiraling costs of a war that lasted longer than anyone could have imagined in 1775. For five years, Congress authorized ever-increasing amounts of paper money to meet the urgent demands of American forces for sustenance, clothing, pay, transportation, and every sort of military equipment, until the total, near the end of 1779, reached the unprecedented sum of $241,500,000.
The delegates were fully aware that unsecured paper money would inflate rapidly, but they were also aware that, until all states approved the Articles of Confederation (adopted by Congress on 15 November 1777 but not ratified until 1 March 1781), they were members of what was, legally, nothing more than a forum for consultation among sovereign allies. Because Congress had no source of revenue apart from recommending that the states provide the means for redeeming Continental currency, this paper money in effect had little or no real backing. The states themselves had issued over fifty-four million dollars in their own paper money by the end of 1779, and there was little money remaining to support the supposedly common currency. Add to these circumstances the fact that the British were engaged in a large-scale effort to counterfeit Continental currency (the full dimensions of which are unknown), it was inevitable that the value of paper money would decline.
While the value of Continental currency varied considerably from place to place, by the end of 1777 in Philadelphia, it took nearly four dollars in paper money to buy one dollar in specie. Despite a burst of optimism about the French alliance in the summer of 1778, by the end of that year it took nearly eight dollars in Continental currency to buy one dollar in specie. Despite limited efforts to redeem and retire Continental currency after 1778 (including the heavily counterfeited 20 May 1777 and 11 April 1778 emissions) and some attempts to enforce laws mandating the acceptance of the currency at par value, Continental currency collapsed in 1781. By the start of the year, depreciation had reached 75 to 1 in most states, 100 to 1 in Philadelphia, 110 to 1 in Maryland, and 210 to 1 in North Carolina. In May the currency collapsed, and the phrase "not worth a Continental" became synonymous with worthless. Two months later only hard money was used in the marketplace.
Depreciation wiped out roughly $226 million in Continental currency, worth $40 million in specie. The noted economic historian E. James Ferguson has stated:
The loss was carried by the people of the nation as money depreciated in their hands—a process sometimes considered as a form of taxation in rough proportion to ability to pay. Eventually the dead mass of currency was drawn in by the states. A good part of it was scattered or destroyed, and in 1790 only about $6,000,000 remained in the hands of individuals. (Power of the Purse, p. 67)
Under the funding act of 1790, the old Continental emissions were exchanged for bonds at the rate of 100 to 1.
Ferguson summarized the importance of paper money for the success of the war in these words:
Paper money provided the sinews of war in the first five years of the Revolution…. The burden was borne at home; indeed, currency finance sustained the war and survived in an attenuated form until the moment of victory. Only after the French and American forces captured Cornwallis at Yorktown did foreign loans and state payments become important. (Ibid., p. 44).
|Currency required to purchase $1 in specie|
|SOURCE: Ferguson, Power of the Purse, p. 32|
Ferguson, E. James. The Power of the Purse: A History of American Public Finance, 1776–1790. Chapel Hill: University of North Carolina Press, 1961.
Harlow, Ralph V. "Aspects of Revolutionary Finance, 1775–1783." American Historical Review 35 (1929): 46-68.
Jordan, Louis. Colonial Currency. Robert H. Gore Jr. Numismatic Endowment. Department of Special Collections. University of Notre Dame, South Bend, Indiana. Also available online at http://www.coins.ed.edu.
Michener, Ronald. "Backing Theories and the Currencies of Eighteenth-Century America: A Comment." Journal of Economic History 48 (1988): 682-692.
Mossman, Philip. Money of the American Colonies and Confederation Period: A Numismatic, Economic, and Historical Correlation. New York: American Numismatic Society, 1993.
Newman, Eric P. The Early Paper Money of America. 4th ed. Iola, Wis.: Krause Publications, 1997.
revised by Harold E. Selesky