Finances of the Revolution
Finances of the Revolution
Finances of the Revolution
FINANCES OF THE REVOLUTION. Since hatred of imperial taxes was one of the main reasons why the colonists undertook to defend their rights by force of arms in the first place, Congress and the states had had to be wary of taxing the people to pay for the war effort. Yet war making was ruinously expensive, and some method of sustaining the armed struggle had to be found. On 22 June 1775, eight days after adopting the New England army around Boston as a continental army, Congress voted to issue $2 million in bills of credit, the beginning of a stream of currency finance that reached $241.5 million by the end of 1779. The colonies had issued paper money to help pay their expenses during the French and Indian War, but the money had been backed by taxation and the reimbursement of expenditures by Parliament, neither of which was now possible. Congress was reduced to asking the states for contributions, but with the states issuing their own unbacked paper money, there were few funds left to support the continental emissions. Everyone knew the currency would depreciate. With expenses estimated as high as $20 million in specie annually, the longer the war lasted, the faster the value would bleed from paper money. The British initiated a significant counterfeiting program to help cheapen the currency, but it was the continuing stalemate, even after the French entered the war in February 1778, that accelerated the devaluation. Although currency finance carried the war through its critical early years, when the currency began to collapse in 1779, it seemed to many that the Revolution was running out of time.
As the central financing of the war stalled, Congress stepped up reliance on borrowing money from wealthier Americans (about $60 million in Loan Office Certificates) and allowing agents of the quartermaster and commissary departments to impress needed supplies, giving in return Certificates of Indebtedness (a minimum of $95 million in ten states). It also shifted a significant burden to the states, who were not themselves in very good financial shape. Nine states agreed to be responsible for paying the wages of their Continental troops in 1781 and 1782, but the soldiers themselves received virtually nothing, a dangerous way to deal with troops, some of whom, in the New Jersey and Pennsylvania Lines, had already mutinied over arrears in pay in January 1781. A plan floated on 18 March 1780 to revalue Continental currency at 40 to 1 by declaring forty dollars of old Continental currency worth one dollar in specie had failed by the end of the year.
In May 1781 the Continental currency collapsed, taking with it, via depreciation, $226 million in debts, in effect a tax levied on those who had held on to the paper. Foreseeing this collapse, Congress had reorganized and rationalized its executive departments in late 1780 and early 1781, steps it had not had the political will, or the financial pressure, to take earlier. On 20 February 1781, Robert Morris—perhaps the wealthiest, and certainly one of the most astute, merchants in America—accepted the job of superintendent of finance.
Morris's principal goal was to establish a sound financial footing for the central government. He streamlined the administration of army supply by relying on, and promptly paying, private contractors, rather than operating through layers of government agents who paid for goods with promissory notes. He created two new series of paper money—the so-called Morris's notes, backed by his own assets, and notes issued by the Bank of North America that he persuaded Congress to charter—to restore confidence in bills of credit. He consolidated the existing debts into a single central debt and wanted Congress to fund it with taxes imposed by the central government. All of his measures were made possible by the fact that the war was winding down, American political independence was assured, the size of the Continental army was shrinking, and no large-scale military operations were necessary after the surrender of Cornwallis at Yorktown in October 1781.
The history of American war finance is the story of the leaders of a coalition's constituent partners learning to work together to pay for a war of unprecedented scope and complexity—and therefore, cost—in a society where the instruments of financial manipulation were underdeveloped and the aversion of the people to taxation was enormous. Given these circumstances, it is probably more appropriate to emphasize their successes rather than their failures and to remember that they did manage to establish the political independence of their confederation.
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revised by Harold E. Selesky