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Revolution: Finance

Revolution: Finance

The rebellious colonies successfully financed the first stages of the Revolution as they had their colonial wars, by issuing fiat paper money called bills of credit. By May 1781, however, both state bills of credit and continentals (bills issued by the Continental Congress) were so numerous as to be almost worthless. In January 1782, a joint-stock commercial bank called the Bank of North America, a financial institution new to America, commenced operations. Its notes and deposits supplanted bills of credit as the major medium of exchange, and its loans to governments and merchants helped to finance the final phases of the war. Forced and voluntary domestic loans and foreign loans also helped to finance the war effort and formed the greater portion of the national debt funded under Alexander Hamilton's funding and assumption plans in the early 1790s.

sources of government revenue

Colonial governments generated revenue by selling assets, taxing, borrowing, and issuing bills of credit. In the first stages of the Revolution, only the last method was readily available to the rebel governments.

Colonial governments often owned valuable assets, including public lands. Some colonies, like Maryland, invested budget surpluses in financial securities like Consols (British government bonds) and Bank of England stock. However, titles to such government assets became tenuous after the Declaration of Independence, so the assets could not be sold at favorable prices. In the final years of the war, the sale of confiscated Loyalist estates became a significant revenue source in some places.

Colonial taxes took various forms. The perennial favorite of colonies with large seaports was tariffs, duties on imports (and occasionally exports). Relative to other types of taxes, tariffs were easily collected and the ultimate sources of the revenue were easily obscured: importers paid the duties to government collectors before silently passing the taxes on to their customers in the form of higher prices. Britain's blockade of the American coast severely disrupted international trade, and most wartime imports were destined for government use anyway, so the war severely curtailed tariff receipts.

Colonial governments also taxed real and personal property (land, buildings, slaves, and personal property like kitchen utensils and bedding), as well as certain types of income (rental income and government salaries). Per capita (head) taxes were also imposed in some places. Levying taxes was fairly easy, but even in peacetime actually collecting them was difficult. During the Revolution direct taxes became even more difficult to collect, especially in areas with Loyalist sympathies. Fearful of driving neutrals to the king's side, rebel governments were reluctant to use coercive collectors, sheriffs, and courts, even in patriotic districts. Use taxes, like court and recording fees, were still collected in many areas, but they funded only the specific services provided.

Some colonial governments had established strong credit ratings. After currency reforms in the early 1750s, for example, Massachusetts successfully borrowed specie (gold and silver) and serviced its debts to lenders' satisfaction. Pennsylvania too successfully borrowed on bonds, but not as extensively as Massachusetts did. Especially early in the war, the rebel governments found borrowing difficult because their legitimacy was suspect and their tax receipts and receipts from sales of assets were anemic. As a result, every state informally borrowed from suppliers, contractors, and even soldiers, receiving goods, wares, and services for the promise of later payment.

Beginning in earnest in 1780 and 1781, the military essentially forced Americans to lend by seizing their corn, pigs, and horses in exchange for IOUs. In the last years of the war the soldiers themselves regularly received IOUs in lieu of wages. The rebel governments did not, however, force people to lend specie to them. Instead, they tried to coax people into lending by appealing to their patriotism. The sums offered were insufficient to prosecute the war, largely because lenders feared that they would never be repaid. Throughout the war the United States Loan Office garnered only about $11.6 million in specie from the sale of certificates.

Rebel governments had a final, well-understood expedient open to them: issuing paper bills of credit. At one time or another, every colony, anticipating tax receipts, had issued such bills as a form of scrip rather similar to modern Federal Reserve notes. As government IOUs that bore no interest, the bills were both a form of borrowing and a form of taxation called seigniorage. Governments used them to purchase goods and services, redeeming them later, when bill holders tendered them for taxes or government assets. People who would not consider holding government bonds held bills because they were a medium of exchange—bearer instruments that passed from hand to hand as cash in a wide range of economic transactions.

Bills of credit could also indirectly tax the citizenry with inflation. By the end of 1781, state governments had issued bills totaling about $246 million in terms of nominal or face value. By the time that Congress finally stopped printing continentals in 1779, it had put some $241.5 million into circulation. As early as 1777, the nominal value of bills in circulation far exceeded the demand for money at prevailing price levels, so putting more bills into circulation simply caused inflation. Holders of bills were subject to a type of "tax" when the purchasing power of their bills decreased. Some scholars have pointed to the progressive nature of this tax: those who held the most money suffered the greatest inflationary losses. At first Americans endured the tax of inflation without much discomfort. Moreover, early in the war it was possible to mitigate the tax by refusing to accept the bills. However, with increases in the tax rate (the rate of depreciation or inflation), the rebel governments found it necessary to strictly enforce their legal tender laws. So avoiding the tax became more difficult just as inflation reached its highest levels. Specie, which had been acquired by trading with the British and French armies, disappeared into hoards as people frantically sought to rid themselves of their rapidly depreciating paper money. The end came in April and May 1781, when continentals lost almost all of their remaining value. State bills of credit held up little better. In May Congress repealed its legal tender laws and asked the states to do likewise.

Since it was impractical to issue any more paper money and the troops in the field were in a perilous condition, state governments buckled down and began collecting taxes, first in kind (wheat, horses, gunpowder) and later in gold and silver, which began to emerge from hoards after repeal of the tender laws. Some of the funds the states turned over to Congress, which did not have the power to levy direct taxes. Moreover, the new Republic had fought well enough and long enough to convince European allies that it was creditworthy. In 1781 and 1782 French, Dutch, and Spanish loans totaling some $7.8 million became available.

robert morris and the bank of north america

Increased tax collection and foreign loans were insufficient, however, to continue to prosecute the war. Philadelphia merchant-statesman Robert Morris, whom Congress appointed as superintendent of finance in May 1781, helped to stave off bankruptcy by issuing IOUs backed by his personal credit. Several of his lieutenants, including Treasurer Michael Hillegas, another Philadelphia merchant-statesman, did likewise.

Morris also helped to establish the Bank of North America, the continent's first bank of issue, discount, and deposit. This commercial bank, which began operations in Philadelphia in January 1782, portended the future. Unlike the rebel federal and state governments, the Bank of North America was a business, a private corporation owned by stockholders. Also unlike the rebel governments, the Bank of North America issued not one but two types of liabilities: checking deposits, much like those in use at banks today, and banknotes. Though superficially similar to bills of credit, banknotes were a very different form of cash that most thought vastly superior. For starters, banknotes were not a legal tender for private debts. They circulated because people valued them, not because the government proclaimed that they should. People valued them because they could convert them into specie on demand. Moreover, banknotes were also backed by high-quality, short-term loans to private individuals, not future taxes or land, as bills of credit had been. In addition to supplying the economy with superior cash instruments and merchants with loans, the Bank of North America made numerous short-term loans to the government in the final years of the war.

Due to Congress's continued inability to levy direct taxes, however, the nations' finances remained precarious until after passage of the Constitution and the implementation of Alexander Hamilton's funding and national bank plans. Not including interest on the national debt, Americans paid approximately $163 million (specie) for their independence, roughly 15 to 20 percent of the gross national product, about the same level that they would commit to fighting the Civil War and World War I. Of the total cost of the war, bills of credit (including the taxes and sales of assets that redeemed some of them) bore about 67 percent of the financial burden ($110 million, specie); voluntary and forced domestic loans ($43 million) and foreign loans ($10 million) accounted for the remainder.

See alsoBank of the United States; Banking System; Hamilton, Alexander; Hamilton's Economic Plan; Taxation, Public Finance, and Public Debt .


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Ferguson, E. James. Power of the Purse: A History of American Public Finance, 1776–1790. Chapel Hill: University of North Carolina Press, 1961.

Ferguson, E. James, John Catanzariti, Elizabeth Nuxoll, Mary Gallagher et al., eds. The Papers of Robert Morris, 1781–1784. 9 vols. Pittsburgh: University of Pittsburgh Press, 1973–1999.

Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957.

Studenski, Paul, and Herman Krooss. Financial History of the United States. Washington, D.C.: Beard Books, 2003.

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Robert E. Wright

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