Economy CSI Series on Debt

An American History: Part III

Finding the Money Post-Revolutionary War

By the Economy Team

"If you would know the value of money, go and try to borrow some."
--Benjamin Franklin;
Poor Richard's Almanac

We Won - Hooray! Now, We Have to Pay...

In 1781 the decisive battle of Revolutionary War is fought in Yorktown. The British surrender and the colonies win independence from England, but now face another battle: repayment of war debts. Benjamin Franklin had penned many a parable regarding debt in Poor Richards Almanac. “Creditors have better memories than debtors,” “The borrower is slave to the lender and the debtor to the creditor,” and “Gain may be temporary and uncertain; but ever while you live expense is constant and certain.” But theses wise words of wisdom rang a bit hollow when applied to this new debt. An altogether huge and crushing debt. Never before had a war been fought with borrowed money. For an individual, debt could lead to prison or indentured servitude. But for a new country? Well, this required a whole new monetary plan.

If you will indulge for a brief moment, Gentle Readers, and let us recall that the British, employing the strategy of economic sabotage during the war, flooded the colonies with freshly printed counterfeit Continentals; the currency which had been put into place as a stop-gap to keep the economy rolling throughout the war. To sum up matters: Continental currency had an enormous inflation rate and had depreciated dramatically. To make matters worse, the national government owed approximately $12 million in foreign debt (mostly to France and Holland) and $44 million in domestic debt; and state governments owed approximately $25 million, mostly in war debts. The primary concerns of post-war economic planners were reducing the inflation rate and raising the value of the currency; and repaying and financing government war debts. Imagine, if you will, these amounts as adjusted for current rates. Actually, we've done the math for you. In current dollars, our new nation owed a foreign debt approximately equal to $194 million; a whopping $710 million in domestic debt and the states were up to their proverbial ears with debt of $404 million. (Actually, in comparison to current circumstances, the Revolutionary War appears to have been quite the bargain.)

Prior to the war, the colonies had instituted ‘Land Banks’ which printed their own currencies in order to assist liquidity and commerce via loans on capital or property. Varying circumstances (interstate commerce, default on loan payments, over-estimation of actual future taxes leading to giddy late nights at the printing press by local patricians) had combined and lead to the outcome of the paper notes falling into circulation – for better or worse. Needless to say, this system wasn’t working out very well for those who found themselves as new citizens of the United States of America.

War debt had trickled down to consumers who were in large part small farmers, the monetary system was neither wholly monetary or barter, and taxation at the time was particularly regressive. This resulted in farmers having to sell their property, often at less than a third of their worth. The speculators were making out like bandits on this situation. The farmers were being reduced to poverty and in some cases, losing their voting rights as this right was, at the time, often tied to property ownership.

This lead to an armed uprising in western Massachusetts in 1786, known as Shay’s Rebellion.

This uprising led to the Constitutional Convention
as up until now the Articles of Confederation, ratified in 1781, had been the governing document which drew the Thirteen Colonies into a loosely defined confederation.

A New Monetary System

The two men who put our system of money into place were:

Thomas Jefferson and Alexander Hamilton.

This is Going to be Easy!

Everyone agreed that the new United States Currency would be the dollar.

This Isn’t Going to be Easy!

Jefferson had envisioned a system backed by land. He was a Republican and a proponent of states rights. For the most part, the idea that a dollar should be based on 100 units (cents) and other units of 10 being used as coins came from Jefferson. The dime and ten dollar gold coin were his idea. The quarter and the nickel were changes others decided as the currency progressed. Pennies were made from copper and other coins were silver or gold. The Constitution would not permit the government to print paper money.

Hamilton was a Federalist. He saw strength in the power of a unified central government with everyone using the same common currency. He also thought presidents should be elected for life and so should senators. (Insert humourous jibe rife with subtle irony and more than a hint of satire here.) Hamilton figured the federal debt from the war to amount to $42,414,085.56 - and not a penny more or less. (That’s roughly $815,655,491.53 in today’s currency. In our opinion, dear reader, still a bargain.) Hamilton also understood that debt could make money in the form of interest and that debt could be a desirable commodity.

Needless to say, these two had a real gulf between them that needed to be bridged.

It fell to George Washington, as our First President and “Decider” to act as referee between Hamilton and Jefferson.

For his part, Washington was very concerned about the way his fellow countrymen were being treated in regard to the debt left from the war, and it is chiefly this that brought him back from Mt. Vernon and his farm, to preside over the Constitutional Convention and accept his nomination as President. Then he made an Executive Decision. He asked Jefferson to be Secretary of State and Hamilton to be Secretary of the Treasury.

And now the fun begins.

Curious Reader, we do hope to see you at the next installment on September 12th.
Working title: The Creation of The Bank of The United States or “Don’t Make Me Pull This Country Over!” – G. Washington

References:
Economic State OF THE United States At The End Of The Revolutionary War – HistoryCentral.com
Poor Richards Almanac - Quotations
Shay’s Rebellion - Wikipedia
Shay’s Rebellion – Image – KenCollier.org
Inflation Conversion Factors for Dollars 1665 to Estimated 2016 by Robert Sahr; Oregon State University
University of Notre Dame – Office of Special Collections; Intro Land Offices by Louis Jordan