After Lexington and Concord, Congress had a war on their hands and needed a way to finance it. The Americans were in large measure tax rebels, so taxation of their own would have to wait. After giving some thought to borrowing, Congress decided instead to call upon their old friend, the printing press.
The colonists had a long history with paper money. They had been inflating since the 1690s and had all but driven silver specie out of circulation. In 1751, Parliament banned further note issues in New England, and by 1764 extended the prohibition to the rest of the colonies.
As the colonies gradually retired the notes still in circulation, it created a brief period of price deflation. But later, in contrast to dire predictions caused by a lack of money, hard money New Englanders experienced price stability and prosperity.
Financing the Revolution
The Congress of 1775, though, was in a tough spot. As Rothbard notes,
Americans were in the throes of an anarchic uprising against their “legally authorized” government and its taxation. They were not yet prepared to slip on a new tax yoke in the cause of breaking the grip of the old. Later this would occur, but not yet in 1775.
On June 22, 1775, Congress decided to print $2 million in Continentals, or “bills of credit.” The plan was to begin redeeming them in 1779—not in hard money, but by levying taxes on the Continentals themselves, which would then be retired. With the issue of Continentals, the prospect for the colonists was bleak: They’d get hit first with a “tax” burden from the inflation, followed by a massive tax to get rid of the inflated dollars.
Congress kept printing and by spring of 1781 the Continental was virtually worthless, requiring 168 dollars to exchange for one dollar of silver. Each state also printed its own currency to finance the war, and the British easily counterfeited colonial currency to bloat the money supply further.
Price and Wage Controls
Rather than stop or slow the presses, as Rothbard notes,
. . .various states levied maximum price controls and compulsory par laws. The result was only to create shortages and impose hardships on large sections of the public. Thus, soldiers were paid in Continentals, but farmers understandably refused to accept payment in paper money despite legal coercion. The Continental Army then moved to “impress” food and other supplies, seizing the supplies and forcing the farmers and shopkeepers to accept depreciated paper in return.
The Continental had been allowed to sink into worthlessness without attempting to redeem it, but in 1779 Congress began issuing “loan certificates” that were also used as currency. At war’s end some of the $600 million in certificates were liquidated at their highly-depreciated rate, but most became the core of a permanent, peacetime public debt.
Rather than let the certificates pass into oblivion in the same manner as the Continentals, Robert Morris—the leader of the nationalist faction—pushed for redemption at par of the existing debt, both federal and state. He did so for two reasons:
. . .(a) to confer a vast subsidy on speculators who had purchased the public debt at highly depreciated values, by paying interest and principal at par in specie; and (b) to build up agitation for taxing power in Congress.
Revolt in Massachusetts
In 1780, Massachusetts adopted a controversial new constitution that had been ratified by only 47 of the state’s 247 towns, most of which were in or around Boston. Not surprisingly, the new constitution favored the rich eastern elite—the merchants, bankers, and speculators.
Many of the constitution’s provisions had little support in the state’s western towns that later became the nucleus of Shays’s Rebellion.
Prior to the Revolution, the Massachusetts backcountry rarely felt the impact of government decisions made in Boston. After 1780, that was no longer true—especially when the government decided to redeem its notes at face value and tax westerners to pay for them.
Many of the men in the western towns had fought in the Revolution and were paid in heavily-depreciated notes. To acquire basic necessities, most parted with their notes for one-eighth to one-tenth their original value.
The ones who bought the notes stayed home during the war. “Nearly 80 percent of the state debt made its way into the hands of speculators who lived in or near Boston, and nearly 40 percent into the hands of just thirty-five men,” historian Leonard Richards explains. Furthermore, of these thirty-five men, “all of them during the 1780s either served in the state house themselves or had a close relative in the state house.”
One creditor who held at least £3,290 in state notes was James Bowdoin, who—with great difficulty—managed to replace the popular John Hancock as governor in 1785. Hancock was suffering from gout and wouldn’t run for reelection. Unlike Hancock, who had a strong following in the countryside, Bowdoin had a low opinion of backcountry people. In his inaugural address, Bowdoin emphasized “the state’s need to fully honor its debts.”
The legislature decided to pay off the state note holders in hard money and expected to have the task completed by the end of the decade. At first, it tried funding the debt with impost and excise duties, and when that didn’t work they turned to poll and property taxes. This meant that every farmer would “have to pay for every son sixteen years or older, every horse he owned, every cow, every barn, every acre in tillage.” Ninety percent of the taxes would come from direct taxes on property, with the remaining 10 percent, import duties and excises, falling mainly on the eastern elite.
Not only was the tax bite going to be heavy, [Richards explains], it was biased against farm families with grown sons, and the chief beneficiaries were to be Boston speculators. These were inflammable ingredients, and what made them more flammable was what was happening in nearby Rhode Island. Indeed, the Boston elite blamed Shays’s Rebellion on the Rhode Island “virus.”
In 1786 Rhode Island’s Country Party, campaigning “To Relieve the Distressed,” displaced the conservative Mercantile Party and authorized £100,000 in land-backed paper money as legal tender. Creditors who refused it faced fines and possible disfranchisement. When the Superior Court rejected the penalty law in Trevett v. Weeden, the legislature overruled the court and refused to reappoint four resistant judges. This horrified the Boston elite.
Shays’s Rebellion
Beginning in 1782, western Massachusetts towns repeatedly petitioned the legislature for relief from grievances associated with the 1780 constitution, only to be ignored. In the summer of 1786, men from the western counties—some armed, others marching with fifes and drums—closed the Northampton courthouse, the most visible symbol of state authority in the region. Similar actions followed at Worcester, Concord, Taunton, Great Barrington, and Springfield.
Governor James Bowdoin called out the militia, but many refused to serve, while courts postponed cases or failed to find jurors. Massachusetts elites were outraged; Samuel Adams even demanded death for those who dared “rebel against the laws of a republic.”
In late December, after protesters again prevented the Springfield court from opening, Bowdoin decided to raise an army. Without legislative authority, he called for 4,400 men under General Benjamin Lincoln. Because the state lacked the needed funds, Bowdoin and Lincoln persuaded 153 wealthy Bostonians to contribute £6,000.
Lincoln left Boston on January 19, 1787, with 2,000 eastern recruits, intending to secure the federal arsenal at Springfield. Fewer than half the expected 2,400 western militiamen joined him, despite local clergymen urging obedience to the state, with relatively few of his troops Revolutionary War veterans.
Although the state and press portrayed Daniel Shays as commander-in-chief, he was merely one of several leaders. Shays—a forty-year-old Pelham farmer and former Continental Army officer—owned more than 100 acres and was active in his community. Most of his followers likewise belonged to substantial extended families accustomed to mutual support.
On January 25, the rebels—who identified as Regulators—advanced through deep snow toward the Springfield arsenal. General William Shepard first ordered warning shots over their heads, then had artillery fired at waist level, killing four and wounding many. Shays withdrew to Petersham, where Lincoln surprised the remaining force on February 3 after an overnight march through a blizzard. Most Regulators, including their leaders, escaped.
Conclusion
Suppressing the rebellion did not solve the state’s fiscal problem. Taxes could not easily be collected from fugitives. Creditors feared that Massachusetts might scale down its debts or repay them in depreciated paper. Their preferred solution was a stronger federal government able to tax and redeem the securities—powers the Confederation Congress lacked.
Before 1787, nationalists had failed to build sufficient support for replacing the Articles of Confederation. Shays’s Rebellion provided the needed incentive. Washington’s agreement to preside over the Constitutional Convention gave the Philadelphia gathering the prestige it needed to pursue a more powerful central government.
