A Short History of Paper Money and Banking

CHAPTER III. Of Continental Money.

According to an estimate by the Register of the Treasury, in 1790, the issues of continental money were as follows, viz:

The first emission was dated May 10 1775, but the notes were not actually in circulation till the August following.1

Till the issues exceeded nine millions, the bills, according to the concurrent testimony of Mr. Jefferson and Mr. Paine, passed at their nominal value. The depreciation afterwards was very great. The rate of exchange for hard money at Philadelphia, from January 1777 to May 1781, was as follows, according to a table take from the merchants’ books and published by Mr. Pelatiah Webster.

1777.	January,	-	1¼
	February,	-	1½
	March,       -	-	2
	April,         -	-	2½
	May,          -	-	2½
	June,          -	-	2½
	July,           -	-	3
	August,      -	-	3
	September,	-	3
	October,    -	-	3
	November,	-	3
	December,	-	4
1778.	January,	-	4
	February,	-	5
	March,       -	-	5
	April,         -	-	6
	May,          -	-	5
	June,          -	-	4
	July,            -	-	4
	August,       -	-	5
	September,	-	5
	October,     -	-	5
	November,	-	6
	December,	-	6
1779.	January	7, 8, 9
	February,	10
	March,	10, 11
	April,	12½, 14, 16, 22
	May,           -	-	22, 24
	June,           -	22, 20, 18
	July,            -	18, 19, 20
	August,       -	-	20
	September,	-	20, 28
	October,     -	-	30
	November,	-	32, 45
	December,	-	45, 38
1780.	January,       -	-	40, 45
	February,	-	45, 55
	March,        -	-	60, 65
	April,          -	-	60
	May,            -	-	60
	June,            -	-	60
	July,             -	-	60, 65
	August,        -	-	65, 75
	September	-	75
	October,      -	-	75, 80
	November,	-	80, 100
	December,	-	100
1781.	January,       -	-	100
	February,	100, 120
	March,        -	120, 135
	April,          -	135, 200
	May,           -	200, 500

On the 31st of May, 1781, the continental bills ceased to circulate as money, but they were afterwards bought on speculation at various prices, from 400 for 1, up to 1000 fot 1.

The value of continental paper was not the same in different parts of the country. The exchange was, for example, December 25th 1779, at 35 for 1 in New England, New York, the Carolinas, and Georgia, and at 40 for 1 in Pennsylvania, New Jersey, Delaware, Maryland and Virginia.

An account taken from the books of merchants in Virginia shows that the depreciation there regularly followed that in Philadelphia, though, towards the close, it sometimes Jagged a month or more behind. Thus, when exchange was at Philadelphia at 100 for 1, in January, 1781, it was in Virginia at 75 for 1: and in April, when exchange in Philadelphia was at 135 for 1, it was in Virginia at 100 for 1.

As late as May, 1781, speculations were entered into at Philadelphia, to purchase continental money at 225 for 1, and sell it at Boston at 75 for 1.

It is worthy of remark “that the depreciation of continental money never stopped the circulation of it. As long as it retained any value at all, it passed quick enough: and would purchase hard money or any thing else, as readily as ever, when the exchange was 200 for 1, and when every hope, or even idea, of its being ultimately redeemed at nominal value had entirely vanished.”2

The facility of raising ways and means, in the early part of the war, by issues of paper, led to much extravagance in the commissary department, and prevented the establishment of a sound system of finance. It is said that when a proposition was before Congress to establish a regular revenue system, one member exclaimed, “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer, and get a waggon load of money, one quire of which will pay for the whole!”3

Our ancestors were lavish of their blood, in defence of their rights. If it was through a wish to save their treasure, that they resorted to paper money, they did not succeed in their object. As a mode of raising revenue, it might be compared to a tax, the expenses of collecting which were many times as great as the sum brought into the treasury. The benefit the Government derived from it, was in no way commensurate with the burden it imposed on the people. Most of the loss fell on the Whigs as it was in their hands the paper depreciated. The Tories, who had from the beginning no confidence in it, made it a rule to part with it as soon as possible.

This continental money was, in its true character, a simple evidence of debt due by the Government: and may, as such, in the first stage of its operation, be compared to the forced loans which the potentates of Europe have at times extracted from their subjects. As a forced currency, it may be compared to the base coin which the same potentates have issued in other seasons of difficulty. The resort to it can be justified (if it can be justified at all,) only on the plea of state necessity—a plea so easily made that it ought never to be admitted without close examination.

It is difficult to believe that a people so devoted to liberty as were the Americans of that day, would have been backward in their contributions for the necessary expenses of war, if they had not been taught by some of their leading men that taxation was quite unnecessary, and that paper money would supply every financial want. “What a shame it is” said a patriotic old lady, “that Congress should let the poor soldiers suffer, when they have power to make just as much money as they choose.”

The best, if not the only excuse, for the policy which was adopted is, perhaps, to be found in the opinion then prevalent, that money was something which derived its value from the authority of Government. In no other way can we apologize for the acts which imposed severe penalties on those who refused to exchange their merchandise for paper, and which in some instances even outlawed the supposed offender.

When the continental money was first issued, an expression of doubt as to its value, involved suspicion of disaffection to the cause of the country. As the issues increased, the prices of goods necessarily rose; but this was attributed to combinations of the merchants to raise the price of their merchandise, and to sink the value of continental money. They were called Tories, speculators, and many other hard names; and their stores were forcibly broken open, and their goods sold at limited prices by committees of the neighbors.4

“The fatal error” says Mr. Webster, “that the credit and currency of continental money could be kept up and supported by acts of compulsion, entered so deep into the minds of Congress, and all departments of administration through the States, that no considerations of justice, religion, or policy, or even experience of its utter inefficiency, could eradicate it: it seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common justice, and even from common sense.

“Congress began, as early as Jan. 11th, 1776, to holdup and recommend this maxim of maniaism, when continental money was but five months old. Congress then resolved that ‘whoever should refuse to receive in payment continental bills, should be declared and treated as an enemy of his country, and be precluded from intercourse with its inhabitants,’ i. e. should be outlawed: which is the severest penalty (except of life and limb,) known to our laws.

“This ruinous principle was continued in practice for five successive years, and appeared in all shapes and forms, i. e. in tender acts, in limitation of prices, in awful and threatening declarations, in penal laws, with dreadful and ruinous punishments, and in every other way that could be devised, and all executed with a relentless severity by the highest authorities then in being, viz. by Congress, by Assemblies and Conventions of the States, and by committees of inspection (whose powers in those days were nearly sovereign,) and even by military force: and though men of all descriptions stood trembling before this monster of force, without daring to lift a hand against it during all this period, yet its unrestrained energy always proved ineffectual to its purposes, but in every case increased the evils it was designed to remedy, and destroyed the benefits it was intended to promote: at best its utmost effect was like that of water sprinkled on a blacksmith’s forge, which, indeed, deadens the flame for a moment, but never fails to increase the heat and flame of the internal fire. Many thousand families of full and easy fortune, were ruined by these fatal measures, and lie in ruins to this day (1790) without the least benefit to the country, or to the great and noble cause in which we were then engaged.”

After this account of the nature of the system, the reader will readily believe Mr. Webster, when he says, in an essay published in March, 1780, “Frauds, cheats, and gross dishonesty are introduced, and a thousand idle ways of living are attempted in the room of honest industry, economy and diligence which have heretofore enriched and blessed this country”

In various parts of his essays, he adverts to the sufferings of the people from the necessary incidents of the war. The price of foreign commodities was increased many per cent. There was “an extreme scarcity and want of some necessary articles; for example, much meat was spoiled and lost for want of salt to preserve it: and many trades and manufactures were either wholly stopped or greatly diminished for want of materials. Another hardship very sensibly felt was the force which was used with all descriptions of men in seizing their goods, wagons, stock, grain, cattle, timber, and every thing else which was wanted for the public service. To these may be added the captures, the ravages, and depredations, the burnings and plunders of the enemy, which were very terrible and expensive. They had possession, first or last, in the course of the war, of eleven of the capitals of the thirteen States, pervaded the country in every part, and left dreadful tracks of their marches behind: burning, in cool blood, a great number not only of houses, barns, mills, &c., but also of most capital towns and villages.” Yet these evils were not as great in the judgment of Mr. Webster, (and he was an eye witness and a participator of these sufferings,) as those which were caused by continental money and the consequent irregularities of the financial system. “We have suffered more from this cause” he says, “than from every other cause of calamity: it has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemies.”5

“While we rejoice in the riches and strength of our country, we have reason to lament with tears of the deepest regret, the most pernicious shifts of property which the irregularities of our finances introduced, and the many thousands of fortunes which were ruined by it; the generous, patriotic spirits suffered the injury: the idle and avaricious derived benefit from said confusion.”6

Certain compulsory measures of the Executive Council of Pennsylvania, designed to support the credit of continental money and of the State bills, gave the fatal blow to the system, in May 1781. Mr. Webster gives a minute account of the proceedings; but we deem it unnecessary to transcribe them, for, as he justly observes, “they will appear to a stranger as intricate and as hard to understand as the prices of stocks in Change Alley.” We doubt not, however, “that they were perfectly understood by people of all ranks at that time, inasmuch as every variation of the exchange altered the value of all their cash on hand.”

“Thus,” he exclaims, after having narrated the proceedings of the Executive Council, and their important effects, “thus fell, ended, and died, the continental currency, aged six years. Bubbles of another sort, such as the Mississipi scheme in France, and the South Sea in England, lasted but a few months, and then burst into nothing: but this held out much longer, and seemed to retain a vigorous constitution to its last: for its circulation was never more brisk than when its exchange was 500 to one; and yet it expired without a groan or struggle; and I believe of all things which ever suffered dissolution since life was first given to the creation, this mighty monster died the least lamented.

“If it saved the State, it has also polluted the equity of our laws; turned them into engines of oppression and wrong: corrupted the justice of our public administration: destroyed the fortunes of thousands of those who had the most confidence in it; enervated the trade, husbandry and manufactures of our country, and gone far to destroy the morality of our people.”

Many who are yet living can attest the truth of this statement.

 

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7 See the American Almanac for 1830.

8Most of the facts in this chapter have been derived from a series of essays by Pelatiah Webster, a merchant of Philadelphia, and an uncle of Noah Webster, the grammarian. They were published at different intervals, from 1776 to 1780, in pamphlet form, and collected into a volume, with notes, in 1790.

9 P. W.

10Ib.

11 P. W. Note to Essay of July, 1779.

12 P. W. Essay of Jan. 8th 1780.

13Note to Essay of Feb. 20th 1780.

• 1† Ib. Vol. II, p. 58.
• 2* See Say, Book, Chap. xxi, Section 2.
• 3‡lb. Vol. II, p. 82.
• 4* This is not the first time this remark has been made. In the British Bullion Report, made in 1811, the following passage occurs: “The wages of common country labor, the rate of which, it is well known, adapts itself more slowly to the changes which happen in the value of money, than the price of any other species of labor or commodity.”
• 5* They were those of Scott and M’Michael, Peter Baynton & Co., and of one other firm, the name of which is not recollected by our informant.
• 6† Ib. pp. 245, 6.
• 7“In most disquisitions upon the noxious tendency of Banks,” says another writer* “much stress has been laid upon the injuries they have a power to inflict, by excessive loans and consequent bankruptcy, and by creating and circulating a permanent excess of currency. Could these two evils be avoided, many believe that Banks would be innoxious. I regret to differ. I am not of those who imagine that Banks incorporated with a liberal capital, will ever endanger their solvency by extending their loans; nor of those who believe that Banks controlled by specie payment, can circulate a permanent excess of paper. And yet, I think I can perceive a portentous power that they exercise over commercial enterprize. I am of opinion that they can circulate a temporary excess of paper, which, from time to time, finds a corrective, in a run upon the Banks for specie; that this temporary excess is succeeded by a temporary deficiency, one extreme invariably tending to another; that the consequences of this alternate excess and deficiency are, in the former case to impart an undue excitement, and in the latter an undue depression to commercial enterprize; that the effect of the former is to create an unnatural facility in procuring money, and to enhance unnaturally the price of commodities; while that of the latter is to produce an artificial scarcity, and to cheapen prices artificially; that the victims of these vibrations are the great body of merchants, whose capital and average deposits cannot always command discounts; that the gainers are a few intelligent and shrewd capitalists, the magnitude of whose deposits commands enormous discounts at all times, and who, being behind the curtain, know when to buy and when to sell. I am of opinion that these vibrations inflict evils which close not with mercantile speculation; that they tend to unhinge and disorder the regular routine of commerce, and introduce at one moment a spirit of wild and daring speculation, and at another, a prostration of confidence, and stagnation of business: that these feelings are transferred from the counting-house to the fire-side; that the visionary profits of one day stimulate extravagance, and the positive losses of another engender spleen, irritation, restlessness, a spirit of gambling and domestic inquietude.
• 8The ill-judged expedition of the Carolinians against St. Augustine, in 1702, entailed a debt of 6000 pounds on that colony, for the discharge of which a bill was passed by the Provincial Assembly for stamping bills of credit, which were to be sunk in three years by a duty laid upon liquors, skins and furs. For five or six years after the emission, the paper passed in the country at the same value and rate as the sterling money of England.†
• 9Because they are divisible into extremely minute portions, and capable of re-union without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the articles of purchase.*
• 10To defray the expenses of an expedition against the Tuscaroras, and to accommodate domestic trade, the Legislature of South Carolina established a public Bank in 1712, and issued 48,000 pounds in bills of credit, called Bank bills, to be lent out on interest on landed and personal security, and to be sunk gradually at the rate of 4000 pounds a year. Soon after the emission of these Bank bills, the rate of exchange and the price of produce rose, advancing in the first year to 150, and in the second to 200 per cent.‡ By the year 1731, the rate of exchange rose to 700, at which, says Holmes, “it continued with little variation upwards of forty years.”
• 11Wages appear to be among the last things that are raised by an increase of Bank medium. The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains unchanged. In the year 1831, which was a year of great expansion, rents rose enormously in many parts of the town, store goods advanced in price, and such fresh provisions as are sold in the market were higher than they had been at any time since the resumption of specie payments; but the money rate of wages was hardly affected.*
• 12We have become so accustomed to this system of breaking, that we begin to consider it a part of the system of nature. But it was not so always. Previous to the revolutionary war, there were but three bankruptcies among the large dealers in Philadelphia.* A bankruptcy in the olden time, spread as much gloom over a family as a death; and if the bankruptcy was the result of misfortune, the family had the sympathy of all their neighbors.
• 13In 1721, the Governor recommended measures for preventing the depreciation of the currency: and the Assembly gave him for answer, that they “had passed a bill for issuing one hundred thousand pounds more in bills of credit.” This alone, as Hutchinson justly observes, had a direct tendency to increase the mischief: but they added that “to prevent their depreciation, they had prohibited the buying, selling and bartering silver, at any higher rates than set by acts of Parliament.” This certainly could have no tendency to lessen it. Such an act can no more be executed than an act to stop the ebbing and flow of the sea.”†