Thursday, May 28, 2009

Money and the American Revolution

I don’t think our Founding Fathers at the time of our Revolution thought enough about money and how to obtain it.

The army, such as it was, was irregularly paid if at all. There was no reliable way to raise revenue or system of taxation.

So the Continental Congress embarked on the most dangerous fiscal policy, and the easiest; it started printing money, loads of it. This paper currency had the dubious security of the promise of future revenues. The effect of these “continentals” was entirely predictable – roaring inflation, a rapidly depreciating currency, which ultimately was considered less than worthless. Even before the revolution, the money supply was unusual and often precarious. Colonies printed their own, for internal consumption. This quaint method may have worked in a very limited way, was but hardly suitable at a time of expanding commerce.

The supply of coins was always limited, due to minting restrictions. Spain was a large supplier. Coins were adapted to smaller denominations by just cutting them into pieces.

Many transactions relied on barter, available and well accepted. Tobacco and beaver pelts were often circulated. Barter has never disappeared. At the end of World War II in Europe, cigarettes were the currency of choice.

Civilians had a very hard time during the revolutionary years. A serious labor shortage developed if men were drafted into the local militia. Goods became scarce through boycotts against British products or trade restrictions by Britain itself.

Around 1780, the Congress knew that for the revolution to continue, large sums of money had to be borrowed from somewhere. John Adams, working quite alone initially, obtained a huge loan from Dutch bankers. France and Spain also became significant lenders.

In a few years these loans were the principal source of revenue for the revolution.

Today, we do exactly the same thing. The creditors are more varied, what we offer are called “Treasuries”, and they are sold at auction. Paying this interest puts an increasing burden on our GNP.

Congress has a familiar method to handle Treasuries. When they become too burdensome, the debt ceiling is raised, and more become available. Dire economic predictions are made, and the cycle continues. The debt is constantly discussed; some economic voices don’t think it’s such a bad thing.

During the revolution, some private financiers such as Robert Morris of Pennsylvania acted in a bail-out capacity for the Continental Congress, with some success. But an attempt to establish a national bank was mistrusted, and ultimately not accepted. Finally, only hard currency had value.

I think the emerging United States were always teetering on the brink of financial disaster. The cost of loans and the lack of steady revenue could not continue indefinitely without a fiscal policy on a national scale.

The effect of war debt really impacted Great Britain after the end of World War II. Then it faced huge costs to handle returning war veterans and a general population that would no longer accept the pre-war living standard. So there was severe austerity, including continuing food rationing and strict currency regulations.

It was a very unhappy time in Great Britain. It certainly could no longer retain its empire.

What it really needed was the brilliance of an Alexander Hamilton and a huge Dutch loan. – Renata Breisacher Mulry

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