War and Government

Sources

Role of Government. The colonists were used to governments regulating their economic behavior. Even so, the government’s presence in people’s lives increased during the Revolution. In order to fight the war Congress and the new state governments intervened in the economy to a greater extent than they ever had previously. Although in the beginning the Continental Congress had little real power, it issued several resolutions. In 1777 Congress recommended that the state governments fix the value of most services and commodities. It resolved that the states should pass laws authorizing the seizure of goods for use by the Continental Army. Congress also suggested that the states control retailers by limiting their number and obliging them to obtain licenses. Beginning in 1780 a nearly bankrupt Congress turned to the states for specific supplies, to pay soldiers, and to take the severely depreciated currency out of circulation. The states responded with new laws governing taxation, land, business, labor, and the relationship between debtors and creditors. They confiscated items from their citizens in order to meet congressional requisitions. Congress’s most significant measure was to issue paper currency that rapidly depreciated during the course of the war. Because the money was used so extensively by the populace, it had a greater impact on people’s daily lives than did any other single act of the Continental Congress.

Supplying the Continental Army. The new Congress and the state governments mobilized the society’s resources in order to supply the Continental Army. In doing so these governments profoundly affected local economies. Connecticut’s requisition system was among the most intricate and successful. In July 1776 the state’s governor and council of safety required Hartford’s citizens to provide one thousand coats, one thousand vests, and sixteen hundred shirts. Smaller towns were also obliged to contribute on a proportionate basis. The council authorized the purchase of hats, blankets, shoes, tents, wooden bowls, canteens, and iron pots, and it placed an embargo on the export of cloth, tanned leather, and shoes. In 1777 the Connecticut government again required towns to supply additional items. The state did such a good job that Connecticut merchant Joseph Trumbull, Congress’s first commissary general, relied mainly on his own state for supplies. In 1780 the near-bankrupt Congress decided to rely more heavily on the states. It requisitioned specific supplies and made the states responsible for paying the army. The states were themselves short of money, and they went into debt to pay their soldiers. Toward the end of the war the states resorted to collecting supplies forcibly from their citizens. Most states abandoned their procurement systems by 1781. Although many citizens were patriotic, they were reluctant to accept depreciating currency and worthless certificates as payment, and their state governments were equally reluctant to force them.

DEPRECIATION OF OLD CONTINENTAL CURRENCY

From January 1777 to April 1781 the value the Continental currency dropped precipitously, especially after January 1779. At the beginning of this period, it cost $1.25 of Continental money to purchase $1.00 worth of specie (gold or silver coin). A little more than two years later, it took $167.50 of Continental money to purchase $1.00 worth of specie.

Impressments. Congress, the state governments, and the army also intervened in local economies by impressing, or confiscating, supplies. They used impressment as early as December 1776, and they continued to rely heavily on the practice, especially when the currency rapidly lost its value, beginning in 1779. From that time forward impressment was the primary means of support for the army’s field operations. States passed laws empowering government agents to seize specific goods. New York, for example, stated that its citizens had to sell their surplus products to the army. The state declared that since farmers

were withholding wheat from the market, the entire crop was subject to confiscation. Pennsylvania citizens became so disgruntled that they threatened not to plant any crops beyond what they themselves needed because the surplus would be confiscated anyway. Whenever possible, officials seized goods from Loyalists, people known to be hoarding goods, and speculators. But officials frequently had no choice but to impress the goods of Patriots too. At times the line between purchase and confiscation became vague. Government officials started out paying with paper currency, but eventually both the Continental agents and state officials relied more heavily on certificates or simply on impressment. Because they were poorly administered, the federal certificates that were issued before 1780 resulted in nearly total loss to those who received them. People who were forced to accept the certificates later experienced great difficulty in getting paid, and they received no interest. Meanwhile inflation steadily decreased the certificates’ value. By 1781 most states had stopped impressing their citizens’ products. The army continued doing so although George Washington was careful to use it only as a last resort.

Continental Currency. The state governments and Congress devised various ways to pay for the war. During the first five years issuing paper money was by far the government’s most important tactic for raising revenue. Foreign loans from France and Holland and taxation of the American populace became more important only after 1780. Americans resorted first to paper money because of their long experience with it during the colonial period, when they had used bills of credit to finance the needs both of governments and business. Besides, they had no real alternatives. Until the Bank of North America began operation in January 1782, there were no banks in America that could have advanced large loans. Nor could Congress borrow from citizens, many of whom supported Britain or were suspicious of lending to a new government that was likely to renege on its financial obligations. From 1777 to 1780 the depreciating currencies allowed Congress and the states to pay for a war that would otherwise have been difficult to fund. As Benjamin Franklin remarked in 1779, the currency “is a wonderful Machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition; and when we are obliged to issue a Quantity excessive, it pays itself off by Depreciation.” Franklin had a point: the high rate of depreciation meant that at the end of the war some $226 million worth of government-issued currency had shrunk to almost nothing. Had the government borrowed that amount, it would have been left with a huge debt. Instead citizens were stuck holding the worthless paper, so in effect the currency amounted to a tax on the American population.

Inflation. Nothing in their previous experience with paper money prepared Americans for the devastating effects of depreciation during the war, when hyperinflation rose to the highest level in all of American history. As the need for funds grew, Congress and the states simply printed bills without first withdrawing those that had been printed earlier. The states had the responsibility of retiring the bills, but they failed to collect the taxes that were necessary to do it. As the quantity of money in circulation grew, and as wartime shortages of goods continued, the prices of nearly all commodities soared. In the Delaware River valley one hundred pounds in paper currency bought 143.3 hundredweight of flour in 1776, but only 83.8 in 1777, and an almost unbelievably trifling 0.71 by 1781. Soldiers’ pay did not rise along with the inflated goods, and their families were frequently devastated. One soldier complained that “Four months’ pay of a private will not procure his wretched wife and children a single bushel of wheat.” Joshua Huntington, who left Yale College just before graduation to join the army, wrote a bitter letter to the Connecticut assembly, reporting that “not a Day Passes ... but some Soldier with Tears in his Eyes, hands me a letter to read from his Wife Painting forth the Distresses of his Family in such strains as these ‘I am without bread, & cannot get any, the Committee will not supply me, my Children will Starve, or if they do not, they must freeze, we have no wood, neither Can we get any—Pray Come Home.’” States could do nothing to stop the runaway inflation although they tried various legislative measures to control the prices of goods, wages, transportation rates, and other basic services. These codes made mandatory the acceptance of paper money at its face value, but people either ignored the laws or found ways to get around them. Merchants increased prices in order to compensate for the greater risks, and they sent their goods to wherever the prices were highest. The merchants who bought farmers’ produce were especially hurt by inflation. Farmers held back their produce in anticipation of higher prices in the future, but merchants had to sell their goods quickly in order to make a profit, and they were forced to accept rapidly depreciating currency as payment. In desperation people resorted to hoarding goods and bartering; farmers threatened not to plant any crops at all. Ironically some relief arrived when the British army bought local goods and paid for them in specie rather than paper money. Farmers and merchants near the British camps in Newport, New York, Philadelphia, Savannah, and other areas frequently traded with the enemy. These entrepreneurs were accused of treason by their patriotic neighbors, but their activities yielded some benefit. Eventually, Patriot merchants received the hard currency paid by the British, and these merchants used it to purchase desperately needed supplies in Europe. The Continental currency finally expired in 1781, by which time it was deemed worthless, “viler than the Rags” on which it was printed.

Financial Crisis. By early 1781 Congress faced a financial crisis. The Continental currency had depreciated to a state of worthlessness, and Congress could not compensate by obtaining substantial loans from abroad. The states, themselves exhausted by the war effort, stopped supplying their allotted contributions. Congress suspended payment on its public debt, thereby destroying its credit with investors. The army was in severe distress, and the bankrupt Congress could do little to provide adequate supplies, much less guarantee that soldiers would be paid. Alarmed by Congress’s ineffectiveness, a faction began agitating to increase Congress’s powers. Philadelphia merchant Robert Morris emerged as the faction’s leader, and he was named superintendent of finance in the spring of 1781. Morris eventually became involved in nearly every congressional department, and it was said that he had more power than anyone except the head of the army, George Washington.

Bank of North America. Morris’s main objectives were to reorganize the country’s finances and strengthen the national government’s powers. One important element of his overall plan was the establishment of a private institution that would function as the government’s bank. Morris believed that such a bank would not only put the government’s finances in order but also provide an attractive investment for investors, whose interests would thereby become tied to the national government’s. The bank would also provide a stable currency that could be used to pay state taxes and in business transactions. Congress quickly approved the plan, but initial subscriptions from investors proved inadequate. Undeterred, Morris arranged for the government to subscribe $254,000 of hard money that it had received as a loan from France. He used his considerable business connections to attract the remaining $146,000 needed for incorporation, and the bank opened its doors in January 1782. Under Morris’s direction the Bank of North America proceeded to make loans to the government eventually totaling some $1.2 million. In addition it advanced loans to merchants who were contracted to supply the army and issued notes that were readily accepted as a medium of exchange. People trusted the bank’s notes in part because Morris’s own financial standing was so high. The Bank of North America functioned as the country’s first commercial bank. It lost its charter in 1785 but was rechartered in 1787 as a private bank run for and by merchants. Morris’s bank allowed Congress to run its fiscal affairs more smoothly. It also provided a model for Alexander Hamilton’s even more ambitious Bank of the United States, incorporated in 1791.

Sources

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

James A. Henretta, “The War for Independence and American Economic Development,” The Economy of Early America: The Revolutionary Period, 1763-1790, edited by Ronald Hoffman and others (Charlottesville: University Press of Virginia, 1988), pp. 45-87.