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The Value of a Dollar, Colonial Era

Currency

Financing Revolution & Government

Independence, and the attempts to attain it from Britain, created financial hardship on the American colonies’ efforts for liberty. The Continental Congress and its supporters struggled to raise monies for the developing nation, and to develop a volunteer army, a new government, and the support of the international community. All of this required available financial capital that the Continental Congress lacked.

Many of the colonists at the time were comfortable to follow their Congress against their common enemy, England, but showed little acceptance of a government with no authority to tax the population. This severely limited the delegates’ ability to raise funds and required them to undertake financing methods that were as revolutionary as the war itself. By issuing bills of credit, borrowing from abroad and within the states, the government financed the cause with great difficulty. Within time, the systems of financing rapidly crumbled based upon the deficits in the financial schemes.

Initially, reliance was placed upon the bills of credit, but as additional bills were issued, valuations fluctuated greatly. Financial backing of the Continental paper money arrived from the credit of the states’ ability to service the debt. By 1779, 40 separate issues of paper money were authorized by the states totaling over $240 million. This rapid rate of issues, in conjunction with the failed public support to back the currency, led to an accelerated monetary depreciation. In March of 1778, 1.75 Continental dollars equaled one Spanish milled dollar. By March of 1780, the exchange was 40 Continental dollars for one Spanish milled dollar. By 1781, Pelatiah Webster stated that the Continental dollar “..ceased to pass as currency, but was afterwards bought and sold as an article of speculation, at very uncertain and desultory prices, from five hundred to one thousand to one.”

Loans, both foreign and domestic, compounded the financial issues following the war. The states’ taxing ability was the primary instrument of servicing the debt obligations. If the Continental Congress asked for a fixed sum to pay a foreign nation, it had no power to acquire the monies from the states. At the war’s end and the establishment of the Articles of Confederation, the new nation still lacked sufficient power to tax and raise funds.

When the new nation was governed by the Articles of Confederation, many lawmakers believed in leaving commerce as free as possible. The principle was to keep commercial enterprises free from government influence to encourage growth of the business community. Despite the intended efforts of this doctrine, the states’ necessity to meet fiscal obligations required them to reintroduce tariffs.

Many of the industries developing in America supported the tariffs as protective support from European imports. It also permitted businesses time to attract new customers because their former customers were within the British Empire. Americans were viewed as aliens to their former mother country, and Britain only traded with loyal parts of its empire. Hindered by limited access to British customers, the tariffs were supported by the population as a protective measure to the young nation. They also enabled the new nation to generate revenues on imports, but the funds generated were not enough.

The weakening financial situation revealed the power struggle between the states and Congress, and the limitations of the new nation. Under the Articles, commerce suffered because Congress could not regulate the laws of trade among the states or enforce a taxation system. This rapidly led to a deterioration of the nation’s fiscal situation. Creditors were alarmed. If the republic was to continue, then it must be restructured to resolve its financial and commercial issues. Leadership expressed the need to meet and overcome the nation’s problems at the National Convention in Philadelphia in 1887. After the convention ended, the body formed the Constitution of the United States.

Once the Constitution was ratified, Congress was granted additional fiscal powers not found in the Articles of Confederation. This included the governing of taxation, loans and coinage of money. The founding leaders began establishing rules for interstate commerce, collection of import tariffs, establishing a national currency and collecting taxes. All rules applied evenly throughout the states and created a developing commercial environment within the nation.

With the new powers, the United States’ initial efforts were to restore the nation’s credit. The states held significant amounts of debt accrued during the war with Britain and under the Articles of Confederation. Many individuals who held devalued notes sold them under face value. Alexander Hamilton, the nation’s treasurer, recommended the United States pay the notes at face value and acquire the financial burden from the states. This proposed scheme created a whirlwind of debate within the new nation.

This federal assumption of the states’ debt would move the new debt to the nation, but the controversy revolved around the debate on whom to pay. Those in line to receive this payment were wealthy speculators who bought the certificates on pennies to the dollar from the original owners. Speculators were to receive a huge financial gain. States like Massachusetts were to gain because they had more debt and it pleased state leaders to give up their heavy debt burden. States with fewer debt obligations fought this measure out of concern of being taxed more by a federal government because of poor fiscal management of other states. The controversy resulted in a struggle between the Northern and Southern states. In the end, a compromise was developed for the nation to assume the states’ debt in return for moving the nation’s capital from Philadelphia to a site on the Potomac River.

With the increased national debt, the nation had to create the necessary financial infrastructure and collections to operate the government. One method was the creation of the First United States Bank. This national bank, modeled after the Bank of England, was constructed and chartered for 20 years. This institution’s purpose was to increase the circulation of currency, to simplify the ability to acquire loans for the government, and to provide a source of individuals to pay the government. Constitutional controversy and debate evolved upon its creation, but in the end, Congress supported its creation.

Revenues were needed to pay the nation’s debt obligations. One method was the issuance of low import tariffs. These tariffs generated needed revenues while providing protection to the nation’s growing industries. Another method was internal taxes upon the population. One was a tax on whiskey and other distilled spirits. Taxes ranged from 9 to 25 cents a gallon and typically hurt farmers in rural regions of the United States. Many farmers could not transport corn and other grains to market due to long distances. By converting the grain into alcohol, they possessed a commodity easily transported and traded. These farmers viewed the tax as oppression of their liberty. In western Pennsylvania, many protested the tax and actively tarred and feathered revenue officers. President Washington called upon the militia to halt this “Whiskey Rebellion” and sent a force far stronger than his army in the Revolutionary War to quell the revolt. The result of this fiscal revolt showed the strength of the new United States Government and its ability to maintain order within its population.

As a new nation, the United States accomplished a significant feat in creating a strong fiscal foundation. It established a national revenue system that was varied in scope, implemented an administrative system for the treasury, and restored the credit of the United States, thereby instituting the beginnings of a financial system that could support the new republic.

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Citation Types

Type
Format
MLA 9th
"Currency." The Value of a Dollar, Colonial Era, edited by Tony Smith, Salem Press, 2016. Salem Online, online.salempress.com/articleDetails.do?articleName=VODCE_0027.
APA 7th
Currency. The Value of a Dollar, Colonial Era, In T. Smith (Ed.), Salem Press, 2016. Salem Online, online.salempress.com/articleDetails.do?articleName=VODCE_0027.
CMOS 17th
"Currency." The Value of a Dollar, Colonial Era, Edited by Tony Smith. Salem Press, 2016. Salem Online, online.salempress.com/articleDetails.do?articleName=VODCE_0027.