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Funding the Revolution: Monetary and Fiscal Policy in Eighteenth-Century America

Abstract and Keywords

The success of the Federalists in the late 1780s had a profound influence on how Americans viewed the relationship between military spending, taxation, and the monetary system. For almost 100 years, the colonists funded military campaigns by means of paper money rather than direct taxes, an approach that helped finance several imperial wars and the American Revolution. By the late 1780s, however, many Federalists realized that paper money alone could not solve America's financial woes, much less pay for its defense. Although the entire era of the American Revolution was characterized by struggles over taxes and money, little attention has been paid to the financial history of the period. This chapter examines domestic fiscal and monetary policy during the American Revolution, starting with the colonists' use of paper money in the late seventeenth century in lieu of taxes. To understand the evolution of monetary and fiscal policy in this period, it considers the genuine radicalism—and ultimately, conservatism—of the American Revolution.

Keywords: American Revolution, monetary policy, fiscal policy, paper money, taxes, radicalism, conservatism, America, colonists, military spending

In June 1788, delegates to the Virginia Ratifying Convention met to debate the proposed Constitution. Much of the opposition to the document predictably focused on the clauses governing military force and the power to tax, particularly the power to lay direct taxes on citizens. To this the Federalists had a ready retort, perhaps best articulated by delegate Francis Corbin. Such powers, he warned, were “indispensable.” If the new national government were “not vested with the power of commanding all the resources of the States when necessary,” he warned, “it will be trifling.” As the costly recent Revolution had so amply demonstrated, “wars are as much (and more) carried on by the length of the purse, as by that of the sword. They cannot be carried on without money.”1

Though controversial, Corbin’s vision carried the day, not only in Virginia, but in the other states as well. The success of the Federalists in the late 1780s signaled a sea change in how Americans conceived of the relationship between military spending, taxation, and the monetary system.2 For nearly a century, the colonists largely avoided direct taxes when funding military campaigns, preferring instead to issue paper money. This innovation helped pay (p. 328) for several imperial wars and the American Revolution. But by the late 1780s, many Federalists concluded that paper money alone could not solve the nation’s financial woes, much less pay for its defense. Under the Constitution, the new national government would be given the unequivocal power to tax, while the states would lose their long-standing privilege to issue paper money, commonly known as “bills of credit.” The nation, not the states, would now exercise far greater control over the “power of the purse.”

Although struggles over taxes and money defined the entire era of the American Revolution, the financial history of the period has attracted little attention. The following chapter seeks to recover the topic’s importance and complexity and to explore historians’ major interpretations of domestic fiscal and monetary policy. It is a story that begins in the late seventeenth century, when the colonists pioneered paper money in lieu of taxes, an innovation that ultimately put them on a collision course with imperial authorities; it continues with the war itself, when the Americans struggled to find new ways to underwrite their struggle for independence; and it concludes with the conflict over the Constitution, when a new generation of nationalists enthusiastically embraced British policies and precedents. Indeed, to understand the evolution of fiscal and monetary policy in this period is to grasp the genuine radicalism—and ultimately, conservatism—of the American Revolution.

A Revolution in Finance

Until the 1760s, colonial governments taxed their subjects lightly, compared with their counterparts in Britain. Britain’s rise as an international power depended on an extraordinary growth in the state, particularly a newly enhanced ability to extract taxes and manage a growing national debt. But no such expansion of state power occurred in the colonies. By one estimate, the British paid ten times as much in taxes as the American colonists prior to the Revolutionary era. As one visitor to the colonies remarked in 1750, “the taxes are very low, and [prospective settlers] need not be under any concern on their account.”3

This is not to suggest that the Americans lived tax-free. Far from it: colonial governments imposed modest poll taxes; faculty taxes, a forerunner to modern income taxes; excise taxes on select commodities; duties on imports and exports; and taxes on land. Local governments assessed taxes too, though many of these came in the form of tolls and fees, or even contributions of labor on public projects.4 These did not fall equally on everyone. Though wealthier people paid more taxes on larger landholdings, the winners of seats in lower houses of colonial legislatures often attempted to shift taxes onto the losers, and in any given colony, one constituency—planters, city dwellers, merchants, and others—might end up (p. 329) paying a disproportionate share of taxes. Moreover, taxes varied a great deal from colony to colony, and at various times between 1688 and 1739, colonies as different as Massachusetts, Virginia, and South Carolina could each lay claim to the dubious distinction of paying the highest taxes, even if their burdens fell far short of the average resident of England.5

Despite the burden being relatively light, paying taxes was no easy matter for most colonists. While there were many things of value in the colonies—real estate, crops, slaves—gold and silver coin (called “specie”) was sometimes in short supply. Economic historians have debated the reasons (and the seriousness) of this specie shortage, but the colonists’ constant laments about the “dearth of available coin” reflected some very real, if episodic, problems. Ordinarily, the lack of specie could have stifled commerce, but the colonists came up with several alternatives. The most ubiquitous was “bookkeeping barter,” also known as “money of account,” whereby individuals maintained running accounts of the value of goods traded, credit extended, and debts incurred. No money changed hands. Instead, individuals simply registered credits and debits in the columns of an account book, balancing them periodically.6

This worked well enough for private transactions, but it was impossible to pay taxes with book credits. Colonial governments came up with an alternative: they defined a set amount of a certain commodity (livestock, for example, or lumber, fish, or tobacco) in terms of various local versions of pounds, shillings, and pence and then accepted those commodities in payment of taxes. These commodity currencies had their problems; in 1658, for example, the Massachusetts General Court issued an order warning taxpayers not to discharge their debts with “lank” cattle. Still, cattle worked well enough until the outbreak of King William’s War, the first of many imperial conflicts that generated demands for revenue on a scale that commodity currencies simply could not meet.7

Massachusetts was the first to find a way out of this impasse. In 1690, its legislature issued what is generally thought to be the first government-sponsored paper currency in the Western world. These pioneering pieces of paper, which the colony used to pay the costs of a failed military expedition to Canada, could be accepted “in all payments equivalent to money.” This effectively made them a legal tender, meaning they could be used to pay taxes and settle debts. In the process, they supplied a much-needed medium of exchange. Colonial officials pledged to use future tax revenue (paid in specie) to retire the bills, but this rarely happened. Instead, they offered to accept the bills for payment of taxes at a 5 percent premium, enabling them to retire the paper from circulation without specie changing hands. Almost all of the other colonies eventually issued their own “bills of credit” by the middle of the eighteenth century. Though most colonial governments promised to redeem them in specie at a set date, legislatures usually dodged this day of reckoning by either extending maturity dates or by drawing the bills from circulation via tax collection. In some cases, they simply deferred the problem by calling in older bills and replacing them with new ones.8

(p. 330) Colonial governments also sponsored “land banks” that issued additional paper money. These institutions made loans by issuing paper money backed by farms, houses, and other real estate that borrowers pledged as collateral. Like bills of credit, notes issued by land banks helped mitigate the money shortage while stimulating commercial activity. Colonial legislatures typically made these notes legal tender, providing a convenient medium of exchange for the collection of taxes and the settlement of debts. Borrowers from the land banks would make interest payments on their mortgages in specie, providing the government with a steady source of revenue. This was financial innovation at its finest, turning immovable real estate into money that passed from hand to hand. Little wonder that Benjamin Franklin called this money “Coined Land.”9

Government-issued bills of credit and land-bank notes worked well in the middle colonies, but much less so in New England and the South, where colonial legislatures printed too many notes, sparking inflation.10 In 1720, imperial authorities responded by requiring many legislatures to obtain royal approval before issuing new bills of credit. Problems persisted, and in 1741 Parliament vetoed a proposed land bank in Massachusetts. A decade later, Parliament took a more decisive step in passing the Currency Act of 1751. The act forbade new bills of credit in all the New England colonies, required that outstanding issues be retired on time, and prohibited the use of existing bills for the settlement of private debts. New England soon moved to a specie-based monetary system, but by this point, bills in Virginia and North Carolina had begun to depreciate, too, prompting colonial creditors to lobby Parliament for additional restrictions. Unlike the earlier legislation, the Currency Act of 1764 did not forbid bills of credit. Rather, it forbade the middle and southern colonies from making their bills legal tender. To the colonists, this was tantamount to an outright ban.11

Initially, resistance to the Currency Act of 1764 was overshadowed by the reaction to the Sugar Act (1764) and the Stamp Act (1765). Nonetheless, many colonists saw the three acts as interrelated, and petitions protesting the new duties sometimes made mention of the Currency Act. As the existing paper money in circulation was paid into the colonial treasuries, the dwindling supply of a circulating medium began to spark more serious protests. In Virginia, Governor Francis Fauquier warned in 1765 that currency had “grown very scarce,” leaving the colonists “really distressed for Money of any kind to satisfy their Creditors.” The following year, when Benjamin Franklin testified before the House of Commons, he cited the Currency Act of 1764 as a primary cause (along with the Stamp Act) of the deteriorating relations between the colonies and Great Britain, arguing that it had eroded the colonists’ respect for Parliament.12

Nonetheless, the Currency Act never became the flashpoint of resistance that other, more obvious attempts to reassert control over the colonies did. In time, the middle and southern colonies found ways to evade or otherwise live with the law, though not without significant economic hardship. (New England had by this time reluctantly moved onto a specie-based monetary system.) Maryland authorized bills that lacked legal tender standing, but accepted them in payment of taxes (p. 331) anyway; New York, on the other hand, successfully petitioned Parliament for a special land bank. Eventually, the imperial authorities recognized that there was little to be gained, either economically or politically, by maintaining a sweeping ban on bills of credit, and in 1773 they amended the earlier legislation, permitting the middle and southern colonies to confer legal tender status on bills of credit, but only for the payment of taxes and other public debts. Private creditors, in other words, could still demand specie in these colonies, while New England continued under an outright ban on bills of credit.13

The scholarship on the Currency Acts consists largely of an article by Jack P. Greene and Richard Jellison; the more exhaustive research of Joseph Ernst came to many of the same conclusions. Conceding that it was not a pivotal issue, Greene and Jellison nonetheless characterized imperial constraints on paper money as a “major grievance,” one that surfaced in the Declaration and Resolves issued by the First Continental Congress. British intransigence on this score through the 1760s and early 1770s, they argue, “helped to convince American legislators that they could not count on the ministry for enlightened solutions to their problems—that, in fact, they were the only group capable of solving them.”14

That may have been true, but as the outbreak of hostilities in 1775 soon demonstrated, the colonists lacked the tools that mature nation states commonly used to underwrite wars. By the eve of the Revolution, Great Britain had developed an administrative apparatus that could issue enormous quantities of sovereign debt, as well as a finely honed system of taxation to service these public securities. It also had the makings of a modern central bank—the Bank of England—that issued paper currency redeemable in specie. The colonies, by contrast, had none of these advantages. When it came time to fund the war, they turned once again to the printing press, a decision that would have profound ramifications for the remainder of the Revolutionary era.

Not Worth a Continental

Under the Articles of Confederation, Congress lacked any independent power to tax. It could only request states to tax their inhabitants on its behalf, with each state’s burden initially determined by the value of land in the state. (This proved impossible to calculate, and in 1783 Congress pegged apportionments to the number of white inhabitants, plus “three-fifths of all other persons…except Indians”—the first use of the infamous “three-fifths” clause later enshrined in the Constitution.) But whatever the method of apportionment, the so-called requisition system still relied entirely on voluntary contributions of the states; Congress could not compel them to tax. Worse, any change to this system was almost impossible: amendments required the unanimous approval of Congress and of the legislatures in all thirteen states. Indeed, even the simplest matters—appropriating money, “ascertain[ing] (p. 332) the sums and expenses necessary for the defense and welfare,” much less borrowing on behalf of the nation—required the assent of nine of the thirteen state delegations present at the Continental Congress.15

Despite these obstacles, Congress used all its limited powers to fund the Revolution. It began borrowing money beginning in the fall of 1776, opening Continental Loan Offices in each of the thirteen states. The loan offices sold three-year bonds paying 4 percent interest in specie. The bonds found few buyers, and officials raised the rate to 6 percent, though the new securities had no maturity date. The bonds nonetheless attracted buyers, largely from the northern states. After March 1778, Congress approved new loan certificates that paid interest in paper money only, and in the following three years issued $60 million worth. Few investors purchased them. Instead, the government used them as a surrogate money, to pay suppliers. As the war drew to a close, Congress issued yet more “specie certificates” designed to raise hard currency, but most of these were used to settle existing debts instead. Estimates vary, but recent scholarship suggests that these different domestic bond and certificate issues helped finance approximately 13 percent of the costs of the war.16

The United States also borrowed from abroad, mostly after 1780. Spain gave a token amount, but France provided the bulk of the funds. These consisted of outright gifts and subsidies as well as loans totaling almost $5 million. (France also helped underwrite and guarantee a separate issue of securities in Amsterdam worth approximately $1.8 million.) After Yorktown, the United States borrowed another $2.8 million from Dutch investors, enabling Congress to continue meeting some of its obligations, and discouraging the British from continuing the war. Taken together, gifts and foreign loans between 1777 and 1783 underwrote another 6 percent or 7 percent of the total cost of the war.17

These sums, while hardly insignificant, only went so far, especially in the opening years of the conflict. Congress consequently adopted the most obvious alternative: printing money. Congress planned to redeem these notes—dubbed “continentals”—with specie supplied by the individual states. Congress assigned each state a quota for redemption, which the states promptly ignored. (A typical request for specie asked in less than authoritative tones that the states “remit to the treasury, such sums of money as they shall think will be most proper in the present situation of [their] inhabitants.”) As of September 3, 1779, Congress had issued approximately $160 million in continentals, but received almost no specie from the states. This failure to back the notes was eerily reminiscent of the more reckless experiments in currency finance during the colonial era.18

Nonetheless, the continentals did depart from colonial precedent. Almost all colonial bills of credit had been denominated in pounds, shillings, and pence (though never uniform in value or pegged to British sterling). By contrast, Congress denominated the continentals in dollars, though this referred to Spanish silver dollars, not a uniquely American dollar.19 The design of the bills also marked a break with the past. Benjamin Franklin, who had long been a proponent of paper money in the colonies, designed most of the new notes. He appropriated classical (p. 333) and medieval emblems and symbols, and adorned the notes with didactic phrases in Latin that emphasized the unity of the thirteen former colonies. For example, the eight-dollar bill portrayed a harp with thirteen strings and the motto Majora Minoribus Consonant—“the greater and smaller ones sound together.” Other designs, including an iconic image of a chain with thirteen links surrounding the (English) words “We Are One,” probably resonated with a broader expanse of the populace.20

Though the continentals initially passed at face value, military setbacks eroded their purchasing power. They depreciated after Congress fled Philadelphia in 1777, and then regained a little of their former luster after the victory at Saratoga and the alliance with France. Crushing military defeats in the South later in 1778 reversed this trend, and the Continental dollar plummeted, losing almost all its value by 1781. By April of that year, a single Spanish silver dollar was worth 146 dollars in paper money. Throughout this period, Congress contributed to the problem by emitting ever-greater quantities of continentals. Measures aimed at propping up the currency—price controls and state legislation making the continentals legal tender—did little to arrest the slide.21 Legislation in North Carolina, for example, declared that anyone who spoke disrespectfully of the paper should be “treated as an enemy to his country.” None of this made a difference. Rampant counterfeiting, encouraged if not sponsored by the British in the loyalist stronghold of New York City, only accelerated the slide.22

A similar fate awaited the bills of credit issued by the individual states. By one estimate, the states issued bills worth a total nominal (face) value of $209 million. Few bore interest. They were backed by different assets, everything from mortgages on real estate to property confiscated from loyalists. Most, though, relied on the promise of future taxes, though a few rested entirely on an abstract faith in the state that issued them. To make matters even more confusing, some of these bills were denominated in dollars, others in local versions of pounds, shillings, and pence. All of them, not surprisingly, depreciated as fast or even faster than the continentals. In 1777, Congress requested that the states cease issuing bills. They largely refused to do so. These currencies, largely worthless by the time they passed from circulation, contributed an estimated 39 percent of the funding for the war.23

By 1780, the purchasing power of the continental had declined to the point where it was no longer practical to issue new notes. Confronted with this ugly reality, Congress opted to devalue the currency. It ordered the states to accept the depreciated paper in payment of taxes. Under the plan, states accepted the old Continental dollars at one-fortieth—2.5 percent—of their face value. In theory, this move would reduce the nation’s currency obligations from $200 million to $5 million. In practice, the states collected only $119 million, though this was considered a resounding success. Thanks to depreciation and devaluation, an enormous amount had been raised—or more accurately, extracted—without recourse to direct taxes. By one estimate, the continentals funded 28 percent of the total costs of the war.24

(p. 334) The United States did not issue any more Continental dollars, but under the devaluation plan, it deputized the individual states, permitting them to issue new interest-bearing Continental dollars of their own in amounts proportional to the number of old Continental dollars they retired. Thus for every twenty “old tenor” dollars they removed from circulation via the collection of taxes, the states could issue a single “new tenor” dollar that promised 5 percent interest, payable by the state that issued it. These new notes, backed by nothing tangible, proved an abysmal failure, and promptly lost most of their value. In the end, the states only issued half the number of new tenor dollars that Congress had permitted. By 1781, Congress formally abandoned its reliance on currency financing. The phrase “not worth a continental” soon entered the vernacular, and states repealed laws that granted the various Continental dollars legal tender status.25

Nonetheless, many Revolutionary leaders argued that currency finance, though hardly an unqualified success, had made the best of a bad situation. Writing in 1779, Benjamin Franklin observed that “this Currency, as we manage it, 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 was blunt on this point. That same year, he noted that depreciated money served as “a gradual Tax” insofar as “every Man has paid his Share of the Tax according to the Time he retain’d any of the Money in his Hands….Thus it has proved a Tax on Money [and] it has fallen more equally than many other Taxes, as those People paid most, who, being richest, had most Money passing thro’ their Hands.”26

Historians have echoed this assessment, even if they disagree on how much money the Continental Congress actually issued. Until recently, most scholars put the total face value at approximately $241 million. A newer estimate puts the total at approximately $200 million. This revised figure acknowledges that not all emissions approved by Congress were actually printed, and that Congress removed some emissions from circulation and replaced them with newer bills. Whatever the exact amount, it is undeniable that the continentals effectively paid much of the cost of the war, especially between 1775 and 1777. During these early years, some 86 percent of government funding came from paper money; that figure dropped to 34 percent between 1778 and 1781, a function of the fact that the purchasing powers of the bills had declined.27

By this time Congress had resorted to another, simpler method of financing the war: confiscation. As early as November 1777, Congress resolved that the states confiscate and sell any real and personal property belonging to loyalists. In December of that year, Congress authorized the Continental army to confiscate private property as needed. Anyone called upon to “contribute” to the cause would be compensated with what became known as “certificates of indebtedness,” which listed both the quantity and value of the property taken. Certificates of indebtedness played an instrumental role in financing the Revolution, especially after paper money ceased to circulate. Unfortunately, most of these IOUs gave no hint of when they might be redeemed, and many of them quickly lost (p. 335) most of their value in the face of growing evidence that the national government could not pay its bills. Worse, states began appropriating much-needed supplies from their citizens too, adding different certificates to the flood of paper in circulation. As resentment over the practice grew, state governments attempted to pacify people by accepting certificates in payment of taxes. This helped retire many from circulation, but it complicated the simultaneous campaign to retire “old tenor” Continental dollars.28

By 1781, the Continental Congress had exhausted its options, and much of the country relied exclusively on barter and book credits in lieu of a reliable medium of exchange. This primitive and desperate state of affairs prompted a radical overhaul of the nation’s financial affairs, as economic nationalists began to push the central government to increase its control over fiscal and monetary matters.

The Financier

The fiscal machinery set up by Congress in 1775 went through several overhauls that culminated with the appointment of Pennsylvanian Robert Morris as superintendent of finance in 1781. Initially, Congress set up several committees to administer financial matters, but replaced this with a single standing committee “for superintending the Treasury” that was staffed by members of Congress. This forerunner to the modern-day Treasury Department limped along until 1778 and 1779, when it split into two entities: a five-member Board of Treasury, which drew its members from outside of Congress; and the Congressional Committee on the Treasury, better known as the Committee on Finance, to which Robert Morris was elected chairman. The Board of Treasury soon proved incapable of administering the nation’s finances, and after an investigation found that “the Demon of Discord pervaded the whole Department,” Congress recommended that it be replaced by a department administered by a new, all-powerful superintendent of finance.29 Morris was a logical choice: a brilliant merchant, he wished, as he put it, to draw “the Bands of Authority together, establishing the power of Government over a People impatient of Control, and confirming the federal union of the several States, by correcting Defects in the general Constitution.”30

Morris was appointed in May 1781. He asked for—and was granted—sweeping powers, despite the fact that his personal financial dealings often commingled with those of the nation. Seeking a clean state, he disowned the debts the federal government incurred prior to January 1, 1781. “It was necessary,” he later explained, “to draw Some Line between those Expenditures for which I should be answerable, and those which had already been incurred.”31 Eventually, Morris and his successors retreated from this position, but even a partial repudiation helped buy time to get the government’s accounts in order and reform how the government did (p. 336) business. He aggressively cut costs, closing superfluous army posts and liquidating surplus supplies. After being given the right to discharge any officer responsible for handling money, Morris used his power to streamline government procurement. Rather than rely on federal officers to tend to the purchase, transportation, and storage of military supplies, Morris cut out the bureaucratic middlemen and turned to private contractors instead. He hired as well as fired, building a small, disciplined corps of “tax receivers” who pressured the states to make payments to Congress. Morris also imposed a regular system of accounting, forcing his officers to do the same and requiring them to submit regular reports.32

Most ambitious was his attempt to reform the requisition system. The first requisition took place in November 1777, but the states never delivered much-needed specie. In the next few years of the war, they instead provided supplies, not specie, to government officials. Under this system, state officials would obtain a certificate that recorded the value of the goods given. States could then “pay” their requisition by transferring the certificate back to the national government. Morris believed this system could be readily corrupted by state officials eager to inflate their contributions, and he persuaded Congress to demand that the states contribute specie instead. When most refused, he used newspapers to publish the sums owed by the states. This generated some increased revenues, but Morris’s hands were tied: Congress still lacked the power to impose a compulsory tax.33

Morris therefore launched a campaign to amend the Articles of Confederation. In 1781, he pushed Congress to ask for the power to levy a 5 percent ad valorem (per item) impost on most imports, save for arms, clothing, and supplies for carding cotton and wool, with a similar duty levied on “prizes” (ships and supplies captured by privateers). Morris also pushed for a poll tax, a land tax, and a liquor excise. Congress dismissed most of these ideas as extreme, but it supported his idea of amending the Articles in order to institute an impost collectible in specie. Unlike direct taxes, the impost required few federal officials to collect, and was largely invisible: merchants paying it simply passed it along to consumers by raising prices.34 Morris vigorously lobbied the state legislatures to assent to the idea, and all but one of the states signed on to the plan. Rhode Island, stirred up by their congressman David Howell, who successfully argued that states should retain “absolute controul [sic] over their own purse strings,” was the lone dissenter. Unfortunately, because amendment of the Articles required unanimity, the measure failed.35

Absent a reliable source of revenue, Morris turned to other sources. France had given or loaned funds previously, and Morris managed to borrow millions more in specie, thanks to the deft diplomacy of John Laurens and Benjamin Franklin. Much of this money never made it home, but went toward servicing existing overseas loans as well as purchasing clothing and military supplies. Morris nonetheless took what he could and then used it alongside another pot of funds: his own personal fortune. In 1781 he began issuing promissory notes redeemable in thirty days, sixty days, or longer. It was never entirely clear who stood behind these: Morris or the government. But that was precisely the point: Morris merged his own finances (p. 337) with those of the nation, deploying his credibility to prop up the government’s reputation. As he wrote in 1782, “My personal Credit, which thank Heaven I have preserved throughout all the tempests of the War, has been substituted for that which the Country had lost.”36

But personal promises alone could not keep the government going. Morris needed a more formal mechanism for raising funds and making loans. In short, he needed a bank, and in May 1781 he petitioned Congress to charter one. Congress acceded and charted the Bank of North America, which opened for business in Philadelphia in January 1782. Though Morris hoped to capitalize it with the funds of private investors, he had a hard time drumming up subscribers, and the majority of its paid-in capital came from Congress. It was the first modern bank—and the first central bank—in the United States. It made short-term loans to the government, held public funds on deposit, and served as the nation’s fiscal agent. It also issued a currency that note holders could redeem in specie. The conservative management of the Bank of North America lent credibility to these “bank notes,” and they circulated at close to their face value in specie. Overall, the Bank of North America gave Morris considerable flexibility to fund the cash-strapped government.37

Thanks to Morris’s fortune and ingenuity, the Continental army had the wherewithal to limp to Yorktown in the fall of 1781. As the likelihood of a peace settlement grew, Gouverneur Morris (no relation, but a protégé nonetheless) observed that time was running out, for they would eventually lose “that great friend to sovereign authority, a foreign war.” Mindful of the stakes, he helped Robert Morris compose a sweeping report on the “important Business of establishing national Credit.” This document, released July 29, 1782, argued that Congress alone should assume the debt incurred during the Revolution, and it linked this proposal to the ongoing campaign to amend the Articles. The report argued that public credit meant nothing absent a commitment and capacity to tax; only national taxes could “provide Solid funds for the national Debt.” Ironically, the proposal looked to Great Britain for inspiration. Like the country it was on the verge of defeating, the United States would pool its motley assortment of obligations into a uniform national debt underwritten by the sale of interest-bearing securities. And like Britain, it would command the faith and confidence of its creditors by using national taxes to make regular interest payments. Morris also counseled Congress to raise enough revenue to generate a surplus, to be put toward a “sinking fund” dedicated to liquidating outstanding debt.38

The report met with a cool reception in Congress. Now on the defensive, Robert Morris spent the remainder of 1782 playing an increasingly dangerous game aimed at forcing the states to cede to Congress the power to tax. He suspended interest payments on loan office certificates, hoping to channel the anger of the nation’s creditors toward a productive end. (In lieu of specie Morris was forced to issue so-called “indents,” receipts noting the unpaid interest.) Morris also became enmeshed in a convoluted series of intrigues to enlist officers of the Continental army in his cause. These efforts yielded little. Congress made a last-ditch effort to (p. 338) coax the states into amending the Articles in the spring of 1783, but to no avail. By that time the momentum had moved away from the nationalists, and the Peace of Paris, signed that fall, put an end to Morris’s dream of a national tax, never mind a national debt.39

In many ways, Morris was a victim of his own success: he managed to fund the final years of the war on a shoestring, and his ability to secure foreign loans—particularly sizable loans from Dutch investors in 1782—undercut claims that the national government needed new powers to taxation to avoid fiscal collapse. Disheartened by his inability to secure a national tax and under increasing scrutiny of his activities, Morris resigned in 1784. Congress proceeded to abolish the office of superintendent and revived the impotent Treasury board. It also dismissed the tax receivers that Morris had used to collect revenue from the states. As the nation moved away from a war footing, Congress effectively abandoned its claims to fiscal power, ceding sovereignty on the issue to the states.40

Morris lost the first round, but he effectively framed the terms for the coming decade. His commitment to financing the national debt via national taxes anticipated the proposals ultimately enacted by Alexander Hamilton. Likewise, Morris’s Bank of North America foreshadowed Hamilton’s proposal for a national bank. The successful circulation of its notes also helped rehabilitate the idea of paper money, and the Bank of North America became the template for many other commercial banks that would thrive in the new nation. Morris may not fully deserve the grand title of “financier of the Revolution” given to him by an earlier generation of historians. But his activities as superintendent presaged the dramatic reforms adopted in 1789.

Postwar Problems

Between 1783 and 1789, Congress largely abdicated its authority over fiscal and monetary affairs. Thomas Jefferson, no friend of a strong central government, helped inspire one of the more noteworthy decisions made by Congress: the creation of a common, national currency. He was not the first to do so; in 1782, Robert Morris and Gouverneur Morris had complained that “the ideas annexed to a Pound, a Shilling, and a Penny, are almost as various as the States themselves,” with the result that the “commonest Things become intricate where Money has any thing to do with them.” The solution they proposed was far from elegant: a minuscule, imaginary unit of money that enabled all the different state currencies to be compared and converted via a common denominator. This unit—1/1440th of a Spanish dollar—won little support in Congress. Jefferson’s opposition was especially vocal. “As a money of account,” he warned, “this will be laborious…as a common measure of the value of property, it will be too minute to be comprehended by the people.”41

(p. 339) Jefferson came up with a more elegant solution. He dismissed the idea of adopting the pounds, shillings, and pence in use in one of thirteen states, given that this would force the other twelve to radically restructure their monetary systems. He likewise scoffed at the idea of having the former colonies return to the British system. “Shall we hang the pound sterling, as a common badge, about all their necks?” Instead, Jefferson proposed that the United States formally adopt the Spanish silver dollar as the basis of its monetary system. The piece of eight, he argued, “offers itself as a Unit already introduced. Our public debt, our requisitions, and their appointments, have given it actual and long possession of the place of Unit.” Foreign trade would also bring the country more pieces of eight than other kinds of coin.42

At the same time, Jefferson wanted the United States to have its own coinage. To underscore this point, he proposed that the United States break with the Spanish convention of dividing dollars into eighths, and instead divide them into tenths (dimes) and hundredths (cents). A congressional committee endorsed Jefferson’s plan, agreeing that it would “produce the happy effect of Uniformity in counting money throughout the Union.” On July 6, 1785, Congress formally adopted the dollar as the nation’s money, though it waited a year before it contemplated the creation of a mint or defined the amounts of gold and silver in each of the various coins to be issued.43

All of this was a fantasy: few states adopted the new currency, preferring instead to revive the older system of local versions of pounds, shillings, and pence. Moreover, Congress lacked the money to set up a mint, and an ill-fated attempt to hire a private contractor to do the job yielded few coins.44 In lieu of a national mint, the states set up their own or hired private coiners to issue copper cents as well. Yet the volume of state-sponsored coins paled in comparison to the flood of genuine and counterfeit coppers from overseas. These included British and Irish halfpennies, as well as a number of tokens manufactured in Britain.45

To complicate matters still further, several states resumed their reliance on paper currency to finance their borrowing. Following colonial precedent, state legislatures approved bills of credit backed by the promise of future tax revenue. To a lesser extent they also revived the public land banks, issuing bills of credit backed by private mortgages. Both types of currency generally enjoyed legal tender status. Seven states in all issued paper money in the immediate postwar era: Rhode Island, New York, Pennsylvania, New Jersey, North Carolina, South Carolina, and Georgia. The overall record of these issues was decidedly mixed: some bills underwent disastrous depreciation; others maintained the majority of their value. For example, Pennsylvania issued bills in 1785 that lost 30 percent of their value by 1788; Georgia’s issue of 1786, by contrast, lost 75 percent of its purchasing power in a single year.46

In fact, the dubious reputation of paper money may explain why state legislatures resorted to taxing their citizens in order to pay off the numerous debts incurred during the Revolution. By one estimate, a staggering 90 percent of state tax revenue went to servicing and paying off debts incurred by state governments. (p. 340) In a startling sign of how power had receded from Congress, several states began compensating holders of loan certificates issued by the national government. These instruments plummeted in value after Congress suspended interest payments in specie in 1782, prompting angry investors to petition their state legislatures for relief. No fewer than six states imposed taxes to maintain interest payments in specie, if not retire some or all of the debt.47 It was a startling demonstration of the continuing power of wealthy bondholders within the political arena.

It is not surprising, then, that vigorous debates over paper money, taxes, and debt dominated the state-level politics of the immediate postwar era. Each state witnessed a tug of war between what Edwin Perkins has termed an “urgency faction” and a “gradualist faction.” The former wished to liquidate the debts swiftly and decisively, even if its members differed on how best to accomplish this end. Some wanted to honor all the debts, and pushed the idea of a massive tax increase to do so. Others, typically indebted farmers, wished to settle debts by forcing creditors to take a significant loss, and counseled states to repudiate debts by issuing yet more dubious currency. The gradualists, by contrast, rejected both onerous taxes and repudiation. They wanted the states to pay off their debts, but at a reasonable, methodical pace. Alexander Hamilton exemplified this position, and like Morris before him, he wanted Congress to combine state debts into a new, national debt serviced by a modest national tax.48

Those who counseled moderation, much less a revival of the Morris plan for a stronger central government, found themselves in the minority during much of the 1780s. Power continued to flow away from Congress to the individual states. For their part, the states either disregarded requests for funds from Congress, or paid them in the depreciated debt instruments issued during and immediately after the war; they rarely paid specie. The only debt that Congress still controlled in its entirely—the various foreign loans from France and the Netherlands—soon proved too big to handle, and the United States defaulted on its loans from France. It barely managed to continue to make payments on the Dutch loans through the remainder of the decade.49

As state legislatures tackled local—and national—debts on their own, they used every tactic at their disposal: devaluation and depreciation, heavy taxes, or some combination of all these approaches. Though states like Virginia and Maryland succeeded in retiring much of their debt without undue suffering, others did not. The Massachusetts legislature launched a wild scheme to retire the debt in less than a decade. They imposed a crushing tax burden that fell heaviest on farmers in the western part of the state, many of whom lacked specie to pay. In 1787, Daniel Shays, a former captain in the Continental army, led a revolt against the state of Massachusetts that was swiftly crushed. Though historians have long debated the causes of the revolt, the prevailing view rightly blames the onerous and misguided tax policies of the conservative legislature.50

Shays’s Rebellion emboldened the nationalists. In December 1786, the Boston merchant Stephen Higginson wrote Secretary of War Henry Knox, marveling at the shift in public opinion. “I never saw so great a change in the public mind on any (p. 341) occasion as has lately appeared in this State, as to the expediency of increasing the powers of Congress, not merely to commercial objects, but generally.”51 On May 24, 1787, delegates from every state but Rhode Island convened in Philadelphia to do just that. In closed-door sessions that took place throughout that summer, the delegates scrapped the Articles of Confederation in favor of a Constitution that gave the national government new and unprecedented power over fiscal and monetary affairs.

The Philadelphia Story

Historians have long debated how and why the Constitution became the governing document of the United States. Much of this debate has been preoccupied with the dramatic changes in fiscal and monetary policy that the Constitution codified. More than anyone else, Charles Beard inaugurated this controversy. In his famous “economic interpretation” of the Constitution, published in 1913, Beard argued that an elite class of Federalist property owners—merchants, slave owners, bankers, and investors in public securities—crafted the Constitution in order to protect their property. Owners of government securities, Beard said, pushed especially hard for the adoption of the Constitution, securing a key provision that transferred the existing debts of the Confederation government to the new national government. Moreover, under the Constitution, the federal government had the power to tax, giving it a means to pay those debts. Other provisions, Beard asserted, benefited wealthy creditors and property owners at the expense of everyone else: backcountry farmers, debtors, and anyone else outside the nation’s economic elite.52

In the ensuing century, Beard’s thesis has generated a number of challenges. Some cast doubt on Beard’s simplistic division between wealthy supporters of the Constitution and poor opponents. Others partially affirmed Beard’s findings, particularly after sifting through vast quantities of data on the men who drafted the Constitution and attended the ratifying conventions. They found, for example, that ownership of financial securities, especially public debt, correlated with support of provisions in the Constitution that strengthened the central government at the expense of the states.53

Other scholars have taken a different angle, arguing that the centralization of fiscal and monetary power had less to do with the framers’ profit motives than with the genuinely chaotic conditions that prevailed on the state level before 1789. In this neo-Whig formulation, the rising influence of ordinary men, never mind the growing concentration of political power in state legislatures, left aristocratic elites disillusioned and frightened, paving the road to Philadelphia. The Constitution, in other words, wasn’t designed to line Federalist pockets, but was instead a deliberate and sophisticated attempt to check democratic excess and shore up elite political power.54

(p. 342) Woody Holton has offered the most sweeping critique of this thesis. He has accused neo-Whig historians, most centrally Gordon Wood, of “mistaking the Federalists’ biased assessment of the crisis that led to the Constitution for reality.” The problem, Holton argued, lay not in “plebeian incompetence,” much less misguided paper money schemes, debtor relief, and other sins laid at the feet of a faceless democratic mob. The fault lay instead with state legislatures, many of which imposed disastrous austerity policies simply to pay wealthy bondholders. These policies triggered a brutal recession that ultimately pushed the Federalists to marshal their forces in Philadelphia. For Holton, the trials of the Confederation era offer evidence of the danger posed by tenacious ruling elites, not selfish mobs. “Yes, the Framers rescued the nation from a terrible economic slump,” noted Holton, “but it was a crisis that they and their friends had helped create.”55

For all the historiographical controversy, the changes wrought by the Constitution in the realm of fiscal and monetary policy were straightforward. Article I, Section 8 gave Congress the “power to lay and collect taxes, duties, imposts, and excises” in order to “pay the debts and provide for the common defense.” Taxes had to be uniform, and a direct tax could only be levied in proportion to population, with slaves counted as three-fifths of a person in any such calculation.56 Article I, Section 8 also gave the federal government the power to “borrow money on the credit of the United States.” An early draft contained a clause that gave the general government the power to issue “bills of credit,” but this attracted the ire of many delegates. After the debacle of the Continental dollar and its kin, retaining such a clause, one delegate warned, “would be as alarming as the mark of the Beast in Revelations.” After some debate, the delegates dropped the clause, though Congress retained the power to “coin money, regulate the value thereof, and of foreign coin,” the last part being a tacit acknowledgment that the United States would have to rely on other countries’ currencies until it could establish a working mint. Section 8 also granted Congress the power to impose penalties for counterfeiting the “securities and current coin of the United States.”57

Article I, Section 10 limited the monetary and fiscal powers of individual states. It prohibited the states from levying taxes, imposts, or duties on imports or exports, which had the effect of turning the United States into a free-trade zone. Section 10 also forbade the states from coining money, issuing “bills of credit,” or making “any thing but gold and silver coin a tender in payment of debts.” Oddly enough, the Anti-Federalists did not raise significant objections to the ban on bills of credit. This may reflect the fact that antipathy toward paper money was one area where many members of both camps agreed.58

Far more divisive was the provision in Article I, Section 8 that authorized Congress “to make all laws which shall be necessary and proper for carrying into execution the foregoing powers.” The nation’s first secretary of the Treasury, Alexander Hamilton, deployed this clause to justify a wide-ranging reformation of the nation’s finances, one that effectively brought the Revolutionary era to a decisive conclusion.

(p. 343) The Hamiltonian Synthesis

In the fall of 1789, Hamilton drafted the bill that established the United States Treasury; Congress adopted it and appointed him secretary of the new department. Hamilton proceeded to use this strategy repeatedly, drafting extraordinarily detailed legislation on some urgent matter that he then delivered to Congress as a fait accompli. This tactic generally led to the wholesale adoption of Hamilton’s proposals, even though Congress increasingly resisted his policy directives.59

In the wake of the Constitution, the most pressing matter of business before Congress remained how to raise revenue. After several months, it passed legislation establishing a tariff. This tax, which fell on an eclectic assortment of items, was in many ways the perfect tax: it required few collectors, and was largely invisible to the consumer. Unfortunately, it failed to raise enough funds, and Congress subsequently amended the schedule of tariffs at Hamilton’s request. In his “Report on Manufactures,” he suggested a range of new and increased tariffs (and a handful of reductions), some of which could have the effect of fostering domestic industry. Congress ended up passing many of these, even if it rejected Hamilton’s more controversial proposal that the federal government subsidize infant industries. But Congress did approve several excise taxes, including one on whiskey that eventually prompted an uprising in western Pennsylvania and other frontier regions in 1794, now known as the Whiskey Rebellion. At Hamilton’s urging, the federal government quashed the revolt with armed force. It was a vivid demonstration of the newfound authority of the national government, particularly its ability to enforce fiscal policy on citizens throughout the country. To some, it was eerily reminiscent of the Crown’s response to colonial protests against the Stamp Tax, and an unsettling reminder that the idealism of the Revolution was largely dead.60

Hamilton’s most significant contribution lay in his proposal to fund the national debt. His “First Report on Public Credit” (1790) proposed that all outstanding debts left over from the Revolution be consolidated into a new, national debt underwritten by bonds that would pay interest in specie. Hamilton made the assumption of the state debts a central piece of this plan, and it reflected his belief that the national debt could help fortify the union of the states. The proposal generated considerable controversy. Some objected because the plan offered to fund the loan office certificates and indents at par value, conferring profits on speculators who had purchased these securities at negligible prices. Other critics vehemently opposed national assumption of the state debts on the grounds that some states had paid down more of their debts than others. Hamilton’s proposal bogged down in Congress on the latter point, and only after a backroom deal—an agreement to satisfy the opponents of a strong centralized government by moving the nation’s capital to the banks of the Potomac River—did Hamilton secure the necessary votes.61

The resulting legislation—the Funding Act of 1790—shifted the debts of both the Confederation and the states onto the federal government’s balance sheet via (p. 344) the issue of new, national Treasury bonds that had no fixed maturity date. Investors would take the various existing debt instruments to special federal commissioners in each state and use them to “buy” the new, national debt. The commissioner would then record the transaction, or what was known as a “subscription” to the national debt, and retire the various paper IOUs used to purchase the new bonds. In the process, the motley assortment of Revolutionary-era debts were transformed into uniform securities that paid interest in the specie generated by new, national taxes and tariffs.

The Funding Act of 1790 did not treat every debt equally. Debt incurred by the Continental Congress and its proxies fell into a privileged category. This included the different bonds and certificates issued by the Continental Loan Office, which totaled approximately $11 million; another $11 million worth of IOUs issued to soldiers discharged from the Continental army; and almost $6 million in certificates issued to pay for supplies and other miscellaneous expenses. These instruments had a collective face value of $27.4 million, and under the Funding Act, they could be exchanged at a one-to-one rate for packages of bonds, two-thirds of which paid 6 percent interest a year effective March 1791, while the other third deferred interest payments until January 1801. Investors could also purchase bonds using depreciated Continental currency, but only at 1/100th of its face value. As with so much else in this plan, a privileged elite benefited the most from these exchanges: few poor people held bonds, certificates, or even Continental dollars, having sold these at a tiny fraction of their true value to speculators in advance of the Funding Act.62

Investors could purchase new bonds using two other classes of paper as well. The first consisted mostly of the paper Morris issued in lieu of specie after he suspended interest payments on the loan certificates in 1782. (These paper promises became known as “indents” because one side of the instrument had a unique border designed to frustrate counterfeiters.) Some of this debt had already been paid by the individual states, but what remained was now receivable for new bonds that paid 3 percent interest. The second (and final) class of debt consisted of the state debts. Each state could transfer up to $4 million in debts to the federal government in exchange for sets of bonds that paid from 3 to 6 percent interest, though some of these would not pay interest until 1801.63

In his “First Report,” Hamilton called the national debt a “national blessing,” but urged Congress to remember that “the creation of debt should always be accompanied with the means of [its] extinguishment.” Toward that end, Hamilton proposed some government revenue be dedicated toward liquidating outstanding debt. Unlike today, the first generation of debt had no maturity date; it simply paid interest in perpetuity. Nonetheless, Hamilton established a mechanism for retiring bonds in order to reassure investors that the United States could—and would—pay off its debts. The Funding Act of 1790 thus contained a provision for the repayment of the debt, and this was enlarged not long afterward by legislation that diverted surplus revenue from tariffs and tonnage fees into a new “Sinking Fund.” Hamilton did use this money to retire token amounts of debt, but he deployed it most successfully during the Panic of 1792, when the Treasury Department intervened in (p. 345) money markets by buying bonds. This injected money into financial system, quelling the panic in much the way central bankers do today.64

The second pillar of Hamilton’s vision for the economy was contained in his “Report on a National Bank,” released in December 1790. The proposal drew intense opposition from Thomas Jefferson and others, but Hamilton’s argument in favor of it carried the day with Washington and a majority of Congress. Inspired by the example of the Bank of England, the new Bank of the United States received a twenty-year charter. The federal government was to supply $2 million of its total working capital of $10 million, with the balance coming from private subscriptions paid 25 percent in specie and 75 percent in federal government bonds. This public-private partnership echoed the administration of the colonial land banks, but the Bank of the United States was much larger. Headquartered in Philadelphia with branch offices around the country, it became the biggest business enterprise in the new nation, and an important adjunct to the national government, serving as its fiscal agent and extending it loans. It also issued the closest thing the nation had to a uniform paper currency, all redeemable in specie.65

The third and final pillar of Hamilton’s financial program was spelled out in his less-well-known “Report on the Establishment of a Mint” (1791). Under this plan, the United States would soon start producing plenty of gold and silver coins of its own design, along with a number of smaller, copper coins in various fractions of a dollar: as high as fifty cents and as low as a half cent. Foreign coins would provide what Hamilton described as the “raw material” for the mint.66 Unfortunately, the United States lacked the necessary technology and mineral resources to mint coins on a scale commensurate with the size of the country. The United States Mint would not make a significant contribution to the money supply for several decades, and the coins in circulation when Hamilton left office closely resembled those in circulation in the colonies a century earlier, augmented by notes issued by a growing number of state-chartered banks. In time, these notes would become the dominant medium of exchange in the new nation.67

In most other respects, though, the revolution orchestrated by Hamilton ushered in a new financial era, and set the nation on the path to genuine financial independence, even if it left future Jeffersonian Republicans seething at the vast expansion of centralized state power. Nonetheless, Hamilton’s innovative assumption and consolidation of wartime obligations, his creation of a new, manageable national debt, and his institution of a program of necessary, not onerous, taxes—all these enabled the country to meet future threats without recourse to the worthless paper, brutal confiscations, and broken promises that had been the pillars of finance in the Revolutionary era. As Hamilton himself put it in 1795, “’tis the signal merit of a vigorous system of national credit that it enables a Government to support war without violating property, destroying industry, or interfering unreasonably with individual enjoyments.”68

This was a curious turn of events. The United States had embarked on the Revolution with almost no control over monetary or fiscal policy. By the 1790s, it had successfully established a modern administrative state capable of issuing debt, (p. 346) taxing its citizens, and providing a circulating medium via a national bank. In breaking free of Great Britain, the United States found itself following in the footsteps of its former adversary. It was an irony lost on most members of the founding generation.


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                                (1.) John P. Kaminski, and Gaspare J. Saladino, eds., The Documentary History of the Ratification of the Constitution: Virginia, No. 2, vol. 9 (Madison: State Historical Society of Wisconsin, 1991), 1011.

                                (2.) Though synthetic in nature, this chapter owes a particular debt to the work of Max M. Edling, especially A Revolution in Favor of Government: Origins of the U.S. Constitution and the Making of the American State (New York: Oxford University Press, 2003).

                                (3.) John Brewer, The Sinews of Power: War, Money and the English State, 1688–1783 (Cambridge, MA: Harvard University Press, 1990); Alvin Rabushka, Taxation in Colonial America (Princeton, NJ: Princeton University Press, 2008), 866–867.

                                (4.) Paul Studenski and Herman E. Krooss, Financial History of the United States (New York: McGraw-Hill, 1963), 17–22; Edwin J. Perkins, The Economy of Colonial America (New York: Columbia University Press, 1988), 187–194.

                                (5.) Rabushka, Taxation in Colonial America, 267–270, 437–439, 556–558.

                                (6.) John J. McCusker, Money and Exchange in Europe and America, 1600–1775: A Handbook (Chapel Hill: University of North Carolina Press, 1978), 116-117, 124; David T. Flynn, “Credit in the Colonial Economy,” available online at Accessed 28 May 2012.

                                (7.) Roger W. Weiss, “The Issue of Paper Money in the American Colonies, 1720–1774,” Journal of Economic History 30 (1970): 770–784; Leslie V. Brock, The Currency of the American Colonies, 1700–1764: A Study in Colonial Finance and Imperial Relations (New York: Arno Press, 1975), 1–16; Perkins, Economy of Colonial America, 163–167. On Massachusetts see Joseph B. Felt, An Historical Account of Massachusetts Currency (Boston: Perkins and Marvin, 1839), 38.

                                (8.) Brock, Currency of the American Colonies, 21–35, 244–291; McCusker, Money and Exchange, 119; Dror Goldberg, “The Massachusetts Paper Money of 1690,” Journal of Economic History 69 (2009): 1092–1106.

                                (9.) Albert Henry Smyth, ed., The Writings of Benjamin Franklin, vol. 2 (New York: Haskell House, 1970), 147, emphasis in original; Theodore Thayer, “The Land Bank System in the American Colonies,” Journal of Economic History 13 (1953): 145–159.

                                (10.) On the depreciation of various colonial currencies see the exchange rates tabulated in McCusker, Money and Exchange, 116–229.

                                (11.) Jack P. Greene and Richard M. Jellison, “The Currency Act of 1764 in Imperial-Colonial Relations, 1764–1776,” William and Mary Quarterly 18 (1961): 485–518; Jack M. Sosin, “Imperial Regulation of Colonial Paper Money, 1764–1773,” Pennsylvania Magazine of History and Biography 88 (1964): 174–198; Joseph Albert Ernst, “Genesis of the Currency Act of 1764: Virginia Paper Money and the Protection of British Investments,” William and Mary Quarterly 22 (1965): 33–74; Joseph Albert Ernst, Money and Politics in America, 1755–1775: A Study in the Currency Act of 1764 and the Political Economy of Revolution (Chapel Hill: University of North Carolina Press, 1973).

                                (12.) Governor Francis Fauquier to the Earl of Halifax, June 14, 1765, Colonial Office Papers, quoted in Greene and Jellison, “Currency Act of 1764,” 491, 492.

                                (13.) Greene and Jellison, “Currency Act of 1764,” 493–495, 504–517.

                                (14.) Ibid., 517–518.

                                (15.) “The Articles of Confederation,” reprinted in Government and the American Economy: A New History, ed. Price Fishback (Chicago: University of Chicago Press, 2007), 571–580. On the origins of the three-fifths clause see Robin L. Einhorn, American Taxation, American Slavery (Chicago: University of Chicago Press, 2006), 138–145.

                                (16.) E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776–1790 (Chapel Hill: University of North Carolina Press, 1961), 35–40, 43 n. 52, 55; Edwin Perkins, American Public Finance and Financial Services, 1700–1815 (Columbus: Ohio State University Press, 1994), 101-103. Scholars have given varying estimates of the relative role played by the different mechanisms for funding the American Revolution: foreign borrowing, domestic borrowing, and fiat paper money. The estimates given here and elsewhere are largely derived from the tabulations in Perkins, American Public Finance, 103.

                                (17.) Ferguson, Power of the Purse, 40–46, 55–56, 126-129; Perkins, American Public Finance, 104–105.

                                (18.) Worthington Chauncey Ford, ed., Journals of the Continental Congress, vol. 7 (Washington, DC: Government Printing Office, 1907), 36; Ferguson, Power of the Purse, 25–47; Ben Baack, “America’s First Monetary Policy: Inflation and Seigniorage during the Revolutionary War,” Financial History Review 15 (2008): 107–121.

                                (19.) The use of pounds, shillings, and pence was not what it seemed. In fact, every colony had its own monetary system: a Virginia pound, a New York pound, and a Georgia pound were each worth a slightly different amount of gold or silver coin; none of them was equivalent to a British pound. This confusing system was an artifact of the early eighteenth century, when each colony deliberately overvalued gold and silver coin at ever-changing rates in an attempt to keep coin within its borders. See McCusker, Money and Exchange, 118–119; Philip L. Mossman, Money of the American Colonies and Confederation: A Numismatic, Economic and Historical Correlation (New York: American Numismatic Society, 1993), 46–53.

                                (20.) Eric P. Newman, “Sources of Emblems and Mottoes on Continental Currency and the Fugio Cent,” Numismatist 79 (1966): 1587–1598; Eric P. Newman, The Early Paper Money of America (Iola, WI: Krause Publications, 1990), 57–69; Benjamin H. Irvin, “Benjamin Franklin’s ‘Enriching Virtues’: Continental Currency and the Creation of a Revolutionary Republic,” Common-place 6 (April 2006), available online at Accessed 28 May 2012.

                                (21.) Ferguson, Power of the Purse, 25–35; Baack, “America’s First Monetary Policy,” 112–120. On the deprecation of the continentals see also Charles W. Calomiris, “Institutional Scarcity, Monetary Scarcity, and the Depreciation of the Continental,” Journal of Economic History 48 (1988): 47–68.

                                (22.) William L. Saunders, ed., The Colonial Records of North Carolina, vol. 10 (Raleigh, NC: P. M. Hale, 1886), 194–195; Ralph Volney Harlow, “Aspects of Revolutionary Finance, 1775–1783,” American Historical Review 35 (1929): 46–68. On British counterfeiting see Kenneth Scott, Counterfeiting in Colonial America (Philadelphia: University of Pennsylvania Press, 1957), 253–263.

                                (23.) Baack, “America’s First Monetary Policy,” 111; Harlow, “Aspects of Revolutionary Finance,” 50–51; Perkins, American Public Finance, 103

                                (24.) Ferguson, Power of the Purse, 44–47, 51–52; Perkins, American Public Finance, 97–98, 103. “Institutional Scarcity, Monetary Scarcity, and the Depreciation of the Continental,” Journal of Economic History 48 (1988): 47–68.

                                (25.) Perkins, American Public Finance, 97–98; Harlow, “Aspects of Revolutionary Finance,” 61–62; Newman, Early Paper Money of America, 15.

                                (26.) Smyth, Writings of Benjamin Franklin, 7:294 and 9:234, emphasis in original.

                                (27.) Ben Baack, “Forging a Nation State: The Continental Congress and the Financing of the War of American Independence,” Economic History Review 54 (2001): 639–656; Farley Grubb, “The Continental Dollar: How Much Was Really Issued?” Journal of Economic History 68 (2008): 283–291.

                                (28.) Ferguson, Power of the Purse, 52–54, 57–69; E. Wayne Carp, To Starve the Army at Pleasure: Continental Army Administration and American Political Culture, 1775–1783 (Chapel Hill: University of North Carolina Press, 1984), 75–98.

                                (29.) Quoted in Studenski and Krooss, Financial History of the United States, 25–26; Ferguson, Power of the Purse, 109–124; Clarence L. Ver Steeg, Robert Morris: Revolutionary Financier (Philadelphia: University of Pennsylvania Press, 1954), 42–64.

                                (30.) Robert Morris to Benjamin Franklin, September 27, 1782, in The Papers of Robert Morris, 1781–1784, vol. 6, ed. John Catanzariti and E. James Ferguson (Pittsburgh: University of Pittsburgh Press, 1984), 449–450.

                                (31.) Robert Morris to George Olney, September 2, 1783, in Papers of Robert Morris, vol. 8, ed. Elizabeth Nuxoll and Mary Gallagher (Pittsburgh: University of Pittsburgh Press, 1996), 486.

                                (32.) Ferguson, Power of the Purse, 122–135; Michael P. Schoderbek, “Robert Morris and Reporting for the Treasury under the U.S. Continental Congress,” Accounting Historians Journal 26 (December 1999): 1–34.

                                (33.) Victor L. Johnson, “Robert Morris and the Provisioning of the American Army during the Campaign of 1781,” Pennsylvania History 5 (1938): 7–20; Ferguson, Power of the Purse, 48–50, 52–53; Catanzariti and Ferguson, Papers of Robert Morris, 1:xix–xx.

                                (34.) Studenski and Krooss, Financial History of the United States, 31; Einhorn, American Taxation, American Slavery, 132–138.

                                (35.) David Howell to Nicholas Brown, July 20, 1783, quoted in Einhorn, American Taxation, American Slavery, 119.

                                (36.) Ferguson, Power of the Purse, 135–136; Newman, Early Paper Money of America, 70; Perkins, American Public Finance, 104–105; Robert Morris to Benjamin Harrison, January 15, 1782, in Catanzariti and Ferguson, Papers of Robert Morris, 4:46.

                                (37.) Ferguson, Power of the Purse, 123, 135–138; Perkins, American Public Finance, 106–136.

                                (38.) Gouverneur Morris to General Greene, December 24, 1781, in The Life of Gouverneur Morris, vol. 1, ed. Jared Sparks (Boston: Gray and Bowen, 1832), 239; Robert Morris to John Hanson (Report on Public Credit), July 29, 1782, in Catanzariti and Ferguson, Papers of Robert Morris, 6:36–84; Morris is quoted on pp. 62 and 69.

                                (39.) Ferguson, Power of the Purse, 146–176; Newman, Early Paper Money of America, 71; Perkins, American Public Finance, 141

                                (40.) Ferguson, Power of the Purse, 128–129, 142, 174–176.

                                (41.) Robert Morris to John Hanson, January 15, 1782, in Catanzariti and Ferguson, Papers of Robert Morris, 4:25–40; “Notes on the Establishment of a Money Unit, and of a Coinage for the United States,” April 1784, in The Writings of Thomas Jefferson, vol. 3, ed. Paul Leicester Ford (New York: G. P. Putnam’s Sons, 1894), 450.

                                (42.) Jefferson, “Notes on the Establishment of a Money Unit,” 449.

                                (43.) Ibid., 454; U.S. Continental Congress, Propositions Respecting the Coinage (New York, 1785), 1; Ford, Journals of the Continental Congress, 29:499–500; Journals of the Continental Congress, 31:503–504, 876–878.

                                (44.) Damon G. Douglas, “James Jarvis: Merchant, Privateer, Coinage Contractor,” Colonial Newsletter 8 (1969): 261–265; Damon G. Douglas, “James Jarvis and the Fugio Coppers,” Colonial Newsletter 8 (1969): 285–292.

                                (45.) Mossman, Money of the American Colonies, 161–202; Eric P. Newman, “New Thoughts on the Nova Constellatio Private Copper Coinage,” in Coinage of the American Confederation Period, ed. Philip L. Mossman (New York: American Numismatic Society, 1996), 79–114.

                                (46.) Perkins, American Public Finance, 137–172.

                                (47.) Ferguson, Power of the Purse, 220–234; Edling, Revolution in Favor of Government, 158; Woody Holton, “Did Democracy Cause the Recession That Led to the Constitution?” Journal of American History 92 (2005): 445–446.

                                (48.) Perkins, American Public Finance, 137–142.

                                (49.) Ferguson, Power of the Purse, 234–238.

                                (50.) Perkins, American Public Finance, 137–142; Leonard L. Richards, Shays’s Rebellion: The American Revolution’s Final Battle (Philadelphia: University of Pennsylvania Press, 2002).

                                (51.) Stephen Higginson to Henry Knox, November 25, 1786, quoted in Stephen E. Patterson, “The Federalist Reaction to Shays’s Rebellion,” in In Debt to Shays: The Bicentennial of an Agrarian Rebellion, ed. Robert A. Gross (Charlottesville: University Press of Virginia, 1993), 116.

                                (52.) Charles A. Beard, An Economic Interpretation of the Constitution of the United States (New York: Macmillan, 1913).

                                (53.) Robert E. Brown, Charles Beard and the Constitution: A Critical Analysis of “An Economic Interpretation of the Constitution” (Princeton, NJ: Princeton University Press, 1956); Forrest McDonald, We the People: The Economic Origins of the Constitution (Chicago: University of Chicago Press, 1958); Robert A. McGuire and Robert L. Ohsfeldt, “Economic Interests and the American Constitution: A Quantitative Rehabilitation of Charles A. Beard,” Journal of Economic History 44 (1984): 509–519.

                                (54.) See, for example, Gordon S. Wood, The Creation of the American Republic, 1776–1787 (New York: W. W. Norton, 1972).

                                (55.) Woody Holton, Unruly Americans and the Origins of the Constitution (New York: Hill & Wang, 2007), 273; Holton, “Did Democracy Cause the Recession That Led to the Constitution,” 469. Another recent critique of Wood comes from Max Edling, who builds on the research of Roger Brown to argue that the Constitution was at heart a self-conscious (and well-intentioned) act of state building aimed at the preservation of the nation. Roger H. Brown, Redeeming the Republic: Federalists, Taxation, and the Origins of the Constitution (Baltimore: Johns Hopkins University Press, 1993); Edling, A Revolution in Favor of Government, 222-223.

                                (56.) Einhorn, American Taxation, American Slavery, 172.

                                (57.) Max Farrand, ed., The Records of the Federal Convention of 1787, vol. 2 (New Haven, CT: Yale University Press, 1911), 310.

                                (58.) Mary M. Schweitzer, “State-Issued Currency and the Ratification of the U.S. Constitution,” Journal of Economic History 49 (1989): 311–322. On the possible nefarious motives for this prohibition, as well as a compelling rebuttal, see Farley Grubb, “Creating the U.S. Dollar Currency Union, 1748–1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?” American Economic Review 93 (2003): 1778–1798; Ronald W. Michener and Robert E. Wright, “State ‘Currencies’ and the Transition to the U.S. Dollar: Clarifying Some Confusions,” American Economic Review 95 (2005): 682–703.

                                (59.) On this period generally, see the essays in Douglas A. Irwin and Richard Sylla Founding Choices: American Economic Policy in the 1790s (Chicago: University of Chicago Press, 2011).

                                (60.) Thomas P. Slaughter, The Whiskey Rebellion: Frontier Epilogue to the American Revolution (New York: Oxford University Press, 1986); Edling, Revolution in Favor of Government, 135–136.

                                (61.) Alexander Hamilton, “First Report on Public Credit,” in Liberty and Order: The First American Party Struggle, ed. Lance Banning (Indianapolis: Liberty Fund, 2004), 45–49; Ferguson, Power of the Purse, 251–343; Robert E. Wright, One Nation under Debt: Hamilton, Jefferson, and the History of What We Owe (New York: McGraw-Hill, 2008), 75–160; Edling, Revolution in Favor of Government, 191–205.

                                (62.) American State Papers, Finance (Washington: Gales and Seaton, 1832), 1:239; Wright, One Nation under Debt, 143–145. By end of 1797, when time ran out to redeem them, the United States retired Continental dollars with a total face value of $6 million. On redemption of the Continental dollar see Arthur Nussbaum, A History of the Dollar (New York: Columbia University Press, 1957), 37. So-called "new tenor" notes were classified as debt instruments and were redeemed at face value. Perkins, American Public Finance, 98.

                                (63.) Newman, Early Paper Money of America, 71; Ferguson, Power of the Purse, 289–343; Perkins, American Public Finance, 213–234.

                                (64.) Hamilton, “First Report,” 49; Studenski and Krooss, Financial History, 53–54; Wright, One Nation under Debt, 156–160.

                                (65.) David Jack Cowen, The Origins and Economic Impact of the First Bank of the United States, 1791–1797 (New York: Garland Publishing, 2000).

                                (66.) At Hamilton’s recommendation, Congress formally defined the dollar as having the same amount of silver as the average Spanish silver dollar (371.25 grains); it also defined it in terms of a set amount of gold: 24.7 grains. This formally put the United States on a bimetallic system.

                                (67.) “Report on the Establishment of a Mint,” January 28, 1791, in The Papers of Alexander Hamilton, vol. 7, ed. Harold Coffin Syrett (New York: Columbia University Press, 1962), 462–473; Don Taxay, The U.S. Mint and Coinage: An Illustrated History from 1776 to the Present (New York: Arco, 1966), 65–148.

                                (68.) Alexander Hamilton, “Defence of the Funding System,” July 1795, in Syrett, Papers of Alexander Hamilton, 19:53.