Paper Money

The Problem

Under the Articles of Confederation, one of the central problems the states faced was a lack of uniform currencycurrency (noun) a system of money for a particular country or state. The Articles failed to establish a standard paper or coin currency to be used by all of the states. As a result, individual states and the Continental CongressContinental Congress (1774-1789) A convention of delegates representing the thirteen colonies (and later states) that became the governing body of the nation until the passage of the Constitution. printed their own various forms of currency. Unfortunately, this created a system of multiple unstable currencies that varied state by state. Virginia dollars, Pennsylvania dollars, and Massachusetts dollars, for instance, all had completely different values, making trade between the states especially confusing and complex. Over time, the various currencies of each state depreciateddepreciation (noun) a loss in value over time at different rates, and the federal Congress had no authority to regulate the system.

Additionally, there was debate over what format American currency should take. There was strong opposition from the wealthiest members of society against using paper as a format for currency due to the fact that paper has no inherent value. While they were also concerned about the lack of a uniform currency, they were more concerned about the format of the currency. Unlike speciespecie (noun) money in the form of coins rather than paper, which uses precious metals such as gold, silver, or platinum that always have value, paper only has value if what it represents is honored by the system. However, because poorer citizens were facing difficult financial times, paper money seemed ideal since it could be printed at any point and immediately put into circulation, even if it would not retain its value in the long term.


Overview

Paying for the War

In order to finance its army for the Revolutionary War, the federal government issued paper money. It became the standard currency during the war, but because it lacked official backing by a federal or national bank (since no official federal bank existed yet), it lost its value when hard economic times hit. Congress requested that the states raise taxes to aid the situation, but because the federal government had no authority to tax under the Articles of Confederation, most states ignored this request and instead chose to print their own paper money, which only worsened the situation and caused greater levels of depreciation amongst the various currencies. Seen below is an example of continental currency, issued by the Congress.

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The Post-War Crisis

This lack of uniform currency created a financial crisis for the new nation, and because the Articles of Confederation limited the powers given to the federal government, recovery was difficult, if not impossible. Some coin currency was in circulation, but not enough to cover even a single year’s expenses of the Continental Army during the Revolution. Unfortunately, the collapsing economy of the 1780s brought back familiar evils that Americans had faced during the days of the colonies. A severe depression permeated the young nation and land was being foreclosed regularly. The majority of Americans who were farmers, soldiers, and small businessmen suffered in particular from these financial troubles.

Trade between the states was especially confusing and problematic due to the lack of uniform currency. Dozens of documents and letters from the period mention the confusion that resulted due to the lack of uniformity, and it was often a topic of discussion at the Continental Congress, as seen in this journal from November 24, 1780. Unfortunately, because the Articles prevented the Congress from enforcing taxes or currency regulations of any kind, this system was stuck in a perpetual chaos, and would only be solved by the future establishment of a national bank and currency under the Constitution.

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The Debate

The elite gentlemen of the states were strongly opposed to using paper as currency at both the state and national level because they viewed paper money as potentially worthless. Men of money viewed "government-issued paper money as a black eye on the state and nation" since it had no inherent value like coins do.1 In contrast, a coin minted in silver will always have value because silver itself is valuable as a material, but paper printed with a value written on it is only valuable if the system recognizes it as representing actual value. The elites knew that the paper money would not retain value in the long term, especially with so many different paper currencies in use, but the poorer famers, store clerks, and soldiers desperately needed money, and paper money could be printed at any time. Rather than have nothing and wait for new reserves of gold and silver to come into circulation, the poorest people preferred having paper money that appeared to have value to it so that they could pay off their debt. However, those who were owed money didn't want to be paid in this rapidly depreciating unstable paper currency.

Rhetoricrhetoric (noun) persuasive dialogue pushing an argument from the Federalists was largely critical of allowing states to issue their own paper currency. Prominent figures such as Alexander Hamilton implied that paper money was “inherently unsound and inflationary” and that states could not be trusted to issue and circulate paper money on their own, as seen in this excerpt from a letter written to James Duane in 1780.2 The lack of a uniform currency and use of paper money was also a concern for Robert Morris. In his role as Superintendent of Finance, Morris was essentially the chief financial officer of the states, and this system of greatly depreciating and unstable currencies made both his job and life very difficult. With Hamilton as his right-hand man, he often sought out data and information to ease his work, as seen in this letter to Robert Benson written by Hamilton on behalf of Morris.


Conclusion

One might wonder why the Articles would neglect establishing a national currency, which could have prevented trade issues and the financial crisis. The simplest explanation is that the Articles established a clearly defined relationship between the states and the national Congress that wanted to avoid giving the government too much power. “The states were to be free and independent while Congress had only limited and well-specified powers.”3 This makes sense when one considers Americans’ fears of centralized government after previously being under the tyrannical British rule. After fighting for “no taxation without representationa famous slogan used during the Revolution to take issue with Britain's tax policies, such as the Stamp Act, since the colonists had no voice in British government, but had to abide by British policies”, the Articles essentially established no national taxation at all, which, combined with the lack of a stable currency, led to economic depression for the states.


Discussion Questions

  1. How could the states have prevented their currency(s) from depreciating so rapidly?
  2. Is money inherently more valuable in the form of coins rather than paper? What gives either their value?
  3. Should the federal government have the power to establish a national currency, or are there ways around this power that could still allow for a prosperous and stable economy?

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