America has a bounty of 250th anniversaries to celebrate these days. On April 18, I went with my 9-year-old son to watch a re-enactment of Paul Revere’s famous ride. The next day, we were among thousands of patriotic Americans at Lexington at 5 a.m., ready for the Redcoats to arrive and hear the shot heard around the world.
June 22 is perhaps an even more consequential semiquincentennial, even if there are no re-enactors or commemorative gatherings. On this day in 1775, the Continental Congress invented a new currency and authorized the printing of $2 million.
This currency proved to be both a blessing and a curse for the war effort. It’s not mere history: Both the successes and the failures offer crucial lessons about how monetary and fiscal decisions affect the economy, and how they shape the credibility of the nation as a whole. Those lessons have resonated through all the intervening years of independence, expansion, conflict, depression, war, reinvention and more. Today the prospects for our currency are starting to turn ominous again.
The Continental currency, like the Revolutionary War, had its origins in Massachusetts. For most of history, money had been tangible: gold, silver, wampum, salt blocks, jewelry beads. Paper in the form of private bills of exchange or promissory notes was rare (China and Japan are the notable exceptions here), used mainly by merchants and bankers, and generally able to be converted into some underlying commodity.
That changed in 1690 when Massachusetts had a problem paying its bills from a failed expedition against French Quebec. London would not reimburse the costs. The raid itself captured no plunder. So the colony’s resourceful government did something that was effectively unheard-of in the Western world: It created 7,000 pounds in its own “bills of credit,” basically paper currency, with only a vague promise that they would be paid back (but a guarantee that they would be legal tender for tax payments). It created what was effectively fiat money.
Although the Massachusetts experiment was, in many ways, a failure, contributing to decades of inflation, it was the model that the Continental Congress drew on when it needed to raise funds to equip the newly created Continental Army. In theory, the $2 million of “bills of credit” it ordered up (initially in denominations from $1 to $20) were like bonds, entitling the bearer to be repaid in silver or gold at a future date, albeit without any promised interest or a plausible mechanism to raise the precious metals in question. In practice, the paper looked and functioned like currency today, complete with distinctly American imagery, the label “the United Colonies” and the ability to serve as a medium of everyday exchange.
George Washington was initially enthusiastic about his $2 million war chest, enough to pay a year’s wages for the 15,000 soldiers in the newly formed Continental Army with money left over for weapons and other supplies.
Within a few years, however, Washington was getting grumpy. Letters he wrote and received frequently complained about inflation (or, as they called it, “depreciation” of the Continental currency). More notes were issued to deal with higher inflation, which further drove up prices. Treacherous Loyalist New Yorkers compounded the problem by adding forged notes into the mix.
In 1779, the Continental Congress delayed the promised repayment of the notes, which further eroded their value. By the early 1780s, the currency was nearly worthless — giving rise to the expression “not worth a continental.” The last years of the war were instead financed with foreign aid, loans and a new national bank.
The Continental currency was good enough to help America get through the first critical years of war but the failure to replace it with a credible national system of finance helped to doom the peace. The newly independent states each went its own unsuccessful way. Rhode Island issued large amounts of paper money, which led to inflation and riots. Massachusetts returned to using silver and gold coins and levying high taxes — and the result was even worse, with Shays’ Rebellion helping to end the Articles of Confederation.
The situation has improved significantly over the past 250 years, starting with Hamilton’s federal assumption of state debts, through the gold standard and ultimately with the establishment of an independent Federal Reserve. Fiat money returned, briefly, during the Civil War, when it was once again rendered useless by inflation. Otherwise, U.S. dollars were backed by something shiny and solid more or less all the way through 1971, when President Richard Nixon took the final steps to exit the Bretton Woods system in order to prevent a large outflow of gold to other countries.
Today, the value of our currency lies in the belief by everyone from American citizens to international investors that the United States is credible and will pay our debts, that we would never default on our Treasury borrowing, either explicitly, by failing to pay, or implicitly, through a huge bout of inflation.
It was not ignorance that sealed the fate of the Continental currency. Many policymakers of the era understood that printing more money would raise prices, and that paper promises without credible mechanisms for repayment would not be taken seriously. Maintaining the credibility of both the money supply and government borrowing remains central to modern macroeconomics, although the relative importance of the role that each played in the collapse of the Continental currency continues to be debated by economic historians.
While vastly better than the Continental currency — a very low bar to clear — the credibility of the U.S. dollar has been far from perfect. In 1933, the United States arguably defaulted on its debt by failing to make the promised repayment in gold. Today the national debt is much higher relative to our economy than it was in 1933 and policymakers keep taking steps to make it grow even faster. The Federal Reserve has done a good job preserving its credibility in the face of several spells of inflation, most recently during Covid, but it faces mounting political attacks, most notably from President Trump. These attacks could grow if rising debt gives politicians even more reason to want low interest rates.
If the past two and a half centuries have taught us anything, it is that ultimately our economic success rests on institutions that command broad and lasting confidence. Without them the social construct we call money would evaporate and we would all be left holding a pile of beautifully decorated but otherwise worthless scraps of paper.
Jason Furman, a contributing Opinion writer, was the chairman of the White House Council of Economic Advisers from 2013 to 2017.
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