In the years immediately following the Revolutionary War, there was a shortage of hard currency. As I understand it, among other things, this was one of the contributing factors to the Shays’ Rebellion (people were compelled to pay their taxes with hard currency yet little was available to them).
So how does an inchoate independent state gain ‘hard currency’? How does it get it into the hands of ‘the people’?
I assume it’s done initially by levying taxes on imports/exports, port fees, and the like but, and again, I am assuming, those would be paid in the currency of the trading nation. In the case of the early USA, that still wouldn’t create dollars. On the other hand, if payment was in gold, I suppose it could be melted down and used to back up the printing of new money.
In any case, my bottom line question is how did the early US actually create its money (without horrendous inflation) and get it into the hands of the people?
The colonies continually had troubles securing enough metallic coin to encourage trade. The UK had mercantilist policies in place that sucked the shiny metal to Europe. There were a lot of Spanish dollars around because of illicit trade (and in fact Spanish dollars remained legal tender in the US until 1857), but there was seldom enough. The colonies would often respond to the specie shortage with paper money, issued with the promise that it could be used to pay taxes at the same value that coins were worth, thus providing a benchmark value for the paper. This often helped colonial government budgets, facilitated trade, and assisted when economic conditions were rough – Ben Franklin himself wrote about such advantages of paper money (although not disinterestedly, since he was a printer of such money himself) – but the issue of paper could of course be taken to extremes. In the case that a government printed too much, you had massive inflation, a loss in value of that paper. This happened during the revolution, since the Continental Congress at the time didn’t have the power to tax but did have the power to print. Individual colonies also had problems. There’s a delicate balance between having enough money to encourage trade, and having too much. Governments often have troubles finding the right balance.
After the war, there were attempts by the new state governments to rein things in.
Newly-born independent states like Massachusetts had major war debts. One solution, a traditional solution, would have been to print money to ease the debt burden both for the state government itself and also for various debtors like farmers, too. The problem with that kind of solution is when creditors, bankers and merchants, have the political power. Inflation like that reduces the value of outstanding debts: good for debt-carrying farmers, bad for bankers. Always, always, there’s this political tug-of-war going on. That’s as true today as it was in the past, and it’s one of the things that is killing the euro.
The solution isn’t necessarily the introduction of “hard” money. The solution is finding the proper balance between having enough money to help the economy without going overboard. Central banks still deal with this today, often without much skill, and as we can see by the current business news. Also, it’s not just governments that could issue paper banknotes in those days, it was also private banks themselves. Later in the 19th century and into the 20th, people used to call one possible solution having a more “elastic” currency, with a foundation of precious metal but also a much broader ability from a central bank to control paper when there’s too much and issue more when more is needed. The push for the creation of the Fed was based on the argument for a more elastic currency.
What eventually happened in the early US was not a huge influx of “hard” currency, not right away, but a new better balance found with paper creation from private banks. Alexander Hamilton became the first Secretary of the Treasury for President Washington, and he established the first Coinage Act for the US, establishing bimetalism, and also pushed for the founding of the first Bank of the United States, which had the power to issue notes and was large enough to have the influence to curb the excesses of smaller state-chartered banks, to keep them in line if the banks themselves were making too much paper. At least, until its charter expired.
Again: What the early US had was not a huge new influx of “hard” money. The precious metal came from mining, and as a result of being an economic powerhouse. Instead, the early US eventually learned to find a somewhat better balance than they had during the war for exactly how much paper should be printed.
This issue is addressed in plain-English terms in two excellent histories, Ron Chernow’s Alexander Hamilton and Joseph Ellis’s Founding Brothers. Both recommended.
Hellestal: Very helpful, indeed. That paper money was issued “with the promise that it could be used to pay taxes at the same value that coins were worth, thus providing a benchmark value for the paper” was an ingenious approach.
Elendil’s Heir: Founding Brothers looks excellent (especially for someone like me who has virtually no familiarity with early US history). Still, I am currently in the middle of ‘Miracle at Philadelphia’ and have a huge backload of “must reads” already (including finishing off ‘Novus Ordo Seclorum’ which I put on hold after reading its first 80 or so pages. It had become clear that I would do better first completing a more general, but still fact based, account of the issues and the era, and only then go back to ‘Novus’).
I hate to add another book to your reading list, but I would recommend first An Empire of Wealth: The Epic History of American Economic Power by John Steele Gordon. I’ve read both books that Elendil’s Heir recommended and while they are very good books, Chernow has no place on a beginner’s shelf and economics is not Ellis’ focus. Gordon knocks it off in a 14-page chapter called “The Hamiltonian Creation” that should have more than enough to answer your questions and give you some needed background at the same time. (The one-star reviews on Amazon are worth reading just for the hilariousness of their ignorance.)
By digging it out of the ground, or by having its citizens export more than they import (foreign trade was paid in gold or silver), or by enticing foreigners to invest in domestic enterprises, or by having immigrants carry it into the country in their pockets. There were no other ways.
The preceding methods, you will see, invariably get it into the hands of people–either miners, or immigrants, or exporters. Then it circulates, with some passing through the government via taxes or borrowing.
Statistics on the amount of gold and silver circulating within the economy of the early United States are unreliable; there was no means of tracking it. However there is no doubting Hellestal’s conclusion that hard currency remained scarce, just because none of the things on my list were happening to any large degree before about 1830. American gold and silver mines were few and small, and Americans imported more than they exported. This is one reason why bank notes, issued in moderation by state-chartered banks under the supervision of the Bank of the United States, found such ready acceptance.
