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Published by EH.Net (August 2023).

Farley Grubb. The Continental Dollar: How the American Revolution Was Financed with Paper Money. Chicago: The University of Chicago Press, 2023. 296 pp. $65 (hardcover), ISBN 978-0226826035.

Reviewed for EH.Net by Hugh Rockoff, Department of Economics, Rutgers University.

 

Farley Grubb has written a splendid book that explains a great deal about the financing of the Revolution that we did not know. It will be a cornerstone of future research.

It is the product of an immense amount of archival research and intense and creative thinking about Colonial and Revolutionary finance. One indication of the work that went into it can be found in the reference list, which includes 25 papers by Grubb, most of them single-authored, the earliest published in 2003.

Continental dollars played a major role in the financing of the Revolution. Grubb (pp. 66-7) estimates that they accounted for 100 percent of Congressional spending in the first two years of the war and 77 percent from 1775 through 1779. Altogether, about $200 million at face value was issued. This was a huge amount in real terms, given that the GDP figure for 1781 in Historical Statistics is also about $200 million (Carter, Haines, and Gartner 2006, series Eg220).

Figure 1 is a typical example of a Continental bill. (For the image, see the EH.Net version of this review or click the link below.)

Continental dollar

Source: Museum of the American Revolution. https://www.amrevmuseum.org/collection/continental-currency-3-dollars

As one can see, the bill has a face value of three dollars and was redeemable in Spanish milled dollars, the famous pieces of eight, a common form of hard money in the Colonial economies. However, it was not redeemable on demand. It was redeemable according to a “Resolution of Congress” passed in February 1776. The Resolution set the dates – years after the war was expected to be over – when the note could be redeemed. Subsequent emissions were redeemable at later dates described in subsequent resolutions. In all, there were 11 emissions between 1775 and 1779. The resolutions, Grubb explains, were well publicized, so people offered the notes knew when they could be redeemed. People understood, of course, that these promises might not be kept. For one thing, the Revolutionaries had to win the war. The states were given quotas to redeem based on their populations, and the redemption schedules for the notes were set, Grubb believes, so that the taxes needed to finance the redemption would be close to what had been feasible before the war.

Thus, as Grubb emphasizes repeatedly, the Continental dollars were not, initially, a legal-tender fiat currency – notice that there was no mention on the bill shown in Figure 1 of legal tender as there is on the face of a contemporary dollar — but rather a zero-coupon bond currency. It was intended that they would rise in value and circulate at a higher price as the date of redemption approached.

The denominations were large. The smallest was one dollar, an amount that Grubb believes was about equivalent to 31 dollars in 2012. The explanation for large denominations is that initially the bills were paid to soldiers and sailors with the hope that the recipients rather than attempting to spend them during the war, something that would be made difficult by large denominations, would save them to spend afterwards. It was hoped, to be specific, that the recipients would treat them as promises of mustering-out pay or even as pensions (Grubb 30).

The value of the Continental dollars declined precipitously as the war progressed. However, Grubb argues persuasively that at least in the first years of the war this was due to the lengthening of the time to redemption in new emissions and other changes in the redemption schedules. We are witnessing, in other words, the decrease in the present value of a bond, and not inflation caused by an expansion of the stock of money.

Grubb likens the Continental dollars to U.S. Savings Bonds. For me, and I would think for many others, especially of my generation, the analogy evokes warm feelings. U.S. Savings Bonds were, and probably for many still are, a go-to present for births, birthdays, graduations, and so on.

The reference to zero-coupon bonds also reminded me of another analogy, one that I heard in a class on monetary economics taught by Milton Friedman at the University of Chicago many years ago. Zero-coupon bonds were then in the news, because several corporations had issued them, and so it was not surprising when a student asked Friedman whether the Federal government should also issue zero-coupon bonds. Friedman answered “yes, and they do.” He added, gleefully as I recall, “and you probably have one in your pocket.” He then pulled out his wallet, took out a dollar bill, and held it before the class. “This, he said, is a zero-coupon bond! It pays zero interest and has a term to maturity of zero!”

Although Grubb’s story, which emphasizes the bond-like properties of the Continental dollar, is somewhat different, it resonates with recent analyses that stress the macroeconomic effects of fiscal deficits. These include, to mention a few prominent recent examples, the book by John Cochrane (2023), The Fiscal Theory of the Price Level, and papers by Bruce Smith (1985a, 1985b) on Colonial monies and Eric M. Leeper, Margaret M. Jacobson, and Bruce Preston (2019) on early New Deal measures.

Initially, the Continental dollars, as I noted above, were not legal tenders. As the war dragged, however, the pressure on the Continental Congress to make them legal tenders mounted. Congress found itself unable to use Continental dollars mainly for soldiers’ pay. Cash was needed to buy goods in the marketplace. In January 1777, Congress asked the states to make Continental dollars legal tenders within their borders. Presumably, Congress believed that it lacked the authority to do so. Most states, certainly the Northern and Middle Atlantic states, did so at once. By May 1777, the Continentals were a legal tender. Simultaneously, the states made their own currencies legal tenders. This allowed them to issue notes in smaller denominations that could be used to make change for the Continentals. In effect, the Continentals became high-powered money. Making the Continentals legal tenders, Grubb (p. 43) concludes, increased their contribution to the ongoing inflation both directly and through the associated increase in state notes.

The inflation resulting from the monetary issues and other pressures on the economy was intense. The consumer price index available at measuringworth.com (Officer and Williamson, accessed July 2023) rose 60 percent between 1775 and 1778 before dropping back a bit in 1779. Many states responded by imposing price controls; ill-fated experiments – that I chronicle in Rockoff (1984, 27-42) – that were soon abandoned.

In January 1779, Congress changed the redemption schedule for the Continental dollars. It now made all the Continentals, whether issued early in the war or later, fungible for redemption. This meant that the bills issued early in the war with short periods to redemption as originally scheduled were no longer more valuable than subsequent issues. This law removed the incentive to cull the notes from earlier emissions, a Gresham’s law story. However, the law probably also created worries about further actions that Congress might take that would reduce the redemption value of the Continentals. Public confidence in the Continentals declined and by 1780, the value of a Continental was nearing one cent on the dollar (Grubb 171).

In March 1780, Congress changed the rules again. It floated a scheme whereby states that acquired Continental dollars and returned them to the Congress would be permitted to issue their own Continental-state dollars, still another form of currency. State efforts to comply with the scheme led finally, Grubb (p. 185) tells us, to the abandonment of the Continental dollar as a medium of exchange.

The end of the story came with the Funding Act of 1790. This Act converted existing debts of the Federal government, of which there were many, into 6-percent callable perpetuities. The Continentals were to be converted at the rate of 100 Continental dollars per one-dollar of the new bonds (Grubb 215).

The Constitution banned both the States and the Federal Government from issuing “bills of credit” – that is, something like the Continental dollars. Most economic and financial histories – including, uh oh! Walton and Rockoff (2018, 108) – claim that the ban was a response to the inflationary record of the State and Continental paper monies. However, Grubb sees it differently. He argues that there were many influential bankers at the Convention and naturally, they were especially influential on questions of finance. They wanted to create an economy in which hand-to-hand currency consisted of bank money redeemable in specie and not of government issued bills of credit. Private interests triumphed. Obviously, a difficult contention to prove – few politicians are willing to tell us that the positions they took on public issues were based on personal greed – but certainly very plausible.

Although Grubb’s book is a major step forward in our understanding of the financing of the Revolution, there is still much to do. Indeed, Grubb makes several pertinent suggestions. For example, he suggests (Grubb 182-3) that we need a new and detailed study of the paper money issued by the states. One hopes that whoever undertakes this task will employ the same attention to detail and clarity of expression as Grubb.

One thing that would especially interest me is additional work on the disturbance to debtor-creditor relations produced by the issue of legal tender notes and inflation. Early financial historians, for example Bolles (1884, 174-189), claimed that the inflation and legal tender status of the Continental and State dollars produced redistributions from creditors to debtors that produced “disastrous consequences.” These redistributions were in turn, Bolles argued, the reason the Constitution prohibited the issue of bills of credit. Bolles and other financial historians offered examples, including heartrending stories about widows living on fixed inheritances –I told one such story in Rockoff (2009) – but how frequent such cases were is unknown. One can imagine a modern study based on large numbers of digitized court cases, newspaper accounts, or other records that would tell us more about the quantitative importance of this phenomenon.

Farley Grubb, to sum up, deserves our thanks for an important and tough job well done.

References

Bolles, Albert Sidney. 1884. The Financial History of the United States, From 1774 to 1789: Embracing the Period of the American Revolution. Ed. 2. New York: Appleton and company.

Carter, Susan, Scott Gartner, and Michael Haines, et al., eds. 2006. Historical Statistics of the United States: Earliest Times to the Present, Millennial Edition. New York: Cambridge University Press.

Cochrane, John H. 2023. The Fiscal Theory of the Price Level. Princeton: Princeton University Press.

Leeper, Eric M, Margaret M. Jacobson, and Bruce Preston. 2019. “Recovery of 1933.” NBER Working Paper Series, 25629.

Officer, Lawrence H., and Samuel H. Williamson. 2003. “The Annual Consumer Price Index for the United States, 1774-Present,” MeasuringWorth.Org, Accessed July 23, 2023.

Rockoff, Hugh. 1984. Drastic Measures: a History of Wage and Price Controls in the United States. New York: Cambridge University Press.

_________. 2009. “Prodigals and Projectors: An Economic History of Usury Laws in the United States from Colonial Times to 1900.” In Human Capital and Institutions: A Long-run View, eds. David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, 285-323. Cambridge: Cambridge University Press.

Smith, Bruce D. 1985a. “American Colonial Monetary Regimes: The Failure of the Quantity Theory and Some Evidence in Favour of an Alternate View.” The Canadian Journal of Economics 18, no. 3: 531–65.

_________. 1985b. “Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas.” Journal of Political Economy 93, no. 6: 1178–1211.

Walton, Gary M., and Hugh Rockoff. 2018. History of the American Economy (13th ed.). Boston: Cengage.

 

Hugh Rockoff is Distinguished Professor of Economics at Rutgers University. His primary research interests include the history of price controls, the U.S. economy in World War II, and U.S. monetary history.

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