Happy Birthday, Money
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.
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