Financial History Issue 112 (Winter 2015) | Page 25
to him. “Paper bills of credit,” he complained, give “the shadow for the substance of a debt.”7
Even less restrained in their words,
Jay, Virginia Congressman James Madison and many other leading nationalists
denounced state-issued paper money in
the strongest terms. Arguing against its
issuance by his state in 1786, for example,
Madison lectured Virginia’s legislature
that paper money would “destroy confidence between individuals” and “disgrace
republican gov[ernmen]ts in the eyes of
mankind.”8 Yet under the Articles of Confederation, Congress was as powerless to
prevent states from issuing paper money
as it was to stop an incoming tide. Creditors like Washington, who feared that
cheap paper money would erode the value
of fixed investments, were swimming
against that tide in trying to prevent state
legislatures from authorizing it. At most,
opponents could try to limit its use to paying taxes or have it secured by something
of value, such as state-owned land.
The dam broke in 1786, when seven
states emitted paper money. “Pennsylvania and North Carolina took the lead in
this folly,” Madison wrote in August to
Thomas Jefferson, who was then serving
as America’s ambassador in Paris. Most of
the initial emissions incorporated limits
that helped them to hold value at least
initially, but in debtor-controlled Rhode
Island, which made its paper money legal
tender for virtually all public and private
debts, the bottom dropped out of the
currency’s value almost immediately and
hard money was driven underground.
“Supplies were withheld from the market, the shops were shut, popular meetings
ensued and the state remains in a sort
of convulsion,” Madison told Jefferson.
“Depreciation is inevitable” in every state
with paper money, Madison predicted, yet
driven by popular factions, he feared that
more states would join others in printing
“this fictitious money.”9
Madison perceived a pattern in the rush
to paper. State governments with the fewest checks and balances tended to act first
and in the most extreme manner. Pennsylvania and Rhode Island, for example,
placed all power in the legislature, with
the executive and the judiciary serving
at its pleasure. In contrast, he observed
in his letter to Jefferson, Maryland held
back because the state Senate — presumably because of the long terms, indirect
selection process and property qualifications of its members — stood as “a bar to
paper in that state.”
But as “the clamor for [paper money] is
now universal, and as the periodical election of the Senate happens at this crisis,”
Madison added with his customary pessimism, Maryland’s next Senate will likely
surrender.10 This experience confirmed
his view that America needed a balanced
national government that could check
the power of state excesses and majority
factions. From Paris, Jefferson had sent
Madison a shipment of treatises on government by European political philosophers that arrived early in 1786. Now he
began trolling through them in earnest for
arguments in support of his view.
Expressing similar sentiments at the
same time, Washington wrote to former Congressman Theordorick Bland
in August 1786, complaining about
“the present alarming troubles in Rhode
Island.”11 Writing to Jay on the same day,
Washington added, “What a triumph for
the advocates of despotism to find that
we are incapable of governing ourselves,
and that systems founded on the basis of
equal liberty are merely ideal and fallacious! Would to God that wise measures
may be taken in time to avert the consequences we have but too much reason to
apprehend.”12
For nationalists, Rhode Island became
an object lesson in the dangers of excess
democracy and a clarion call for constitutional reform. Proponents of paper money
pointed to the success of other states in
preserving its value, but critics saw it from
Madison’s perspective and, all but giving up on the states, turned toward the
nation for salvation. Referring to related
developments in New Jersey, Madison
asked James Monroe earlier in 1786, “Is it
possible with such an example before our
eyes of impotency in the federal system, to
remain skeptical with regard to the necessity of infusing more energy into it?”13
Echoing these sentiments in his August
letter to Jay, Washington wrote, “I do not
conceive we can exist long as a nation,
without having lodged somewhere a power
which will pervade the whole Union in an
energetic a manner.” Significantly, he then
added, “Retired as I am from the world, I
frankly acknowledge I cannot feel myself
an unconcerned spectator.”14
The specter of unpaid debt, and the
states replacing Congress as the functional
center of governing authority drew Washington, Madison, Jay and the other nationalists to the fore — driving them, and their
country, to a new Constitution and a more
perfect union that would forever change
the nature of government.
Pulitzer prize-winning historian Edward
J. Larson is University Professor of history and holds the Hugh & Hazel Darling
Chair in Law at Pepperdine University
and an inaugural Library Fellow at the
Fred W. Smith National Library for the
Study of George Washington in Mount
Vernon, VA. This article has been adapted
from his latest book, The Return of George
Washington, 1783–1789 (HarperCollins,
2014), with the permission of the publisher.
Notes
1.
George Washington to John Jay, Aug. 15,
1786, PGW CS 4: 213.
2.
Ray Raphael, Constitutional Myths: What
We Ge