By Richard Sylla

By 1781 , the Revolutionary War had dragged on for five grueling years . Congress ’ s Continental Currency , first issued in 1775 and issued to excess by 1779 , was quickly becoming worthless . Congress pegged these “ Continentals ” one-to-one to the Spanish peso , but never indicated when that redemption might happen . Congress didn ’ t have enough Spanish dollars — as the pesos generally were called in the English-speaking world — to redeem the Continentals they had printed , so the money swiftly morphed into a fiat currency that hemorrhaged value .

When Hamilton wrote his first surviving letter on finance in late 1779 or early 1780 , he noted that it took 20 paper dollars to buy one silver dollar . 2 In March 1780 , Congress revalued the Continentals at a rate of 40 paper to one silver . A year later , that rate was plummeting to 100 to one .

The Power to Tax

Individual states also issued paper currencies , which did little better . Unlike the Confederation Congress , the states could levy taxes . In fact , they were supposed to do that to meet their own fiscal needs as well as Congress ’ s national needs — mainly financing the war at this point . State taxes were supposed to support the value of paper currencies , their own and the Continentals , by making them acceptable for tax payments . But state taxes and revenues collected proved woefully inadequate . It turns out that Americans didn ’ t like taxation with representation any more than they liked taxation without representation .

Borrowing , an alternative to taxation and printing money , proved difficult both at home and abroad . Hyperinflation undermined lender confidence . After all , rebel governments demonstrating fiscal irresponsibility tend not to have good credit !

Hamilton ’ s first letter notes that prices were rising much faster than the quantity

Hamilton in the Uniform of the New York Artillery , by Alonzo Chappel .

Tin pattern for a silver dollar planned by the Continental Congress , 1776 .

of paper money that Congress and the states were issuing . He had stumbled onto the modern concept of the velocity of money , or how fast people spend it . Rising inflation makes people realize that money is declining in value , so they spend it as fast as they can before prices rise further . It ’ s all well and good to note the behavior , but Hamilton wisely turned to solutions : “ The most opulent states of Europe in a war of any duration are commonly obliged to have recourse to foreign loans and subsidies . How then could we expect to do without them ?”

In other words , Congress needed cash from abroad . That much was obvious , but how to shore up the nation ’ s finances with that loan ?

The only plan that can preserve the currency is one that will make it the immediate interest of the monied men to cooperate with the government in its support . This country is in the same predicament in which France was previous to the famous Mississippi scheme projected by Mr . Law . Its paper money like ours had dwindled to nothing , and no efforts of the government could revive it , because the people had lost all confidence in its ability …

Article 1st The plan I would propose is that of an American bank , instituted by authority of Congress for ten years under the denomination of The Bank of the United States .

2d A foreign loan makes a necessary part of the plan , but this I am persuaded we can obtain if we pursue proper measures . I shall propose it to amount to 2,000,000 £ Sterling . This loan to be thrown into the Bank as part of its stock .

3 A subscription to be opened for 200,000,000 of dollars and the subscribers erected into a company called the company of the Bank of the United States . 3

Americans didn ’ t like taxation with representation any more than they liked taxation without representation .

Plan for the Bank of the United States

Hamilton ’ s proposal to use a foreign loan to capitalize the Bank of the United States also included establishing a sound currency to replace the discredited Continentals and state-issued paper currencies . The bank would issue an entirely new currency convertible into specie , or coin money . With this new money , confidence would rise . Private investors would augment the bank ’ s capital and share in its profits with the government , and the bank would lend to both the government and individuals .

The Trustees of the British Museum / Art Resource , NY www . MoAF . org | Fall 2016 | FINANCIAL HISTORY 17