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