The Dollar and the American Revolution

The Dollar and the American Revolution

I’ll start with two questions. One could be called a trivia question. This one isn’t so trivial. From time to time I meet someone from England, or Great Britain, who tells me that the American Revolution wasn’t necessary. The problems were temporary. The colonists were just hotheads. How do we answer this? You’ve probably heard one answer: No taxation without representation. I’ll give another possible answer before I’m finished.

Here’s the other question. I’m sure you know that the US uses the dollar as its currency. Yet the currency of Great Britain is the British Pound. Why didn’t the United States stick with tradition and call its currency the Pound? The answers to these two questions tie together.

The word dollar goes back to the German word thaler, which comes from thal, which means valley. In the early 16th century, in what is now Germany, the Count of Schlick owned a silver mine in the mining district of Bohemia. The mine was in a valley. The Count of Schlick had silver from the mine made into silver coins, known as thaler, or coins from the valley.

The Spanish borrowed this German word, thaler, but pronounced it as dollar. The Spanish monetary unit was the real. You have heard of pieces-of-eight from the days of the pirates. A piece-of-eight was a silver coin and it was worth eight and three-eights reals. I don’t know who came up with eight and three-eights reals. It certainly isn’t how I would have done it. The Spanish piece-of-eight was also known as a dollar, or Spanish dollar.

At the height of the Spanish Empire, Spain ruled most of South America, along with Central America, Mexico, and a few other places. There were rich silver mines in what is now Bolivia and silver was also mined in Mexico. The Spanish had mints making silver into coins, including pieces-of-eight, in the New World. They had mints in what would now be Bolivia, Peru and Mexico. Spanish galleons then carried tons of silver coins back to Spain. You’ve heard tales about the pirates in the days of the Spanish Empire. These massive shipments of silver coins is one thing the pirates were after. These massive shipments of coins are also one reason we have tales of sunken treasure. It was inevitable that some of the ships would go down in storms.

The Spanish dollar, or piece-of-eight, became one of the most common coins in the world. They were used in Asia, including China. In New South Wales, part of Australia, they didn’t have enough British currency. They decided to use the Spanish dollar but they punched holes in them to show that they were no longer Spanish dollars, but local currency.

The American colonies also had a problem with currency. There wasn’t enough of it. For some reason, the British authorities never put enough coins in circulation for commerce to run smoothly. How did the colonists cope with this shortage of currency? There were a variety of British, French, Spanish, Portuguese, and Dutch coins in circulation. A lot of Dutch coins came in when New York was still New Amsterdam. Apparently Spanish and Portuguese coins predominated.

Despite this variety of coins, there still wasn’t enough currency in the colonies. One alternative was to spend bonds as we would use paper money. Just as states and cities issue bonds today, in Colonial America, there were bonds issued by colonial governments and bonds issued by cities. So bonds were sometimes used as money.

Other things were used as money. You’ve probably heard of wampum, or Indian beads, which was traded as money. A bewildering variety of other products were sometimes traded as money in various parts of the colonies, including tobacco, animal skins, cheese, tar, whale oil, butter, tallow, corn, wheat, port, beeswax, sugar, rum, molasses, beads, nails, rice and indigo. Musket balls were legal tender in Massachusetts; wool was legal tender in Rhode Island; and rice was legal tender in South Carolina. I assume that you know what legal tender is. When you owe money to someone, legal tender is what they have to accept as payment.

You may remember dollar bills marked as silver certificates. Maryland issued paper money backed by tobacco, marked as Tobacco Note. Benjamin Franklin advocated issuing paper money backed by land, in a pamphlet, A Modest Enquiry in the Nature and Necessity of a Paper Currency.

Colonial America certainly isn’t the only time that commodities were used for money. Cattle were among the earliest forms of money. The Romans called cattle capitale and our word “capital,” or wealth, comes from the Latin capitale. The Romans also saw salt as having value because of its scarcity and they sometimes used it as a medium of exchange. Roman soldiers were paid in salt, at times. Our word “salary” comes from the Latin word for salt money, salarium.

Returning to the American colonies …

The use of commodity money was hardly better than barter, which has serious limitations for commerce. Here are a couple of quotes from the website of the Economic History Association on barter.

First quote: “For exchange to occur in a barter situation each party must have the good desired by its trading partner.”

Second quote: “A barter economy uses a large number of prices because every good must have a price in terms of each other good available in the economy.”

In short, it is much better to have everyone using the same currency.

In the end, the Spanish dollar, or piece-of-eight, was the coin most familiar to the colonists. During the Revolutionary War, the Continental Congress used the dollar as the unit of currency. George Washington’s Army was funded in dollars. Surprisingly, the Spanish dollar, was actually legal tender in the US until 1857.

With the ratification of the Constitution and the election of George Washington as President, the new republic continued the trend. A cabinet level committee headed by Thomas Jefferson recommended the dollar as the currency. As Secretary of the Treasury, Alexander Hamilton proposed the Coinage Act of 1792, which made the dollar official currency. The first dollar coins were made at the US Mint in Philadelphia in 1794.

Today the US Mint produces coins at four locations, Philadelphia, Denver, San Francisco, and West Point. Dollar bills and higher denominations are printed by the Bureau of Engraving and Printing at two locations, Washington, D. C. and Fort Worth, Texas. There are over $2 trillion dollars of U.S. currency in circulation.

To those who say that the American colonists had nothing to complain about, we need only point to the incredible shortage of British coins and currency. It is amazing that the economy could work at all. It certainly looks like the American colonies were better off becoming states with a central administration and a sufficient supply of stable currency.

Quid est Veritas? said:

I disagree here. The British colonies did mint their own coins, and the British parliament passed a number of acts to regulate colonial currencies. When they went in rebellion, they all started minting money and the result was runaway inflation, so that in the post-war period the use of Spanish colonial currency remained the standard in most places. The new US dollar was basically a slightly depreciated version of it, in fact. The colonies used Spanish money because that is where a lot of the bullion came from - due to the silver mines in Spanish America being Europe's chief supply at the time. The foreign markets of the colonies were interested in tobacco and the three-prong slave trade, as well as shipping Caribbean sugar, which was largely paid with Spanish silver - either legitimately or via privatering. The British colonies were thriving, hence they were expanding - not throttled by British regulation. Some regulation is necessary, and the disaster of the first post-Independance economic policies of the US shows the necessity of regulation and control of currencies produced.

The British policies were made with an eye to all the British dominions, so for instance they enforced the East India Company's tea monopoly, not just the thirteen colonies. Sure they could better regulate their own currencies and economies at a local level to their advantage, but as the scale increases different economies come into conflict. This is why US commerce has been drifting from state to federal level since the beginning.

The British had their own currency problems at home, with widespread shortages and clipping of silver coins, so this was a problem that needed to be sorted out. Independance didn't suddenly solve this, and prior to this, the use of Spanish silver plugged this gap to some extent in the colonies. Loss of bullion from the British Isles needed to be curtailed, and as they were the seat of government and lynchpin of the system, this was also in the colonies' long term advantage to do so if they remained British. That the colonies needed coin is true, but Independance didn't magically solve this problem, with the continental currency during the war a disaster and the US dollar unable to plug this gap into the mid 19th century (hence continued use of Spanish colonial pesos). Other British colonies did just fine, such as Canada or the Caribbean, and later colonies became perfectly functional economies under British dominion. They didn't have to become independant on economic grounds, though the desire to have more local control of their economies certainly contributed to them wanting to be.

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I appreciate your interest. If there was no shortage of coins and currency in the American colonies, why did Benjamin Franklin write a pamphlet on the need for paper money backed by land? There was clearly a need.

The uselessness of the Continental currency during the Articles of Confederation came about because the central government didn't have the power to tax. That resulted in paper currency being worthless.

Currency problems in the 19th century came about partly because the President Jackson presided over the abolition of the Bank of the United States, which was not a very good idea. The US had no central bank from that time until the early 20th century.

Quid est Veritas? said:

Didn't say there was no shortage of coins, but this was a problem throughout the British empire, including Britain itself. Parliament was well aware of this, and was reticent to allow coin to leave Britain as a consequence. As coins were gold or silver, neither of which Britain had a steady supply of, they had a chronic shortage. That is one of the reasons they encouraged sales of Opium to China for instance, to stop scarce silver draining in exchange for silk and tea. Fiat currencies readily lead to inflation, which today we have just come to accept as a fact of life somewhat, but means that there is a long-term fall in the value of money (why old people could buy something for a penny that we have to pay a few bucks for). Backing paper money with other commodities or value-holders like land was another option, but essentially these are forms of lending or speculation of futures. What the British wanted was stability. Independance didn't magically change any of this for the US - hence the continued use of Spanish silver and promissory notes as currency for decades thereafter, well into the mid 19th century.


No, it was from the fact that they flooded the economy with printed money, leading to devaluation of it and runaway inflation - exactly what the British had feared and avoided. True they were backed by anticipated tax revenues, essentially Futures again, but there is no reason why this would not occur if the colonies won - the states could have funded the central government if it was advantageous, like a league from Ancient Greece, as envisioned in the Articles of Confederation. After the end of the war, a deep economic depression resulted from a glut of the useless continental currency and shortages of British and Spanish silver, which had been exacerbated by the disruptions to trade. The Revolution made the American monetary setup weaker than before, hence Hamilton and the bank and such tried to sort it out - and consequently had to increase taxes. This had not been their intention prior to the war, and was controversial (and hence the Bank later undone) as it cut against many of the decided local policy aims of the Revolution and the tax-aversion of the colonists. They went from the idea of self-rule, to a new Federated State levying higher taxes, which is a big unintentional change from what they had wanted. Again, money woes were exacerbated by American Independance, requiring direct taxes in property rather than just tariffs and excises as prior to the war. This probably dampened prosperity a bit, as it decreased incomes and inflated prices. If anything, American Independance weakened the colonies economically, at least initially, and was not required for development of modern economies - as the examples of other British colonies make plain. The early history of the US, with its volatile economy and the very fact that this lead to attempts at centralised control, argues against the argument that the colonies had to become independant for their financial well-being - they functionally recreated the Imperial yoke they had just thrown off to stabilise it. The new unitary state shied away from paper currency just like the British had, and the same shortage of specie remained. Meet the new government, same as old government - at least in this regard.

Independance didn't solve the US cash shortage, and neither was it an economic necessity.

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Veritas: “Fiat currencies readily lead to inflation, which today we have just come to accept as a fact of life somewhat, but means that there is a long-term fall in the value of money (why old people could buy something for a penny that we have to pay a few bucks for).”

You don’t understand the causes of inflation. Prices go up as the price of land goes up. They go up as the price of oil and other forms of energy go up. Prices go up with the price of labor. Trying to blame all inflation as the result of “fiat currency” is silly.


Veritas: “the states could have funded the central government if it was advantageous”

This isn’t true.

<< Heading: The American Revolution
Beginning in 1777, Congress repeatedly asked the states to provide money. But the states had no system of taxation either, and were little help. >>

<< By 1780 Congress was making requisitions for specific supplies of corn, beef, pork and other necessities—an inefficient system that kept the army barely alive. >>

This backs up the point I made in the OP, that supply and payment on a commodity basis is cumbersome and inefficent.


Veritas: “After the end of the war, a deep economic depression resulted from a glut of the useless continental currency and shortages of British and Spanish silver, which had been exacerbated by the disruptions to trade. The Revolution made the American monetary setup weaker than before …”

and

Veritas: “Again, money woes were exacerbated by American Independance …”

This isn’t true, either.

<< Heading: Confederation: 1781-1789
A brief economic recession followed the war, but prosperity returned by 1786. >>


Source
Economic history of the United States - Wikipedia

Quid est Veritas? said:

You really should read what I wrote. This is the second response that just jumps at things.

Where did I say "all"? Fiat currencies have no intrinsic worth, only based on trust in the issueing authority. As such, they are more prone to inflation if public confidence wavers, and value falls easier than confidence is regained, as there is no supply of commodity to which it is tied. This is well-known. I never made any absolutist cause claims to "all".

Read my post and you'll see I was talking about the original envisioned League akin to the Ancient world, of independant countries loosely allied. That is why they decided to term themselves States after all. This is a far cry from the Federation they became, with moderate centralised control. That they couldn't fund, but no one thought they would have to fund such a thing, as that is not what they wanted - but the exigencies of war and economic policy forced it.

Read your source. It agrees with me. A deep depression after the war. Did they come out of this by their ability to mint money? No, by westward expansion, new technology like the cotton gin, and the new tariffs with Britain giving manufacturing a leg-up from decreased competition, unintentional Protectionism in fact.

"Economically mid-Atlantic states recovered particularly quickly and began manufacturing and processing goods, while New England and the South experienced more uneven recoveries.[49] Trade with Britain resumed, and the volume of British imports after the war matched the volume from before the war, but exports fell precipitously"

So they were buying goods, but not exporting as much. With what were they buying? Were the British accepting the useless Colonial script? Of course not, so they were draining silver specie. They expanded trade with France and the Dutch, but the levels never matched their major trading partner of Britain.

"Despite these good economic conditions, many traders complained of the high duties imposed by each state, which served to restrain interstate trade. Many creditors also suffered from the failure of domestic governments to repay debts incurred during the war.[52] Though the 1780s saw moderate economic growth, many experienced economic anxiety, and Congress received much of the blame for failing to foster a stronger economy."

Was paper money the answer to economic anxiety? No, the new Federal government established bimetallic coinage pretty quickly, with all the same issues as before. Hence the continued use of pesos and commissary notes. The coinage continued giving issues till the US went onto the gold standard and dropped bimetallism, as they now had a steady gold supply from the West. The federal government was not trusted enough for a fiat currency, and no one else would accept that from a new country (think if modern countries would suddenly take a fiat currency from South Sudan or if Biafra broke free of Nigeria - of course not).

None of the Colonial economic issues with the coinage were solved by Independance, and it in fact resulted in a drain post-war of bullion. Further the Federal government decided to adopt a British-esque metals based coinage as the primary form of their new dollar, to assuage economic anxieties.


Please stop tilting at strawmen. Your claim is the US needed Independance to solve the colonial coinage shortage - but Independance worsened that, from loss of confidence in paper currencies and drainage of specie from unequal foreign trade afterwards. The US became economically prosperous, but so did much of the British Empire elsewhere - there are no real grounds to ascribe this to monetary policy post-Independance at all, or to argue that Independance was necessary for this to come about. We have case studies where Independance did not occur too, and they eventually sorted out their coinage issues too and are prosperous as well.

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Where did you get this obsession with fiat currency? I don’t see how that is relevant.

Veritas: “Read your source. It agrees with me. A deep depression after the war. Did they come out of this by their ability to mint money? No, by westward expansion, new technology like the cotton gin …”

You only reach these conclusions by jumbling up different time periods. As I said earlier:


<< Heading: Confederation: 1781-1789A brief economic recession followed the war, but prosperity returned by 1786. >>

Source
Economic history of the United States - Wikipedia

Quid est Veritas? said:

You really should read what I wrote. This is the second response that just jumps at things.

Where did I say "all"? Fiat currencies have no intrinsic worth, only based on trust in the issueing authority. As such, they are more prone to inflation if public confidence wavers, and value falls easier than confidence is regained, as there is no supply of commodity to which it is tied. This is well-known. I never made any absolutist cause claims to "all".

Read my post and you'll see I was talking about the original envisioned League akin to the Ancient world, of independant countries loosely allied. That is why they decided to term themselves States after all. This is a far cry from the Federation they became, with moderate centralised control. That they couldn't fund, but no one thought they would have to fund such a thing, as that is not what they wanted - but the exigencies of war and economic policy forced it.

Read your source. It agrees with me. A deep depression after the war. Did they come out of this by their ability to mint money? No, by westward expansion, new technology like the cotton gin, and the new tariffs with Britain giving manufacturing a leg-up from decreased competition, unintentional Protectionism in fact.

"Economically mid-Atlantic states recovered particularly quickly and began manufacturing and processing goods, while New England and the South experienced more uneven recoveries.[49] Trade with Britain resumed, and the volume of British imports after the war matched the volume from before the war, but exports fell precipitously"

So they were buying goods, but not exporting as much. With what were they buying? Were the British accepting the useless Colonial script? Of course not, so they were draining silver specie. They expanded trade with France and the Dutch, but the levels never matched their major trading partner of Britain.

"Despite these good economic conditions, many traders complained of the high duties imposed by each state, which served to restrain interstate trade. Many creditors also suffered from the failure of domestic governments to repay debts incurred during the war.[52] Though the 1780s saw moderate economic growth, many experienced economic anxiety, and Congress received much of the blame for failing to foster a stronger economy."

Was paper money the answer to economic anxiety? No, the new Federal government established bimetallic coinage pretty quickly, with all the same issues as before. Hence the continued use of pesos and commissary notes. The coinage continued giving issues till the US went onto the gold standard and dropped bimetallism, as they now had a steady gold supply from the West. The federal government was not trusted enough for a fiat currency, and no one else would accept that from a new country (think if modern countries would suddenly take a fiat currency from South Sudan or if Biafra broke free of Nigeria - of course not).

None of the Colonial economic issues with the coinage were solved by Independance, and it in fact resulted in a drain post-war of bullion. Further the Federal government decided to adopt a British-esque metals based coinage as the primary form of their new dollar, to assuage economic anxieties.


Please stop tilting at strawmen. Your claim is the US needed Independance to solve the colonial coinage shortage - but Independance worsened that, from loss of confidence in paper currencies and drainage of specie from unequal foreign trade afterwards. The US became economically prosperous, but so did much of the British Empire elsewhere - there are no real grounds to ascribe this to monetary policy post-Independance at all, or to argue that Independance was necessary for this to come about. We have case studies where Independance did not occur too, and they eventually sorted out their coinage issues too and are prosperous as well.

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Where did you get the idea that the early American Republic wasn’t prosperous? Where did you get the idea that Americans spent decades in a deep depression?

“By the 1830s, the late British economist Angus Maddison showed, American per-capita income was already the highest in the world.”

“Another reason for early American prosperity was that the scarcity of population in a vast territory had pushed labor costs up from the very beginning of the colonial era. By the early nineteenth century, American wages were significantly higher than those in Europe. This meant that landowners, to make a profit, needed high levels of productivity—and that, in turn, meant the mechanization of agriculture, which got under way in America before it did overseas.”



Source:A Brief History of American Prosperity
A Brief History of American Prosperity

Sophiawilliam said:

Yes, in fact, the American Revolution was financed mostly by the French. The French King, Louis XVI, was a puppet who did everything his handlers told him to, so they not only financed the revolution they also took many, many liberties with the American government. For example, they strengthened their control over the American government right after George Washington became the President. Most people can't believe it, but it's true! Here learn more.

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Neither Louis XVI nor his “handlers” were in any position to “control” or influence the American government during Washington Administration.

George Washington became President in 1789 and held office until 1797.

The French Revolution broke out in 1791. Louis XVI fled Paris in 1791 but was returned against his will. He was deposed, no longer King, in 1792, and executed, guillotined, in 1793.

Thus, George Washington was President for five years after Louis XVI was overthrown and four years after he was guillotined.

Sophiawilliam said:

Yes, in fact, the American Revolution was financed mostly by the French. The French King, Louis XVI, was a puppet who did everything his handlers told him to, so they not only financed the revolution they also took many, many liberties with the American government. For example, they strengthened their control over the American government right after George Washington became the President. Most people can't believe it, but it's true! Here learn more.

Click to expand...

Then there is Citizen Genet Affair. After the French Revolution, Edmond Charles Genet was sent to the US as “minister” or ambassador. Washington and Jefferson found him to be unbearable and obnoxious but this turned out to be the least of it.

French influence over the US during the Washington Administration? Great Britain and France were at war. Consider the following.

“The U.S. Cabinet also refused to make advance payments on U.S. debts to the French government.”

“Washington's Cabinet signed a set of rules regarding policies of neutrality on August 3, 1793, and these rules were formalized when Congress passed a neutrality bill on June 4, 1794.”

Neutrality means that the US refused to side with France against Great Britain, or vice versa.

Genet fell out of favor in France. Washington and Jefferson, as Secretary of State, allowed him to remain in the US only because he would have been executed if sent back to France.

This information doesn’t come from a radical source. It comes from the website of the US State Department.

Link
The Citizen Genêt Affair, 1793-1794