During the Revolutionary War, the Congress and the states had to face financial woes because no concrete plans had been made to fund the war expenses. The states, however, tried to find ways of fixing those financial woes by printing their own money. Did the printing of money prove to be disastrous for America?
The Negative Affect of Paper Currency
The printing of money by the states became dangerous when farmers and small-scale borrowers discovered that this was not only an easy way to pay their states’ war debts, but a painless way to make their own commercial debts disappear.
Loans and mortgages, which had been contracted before the Revolution, could now be effortlessly paid off in cheap paper currency. And, if lenders and merchants balked at accepting the paper money, or refused to take it—unless at a substantial discount from face value—the legislatures, like Rhode Island’s, could always pass penalty laws which criminalized such refusals.
“The paper money of this State has run down to six for one,” complained one Providence, Rhode Island merchant. “Notwithstanding which, the Legislature continue it as a tender, and mean to do so and pay off all the State debts with it, be it as bad as it may. A more infamous set of men under the character of a legislature, never, I believe, disgraced the annals of the world; and there is no prospect for any change for the better.”
But Rhode Island—or Rogue Island, as it was nicknamed—was only the most notorious for compelling the acceptance of what became little more than paper itself. South Carolina backed up its paper money with a Pine Barren Act, which forced lenders to accept repayment in real estate, which would be of small use to a merchant in Charleston who had vendors to satisfy in Lisbon or Amsterdam.
This is a transcript from the video series America’s Founding Fathers. Watch it now, on The Great Courses Plus.
Paper Currency and the Problem Between States
The depreciating paper currency also created a problem between states. When merchants in Massachusetts or Connecticut demanded payment for goods sold in Rhode Island, and were presented with paper currency they knew was worthless anyplace except Rhode Island, there was nothing the Rhode Island legislature could do to reach across state boundaries and compel them to accept Rhode Island paper.
But the legislature did almost as much by permitting Rhode Islanders to pay the amounts owed in Rhode Island currency to the Rhode Island courts, which then declared the out-of- state debts legally satisfied.
This, of course, triggered an uproar in the Confederation Congress. The North Carolinian, Richard Spaight, wrote anxiously that:
The General Assembly of Connecticut have reprobated, in very severe terms the conduct of the State of the Rhode Island and have ultimately come to a determination to remonstrate to Congress, against the injustices of the proceedings of Rhode Island. It seems their laws enable them to pay the citizens of any other State off with their paper money which is depreciated to eight or nine for one; but do not allow the citizens of any other State to pay them off with it.
Their mode of process is, that any citizen of Rhode Island who is indebted to the citizen of any other State, or a foreigner, may go and lodge the debt in paper money, in the hands of any magistrate, who gives him a discharge for the same, and advertises the payment that the creditor may come in and take his money, which, if he does not do in a certain limited time, the law requires that it shall be paid into the public treasury for the benefit of the State.
Learn more about George Washington’s doubts.
Angry Reaction to Rhode Island’s Laws
In Massachusetts, anger boiled even higher. Massachusetts judge Francis Dana hoped that some bold politician would seize upon the occasion of its abominations and antifederal conduct for annihilating Rhode Island as a separate member of the Union.
But the frustration Dana felt over Rhode Island’s behavior had a much more dangerous political corollary, as it suggested that republican forms of government, which lodged sovereignty in the people as a whole, would sooner or later prove that large numbers of those people were wholly unworthy to exercise sovereignty.
That, given political power, they would embark on more and more reckless schemes for defrauding others, while preening themselves as the tribunes of the nation.
Nathaniel Gorham, who represented Massachusetts in the Confederation Congress, warned that Rhode Island showed that:
Public bodies feel no personal responsibility, and give full play to intrigue and cabal. Rhode Island is a full illustration of the insensibility to character produced by a participation of numbers, in dishonorable measures, and of the length to which a public body may carry wickedness and cabal.
Learn more about Thomas Mifflin’s Congress.
The Dismissive Reaction of State Legislatures
In the state legislatures, these complaints were dismissed as the whinings of the rich and the propertied, or worse, the diabolical dispositions of merciless creditors.
“The times have been such as to render regulations of this kind necessary in most, or all of the States,” replied one Maryland delegate, “to prevent the wealthy creditor and the moneyed man from totally destroying the poor though even industrious debtor—such times may arrive again.”
In Philadelphia, the Freeman’s Journal indignantly prophesied that without paper money, the people will shrink in despair from the magnitude and frequency of the tax bills which they declare themselves unable to discharge, for want of cash, which is not to be obtained.
Paper money is, in fact, the traditional medium of America, the true Pactolian stream, which converts all into gold that is washed by it. And the man who was about to be drowned in that legendary Pactolian stream, with its golden sands, was none other than the man who first offered to finance the Revolution out of his own pocket, Robert Morris.
Common Questions about American Congress and the Depreciating Paper Currency
South Carolina backed up its paper money with the Pine Barren Act, which forced lenders to accept repayment in real estate.
Francis Dana hoped that some bold politician would seize upon the occasion of its abominations and antifederal conduct for annihilating Rhode Island as a separate member of the Union.
The merchants in Massachusetts or Connecticut demanded payment for goods sold in Rhode Island, and they were presented with paper currency that was worthless anyplace except Rhode Island.