The Financial Woes of the Confederation Congress

From the Lecture Series: America's Founding Fathers

By Allen C. Guelzo, Ph. D., Gettysburg College

The Confederation Congress was not the only government in America with money problems, or, for that matter, even the worst problems. But, what are the reasons that caused these problems? Did the Congress try to find some solutions, and did they work?

The Betsy Ross flag of the US.
The Congress and the states had no practical way of dealing with the financial woes that had resulted from the Revolutionary War. (Image: Yuriy Boyko/Shutterstock)

The Beginning of Financial Woes in America

The financial problems appeared almost as soon as the Revolution had begun. In the spring of 1775, as soon as the news of Lexington and Concord, and then Bunker Hill, arrived in Philadelphia, the Pennsylvania Assembly began purchasing firearms and stores, and established a 25-member Committee of Safety to oversee the purchases.

A portrait of Robert Morris.
Robert Morris offered money from his own pocket to fund the Revolutionary War. (Image: Ole Erekson/Public domain)

Benjamin Franklin was named the committee’s chair, but the real leadership of the committee fell to a Philadelphia merchant, Robert Morris, a partner in the substantial Philadelphia trading firm of Willing, Morris. And with good reason, since no one knew what the costs of the conflict with Britain might be, and the Pennsylvania treasury was, until new tax measures were passed and funds collected, wholly inadequate to the first demands made on it.

So, Morris obligingly advanced the whopping sum of £25,000 from his own purse. Given that gunpowder was selling on foreign markets at £14–£19 a barrel, this would not last long, and it didn’t.

But when the Assembly turned to consider raising new funds through tax revenues, they encountered the unpleasant legacy of all of the British colonies, as they had inherited the problems from British policy over the previous quarter-century.

The fundamental problem was that America’s most abundant asset was land, and its least abundant asset was specie—hard coin.

The Legacy of the British Empire

This was, in large measure, a product of British commercial regulation. Britain’s transatlantic commercial philosophy was built around mercantilism, as defined by treatises from Thomas Mun’s 1664 book on England’s Treasure by Forraign Trade to Sir James Steuart’s An Inquiry into the Principles of Political Economy of 1767.

Mercantilism assumed that national wealth was a zero-sum game. Every nation started out with a piece of the pie of wealth, and could only become richer by taking pieces of other’s peoples’ slices. That means that for doing so, there were some strategies to be pursued.

This is a transcript from the video series America’s Founding Fathers. Watch it now, on The Great Courses Plus.

The Creation of Financial Reserves

One strategy was to create financial reserves of hard coin. The idea was to regulate the nation’s economy to produce goods that other countries would pay hard coin for.

The strategy included subsidizing the development of production which would allow the people of the nation to buy domestically produced goods they would otherwise have bought from other countries, either through direct cash subventions or by imposing high tariffs. The plan was to prevent one’s reserves of coin from flowing easily into the hands of other countries.

That meant that governments must organize economies, just as they  organize politics, as weapons of war with other governments, rather than simply letting economies take their own course.

The Establishment of British Colonies

Another strategy mooted for the establishment of colonies in places with valuable resources that could have been extracted for nation’s benefit. The plan was to make sure that those colonies were also regulated, so that their trade was carried in the nation’s ships, and the colony supplies of hard coin home was to benefit the nation’s treasury.

Britain, by this means, starved its colonies of specie. Every piece of British commercial legislation from 1660 onward reached deeper and deeper into the colonial economies to ensure that the colonies served Britain’s economic interests.

A vintage painting of a view of Fort George with the city of New York, from the SW.
Britain established forts like Fort George in its colonies for ease of trade. (Image: New York Public Library/Public domain)

The colonies got by for themselves by issuing paper currency and IOUs in the form of tax anticipation notes and land banks, which lent money to farmers for improvements and taking their existing land as collateral.

But the Parliament forbade the creation of corporations or banks in the colonies, so there was no mechanism for accumulating significant reserves from what small amounts of specie came into American hands.

Learn more about Thomas Mifflin’s Congress.

The Economy of Colonial America

Some specie did come to Americans—Spanish dollars, Dutch guilders, French Louis d’or—and largely through selling goods to the French West Indies, the Spanish Caribbean, and the Dutch. But it flowed out just as quickly, since Britain demanded payment in specie whenever it was available.

For merchants like Morris, business transactions were handled through loans or privately written IOUs known as bills of credit or bills of exchange. By the outbreak of the Revolution, three-quarters of all the money circulating in the colonies was paper of various sorts.

The sudden demand for financing the Revolutionary War caught both the Congress and the states ill-equipped to meet the unprecedented demands of paying for war. And in the cases of both Congress and the states, the most familiar expedient, and the one which involved the least political courage, was the issue of massive amounts of paper currency.

The Use of Paper Currency in America

In 1785, South Carolina used a land bank system to issue £100,000 in paper money. Georgia followed a year later with the issue of £50,000 in state money, supposedly secured by lands which were actually owned by the Creek Indians.

The state money was supposed to finance a war against the Creeks, which would then seize the land. After a year, the lands remained in Creek hands, and the Georgia money had fallen to one-quarter of its face value.

Learn more about George Washington’s doubts.

The Failure of Paper Currency in America

North Carolina authorized the issue of £100,000 in paper money, which the legislature used to buy up the state’s tobacco crop and thus benefit the farmers, who got paid for their tobacco, and also benefit the state of North Carolina, since the tobacco could then be sold abroad for a tidy profit.

Alas, for North Carolina, the price of tobacco abroad fell, and the North Carolina currency fell to such miserable levels that merchants refused to accept it. Pennsylvania followed with the printing of another £150,000 in paper. New York upped the ante by printing £200,000.

The most notorious, however, was Rhode Island, which issued £100,000 in paper money in May 1786, and then attached to it a requirement that it be received by merchants and lenders as a legal tender in payment of all contracts, and a refusal to receive them cancelled the debt.

So, while the Confederation Congress limped by on grudging foreign loans and equally grudging contributions from the states, the states themselves felt perfectly free to print their own money.

All these reasons were responsible for the economical woes of America, and it was only to become worse in future.

Common Questions about the Financial Woes of the Confederation Congress

Q: Where did the British establish the colonies?

The British established colonies in places with valuable resources. It was done to reap maximum benefit of the resources.

Q: How much sum did Robert Morris give to fund the Revolutionary War?

Robert Morris advanced £25,000 to fund the Revolutionary War.

Q: Who wrote England’s Treasure by Forraign Trade?

Thomas Mun wrote England’s Treasure by Forraign Trade.

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