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State Issuance of Paper Money in the Early Republic | Mises Wire

Posted by M. C. on March 16, 2021

The first state to push through paper money during the postwar period was Pennsylvania, in March 1785. The Constitutionalists drove the measure through, but this “radical” act was essentially an alliance of farmers and wealthy public creditors who were anxious to have the state supply itself with money to pay their interest claims. Thus, of the emission of £150,000 of paper bills of credit, £100,000 went to pay the interest on the public debt, and £50,000 to be loaned on the security of land. The money could be used for payment of taxes; it was not, however, legal tender for private debts.

https://mises.org/wire/state-issuance-paper-money-early-republic

Murray N. Rothbard

[Chapter 5 of Rothbard’s newly edited and released Conceived in Liberty, vol. 5, The New Republic: 1784–1791.]

A severe depression, bank contraction, a heavy burden of taxes to pay state debts, all this turned men’s thoughts to issuing paper money to finance government. Historians influenced by the Populist struggles of the late nineteenth century have always identified proponents of inflation with “farmer-debtors” and hard-money men as “merchant-creditors.” Actually, while it is true that debtors, especially during hard times, tend to favor inflation, merchants are even more likely than farmers to be heavily in debt since they have higher credit ratings and can borrow more. The result was that most of the economic groups in the 1780s favored inflation: the main problem was in determining which groups would obtain the enjoyment of the newly created money. Those wealthy cliques of merchants who already enjoyed the favors of the existing monopoly-chartered banks naturally opposed competition of state paper money; others tended to favor the new emissions. The exceptions were largely the sober-minded who remembered the rapid depreciation and dislocation during the war.

The first state to push through paper money during the postwar period was Pennsylvania, in March 1785. The Constitutionalists drove the measure through, but this “radical” act was essentially an alliance of farmers and wealthy public creditors who were anxious to have the state supply itself with money to pay their interest claims. Thus, of the emission of £150,000 of paper bills of credit, £100,000 went to pay the interest on the public debt, and £50,000 to be loaned on the security of land. The money could be used for payment of taxes; it was not, however, legal tender for private debts. Indeed, it was the provision of legal tender, not the paper money itself, at which the conservatives balked. Thus, as during the Revolutionary War, the conservative Pelatiah Webster balked not at banks nor at paper money, but at legal tender legislation. The main opposition to the state paper cause came, naturally enough, from the Bank of North America clique, these being the two major competing methods for supplying new money in the states. The Bank of North America refused to accept the already depreciated state notes at par, a major factor in impelling the legislature to repeal its charter. Despite frenzied attacks on all denigrators of the state paper, it had depreciated by 7.5 percent by the summer of 1786, and in the following year the conservative-dominated Pennsylvania legislature began to destroy and contract the outstanding notes.

In South Carolina, the “farmer-debtors” who led the state to adopt paper money were the great planters heavily in debt to British traders for the purchase of slaves to replace the thousands lost during the war. They were joined by Charleston merchants also in debt to the British. In October 1785, South Carolina authorized the emission of £100,000 of interest-bearing notes to be loaned on the security of land. The bills were receivable in payment of taxes, but again were not legal tender. Opponents managed to scale down the issue from the originally proposed £400,000. Extraordinary efforts, including boycotts, organized and individual, were made by merchants and planters of South Carolina to keep up the value of the notes, but they fell nevertheless to a 10 percent discount by the spring of 1787.

North Carolina issued £100,000 of paper in 1786, and these were legal tender. Over a third of the issue was used by the state to buy one million pounds of tobacco at twice the market price, and thus to provide a windfall subsidy to the state’s tobacco planters. The rest of the money went to pay some of the claims of the veterans of the Revolutionary War. Since the money was legal tender, Gresham’s Law (that money overvalued by the State will drive out undervalued money) came quickly into operation. Specie disappeared from North Carolina, and the paper depreciated by over 50 percent by the end of 1787. And since out-of-state creditors would not accept the depreciating paper, the merchants found it difficult to pay their creditors. Thus, the merchants suffered greatly from being forced to accept depreciated paper by the state, while at the same time their out-of-state creditors insisted on hard money. In the meanwhile, the mass of tobacco piled up in state warehouses, and the states found it impossible to sell it anywhere near the price that it had paid. Eventually the state had to take a 50 percent loss on the tobacco. By the end of the decade, North Carolina was forced to begin calling in and destroying its paper money.

Georgia had a similar experience; the legislature issued £30,000 in 1786 to pay Revolutionary veterans, and the bills were made legal tender for all payments: the issue was made at the behest of the rapidly expanding settlers in the backcountry. The money began to depreciate immediately, and Savannah citizens wisely and increasingly refused to take it despite the law. In only a year, the Georgia paper had fallen to a discount of four to one, and it ceased to be legal tender in 1790.

The New Jersey issue was essentially a land bank, pushed through by the Assembly over the opposition of the Council. The legislature finally passed an emission of £100,000 in legal tender bills in May 1786, all to be loaned on the security of real estate. Local vigilante associations terrorized merchants and traders into accepting the paper at par, but they could not terrorize New York and Philadelphia merchants, and the paper issue quickly began to depreciate by 15 percent. By 1789 the money was too valueless to pass in circulation.

The New York paper issue again belies the “radical-farmer-debtor,” “conservative-merchant-creditor” dichotomy. £200,000 were issued in 1786, of which three-fourths was to be loaned on real estate or specie security, and one-fourth to pay interest to public security-holders. Staughton Lynd points out that New York City’s leading conservative newspaper, the New York Daily Advertiser, approved the paper issue, as did the highly conservative Bank of New York. The conservatives were content that the paper was not declared legal tender for new debts, only for old ones. It should be noted that the New York radical leaders were opposed to legal tender, and most were opposed to the paper money.1 The paper generally passed at a discount of up to 12 percent.

Seven states issued paper money during the Confederation period, and of these Rhode Island was undoubtedly the most enthusiastic. A state in which there had previously been a rash of armed resistance to tax collection, Rhode Island issued £100,000 in 1786, a sizable amount considering its small population. The money was all to be loaned on land—the bill having been put through by the rural farmers over the determined opposition of the Providence merchant community. Rhode Island not only offered a very low interest rate on its loans; it provided a particularly severe set of legal tender laws and punishments. Indeed, a person accused of the heinous crime of refusing to accept the new bills at par was to be tried in a special court, without benefit of jury trial or even of the right of appeal. This brutal attack on the creditors and on merchants impelled mass resistance by the merchants and traders. Many merchants, despite the law, refused to accept the notes, and even closed their stores in protest. Farmers, in turn, pledged to boycott the sale of their produce to Providence. Customers rioted and tried to force tradesmen to accept the notes at par, and many traders and creditors were forced to flee the state. Finally, determined judicial resistance against the coercive acts led, after a furious struggle, to the repeal of these notorious laws in December 1786. The notes depreciated rapidly after that, down to 10 percent of face value by the end of 1788, and the legal tender clause was at last repealed in 1789.

Rhode Island was far more successful in her treatment of public creditors. The creditors were forced by law to accept redemption of their credit in the rapidly depreciating paper. In that way Rhode Island was able to rid her citizens of virtually the entire burden of state debt by 1790, and the debts were repaid at minimum sacrifice to the people of Rhode Island.

Of the six states that did not issue paper money during the 1780s, Connecticut managed to escape its distress by the far sounder method of emergency tax reductions and tax abatements. Delaware was in the trading and financial area of Pennsylvania, and hence Pennsylvania’s bank and state paper circulated there. Virginia’s opinion was staunchly hard money, this sentiment being shared by its liberals as well as conservatives, so there was little struggle there.

A strong drive for paper money arose in Maryland in 1786, and the Inflationist Party called for £350,000 of paper notes, of which £200,000 was to be lent to land owners. The Maryland Senate blocked the bill that was passed by the House in late 1786. Like Connecticut, Maryland, after outbreaks of armed attacks on her tax collectors, was partly able to stave off a drive for paper money by abating tax collections and suspending the forced sale of property of delinquent taxpayers. In New Hampshire too, the grievous burden of taxes led to the march of a large armed mob upon the capital in September 1786. The mob besieged the legislature and urged the issue of paper money; but a counter gang of citizens and militia drove off the rebels, and the voters of the towns firmly rejected a paper-money scheme referred to them by the legislature. Conservative Massachusetts, the hardest pressed of all, refused to issue paper or to grant any relief in taxes or in executions for tax delinquency.

  • 1. Professor Lynd concludes:
    Because of its prominence in the politics of the late nineteenth century, the paper money question has often been considered the central issue dividing radicals from conservatives in the Critical Period. It was nothing of the kind…. The allegedly extremist victory was, in fact, a mild inflationary measure rapidly acquiesced in by all groups in the community, just as in other cities…. What all creditors feared in paper money was not inflation as such…. [but] that it might be made a legal tender.Staughton Lynd, “The Revolution and the Common Man: Farm Tenants and Artisans in New York Politics, 1777–1788” (unpublished PhD dissertation, Columbia University, 1962), pp. 212–13.

Author:

Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

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The Depression of the 1780s and the Banking Struggle | Mises Wire

Posted by M. C. on February 13, 2021

The Bank of North America was furious at the threat of competition at home (it worried not at all about the new banks in Boston and New York), and Pelatiah Webster, a bank stockholder, argued presumptuously in the Pennsylvania Assembly that the two banks “might act in opposition to each other and of course destroy each other,” i.e., compete. When this argument unsurprisingly failed to impress the legislators, the Bank of North America in March used the ancient device of co-optation: it expanded its new shares to $1.6 million and cut in the promoters of the new bank.

https://mises.org/wire/depression-1780s-and-banking-struggle

Murray N. Rothbard

[Chapter 2 of Rothbard’s newly edited and released Conceived in Liberty, vol. 5, The New Republic: 1784–1791.]

It has been alleged—from that day to this—that the depression which hit the United States, especially the commercial cities, was caused by “excessive” imports by Americans beginning in 1783. But this kind of pseudo-explanation merely betrays ignorance of economics: a boom in imports reflects voluntary choices and economic improvement by consumers, and this expression of choice can scarcely be the cause of general depression. In short, an improved standard of living for the bulk of consumers reflects improvement and not depression. It is impossible for consumers to buy “too many” imports, for they must pay for them with something, and this payment is financed from exports or from previously accumulated specie. Specie, indeed, had been accumulated in the colonies by the end of the war from British and French war expenditures. In either case, the payments reflected affluence rather than destitution, and these purchases were an enormous help after the ravages of the war. A specie drain is also the result of consumer desires and obviously cannot continue indefinitely. Clearly, Americans could not merely buy from abroad and not sell; indeed, if they could have done so they would have found a utopian cornucopia in which one need only consume without having to produce or sell in exchange.

There was, however, an excess of imports, but this was not caused by the free choices of American consumers. In the first place, as we have seen above, many manufacturers were artificially expanded during the war and with the resumption of peace these businesses now had to compete with the more efficient British, who at the same time restricted American exports. In addition, there was inflationary credit expansion by the Bank of North America, headed by wealthy Philadelphia merchant and former economic czar Robert Morris, and by two new banks which sprang up in 1784 to take advantage of the large profits of this new-found occupation: the Bank of Massachusetts in Boston and the Bank of New York in New York City, the latter organized mainly by large public creditors. Each institution enjoyed a monopoly on banking in its region. Inflationary expansion of bank credit leads bank clients to believe that they have more real money than they actually possess, and this leads to an artificial expansion of imports, which must be paid for in specie. The consequent drain of specie from the expanding banks, and increased calls for payment of their notes and deposits in specie, inevitably creates difficulties for the banks and forces them into hasty contraction, which in turn leads to deflation and depression. It is this boom-bust cycle of bank credit expansion and contraction that occurred in the immediate postwar period and brought a depression in mid-1784 and 1785. This trade cycle was superimposed on and aggravated the inevitable postwar distress of over-expanded wartime manufactures by increasing imports more than would have otherwise been the case.

Excessive importation continued into the 1780s. At the end of the Revolutionary War, the contraction of the swollen mass of paper money, combined with the resumption of imports from Great Britain, cut prices by more than half in a few years.1 As we shall see below, vain attempts by seven state governments, beginning in 1785, to cure the “shortage of money” and re-inflate prices were a complete failure. Part of the reason for the state paper issues was a frantic attempt to pay the wartime public debt, state and pro rata federal, without resorting to crippling burdens of taxation. The increased paper issues merely added to the “shortage” by stimulating the export of specie and aggravated the importation of commodities from abroad.

By the end of 1783, Robert Morris had succeeded in divorcing his Bank of North America—which had begun the year before as a virtual central bank—from the federal government.2 Its growing profitability—it had paid a dividend of 14.5 percent in 1783—stimulated its own expansion as well as new bank projects. The bank increased its subscription by $500,000 in January 1784 and soon a new group, disgruntled by the loans of the Bank of North America going to favored insiders, asked for the chartering of a Bank of Pennsylvania. The Bank of North America was furious at the threat of competition at home (it worried not at all about the new banks in Boston and New York), and Pelatiah Webster, a bank stockholder, argued presumptuously in the Pennsylvania Assembly that the two banks “might act in opposition to each other and of course destroy each other,” i.e., compete. When this argument unsurprisingly failed to impress the legislators, the Bank of North America in March used the ancient device of co-optation: it expanded its new shares to $1.6 million and cut in the promoters of the new bank. Thus the Bank of North America’s expansion ended the threat of another bank in Pennsylvania. But the bank was scarcely out of trouble. Soon it was forced by liabilities accrued from its previous expansion to contract sharply during 1784 and precipitate a financial crisis.3

After the victory of the radicals in the fall 1784 elections, the victors, led by Assemblymen William Findley of Westmoreland, Robert Whitehill of Cumberland, and John Smilie of Fayette Counties, moved to repeal the charter of the Bank of North America. While the radical Constitutionalists acceded to the depression-born demand of artisan-manufacturers and passed a protective tariff, their push against the bank in the spring of 1785 precipitated a notable debate over the bank’s activities. A pamphlet war, as well as a legislative debate and mass petitions, raged over the Bank of North America. While much of the anti-bank argument was political—attacking its special privileges, its favoritism, in general its negation of the liberal ideal of equality before the law—the radicals also emerged with some sophisticated economic arguments against the bank. The Assembly committee that recommended repeal, as well as the anti-bank men in subsequent debates, stressed the crucial economic point that, as one legislator phrased it, the bank was “an engine of trade that enabled the merchants to import more goods than were necessary, or than there was money to pay for, [and that] by means of a bank the European merchants were enabled to procure and carry off money for their goods.” Then, after the temporary expansion of this fictitious credit, the bank “overtraded” and was later forced to contract and precipitate an economic crisis. In short, the radicals in the anti-bank debate of 1785, led by Findley and Smilie, adumbrated the later Ricardian theory of banking and international trade which was also in essence a monetary theory of the trade cycle. The following year, the eminent Reverend John Witherspoon, in his Essay on Money (1786), though favoring the bank, explained in greater detail how inflation of bank paper raises prices and drives specie out of the country. Indeed, in the course of the controversy an anonymous pamphleteer, “Nestor,” first proposed in America the “currency principle” of 100 percent specie backing for bank liabilities and argued that a bank “should not emit a single note beyond the sum of specie in its possession.”

In accordance with his general theory of the history of American banking struggles, the historian Bray Hammond persists in labeling the radical hard-money opposition to the bank “agrarian,” even though he inconsistently admits that wealthy Philadelphia capitalists like George Emlen also stood for hard money and against the bank. This view, furthermore, is hard to square with the fact that the Philadelphia delegates (at this point radicals) voted overwhelmingly for repeal of the bank charter.4

To defend its existence, the Bank of North America brought out heavy guns indeed, all its supporters being either stockholders, in pay of, or in debt to, the bank. Leading the defenses was the noted James Wilson, the bank’s counselor and heavily in the bank’s debt. Wilson not only advanced the specious legal argument that the bank’s charter, though granted as a privilege by the state, was now somehow its “property right”; he also insisted that the cause of the depression was only excessive importation per se. Other prominent defenders were Robert Morris, Gouverneur Morris, and Pelatiah Webster, who opined that “a good bank may increase the circulating medium of a State to double or treble the quantity of real cash, without increasing the real money, or incurring the least danger of a depreciation.”

The Pennsylvania Assembly overwhelmingly repealed the charter of the Bank of North America in September 1785, but the debate continued to rage. Finally, the conservatives’ political victory in the 1786 elections, in which they carried Philadelphia and eastern Pennsylvania, led to the re-charter of the bank in the following year, though with considerably restricted powers.

The most inglorious role in the continuing debate was played by Thomas Paine, author of the fiery libertarian pamphlet Common Sense (1776), who was reportedly hired by the bank to lend his formidable pen to its cause. In a 1786 pamphlet, Paine not only defended bank inflation and advanced the flimsy “property right” argument, he had the presumption to urge that the state privilege the bank by making it a kind of central bank to the commonwealth, with the state borrowing from the bank instead of issuing state paper to meet its expenses. Understandably denounced by his old radical comrades as a mercenary renegade, Paine not only mendaciously denied any vested interest in defending the bank, but he also lashed out at the opposition as an unholy alliance of irresponsible frontiersmen and urban capitalists and usurers. So far had Paine advanced down the right-wing road that he now advocated a return to a bicameral legislature.

  • 1. [Editor’s footnote] For more on Revolutionary War finance, see Murray Rothbard, Conceived in Liberty, vol. 4: The Revolutionary War, 1775–1784 (Auburn, AL: Mises Institute, 1999), pp. 1487–97, 1508–13; pp. 373–83, 394–99. The original Conceived in Liberty volumes were published in individual editions. Page numbers to the earlier individual editions will follow page numbers to the 2011 all-in-one edition.
  • 2. [Editor’s footnote] For more on the Bank of North America, see ibid., pp. 1506–07, 1523–24; pp. 388–93, 409–10.
  • 3. The Bank of Massachusetts, having expanded from its inception in 1784, was also forced to contract as losses hit its mercantile customers in the spring of 1785; this contraction aggravated the depression during that year.
  • 4. Bray Hammond, in his eagerness to denigrate the radicals, discusses only their political arguments and completely omits their economic reasoning. Bray Hammond, Banks and Politics in America (Princeton, NJ: Princeton University Press, 1957), pp. 53–62. In addition, see ibid., pp. 87–88. Contrast Hammond’s analysis with the thorough and judicious treatment in Joseph Dorfman, The Economic Mind in American Civilization, 1606–1865, vol. 1 (New York: The Viking Press, 1946), pp. 260–68. See also Harry E. Miller, Banking Theories in the United States before 1860 (Cambridge, MA: Harvard University Press, 1927), pp. 23, 30, 49–51, 139; Robert L. Brunhouse, The Counter Revolution in Pennsylvania, 1776–1790 (Harrisburg, PA: Pennsylvania Historical Commission, 1942), pp. 172–75. [Editor’s remarks] Nettels, The Emergence of a National Economy, pp. 61–62, 77–81. 

Author:

Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

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