Fiat monies have a long and storied history of failed experimentation…even in America. The dying US Dollar is far from the first attempt at such asininity. In fact, the origin of the colloquialism “not worth a continental” is rooted in money printing gone wrong in the early continental American colonies.
Between 1690 and 1764 many early American colonies experimented with fiat monies to finance superfluous expenditure. Massachusetts was the first to attempt this, in order to finance military raids against the French colonies of Quebec. Within a few years, other colonies fell into step and began printing their own “bills of credit”. The primary difference between these colonial experiments and the dollar today was the lack a of central bank.
One colonial legislator explained it as follows:
“Do you think, gentleman, that I will consent to load my constituents with taxes, when we can send to our printer and get a wagon load of money, one quire of which will pay for the whole?”
The consequences of this quixotic ideology were far from surprising. Prices of goods and services soared. Legal tender laws were enacted to force colonists to transact with worthless pieces of paper, and the common man saw hardship and the eradication of his personal savings. By the 1750s, Connecticut had price inflation of 800%, the Carolinas by 900%, Massachusetts by 1000%, and Rhode Island by as high as 2300%.
The situation in the American colonies became so dire that in 1751 British Parliament actually stepped in to force a ceasing in the printing of fiat monies, and surprise surprise, a miracle boom of prosperity followed as economic action returned to its baseline (reality vice fantasy). Dutch and English and French gold coins began to circulate in place of worthless paper and economic prosperity continued to blossom even throughout the period of the seven years war!
Unfortunately, early America quickly found itself in a difficult position when it came to financing the American revolution. In 1755 the total money supply for all of the colonies was 12 million, just five years later a total of 227 million new continental dollars were circulating (an increase of about 2000%). And yet still the continental army was underfunded and issued its own certificates of credit to pay for an additional 200 million dollars in supplies.
At first this massive influx of new money gave a false sense of prosperity, as one colonist said:
“What a shame it is that congress should let these poor soldiers suffer when they have the power to make as much money as they choose”.
In 1775 the continental was worth about $1 in its gold equivalent by 1779 it was worth less than $0.01 in its gold equivalent, and outright ceased to circulate entirely due to its worthlessness.
“It will be asked, how will the two masses of continental and of state money have cost the people of the United States seventy two millions of dollars, when they are to be redeemed now with about six million? I answer that the difference, being sixty six millions has been lost on the paper bills separately by the successive holders of them.
Every one through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands. This was a real tax on him, and in this way the people of the United States actually contributed those sixty six millions of dollars during the way and by a mode of taxation the most oppressive of all because it was the most unequal of all.”
-Thomas Jefferson
Book of the Month:
The Dao of Capital: Austrian Investing in a Distorted World
-“Rather than pursue the direct route of immediate gain, we will seek the difficult and roundabout route of immediate loss, an intermediate step which begets an advantage for greater potential gain.”
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