Having just celebrated July 4th, I’ve been thinking about 1776, the American Revolution, and money. At the time, money frequently determined who won and lost wars. When countries ran out of money, they had to stop fighting. Great Britain had sufficient revenue to fight wars because they could collect taxes efficiently and fund a national debt.
By contrast, the credit of a new nation is anything but dependable. Just like you and me, a country establishes good credit by showing it can pay back loans. In 1776, trying to raise money to fight the war, the U.S. had no credit history. The Continental Congress was able to borrow close to $11 million from the French and the Dutch (British enemies) and through domestic bond sales but still it was not enough. As a result, Congress turned on the printing presses.
As Benjamin Franklin said, “This currency as we manage it is a wonderful machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition.” As Franklin later pointed out, though, when too much money is printed it rapidly diminishes in value. From 1775 to 1779, the Continental Congress had issued and then spent close to $250 million. The people who received the $250 million now had lots of dollars to spend. As a result, prices skyrocketed.
The Economic Lesson
An economist would say that the Continental Congress had created demand pull inflation which means that too many dollars are chasing too few goods. Or, in colonial terms, “A wagon-load of money will scarcely purchase a wagon-load of provisions.”