DarkRange55
We are now gods but for the wisdom
- Oct 15, 2023
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Had to break into two sections because of word limit. If it's too long, then don't read. Used Chat to edit, sue me. Breaking some myths…
Section 1: Colonial and Revolutionary Era (Sections 1–7)
Part I, Section 1: The Spanish Dollar, the "Piece of Eight," and Gold Doubloons in the Colonies
In the seventeenth and eighteenth centuries, the most important coin in North America was not British sterling, but the Spanish silver dollar, known in Spanish as the real de a ocho ("royal coin of eight") and in English as the "piece of eight." Each was valued at eight reales, a subdivision of the Spanish monetary system, and contained roughly 27.07 grams gross weight, about 24.1 grams of pure silver. Because of its consistent weight and purity, the Spanish dollar became the first global currency, trusted in Europe, Africa, the Americas, and Asia.
The origins of this coin lay in Spain's vast colonial empire. From the mid-1500s onward, Spain exploited some of the richest silver deposits ever discovered: • Zacatecas (Mexico, discovered 1546) and Guanajuato (Mexico, 1550s): These mines supplied an immense flow of silver for centuries, with Guanajuato producing nearly one-third of the world's supply at its peak. • Potosí (modern Bolivia, discovered 1545): The famous Cerro Rico ("Rich Mountain") was so prolific that "to be worth a Potosí" became a Spanish proverb for enormous wealth.
To process this wealth, the Spanish Crown established mints in the New World: Mexico City in 1535 (the first in the Americas), Lima (1568), Potosí (1574), and later Guatemala, Bogotá, and Santiago. Coins bore royal arms, crosses, pillars, and mintmarks such as "Mo" for Mexico City or "PTS" for Potosí. By the eighteenth century, Spanish America produced over 80% of the world's silver, and much of it was coined into dollars.
The Spanish dollar's dominance in the colonies was not by legal design but by custom and necessity. The British Crown technically forbade its use, issuing proclamations such as Queen Anne's in 1704 to regulate or restrict foreign coinage, but enforcement was impossible. Because sterling coins were scarce, colonists simply adopted the Spanish dollar as a private currency — not officially sanctioned, but universally accepted because of its silver content. In practice, it became the backbone of commerce across the colonies.
Though silver was the everyday workhorse of commerce, gold coins also circulated in the colonies, especially in larger transactions. Spain minted gold escudos, commonly known in English as doubloons, at the same New World mints. A doubloon (two-escudo coin) contained about 6.77 grams of pure gold, making it far more valuable than a silver dollar. Gold doubloons often traveled alongside silver pieces of eight in Atlantic trade and were prized for settling larger debts. Other foreign gold and silver coins such as Portuguese moidores, English guineas, Dutch guilders, and French livres and louis d'or also appeared, though in smaller numbers compared to Spanish issues.
Thus, colonial America's monetary foundation rested not on British sterling but on the hard money of the Spanish Empire and its trusted substitutes: • Spanish silver dollars (pieces of eight) circulated as a private currency, trusted for daily trade. • Gold doubloons (escudos) served as higher-value money for large transactions. • Other foreign coins — Portuguese, English, Dutch, and French — supplemented the supply.
Together, these coins provided the colonies with a reliable medium of exchange when neither local mints nor consistent sterling coin could be relied upon.
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Part I, Section 2: Scarcity of Sterling and the Patchwork of Foreign Coins
Although the British Empire claimed North America as its colonies, sterling coinage was almost nonexistent there. The reasons lay in mercantilist policy and the structure of trade. • Britain believed wealth meant holding gold and silver at home. Export of sterling was restricted, and the Royal Mint in London produced coins largely for domestic circulation. • Colonists imported more than they exported. This trade deficit meant that any sterling coins that did arrive were quickly drained back to Britain to settle accounts. • Colonial governments were forbidden to mint their own silver coins. Governors sometimes issued local proclamations "rating" foreign coins in shillings or pence, but they had no authority to strike sterling coinage.
As a result, the colonies depended on a patchwork of foreign coins: • Spanish dollars (pieces of eight): The backbone of commerce, despite Crown prohibitions. • French livres and louis d'or: Common in New England and the Caribbean, and especially after wars when captured French coin entered circulation. • Dutch guilders (florins): Entered via Dutch West Indies trade. • Portuguese cruzados and moidores: From Brazil and Atlantic trade routes. • English guineas and shillings: Rare and in short supply compared to foreign issues.
Colonial assemblies sometimes issued official tables listing what each foreign coin was "worth" in local money of account. This created a confusing system of exchange rates, where a Spanish dollar might be legally valued at 6 shillings in one colony and 7 shillings 6 pence in another.
The result was a paradox: the Crown demanded sterling, but on the ground, colonial markets were sustained by Spanish, French, Dutch, and Portuguese money. Sterling was more a bookkeeping unit of account than an actual medium of exchange.
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Part I, Section 2A: Why British Sterling Never Became the Global Currency
Although Britain was the world's leading naval and commercial power by the eighteenth century, its sterling coinage (pounds, shillings, and pence) never became the global standard in the way that the Spanish dollar did. Several reasons explain why sterling failed to take on that universal role: 1. Mercantilist Hoarding: Britain believed national strength came from keeping bullion within its borders. Export of sterling coins to the colonies was deliberately restricted by laws and royal instructions. Instead of sending English coins abroad, Britain encouraged colonists to settle debts with bills of exchange, barter, or foreign coin. 2. Limited Minting and Chronic Shortages: The Royal Mint in London produced coins mainly for domestic use, and Britain often faced coin shortages even at home. English coins were lighter in silver content than Spanish dollars, which made them less attractive internationally. 3. Spanish Dominance of Silver Supply: Spain controlled the richest silver mines in the world — Potosí, Zacatecas, Guanajuato — and its mints at Mexico City, Lima, and Potosí struck vast quantities of reliable silver dollars. Because Spain dominated global silver flows, the Spanish dollar had both consistency and abundance unmatched by sterling. 4. Colonial and Global Trust in Spanish Dollars: Merchants across the Americas, Europe, and Asia trusted Spanish dollars because they knew exactly how much silver they contained. Even Britain used Spanish dollars in overseas trade and to pay soldiers. Colonists in America, starved of sterling, relied almost entirely on Spanish dollars as their everyday currency. 5. Sterling as "Money of Account" Only: In colonial ledgers, debts were often recorded in pounds, shillings, and pence ("money of account"), but actual payment was made in Spanish dollars, Dutch guilders, Portuguese cruzados, or even tobacco and other commodities. With so little physical sterling in circulation, it never functioned as a true international medium.
In short: Sterling was legally the standard in Britain, but the Spanish dollar became the practical global currency because of its abundance, silver purity, and wide acceptance. Britain's mercantilist hoarding policy, minting limits, and lack of domestic silver mines meant sterling could not compete on the world stage.
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Part I, Section 2B: Mercantilism and the Colonial Money Supply
To understand why the American colonies were perpetually short of hard currency, one must understand mercantilism, the dominant economic philosophy of Europe in the 1600s and 1700s. Under mercantilist theory, wealth was measured by the accumulation of gold and silver bullion, and national policy aimed to ensure that more bullion flowed into the mother country than flowed out. Colonies existed to enrich the metropole, not to develop independent economies of their own.
Navigation Acts and Trade Controls
Britain's mercantilist framework was enforced through the Navigation Acts (first passed in 1651 and expanded in the 1660s–1690s), which required: • Colonial goods like tobacco, sugar, and indigo could only be shipped on English ships. • Certain "enumerated commodities" could only be exported to England. • Imported manufactured goods had to come from Britain.
The result was a chronic trade imbalance: colonies imported more from Britain than they exported, forcing them to send scarce coin back to London to settle accounts.
Sterling Hoarding
To preserve bullion, Britain restricted the export of sterling coin. Royal instructions to colonial governors discouraged or outright forbade local coinage. Even when foreign coins like Spanish dollars entered circulation, London feared they would siphon off English silver, so Parliament issued proclamations like Queen Anne's Proclamation of 1704 to regulate and devalue foreign coin.
Colonial Frustration
For colonists, mercantilism meant: • Chronic scarcity of money — trade sucked specie back to England, leaving little behind. • Dependence on foreign coin — especially Spanish dollars from New Spain, despite London's dislike of them. • Reliance on alternatives — commodity money, barter, and paper bills of credit emerged largely because mercantilism kept specie from circulating freely in America.
Conclusion of Section 2B
Mercantilism, by design, left the colonies starved of hard money. Britain enriched itself by hoarding specie and controlling trade flows, while the colonies had to improvise with Spanish dollars, French livres, Dutch guilders, tobacco notes, and even barter. This deep structural imbalance is what made colonial monetary life so fragmented — and why later, after independence, Americans were determined to free themselves from London's monetary grip.
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Part I, Section 2C: The Value of the Spanish Dollar in Sterling and by Colony
One of the most confusing aspects of colonial money was the relationship between the Spanish silver dollar and the British pound sterling. The two were never equivalent, and the value of the dollar fluctuated both in Britain and across the colonies.
Sterling Value of a Spanish Dollar
In Britain, a pound sterling (£1) was a unit of account equal to 20 shillings (s), each shilling worth 12 pence (d). It was not a single coin but an accounting measure. • A Spanish silver dollar, with about 24.1 grams of pure silver, was generally worth 4s 6d to 5s sterling. • This meant one pound sterling was worth roughly four Spanish dollars. • However, this valuation shifted over time with silver content, wear, and market conditions.
Thus, there was never a neat 1:1 parity between a pound and a dollar.
Regional Fluctuations in the Colonies
Because each colony had its own currency system, the value of the Spanish dollar varied significantly: • New England: 6 shillings per dollar. • New York: 8 shillings per dollar. • Pennsylvania: 7s 6d per dollar. • The Carolinas: Often 8 shillings per dollar.
This meant that the same Spanish coin might be worth more or less depending on where you were — a source of constant confusion for merchants.
Reasons for Variation 1. Colonial "pounds" were not equal to sterling. Each colony's "pound" had depreciated differently over time. 2. Local legislatures manipulated rates. By officially "rating" a Spanish dollar higher in shillings, colonies could increase the local money supply (a form of inflation). 3. Wear and clipping. Old or shaved coins were discounted; fresh ones sometimes commanded premiums. 4. Trust in paper money. Colonies with weak or overissued paper currency saw silver dollars trade at a higher shilling value.
Consequences • Merchants and creditors had to constantly adjust for local exchange rates. • Colonial courts sometimes published official tables of coin values to standardize trade, but disparities persisted. • The lack of a common standard was one reason why, after independence, the U.S. adopted the dollar (modeled on the Spanish piece of eight) as its national unit, rather than sterling.
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Part I, Section 3: Commodity Money, Wampum, and Barter in the Colonies
Despite the dominance of Spanish silver and occasional gold, coin was always scarce in everyday colonial life. In many rural areas, colonists had little or no access to coinage at all. To fill the gap, they turned to commodity money, Native wampum, and direct barter. These methods provided local liquidity, though they were uneven, fragile, and often temporary.
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Tobacco as Currency in Virginia and Maryland • In Virginia and Maryland, tobacco was not only the chief export crop but also legal tender. • As early as 1619, the Virginia House of Burgesses declared that taxes and debts could be paid in tobacco. • This system worked by direct delivery of leaf tobacco, but problems arose over quality and spoilage.
To solve this, in 1727 Virginia established public tobacco warehouses where planters deposited inspected leaf. These warehouses issued tobacco notes — paper receipts that represented a claim on stored, graded tobacco. Because they were standardized and backed by physical stock, these notes circulated as a kind of proto-paper currency. Planters, merchants, and even courts accepted them in settlement of debts.
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Other Regional Commodities as Money
Different colonies adapted to their own resources: • South Carolina & Georgia: Rice and indigo often functioned as mediums of exchange. • Middle Colonies & New England: Corn, wheat, and dried fish were frequently used to pay taxes and local debts. • The frontier: Livestock such as hogs, cattle, and sheep often served as "currency on the hoof." • Northern fur trade: Beaver pelts, highly valued in Europe, became a trusted standard medium between colonists and Indigenous traders.
These commodities were accepted because they were useful, divisible, and in demand. But their values fluctuated depending on harvest size, quality, and transport costs, making them less stable than silver coin.
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Wampum: Beads as Money • Wampum (beads made from quahog and whelk shells) had deep cultural and ceremonial importance for Native Americans. • Europeans in New England adopted wampum as money during the early 1600s. • In 1637, Massachusetts declared wampum legal tender for small debts (up to 12 pence). • Initially valuable because production was labor-intensive, wampum lost credibility after Europeans began mass-producing it, causing inflation and depreciation. • By the early 1700s, wampum had mostly ceased to circulate as money, though it remained central in diplomacy and cultural exchange.
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Barter in Everyday Rural Life
Where coins and even commodity notes were scarce, barter remained the fallback system. • Farmers and artisans swapped goods and services directly: a bushel of corn for a day's labor, rum for firewood, pork for tools. • Colonial court records show many debts settled "in kind." • Though inefficient compared to coin, barter allowed rural economies to function when official money was absent.
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Problems with Commodity and Barter Systems
The biggest drawback was lack of standardization: • A bushel of wheat or a side of pork could vary in quality. • Tobacco notes required trustworthy inspection. • Wampum depreciated once overproduced.
Colonial assemblies sometimes published "official rates" for commodities in local money of account to reduce disputes, but enforcement was weak.
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Conclusion of Section 3
The colonial money supply was a layered ecosystem: • Spanish silver and gold for trusted coinage. • Tobacco, rice, wheat, corn, pelts as commodity money in local and regional trade. • Wampum in early New England and Native commerce. • Barter as the universal fallback.
This mixture reflects both the ingenuity and instability of colonial economies, where scarcity of coin forced people to improvise, setting the stage for later debates over paper money, banking, and "real" versus "substitute" money.
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Part I, Section 4: Bills of Exchange and Merchant Credit
Even though Spanish dollars, commodity money, and barter kept local economies afloat, these were unsuitable for the large-scale, transatlantic trade that defined the colonies' prosperity. Planters, merchants, and governments needed ways to pay for imports of British manufactured goods, settle debts with London creditors, and move wealth across the ocean without physically shipping gold and silver. The solution was the bill of exchange, a paper instrument that became the lifeblood of colonial commerce and tied American trade directly to the London financial system.
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What a Bill of Exchange Was
A bill of exchange was a written financial order, similar to a modern check or promissory note. The usual arrangement worked as follows: • A colonial merchant or planter (the drawer) who had shipped tobacco, rice, or other goods would draw a bill on his London correspondent (the drawee). • The London correspondent, typically a merchant banker or factor, would "accept" the bill, promising to pay the designated sum in sterling. • The bill could then be sold or "discounted" locally in the colonies to obtain immediate liquidity. • Whoever held the bill at maturity could present it in London for actual payment in sterling.
In other cases, English merchants trading in the colonies also issued bills, but the dominant pattern was colonial drawers writing against balances or credit with their London agents.
Because these instruments were portable and transferable, they quickly became negotiable paper assets in colonial commerce.
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Why Bills Were Indispensable
Bills of exchange solved fundamental colonial problems: 1. Scarcity of Sterling: Colonists rarely saw actual English coin. Bills gave them access to sterling balances in London without transporting bullion. 2. Security: Shipping silver and gold across the Atlantic was expensive and dangerous due to storms, shipwrecks, and piracy. A paper bill avoided those risks. 3. Flexibility: Bills could be endorsed (signed over) to new holders, making them liquid and tradeable. 4. Integration with British Finance: Bills tied colonial commerce directly into London's banking houses, reinforcing imperial financial dependence.
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How Bills Circulated Locally
Although originally intended for long-distance settlement, bills of exchange circulated within mercantile networks in the colonies as well: • A planter who drew a bill on his London factor might endorse it to a local merchant in payment of debt. • That merchant could in turn pass it on to another creditor. • By the time it was finally redeemed in London, a single bill might have changed hands multiple times.
This made bills of exchange function almost like a paper money system for the merchant elite. However, they were not a general legal tender. Farmers, artisans, and rural households rarely used bills directly, since they lacked access to London credit networks.
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Credit Networks and Colonial Dependency
The colonial economy ran on webs of credit anchored in Britain: • Merchants extended credit to planters until harvest. • Planters paid back debts with crops, which were consigned to Britain and sold by London factors. • Bills of exchange drawn on those factors became the key financial instrument linking American credit obligations to the London market.
This system made the colonies prosperous but also deeply dependent on London financiers. A tightening of credit in London — often triggered by wars, banking crises, or political shocks — rippled immediately into the colonies, producing severe economic contractions.
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Risks and Limitations
Bills of exchange carried their own dangers: • Credit risk: If the London drawee failed or refused payment, the bill became worthless. Colonial debtors were then left exposed. • Limited access: Only larger merchants and planters with established trade links could draw bills; rural farmers still relied on barter and commodity money. • Fragility: Because the system depended on trust and London credit markets, any collapse in confidence overseas triggered defaults and bankruptcies in America.
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Conclusion of Section 4
Bills of exchange were the high-finance counterpart to everyday colonial money. • Local trade was sustained by coins, commodities, and barter. • Long-distance commerce relied on paper promises drawn against London banking houses.
The system was elegant but fragile: it expanded commerce, yet it also ensured that colonial prosperity rested on the stability of British financial institutions. This dependence — and the crises it caused when London tightened credit — planted early seeds of American resentment and later demands for monetary independence.
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Part I, Section 5: Colonial Paper Money Experiments (1690s–1760s)
While Spanish silver, commodities, and bills of exchange kept the economy running, the chronic scarcity of hard money pushed some colonies to take a bold step: issuing their own paper bills of credit. This marked the first large-scale experiment with government-issued paper money in the Western world and set the stage for later debates over fiat currency.
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Massachusetts: The First Paper Issue (1690) • In 1690, during King William's War, Massachusetts faced a fiscal crisis after a failed military expedition against French Canada. • The colony owed soldiers and suppliers but had no silver coin to pay. • Its solution: issue £7,000 in paper "bills of credit" — promises by the colonial government to accept the notes in payment of taxes. • These bills circulated hand-to-hand as money.
This was the first time a Western government issued unbacked paper money not directly convertible into silver or gold, relying solely on government faith and tax redemption.
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Spread of Bills of Credit
Other colonies quickly followed Massachusetts' example: • South Carolina (1703) issued bills to finance defense against Spanish Florida. • New York, New Jersey, Pennsylvania, and others adopted similar systems. • By the mid-18th century, nearly every colony had paper money circulating alongside coins and barter.
Bills of credit were typically printed in small denominations for everyday use. Colonial governments promised to redeem them in the future through tax receipts, giving them a kind of "backing."
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Advantages of Paper Money • Solved coin shortages: Paper provided liquidity when silver drained away to Britain. • Facilitated trade: Allowed smaller transactions without relying on scarce coins or bulky commodity money. • Enabled public finance: Gave colonies a tool to fund wars, infrastructure, and debts without waiting for specie inflows.
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Problems and Depreciation
The system had weaknesses that became increasingly clear: 1. Over-Issuance: Colonies often printed more bills than they could retire through taxes, leading to depreciation. 2. Lack of Universal Acceptance: Bills were often trusted only locally. Merchants trading abroad demanded silver instead. 3. Inflation: In some colonies (e.g., Rhode Island), aggressive printing eroded confidence, driving up prices. 4. Exchange Rate Confusion: Each colony's bills traded at different discounts against sterling, creating chaos in interstate commerce.
A Spanish dollar might be worth 7s 6d in Pennsylvania paper but 10s in New England paper, depending on depreciation.
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British Resistance: The Currency Acts
Britain grew increasingly alarmed at the spread of colonial paper money: • Merchants in London who sold goods to the colonies complained they were being repaid in depreciated bills instead of sterling. • To protect British creditors, Parliament passed the Currency Act of 1751, which applied specifically to the New England colonies (Massachusetts, Rhode Island, Connecticut, New Hampshire). It prohibited new issues of paper money and restricted existing notes to non-legal-tender status for private debts. • In 1764, the Second Currency Act extended these restrictions to all thirteen colonies, forbidding colonial assemblies from declaring bills of credit legal tender for private debts.
The Acts did not completely eliminate paper money — colonies still issued bills for short-term finance — but they undercut the credibility of colonial currencies and deepened resentment toward British interference.
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Conclusion of Section 5
From 1690 to the 1760s, colonial America became a laboratory for paper money. Massachusetts pioneered it out of military necessity; other colonies embraced it to address shortages of specie. While paper money solved liquidity problems and encouraged trade, it also introduced instability, inflation, and disputes with Britain.
The Currency Acts of 1751 and 1764 marked a turning point: Britain prioritized protecting metropolitan merchants over colonial needs. Colonists viewed these acts as another example of economic subordination — resentment that would later fuse with other grievances into the revolutionary cause.
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Part I, Section 6: Revolutionary Paper Money and the Continental Dollar
When the American colonies broke with Britain in 1775, they also broke away from Britain's monetary framework. Cut off from sterling credit, deprived of specie imports, and needing to fund an expensive war, the Continental Congress turned to paper money as its primary financial weapon. This experiment produced the famous — and infamous — Continental dollar, whose eventual collapse left a permanent imprint on American attitudes toward paper currency.
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Early Issues (1775–1776) • In June 1775, weeks after Lexington and Concord, the Continental Congress authorized its first paper issue of $2 million in Continental bills of credit. • These were denominated in Spanish dollars (the trusted unit of account), printed on special paper with engraved designs, and backed by a vague promise that they would be redeemed through future tax revenues of the United Colonies. • Over the next two years, Congress approved repeated new issues as the war escalated — by the end of 1776, over $25 million in Continentals were in circulation.
The bills were not backed by silver or gold. Their only foundation was "the faith of the United Colonies."
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Rapid Expansion and Depreciation
By 1779, the total authorized Continental emissions exceeded $240 million. Several forces drove depreciation: 1. Over-Issuance: Congress printed far more than the economy could absorb. 2. Lack of Tax Power: Congress had no power to levy direct taxes; redemption depended on uncertain state cooperation. 3. Counterfeiting: The British deliberately flooded the colonies with counterfeit Continentals as a form of economic warfare, worsening distrust. 4. Specie Drain: Hard coin (silver and gold) was hoarded or used for foreign trade, while paper stayed in circulation.
As a result, depreciation set in quickly. By late 1777–1778, a Continental traded at 3–4 to 1 against silver; by 1779, at 20–25 to 1; and by 1780–81, rates collapsed entirely.
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State Currencies and Inflation Chaos
The Continental was not the only paper money in circulation. Individual states also issued their own bills to finance local war efforts. This created a confusing patchwork of Continental dollars, state notes, and foreign coin, each trading at different discounts.
Inflation was severe. In some areas, prices rose tenfold between 1777 and 1780. Soldiers were often paid in depreciated Continentals, sparking protests and desertions. Farmers resisted selling food for paper that might lose value before it could be spent.
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Attempts to Stabilize
Congress and the states tried multiple measures: • Price controls (e.g., the 1777–1779 "regulation movement" in New England) failed as goods vanished from markets. • Requisitions (states asked to contribute goods directly) often went unfilled. • Loan certificates — interest-bearing bonds — were introduced as a more credible alternative to non-interest paper. • Foreign aid: Gold and silver loans from France, Spain, and the Dutch Republic (1778–1781) increasingly replaced Continental bills as the true financial foundation of the war.
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The Collapse (1780–1781)
By 1780, in Philadelphia and New England, one silver Spanish dollar exchanged for about 40 Continental dollars; by 1781, rates reached 100–150 to 1 in many areas. Rates varied regionally — faster collapse in some markets, slower in others — but the general trajectory was unmistakable: the Continental dollar was rapidly becoming worthless.
Congress attempted a last reform in 1780 by consolidating old Continentals at 40 to 1 into a "new tenor" issue, but this too failed quickly. By 1781, the paper currency was effectively dead.
In practice, the war's financing was carried by foreign loans (especially from France and the Netherlands) and by Robert Morris's financial reforms (1781–83), which leaned on private bankers and the new Bank of North America.
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Legacy of the Continental Dollar
The failure of the Continental dollar left a deep scar on American monetary memory: • Distrust of Paper: The experience reinforced suspicion of unbacked government-issued paper money. For decades afterward, Americans preferred specie or bank-issued notes convertible into specie. • Federal Weakness Exposed: The collapse demonstrated the dangers of a central government without taxation power. This lesson helped shape the Constitution of 1787, which granted Congress authority over taxation and money. • Rhetorical Symbol: "Not worth a Continental" became a lasting American proverb about unreliable money.
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Conclusion of Section 6
The Revolutionary era showed both the necessity and the peril of paper money. Without the Continental dollar, the war effort might have collapsed in its early stages. But the uncontrolled issuance, combined with counterfeiting and weak fiscal institutions, destroyed its value.
This episode hardened American skepticism toward fiat currency and made specie-backed systems the default model for the young republic. It also revealed the critical truth that money's value depends not only on quantity but also on trust, taxation power, and institutional credibility — lessons that would echo throughout later American monetary history.
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Part I, Section 7: Post-Revolution — The Articles of Confederation and the Crisis of the 1780s
When the Revolutionary War ended in 1783, the United States emerged politically independent but financially exhausted. The collapse of the Continental dollar had left deep scars, and the new government under the Articles of Confederation (ratified 1781) faced overwhelming fiscal and monetary challenges. The 1780s became a decade of instability, debt crises, and competing currencies — a proving ground for the monetary reforms that would later emerge under the Constitution.
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Debt Legacy of the Revolution • The Continental Congress had borrowed heavily during the war — issuing not only Continentals but also loan office certificates, foreign loans, and state debts. • By 1783, the U.S. carried a combined domestic and foreign debt of roughly $70–80 million. • About $42 million was owed domestically in bonds and certificates, many of which had depreciated badly in secondary markets. • About $12 million was owed abroad to France, Spain, and the Netherlands, carrying higher legitimacy and repayment pressure. • States themselves held an additional ~$25 million in debts. • Much of the interest was unpaid, leaving U.S. credit in tatters both at home and abroad.
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Collapse of the Continental and Specie Hoarding • By the 1780s, Continentals were worthless. • States began experimenting with their own paper money to ease local shortages. Some states (e.g., Rhode Island) printed aggressively, while others (e.g., Massachusetts) resisted. • With trust in paper currency badly damaged, people increasingly hoarded specie (gold and silver coin), draining it out of circulation and worsening scarcity in everyday transactions.
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State Currency Chaos
Each state pursued its own path: • Rhode Island became infamous for printing excessive paper money in 1786, which depreciated rapidly. The legislature passed "Tender Laws" forcing creditors to accept it at face value, provoking lawsuits such as Trevett v. Weeden (1786). • Massachusetts took the opposite path, demanding that taxes and debts be paid in hard money. This policy placed enormous strain on indebted farmers and contributed to the outbreak of Shays' Rebellion (1786–87). • Other states like New York and Pennsylvania struck middle paths, issuing limited paper but also relying on foreign coins and barter.
The lack of uniformity caused massive confusion in interstate commerce, as each state's "dollar" or "pound" carried different values.
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Bills of Exchange and Foreign Coins
With trust in paper destroyed, foreign coins dominated circulation. Spanish dollars, Portuguese johannes, French livres, and Dutch guilders were still widely used, especially in port cities. Bills of exchange on London or Amsterdam continued to serve as the main instrument of long-distance finance.
But the lack of a national standard left America in a monetary patchwork more chaotic than before independence.
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Economic Crisis of the 1780s
The decade saw repeated crises: • Depressed Trade: After the war, Britain restricted American access to West Indies markets, cutting a major export outlet. • Specie Drain: Imports from Britain surged, draining scarce silver back across the Atlantic. • Credit Crunch: British merchants demanded repayment in specie, not depreciated paper. • Foreclosures: Farmers unable to pay debts in hard money lost land, fueling unrest.
The most dramatic episode was Shays' Rebellion (1786–87) in western Massachusetts. While its immediate spark was farmers' inability to pay taxes in specie, the uprising also reflected broader agrarian discontent over high debts, falling farm prices, and perceived government favoritism toward creditors.
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Weakness of the Articles of Confederation
The Confederation government lacked critical powers: • No power to levy direct taxes. • No authority to issue a stable national currency. • No ability to regulate interstate commerce, leaving states to pursue conflicting monetary policies.
As a result, the government could not service its debts or provide financial stability. The "union" was held together more by necessity than by effective governance.
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Conclusion of Section 7
The 1780s revealed the fragility of America's first national framework. With the Continental dead, states veered between inflationary paper issues and rigid specie demands, both of which destabilized their economies. Farmers and laborers suffered under debt and foreclosures, while merchants faced chaos in interstate trade.
The decade's crises — capped by Shays' Rebellion — convinced many leaders that only a stronger federal government with control over taxation, money, and credit could restore order. These lessons directly shaped the debates at the Constitutional Convention of 1787, setting the stage for America's next great monetary experiment.
Section 1: Colonial and Revolutionary Era (Sections 1–7)
Part I, Section 1: The Spanish Dollar, the "Piece of Eight," and Gold Doubloons in the Colonies
In the seventeenth and eighteenth centuries, the most important coin in North America was not British sterling, but the Spanish silver dollar, known in Spanish as the real de a ocho ("royal coin of eight") and in English as the "piece of eight." Each was valued at eight reales, a subdivision of the Spanish monetary system, and contained roughly 27.07 grams gross weight, about 24.1 grams of pure silver. Because of its consistent weight and purity, the Spanish dollar became the first global currency, trusted in Europe, Africa, the Americas, and Asia.
The origins of this coin lay in Spain's vast colonial empire. From the mid-1500s onward, Spain exploited some of the richest silver deposits ever discovered: • Zacatecas (Mexico, discovered 1546) and Guanajuato (Mexico, 1550s): These mines supplied an immense flow of silver for centuries, with Guanajuato producing nearly one-third of the world's supply at its peak. • Potosí (modern Bolivia, discovered 1545): The famous Cerro Rico ("Rich Mountain") was so prolific that "to be worth a Potosí" became a Spanish proverb for enormous wealth.
To process this wealth, the Spanish Crown established mints in the New World: Mexico City in 1535 (the first in the Americas), Lima (1568), Potosí (1574), and later Guatemala, Bogotá, and Santiago. Coins bore royal arms, crosses, pillars, and mintmarks such as "Mo" for Mexico City or "PTS" for Potosí. By the eighteenth century, Spanish America produced over 80% of the world's silver, and much of it was coined into dollars.
The Spanish dollar's dominance in the colonies was not by legal design but by custom and necessity. The British Crown technically forbade its use, issuing proclamations such as Queen Anne's in 1704 to regulate or restrict foreign coinage, but enforcement was impossible. Because sterling coins were scarce, colonists simply adopted the Spanish dollar as a private currency — not officially sanctioned, but universally accepted because of its silver content. In practice, it became the backbone of commerce across the colonies.
Though silver was the everyday workhorse of commerce, gold coins also circulated in the colonies, especially in larger transactions. Spain minted gold escudos, commonly known in English as doubloons, at the same New World mints. A doubloon (two-escudo coin) contained about 6.77 grams of pure gold, making it far more valuable than a silver dollar. Gold doubloons often traveled alongside silver pieces of eight in Atlantic trade and were prized for settling larger debts. Other foreign gold and silver coins such as Portuguese moidores, English guineas, Dutch guilders, and French livres and louis d'or also appeared, though in smaller numbers compared to Spanish issues.
Thus, colonial America's monetary foundation rested not on British sterling but on the hard money of the Spanish Empire and its trusted substitutes: • Spanish silver dollars (pieces of eight) circulated as a private currency, trusted for daily trade. • Gold doubloons (escudos) served as higher-value money for large transactions. • Other foreign coins — Portuguese, English, Dutch, and French — supplemented the supply.
Together, these coins provided the colonies with a reliable medium of exchange when neither local mints nor consistent sterling coin could be relied upon.
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Part I, Section 2: Scarcity of Sterling and the Patchwork of Foreign Coins
Although the British Empire claimed North America as its colonies, sterling coinage was almost nonexistent there. The reasons lay in mercantilist policy and the structure of trade. • Britain believed wealth meant holding gold and silver at home. Export of sterling was restricted, and the Royal Mint in London produced coins largely for domestic circulation. • Colonists imported more than they exported. This trade deficit meant that any sterling coins that did arrive were quickly drained back to Britain to settle accounts. • Colonial governments were forbidden to mint their own silver coins. Governors sometimes issued local proclamations "rating" foreign coins in shillings or pence, but they had no authority to strike sterling coinage.
As a result, the colonies depended on a patchwork of foreign coins: • Spanish dollars (pieces of eight): The backbone of commerce, despite Crown prohibitions. • French livres and louis d'or: Common in New England and the Caribbean, and especially after wars when captured French coin entered circulation. • Dutch guilders (florins): Entered via Dutch West Indies trade. • Portuguese cruzados and moidores: From Brazil and Atlantic trade routes. • English guineas and shillings: Rare and in short supply compared to foreign issues.
Colonial assemblies sometimes issued official tables listing what each foreign coin was "worth" in local money of account. This created a confusing system of exchange rates, where a Spanish dollar might be legally valued at 6 shillings in one colony and 7 shillings 6 pence in another.
The result was a paradox: the Crown demanded sterling, but on the ground, colonial markets were sustained by Spanish, French, Dutch, and Portuguese money. Sterling was more a bookkeeping unit of account than an actual medium of exchange.
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Part I, Section 2A: Why British Sterling Never Became the Global Currency
Although Britain was the world's leading naval and commercial power by the eighteenth century, its sterling coinage (pounds, shillings, and pence) never became the global standard in the way that the Spanish dollar did. Several reasons explain why sterling failed to take on that universal role: 1. Mercantilist Hoarding: Britain believed national strength came from keeping bullion within its borders. Export of sterling coins to the colonies was deliberately restricted by laws and royal instructions. Instead of sending English coins abroad, Britain encouraged colonists to settle debts with bills of exchange, barter, or foreign coin. 2. Limited Minting and Chronic Shortages: The Royal Mint in London produced coins mainly for domestic use, and Britain often faced coin shortages even at home. English coins were lighter in silver content than Spanish dollars, which made them less attractive internationally. 3. Spanish Dominance of Silver Supply: Spain controlled the richest silver mines in the world — Potosí, Zacatecas, Guanajuato — and its mints at Mexico City, Lima, and Potosí struck vast quantities of reliable silver dollars. Because Spain dominated global silver flows, the Spanish dollar had both consistency and abundance unmatched by sterling. 4. Colonial and Global Trust in Spanish Dollars: Merchants across the Americas, Europe, and Asia trusted Spanish dollars because they knew exactly how much silver they contained. Even Britain used Spanish dollars in overseas trade and to pay soldiers. Colonists in America, starved of sterling, relied almost entirely on Spanish dollars as their everyday currency. 5. Sterling as "Money of Account" Only: In colonial ledgers, debts were often recorded in pounds, shillings, and pence ("money of account"), but actual payment was made in Spanish dollars, Dutch guilders, Portuguese cruzados, or even tobacco and other commodities. With so little physical sterling in circulation, it never functioned as a true international medium.
In short: Sterling was legally the standard in Britain, but the Spanish dollar became the practical global currency because of its abundance, silver purity, and wide acceptance. Britain's mercantilist hoarding policy, minting limits, and lack of domestic silver mines meant sterling could not compete on the world stage.
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Part I, Section 2B: Mercantilism and the Colonial Money Supply
To understand why the American colonies were perpetually short of hard currency, one must understand mercantilism, the dominant economic philosophy of Europe in the 1600s and 1700s. Under mercantilist theory, wealth was measured by the accumulation of gold and silver bullion, and national policy aimed to ensure that more bullion flowed into the mother country than flowed out. Colonies existed to enrich the metropole, not to develop independent economies of their own.
Navigation Acts and Trade Controls
Britain's mercantilist framework was enforced through the Navigation Acts (first passed in 1651 and expanded in the 1660s–1690s), which required: • Colonial goods like tobacco, sugar, and indigo could only be shipped on English ships. • Certain "enumerated commodities" could only be exported to England. • Imported manufactured goods had to come from Britain.
The result was a chronic trade imbalance: colonies imported more from Britain than they exported, forcing them to send scarce coin back to London to settle accounts.
Sterling Hoarding
To preserve bullion, Britain restricted the export of sterling coin. Royal instructions to colonial governors discouraged or outright forbade local coinage. Even when foreign coins like Spanish dollars entered circulation, London feared they would siphon off English silver, so Parliament issued proclamations like Queen Anne's Proclamation of 1704 to regulate and devalue foreign coin.
Colonial Frustration
For colonists, mercantilism meant: • Chronic scarcity of money — trade sucked specie back to England, leaving little behind. • Dependence on foreign coin — especially Spanish dollars from New Spain, despite London's dislike of them. • Reliance on alternatives — commodity money, barter, and paper bills of credit emerged largely because mercantilism kept specie from circulating freely in America.
Conclusion of Section 2B
Mercantilism, by design, left the colonies starved of hard money. Britain enriched itself by hoarding specie and controlling trade flows, while the colonies had to improvise with Spanish dollars, French livres, Dutch guilders, tobacco notes, and even barter. This deep structural imbalance is what made colonial monetary life so fragmented — and why later, after independence, Americans were determined to free themselves from London's monetary grip.
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Part I, Section 2C: The Value of the Spanish Dollar in Sterling and by Colony
One of the most confusing aspects of colonial money was the relationship between the Spanish silver dollar and the British pound sterling. The two were never equivalent, and the value of the dollar fluctuated both in Britain and across the colonies.
Sterling Value of a Spanish Dollar
In Britain, a pound sterling (£1) was a unit of account equal to 20 shillings (s), each shilling worth 12 pence (d). It was not a single coin but an accounting measure. • A Spanish silver dollar, with about 24.1 grams of pure silver, was generally worth 4s 6d to 5s sterling. • This meant one pound sterling was worth roughly four Spanish dollars. • However, this valuation shifted over time with silver content, wear, and market conditions.
Thus, there was never a neat 1:1 parity between a pound and a dollar.
Regional Fluctuations in the Colonies
Because each colony had its own currency system, the value of the Spanish dollar varied significantly: • New England: 6 shillings per dollar. • New York: 8 shillings per dollar. • Pennsylvania: 7s 6d per dollar. • The Carolinas: Often 8 shillings per dollar.
This meant that the same Spanish coin might be worth more or less depending on where you were — a source of constant confusion for merchants.
Reasons for Variation 1. Colonial "pounds" were not equal to sterling. Each colony's "pound" had depreciated differently over time. 2. Local legislatures manipulated rates. By officially "rating" a Spanish dollar higher in shillings, colonies could increase the local money supply (a form of inflation). 3. Wear and clipping. Old or shaved coins were discounted; fresh ones sometimes commanded premiums. 4. Trust in paper money. Colonies with weak or overissued paper currency saw silver dollars trade at a higher shilling value.
Consequences • Merchants and creditors had to constantly adjust for local exchange rates. • Colonial courts sometimes published official tables of coin values to standardize trade, but disparities persisted. • The lack of a common standard was one reason why, after independence, the U.S. adopted the dollar (modeled on the Spanish piece of eight) as its national unit, rather than sterling.
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Part I, Section 3: Commodity Money, Wampum, and Barter in the Colonies
Despite the dominance of Spanish silver and occasional gold, coin was always scarce in everyday colonial life. In many rural areas, colonists had little or no access to coinage at all. To fill the gap, they turned to commodity money, Native wampum, and direct barter. These methods provided local liquidity, though they were uneven, fragile, and often temporary.
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Tobacco as Currency in Virginia and Maryland • In Virginia and Maryland, tobacco was not only the chief export crop but also legal tender. • As early as 1619, the Virginia House of Burgesses declared that taxes and debts could be paid in tobacco. • This system worked by direct delivery of leaf tobacco, but problems arose over quality and spoilage.
To solve this, in 1727 Virginia established public tobacco warehouses where planters deposited inspected leaf. These warehouses issued tobacco notes — paper receipts that represented a claim on stored, graded tobacco. Because they were standardized and backed by physical stock, these notes circulated as a kind of proto-paper currency. Planters, merchants, and even courts accepted them in settlement of debts.
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Other Regional Commodities as Money
Different colonies adapted to their own resources: • South Carolina & Georgia: Rice and indigo often functioned as mediums of exchange. • Middle Colonies & New England: Corn, wheat, and dried fish were frequently used to pay taxes and local debts. • The frontier: Livestock such as hogs, cattle, and sheep often served as "currency on the hoof." • Northern fur trade: Beaver pelts, highly valued in Europe, became a trusted standard medium between colonists and Indigenous traders.
These commodities were accepted because they were useful, divisible, and in demand. But their values fluctuated depending on harvest size, quality, and transport costs, making them less stable than silver coin.
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Wampum: Beads as Money • Wampum (beads made from quahog and whelk shells) had deep cultural and ceremonial importance for Native Americans. • Europeans in New England adopted wampum as money during the early 1600s. • In 1637, Massachusetts declared wampum legal tender for small debts (up to 12 pence). • Initially valuable because production was labor-intensive, wampum lost credibility after Europeans began mass-producing it, causing inflation and depreciation. • By the early 1700s, wampum had mostly ceased to circulate as money, though it remained central in diplomacy and cultural exchange.
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Barter in Everyday Rural Life
Where coins and even commodity notes were scarce, barter remained the fallback system. • Farmers and artisans swapped goods and services directly: a bushel of corn for a day's labor, rum for firewood, pork for tools. • Colonial court records show many debts settled "in kind." • Though inefficient compared to coin, barter allowed rural economies to function when official money was absent.
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Problems with Commodity and Barter Systems
The biggest drawback was lack of standardization: • A bushel of wheat or a side of pork could vary in quality. • Tobacco notes required trustworthy inspection. • Wampum depreciated once overproduced.
Colonial assemblies sometimes published "official rates" for commodities in local money of account to reduce disputes, but enforcement was weak.
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Conclusion of Section 3
The colonial money supply was a layered ecosystem: • Spanish silver and gold for trusted coinage. • Tobacco, rice, wheat, corn, pelts as commodity money in local and regional trade. • Wampum in early New England and Native commerce. • Barter as the universal fallback.
This mixture reflects both the ingenuity and instability of colonial economies, where scarcity of coin forced people to improvise, setting the stage for later debates over paper money, banking, and "real" versus "substitute" money.
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Part I, Section 4: Bills of Exchange and Merchant Credit
Even though Spanish dollars, commodity money, and barter kept local economies afloat, these were unsuitable for the large-scale, transatlantic trade that defined the colonies' prosperity. Planters, merchants, and governments needed ways to pay for imports of British manufactured goods, settle debts with London creditors, and move wealth across the ocean without physically shipping gold and silver. The solution was the bill of exchange, a paper instrument that became the lifeblood of colonial commerce and tied American trade directly to the London financial system.
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What a Bill of Exchange Was
A bill of exchange was a written financial order, similar to a modern check or promissory note. The usual arrangement worked as follows: • A colonial merchant or planter (the drawer) who had shipped tobacco, rice, or other goods would draw a bill on his London correspondent (the drawee). • The London correspondent, typically a merchant banker or factor, would "accept" the bill, promising to pay the designated sum in sterling. • The bill could then be sold or "discounted" locally in the colonies to obtain immediate liquidity. • Whoever held the bill at maturity could present it in London for actual payment in sterling.
In other cases, English merchants trading in the colonies also issued bills, but the dominant pattern was colonial drawers writing against balances or credit with their London agents.
Because these instruments were portable and transferable, they quickly became negotiable paper assets in colonial commerce.
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Why Bills Were Indispensable
Bills of exchange solved fundamental colonial problems: 1. Scarcity of Sterling: Colonists rarely saw actual English coin. Bills gave them access to sterling balances in London without transporting bullion. 2. Security: Shipping silver and gold across the Atlantic was expensive and dangerous due to storms, shipwrecks, and piracy. A paper bill avoided those risks. 3. Flexibility: Bills could be endorsed (signed over) to new holders, making them liquid and tradeable. 4. Integration with British Finance: Bills tied colonial commerce directly into London's banking houses, reinforcing imperial financial dependence.
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How Bills Circulated Locally
Although originally intended for long-distance settlement, bills of exchange circulated within mercantile networks in the colonies as well: • A planter who drew a bill on his London factor might endorse it to a local merchant in payment of debt. • That merchant could in turn pass it on to another creditor. • By the time it was finally redeemed in London, a single bill might have changed hands multiple times.
This made bills of exchange function almost like a paper money system for the merchant elite. However, they were not a general legal tender. Farmers, artisans, and rural households rarely used bills directly, since they lacked access to London credit networks.
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Credit Networks and Colonial Dependency
The colonial economy ran on webs of credit anchored in Britain: • Merchants extended credit to planters until harvest. • Planters paid back debts with crops, which were consigned to Britain and sold by London factors. • Bills of exchange drawn on those factors became the key financial instrument linking American credit obligations to the London market.
This system made the colonies prosperous but also deeply dependent on London financiers. A tightening of credit in London — often triggered by wars, banking crises, or political shocks — rippled immediately into the colonies, producing severe economic contractions.
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Risks and Limitations
Bills of exchange carried their own dangers: • Credit risk: If the London drawee failed or refused payment, the bill became worthless. Colonial debtors were then left exposed. • Limited access: Only larger merchants and planters with established trade links could draw bills; rural farmers still relied on barter and commodity money. • Fragility: Because the system depended on trust and London credit markets, any collapse in confidence overseas triggered defaults and bankruptcies in America.
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Conclusion of Section 4
Bills of exchange were the high-finance counterpart to everyday colonial money. • Local trade was sustained by coins, commodities, and barter. • Long-distance commerce relied on paper promises drawn against London banking houses.
The system was elegant but fragile: it expanded commerce, yet it also ensured that colonial prosperity rested on the stability of British financial institutions. This dependence — and the crises it caused when London tightened credit — planted early seeds of American resentment and later demands for monetary independence.
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Part I, Section 5: Colonial Paper Money Experiments (1690s–1760s)
While Spanish silver, commodities, and bills of exchange kept the economy running, the chronic scarcity of hard money pushed some colonies to take a bold step: issuing their own paper bills of credit. This marked the first large-scale experiment with government-issued paper money in the Western world and set the stage for later debates over fiat currency.
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Massachusetts: The First Paper Issue (1690) • In 1690, during King William's War, Massachusetts faced a fiscal crisis after a failed military expedition against French Canada. • The colony owed soldiers and suppliers but had no silver coin to pay. • Its solution: issue £7,000 in paper "bills of credit" — promises by the colonial government to accept the notes in payment of taxes. • These bills circulated hand-to-hand as money.
This was the first time a Western government issued unbacked paper money not directly convertible into silver or gold, relying solely on government faith and tax redemption.
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Spread of Bills of Credit
Other colonies quickly followed Massachusetts' example: • South Carolina (1703) issued bills to finance defense against Spanish Florida. • New York, New Jersey, Pennsylvania, and others adopted similar systems. • By the mid-18th century, nearly every colony had paper money circulating alongside coins and barter.
Bills of credit were typically printed in small denominations for everyday use. Colonial governments promised to redeem them in the future through tax receipts, giving them a kind of "backing."
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Advantages of Paper Money • Solved coin shortages: Paper provided liquidity when silver drained away to Britain. • Facilitated trade: Allowed smaller transactions without relying on scarce coins or bulky commodity money. • Enabled public finance: Gave colonies a tool to fund wars, infrastructure, and debts without waiting for specie inflows.
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Problems and Depreciation
The system had weaknesses that became increasingly clear: 1. Over-Issuance: Colonies often printed more bills than they could retire through taxes, leading to depreciation. 2. Lack of Universal Acceptance: Bills were often trusted only locally. Merchants trading abroad demanded silver instead. 3. Inflation: In some colonies (e.g., Rhode Island), aggressive printing eroded confidence, driving up prices. 4. Exchange Rate Confusion: Each colony's bills traded at different discounts against sterling, creating chaos in interstate commerce.
A Spanish dollar might be worth 7s 6d in Pennsylvania paper but 10s in New England paper, depending on depreciation.
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British Resistance: The Currency Acts
Britain grew increasingly alarmed at the spread of colonial paper money: • Merchants in London who sold goods to the colonies complained they were being repaid in depreciated bills instead of sterling. • To protect British creditors, Parliament passed the Currency Act of 1751, which applied specifically to the New England colonies (Massachusetts, Rhode Island, Connecticut, New Hampshire). It prohibited new issues of paper money and restricted existing notes to non-legal-tender status for private debts. • In 1764, the Second Currency Act extended these restrictions to all thirteen colonies, forbidding colonial assemblies from declaring bills of credit legal tender for private debts.
The Acts did not completely eliminate paper money — colonies still issued bills for short-term finance — but they undercut the credibility of colonial currencies and deepened resentment toward British interference.
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Conclusion of Section 5
From 1690 to the 1760s, colonial America became a laboratory for paper money. Massachusetts pioneered it out of military necessity; other colonies embraced it to address shortages of specie. While paper money solved liquidity problems and encouraged trade, it also introduced instability, inflation, and disputes with Britain.
The Currency Acts of 1751 and 1764 marked a turning point: Britain prioritized protecting metropolitan merchants over colonial needs. Colonists viewed these acts as another example of economic subordination — resentment that would later fuse with other grievances into the revolutionary cause.
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Part I, Section 6: Revolutionary Paper Money and the Continental Dollar
When the American colonies broke with Britain in 1775, they also broke away from Britain's monetary framework. Cut off from sterling credit, deprived of specie imports, and needing to fund an expensive war, the Continental Congress turned to paper money as its primary financial weapon. This experiment produced the famous — and infamous — Continental dollar, whose eventual collapse left a permanent imprint on American attitudes toward paper currency.
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Early Issues (1775–1776) • In June 1775, weeks after Lexington and Concord, the Continental Congress authorized its first paper issue of $2 million in Continental bills of credit. • These were denominated in Spanish dollars (the trusted unit of account), printed on special paper with engraved designs, and backed by a vague promise that they would be redeemed through future tax revenues of the United Colonies. • Over the next two years, Congress approved repeated new issues as the war escalated — by the end of 1776, over $25 million in Continentals were in circulation.
The bills were not backed by silver or gold. Their only foundation was "the faith of the United Colonies."
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Rapid Expansion and Depreciation
By 1779, the total authorized Continental emissions exceeded $240 million. Several forces drove depreciation: 1. Over-Issuance: Congress printed far more than the economy could absorb. 2. Lack of Tax Power: Congress had no power to levy direct taxes; redemption depended on uncertain state cooperation. 3. Counterfeiting: The British deliberately flooded the colonies with counterfeit Continentals as a form of economic warfare, worsening distrust. 4. Specie Drain: Hard coin (silver and gold) was hoarded or used for foreign trade, while paper stayed in circulation.
As a result, depreciation set in quickly. By late 1777–1778, a Continental traded at 3–4 to 1 against silver; by 1779, at 20–25 to 1; and by 1780–81, rates collapsed entirely.
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State Currencies and Inflation Chaos
The Continental was not the only paper money in circulation. Individual states also issued their own bills to finance local war efforts. This created a confusing patchwork of Continental dollars, state notes, and foreign coin, each trading at different discounts.
Inflation was severe. In some areas, prices rose tenfold between 1777 and 1780. Soldiers were often paid in depreciated Continentals, sparking protests and desertions. Farmers resisted selling food for paper that might lose value before it could be spent.
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Attempts to Stabilize
Congress and the states tried multiple measures: • Price controls (e.g., the 1777–1779 "regulation movement" in New England) failed as goods vanished from markets. • Requisitions (states asked to contribute goods directly) often went unfilled. • Loan certificates — interest-bearing bonds — were introduced as a more credible alternative to non-interest paper. • Foreign aid: Gold and silver loans from France, Spain, and the Dutch Republic (1778–1781) increasingly replaced Continental bills as the true financial foundation of the war.
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The Collapse (1780–1781)
By 1780, in Philadelphia and New England, one silver Spanish dollar exchanged for about 40 Continental dollars; by 1781, rates reached 100–150 to 1 in many areas. Rates varied regionally — faster collapse in some markets, slower in others — but the general trajectory was unmistakable: the Continental dollar was rapidly becoming worthless.
Congress attempted a last reform in 1780 by consolidating old Continentals at 40 to 1 into a "new tenor" issue, but this too failed quickly. By 1781, the paper currency was effectively dead.
In practice, the war's financing was carried by foreign loans (especially from France and the Netherlands) and by Robert Morris's financial reforms (1781–83), which leaned on private bankers and the new Bank of North America.
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Legacy of the Continental Dollar
The failure of the Continental dollar left a deep scar on American monetary memory: • Distrust of Paper: The experience reinforced suspicion of unbacked government-issued paper money. For decades afterward, Americans preferred specie or bank-issued notes convertible into specie. • Federal Weakness Exposed: The collapse demonstrated the dangers of a central government without taxation power. This lesson helped shape the Constitution of 1787, which granted Congress authority over taxation and money. • Rhetorical Symbol: "Not worth a Continental" became a lasting American proverb about unreliable money.
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Conclusion of Section 6
The Revolutionary era showed both the necessity and the peril of paper money. Without the Continental dollar, the war effort might have collapsed in its early stages. But the uncontrolled issuance, combined with counterfeiting and weak fiscal institutions, destroyed its value.
This episode hardened American skepticism toward fiat currency and made specie-backed systems the default model for the young republic. It also revealed the critical truth that money's value depends not only on quantity but also on trust, taxation power, and institutional credibility — lessons that would echo throughout later American monetary history.
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Part I, Section 7: Post-Revolution — The Articles of Confederation and the Crisis of the 1780s
When the Revolutionary War ended in 1783, the United States emerged politically independent but financially exhausted. The collapse of the Continental dollar had left deep scars, and the new government under the Articles of Confederation (ratified 1781) faced overwhelming fiscal and monetary challenges. The 1780s became a decade of instability, debt crises, and competing currencies — a proving ground for the monetary reforms that would later emerge under the Constitution.
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Debt Legacy of the Revolution • The Continental Congress had borrowed heavily during the war — issuing not only Continentals but also loan office certificates, foreign loans, and state debts. • By 1783, the U.S. carried a combined domestic and foreign debt of roughly $70–80 million. • About $42 million was owed domestically in bonds and certificates, many of which had depreciated badly in secondary markets. • About $12 million was owed abroad to France, Spain, and the Netherlands, carrying higher legitimacy and repayment pressure. • States themselves held an additional ~$25 million in debts. • Much of the interest was unpaid, leaving U.S. credit in tatters both at home and abroad.
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Collapse of the Continental and Specie Hoarding • By the 1780s, Continentals were worthless. • States began experimenting with their own paper money to ease local shortages. Some states (e.g., Rhode Island) printed aggressively, while others (e.g., Massachusetts) resisted. • With trust in paper currency badly damaged, people increasingly hoarded specie (gold and silver coin), draining it out of circulation and worsening scarcity in everyday transactions.
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State Currency Chaos
Each state pursued its own path: • Rhode Island became infamous for printing excessive paper money in 1786, which depreciated rapidly. The legislature passed "Tender Laws" forcing creditors to accept it at face value, provoking lawsuits such as Trevett v. Weeden (1786). • Massachusetts took the opposite path, demanding that taxes and debts be paid in hard money. This policy placed enormous strain on indebted farmers and contributed to the outbreak of Shays' Rebellion (1786–87). • Other states like New York and Pennsylvania struck middle paths, issuing limited paper but also relying on foreign coins and barter.
The lack of uniformity caused massive confusion in interstate commerce, as each state's "dollar" or "pound" carried different values.
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Bills of Exchange and Foreign Coins
With trust in paper destroyed, foreign coins dominated circulation. Spanish dollars, Portuguese johannes, French livres, and Dutch guilders were still widely used, especially in port cities. Bills of exchange on London or Amsterdam continued to serve as the main instrument of long-distance finance.
But the lack of a national standard left America in a monetary patchwork more chaotic than before independence.
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Economic Crisis of the 1780s
The decade saw repeated crises: • Depressed Trade: After the war, Britain restricted American access to West Indies markets, cutting a major export outlet. • Specie Drain: Imports from Britain surged, draining scarce silver back across the Atlantic. • Credit Crunch: British merchants demanded repayment in specie, not depreciated paper. • Foreclosures: Farmers unable to pay debts in hard money lost land, fueling unrest.
The most dramatic episode was Shays' Rebellion (1786–87) in western Massachusetts. While its immediate spark was farmers' inability to pay taxes in specie, the uprising also reflected broader agrarian discontent over high debts, falling farm prices, and perceived government favoritism toward creditors.
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Weakness of the Articles of Confederation
The Confederation government lacked critical powers: • No power to levy direct taxes. • No authority to issue a stable national currency. • No ability to regulate interstate commerce, leaving states to pursue conflicting monetary policies.
As a result, the government could not service its debts or provide financial stability. The "union" was held together more by necessity than by effective governance.
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Conclusion of Section 7
The 1780s revealed the fragility of America's first national framework. With the Continental dead, states veered between inflationary paper issues and rigid specie demands, both of which destabilized their economies. Farmers and laborers suffered under debt and foreclosures, while merchants faced chaos in interstate trade.
The decade's crises — capped by Shays' Rebellion — convinced many leaders that only a stronger federal government with control over taxation, money, and credit could restore order. These lessons directly shaped the debates at the Constitutional Convention of 1787, setting the stage for America's next great monetary experiment.
