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I haven’t contributed anything to the blog in a while. One reason for that was a short paper I’ve been writing for one of my classes. Since it’s a piece of writing and this blog is very unlikely to at any point have something else like it, here is that paper. The article it is a response to can be found here. (Note: access to it will require login/affiliation with some third party, such as Rutgers, that provides access.)

It’s a classic old saying – some variation of “Those who forget the mistakes of the past are doomed to repeat them.” It holds merit because, unfortunately, people screw up all the time. A few such examples of this occurred during the colonial period of America. Unfortunately for colonists, these mistakes were made with money, one area where most people can ill afford serious mishaps. In Charles Calomiris’ “Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental,” bad monetary policy (on both the colonial and federal level) before and during the American Revolution is examined. Calomiris found some common threads with the problems of both eras, with the ultimate theme being one of monetary scarcity: he argues it was a legitimate problem caused by legitimately bad policy. While this was a vital part of American history, it was also an early stage – perhaps too early to have had enough mistakes to learn from. In short, the facts back Calomiris up: much of what the colonies (and later, the nation) did with the money they issued just didn’t work too well.

In colonial times, the main money was at first coin (specie). The problem with specie was that there was only so much to go around, and Britain wanted as much for itself as possible – so much so that they outlawed its exportation. Specie alone would have been insufficient for the colonies’ currency needs; as a result, large amounts of paper currency also circulated. These would generally take the form of bills of credit backed by future tax receipts or loan office notes backed by land. The colonies’ problem was that too often, this backing was woefully insufficient. It was better in some places than others, but when it was bad, it was awful. Rhode Island was a particularly bad offender: it got so bad there that in 1760 they averaged ₤31.5 worth of paper notes per person nominally. What was that ₤31.5 actually worth? According to available data, the answer is a mere ₤1.22. Therefore, an average person’s purchasing power was worth a little over 1/26 of what they held. Case in point: the colonies could print all the money they wanted, but if no one believed it was legitimately worth anything, it didn’t do much good. Clearly, the scarcity Calomiris argued existed (and frankly, from these numbers it’s hard to disagree) was not due to a lack of trying: it was due to lack of accountability. When Massachusetts finally got serious about backing their currency after 1750, their inflation problems improved dramatically. Over the same time period, Rhode Island’s problems persisted because their faulty policy of printing absurd amounts of worthless paper currency persisted. This could have proven a valuable lesson for the Continental Congress in financing the Revolutionary War…could have.

Congress financed the war largely by issuing paper money known as the continental. When the continental was first issued in 1775, it wasn’t worthless – in fact, at that time, a continental dollar was actually worth the same as a specie dollar. Of course, as Calomiris points out, at this time it was not yet known that something the scope of the Revolutionary War was about to be waged. As this became clearer, the continental’s value started to decrease. By the end of 1776, it took 1.5 continental dollars to equal one specie dollar. By the end of 1777, five continental dollars were equal to one specie dollar. The continental continued to depreciate until April 1781, when it took nearly 150 of them to equal one specie dollar. Unsurprisingly, insufficient backing was a primary concern that led to the increasing worthlessness of this money. At the time, Congress had no power to tax, and therefore very little guarantee of collecting the revenue needed to back the notes with something of real value. This did not inspire confidence in citizens, the people who actually had to use this subpar currency. Calomiris provides a graph showing that the value of a continental, for a time, fluctuated to a great degree along with war news: good news meant it was worth more, bad news meant it was worth less. This effect, however, became less pronounced around mid-1779, when fluctuations in value became much smaller and a much more consistent downward trend in continental value became the norm. This happened despite the fact that from late 1779 onward, Congress did not even issue any more continentals. The damage had been done; too many bills had been issued. Not helping matters was the fact that Congress had lost confidence in the continental’s success as a form of money to the point of refusing to put any more of it into the economy. They tried getting the states to stop issuing more bills of their own, and they tried getting the states to accept continentals as legitimate payment for taxes. Neither truly helped the continental become any more valuable. Congress did not have a viable plan to back the currency they issued so prodigiously, and they paid the same price as Rhode Island before it – high inflation and low trust from its people.

No statement is worth much if it can’t be soundly backed up. The same can be said of issuing currency. If there’s no credible proof it’s worth anything, the people it’s being issued to will not treat it like it’s worth anything. Colonial governments in Rhode Island (and several other colonies, notably South Carolina and Massachusetts, before it cleaned up its act in 1750) learned this the hard way, as did the Continental Congress during the Revolutionary War. When there is too much worthless currency floating around (like when there were 19,500 nominal notes in Rhode Island in 1755, when their real value was barely 5% of that), it is an ill-advised decision to pump more worthless currency into the economy so that it, too, can float around and do nothing but push inflation ever higher (like in 1760, when Rhode Island’s 31,500 nominal notes per thousand people translated to an actual worth of just over 1,200). The data contained in Calomiris’ article is as strong an argument as any for the study of economic history. Such fatally flawed policy need not and should not be repeated when the (undesirable) results of such a policy are so readily available for analysis. That old saying – the one about those forgetting the mistakes of the past being doomed to repeat them – sounds clichéd by now. However, a statement doesn’t become so clichéd unless it gets repeated often enough. It probably doesn’t get repeated so often if there isn’t some truth to it. This is such a time. Fiscal responsibility is a must to deal with inflation. Calomiris details governments that did not have it. Current governments should be familiar with these irresponsible ones of the past, lest they develop the same bad habits themselves, and the familiar refrain of some form of “Those who forget the mistakes of the past…” is heard yet again.