America had been in and out of major wars since the 1740s, but seeking its independence by going to war with Great Britain created special economic problems for the colonies. Because Great Britain was the main holder of colonial debts, war with Britain would relieve some debt problems for the colonies; however, the colonies themselves lacked gold and silver to print their own specie-backed currency. The war would also cause America to lose its main trading partner, Great Britain.War would require money to purchase key war materials such as gunpowder. As in past conflicts, American factories could be ramped up to manufacture some war materials, but not everyone supported the war. Furthermore, some merchants, traders, manufacturers, and businesses were suspicious of paper money after the inflationary problems of the 1740s, 1750s, and 1760s. They were leery of beginning to produce war material only to be paid with worthless currency.
The American Revolution would be as much a financial crisis as a political conflict, and victory would be as much financial as military. The colonists, how-ever, realized that continued economic ties with Britain provided no better future either. They came to realize that it was time for economic freedom as much as political freedom. Not surprisingly, the northern urban centers and the southern plantation owners were the centers of support for revolution as they had been the most negatively affected by the British mercantilism that had harmed and constricted the colonial economy for decades.By 1774, the die of war was cast. British soldiers were in the colonies enforcing oppressive regulations and acts of Parliament.
The colonists were organizing a boycott, and the British were blockading major ports. The First Continental Congress met in Philadelphia. A major boycott was being planned; but before that, merchants such as Robert Morris of Philadelphia sent many ships filled with flour to Europe to obtain goods and establish credit before the fighting began. Credit had already been tightened in anticipation of a major conflict with Great Britain.Congress formed the Committee of Safety and filled it with prominent merchants. The committee’s first assignment was to arm 4,500 soldiers. The most critical need was gunpowder, and Robert Morris was given the first government contract. Fulfilling the contract was a high-risk investment of Morris’s ships but the profit would be more than 30 percent, high enough that one shipment could pay for the loss of two or three shipments. American merchants like Morris would find war to be profitable.
Morris was able to establish a European trade that had gun-powder, cannon, and arms flowing into America before the Declaration of 1776. Congress started to print continental dollars and to let contracts for war materiel. The public lacked confidence in paper money, but there was little silver or gold available for Congress to use in the fight.
In late 1775, Robert Morris was a key member of many congressional committees and had procurement responsibilities for the Congress. Many in Congress were upset with the profit margins of the merchants, but these profits brought victory by giving merchants the incentive to risk their money and property against the British navy. British blockades began in 1776 as the war officially started.
Benjamin Franklin was able to get a secret credit deal from France that would prove critical to the American war effort.Morris established a trading network throughout Europe and the colonies. He had, for example, been given sole responsibility for the Virginia tobacco trade. American ships were also sailing in search of British ships to capture for their cargo and money. The economics of war often received little attention but the America victory depended on it. Morris’s network supplied the muskets, gunpowder, blankets, lead, and money to support Washington’s famous Christmas Eve crossing of the Delaware to defeat the Hessians.
During this campaign, the enlistment period was up for many of Washington’s soldiers, and they were due to return to their homes in the next few days. Washington offered a $10 bounty for soldiers to sign up for another year. Morris was able to collect the necessary funds in coin to hold on to the soldiers.It would be a long war and would involve a string of financial ups and downs. Congress considered imposing new taxes to support the war, but that was politically impossible as the war was being waged over British taxes. In 1777, Congress, hoping to borrow money to help pay for the war, approved the issuance of $5 mil-lion in certificates paying 4 percent. There was a lot of competition with individual states, which were issuing their own certificates at the 4 percent rate. The bonds found few takers until Congress raised the interest rate to 6 percent. Still, by the end of 1777, more French loans were needed to pay for the war.
Morris set up an informal bank that sold six-month certificates, and the bank would circulate paper notes to be used as currency. This bank was successful with providing credit for merchants, who preferred bank notes to Continental dollars.As 1780 approached, all forms of paper money that had been issued were highly inflated. The state of circulating currency was a mass of state-issued paper, Continental dollars, and some interest-bearing bank notes. The crisis peaked in 1781 when 10 regiments of Pennsylvania soldiers, tired of the lack of supplies and pay, marched on Congress. This was not an isolated rebellion but was the largest to directly threaten Congress. Congress was printing money to pay for the war with no formal agreement between the individual states to back the money—that is, to accept the responsibility to pay back the debts after the war. Congress decided that the currency and the war financing required central control, and Robert Morris was named superintendent of finance.
The need for unity in taking responsibility for the war spending ultimately resulted in the ratification of the Articles of Confederation.Morris founded a private national bank to issue currency backed by silver and gold. The idea was to attract patriotic investors and French support. Most important, Morris used the bank as a central bank to control the value of the currency. Under the bank, all states would share the war debt. However, Morris planned to use poll taxes, import taxes, excise taxes, and land taxes to pay off the debt. He used a 6 percent interest rate to attract foreign money. Morris also aggressively sold grain to Spain for gold and silver to back his new bank. Many critics looked at Morris as a financial alchemist and could not understand why he was buying back Continental dollars and bank paper while limiting new money. The French were still giving loans to the colonies because manufacturing gunpowder and other war supplies had created an economic boom for them, and France’s earlier investments required them to stay for the long haul or lose everything.Morris also proved creative in saving money on supplies for the army.
He replaced an elaborate system of government agents and army supply officers with contractors who became responsible for collecting and delivering supplies to the army. This also allowed the army to put more troops in the fight. The use of con-tractors was years ahead of its time, but the system worked extremely well in the north. Merchants lined up to bid on contracts at the rate of 10 cents per soldier per day. If supplies were captured by the enemy, the government would cover the loss. The concept would come to be frowned on by the professional armies of Europe, however, because of the lack of control over contractors. The idea would be resurrected by the Bush administration during the Iraq War. The problem of pay, how-ever, was not to be resolved for over a decade.
George Washington had spent years begging soldiers to stay on with little money available for pay. Some of these soldiers still had worthless paper dollars from the French and Indian War. The average soldier was patriotic but the soldiers were also farmers and laborers with families to feed. The years of fighting had taken their toll, and although a military end was in site, inflation and a lack of hard cash were big obstacles to success.
Even Washington’s ultimately successful southern campaign to Yorktown was in jeopardy for lack of funds. But the arrival of the French fleet not only brought troops but also kegs of silver coins for the soldiers’ pay.
The American victory at Yorktown brought money from Holland—the first major loan outside of France. The financial work of Robert Morris had been behind the ultimate American victory, but it would take another 10 years to settle the debt created. The pattern of war, boom, inflation, peace, and recession that had been seen in the past was repeated during the Revolutionary War period and would be repeated in the future.
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