By 1779, the inflation was nearing the runaway stage. "In August 1778, a Continental paper dollar was valued (in terms of gold and silver) at about twenty--five cents; by the end of 1779, it was worth a penny." "Our dollars pass for less this' afternoon than they did this morning," people began to say.8 George Washington wrote in 1779 that "a wagon load of money will scarcely purchase a wagon load of provisions." 9 It was widely recognized that the cause was the continuing and ever larger emissions of paper money. Congress resolved to issue no more in 1779, but it was all to no avail. Runaway inflation was at hand. In 1781, Congress no longer accepted its own paper money in payment for debts, and the Continentals ceased to have any value at all.
A good portion of the dangers of paper money had been revealed, and reflective people were aware of what had happened. Josiah Quincy wrote George Washington "that there never was a paper pound, a paper dollar, or a paper promise of any kind, that ever yet obtained a general currency but by force or fraud, generally by both." 10 A contemporary historian concluded that the "evils which resulted from the legal tender of the depreciated bills of credit" extended much beyond the immediate assault upon property. "The iniquity of the laws," he said, "estranged the minds of many of the citizens from the habits and love of justice. . . . Truth, honor, and justice were swept away by the overflowing deluge of legal iniquity. .. ."11
But the economic consequences of the inflation did not end with the demise of the Continental currency. Instead, it was followed by a deflation, which was the inevitable result of the decrease in the money supply. The deflation was not immediately so drastic as might be supposed. Gold and silver coins generally replaced paper money in 1781. Many of these had been out of circulation, in hiding, so long as they were threatened by tender law requirements to exchange them on a par with the paper money. Once the threat was removed, they circulated. The supply of those in hiding had been augmented over the years by payments for goods by British troops. Large foreign loans, particularly from the, French, increased the supply of hard money in the United States in 1781 and 1782. A revived trade with the Spanish, French, and Dutch brought in coins from many lands as well. In addition, Robert Morris's Bank of North America provided paper money redeemable in precious metals in the early years of the decade.
The Impact of Depression
By the middle of the 1780s, however, the deflation was having its impact as a depression. Trade had reopened with Britain, and Americans still showed a distinct preference for British imports. That, plus the fact that the market for American exports in the British West Indies was still closed, resulted in a large imbalance in trade. Americans made up the difference either by borrowing or shipping hard money to Britain. Prices fell to reflect the declining money supply. Those who had gone into debt to buy land at the inflated wartime prices were especially hard hit by the decline in the prices of their produce. Foreclosures were widespread in 1785-1786. This provided the setting for the demands for paper money and other measures to relieve the pressure of the debts. Some people were clamoring for the hair of the dog that had bit them in the first place - monetary inflation - and several state legislatures had accommodated them.
Though there is evidence that the worst of the depression was over by 1787, if not in the course of 1786,12 paper money issues and agitations for more were still ongoing when the Constitutional Convention met in Philadelphia. In any case, those who had absorbed the lessons of recent history were very much concerned to do something to restrain governments from issuing paper money and forcing it into circulation. There were those who met at Philadelphia, too, who took the long view of their task. They hoped to erect a system that would endure, and to do that they wished to guard against the kind of fiscal adventures that produced both unpleasant economic consequences and political turmoil. Paper money was reckoned to be one of these.
The question of granting power to emit bills of credit came up for discussion twice in the convention. The first time was on August 16, 1787. (The convention had begun its deliberations on May 25, 1787, so it was moving fairly rapidly toward the conclusion when the question arose.) The question was whether or not the United States government should have power to emit bills of credit. Congress had such a power under the Articles of Confederation, and most of the powers held by Congress under the Articles were introduced in the convention to be extended to the new government.
Constitutional Convention Debates
Gouverneur Morris of Pennsylvania "moved to strike out' and emit bills on the credit of the United States'." That is, he proposed to remove the authority for the United States to issue such paper money. "If the United States had credit," Morris said, "such bills would be unnecessary: if they had not, unjust & useless." His motion was seconded by Pierce Butler of South Carolina.
James Madison wondered if it would "not be sufficient to prohibit making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best." (Madison's distinction between bills of credit that may be freely circulated and those whose acceptance is forced by tender laws should remind us that paper instruments serving in some fashion as money are not at the heart of the problem. After all, private bills of exchange had for several centuries been used by tradesmen, and these sometimes changed hands much as money does. They are what we call negotiable instruments, and the variety of these is large. What Madison was getting at more directly, however, was that governments, if they are to borrow money from time to time, may issue notes, and these may be negotiable instruments which may take on some of the character of money in exchanges. But Madison's objection was overcome, as we shall see.)
Gouverneur Morris then observed that "striking out the words will leave room still for notes of a responsible minister which will do all the good without the mischief. The Monied interest will oppose the plan of Government, if paper emissions be not prohibited."
However, Morris had moved beyond his motion, which was for removing the power, not specifying a prohibition, and Nathaniel Gorham of Massachusetts brought him back to the point. Gorham said he "was for striking out, without inserting any prohibition. If the words stand they may suggest and lead to the measure."
Not everyone who spoke, however, favored removing the power. George Mason of Virginia "had doubts on the subject. Congress he thought would not have the power unless it were expressed. Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies [sic], he was unwilling to tie the hands of the Legislature. He observed that the late war could not have been carried on, had such a prohibition existed."
Nathaniel Gorham tried to reassure Mason and others who might have similar doubts by declaring that "The power so far as it will be necessary or safe, is involved in that of borrowing."
Cont ...