 My name is Farley Grubb. I'm a professor of economics at the University of Delaware. Also a research associate at the National Bureau of Economic Research, which I should say built us about anything I have to say. They're not responsible for that. What I'm going to talk about today is a book I have forthcoming that you have the front page of the continental dollar, how the American Revolution was financed with paper money. And in particular, I'm going to focus on two things. One is, how did Congress make all these decisions about how to create and structure this paper money. And then also in the process, how do we know what we know. So let me begin by saying, when the Second Continental Congress got together in May of 1775. Things were running ahead of them in the sense that the battles of Lexington and Concord had already happened just a month before. And it was clear that hostilities had begun. And I believe the second day of the Second Continental Congress, Massachusetts showed up, and they presented Congress with a piece of paper, and they showed them, we're issuing these pieces of paper by the Massachusetts government, Massachusetts Pounds. It was a bond type currency, in order to pay for the militia and the supplies we need to fight the British around Boston. And Massachusetts asked the Second Continental Congress, if they would make this Massachusetts paper money, a currency throughout the other states throughout the other colonies, have the other colonies to collect it as paper money in order to help them fund fighting around Boston. So this was an initial, you know, Congress is thinking we're going to make ourselves. Kind of the national government fighting the revolution here how are we going to fund this how are we going to pay for troops pay for supplies. Massachusetts showed up and said, well, just make our money, a kind of money that's used throughout the colonies. This would be like a currency union. Now all the individual colonies and then states issued their own paper monies. And what Massachusetts was basically proposing was creating a currency union, where the individual states would each have their own paper monies but they would accept each other's paper monies in a kind of currency union fashion. And that would then fund the revolution. So this was a choice they had to face now if you look at what was their decision on this. It's hard to find what their decision was they they didn't do that they didn't create a currency union they didn't propose that Massachusetts paper money be accepted by all the other states. Why. Well, this comes back to how do we know what we know. And one of the primary sources is the journals of the Continental Congress. There are 34 volumes of that that were published. And they have available was published in the early years of the 20th century. You can get it online from a library of Congress but the online version is really hard to use, unless you know these specific dates, or things that you're looking for. Well, I went out and purchased a full set all 34 volumes from a library in New Jersey. That was decommissioning it for over 1000 bucks. They sent it to me. It had never been opened. You had to raise or open the pages in order to read it, but it gives you a chance to read in continuous fashion. All the things going on in Congress. Another thing is, is that the journals to Continental Congress give you the revel, resolutions that were passed. Some of the votes, they give you some of the presentations but they don't give you that deliberations or the decisions, how Congress debated and decided on certain things. And in fact, in the journals of Continental Congress they make clear that the delegates were pledged to secrecy that they would not discuss the deliberations, the debates. All that you'd get was the end decisions. So it's hard to figure out how they chose or decided what they did what they did. Now another primary source besides the journals of Continental Congress are the letters of the delegates to Congress. This, this was compiled by Paul Smith, starting in 1976 into the 1990s. There are 21 or 24 volumes of that I purchased all those and set down and read them. The delegates were really honorable they never talk about the deliberations and the discussions and the arguments in Congress. So it's really hard to figure out how they decided and chose amongst alternatives. Now, for this first choice, do we form a currency union. Do we form all the paper monies of the individual states, or do we do something different. That I ran across when I read Jared Sparks in 1832 published the life of Gouverneur Morris for volume three volumes I think. When you read through the first part of that. He includes letters from Gouverneur Morris was a delegate to the Continental Congress from New York. He includes letters from the New York Assembly to their delegates in Congress. And in those letters. It says, first of all, keep these letters secret don't tell anyone else. Don't tell them what you're doing. But what we want you to do is dissuade Congress from forming a currency. Do not obligate us to accept other colonies or other states paper money. We don't want a currency. Instead, try to get Congress to issue its own paper money, or its own, you know, and obligate us as a group to servicing that new paper money. In essence, that's what Congress did. They didn't form a currency union. They kind of ignored all the paper monies issued by the individual states. And they decided to issue a new money, the continental dollar. Let's go forward forward a couple slides for those continental dollars. So here's a couple pictures of continental dollars from the first emission. And from the second emission. So we get these pieces of paper and this is one artifact that tells you what this stuff was like. But again, this was a new money didn't exist in the individual colonies or any place else. So this is something they had choices over to just figure out how it was going to work. There were 11 separate emissions of continental dollars between 1775 and 1779, when the last emission was done. In total, there was roughly 20 million net new continental dollars emitted. If you look at the emissions here. You can tell a few things one you can tell the denomination. The first one says it's a $20 bill. And then also what is it denominated in this denominated in Spanish mill dollars those are silver dollars so Spanish silver dollars. And all of them are similar in that they have a denomination, they say they're denominated in Spanish silver dollars, but they don't tell you much more. They say and every one of them has a date on it. So the first one here has the date of the first emission in 1775 and it says basically to figure out what this is you have to go to the resolutions of Congress past the 10th of May and 1775. And if you go to each emission, you'll see the same thing it's, you know, you have to go to the resolution passed by Congress on the date printed on the bill. And you have to go back to the journals of the Continental Congress and there is the resolutions that give you all the information about how this is going to work. Now, given that this is a new money, they had lots of decisions to make that we have to maybe infer what it was or why they did it. Because they don't tell us in the journal journals of Continental Congress or in the letters of the delegates. And of course the papers of the Continental Congress. Most of the papers of the Continental Congress I've access to that on microfilm and the dark basement of my library on a manual microfilm reader. Most of the papers are simply accounting tables and things like that they don't present the deliberations of congressman. They come and we say well they have to make a lot of choices they're going to create a national currency. The first thing is, are we going to create a national bond currency, or like a fiat currency. Well, that's pretty simple they didn't know what fiat money was no one had created a fiat money. Like what we supposedly have today, all the kinds of paper money being created by the colonies before the revolution and during the revolution were bond like instruction constructures. In other words, you create this piece of paper, and it was like a bond that would have a payoff at some future date. So in some sense, it was paper money very much like. A bonds bond or a US Treasury bond. That was the kind of paper money that they create. Once you do that once you say we're going to create a bond type paper money we have a lot of choices to make that Congress had to have to engage in. First of all, when would the bond be paid off. What was this maturity date. Well, if you read, if you look at these pieces of paper they don't tell you got to go to the resolutions and the first two resolutions, or the first two emissions of paper money the first two that you see here on the slide, had explicit payoff dates. And those were four to seven years into the future. In other words, this was this money was not redeemable on demand, or next year. It could be redeemed at face value only four to seven years in the future. Exactly why they don't say but we got a little bit of an inkling of this. Congress was an extra legal revolutionary body with no structure. They did things by consent. They had no powered attacks. They had no power to enforce their agreements. They could only govern by consent and voluntary association from the states. So, looking at that since they can't tax they can't get money to pay the stuff off and tell some time in the future and they turn to the states and they say you got to pay the stuff off. We can't do it now because we're in the middle of a war and we can't export our products and you get several statements by people like Thomas Jefferson who say, Well we farmers can't sell their produce we can't export our goods so we can't pay a tax we got to wait till the war is over, then we can pay it off. So, they had to push the redemption or the payoff of these bonds till one they thought the war would be over. Silas Dean delegate from Connecticut said he didn't expect the word to last more than seven years. So I kind of explains the distance. The next thing they had to do was to choose. Do we redeem these bonds at in one year at a point in time or do we spread it out over a year of what I call a window of years. Let's go forward to slides. This is simply a listing of the first two emissions and in those first two emissions they listed when the stuff would be redeemed. So you can see the stuff in issued the first emission 1775, they're going to redeem one quarter of it in 1779 another quarter and 1780 another quarter and 1781 another quarter and 1770. In other words, they created a four year window in which they would redeem the stuff at face value. Now, who's going to redeem it. The individual states are given quotas for them to redeem it and then send it to the continental treasury to be destroyed. And they create a window of years, not a one point. Now, else in the book I talked about how problematic that is in terms of making this stuff a usable medium of exchange, or tradeable money. Clearly, if you're going to get a face off payment in the first year of redemption 1779 that's worth more than getting a payoff in 1782. So, having a four year window makes the money not have the same value depending on what year you think your dollars are going to be redeemed at face value. They create no mechanism to indicate which continental dollars will be redeemed in which year within the window designated. So again that creates a little bit of a problem so you wonder why did they do this. I go through and I show the only sensible explanation I can find for why they created a four year window was to keep annual taxes low enough that people could pay them. So if you stream all three million issued in one year tax would be way beyond what people were used to paying and they probably couldn't pay it, even once the revolution was over. And so by spreading it out over multiple years, you kept tax rates within a feasible range, and thus people could expect that they would be paid at face value, and it would give the system what we call fiscal credibility. That's why we get a window now this was done in the colonial period when the colonies issued paper money. They usually had it redeemed over a window of years not at a fixed point in time. I think only Maryland had a fixed point redemption for its paper money all the other colonies had, you know, four six eight year windows where things were redeemed in equal amount. So that's one kind of choice they had to make and they chose a window of years, not a specific redemption point. The second thing was who's going to redeem this stuff well Congress can't tax anyone they don't have that power. So they turn to the states and they say well states are going to have to redeem this within these within these years. And which states are going to redeem it well they basically looked at a portioning this, roughly based on the population of each state so each state would be given a quota quota, based on its relative population share in the union, and they were expected to redeem this paper money in 1779 and send it to the continental treasury to be destroyed. How a state redeemed the money was left up to the state what taxes could be paid in this money. And at what rates that was all a state issue to be dealt with individually by states. And what they had to do was also decide well, there's a lot of continental dollars are going to be spent in certain states, and some not in other states so when states have to bring in their portion and send it to the continental treasury in some states will have a lot more continental dollars than what they're required to do. Well, what, what the Congress did in its resolution was to say okay. There's going to be a redemption option at the continental treasury. If you get to 1779 and your state has already collected all the continental dollars that are owed but you have some leftover. You can go to the continental treasury and say if you have any gold and silver in the treasury, you have to pay me face value for this continental dollar. That's a species redemption option at the continental treasury. And the thinking here was some states don't have any continental dollars at all because they weren't spent there they weren't spent on troops there weren't battles in those states. Take a state like North Carolina, early in the war, very little continental dollars are spent there. Most of the continental dollars are being spent in Pennsylvania, New Jersey, because that's where most of the wars fought early on. So if, if you're in North Carolina you're saying well, we're required to give these continental dollars to the national treasury we don't have them. So we're going to have to send in gold and silver coins instead. The continental treasury has these gold and silver coins and the people who have an excess amount from other states can come in and claim those. So it rebalances. Who owes what that was well understood that's how individual states rebalanced obligations to pay paper money to state government. So if you had the excess of paper money than what you owed in taxes, you could go to the treasury and cash those in for the golden silver that was paid by citizens who didn't have paper money to pay their taxes but had to pay in so some is well understood by colonists that there would be a species redemption option. So this kind of thing they had set choices to make that another choice to make and that was after the first emission it was clear this was not going to be a one off affair they're going to have to issue more paper money to pay for continuing troops and supplies. So they're going to have more emissions and the question is when we do a next emission. Do we have the same redemption window or do we move it forward in time. So you see in the slide here is the second mission they decided to move it forward in time the redemption there wouldn't start until after the redemption of the first image so it begins in 1783 and runs for four years to 1786. Now, it turns out, how do we know the discussions here. And the letters of the delegates don't tell us anything. But within the letters of the delegates to Congress, Paul Smith included some entries from Richard Smith from his diary. So it's not a letter, but in this diary Richard Smith was delegate to Congress from New Jersey. And he recorded the debates over certain monetary issues that took place. And what he said was with the second emission there was a debate over when it should be redeemed. And James Dwayne delegate from New York proposed that it be redeemed in the same set of windows as the first emission. So from 1779 to 1782. And Richard Smith says, well, we debated that there was a brisk debate over this. And we decided, no, that the redemption would begin in 1783 after the redemption of the first emission so be staggered forward in time. So that tells us that there was a debate over this and there was options. And they decided that they would stagger each emission forward in time in terms of when redemption would take place. Now, they don't say why. But again, when I calculate out the taxes needed. It seems clear that what they were debating or deciding was to keep the tax levels, the same or near the same in order to make this fiscally credible so people could pay their taxes. That if you redeemed the second emission in the same period as the first dimension that would double the taxes needed. And that was beyond what people had ever been used to paying, and they probably couldn't pay it. So it looks like they were thinking about, well, we got to spread these taxes out over time to do this. Now Richard Smith also engaged in a reported on another thing in his diary. And he ended up talking about there was a committee put together after the second emission so after November 29 1776. Another committee to put together and look into what they're doing. And this committee had all the great luminaries on it, Benjamin Franklin and a handful of others, and they came back with a set of proposals. And their proposal was to call in the first two emissions and issue a new emission for the $6 million continental dollars that were even bigger in denomination than what they issued, and that they also pay interest yearly interest on this stuff. And Richard Smith and his diary says this was debated we debated all this and decided we can't pay interest on these continental dollars. Yeah, they're not going to be paid off and tell sometime in the future, but we can't pay yearly interest because we have no interest, or at least that was a thinking. And so we were going to keep these things as what we'd call zero coupon bonds there's no interest paid. It's not like a US Treasury bond. That's more like a US savings bond you buy us savings bond, and the face value you don't get until some future date, but you don't get any interest payments in the meantime, you know. So, they basically debated whether to make this an interest bearing bond, or a non interest bearing bond, and they decided to keep it as a non interest bearing bond. So, why don't we go ahead a slide. This kind of shows Richard Smith was involved in New Jersey paper money. And here we kind of see as New Jersey issued more paper money to fight in this case, the French and Indian War. They staggered it forward in time. As each mission came out they had redemption move forward and forward in time, and they spread each mission had, you know, a two to six year window. They kept moving it forward in time. But if you look down at the bottom line they kind of keep taxes, the amount of taxes needed to redeem this constant. So that was kind of how people thought yeah they're going to issue more of the stuff. It's going to be paid off further and further in the future, so that tax levels would stay pretty constant going into the future so that we could, we could pay these. So this is an example of New Jersey's paper money issued during the French and Indian War. If you look at it, you can see Richard Smith is one of the endorsers down below that's his signature in the middle there. So he knew a lot about paper money his brother, Samuel Smith was the treasure of New Jersey and involved in issuing New Jersey paper money. New Jersey paper money also had the silver content to be paid off printed on it. You know, so it's very much like the continental dollar you print what the silver content would be the resolution tells you some future data be ill that it would be paid off. So anyway, Richard Smith knew a lot about this needs the only person I found commented on a lot of the decisions being made. Let's move forward one more slide. This you can't really read unless you blow it up but Congress issued like how did people know all this Congress issued a broad side for the first submission, June of 1775, and it listed the resolution and in that resolution. They listed list the amount of paper money being issued. It's denominational structured and they also list what each state owes at these future dates starting in 1779. And it lists the species redemption up in other words it lists all the information, and I went through and this broad side besides the broad side being issued. I was picked up by most of the newspapers in the colonies and reprinted in full. And I went through all the surviving newspapers, and at least in the northern states. You know, over half of them printed this broadside people knew what was what was being designed here. Not as often found in some of the newspapers in the southern states. But if you go from the middle states north. This information was out there. In the second emission that gets printed in newspapers as well like the Pennsylvania evening Gazette. And it also gets revealed when they publish the proceeds of the journals the continental Congress. Okay, let's look at some continental dollars here. The other things they had to decide so they had all these decisions to make. They had to decide what the stuff be illegal tender or not. A lot of controversy during the colonial period over making colonial paper monies illegal tender or not. The colonies tended to make their individual paper money, illegal tender, the British parliament didn't like that. They passed resolutions prevent the colonies from making their paper monies illegal tender. The new continental dollar and does the continental Congress decide to make it illegal tender when the issue. No they don't. The initial resolution said nothing about legal tender. Exactly why I don't know. As far as I can tell, Congress may have thought it didn't have the power to make these pieces of paper a legal tender starting, you know, kind of middle of the Revolution. 1777 Congress turned to the individual states and asked them to make the continental dollar a legal tender within each state. Now why they did this again was a little unclear. Initially, most of the continental dollars were being used to pay troops. And they set troop pay in 1775. And soldiers had to take these as pay they had no choice here this is your soldier here's this pay. So you didn't need a legal tender law there. But by the time you get to 1777. Most of the continental dollars are now being spent, not necessarily on troop pay, but on supplies in the marketplace are going to purveyors and vendors and others and they're saying we need food for the troops. We need clothing, we need firearms we need gun we need to buy stuff. And the problem they face there is purveyors in the marketplace could refuse to accept the stuff now we don't want to take it. And I think they had to move turn to the states and so you got to make this a legal tender so we can force people to accept it in payment for the goods that that were where we need for the for the army. An individual states moved and did this and by the time you get to the eighth admission. At the end of 1777. The northern states had made this stuff a legal tender, and that's it could be used as a currency throughout all the states. The last thing I'm going to discuss and it's something that no one's really talked about much is they also had to. This is a new money they had to make a choice over denominational spacing and denominational size. It's a little bit of an esoteric topic, but we're going to create a new money. How do we count in it. What are the numbers going to be. So let's go forward three slides. There we go. I went through and I in the resolutions, they list the denominations that they're going to issue this paper money in. As far as I can tell, so this is a choice they had to make this is a new choice. As far as I can tell, they chose the most bizarre and unusual denominational spacing I've ever seen and any money historically or current effort. What are they doing most these people had been involved in monetary issues and their colonies before the revolution. But if you look at here in terms of the denominations in terms of Spanish silver dollars. Most of the emissions come in in in denominations of a $1 bill $2 bill $3 bill $4 bill $5 bill $6 bill and then $8 bill. And you look across the core that's where most of it is. There's one emission number three they have some fractions of the dollars the only time they do that. And then they have a few issued and larger denominations like a $20 bill or a $30 bill. But this, you know, from one to eight units. So our money today. When people analyze the denominational spacing so we got a one penny a 5 cent, a 10 cent, a 25 cent, a 50 cent than a $1 bill a $2 bill, a $5 bill a $10 bill a $20 bill a $50 bill $100. The spacing there people look at that spacing and say well why do we get that spacing we don't have a, you know, a $3 or $4 or $5 or $6 bill. So it has to do with how you divide things out and how you make change how easy it is to make change with this stuff. In addition, they point out that you tend to focus on units that are easily divided by five and 10. So they'll study this they said well you know it has to do with the convenience of making change and being able to divide by units of five that's why we have a $1 bill a $2 bill than a $5 bill than a $10 bill and a $20 easy division. So trying to figure out this is they don't talk about it anywhere no one says why they did this. In addition, the denominational size and a lot of people haven't looked at this is very large. That lowest denomination and most of these the $1 or the $2 bill. That was a big piece of money. Just to give you an idea, a $1 bill $1 continental bill paid for an entire week's room and board for a soldier in Philadelphia. That's how big it is. So if you're going to use it as money and buy anything other than something really big, you got to make change, but you'd have to make change in something else. You couldn't make change in continental dollars. You had to make change and either state money, or in this case colonial, each state issued his own paper money, or in some kind of barter good or book credit or something like that. It's very difficult to use at a medium of exchange, given that the smallest unit is a really big piece of money. So I spent a lot of time looking at, well, why did they do this, why did they do this is very bizarre they had to choose to do this. And they knew better, unless they had some purpose. And I think and again they don't tell us this we have to deduce it. I think the purpose was most of this is being spent on soldiers pay, especially early on. And what they're hoping is that soldiers are simply hold this money until after the Revolution, and then redeem it at face value that they won't spend it as currency. That's very difficult to spend this currency. Now, when they start buying products in the marketplace, food, clothing for soldiers, then it has to be spent more as money and they have to make it a legal tender but it's still pretty big money. And but when they make it a legal tender, it means you can make change in in state paper monies. So when you make it a legal tender, you're going to spend this continental dollar even this $1 bill is a big piece of money, and they're going to make change say in Pennsylvania pounds or in Virginia pounds, which is in smaller units. And so I think what's going on is they're trying to engage in kind of a market separation where the day to day currency is the individual states paper money. And the continental dollar are these big unit paper monies that people will tend to hold and not spend too long. So I think that's part of what their goal was. Let's go to the next slide. I went through and I looked at all the paper monies from the individual states during the revolution during the first couple years of the revolution. And also the paper monies issued during the seven years war which is a comparable kind of by war problem for money issued during by the individual colonies and I tried to contrast that to the continental doll. What you see down below is the content. This is based on the percentage of units above a certain value. So I put all this into 2012 US dollars to give you some sense. If you look at this one, there's no continental dollars that are smaller than I say a $5 bill today. The continental dollars are in really large units. So it's like walking around with with continental dollars and and they're like $50 bills or $100 bills in your pocket really hard to spend, unless you make change in something else. If you look at the other states, the states issued money in much smaller denominations. New York and Pennsylvania, New Jersey, they have a huge percentage of their money is like below a $10 bill. So it's, it's in small units so it's easy to use and day to day transactions. So I think they were initially trying to enter a world where day to day transactions were in state paper monies. And these continental dollars were like big bond units that people would hold on to. And the only state that was different than this and you can see it in the picture is New York. During the seven years war during the seven years war in New York issued paper money that was really big and not small, no small units and I, and yet during the Revolution, New York issued a lot of small unit paper money. It's something never been noticed before. So I think maybe New York and this delegation and Governor Morris and James Dwayne and so on were saying, Well, we got to issue these big units like what New York did during the seven years war. And since they're doing that during the Revolution, New York can issue small units for trading, but it really makes the continental dollar very different and distinct kind of money. Okay, let's go back to the pictures the continental dollars. There we go. So they had all these choices to make and a lot of the choices have to do with this, you know, richness diary and then deducing what the tax rates might be. Now I'm going to finish up here by saying okay. They initially made these choices. And they're made by the whole Congress sitting as a group. And after the second emission they kind of break out into subcommittees and through the cracks decisions aren't made at all. After the second emission. And then says when emissions, like three through eight are going to be redeemed, not until you get to 1779 when the Congress is a whole city and says oops, we never said when these other emissions are going to be reading. And so individuals have to kind of forecast and guests, based on the patterns they saw in the first two emissions, what, when this future stuff is going to be reading. And if they're guessing farther in the future. That means the stuff is going to slowly lose value present value as the redemption gets pushed farther and farther in the future. So what happens is the continental dollar declines and in present value up through 1779 because the forecast is the future emissions won't be redeemed until 1020 30 years in the future. So like a US savings bond today the current value is very low and it's only 20 years from now that it's going to pay you the present value. And so, by the time you get to 1779 the last emission of continental dollars their present value is down to, you know, around, you know, 1015% of phase value, and that's because the forecast has to do with that future. Now, up through 1779 my by my accounting is that about 77% of congressional spending were these continental dollars. But as they issue more and more of these dollars and the expectation is they won't be redeemed until way out in the future. The first thing power of these dollars is getting lower and lower until they get to the point where they just can't keep doing this, and thus the last they kept the last emission in 1779 and they say we're not going to issue any more than 20 million of this stuff. And that means after 1779 they have no way of funding the revolution. They try a bunch of different schemes but boy they're they're relying a lot on foreign gifts. And it's really the French and the Spanish and the Dutch that come in that kind of save the funding of the revolution after 1779, and some of the work by Robert Morris as superintendent of the finance because the continental dollar basically run its course by 1779 it lost its purchasing power, because any new emissions wouldn't be redeemed until sometime way in the future. I think I've run my course and I'm going to stop here. There's a lot more in the book, a lot more in the book than what I talked about. In particular, there's a lot dealing with how they engaged in thinking about and pricing the continental dollar over time, and how it really didn't depreciate until after 1779. It's current value decline. But people didn't expect a loss of principle the face value they thought was going to be paid off it just wouldn't be paid off until way in the future. So present value was a lot lower. Realize and start thinking oh I'm going to lose principle they're not going to pay off even the face value in the future until Congress started altering the rules in late 1779 and 1780. And then people started thinking, well maybe they're not going to pay off on this at all. And we start getting true depreciation in terms of a loss of expected principle pay off. And that's actually what happened when you get to the 1790 funding act where they say well, we'll convert this into interest bearing bonds but only at 100 to one on the dollar and people thought you're not going to pay off on the principle. And that's where it ended up. I'm going to stop here I'm going to thank you thank the audience for tuning in.