Continental Securities: The First Example of America’s Long Tradition of Lying about the Economy

Well Well, with all the hubbub in the markets and the economy and the $700 billion bailout, there is a certain narrative that I keep hearing. Namely, that the whole problem is greed and all the government is really doing is lying to us about the situation so they can snap up the keys to the banks. While I would question the whole “snapping up the banks” part (only because they do need more oversight), but the “lying to us about the situation” is not only true, but has been apart of how the American economy has worked since before America even existed.

Let us read from the Smithsonian website:

“Small quantities of gold and silver Spanish American coins came to British America through trading in the Caribbean. The most common of these were silver eight-reales pieces, the “pieces of eight,” that parrots squawk about in pirate stories. They were also known as Spanish dollars. The term dollar, of German origin, was applied to coins of any country that carried the intrinsic value of their weight in silver. Even before the Revolutionary War, some colonies issued paper money based on dollars rather than British pounds sterling.
Paper money first appeared in America in 1690, when the Massachusetts Bay Colony issued bills to pay soldiers engaged in campaigns against the French in Canada. This was an emergency measure, but it turned out to be a solution to the long-term problem of building an economy without large reserves of precious metals. Eventually, all of the other colonies issued their own bills.

This money never had a uniform value. A pound note from one colony might not be worth a pound in another colony. For that matter, it might not be worth a pound anywhere – ; some colonies printed far more paper money than they could ever redeem.

So what does that mean? Well, it basically means that the governments of the colonies were happy to lie about the relative value of the paper currency being issued, knowing full well that the people trading with it were actually getting screwed. But to them it was better to make the economy a sham that to circulate British pounds. But don’t take it from me, again from the Smithsonian:

The monetary system in the colonies was “notable because it was based on thin air,” says Smithsonian numismatics curator Richard Doty in his book. To make up for the lack of currency, the colonists would “replicate and create, try, reject, and redesign every monetary form ever invented anywhere else.”‘

A intresting example of this is the so-called “Continental Securities.” These were paper bills curculated by the Continental Congress to finance the Revolutionary War. The notes were backed by the “anticipation” of tax revenues. Without solid backing and easily counterfeited, the notes quickly became devalued, giving rise to the phrase “not worth a Continental.”

This monetary meltdown affected people in dramatic ways, not the least of which was Haym Salmon, one of the big financial backers of the Revolution. In 1781 when the war chest of George Washington and the Congress ran dry, Washington determined that he would need about $20,000 to continue the war effort. When told that Congress was out of money as well, Washington gave just one order, “Send for Haym Salmon.”

Unfortunatly, Haym’s investment didn’t work out so well:

His estate showed that he owned approximately $354,000 of Continental securities, but inflation had reduced the value of this substantial amount owed him to a mere $44,732. Against this asset, he owed $45,292. His estate was insolvent! Haym Salomon had died in bankruptcy.”

In fact, a figure no less illustrious than Ben Franklin was one of the most vocal supporters of the worthless paper money of the colonies because he felt that they really had no choice (since the colonies could not produce gold and silver on their own) even though he knew full well the risks…

From letters written in April 1787:

Paper money in moderate quantities has been found beneficial; when more than the occasions of Commerce require, it depreciated and was mischievous; and the populace are apt to demand more than is necessary”

With that quote I wonder what ‘ol Ben would have thought of this:

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~ by herodotuswept on October 3, 2008.

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