It’s one thing to make speeches about declaring independence, or to assemble militias and discuss battle tactics against the enemy.
It’s quite another thing to pay for it all.
So how do you pay for a war that no one expected to last eight years?
Great Britain possessed world-wide colonies, tremendous wealth, the ability to tax its subjects, and excellent credit ratings in the well-established world credit market. But how did the fledgling American confederation of 13 states and a weak Congress go about funding their own rebellion?
History books and many teachers will imply that the French money and supplies before and after the Battles of Saratoga made all of the difference in America winning the war. While the French assistance certainly helped, it actually did a disservice to the Americans who basically paid for their own rebellion… the merchants, suppliers, planters and growers, average families, and of course the soldiers of the Continental Army. Let’s look at the total picture of how the War for Independence was paid for – 100 percent of which was paid for by Americans themselves through taxes, bonds, IOUs, and by paying off all foreign loans.
Estimated Funding Sources: War for Independence (in millions of pounds sterling)
Glossary of terms to know for this article
From 1775 to 1783, America used a variety of methods to pay for the war; some of which would seem very familiar to us even today. Here they are in order of percent contributed to the war effort:
1 // The 13 States Printed Their Own Money (39%): We know that the thirteen colonies/states acted as individual sovereign countries in their time. That included the right to tax its citizens and to print money. So to pay for the food and supplies of its own militias, the states printed lots of money. But because taxes were such a hot button, for obvious reasons, the decision to tax residents to give value to the new currency was put off to sometime in the future (most states started in 1777). Some states also confiscated and sold Loyalist properties. But taxes also served as a mechanism to take currency out of circulation, therefore preventing inflation and keeping prices stable. That technique worked for a while until, as discussed below, the value of the federal Continental dollar started a tailspin and the confidence of all printed money started to drop.
2 // Congress Printed Its Own Money (28%): Since Congress didn’t have the power to tax and there was no organized national bank, printing money was the primary source of funding Congress used during the Revolutionary War starting in 1775. And it printed a lot of money – the printing presses worked non-stop from 1775 to 1781! Lacking precious metals to mint coins, Congress printed paper notes that represented the equivalent value in specie. All types of weird denominations of a dollar were created, like “One Third of a Dollar” and so on. The two biggest problems with the so-called Continental dollars were that 1) there were so many printed and out there in circulation and 2) that they weren’t backed by specie (which is like gold or silver) even though the dollar’s face value said “This Bill entitles the Bearer to receive ONE Spanish milled DOLLAR or the value thereof in Gold or Silver…” But that wasn’t true at all. The dollars were actually backed by nothing and as the war dragged on, people figured that out, which is why the term “Not worth a Continental” came into being. The never-shy Mercy Otis Warren called the dollars, “immense heaps of paper trash.” The printed currency also carried such snazzy sayings as “Mind Your Business,” “Death to Counterfeiters,” and “A Lesson to arbitrary Kings, and wicked Ministers.” Each piece of currency was personally signed and numbered by an official to make them look more valuable and to discourage counterfeiters. But after a while, counterfeiting became a very serious problem with Continental dollars and, as a sabotage tactic, the British became pretty good at it. In fact, some eagle-eyed citizens got to the point where they could spot counterfeit dollars because they looked too good.
It turns out that as the war waged on, the confidence in the Continental dollar started dropping like a rock because they were so numerous and backed by nothing. After all, it is thought that in 1775 there was only $12 million in specie in the whole 13 colonies and none of it was in Congress’s hands. Since Congress printed $12 million in Continental dollars just getting the presses going and the ink flowing, you could see why a currency crisis was in the works. In all, during the Revolutionary War, Congress printed almost $242 million in face value Continental currency. The true specie amount was about $46 million, as shown in the above chart.
3 // The 13 States Issued Their Own Debt Certificates (14%): Most of these were like state-issued war bonds. Also called “bills of credit,” they were “interest bearing certificates” with the buyer putting up their land as collateral. The patriotic buyer would then (or so they were told) get their principal back plus interest – assuming America won the war! As support for the common defense, states would also issue these as “requisition certificates” to vendors or suppliers to pay for food and supplies if the Continental Army happened to be camped in their state.
4 // Congress Issued Its Own Debt Certificates (10%): These certificates were also called (in politically correct verbiage of its time) “involuntary credit extensions” because they paid no interest and their value, tied to the Continental dollar, dropped like lead daily. These were mostly given out by the Continental Army quartermaster corps to citizens when buying or confiscating materials. In the last two years of the war, the Continental Army soldiers were also paid in these, so you can see why there was much grumbling – and mutiny. Some discharged soldiers sold their certificates to investors for literally pennies on the dollar.
5 // Congress Received Loans from Europe (6%): Before Saratoga, France had been smuggling small amounts of gunpowder and supplies to us through a dummy corporation. Although there was some bickering about whether these were loans or gifts, America tried to repay France in tobacco and IOUs. After the victory at Saratoga, from 1778 thru 1783, Ben Franklin and Silas Deane negotiated with France to give America six huge loans which just about broke the French Treasury. Following Yorktown, the world credit rating for England fell while the rating for America shot straight up. So in Amsterdam, John Adams easily raised $2.8 million for America at a favorable 5% interest rate (signifying low risk), and another $2.2 million from Dutch investors and the Spanish Crown. Some of the loans were used to keep the Continental Army intact in 1782-1783, but a lot of the money was spent in Europe to buy military supplies or to just make interest payments to keep America’s credit door open. With the signing of the peace treaty, even British investors wanted in on loaning America money!
Occasionally it’s brought up that the United States completely defaulted on its loans from France. That’s not entirely true. In 1785 the cash-strapped Congress halted interest payments to France and defaulted on scheduled payments due in 1787 because the states were forwarding so little money. But with the establishment of the Constitution and the order that it brought to American finances, Secretary of the Treasury Alexander Hamilton was able to take action. “In 1795, the United States was finally able to settle its debts with the French Government with the help of James Swan, an American banker who privately assumed French debts at a slightly higher interest rate. Swan then resold these debts at a profit on domestic U.S. markets. The United States no longer owed money to foreign governments…”
6 // Congress Sold Bonds to Wealthy, Patriotic Americans (3%): Similar to World War II savings bonds, these war bonds paid about 6% interest – again, assuming America won the war. Although some bonds were sold in Massachusetts, Connecticut and Pennsylvania (the possible site of the new government if America won the war), these bonds weren’t a huge success. For one, private loans paid more interest and if defaulted upon, could at least be recovered in an English court even if America lost. And two – well, a lot of the wealthiest Americans were Loyalists. The bonds were a bet that America would win the war. But if America lost, it was thought that just holding the bonds could indicate to the victorious British Crown that you supported the traitors. Not a good thing.
Downward Dollar Plunge and Near Bankruptcy
In tag team timing, from 1777 – 1780 Congress first took the lead in financing the war. By 1780, the states had their financial plans working well enough that they took the lead from 1780 – 1783 while Congress completely reorganized its financial house. It needed to! In July 1777, a Continental dollar had already dropped two-thirds of its value. It stabilized a little with the French alliance, but then again started a downward spiral. By 1780, Congress revalued its dollar as officially only one-third of its 1775 value. But the new and improved dollar still plummeted to the point where, by 1781, it took 167 dollars to equal the previous one dollar. So what did Congress do? They couldn’t tax, so they printed even more dollars to be able to buy an ever-shrinking amount of goods and services. Prices were skyrocketing with severe depreciation and hyperinflation happening everywhere. States were still demanding that taxes be paid. It was a crisis, which threatened the existence of the new republic.
By 1781 and in desperation, Congress put strong-willed financier and Congressman Robert Morris into the new office of Superintendent of Finance. Some of the first emergency actions Morris took were to devalue the dollar, and then he squeezed about $2 million in specie from the states. But in a very controversial move, he suspended pay to the Continental Army enlisted soldiers and officers. Instead, he decreed that the army be paid in debt certificates or land grants until the peace treaty was signed. In 1782, the new consolidated national debt was so enormous that Morris suggested Congress only pay the interest on the debt, saying (this may sound familiar in today’s world) “… leave posterity to pay the principle.”
Morris is a much checkered personality in American history and because of his bad personal land speculations leaving him owing $3 million, he ironically spent 1798-1801 in debtor’s prison. But it should never be forgotten that more than once Morris used his own fortune or credit to keep the country afloat during its worst hours. “My personal Credit, which thank Heaven I have preserved through all the tempests of the War, has been substituted for that which the Country has lost… I am now striving to transfer that Credit to the Public.”
Economic Aftermath of the Revolutionary War
America’s Revolutionary War was very expensive. Not only did it sap economic resources in the country, the depreciated currency acted (as wise Ben Franklin put it), “among the inhabitants of the States… as a gradual tax upon them.” And this was to a people who had been used to a life of light taxation before hostilities broke out. In the “be careful what you wish for” department, two economic historians speculated, “… that Britain was probably a ‘victor’ in defeat, for, after independence, U.S. taxes rose precipitously. From 1792-1811, U.S. per capita tax rates were over 10 times higher than the imperial taxes levied by the British from 1765 to 1775.” But we know it wasn’t about taxes alone. It was about liberty and rights. “The colonists paid a high price for their freedom.”
The predictable recession broke out following the Revolutionary War, with data showing the “period of contraction” (a.k.a. recession) running consecutively from 1782-1789. Indeed, for a point of reference we all can relate to, financial history professors McCusker & Menard point out that during the Great Depression (between 1929-1933), per capita GNP fell by 48 percent. It’s estimated that those same economic markers (between 1775-1790) fell by 46 percent.
The British war cost added a new national debt of £250 million onto their huge debt left from the French and Indian War of £135 million. The new debt carried an annual interest payment of £9.5 million alone. The loss of the war brought down the Lord North government within the halls of Parliament.
The Spanish war costs were pretty marginal reflecting their cursory involvement in the whole thing. It totaled to about 700 million reales, which Spain covered by taxing their colonies and issuing royal bonds.
The French war cost equaled over 1.3 billion livres in loans and supplies to America, plus the huge extra expenses to equip and send the French army and navy to America, and to attack British outposts around the world. Added to the 3.3 billion livres France owed from the French and Indian War, the resulting economic chaos eventually led to the French Revolution, which brought down the heads (literally) of the monarchy and nobility.
The American war costs, as shown in the above table, totaled approximately £165 million in 1783 values. It’s always tricky to convert 200 year old currencies gathered using imprecise war records – but that amount could roughly add up to about $21.6 billion in 2010 dollars.
In America, the chaos of funding the American Revolution glaringly showed the weaknesses in the Articles of Confederation and a weak central government. George Washington had known all too well the many times in war he had begged for any money or supplies from a helpless Congress or indifferent states.
The establishment of the Constitution in 1787 brought fiscal stability to America, which was near collapse just after it had earned and paid for its liberty. It brought order to the national finances. It created a common market, common currency, it regulated trade and commerce, consolidated and funded the national debt, established a national bank, and gave Congress the authority to tax.
Okay, so maybe “gave Congress the authority to tax” wasn’t such a good idea.
Thanks to the office of the Historian of the U.S. Department of State and its Special Assistance group for supplying valuable source material regarding the American payment of foreign loans during the post-war period.
 The table has been produced based upon “Ferguson’s estimate of the total cost of the war”: Edwin J. Perkins, American Public Finance and Financial Services, 1700-1815 (Columbus, OH: Ohio State University Press, 1994), 103, Table 5.4. Economic historians will recognize the invaluable research and work of two individuals in particular that this article draws from: Merrill Jensen, and especially his graduate student E. James Ferguson, who in the 1950s and 1960s, developed, tested, and published much of the statistical work that is still used today in the study of the Founding Era finances. Edwin J. Perkins is another good authority.
 Proceedings of the Twenty-First Continental Congress of the Daughters of the American Revolution, 21 (1912), 799.
 Mercy Otis Warren, History of the Rise, Progress and Termination of the American Revolution interspersed with Biographical, Political and Moral Observations, II; Lester H. Cohen, ed., (Indianapolis, IN: LibertyClassics, 1988), 287.
 To be exact – Congress issued $241,552,780 in face value Continental currency during the Revolutionary War. Eric P. Newman, The Early Paper Money of America. 3rd edition (Iola, WI: Krause Publications, 1990); 16. E. James Ferguson puts this face value total at $227.8 million which includes the 1780-81 new emissions, saying “The actual sum in circulation may never be known” E. J. Ferguson, The Power of the Purse: A History of American Public Finance 1776-1790 (Chapel Hill, NC: University of North Carolina Press, 1961), 43. Counterfeited currency was also in circulation.
 U.S. Department of State – Office of the Historian; Milestones: 1784–1800, “U.S. Debt and Foreign Loans, 1775–1795”, https://history.state.gov/milestones/1784-1800/loans; (accessed January 12, 2014).
 Jack P. Greene and J.R. Pole, eds., The Blackwell Encyclopedia of the American Revolution, (Cambridge, MA: Blackwell Publishers, 1994), 364, Table 1. Taken from E. J. Ferguson, The Power of the Purse: A History of American Public Finance 1776-1790 (Chapel Hill, NC: University of North Carolina Press, 1961), 32.
 C.P. Nettles, The Emergence of a National Economy 1775-1815, (New York: Holt, Reinhart and Winston, 1962), 33. In Jack P. Greene and J.R. Pole, eds., The Blackwell Encyclopedia of the American Revolution, 370. Morris spells “principal” as “principle”.
 Robert Morris to Benjamin Harrison, 15 January 1782, in The Papers of Robert Morris, 1781-1784, E. J. Ferguson, ed. In Charles Rappleye, Robert Morris: Financier of the American Revolution, (New York: Simon & Shuster, 2010), 259.
 Jared Sparks, ed., The Works of Benjamin Franklin…with Notes of a Life of the Author, II, (Boston, MA: 1836-1840), 424. From John J. McCusker & Russell R. Menard, The Economy of British America 1607-1789, (Chapel Hill, NC: The University of North Carolina Press, 1991), 373.
 Lance Davis and Robert Huttenback, quoted in Edwin J. Perkins, The Economy of Colonial America, Second Edition, (New York: Columbia University Press, 1988), 208.
 McCusker & Menard, The Economy of British America 1607-1789, 374.
 McCusker & Menard, The Economy of British America 1607-1789, 63, Table 3.4.
 McCusker & Menard, The Economy of British America 1607-1789, 373-374.
 This computation converting from 1783 sterling pounds (£) to 2010 dollars ($) was done converting “real value” over time. The generally-accepted Web site used was MeasuringWorth.com http://www.measuringworth.com/ (accessed January 12, 2014). Edwin J. Perkins in The Economy of Colonial America (Appendix) computed $14.9 billion in 1985 real value dollars.