When the Second Continental Congress met in June 1775, they were not prepared for what they found. Several months earlier on April 19 the war of words with Great Britain had become a shooting war. The individual colonies found themselves at war with one of the greatest military powers of the age. It would fall on the delegates of the Continental Congress to lead them the best they could with a strong united voice that would see them through the crisis, or maybe not. Congress was not really prepared to become a governmental body. These men who were sent to discuss issues and send petitions suddenly found themselves placed in the position of having to create a united front from thirteen separate entities. They would be tasked with coming up with a military response, building an army, and finding some way to pay for all of it. They were, to say the least, not always up to that task. While many of the men that served in congress had experience running business or even colonial government, the task set ahead of them was more than they had ever done before. In many of the tasks set before it, Congress either failed or nearly failed, nearly causing the still birth of the great republic.
Nowhere did Congress fail as abysmally as it did in trying to create some way to generate money that would support the war. There were several sources they would look to in an effort to pay the bills. Getting support from the states and foreign powers was one path they took. Steps were even taken to try and build a real economy that would see them through the war and perhaps thereafter. Each came with its own set of difficulties.
From the States
Not even a week after starting his term in Congress, James Madison wrote a letter to his friend, mentor and governor of Virginia, Thomas Jefferson, where he summed up what he found.
From a lack of adequate Statesmen, [Congress is] more likely to fall into wrong measures and of less weight to enforce right ones, recommending plans to several states for execution and the states separately rejudging the expediency of such plans, whereby the same distrust of concurrent exertions that has dampened the ardor of patriotic individuals must produce the same effect among the States themselves.
The Congress was in a very unique position when it came to the states. While Congress was acting on behalf of the thirteen former colonies, they had no power to compel them into action. As such, no matter how much Congress needed money or supplies, they could not simply take them from the states and they had no power to create any sort of national tax to raise revenue. It was this lack of being able to raise revenue that caused Congress to decide on a paper-based currency for their use.
While the states themselves did have the power to impose taxes, many chose not to. It was difficult to fight a war that started because of taxes and then turn around and impose new ones on the people. Congress would have to rely on most of the support for the army being provided by the states themselves.
What had started as a Congress that spoke with one voice for all the colonies had been defeated by its thirteen partners, each of whom now stood as if on their own. In effect, after a brief period of actually having power, Congress was rendered subservient to thirteen masters. This lack of authority placed the nation and the war on seriously shaky ground.
Part of the problem came from the fact that as the war went on, the reputation of Congress was so threadbare that many of the states preferred to put their resources into maintaining their militias rather than supporting the “national” army. This desire to ensure their own safety over that of the United States was very hard to overcome. Militias had the pick of the food and supplies from each state and often the Continental Army would find itself competing with the militias for recruits because the states could pay more. More importantly they could actually pay. Congress had a very difficult time actually paying their soldiers, something that would have horrible consequences as the war progressed. To add insult to injury, when the Continental Army did find itself in a position where militia units could be useful, they were forced to provide for their supplies out of their dwindling stocks. Many, many times General Washington was forced to send sorely needed men in militia units home because they could not be fed from Congress’s meager supplies.
As stated, state militias often could and would pay recruits more than Congress was able to. This not only had the effect of the Continental Army constantly searching for men, unable to fill the ranks, but it also led to another sort of drain. As men and officers fulfilled their enlistments in the Continental Army, they would go home, rest and recuperate and instead of re-enlisting would join their state militias because the pay was better and actually existed. This sort of dichotomy had a very strange effect, an almost good and bad. The bad was that not only could the Continental Army not fulfill its quota for new troops, it could not keep the ones it had. The good was that as the war progressed, the militias were able to take advantage of this influx of talent and become a much more effective fighting force. The victories and pseudo victories in the south later in the war, such as Cowpens and Guilford Courthouse saw the benefits of this talent drain into the militia.
If anything could be said to have come from this conflict with the states it is that the idea of a confederation was shown to be a shallow husk. Washington himself, in the years after the war, would be one to take up the cause of a strong central government. Without the experience that he had in the war, dealing with what amounted to fourteen separate governing bodies, he may have been one of the many that saw a strong central government as anathema to what the revolution had been fought for. After all, the colonists had rebelled from just such a structure and if left to their own devices would not have willingly moved back towards it.
Numerous times, Congress attempted to raise money from the states by issuing resolutions for the raising of men, money and supplies. As late as 1781, Congress was still passing these resolutions:
Resolved, That it be recommended to the several states to lay taxes for raising their quotas of money for the United States, separate from those laid for their own particular use, and to pass acts directing the collectors to pay the same to the commissioner of the loan office, or such other person as shall be appointed by the superintendent of ﬁnance, to receive the same Within the State, and to authorize such receiver to recover the moneys of the collectors, for the use of the United States, in the same manner, and under the same penalties, as state taxes are recovered by the treasurers of the respective states, to be subject only to the orders of Congress, or the superintendent of ﬁnance.
Notice the wording of the resolution. Congress could only recommend that the states carry out the actions in the resolution. They could choose not to and most did. At the time of that resolution being passed, the southern states were occupied, the middle states (New York specifically) played host to a large British army embedded into New York City and even though the French were becoming more involved, the states were more concerned with providing for themselves.
As Congress struggled in getting cooperation from the states, the value of continental currency collapsed. The only way out would have been for the states to cooperate. In a debate on the floor of Congress, this was discussed and laid out by one delegate.
To raise the value of our paper money and to redeem it, will not, we are persuaded, be difﬁcult, nor to check and defeat the pernicious currency of counterfeits impracticable; both require a far less share of public virtue and public vigilance than have distinguished this arduous conﬂict. Without public inconvenience or private distress, the whole of the debt incurred in paper emissions to this day may be cancelled by taxes; it may be cancelled in a period so limited as must leave the possessor of the bills satisﬁed with his security.
For want of cooperation from the States, the national economy very nearly became still born.
It did not take Congress very long to realize that they would need the help of foreign allies if they were going to defeat the British. The colonies themselves did not have the resources to create the war machine necessary. Immediately, Congress dispatched agents to Europe to start rounding up as much support as possible. The early search for support was difficult as most European powers were not prepared to go to war with the English over what seemed like an internal struggle. This was one of the reasons that the push for independence was so important. Once Congress passed the independence resolution and declared themselves free of Britain, the task became much easier. In October 1776, Congress sent the following instructions to the agents in France.
You shall endeavor, when you ﬁnd occasion ﬁt and convenient, to obtain from them a recognition of our independency and sovereignty, and to conclude treaties of peace, amity and Commerce between their princes or states and us, provided, that the same be not inconsistent with the treaty you shall make with his most Christian majesty, that they do not oblige us to become a party in any war which may happen in consequence thereof, and that the immune ties, exemptions, privileges, protection, defense and advantages, or the contrary, thereby stipulated, be equal and reciprocal. If that cannot be effected, you shall, to the utmost of your power, prevent their taking part with Great Britain in the war which his Britannic majesty prosecutes against us, or entering into offensive alliances with that king, and protest and present remonstrance’s against the same, desiring the interposition, mediation and good offices on our behalf of his most Christian majesty, the king of France, and of any other princes or states whose dispositions are not hostile towards us. In case overtures be made to you by the ministers or agents of any European princes or states for commercial treaties between them and us, you may conclude such treaties accordingly.
From the early days of the conflict, Congress put itself into the position of dealing with potential foreign allies in order to gain the supplies and funds that it needed to carry out the war.
In 1777, John Adams took the time to lay out for his wife the possibilities of getting more loans from Europe to help fund the war:
As to America, in the present state of affairs, it is not probable that a loan is practicable, but should it appear evident that we are likely to support our in dependency, or should either France or Spain acknowledge it, in either of these cases, we might have money, and when it shall be seen that we are punctual in our first payments of the interest, we shall have as much as we please.
In the same letter he breaks down all the possible sources of potential revenue that the Congressional agents in Europe were hoping for. While the issuance of loans was a trickle into the treasury, many foreign powers projected interest in potential commercial treaties. None, however, would move before a major power officially recognized the United States.
While the idea of asking for help from France, the natural enemy of all Englishmen, stuck in the throats of many of the delegates, it was necessary. Congress appointed Silas Deane of Connecticut to that task and he was very successful in that endeavor. At first his mission was a secret one, as the goal of the revolution was still up in the air. He could not be seen requesting aid from the French and for their part the French government could not be seen supplying the rebels for fear of ending up in a war with England.
A system of covert aid was set up with the help of the French playwright Beaumarchais, who was acting with the wink and nod support from the French court. Beaumarchais used much of his own money to set up a fake merchant company that would provide arms, powder and other military supplies to the Americans. This material would be “purchased” from the armories of the French Army under the table. For his part Beaumarchais and Deane arranged a fair trade, military stores for tobacco and other goods.
Such an agreement was an incredible boon to the Congress and it was always struggling to come up with hard currency that deals like this would normally require. Beaumarchais used his profits to purchase more stores in return for more crops and this cycle helped supply the Americans and ostensibly keep the French king’s hands clean. Unfortunately Congress had a knack for making such easy things incredibly difficult.
The difficulty came based on false information provided by Arthur Lee, Congress’s appointed representative to Prussia. Lee spent time in London and Paris feuding with not only Silas Deane but Benjamin Franklin. In a series of reports to Congress Lee was able to convince them that the military stores Beaumarchais was providing were a gift to the new country and urged them to not pay for the “gifts.”Lee was lying and did much to undermine his “rivals” and to make himself look good to the Congress. Being more of a political animal than a diplomat, Lee had many supporters in Congress who fell for what he said. Eventually his duplicity was uncovered, but the damage was done.
Over the course of the agreement and prior to the official alliance, Beaumarchais had arranged for almost $46 million in goods, partially financed from his own pocket and partially from the French court, to be sent to the United States to support the war. After many years of fretting and delay and promise of some sort of payment, Congress never sent one shipment of tobacco or anything else to Beaumarchais as payment and eventually the entire scheme came crumbling down. For his pains, Beaumarchais gained nothing and lost everything.
As for the French, the amount of support they provided to the Americans was one of the worst kept secrets on the continent. When word got around of the American victory at Saratoga, which led to the surrender of an entire British army, France was ready to come out of the darkness and support the Americans with men, troops, ships, supplies and, most importantly, money. Millions and millions in hard currency were loaned to the United States during the war. Eventually Spain and the Netherlands would also provide loans to the new nation in an effort, more than anything, to cause injury to Great Britain. How did Congress repay these loans? They did not. In fact, France spent so much money on the Continental Army that it caused economic problems that only a few years after the war, the French found themselves in a revolution of their own.
A question that was hotly debated in Congress was the amount of trade that should be conducted with other countries during the war. The more ships they sent out for trade, the more revenue they could generate to pay for the war, but there was a catch: fighting against one of the largest navies in the world meant losing many ships, many goods and much revenue. As Roger Sherman of Rhode Island said in the course of a debate on the subject on February 16, 1776, “I fear we shall maintain the armies of our enemies at our own expense with provisions. We can’t carry on a beneﬁcial trade, as our enemies will take our ships. A treaty with a foreign power is necessary, before we open our trade, to protect it.”
The support that was gained from the foreign powers, especially France, was indispensable. It allowed the army to fight and survive and kept the nation going. While Congress and its committees did much to secure what support they could, it was eventually the spirit and victories of the army that created an atmosphere that allowed other nations to want to invest in the cause. Washington’s victories at Trenton and Princeton, along with those of Gates and Arnold at Saratoga, did more to help the cause with foreign powers that Congress ever did. As far as diplomacy goes, because of the distance involved the agents in Paris often were left to their own designs and as such were able to arrange for an incredible amount of support, much of which was done without any input from Congress. In fact it could be said that thanks to men like Lee, Congress really had very little control over the support that was gained from across the sea.
Build an Economy
One of the best things that Congress could have done to provide the men and material necessary to carry on the war effort would have been to create and maintain an economic system that instilled confidence in the people of the country. This confidence was lacking and only became worse as the war raged on. In December 1778 General Washington observed to a member of Congress that action had to be taken to strengthen the economy:
That party disputes & personal quarrels are the great business of the day whilst the momentous concerns of an empire— a great & accumulated debt—ruined finances— depreciated money— & want of credit (which in their consequence is the want of everything) are but secondary considerations & postponed from day to day—from week to week as if our affairs wore the most promising aspect
This lack of confidence found several outlets. The decision was made early on in the conflict that Congress would carry out all of its financial business using paper scrip that Congress itself produced. Paper currency is only as valuable as what stands behind it. In the best case scenario, the paper is backed by hard specie, such as gold. As long as there is gold available to back up the currency, the currency has value. The worst case scenario is when there is nothing backing up the value of the currency, except for the confidence of the people that it can be exchanged. Congress based its currency on the promise that once the war was over, it would be able to generate enough revenue to pay off the scrip. In effect, they attempted to fund the war with promissory notes, the value of which was almost totally dependent on how the fortunes of war were going for the American side. As the Continental Army faced defeat after defeat and the war dragged on, the value of congressional scrip dropped and dropped. This created a vicious circle where the army could not be supplied or presented in numbers to win battles, but by not winning battles, there was not enough confidence to support the currency and as such, the currency would lose value making it more difficult to field and fund the army.
In December 1776, George Washington began planning his foray against the Hessians stationed in Trenton. He knew that to do it he would need men. The problem was that at the end of the month the majority of his army had expiring enlistments. Washington asked for volunteers to extend their enlistments for several weeks until replacements could be found. None came forward. Finally he offered ten dollars each if they would stay on six more weeks. This was enough for many, but they would not accept the Continental currency for their bounty; instead Washington promised to pay them out of his own fortune. Such was the confidence in congressional scrip even that early in the war.
As the value dropped, Congress had no choice but to print more, driving the value down even further. By 1781 the exchange rate was $225 to $1 ($225 in paper money for $1 of hard specie). This was at a time when the average Continental Army private made $5 a month in Continental scrip, when they were paid at all.
Joseph Plumb Martin, a soldier from Connecticut, relayed in his memories a story where to earn a little extra (having not been paid in many months) he assisted in a roundup of runaway slaves that had fled to British service after the siege at Yorktown in 1781:
the fortune I acquired was small, only one dollar; I received what was then called its equivalent, in paper money, if money it might be called, it amounted to twelve hundred (nominal) dollars, all of which I afterwards paid for one single quart of rum; to such a miserable state had all paper stuff, called-money- depreciated.
This devaluation meant that many people who had goods that Congress and the army needed would not take the paper money. Instead they were more than happy to sell their goods to the British army who paid in specie. While it would be easy to hold these people in contempt for not supporting the Congress or at least the Continental Army, it should be remembered that these people had families to support regardless of who won the conflict. Faced with the choice of taking scrip or selling to the enemy they really had no choice. As the war progressed the Continental Army had to adapt to these issues. At first it was the desire of Washington that any supplies taken from the people be paid for with specie. As the supply of specie dried up the Continental scrip became the preferred method of payment. As the value of the scrip bottomed out the army was forced to simply take what was needed, pillaging their own people. Of course they were gave receipts, which were as worthless as the scrip.
In August 1777, John Adams addressed the specter of scrip-driven inflation in a letter to his wife, “We are contriving every way we can to redress the evils we feel and fear from too great a quantity of paper. Taxation as deep as possible is the only radical cure. I hope you will pay every tax that is brought you, if you sell my books, or clothes, or oxen, or your cows to pay it.” Congress had no answer to problem that they created and if the men of Congress were starting to panic, the people on the streets were beginning to feel it even worse.
By 1781, they had had enough and in the May 12 edition of the Rivington’s New York Gazette the following story took over the front page.
The Congress is finally bankrupt! Last Saturday a large body of the inhabitants with paper dollars in their hats by way of cockades, paraded the streets of Philadelphia, carrying colors flying, with a dog tarred, and instead of the usual appendage and ornament of feathers, his back was congress covered with the Congress’ paper dollars. This Bankrupt. example of disaffection, immediately under the eyes of the rulers of the revolted provinces, in solemn session at the State House assembled, was directly followed by the jailer, who refused accepting the bills in purchase of a glass of rum, and afterwards by the traders of the city, who shut up their shops, declining to sell any more goods but for gold or silver. It was declared also by the popular voice that if the opposition to Great Britain was not in future carried on by solid money instead of paper bills, all further resistance to the mother country were vain, and must be given up.
This was a telling account of the effect of the poor value of the scrip and the effect that it had on the people. Though this newspaper was published with a loyalist leaning, there is much to be seen from the perspective of one’s enemy. This sentiment was felt all across the fledgling nation. Had Congress been able to stop the rampant inflation and build confidence in its own brand, the economy and the war effort would have been stronger.
One attempt that Congress made in order to keep the economy “under control” was price fixing. It was hoped that by attempting to control prices for certain items, everything from foodstuff to clothing, they would be able to stop prices from rising in response to increased demand and low supply. Being part of a colonial system was hurting the country right out of the gate. Before the war, raw material was sent on to England and finished goods sold back in return. As such, the industrial capacity of the colonies was not that strong, leading to shortages of finished goods.
This led to resolutions from Congress, such as one from October 1775 recommending that since the manufactory of cloth could not keep up with demand, people should supplement their wardrobe with leather, starting to be fair, with members of Congress themselves. The resolution made strong recommendation that “dealers” in the skins continue to sell at the usual rate to avoid inflation.
On May 30 1776, they added salt to the list of items that would be held to a regulated price:
Whereas it hath been represented to Congress, that avaricious, ill designing men, have taken advantage of the resolve of Congress, passed the 30th of April, for withdrawing, from the committees of inspection, the power of regulating the price of goods, to extort from the people a most exorbitant price for salt: Resolved, That it be recommended to the committees of observation and inspection in the United Colonies, so to regulate the price of salt, as to prevent unreasonable exactions on the part of the seller, having due regard to the difficulty and risqué of importation; subject, however, to such regulations as have been, or shall hereafter be made, by the legislatures of the respective colonies.
During one particular debate over where to purchase supplies for the army, it was pointed out that merchants in Philadelphia had raised their prices fifty percent above the “market rate.” A proposal was made to purchase said products in New York to punish Philadelphia for breaking the association. The debate ended with a resolution to try to convince Philadelphia to lower its price, or the items would be purchased elsewhere. It was through methods like this that Congress tried to keep the prices steady.
By 1780, Congress was left with trying to limit the prices of not only goods inside the country, but goods being imported into the country. Then the price of labor started to fall under the price fixing scheme.
Resolved, therefore, that it be recommended to the Legislatures of the respective States to pass laws for limiting the prices of labour and all commodity foreign and domestic (salt and military stores excepted) so as not to exceed twenty prices of what the same article sold for in the year allowing such additional price for imported articles, for insurance, freight and other charges as the nature of the trade of each State shall justify and allowing also as an encouragement for country manufactures the same price as a foreign commodity of like quality shall sell for, deducting the price of insurance.
Resolved that for the more certain limitation of the price of foreign articles and for the encouragement of importations it may be expedient for the several States to open offices for insuring the importations of their respective inhabitants.
The issue with price fixing is that it is normally done with an eye towards limited shortages of goods, and in some cases labor. What usually ends up happening is that if the price of a good is not allowed to increase the shortage of said item does not go away, but in fact it tends to get worse. If the cost of an item is allowed to go up, demand will decrease and cause the price will fall. Trying to short that circuit causes two possible outcomes. One, the shortage get worse because demand only increases. Second, a black market forms around those that are willing to pay more to end-around the shortage. Congress, by turning to price fixing, only made the economy worse, but it was something that they could not control that would bring the economy to its knees.
Counterfeiting was a major issue for Congress and helped to lead the major inflation that threatened to ruin the economy. Not only criminals, but the British themselves took to creating fake Continental scrip that flooded the market. John Adams addressed this in a letter home in 1777. “Their principal dependence is not upon their arms, I believe, so much as upon the failure of our revenue. To think they have taken such measures, by circulating counterfeit bills, to depreciate the currency, that it cannot hold its credit longer than this campaign. But they are mistaken.”
The only good thing with the counterfeit money was that it was usually easily uncovered, especially since it was of higher quality than what Congress produced! The paper was usually a higher quality and the engraving was of a much higher quality. The $30 bill that was produced by congressional engravers even misspelled Philadelphia as “Philidelpkia” while the counterfeit version had it spelled correctly.
Even members of Congress personally had to deal with the specter of counterfeit scrip. John Adams admonished his wife: “How could it happen that you should have counterfeit New Hampshire money? Can’t you recollect who you had it of? Let me entreat you not to take a shilling of any but continental money or Massachusetts, and be very careful of that. There is a counterfeit continental bill abroad sent out of New York, but it will deceive none but fools, for it is copper plate, easily detected”
In 1780 Congress passed a resolution attempting to strike at the heart of the counterfeiters by offering a bounty on them, “two thousand dollars in the present Continental currency to any person or persons who take and prosecute to conviction.” It was worth about $10 specie at the time. Even with counterfeiting being a capital offense, by the end of the war almost half of all Continental scrip in circulation was fake.
In the end the war was won, so it would be easy to say that Congress was successful in finding ways to pay for the war. The problem with saying that is that while it may seem that way on the outside, on the inside it just was not true. The new nation started off in deep debt with a shaky economy that would not recover for years. Foreign debts were piled high, and relief was only found eventually by not repaying the French what they had loaned. The Continental soldiers were not paid, or were only paid a fraction of what they were owed. Many held out for the promise of what Congress owed them, only to fall victim to speculators and soaring prices. Some were even forced into outright rebellion when they could no longer afford the very land they fought for. Eventually it would take a new government, a new version of Congress, to set the country on the right path economically.
Editor’s Note: This is the third in a series of articles by Mr. Hatfield on the Continental Congress vs. Continental Army. See also, Continental Congress vs. Continental Army: The Officer Corps and Continental Congress vs. Continental Army: Strategy and Personnel Decisions.