UD professor Farley Grubb's analysis of the Continental dollar offers an alternate hypothesis on why the United States' first currency system crashed.

Money then and now

Modern analysis could change understanding of Revolutionary War-era finances

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4:18 p.m., July 24, 2014--New research by Farley Grubb, an economics professor at the University of Delaware, suggests that people may have drawn incorrect lessons from history in their understanding of the Continental dollar, the first national currency of the United States.

“The lesson of the Continental dollar that we’ve come away with is about irresponsible excessive printing of paper money by a legislative body,” said Grubb. “Therefore, people think we should give that power to bankers or someone else. But the lesson we should come away with is the problem of changing the rules of the game, and of fiscal credibility in a congressional body.” 

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Continental dollars, first issued by Congress in 1775, were almost valueless by the end of the Revolutionary War. Traditional historical interpretations claim excessive printing of money was to blame for this crash.

“The big story of the Continental dollar was that Congress printed a lot of this stuff,” said Grubb. “So, you flood the economy with paper money and cause inflation and the value of the money goes to zero. This has become a standard story in economics of the folly of printing massive amounts of paper money.”

For this reason, at the 1787 Constitutional Convention, Congress and state governments were stripped of their power to print money. 

“The episode of the Continental dollar was formative in the monetary policy of the U.S. Constitution,” said Grubb, who presented his research to the U.S. Treasury Historical Association in Washington, D.C., in April. “And a lot of people praise the Founding Fathers for this because it’s really dangerous to let politicians print paper money.” 

But, said Grubb, it was those same Founding Fathers who created the Continental dollar in the first place.

So could we assume that the Founding Fathers simply learned from the mistake of the Continental dollar?

“Well, no,” said Grubb. “That’s my argument. That’s the interpretation that we’ve lived with for 200 years. It’s our interpretation that’s wrong. The Founding Fathers were pretty smart people. They knew about paper money long before they created this system.”

How then did this incorrect interpretation come about? Grubb argues that the differences between the Continental dollar and modern paper currency have not been taken into consideration.

“My research argues that the Continental dollar was not the paper money that we think it was,” said Grubb. “It was what you call a zero-coupon bond, like a U.S. savings bond, in which case its value depends on a future redemption when people would buy the bond back.”

So, the value of a Continental dollar changed based on the length of the redemption period that Congress set. Grubb took this effect into consideration when calculating the value of the Continental dollar, and by doing so created an alternative hypothesis as to why it lost value.

“What goes wrong is really late in the revolution,” said Grubb, who explained that by 1779, Congress was in serious debt from the Revolutionary War and wanted to pay off this debt as soon as possible. As a result, Congress shortened the redemption periods of Continental dollars. 

“That action should have raised its value a lot, but it didn’t,” said Grubb. In order to reimburse Continental dollars in a shorter period of time, Congress had to raise taxes to impossibly high levels, thus lowering the value of the Continental dollar significantly.

Grubb argues this drop in value, and not a flooding of the market with excessive paper money, is what caused the crash of the Continental dollar. 

“It’s more a story about stopping Congress from having the ability to retroactively change the rules of the game than it is about irresponsible printing of money, which is a different story,” said Grubb.

“Understanding what the Founding Fathers did at the Constitutional Convention becomes a different story, too,” Grubb said. “We’ve interpreted this in hindsight as, ‘take away the power to issue paper money from congressmen because they’re irresponsible and they’ll just willy-nilly print a large amount.’”

But Grubb, who considers himself an economic historian, suggests that more complex analysis of the Continental dollar offers a different perspective.

“The rise in prices and the crash in value of the Continental dollar was not due to irresponsible printing of money,” Grubb said. “The crash of the system came about because Congress changed the rules of the game.”

Article by Sunny Rosen

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