The Seven Year’s War
and
Financing the War for
Independence
The Colonial Problem
• 17th & 18th century world gold & silver coin
monetary regime
• Colonies have persistent balance of payments
deficit
• Why? Consequences?
• Solutions?
– Specie Substitutes
– Devalue colonial currency (colonial pounds); Queen
Anne’s Proclamation of 1703
– Issue Paper Money, Currency Acts of 1751 and 1764
• The case of NJ
Kemmerer (1939): Colonial LoanOffice System in NJ
• 1703---£100 sterling for £167 New Jersey
pounds
• 1709 NJ issues £3,000 bills of credit for
war against Canada, NJ pound £178.
• English order the Governor to stop issues
and retire notes. Taxes used to redeem.
1719 NJ £145 per £100 sterling.
• “No money”
• Why was there an increase in law suits for
debt collection?
NJ Loan Office System
• 1723 First NJ loan bank---£40,000 legal
tender, one shilling to three pounds
denomination.
• Loan office in each county. Loans £12 to
£100. Interest 5%. Collateral 2 times value
of loan. 12 years maturity---pay 1/12th and
interest annually.
• Income to state government. Legislature
votes duplicate pay and £1000 to governor.
Public debt paid off and taxes cut.
NJ Loan Office System
•
•
•
•
Second Loan Bank 1732
Third and Last Loan Bank 1735.
No more loan banks.
French and Indian wars NJ issues £347,000 in bills
of credit.
• Were the Loan Offices a “success?”
• “The pattern was sufficiently perfect to satisfy a fairly
orthodox quantity theorist.”
The Crisis of the Seven Years War
Seven Years War
War of the Spanish
Succession
War of the
Austrian
Succession or
King George’s
War
Seven Years’ War
• British send thousands of troops
• British pay salaries and expenses in
specie.
• Colonies asked to bear a share. They
raise local militia, led by officers below
rank of general. (Washington was a
colonel.)
• Parliament promise to reimburse colonies
for part of their costs.
Seven Years War 1756-1763
• The total war expenditures by colonies were
£2.5 million
– British Parliament paid £1 million or 40%.
– The cost = about 3% of GDP
• The colonies banned from issuing fiat currency
(land banks etc). They financed war largely by
issuing bills of credit or debt that was then
rapidly retired by high postwar taxes.
• Burden disproportionate  tensions among
debtors & creditors and taxpayers and holders
bills of credit
Case of Massachusetts
• Massachusetts borrows £700,000 at 6%
of its total expenditure of £818,000.
• Parliament reimburses £352,000
• Currency Act of 1751 stipulates all
treasury notes must include rigid
schedule of taxation designed to
eliminate debt in 5 years. Huge increase
in property and estate taxes.
• Total tax revenue rises from £10,000 to
£60,000 p.a. Tensions rise, popular
discontent
Other Colonies
• Virginia and Pennsylvania pay with currency but
lower taxes and slower phase out.
• New York gets ½ of expenditures covered by
Parliament. Only finishes retiring rest by taxes
over rest of 1760s.
• New Jersey spends £200,000 but Parliament
only grants ¼ for reimbursement. Does not
raise enough taxes. Only in 1765 is a plan put in
place that reduces this currency over 15 years.
Post-Seven Years War
• London merchants fear that colonial courts will side
with debtors who pay back in paper money and
press the Board of Trade.
• Board of Trade persuades Parliament to pass
Currency Restraining Act of 1764 extends 1751 act
to all colonies.
• Act of 1764 forbids issue of new new currency that
included legal tender provisions.
• Colonial outcry. Colonial legislatures force
governors to submit legislation to issue legal
tender money to Board of Trade under threat of no
salary.
• Board rejects SC and NY, but in 1770 allows PA
and NY with legal tender for public only
transactions.
At end of colonial period
• 1773 Parliament
votes for act to
allow currency
issue as legal
tender at face
value for public
but not private
payments.
Background to War
• Seven Years’ War (1756-1763) Expensive. British taxes
highest in world.
• Postwar, colonists receive military protection at almost no
cost---6,000 ,men at £350,000 annually. Lowest taxes in
Western world, ¼ of British taxes.
• Sugar Act 1764: (1) strict enforcement of tariff (at a lower
rate) on sugar from non-British West Indies (protection of
British planters from cheaper French sugar) (2) Adds more
enumerated articles, (3) new tariff on European imports.
• Currency Restraining Act of 1764 extends 1751 act to all
colonies. It forbids issue of new currency that included legal
tender provisions. Angers debtors & colonial governments
• Stamp Act of 1765Stamp Congress of 1765, boycott of
English goods repeal of Act and lowering of duties
Background to War
• Quartering Act of 1765.
• Declaratory Act 1766: affirms British right to legislate
and tax colonies.
• New chancellor of exchequer worried about high
property taxes on English landowners: Townshend
duties with enforcement by admiralty courts with
general search warrants against smuggling
• Riots and a new boycott. Decline in British
merchants exports. 1770 Townshend duties
repealed.
• Tea Act of 1773: English East India Company
allowed to ship directly to colonies, underselling
Dutch smugglers and bypassing American
merchants…….Tea Party.
Background to War
• Intolerable Acts 1774: (1) Close Port of Boston to all
shipping until pay for Tea (2) British officials charged with
crimes to be tried in other colonies (3) Revise
Massachusetts charter by Crown appointed governor (4)
Quarter Troops in Boston.
• Boycott and First Continental Congress.
• The Interior: Before 1763, British policy encourages rapid
westward development against France and Spain.
• Proclamation of 1763---reserves lands for Indians that are
claimed by colonies. Keep out colonists and have land
directly sold by Crown.
• Quebec Act gives territory claimed by colonies (Ohio,
Indiana, Illinois, Michigan and Minnesota) to Quebec.
• July 4, 1776
An Unequal Contest of Resources
• August 22, 1776---a fleet of 130 British ships sailed
through the narrows past Sandy Hook. Huge
amphibious assault of 15,000 of the best trained and
equipped troops in the world hit Brooklyn.
An Unequal Contest of Resources
• Britain, wealthy, best fleet, superior army, most
advanced finances in Europe. Population 10
times colonies.
• Idea was to raise a big army and win war
quickly before Britain’s European enemies
could intervene---especially France.
• U.S. regular and militia. Equipment and
finances are huge problems.
An Unequal Contest of Resources
• After initial defeats, American strategy is to avoid “general
engagement” as British army formidable when arrayed for
a major battle but diluted by holding various cities. British
form provincial corps of loyal Tories—irregular warfare.
• Once no immediate victory, Britain moves to naval
blockade and slower war.
• Offer pardons and incentives for patriots to defect.
Convinced that if they can maintain their position, hold on
to the cities, and keep the rebels in check the mass of the
population will come to their senses.
• War drags on for 7 years (5 active)
• HOW CAN THE COLONIES PAY FOR SUCH A WAR???
Economic Characteristics of War
for Independence
• April 1775-September 1783
• Total military personnel 184,000 to 250,000
• Population est. 2,148,000, percent mobilized—8.5 to
11.6%
• Deaths 4,004 and wounded 6,004 or 4% of total
mobilized (an underestimate)
• Direct cost (1775 specie) $100-140 million.
• Direct Cost/One years GDP=104.2% (15-20% per year)
• Financing by taxes—13.1% and by debt and money
86.9%
• Inflation: Prices rise from outbreak to peak 3 times initial
level
Two Pennsylvania Shillings
The Problems of Money and Debt
• Total specie and bills in 1775: $10 million.
• May 1775-November 1776 states defy British
ban on currency issues and issue $18 million of
bills. A threat—a bargaining chip.
• By end of 1776 Continental Congress issued
$25 million to outfit the army in absence of any
tax revenue.
• Congress promises to redeem them in specie on
specific dates beginning in 1779. Delegates to
Congress pledge joint and several liability of
colonies to replay. Congress lacks power to
tax—only voluntary contributions from states.
Calomiris (JEH, 1988)
• Fall of New York in 1776
rattles public opinion
• 1777: Congress asks
states
– Accept money as
payment for taxes and
legal tender for private
transactions
– Stop issuing state money.
– Raise taxes to retire
money
• Improves when French
alliance announced in
1778.
• Deteriorates 1779
onwards as war
continues.
• No tax backing for
continentals
How does Calomiris explain the
reluctance of states to pay
taxes? Two reasons
War for Independence
• While Seven Years War financed by mix of issuing debt
and money---most of new war financed by issuing
currency.
• Why?
• Who raised money---Congress and each of the thirteen
colonies.
• Congress issues paper money but has no power to tax.
It relies on colonies to raise taxes for it.
• New England had previously used debt to finance war.
But freed from British rules they shift back to fiat
currency.
• Other colonies rely on issue of paper money---individual
colonies recruit and equip own militias.
So: Taxes 13%, Borrowing 29% (=.33*87)and Money Creation 58% (=.67*87)
Congressional Loans?
• Congressional loans raised by loan office in each state.
• Initial rate 4% not enough raised to 6% in 1777. Uncertainty of war
leads to new notes with no fixed maturity.
• In late 1777 loan offices accept depreciated currency at face value to
buy securities so opportunity buy then a very low real prices.
• 1778 Withdraw repayment in specie. Payment of notes in currency on
a sliding scale.
• Real returns probably 9 to 12 percent. Much higher than England or
Holland at 3 to 7 percent. On a par with France.
• Congress first issues fiat currency in 1775.
Gradual decline in value.
Cost of Revolutionary War = One Year’s GDP
Financed by Taxes 13%, Borrowing 29%, and Money Creation 58%
Consequences?
Quantity Theory? MV=PQ? Prices rise 20,946% but money 7,143%?
A Very Bad Year
How does this change people’s behavior---consumption? Savings?
Revenue from Money Creation
25
20
15
$ millions
But what does
the
government
gain?
10
5
0
1774
1775
• R = (Mt – Mt-1)/.5(Pt +Pt-1)
• You issue more and
then……?
1776
1777
1778
1779
1780
•By 1781 continentals only held for speculative value—only states have
right to raise taxes—which Congress needs to redeem currency.
“Not Worth a Continental”
• Public complains but still uses the money.
• Why doesn’t public complain more
bitterly?
• Inflation tax is seen as more equitable, i.e.
the rich and the poor pay
• Robert Morris: “the depreciation of the
paper money, which wiped away not less
than 12 millions annually was in effect a
tax to that amount.”
Mid-war crisis
• Congress’ continental currency pays for
much of the war from 1777 to 1780.
• Then can’t generate more revenue
• In 1781, the Superintendent of the
Treasury Robert Morris suspends all
payment of wages to soldiers---this lasted
for the next two years until army
disbanded (Soldiers then paid in securities
not specie or fiat money…creating a new
problem)
Foreign Aid--Critical
• Important---why?
• French pay for their own troops, value is equal to
$50 or $60 million
• French grants of $2 million, only 1 or 2% but
critical and
• French Loans 1778-1783 of $4 million. Dutch
and Spanish loans of $100,000
• After Yorktown 1781 (role of French fleet), John
Adams gets a syndicate in Amsterdam to offer
$2.8 million. After battlefield victories but keeps
army on field until treaty in 1783.
• State governments carry more of the load 17811783. They raise taxes and seize loyalist
properties to be sold. Cover 40% of wartime
expenditure
• Trader and financier.
“Wealthiest man” in the
colonies.
• Congress appoints him
Superintendent of
Finance in 1781.
• He succeeds in borrowing
funds at home and
abroad
• Resigns in 1784 in
frustration of Congress
inability to secure a
system of taxation---a
national tariff (blocked by
one state—Rhode
Island).
Robert Morris
•Also founds Bank of North
America 1781—the 1st bank
Default on the Debt
• Federal Government has no reliable sources of
income.
• 1790 Debt
– (1) Federal domestic debt $27 million
– (2) Federal foreign debt 10.5 million;
– (3) State debts $26 million
State Finances?
• Some states do impose higher taxes, some try to
pay for war by the confiscation of loyalist
properties.
• States have the same plans as during Seven
Years War to eventually retire their own notes
from circulation.
• State tax receipts used then to reduce state
currencies. What does Calomiris show?
• States reduce stock of bills of credit, producing
deflation---levying of taxes causing distress
among farmers and other debtors.
– Massachusetts policies caused 1787 Shay’s Rebellion
– Monetary expansion in Rhode Island helped farmers.
• BUT they do not manage to retire debt So that by
1790 large state debts outstanding.
The New Nation is Shaky