7/4/23

Happy Independence Day!

Here’s a fun pop quiz for your Fourth of July BBQ: Who was the first American economist to warn about the dangers of inflation?

You may not have heard this name before, but it was Pelatiah Webster, who – in a series of essays, some of which he sent to Ben Franklin[1] — warned that the nascent American nation was quickly depreciating its currency[2] because they were printing so much money.

That goes to show that the inflationary crisis we’re facing isn’t new. Our nation has grappled with inflation ever since its founding.

All of America’s bloodiest wars, including the Revolutionary War, were financed partly via inflation.

Continental Congress Causes Inflation

During the Revolutionary War, Congress had limited power to tax, and the nascent country had difficulty borrowing money.

So printing money was the easiest option to finance the war.

Congress issued continental dollars. These began as zero-interest bonds that promised to pay the holder back in gold or silver at a later date. However, between 1775 and 1782, Congress issued about $6 million of Continental currency. In 1775, when the Continental Congress began to issue continental dollars, one continental dollar could be redeemed for one silver dollar. By 1779, it took 40 continental dollars to buy one silver dollar. By 1783, so many Continentals were printed that they became almost worthless.

By the winter of 1777, Continental dollars were already losing their value. So Congress decided to impose price controls.[3] Congress imposed a maximum price upon goods, and this led some farmers to refuse to sell their excess produce to Americans. Instead, some of those farmers sold their goods for gold to the British.

Price controls meant that farmers who would have otherwise been able to sell their goods didn’t want to, because they weren’t getting the market value for their goods. The reduced supply of goods on the market was one of the factors that contributed to supply shortages at Valley Forge during the harsh winter of 1777.[4] After Washington’s army nearly starved, the Continental Congress finally concluded that “limitations upon the prices of commodities are … productive of very evil consequences.”[5]

Although Pelatiah Webster issued his warning about depreciating currency in 1780, the Continental Congress kept printing. By the end of the war in 1783, Continental dollars were worth less than 1/40 of their original value. This experience led Thomas Paine, the Founder who had written the influential pamphlet Common Sense, to write in 1786 about the “evils of paper money”.[6]

The evils of paper money, and the irresistible temptation that paper money presents to politicians, were abundantly clear to the writers of the Constitution. Article 1, Section 10 of the US Constitution provides that “no … thing but gold and silver” shall be legal tender. Since that clause was ignored in the 20^th century, the US dollar has lost over 99% of the value that it had held for the whole of the 19^th century.

Although we’ll celebrate our nation’s founding and associated freedom this week, we’re not free from the dangers of inflation.

Our federal government keeps spending. The ability to print money – inflation – allows them to spend way beyond the amount raised through taxes.

America has overcome inflation in the past. If we – as a nation – act prudently, we can do so again. But we must understand what we’re facing, and what consequences our actions as a nation could have.

We’re uniquely qualified to offer insights on inflation. Roger D. Silk holds a Ph.D. in applied economics from Stanford, and is the author of the recently published book explaining inflation: Politicians Spend, We Pay, available here.

You can enter here for a chance to win a free copy. Or call 703 437 9270 and ask for Connor or Katherine.

[1] https://founders.archives.gov/documents/Franklin/01-32-02-0238

[2] https://www.hetwebsite.net/het/profiles/webster.htm

[3] “Forty Centuries of Wage and Price Controls; How Not to Fight Inflation” by Robert Sheuttinger and Eammon Butler, page 48

[4] Ibid.

[5] https://www.govinfo.gov/content/pkg/CREC-1997-10-02/html/CREC-1997-10-02-pt1-PgE1910.htm

[6] https://www.govinfo.gov/content/pkg/CREC-1997-10-02/html/CREC-1997-10-02-pt1-PgE1910.htm