The winter of 1779-1780 was a pretty bad one for thirteen Colonies struggling to free themselves from cross-Atlantic control. First off, the weather was miserable. “Washington’s army, encamped at Morristown, New Jersey, suffered more than it had at Valley Forge from severe frosts and six-foot banks of snow.” Those words, from Ralph Ketcham’s extensive biography of James Madison, succinctly summarize some of the worst conditions anyone could remember. Even the British, with a recent run of successes, called a halt to operations.
A young Madison (shown above), snowbound in Virginia, took the time to investigate the Colonies’ second problem: money. The Colonies had lots of money floating around…roughly $200 million in paper currency. The real issue was that it wasn’t worth the paper on which it was printed. The previous couple of years had seen currency values fall, in some cases, to less than 1% of their face value. And James Madison came to some interesting conclusions.
After extensive reading, he determined that the value of money…well, let’s just quote him directly. “…does not depend on its quantity. It depends on the credit of the state issuing it, and on the time of its redemption; and is not otherwise affected by the quantity, than as the quantity may be supposed to endanger or postpone the redemption.”
Of course, a good many people disagree with that premise, even today. Many times, we’ll say things like, “If the government has trouble paying its bills, they’ll just print more money.” It’s a derisive statement that implies the following: if the government prints more money, there are more dollars in the system for the same amount of goods and services. This serves to make dollars less valuable and, by extension, goods and services more expensive. I’m no economist, so while that line of thinking resonates with me and seems to make sense, I have no idea as to whether things really operate like that.
Anyways, Madison’s thoughts flew in the face of conventional wisdom during the Revolution as well. So it’s not surprising that he disagreed with the rest of the Continental Congress when, on March 18, 1780, that body resolved to reduce the $200 million of outstanding currency to just $5 million with a 1:40 reverse monetary split. Ketcham writes, “It was hoped the new currency would escape depreciation and thus stabilize Congressional finances…Yet the act stopping the Continental currency presses took power from Congress precisely when it needed more to prosecute the war.”
James Madison was despondant. Writing to Thomas Jefferson, his new (and eventual life-long) confidant, his depressed pen would write, “It is to be observed that the situation of Congress has undergone a total change from what it originally was. Whilst they exercised the indefinite power of emitting money on the credit of their constituents they had the whole wealth and resources of the continent within their command, and could go on with their affairs independently and as they pleased. Since the resolution passed for shutting the press, this power has been entirly given up and they are now as dependent on the States as the King of England is on the Parliament.”
General Washington, from his vantage point in an army that, to this point, was largely unpaid and very poorly-provisioned, said, “I see one head gradually changing into thirteen…I see the power of Congress declining for the consideration and respect which is due to them as the grand representative body of America, and am fearful of the consequences.”
A twenty-something Alexander Hamilton, now part of Washington’s military staff, pored over the situation and partially agreed with Madison, though he strongly believed that foreign loans were the best solution. He would write, “The quantity of money in circulation is certainly a chief cause of its decline. But we find it is depreciated more than fives times as much as it ought to be. … The excess is derived from opinion, a want of confidence.” These words were part of a letter, more than six-thousand words in length, that outlined a financial system and was composed under a pseudonym and sent to a congressman (Robert Morris).
But for the time being, the devaluation of the currency was a painful decision, and wiped out the savings of many Americans. And 1780 was only 3 months old, and much more hardship was in the works.
Recommended Reading: Alexander Hamilton’s letter to Robert Morris – It’s hard to believe he was just 23 years old when he penned this.