Ron Paul: America’s First Hyperinflation

Guest Post by Ron Paul

Ron Paul: Americas First Hyperinflation

Today, we’re seeing 40-year record inflation thanks to a combination of irresponsible monetary and fiscal policies. I’ve spoken to a lot of Americans who are seriously worried we’ll see a destructive bout of hyperinflation.

If we do, you may be surprised to learn it won’t be the first time…

Today I’m going to tell you the story of America’s first hyperinflationary episode. Our Founding Fathers learned a crucial lesson from it, and tried to ensure it wouldn’t happen again…

America’s first hyperinflation

During our own nation’s Revolutionary War in 1775, the Continental Congress legalized the printing of paper money. Politicians thought there wasn’t enough specie (real, or gold and silver) money in the entire nation, so they decided to make their own.

Historians estimate that just $10 million in real money was circulating in the U.S. at the time. So Congress authorized IOUs to be used as money. They paid for food and horses and weapons, even paid soldiers in “continental currency.”

Here’s an example:

You’ll observe there’s a clear value of “TWENTY Spanish milled dollars or the value thereof in gold or silver.” Well, Congress had promised to begin redeeming this paper money in the future – as early as 1779.

Presumably, the war would be over by then, one way or another! Either the entire Continental Congress would be hanged by General Howe or Sir Thomas Gage as traitors, or General Washington would’ve kicked the monarchists out. After the war was over, Congress decided, they’d have plenty of time to figure out ways to tax their citizens and make good on the promises all this paper money made.

Ah, the best-laid plans…

Two small problems:

As you might remember from high school, the Revolutionary War was still going strong in 1779. The Continental Army suffered a truly awful winter in Valley Forge, morale was poor, public support was lower than ever…

Also, Congress had gone just a little too far with their money-printing. They issued a total of $226 million in paper money. That’s right – they increased the money supply more than twenty-fold! What happens when you increase supply dramatically without a balance of increased demand? Value plummets – and by 1779 the Continental dollar was a joke. Our nation’s first paper money traded at about 5% of its face value if it was accepted at all.

By 1781, Continentals had become so worthless they simply weren’t circulated any more. No factory or shopkeeper or handyman would accept them as payment even at 1% of face value. Continental bills became bookmarks or toilet paper.

This sorry episode of our national history, paying patriotic volunteer soldiers in absolutely worthless paper money, caused an economic crisis as bad as the Great Depression! GDP shrank by a third.

The situation wasn’t stabilized until 1782. Congress appointed Robert Morris to the newly-invented position of Superintendent of Finance. Morris opened a bank, arranged a loan of gold and silver coins from France, and personally financed the war effort! He signed IOUs in his own name to get crucial materiel for the troops. Morris even opened the first U.S. Mint to begin producing the first official gold and silver coins for the U.S.

The U.S. won the war, finally. The last British troops didn’t board transports to set sail for home until November 25, 1783.

But our Founding Fathers had learned a valuable lesson. According to Robert Wright, Benjamin Franklin even caustically observed that the depreciation of the Continental had essentially acted as a tax on the population which financed the war.

Even though they weren’t economists (really there wasn’t such a thing back then), they’d seen the nation’s economy crippled by their experiments in what we’d call “Modern Monetary Theory” today.

So they did their very best to prevent such a disaster from ever happening again – in the Constitution itself.

How the Constitution tried to prevent inflation

The Constitutional Convention of 1787 includes the following text from Article I, Section 10, Clause 1 (also known as the  “Contract Clause”):

No State shall… coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.

And Article I, Section 8, Clause 5 (the “Coinage Power” clause) states in part:

[The Congress shall have Power . . . ] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…

When we consider these along with the Ninth and Tenth Amendments, we get a very clear picture of the Constitution’s monetary policies:

  1. A dollar is a silver coin containing 371.25 grains of pure silver – based on the Spanish milled dollar, which contained 371.25 grains of pure silver, about 3/4 troy oz, by weight. (Before the 1792 Coinage Act, the Spanish milled silver dollar was the only dollar Americans knew of.)
  2. Only gold or silver coins and currency (banknotes backed by gold or silver) can be legal tender.
  3. No U.S. state may issue coins or currency – only the Federal government has this power.
  4. No one may counterfeit government-issued money – one of the few crimes expressly mentioned in the Constitution.
  5. Unbacked currencies ( fiat money notes, or “bills of credit” not backed by anything of value) are forbidden.

In other words, based on the Constitution, only gold and silver coins (or banknotes readily redeemable for such coins) can be accorded legal tender status.

See, the Founders learned their lesson! They explicitly prohibited the mistake of 1779 from ever happening again! They gave a young nation a plan to avoid the temptation of “printing money” and destroying its economy.

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About the Author: Patriotman

Patriotman currently ekes out a survivalist lifestyle in a suburban northeastern state as best as he can. He has varied experience in political science, public policy, biological sciences, and higher education. Proudly Catholic and an Eagle Scout, he has no military experience and thus offers a relatable perspective for the average suburban prepper who is preparing for troubled times on the horizon with less than ideal teams and in less than ideal locations. Brushbeater Store Page: http://bit.ly/BrushbeaterStore

One Comment

  1. Paulo October 8, 2022 at 10:27

    Remember the coin machines in grocery stores where
    people would pour their piggy bank coins and the coin
    machines would outpot FRT’s (Federal Reserve Tokens)?
    Additionally, the coin machines would charge & deduct
    ten percent of the return.
    There where lots of 1964 on prior Silver Coins in there too,
    that people where not aware of.

    Getting very very difficult to find a 1964 and prior Silver Coin
    nowadays when getting change back.

    “Every man to his family and his possessions”

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