Red-Blooded Risk: The Secret History of Wall Street

1776 and All That

That all changed in 1776. Ever since Roman times, the way you fought a war was to raise money from taxes, then pay soldiers to fight it for you. You could fight a war for any stupid reason you liked (in fact, in most wars one or both sides claimed to be fighting for peace), except one: you couldn't fight a war against taxes. But that's exactly what the American Congress wanted to do. Fortunately, there were experienced businesspeople represented and they knew paper money could eliminate the unpopular “taxing” step. They issued $250 million of continental dollars, which depreciated at about 50 percent per year. That paid for a successful war.

Why did people accept the low-quality money? Patriotism was a factor in some cases, no doubt, as was duress. If soldiers showed up to your farm to buy supplies for the troops at Valley Forge, you weren't given a choice of currency for payment. Also, wartime creates a lot of temporarily and locally slack resources: crops you can't get to market, animals you cannot afford to feed, gunpowder that will be seized by the British if you don't sell it to the Americans today. Converting these to easily portable and concealable cash is attractive, even if the cash will have depreciated a percent or two when you spend it next week. Moreover, the American economy was doing great, supplying both armies in addition to its normal activities. All sorts of trade restrictions were lifted and taxes eliminated. A strong economy creates a demand ...