On 22 June 1775 the First Continental Congress, struggling to finance the Revolutionary War effort without power to tax or borrow, authorized the issuance of $2 million in bills of credit. These bills of credit, soon to be known as continentals, were issued with the understanding that individual states would redeem them according to an apportionment based upon population. The Congress had considered, but rejected, another option that would have assessed to each state a sum of money to be raised by the issuance of state notes on the authority of each state government.
Congress issued an additional $4 million in bills of credit before the year was out. These were scheduled for redemption between the years 1779 and 1986, and, contrary to a suggestion from Benjamin Franklin, paid no interest. The plan for each bill of credit to bear the signature of two members of Congress fell by the wayside, and Congress hired 28 individuals to sign the bills. Congress continued to run the presses, authorizing the issuance of $241,552,780 in bills of credit before voting to limit circulation to $200 million in bills of credit toward the end of 1779. After 1779 Congress ceased the issuance of bills of credit (continentals).
Congress issued the continentals because the states did not want to levy taxes to finance a war that was partially sparked by anger over English taxation of the colonies. Desiring to tread lightly on taxes, the individual state governments issued $210 million of their own notes between 1775 and 1780, further fanning the flames of inflation.
Although the states shied away from levying taxes to redeem continentals, they complied with the request from Congress to declare continentals legal tender. To reinforce the state action, Congress passed resolutions to shame people into accepting continentals in payment for goods. After hearing of one instance of an individual refusing to accept continentals, Congress resolved (23 November 1775): “That if any person shall hereafter be so lost to all virtue and regard for his country as to refuse, such person shall be deemed an enemy of his country.” Until the end of 1776 price inflation remained relatively tame, but then inflation began to gather momentum, becoming runaway in 1779 when the ratio of continentals to specie in face value increased from 8:1 to 38:1.
In December 1776 the New England states held a price convention in Providence, Rhode Island, that called for less paper money and more taxation, and that developed a recommended set of prices for farm labor, wheat, corn, rum, and wool. The New England states enacted these price recommendations into law and Congress urged other states to do the same. Congress also gave its blessing for states to assume the authority to confiscate hoarded goods. Citizens held mass meetings denouncing price increases, and irate women raided shops that reportedly were hoarding goods. Merchants had to defend themselves in court. Philadelphia protesters hanged in effigy a specie dollar to protest dealers refusing to accept paper money.
In 1778 a second price convention set forth a list of recommended prices, and Congress seemed ready to legislate, calling for a price convention in 1780. Congress also asked the states to formulate price recommendations on the assumption that prices were 20 times higher than they were in 1774. Congress gave up on the idea of fixing prices, however, and in March 1780 Congress asked the states to remove punitive legislation against those refusing to accept continentals.
After 1779 the depreciation of continentals continued, raising to 100 to 1 the face value ratio of continentals to specie by January 1781. The ratio of 100 to 1 became the official ratio at which Congress converted continentals into interest-bearing, long-term bonds under the funding act of 1790.
The experience of the continentals became a lesson in the evolution of paper money—a lesson that had to be relearned many times. The issuance of inconvertible paper money became the accepted practice worldwide as governments learned to maintain its value by restricting its supply.
