Last week we discussed the efforts by several national leaders to address the ongoing economic crisis caused by trade and commerce issues. This week, I want to take a closer look at some of the problems that people were actually facing.
Paper Money
Money in the 18th century typically consisted of specie. That is a precious metal such as gold or silver, or copper, which could hold its value simply based on the fact that there was a limited supply of it. During the colonial era, Britain’s economic system encouraged the extraction of specie from the colonies back to Britain. As a result, money shortages were a common problem.
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| Rhode Island Ten Shilling Note, 1786 |
The obvious problem with paper money was that the holder could never be 100% certain that it could be exchanged as promised for something with real value. These were essentially IOU notes that were only as good as the word, and the economic viability, of whoever was issuing the notes. Notes from the Bank of England retained their value because people had faith that the bank would exchange the notes and was in no danger of bankruptcy.
Many colonies had issued notes at various times. Problems arose when people were not confident of full repayment. Notes would then trade at a discount. For example, if there was a 50/50 chance of repayment, someone might accept the notes at fifty cents on the dollar. So if you wanted to buy something for a shilling, you might have to pay for it with a two shilling note. This was known as a discount rate. The discount rates of notes went up and down all the time, and even might vary from vendor to vendor. You would have to negotiate the value of your money.
During the colonial era, this often became an issue when colonists tried to pay debts to merchants in Britain with colonial notes. Merchants wanted to be paid in pounds sterling and did not want to have to deal with these weird colonial notes. They brought their complaints to the government, which often restricted the ability of colonial governments to issue paper money.
During the revolutionary war, the Continental Congress, and the states, were free of any such restrictions from London. They freely issued paper money to fund the war and other government expenses. Since there was no guarantee that they would win the war, or that they would pay off these notes even if they did win, the notes almost immediately began trading at a deep discount, which got even worse as the governments printed even more money. Officials sometimes tried to force merchants to accept the paper at face value, and also often accepted it at face value for payment of taxes.
These mandates often led merchants to ruin. Let’s say you owed someone £100. If you could go out and buy £100 worth of notes for £1 then pay off your debt with them, you came out ahead. The poor creditor who lent you £100 worth of real money essentially lost 99% of it. This led to the obvious result that no one wanted to lend money or credit of any kind. Merchants who were forced to sell their goods and accept paper at face value simply stopped selling their goods. During the war, this was treated as being unpatriotic and against the war effort, but patriotism was not a good enough reason for merchants to allow themselves to go bankrupt.
Some of the notes issued during the war operated more like war bonds. In an effort to get people to accept them, some notes would come with a date certain when they could be exchanged for specie, and some even offered interest on the money. Even with these though, their value depended on how much you trusted the issuer to keep its promise.
When the war ended, the army was largely paid off with paper. Soldiers needed money right away so they often spent their paper money at deep discounts, perhaps getting only ten cents on the dollar, or even less. The bulk of these notes ended up in the hands of speculators. These were men who thought they had a pretty good idea of their chances of being able to redeem these notes. Some speculators were government officials themselves who would have a say in how and when these notes would get redeemed.
This situation deeply divided people in many states. For the merchants, they had taken great risk by buying up the notes offering at least some money to people who would otherwise have nothing. Their willingness to accept this risk meant that they should be rewarded by having the government pay off its notes to them in full as had been promised when it issued the notes.
For the farmers, many of whom had gone to war for years, receiving almost none of their promised pay and having given up years of labor on their farms when they could have been building up their own wealth, the idea that they should have to hand over everything they owned in order to pay off already wealthy merchants seemed to be the height of injustice. Many farmers had borrowed money during the war to produce food for the army. When the war ended and the army stopped buying food, they had trouble selling their crops, while the lenders wanted those loans paid off.
For most farmers, the solution was to have the government issue more paper money. This would allow them to pay off their debts and taxes in depreciated currency, much like the currency they had been receiving for their labor for years. Merchants obviously opposed this idea since they wanted to get paid with real money and stop carrying all these notes of dubious and speculative value.
Requisition Act of 1785
The post-war recession and money shortages were causing problems everywhere. To make matters worse, Congress passed the Requisition Act of 1785. During the war, and desperate for cash, Congress had been borrowing money wherever it could find any. Much of it came from European governments and banks, who wanted to be paid back. Defaulting on such loans could result in loss of trade or seizure of property. In some cases during this time period, default by a government could result in war.
While things had not reached that state yet, Congress was obligated to make payments. Its hope to sell some western lands was still several years away. It attempted to set up federal tariffs, but the states refused to approve this plan. The only revenue source it had was to requisition money from the states. Congress had been trying to do this for years, with limited success. In 1784, the state requisitions totaled about $750,000. In 1785, this amount quadrupled to $3 million. About 30% of the money was needed to run the government. Another 30% was required for repayments to foreign lenders. This portion had to be paid in specie. The other 40% would go to repay Americans who held government bonds. Much of these bonds were interest payments on Commutation certificates, those papers issued to officers at the end of the war in exchange for having to give up their promised pensions.
Up until this time, many states had been paying interest on commutation certificates issued by Congress directly to the certificate holders in their states, and deducting that amount from what they paid to Congress in the Requisition. The 1785 Requisition explicitly banned this practice.
The Requisition was like throwing gasoline on an economic fire. The economic burden divided Americans, and resulted in a variety of responses. New Jersey responded with a “I got your requisition right here” and refused any payment. Connecticut similarly refused payment. Congress could not force the issue. After all, it had no courts, no police, no army.
In other states, where influential merchants held a great deal of bonds that were due to be repaid through these taxes, support for paying the requisition was much stronger. Funds would have to be raised through higher taxes. This made the already almost-bankrupt farmers even madder, but the merchants who would be paid through this scheme saw it as a necessary step to repay debts.
Rhode Island Response
The case of Rhode Island is a good example of the problem. The state debt from the war was massive. Interest payments alone were over £10,000 per year. By comparison, the entire government budget before the war was only about £2000. The state had no western lands to sell and largely had to rely on taxes to repay both state debts and Congress’ requisitions.
The majority of the Rhode Island government was controlled by supporters of the merchants who had speculated heavily on notes and wanted to see these repaid in full. It had approved an impost in 1783, which made all imports much more expensive for its citizens. It even agreed to send two delegates to the Annapolis convention that I discussed last week, but the delegates did not arrive until after the convention had ended.
Like everyone else, Rhode Island was suffering from the post-war depression. The economic demands on the state divided them into two parties, the merchants who wanted full debt repayment using specie, and indebted farmers who wanted to get out of debt by having the state issue heavily devalued paper money.
Beginning in 1784, town meetings began sending petitions to the legislature, demanding the issuance of more paper money. The merchant controlled Assembly rejected these demands. In 1786, they responded to petitions by calling for all town meetings across the state to send their views on the issue. Ninety percent of the meetings responded with a demand for more paper money. The pro-merchant legislators were shocked by this outcome and, in March, 1786 still overwhelmingly rejected a plan to issue more paper.
The next month, Rhode Island held its annual elections. The pro-paper voters tossed out most of the legislature and replaced them with officials willing to carry out their demands. When the new Assembly met in May, it suspended the last tax collection and authorized the emission of £100,000 of paper money. The money would flood into the economy through loans given to land owners. The law further mandated that the paper was legal tender. The state set up a system where if you owed someone money, you could just leave the money with the court. If the creditor refused to accept it, the government would keep the money and consider the debt paid. This forced creditors to accept the money. Later, the legislature added a £100 fine for refusal to accept the paper. That was roughly two years wages for the typical laborer. Multiple violations could result in a creditor losing the right to vote. It also created a special court to rule on paper money issues, with no jury and no appeal.
Despite these efforts, merchants did everything they could to avoid having debts repaid in paper that they knew would trade at depreciated levels. Congress refused to accept the paper money for payment of its requisition.
At one point with merchants threatening to abandon the state entirely, the government considered a plan to take over most private businesses: ships, warehouses, waves, shipyards, etc. and run it on its own. It also considered requiring an oath to support paper money. Refusal could result in a loss of voting rights or the right to run for office. One newspaper reported a proposed bill that would simply cancel all debts and redistribute all wealth equally among the people, with the process taking place every 13 years. While that did not happen, the legislature did force the repayment of one-fourth of all state debt with paper money.
The indebted farmers were happy with the plan and overwhelmingly reelected the legislators the following year. The plan managed to greatly reduce both state debt and private debt at the expense of wealthy merchants who most people didn’t like anyway. Over time, however, the paper money began to drag down the economy as merchants left the state or found ways to avoid the paper. In 1789, the legal tender mandate was dropped and the paper money traded at a depreciated rate of about seven cents on the dollar.
Exeter Riot
Several neighboring states looked at Rhode Island’s solution with great interest. Wealthy merchants realized they could be effectively stripped of their property if a majority of voters decided to do so. By contrast indebted New England farmers thought this was a great solution to correct massive problems and inequalities that prevented them from making a living as productive farmers.
No other state was as extreme as Rhode Island. North Carolina also issued a currency that quickly depreciated. New Jersey and Georgia also issued paper which saw substantial, but not crazy levels of depreciation.
New York, Pennsylvania and South Carolina issued paper currencies that depreciated a little, but largely worked. They were largely used to provide loans to cash strapped farmers. New York and Pennsylvania even used their money to buy Continental securities held by their citizens, thus making those states creditors of Congress.
The divisions between creditors and debtors were still very real, and getting worse with the continuing economic hardships. In New Hampshire, the dispute nearly led to civil war. As in other states, farmers, feeling the pinch, first tried to address the issue at town meetings and through petitions to the legislature. In many cases, debtors were recently returned veterans who found themselves being thrown into debtor’s prison for debts they or their family had incurred while in the army. As early as 1782, armed rioters in the town of Keene shut down a courthouse to prevent the court from hearing detb cases. The state’s attorney general rode to the scene personally. The AG at the time was former Continental General John Sullivan, who had left the army in 1780. He served a few years in Congress, but returned to New Hampshire in 1781, shortly after having to take a personal loan from the French Ambassador to cover his own debts.
Sullivan showed up at the Keen riots in 1782 wearing his Continental Army uniform. Many of the rioters were former soldiers who had served under him. He was able to use their respect for him to get the protesters to disperse. The following day, he personally handled all the debt cases before the court, agreeing to continue any case where both parties were not ready to proceed.
That resolved the immediate crisis, but the larger problem only grew. Debts forced many farmers to sell their farms. Many also faced debtor’s prison. While they sent multiple petitions for relief, primarily in the form of requesting more paper money, the legislature, controlled by the supporters of merchant creditors, ignored the petitions.
In September, the legislature was meeting in Exeter locals in nearby Kingston hatched plan to march on the legislature and force them to pass a bill for paper money. The men, former war veterans, formed a column of 200 and marched to Exeter. There, they surrounded the building where the legislature normally met. On this day, however, a judge was holding court there. So when the men surrounded the building the court simply ignored them and continued with its business. Eventually, the protesters discover the legislature was meeting in a nearby church. As they marched over, they were confronted by a growing mob of locals who sought to defend the legislature.
The men managed to surround the church and refused to let anyone in or out. Once again former General Sullivan, by this time President of New Hampshire, came out to engage the protesters. While he was in negotiations, the locals, militiamen themselves, formed up their own military column. They managed to convey the false idea that they were bringing artillery, which caused the protesters to withdraw, but only across the river, where they set up camp.
Using the respite, Sullivan sent out messengers to call out militia in other towns in the area. By the next morning, about 2000 militia marched to Exeter, then surrounded the protesters’ camp. A few shots were fired, but it appears no one was killed or seriously injured.
The three leaders of the protest were indicted on charges of treason. However, they were immediately pardoned. Several militia officers who had participated were stripped of their commissions.
The militia sent a request for towns to vote on the issue of paper money. Perhaps after seeing the chaos such policies were creating in Rhode Island, the majority voted against paper money. Sullivan banned the use of conventions to petition the legislature, and sought authority to call out the militia when needed.
While the crisis in New Hampshire ended without bloodshed, that would not be the case in Massachusetts.
Next week: we will take a look at the situation in Massachusetts, where Daniel Shays starts a rebellion.
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Next Episode 343 Shays' Rebellion (coming soon)
Previous Episode 341 Annapolis Convention
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Further Reading
Websites
The Requisition of 1785 and Shays’s Rebellion, 1786–1787 https://digfir-published.macmillanusa.com/tap6e/tap6e_ch8_19.html
Introduction to Ratification in Rhode Island https://csac.history.wisc.edu/wp-content/uploads/sites/281/2023/12/DC9-13-00-01_R.I.-Essay.pdf
Gross, Robert A. “A Yankee Rebellion? The Regulators, New England, and the New Nation.” The New England Quarterly, vol. 82, no. 1, 2009, pp. 112–35. JSTOR, http://www.jstor.org/stable/20474709
The Paper Money Craze of 1786: https://cdn.theatlantic.com/media/archives/1886/09/58-347/131865758.pdf
Free eBooks
(from archive.org unless noted)
Belknap, Jeremy The History of New Hampshire. Dover: S.C. Stevens and Ela & Wadleigh.
Bell, Charles H. History of the Town of Exeter, New Hampshire. Boston: J.E. Farwell & Co. 1888.
McClintock, John Norris History of New Hampshire, Boston: B.B. Russell, 1888.
Sanborn, Franklin B. New Hampshire: An Epitome of Popular Government. Cambridge: The Riverside Press, 1904.
Books Worth Buying
(links to Amazon.com unless otherwise noted)*
Conley, Patrick T. First in War, Last in Peace : Rhode Island and the Constitution, 1786-1790, Rhode Island Bicentennial Association, 1986 (borrow on archive.org).
Holton, Woody Unruly Americans and the Origins of the Constitution, Hill and Wang, 2007.
Stephens, Karl F. Neither the Charm Nor the Luck: Major-General John Sullivan, Outskirts Press, 2009 (borrow on archive.org).
* As an Amazon Associate I earn from qualifying purchases.
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