Lessons to Learn from the Failure of the Continental Dollar

[continental dollar]Although few have seen hyperinflation in their lifetimes, it can and does happen. In one of the most cited cases, the Continental dollar of the United States was inflated into oblivion. In fact, the value was so diminished that towards the end of its short life, few merchants accepted it.

The Continental Currency

The value of the Continental currency, the first paper currency of the would-be United States, began as all currencies do – widely used and accepted while maintaining a strong value. In 1776, a total of $19 million in the paper currency was issued, and it remained on par with gold and silver in purchasing power. $1 in Continental currency could buy $1 of goods.

However, just two years later in 1778, more than $31 million had been issued, and it now took $6 in the new currency to buy just $1 in goods. By 1779, the floodgates had been opened, and the currency was depreciating so rapidly that the Continental dollar had just 2.5% of the purchasing power it possessed three years earlier.

Congress Steps In

To stop the plunging value of the Continental dollar, Congress passed a law requiring merchants to accept the dollars equally to gold and silver, otherwise known as “real” money. Of course, businessmen willing to accept this proposition were few and far between, as the value of the paper trading hands was losing value by the minute. Trades in gold and silver had all but disappeared as well, mostly due to the fact that market participants were unwilling to shed their true wealth when they could just pawn off paper to the next person.

The Source of the Inflation

The Continental dollar had excellent security features, which meant that the money would be nearly impossible to recreate, even by the best printing presses. Thus, it wasn't counterfeiting that was destroying the currency. Instead, it was Congress itself.

Politicians eager to keep their positions in power were unwilling to raise taxes to pay for war time debt and massive budget deficits. They chose to simply inflate the value of the currency, hoping few voters would notice and they would be able to keep their jobs, despite creating a new tax, the inflation tax. Does this sound familiar?

The new policies meant to lock in the failing currency as a medium of exchange were having an incredible effect on the supply of goods. Suppliers were unwilling to sell their wares for paper currency and pre-set government rates, creating shortages of virtually every commodity in the colonies.

You Know the History

As with any fiat currency, the Continental dollar later collapsed due to inflation.

With politicians unwilling to fix the deficit and instead choosing to inflate the currency, the currency was left in ruins. The Continental was eventually recalled by Congress and redeemed at 1/40th its face value. In a very few localities, it remained in existence for many more years, where it eventually plummeted to 1/1000th of its issuing value.

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