On July 4, 1776, the Continental Congress, meeting in Philadelphia, approved the final text of the Declaration of Independence. George Washington was not there.
He was in New York preparing to defend Manhattan against the impending onslaught from a British flotilla in New York Harbor. Five days later, the Commander in Chief received a copy of the declaration from John Hancock and ordered that it be read to the Continental Army to rally the spirits of the troops already engaged for over a year. But esprit de corps was not Washington’s only, or even principal concern.
While the general was scrounging to feed, arm, and equip his forces, the young nation was broke. And though we rightly credit Washington for his heroic courage and dogged persistence, the story of the American Revolution is also a tale of financial innovation and sacrifice that funded the war and fueled the growth of the republic long after the battle was won.
When armed hostilities broke out at Lexington and Concord in April 1775, it was unknown whether this nascent rebellion would expand into full-blown revolution. It was also unclear how such an ambitious undertaking would be financed. While still subject to British jurisdiction, the colonies formed a loose and nearly powerless association to coordinate resistance known as the Continental Congress.
This body did not have authority to raise revenue through taxation, so in May 1775 the Congress authorized the issue of $2 million in a new paper currency called the Continental Dollar with a face value equal to the Spanish gold dollar. These “Continentals” carried an implicit promise of redemption at some future date but were not freely exchangeable into specie. Between 1775 and 1779, a total of $241million in Continentals were floated by the Congress, equivalent to around $10 billion in 2026 dollars.
Since they were not freely redeemable and were pumped out in increasingly large quantities, these paper dollars quickly depreciated and were nearly worthless by the end of the war. Continentals also competed with around $27 million in various paper currencies issued by the individual colonies. The depreciation was accelerated by successful British efforts to sabotage the note through large scale counterfeiting. Printing money alone would not suffice.
Congress recognized the need seek assistance from foreign governments, especially France. Eager to avenge their loss to Britain in the Seven Years War, France initially provided materiel and then joined the war in support of the United States in 1778. Equally important was the French financial assistance in the form of loans and grants to the young republic. Significant loans from the Netherlands and Spain also played a critical role in supporting the war.
Another essential but underappreciated source of revolutionary funding came from wealthy merchants and financiers whose involvement ultimately laid the groundwork for the U.S. government bond market upon which the global financial system depends. Among dozens of patriotic businessmen who bankrolled the effort, three Philadelphia export brokers stand out: Thomas Willing, Robert Morris and Haym Salomon, without whom the revolution might have died of starvation.
During the age of sail, exporters who launched their ships for distant shores laden with American goods had to cool their heels for weeks while the vessels crossed the sea before getting paid. To expedite the transactions, importers issued IOUs for payment called bills of exchange which could be presented for settlement at an import bank upon receipt of the shipment. Over time, it became common to sell these IOUs at a discount to realize the cash, effectively turning bills of exchange into tradeable securities in what looked much like a contemporary bond market.
Willing and Morris supported the war effort by selling their own bills of exchange for cash to supply George Washington’s army. It is no exaggeration to state that without their efforts the revolution may well have failed for lack of resources. In 1781, Congress appointed Morris Superintendent of Finance tasked with devising schemes to fund the revolution.
Another of the essential revolutionary financiers was a recent Polish immigrant named Haym Salomon who was recruited by Morris. In addition to pledging their own fortunes, both men leveraged their own personal credit reputations to guarantee bonds issued by the United States and to raise cash by underwriting the sale of bills of exchange representing French loans. Salomon’s contribution was also indispensable, including securing a $20,000 loan to finance the march onto the Yorktown peninsula in October of 1781, where Washington cornered the British forces and accepted Cornwallis’ surrender, ending the war. Salomon was also cofounder of the Congregation Mikveh Israel in Philadelphia which is today the oldest synagogue in the nation.
Although the war was finally over, the new nation’s money troubles were not. The Continental Congress had no revenue, no ability to tax, and was drowning in debt. In addition, most of the colonies (now states) also had issued a mélange of debt instruments of their own, and the Continental currency was essentially kaput. Enter Alexander Hamiltion.
Hamilton had already written extensively about his thoughts on structuring the new country’s finances and was ready to act when he was appointed the first Secretary of the Treasury under the new Constitution in 1787. He argued for assuming the debt of the individual states and issuing new U.S. Treasury bonds to consolidate the disparate existing obligations. While some southern politicians including James Madison objected, Hamilton negotiated a deal known as the Compromise of 1790, which adopted Hamilton’s debt plan in exchange for relocating the nation’s capital along the Potomac River in the new District of Columbia. By 1795, the infant American republic was on a steady financial footing and was enjoying robust economic growth thanks in part to Hamilton’s foresight.
Many of these expediencies including a market for bills of exchange (bonds) and the issuance of high quality Treasury securities were building blocks in the edifice that is now the U.S. financial system, the deepest, most liquid and secure in the world and whose currency is still involved 80% of all foreign trade finance. Something to celebrate.