Continental Dollar¶

The Continental dollar was paper currency issued by the Continental Congress during the American Revolution (1775-1783), representing an early American experience with currency debasement and hyperinflation. The currency's catastrophic loss of value—culminating in the phrase "not worth a Continental"—demonstrated the dangers of unbacked paper money and influenced the monetary provisions of the U.S. Constitution.

Origins and Purpose¶

When the American colonies declared independence in 1776, the Continental Congress faced an immediate fiscal crisis. It needed to finance a war against the world's most powerful empire but lacked the authority to levy taxes (taxation authority remained with the individual states). The Congress could not borrow substantially, as its creditworthiness was untested and its political survival uncertain.

The solution was to issue paper currency—"Continentals"—to pay soldiers, purchase supplies, and fund the war effort. Between 1775 and 1779, the Continental Congress authorized the printing of approximately $200 million in Continental dollars, a massive sum relative to the colonial economy. Individual states issued additional paper currencies, compounding the monetary expansion.

Design and Backing¶

Unlike commodity-backed currencies, the Continental dollar had no direct convertibility into gold or silver. It was a pure fiat currency, backed only by the Continental Congress's promise to accept it for tax payments and the hope that an independent United States would eventually redeem it. This lack of tangible backing proved critical to its fate.

The currency initially circulated at face value, accepted by patriotic Americans as a contribution to the revolutionary cause. However, as more Continentals were printed and the war dragged on with no clear end in sight, confidence began to erode.

Debasement and Inflation¶

The Continental Congress, desperate for revenue, resorted to the printing press repeatedly. Each new emission of currency provided immediate purchasing power but diluted the value of all previously issued Continentals. The predictable result was severe inflation: prices denominated in Continentals rose rapidly, while prices in gold or silver coins rose much less or remained stable.

By 1779, the Continental dollar had lost approximately 95% of its purchasing power. Soldiers complained of being paid in worthless paper while suppliers refused to accept Continentals except at steep discounts. The phrase "not worth a Continental" entered American vernacular, becoming a permanent expression of worthlessness.

Government Responses¶

The Continental Congress attempted various measures to prop up the currency's value. It declared Continentals legal tender, requiring acceptance for all debts. It threatened merchants who refused them or demanded premiums. Some states imposed price controls to prevent merchants from raising prices in response to monetary expansion. These coercive measures failed, as they attacked the symptoms rather than the cause of inflation.

In 1780, the Congress attempted a currency reform, recalling old Continentals and issuing new ones at a 40-to-1 ratio—explicitly acknowledging that the currency had lost 97.5% of its value. Even this proved insufficient. The new currency also depreciated rapidly, and by 1781, the Continental Congress effectively stopped issuing paper currency, relying instead on loans from France and other sources.

Manifestation of Gresham's Law¶

The Continental dollar period clearly demonstrated Gresham's Law. As Continentals depreciated, hard money (gold and silver coins) disappeared from circulation. Despite legal tender laws requiring acceptance of Continentals, people hoarded precious metal coins and spent only the depreciating paper. Merchants who could discriminate between payment forms charged different prices: much higher prices in Continentals than in specie.

This created a two-tier economy: official transactions used Continentals at legal tender rates, while black market transactions used hard money. The gap between the two markets widened as Continental debasement accelerated, with gold commanding increasing premiums over face-value currency.

The Continental dollar debasement created significant wealth transfers. Creditors who had lent money or sold goods on credit early in the Revolution were repaid in nearly worthless paper, losing most of their capital. Debtors, conversely, benefited from discharging obligations with depreciated currency. This arbitrary redistribution created economic hardship and social resentment.

Soldiers bore particular hardship. Paid in Continentals, they watched their wages lose value even as they risked their lives. Mutinies occurred in 1780 and 1781, partly motivated by grievances over worthless currency. The inability to pay the army adequately in sound money nearly cost the Revolution its success.

Final Resolution¶

The Continental dollar never recovered. After the war, the new federal government under the Constitution declined to redeem Continentals at face value. Speculators who had purchased Continentals at deep discounts hoping for eventual redemption were largely disappointed. The currency was effectively repudiated, completing the wealth destruction its debasement had initiated.

Constitutional Impact¶

The Continental dollar experience profoundly influenced the drafting of the U.S. Constitution. The Framers, having witnessed the disaster of unbacked paper currency, included provisions designed to prevent its recurrence. Article I, Section 10 explicitly prohibits states from issuing bills of credit or making anything but gold and silver coin legal tender for debts.

Notably, the Constitution grants Congress the power to "coin money" but does not explicitly authorize paper currency issuance. This omission was intentional, reflecting the Framers' skepticism toward paper money based on the Continental dollar experience. The federal government later claimed the power to issue paper currency based on implied powers and constitutional interpretation, but the original intent clearly favored commodity-backed money.

Lessons and Historical Significance¶

The Continental dollar represents a case study in wartime debasement. Faced with urgent expenses and lacking taxation authority, the Continental Congress resorted to the printing press, initiating a debasement spiral that nearly undermined the revolutionary cause. The episode demonstrates that even governments with legitimate needs and patriotic citizens cannot sustain unbacked currency if they print without restraint.

The Continental dollar also illustrates the social consequences of monetary debasement. The wealth transfer from creditors to debtors, the impoverishment of fixed-income recipients, and the arbitrary redistribution of property all created social tensions that persisted after the war. The experience taught Americans that sound money is not merely a technical economic issue but a foundation for social trust and political legitimacy.

Comparison to the Assignat¶

Parallels exist between the Continental dollar and the French assignat, issued just over a decade later. Both were paper currencies issued by revolutionary governments facing fiscal crises. Both initially had theoretical backing (the Continental by future tax revenues, the assignat by confiscated lands). Both were printed in excessive quantities to finance government operations. Both hyperinflated and contributed to economic and social chaos.

The Continental dollar experience was somewhat less severe than the assignat's—it lost roughly 99% of its value compared to the assignat's 99.9%, and the inflation took longer to reach its nadir. Nevertheless, both episodes confirmed the dangers of unbacked paper currency issued by governments with unlimited printing power and immediate fiscal needs.

Contemporary Relevance¶

The Continental dollar's lessons remain relevant. Modern governments face similar temptations: urgent expenses, reluctance to tax, and the availability of the printing press (now electronic rather than physical). The mechanisms have grown more sophisticated, but the fundamental dynamic—financing government operations through monetary expansion rather than taxation—remains identical.

The seigniorage motive that drove Continental issuance operates equally in modern fiat currency systems. The difference lies primarily in the sophistication of the monetary mechanisms and the gradualness of the debasement, not in the underlying principle. "Not worth a Continental" should serve as a permanent warning against unbacked currency and unlimited money creation.