[Chapter 5 of Rothbard’s newly edited and released Conceived in Liberty, vol. 5, The New Republic: 1784–1791.]

A severe depression, bank contraction, a heavy burden of taxes to pay state debts, all this turned men’s thoughts to issuing paper money to finance government. Historians influenced by the Populist struggles of the late nineteenth century have always identified proponents of inflation with “farmer-debtors” and hard-money men as “merchant-creditors.” Actually, while it is true that debtors, especially during hard times, tend to favor inflation, merchants are even more likely than farmers to be heavily in debt since they have higher credit ratings and can borrow more. The result was that most of the economic groups in the 1780s favored inflation: the main problem was in determining which groups would obtain the enjoyment of the newly created money. Those wealthy cliques of merchants who already enjoyed the favors of the existing monopoly-chartered banks naturally opposed competition of state paper money; others tended to favor the new emissions. The exceptions were largely the sober-minded who remembered the rapid depreciation and dislocation during the war.

The first state to push through paper money during the postwar period was Pennsylvania, in March 1785. The Constitutionalists drove the measure through, but this “radical” act was essentially an alliance of farmers and wealthy public creditors who were anxious to have the state supply itself with money to pay their interest claims. Thus, of the emission of £150,000 of paper bills of credit, £100,000 went to pay the interest on the public debt, and £50,000 to be loaned on the security of land. The money could be used for payment of taxes; it was not, however, legal tender for private debts. Indeed, it was the provision of legal tender, not the paper money itself, at which the conservatives balked. Thus, as during the Revolutionary War, the conservative Pelatiah Webster balked not at banks nor at paper money, but at legal tender legislation. The main opposition to the state paper cause came, naturally enough, from the Bank of North America clique, these being the two major competing methods for supplying new money in the states. The Bank of North America refused to accept the already depreciated state notes at par, a major factor in impelling the legislature to repeal its charter. Despite frenzied attacks on all denigrators of the state paper, it had depreciated by 7.5 percent by the summer of 1786, and in the following year the conservative-dominated Pennsylvania legislature began to destroy and contract the outstanding notes.

In South Carolina, the “farmer-debtors” who led the state to adopt paper money were the great planters heavily in debt to British traders for the purchase of slaves to replace the thousands lost during the war. They were joined by Charleston merchants also in debt to the British. In October 1785, South Carolina authorized the emission of £100,000 of interest-bearing notes to be loaned on the security of land. The bills were receivable in payment of taxes, but again were not legal tender. Opponents managed to scale down the issue from the originally proposed £400,000. Extraordinary efforts, including boycotts, organized and individual, were made by merchants and planters of South Carolina to keep up the value of the notes, but they fell nevertheless to a 10 percent discount by the spring of 1787.

North Carolina issued £100,000 of paper in 1786, and these were legal tender. Over a third of the issue was used by the state to buy one million pounds of tobacco at twice the market price, and thus to provide a windfall subsidy to the state’s tobacco planters. The rest of the money went to pay some of the claims of the veterans of the Revolutionary War. Since the money was legal tender, Gresham’s Law (that money overvalued by the State will drive out undervalued money) came quickly into operation. Specie disappeared from North Carolina, and the paper depreciated by over 50 percent by the end of 1787. And since out-of-state creditors would not accept the depreciating paper, the merchants found it difficult to pay their creditors. Thus, the merchants suffered greatly from being forced to accept depreciated paper by the state, while at the same time their out-of-state creditors insisted on hard money. In the meanwhile, the mass of tobacco piled up in state warehouses, and the states found it impossible to sell it anywhere near the price that it had paid. Eventually the state had to take a 50 percent loss on the tobacco. By the end of the decade, North Carolina was forced to begin calling in and destroying its paper money.

Georgia had a similar experience; the legislature issued £30,000 in 1786 to pay Revolutionary veterans, and the bills were made legal tender for all payments: the issue was made at the behest of the rapidly expanding settlers in the backcountry. The money began to depreciate immediately, and Savannah citizens wisely and increasingly refused to take it despite the law. In only a year, the Georgia paper had fallen to a discount of four to one, and it ceased to be legal tender in 1790.

The New Jersey issue was essentially a land bank, pushed through by the Assembly over the opposition of the Council. The legislature finally passed an emission of £100,000 in legal tender bills in May 1786, all to be loaned on the security of real estate. Local vigilante associations terrorized merchants and traders into accepting the paper at par, but they could not terrorize New York and Philadelphia merchants, and the paper issue quickly began to depreciate by 15 percent. By 1789 the money was too valueless to pass in circulation.

The New York paper issue again belies the “radical-farmer-debtor,” “conservative-merchant-creditor” dichotomy. £200,000 were issued in 1786, of which three-fourths was to be loaned on real estate or specie security, and one-fourth to pay interest to public security-holders. Staughton Lynd points out that New York City’s leading conservative newspaper, the New York Daily Advertiser, approved the paper issue, as did the highly conservative Bank of New York. The conservatives were content that the paper was not declared legal tender for new debts, only for old ones. It should be noted that the New York radical leaders were opposed to legal tender, and most were opposed to the paper money.1 The paper generally passed at a discount of up to 12 percent.

Seven states issued paper money during the Confederation period, and of these Rhode Island was undoubtedly the most enthusiastic. A state in which there had previously been a rash of armed resistance to tax collection, Rhode Island issued £100,000 in 1786, a sizable amount considering its small population. The money was all to be loaned on land—the bill having been put through by the rural farmers over the determined opposition of the Providence merchant community. Rhode Island not only offered a very low interest rate on its loans; it provided a particularly severe set of legal tender laws and punishments. Indeed, a person accused of the heinous crime of refusing to accept the new bills at par was to be tried in a special court, without benefit of jury trial or even of the right of appeal. This brutal attack on the creditors and on merchants impelled mass resistance by the merchants and traders. Many merchants, despite the law, refused to accept the notes, and even closed their stores in protest. Farmers, in turn, pledged to boycott the sale of their produce to Providence. Customers rioted and tried to force tradesmen to accept the notes at par, and many traders and creditors were forced to flee the state. Finally, determined judicial resistance against the coercive acts led, after a furious struggle, to the repeal of these notorious laws in December 1786. The notes depreciated rapidly after that, down to 10 percent of face value by the end of 1788, and the legal tender clause was at last repealed in 1789.

Rhode Island was far more successful in her treatment of public creditors. The creditors were forced by law to accept redemption of their credit in the rapidly depreciating paper. In that way Rhode Island was able to rid her citizens of virtually the entire burden of state debt by 1790, and the debts were repaid at minimum sacrifice to the people of Rhode Island.

Of the six states that did not issue paper money during the 1780s, Connecticut managed to escape its distress by the far sounder method of emergency tax reductions and tax abatements. Delaware was in the trading and financial area of Pennsylvania, and hence Pennsylvania’s bank and state paper circulated there. Virginia’s opinion was staunchly hard money, this sentiment being shared by its liberals as well as conservatives, so there was little struggle there.

A strong drive for paper money arose in Maryland in 1786, and the Inflationist Party called for £350,000 of paper notes, of which £200,000 was to be lent to land owners. The Maryland Senate blocked the bill that was passed by the House in late 1786. Like Connecticut, Maryland, after outbreaks of armed attacks on her tax collectors, was partly able to stave off a drive for paper money by abating tax collections and suspending the forced sale of property of delinquent taxpayers. In New Hampshire too, the grievous burden of taxes led to the march of a large armed mob upon the capital in September 1786. The mob besieged the legislature and urged the issue of paper money; but a counter gang of citizens and militia drove off the rebels, and the voters of the towns firmly rejected a paper-money scheme referred to them by the legislature. Conservative Massachusetts, the hardest pressed of all, refused to issue paper or to grant any relief in taxes or in executions for tax delinquency.