Signs that price inflation is a rising danger are everywhere. In the wake of soaring deficit spending and massive increases in the money supply by the Federal Reserve, a few voices are even warning of hyperinflation in the near future. Before you dismiss that possibility out of hand, consider the fact that in the early years of the American republic, hyperinflation actually happened.
In Valley Forge, Pennsylvania, the brutal winter of 1777–78 came to a long-awaited close in March. Nearly a quarter of George Washington’s Continental Army troops encamped there had died—victims of hunger, exposure, and disease. Almost every American knows that much, but few can tell you why Congress was as much to blame as the weather.
For six years—from 1775 until 1781—representatives from the 13 colonies (states after July 4, 1776) met and legislated as the Second Continental Congress. It produced and ratified the Declaration of Independence and the country’s first written constitution, the Articles of Confederation. It also ruined a currency and very nearly the new nation in the process, proving that even the best of men with the noblest of intentions sometimes must learn economics the hard way.
You can learn more about how and why many governments in the past have ruined currencies in my free eBook, When Money Goes Bad.
Governments derive their revenues primarily from one, two, or all three of these sources: taxation, borrowing, and inflating the currency. Americans were deemed to be in no mood to replace London’s taxes with local ones so the Second Continental Congress, which before March 1781 faced no legal prohibition to tax, opted not to. It borrowed considerable sums but also authorized a blizzard of paper money.
John Adams, later our second president, had been an opponent of paper money. He once referred to the idea as “theft” and “ruinous.” Nonetheless, he and Ben Franklin were among five committee members appointed to engrave the plates, procure the paper, and arrange for the first printing of Continental dollars in July 1775.
Not even the skeptics foresaw the bottom of the slippery slope that began with the first $2 million printed on July 21. Just four days later, $1 million more was authorized. Franklin actually wanted to stop the presses with the initial issue and opposed the second batch, but the temptation to print proved too attractive. By the end of 1775 another $3 million in notes were printed. After war erupted, the states demanded more paper Continentals from Congress. A fourth issue—this time for $4 million—was ordered in February 1776, followed by $5 million more just five months later and another $10 million before the year was out.
Congress cranked out another 13 million paper dollars in 1777. It printed another 63 million in 1778 and 90 million in 1779. By 1780 the stuff was virtually worthless, giving rise to a phrase familiar to Americans for generations: “not worth a Continental.”
Along the way, the politicians tried desperately to salvage the currency by adding error on top of error. Economist John Rubino writes:
Several laws were passed, requiring citizens to accept the paper money on a par with gold or silver. This attempt at price controls had the effect of eliminating goods from the market. Who would offer goods of real value in exchange for near-valueless paper? It was just at that time that George Washington and his men were suffering at Valley Forge—suffering, in great part, because no one had any food to sell to his quartermaster for paper money. Price controls nearly destroyed our army and might have, but for the heroism of the Continental solders.
Less than a century later, the paper money of the Southern Confederacy experienced a similar destruction.
Remember that just a year ago, the “experts” in Washington assured us that rising prices were “transitory.” Now with inflation officially 8.5 percent and more likely 10 percent in reality, those experts were obviously either mistaken, stupid or deceptive. Even now, the Federal Reserve is still maintaining interest rates that are far below inflation (making real rates negative). The money supply, which the Fed expanded by an astonishing 35% or more since COVID, is still rising rapidly.
So, if someone tells you that hyperinflation can’t happen in America, you can tell them it already did—twice. Given the disgraceful fiscal and monetary policies of Washington today, a third such experience cannot be ruled out.
Lawrence writes a weekly op-ed for El American. He is President Emeritus of the Foundation for Economic Education (FEE) in Atlanta, Georgia; and is the author of “Real heroes: inspiring true stories of courage, character, and conviction“ and the best-seller “Was Jesus a Socialist?“ //
Lawrence escribe un artículo de opinión semanal para El American. Es presidente emérito de la Foundation for Economic Education (FEE) en Atlanta, Georgia; y es el autor de “Héroes reales: inspirando historias reales de coraje, carácter y convicción” y el best-seller “¿Fue Jesús un socialista?”