Money Won't Be Worth A Continential!

July 29, 2013

In the early 1770’s, relations between England and the Colonies had deteriorated, primarily over the issue of unrepresented taxation. In 1776, Congress came together with the purpose of managing a war.  During that summer, they drafted, and signed the Declaration of Independence and with it pledging their lives, fortunes and sacred honor.

Concurrently with the Declaration, the Second Continental Congress formed a committee to formalize a new nation.  Congress approved the final draft for the Articles of Confederation in late 1777.  The States finished ratifying them by 1781.  This first constitution established a confederacy.  Its provisions included:

•  establishing our name
•  reserving to the states sovereignty and all other powers that were not expressly assigned to the federal government
•  pledging friendship and assistance
•  reserving to Congress powers to enter into treaties with foreign nations
•  granting rights of travel, with guarantees of protection, promises of extradition, and
•  granting powers to borrow.

Soon several weaknesses became apparent.  Congress had no power to tax, to regulate interstate commerce, and only minimal powers for enforcing its legislation.  The United States was completely dependent upon states to voluntarily meet assessments.  Washington and his army suffered much from shortages of supplies and troops often went unpaid.   States sent only limited assessments.  By the end of the war, the U.S. was deeply in debt with an army close to revolt. 

Without the power to tax, Congress used its only means to finance the war -- to print money.   They printed a lot of it, $200 million [the equivalent of $10 Billion in today’s dollars].  The States instead of taxing their citizens to redeem this new continental money printed their own $200 million.  With the flood of paper currency, inflation soared, wealth disappeared, the value of money plummeted, and the economy tanked.  Under these conditions, some states began taxing interstate trade, almost splintering the nation.  The weaknesses of the Articles and the lack of fully understanding the consequences of creating money without requisite productivity had brought a Nation to its knees.  Meanwhile England and Spain, waited upon our inevitable collapse. 

Today we are seeing a lot more than $200 million [$10 billion] in new paper money rolling off the presses as the Federal Reserve (the Fed) continues to reduce the buying power of our money by increasing the paper money supply without an increase of productivity.  The Fed’s Balance sheet now carries over $3 trillion in paper purchases, greater than 15% of our economy.   We haven’t seen the full effect of significant inflation yet, but rest assured it’s on its way.  When interest rates start to increase the Federal debt through higher interest payments will negatively affect an already fragile economy.  When that day comes, we will be facing two choices: hyper-inflation or a jobless economy.  In the meantime the value of our money diminishes daily as does the long-term direction of our country’s credit rating.  Our nation must stop the printing presses, make real spending reductions -- not just reduce the amount of increased spending -- and return our nation to fiscal responsibility. Otherwise our money “won’t be worth a continental!”

Until next week,

Mark, Bill and John