Conceived in Liberty (267 page)

The collapse of the state programs, however, failed to teach the local despots and vigilantes of the Pennsylvania, New York and New England towns their lesson. They tried to enforce local controls, and again all their efforts came to grief. In 1779, the towns and counties of Massachusetts (but not the state) tried again to frame joint codes at a statewide convention. In Philadelphia, the price-fixing committee was told by the town’s artillery company that it would, if necessary, support the committee’s decrees with force of arms. In late October 1779, delegates from New York and New England, meeting at Hartford, approved another comprehensive price code. Congress reversed itself again to endorse and recommend the new code in January 1780. Obediently, the states from New England to Virginia called a meeting at Philadelphia in early 1780 to establish a general uniform code of regulated prices. But delegations from New York and Virginia failed to appear, and the meeting adjourned in April to wait for these states. The meeting never reconvened.
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The absurdity of price controls was being made ever clearer by the enormous depreciation of paper money, and the states finally abandoned their attempts at enforcement. Only the southern states had never succumbed to the price control mania.

(It goes without saying that each successive price code reluctantly allowed for far higher prices than the preceding scheme, a trend that should have given pause to the most fanatical of price controllers.
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Attempts at enforcement of these controls and regulations were numerous and zealous, especially by local officials and committees. One example is the case of Peter Messier, a tea merchant from New York. In May 1777, Messier’s home was invaded by a party led by two soldiers who refused to pay the price that he charged for tea; instead, they seized as much tea as they wished, leaving as compensation whatever amount
they
considered “fair,” and this was not enough. Later, several other groups visited him, presuming to search his house in the name of the “Committee for Detecting Conspiracies.” They assaulted Messier and his servants and committed personal acts of vandalism.
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As usually happens during inflation and wage-price controls, wage rates lagged behind other prices and especially raw materials; this added an extra burden upon the wage-earners, the poorest strata of the population. Moreover, as ten entrepreneurial Philadelphia cordwainers pointed out in mid-July 1779, the price control over their product (shoes) not only impoverished them, but forced them to fire their journeymen employees. They added an impassioned plea for laissez faire:

It [the system of price controls] is absurd and contrary to every principle of trade.... It will destroy every spring of industry, and will make it the interest of every one to decline all business.... Trade should be free as air, uninterrupted as the tide, and though it will necessarily like this be sometimes high at one place and low at another, yet it will ever return of itself sufficiently near to a proper level if... injudicious attempts to regulate it, are not interposed....

Contrary to a general impression, opinion for or against price controls was determined far more by the state of the person’s economic understanding than by his social class, or, for that matter, by his generally conservative or radical views. It is simply not true that radicals favored price controls and conservatives opposed them; the pros and cons cut across both ideological as well as occupational lines. Thus, while the conservative James Wilson denounced price controls in Congress— “There are certain things, Sir, which absolute power cannot do”—the reactionary Samuel Chase defended controls on the ground of necessity. Pennsylvania provided the sharpest model of conservative-radical cleavage on this issue. Robert Morris joined Wilson in opposing controls, and the Pennsylvania radicals, in their hatred for these two, were driven to supporting controls. It must be noted, however, that the radical price control leaders included such wealthy and eminent merchants and lawyers as Gen. Daniel Roberdeau, William Bradford, and Owen Biddle. Furthermore, among the radical leaders, Tom Paine, seeing the ill effects of price controls, shifted sharply and permanently in late 1779 from supporting price controls to a strong opposition to them.
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Those radicals who favored price controls also justified this sharp deviation from their commitment to liberty and property rights by alleged wartime necessity, much as the Jacobins would do in France over a decade later. Thus, Gen. John Armstrong, a highly respected jurist and engineer and a leading Pennsylvania radical (though an early patron of James Wilson), was the most inveterate and zealous advocate of price controls in Congress. He pleaded that necessity required this exception to the laissez faire rule.

In a sense, the proponents of price controls had no economic arguments. Their views were purely superficial and ad hoc: “Prices are going up, they shouldn’t, ergo outlaw price rises,” was the argument form. In contrast was the sophisticated economic understanding of the opposition. Leading the opponents of controls was the New Jersey libertarian theorist, the Reverend John Witherspoon. He accurately and prophetically warned Washington that the army’s severe price and wage controls on the commodities and services it purchased would only aggravate the shortages and lead to starvation for the army. No man, declared Witherspoon, can be forced to supply goods in the market at prices he considered unreasonable; and his concept of what is reasonable is the price “proportioned to demand on the one side, and the plenty or scarcity of goods on the other.” And this price that clears supply and demand can only be set on the market by the voluntary interactions of buyers and sellers, not by any outside politician or government official, it being impossible for any authority to know all the nuances and variations that enter into supply and demand and hence into price. Price control, in fact, could only hobble commerce and thereby make commodities scarce and more costly than ever. The prices of regulated goods, Witherspoon pointed out, had already risen faster than those of the nonregulated.

The moderate Dr. Benjamin Rush was an able student of political economy, and he pointed both to economic theory and to the lessons of economic history. Previous price control efforts had always failed because the true cause of the price rise was not, as the unthinking believed, the wickedness or Tory proclivities of the merchants, monopolizers, or speculators. The cause, he declared, “was the excessive quantity of our money.” Only a decrease in the quantity of money, he pointed out, and a rise in the rate of interest, would end the disastrous price increases, and bring value back to the country’s money. John Adams was also highly knowlegeable and forthright in monetary matters, and he too pointed to the historic failures of price controls. As early as 1777, he urged a radical and libertarian cure for the inflation: redeeming notes in gold and silver and ending paper money issue.

Also outstanding in opposing price controls was the Philadelphia merchant and economic essayist, Pelatiah Webster. Webster clearly discerned that the price increases were due to the quantities of paper money, and that they could not be stopped by the superficial scheme of price controls. He insisted that freedom of trade, or the “unrestrained liberty of the subject to hold or dispose of his property as he pleases,” was essential to property at any time, whether in war or peace. On the free market, he pointed out, every seller will produce the greatest quantity of the best goods for the consumers, in order to maximize his income. The scarcest commodities will have the greatest demand and the highest prices, and this
will stimulate production in these fields as well as impel the most economic allocation of the scarce goods. Price controls are unworkable and impose great administrative burdens. He further pointed out that price controls could not alter the value of money, which is determined on the market by the relation between its quantity and the supply of goods offered in exchange. He concluded that “laws ought to conform to the natural course of things,” and therefore that all fetters and restrictions on the market should be removed.

Even less than for price controls do the radical-conservative categories explain the differences of opinion on paper money, for support for paper was far more broadly based than for controls. The archconservative Gouverneur Morris originated the idea of using government paper to finance the Revolution; and, far from being ashamed of his creation, he trumpeted to the complaining Washington that paper money was a great engine that would mobilize the nation’s resources for the war. He recognized that the paper would depreciate, but he looked forward to this as a tax; the obvious inequity of the tax’s falling hardest on the lowest-paid and the most exploited group in the country, the soldiery, caused him only fleeting regret. These men would simply have to sacrifice their pay as well as their lives to the national effort. As might be expected from the old paper-money enthusiast, Benjamin Franklin hailed paper as a “wonderful machine” that would “pay itself off by depreciation,” which he persuaded himself would fall equitably on the members of society. In 1779, another ultraconservative, John Jay, prepared an apologia for the depreciating Continental paper.

Characteristic was the specious argument offered by inflationists everywhere that “true” redemption of paper money rests not on gold or silver but on the industry, trade, and soil of the country. Even Pelatiah Webster defended the benefits of depreciated paper, although he opposed the state legal tender law. But despite the blithe acceptance by the more sophisticated inflationists of depreciation, the universal outcry over the depreciation and price rise and the frantic attempts to stop them are testimony enough that the vast bulk of the people could not assume so philosophical an attitude. The havoc wrought in the United States by the distortions, inequities, currency breakdowns, shortages, and depreciation caused by the central state, and local government policies of wild inflation and price control, was far greater than that imposed by the British troops during the war. This is to say nothing of the maleficent heritage of the public debt that remained for the future economic and political life of the country. On their own grounds, the cheap money and price control policies burdened rather than fostered the revolutionary effort.

By 1779, no amount of theorizing, however, could cloak the naked fact of runaway paper depreciation and currency breakdown. Clearly, something
had to be done. The monetary engine was now seen to be a runaway source of ill rather than a panacea. Evidently, to preserve any value of the paper, the note issues had to be stopped. The simplest and least burdensome solution would have been to rescind the dubious retirement clause, which could only inflict tax burdens on society in order to retire the notes. This would have allowed the notes to find their own negligible level, while permitting the economy to return to gold and silver. But despite the fact that the states had scarcely paid in any of the requisitions with which to retire the paper notes, Congress failed to take this easy path; instead it searched desperately for a way to retire some of the notes. As early as April 1778, Congress contemplated forcing the conversion of $20–45 million of paper into loan certificates, which were interest-paying certificates of indebtedness issued by Congress. Congress finally lacked the courage to do this.

On September 3, 1779, Congress brought itself, nearly unanimously, to set an absolute limit of $200 million in paper issues outstanding, a sum that left a leeway of $60 million that could still be issued. The spirit of this resolve was quickly violated as Congress hastened to issue the $60 million, and Continentals continued to depreciate rapidly. Congress had absurdly believed that the mere stoppage, at this late date and after enormous issues, would reverse the depreciation and allow the government to retire all the notes at par. It was now disabused of this notion, but it still insisted on levying crippling taxes in order to retire the notes.

By a law of March 18, 1780, Congress decided to have the states tax $15 million worth of notes per month and deliver them to Congress to retire the paper in thirteen months’ time. As the retirement proceeded on its way, new bills totalling $10 million were to be issued by the states; not only was this quantity to be considerably less than the old, but the states were to pay 5 percent interest in specie or European sterling bills to be totally redeemed in specie in six years. Of the new bills, 40 percent were to go to Congress as income and 60 percent to the states delivering taxes in the old bills. The old paper was sensibly revalued at 40 to 1, so that the Congressional debt was now worth $5 million in specie instead of $200 million—a sensible step of partial repudiation. Even at that, however, the paper was overvalued, since in March 1780 its market valuation was closer to 60 to 1.

For a while, Continental money stopped depreciating, and even improved in value. But the states found they could not levy the requisite taxes, and the burdensome plan collapsed. By the end of 1780, only $2 million in old paper had been retired, and the market, seeing the retirement plan and the official pegging of value fail, lowered Continentals to 100 to 1 by January 1781, and 168 to 1 by April.

Meanwhile, the Congress, having stripped itself of its massive inflationary power, turned to another potential inflationary instrument, its loan certificates. Loan certificates, before March 1, 1778, had paid 6 percent interest in specie, and hence three $7 million blocs of certificates were highly prized; but after March, the interest was paid in paper. After March 1778, these certificates were not genuine loans, but simply notes issued by the government in payment for supplies and accepted by the merchants because the government would not pay in anything else. Hence, the certificates became a form of currency, and they too depreciated. As early as the end of November 1779, they were selling at 24 to 1 in specie on the market. Of the post–March 1778 loan certificates, $600 million were issued by the federal government during the war, of which $530 million were issued after September 1779. Loan certificates were even issued to pay the interest on other loan certificates.