During the American Revolution, the members of the Second Continental Congress were faced with a dilemma, i.e. how to pay for a war against the most powerful nation in the world without taxes? Taxing the population was a political non-starter. One of the key reasons we rebelled was that the taxes imposed by the British Parliament were considered unjust and unfair. Remember the slogan “no taxation without representation.”
Our leaders in the Continental Congress dug the “funding the war” hole deeper by not giving themselves in the Articles of Confederation the powers to tax. To pay for the war which would eventually cost ~$2,735B in 2020 dollars, our Founding Fathers had to get creative.
So back to how we paid for the war. According to John R. Smith, Jr.’s February 23rd, 2015 article in the Journal of the American Revolution, titled “How was the Revolutionary War was paid for,” the money came from six sources.
One, each state legislatures was allowed to issue its own money. Amazingly, state “dollars” paid for 39% of the war’s expenses.
The second largest source of funds were Continental dollars issued by the Continental Congress to buy supplies, ships, arms and ammunition and pay soldiers and sailors. These dollars covered 28% of the cost of the war.
As the war progressed, the value of the state and continental dollars which were backed by nothing plummeted in value. For example, Congress ultimately printed about $242 million which were at the end of the war worth about $46 million.
By the end of the war, we had 15 currencies in circulation – one from each state, the Continental dollar and the British pound. In some cities, one could use Dutch guilders, Spanish dollars and/or French livres. Imagine the “fun” our founding fathers had in determining the relative value of each currency and the conversion rates!
Method three was issuing debt certificates by state legislatures which were purchased by private citizens. This method of raising money paid for 14% of the expenses required to fight the British.
Number four was that Congress did the same. Its debt certificates covered 10% of the funds needed to pay for the fight against the English. Keep in mind that if we lost the war, the certificates would be worthless. Purchasers of these financial instruments were really investing in the success of the revolution.
The fifth way our Founding Fathers raised money was via overseas loans. Six percent of the money (~$9M) came from borrowing money from Dutch investors and the Dutch (~$6M) and French government ($3M).
Last, the Continental Congress borrowed directly from private citizens. This accounted for roughly 3% of the money needed.
What is ironic is that if one looks at the tax rates of U.S. versus British citizens from 1792 to 1811, you’d learn that tax rates on U.S. citizens were 10 times higher than if we had remained a British colony. But then the war wasn’t about taxation, it was really about independence and freedom.