Introduction to Finance

Revolutionary War 
The war that brought the United States into being was fi nanced 
mainly by infl ation. The Second Continental Congress had no real authority to levy taxes and, 
thus, found it diffi
cult to raise money. As a result, the congress decided to issue notes for $2 mil-
lion. It issued more and more notes until the total rose to over $240 million. The individual states 
issued $200 million more. Since the notes were crudely engraved, counterfeiting was common, 
adding to the total of circulating currency. Continental currency depreciated in value so rapidly 
that the expression “not worth a continental” became a part of the American language.
War of 1812 
During the War of 1812, the government tried to avoid repeating the infl a-
tionary measures of the Revolutionary War. However, since the war was not popular in New 
England, it was impossible to fi nance it by taxation and borrowing. Paper currency was issued 
in a somewhat disguised form: bonds of small denomination bearing no interest and having 
no maturity date. The wholesale price index, based on 100 as the 1910–1914 average prices, 
rose from 131 in 1812 to 182 in 1814. Prices declined to about the prewar level by 1816 and 
continued downward as depression hit the economy.
Civil War 
The Mexican War (1846–1848) did not involve the total economy to any extent 
and led to no infl ationary price movements. The Civil War (1861–1865), however, was fi n-
anced partly by issuing paper money. In the war’s early stages, the U.S. Congress could not 
raise enough money by taxes and borrowing to fi nance all expenditures; therefore, it resorted 
to infl ation by issuing U.S. notes with no backing, known as greenbacks. In all, $450 million 
was authorized. Even though this was but a fraction of the cost of the war, prices went up 
substantially. Wholesale prices on a base of 100 increased from 93 in 1860 to 185 in 1865. 
Attempts to retire the greenbacks at the end of the war led to defl ation and depression in 1866. 
As a result, the law withdrawing greenbacks was repealed.
World War I 
Although the U.S. government did not print money to fi nance World War I, 
it did practice other infl ationary policies. About one-third of the cost of the war was raised 
by taxes and two-thirds of the cost by borrowing. The banking system provided much of this 
credit, which added to the money supply. People were even persuaded to use Liberty Bonds 
as collateral for bank loans to buy other bonds. The wholesale price index rose from 99 in 
1914 to 226 in 1920. Then, as credit expansion was fi nally restricted in 1921, it dropped to 
141 in 1922.