The last quarter of the 18th century in the American colonies, which transformed into the nascent United States, was a period of profound transition marked by economic upheaval, intense political debates, and a persistent struggle with issues of class, poverty, and corruption. As dedicated historians, committed to uncovering the unvarnished truth, we must examine this era not merely through the lens of nation-building, but also through the complexities of its societal and financial realities.
One truly striking, albeit localized, detail from this period surfaces early on: in 1776, delegates at the Continental Congress reportedly complained about many rats in Philadelphia. This seemingly mundane observation, placed against the backdrop of a burgeoning revolution, serves as a stark reminder that even amidst grand political aspirations, the daily realities and challenges of urban life, including unsanitary conditions, were ever-present.
The Tumultuous Aftermath of Revolution and Early Financial Experiments
The Revolutionary War, while securing independence, plunged the newly formed nation into significant economic distress. Incomes plummeted in the final decades of the eighteenth century, and the states found themselves broke and vulnerable, susceptible to foreign invasion and economic collapse without a cohesive national government. The “dysfunctional financial system” and “hyperinflation” that characterized this time led to per capita income losses of potentially as much as 30% by 1790. The loose confederation that preceded the federal union allowed states to tax interstate trade, which had disastrous effects on commerce, and 11 of the 13 colonies passed their own tariff laws in the 1780s, further hindering recovery.
It was within this climate of economic anxiety that bold, albeit often misguided, financial experiments were undertaken. In the Spring of 1781, Robert Morris, a wealthy Philadelphia merchant and, at this time, the virtual economic and financial “zar” of the Continental Congress, assumed total economic power in Congress and introduced a bill to create the Bank of North America. This institution was envisioned as the “first commercial bank as well as the first central bank in the history of the New Republic”, and indeed, “the nation’s first central bank,” even before the Constitution was drafted. Modeled after the Bank of England, it was authorized to issue more paper promissory notes than it held in deposits. In early 1782, the Bank of North America opened its doors, having quickly received a federal charter and the privilege of being the sole bank permitted to operate in the country. Its notes were to be accepted in all duties and taxes to the government at par with specie, and it was designated as the depository for all congressional funds.
However, the Bank of North America’s tenure as a central bank was short-lived and fraught with issues. It rapidly loaned $1.2 million to Congress, but the market soon perceived that the bank’s notes were being inflated compared with specie. Despite the nominal redeemability of its notes, the market’s lack of confidence led to their depreciation outside of Philadelphia, the bank’s home base. The bank even resorted to hiring people to discourage redemption of its notes, a move hardly calculated to inspire confidence. By the end of 1783, Morris’s political power had slipped, and he moved swiftly to transition the Bank of North America from its central bank role to that of a purely private commercial bank, chartered by the state of Pennsylvania. All federal government stock in the bank was sold into private hands, and all U.S. government debt to the bank was repaid, effectively ending the first experiment with a central bank in the United States.
The broader truth about monetary policy in this period was a consistent struggle against inflation and depreciation. In the mid-1780s, seven state governments made “vain attempts to reinflate prices with paper money,” which inevitably failed, causing depreciation and a shortage of specie. This was a clear demonstration of Gresham’s Law at work, where “bad money drives out good”. For example, in 1787 to 1788, North Carolina’s paper money depreciated by more than 50%, with coin vanishing and the paper having “practically no value outside the state”. Merchants suffered severe losses as they were forced to accept depreciated paper at inflated values locally but could not use it to pay foreign debts. This pattern of depreciation, inflation, and specie scarcity had been a recurrent problem in the colonies, as seen with Massachusetts’s early paper money issues.
This widespread financial chaos and the perceived “clogged” state of government led figures like George Washington to express deep concern, noting in 1786 that “the wheels of government are clogged and…we are descending into the vale of confusion and darkness”. The severity of the post-Revolutionary economic situation was also underscored by Shays’ Rebellion in 1786, a “violent protest of farmers” against foreclosures, high taxes, and deflation, which “terrifying politicians and elites elsewhere in the country”.
The Constitutional Framework, Political Division, and the Problem of Corruption
The recognition of these profound economic and political vulnerabilities directly informed the drafting of the U.S. Constitution. The framers, “mindful of the bleak record of colonial and revolutionary paper issues and provincial juggling of the weights and denominations of coin,” explicitly prohibited states from coining money, emitting paper money, or making anything but gold and silver coin legal tender. This was a deliberate intent of the Founding Fathers, who had bitter experiences with fiat money during the Revolutionary War.
However, the establishment of the new federal government and its initial financial policies immediately ignited new political conflicts, with corruption at their very core. The 1790s were characterized by intense debate about Alexander Hamilton’s financial plan. Hamilton’s proposals—which included refunding national and state debts, creating a national bank, and implementing tariffs and excise taxes—were “deliberately modeled on the British financial system” and inevitably provoked fears of “systematic corruption” in “classic commonwealth terms”. Critics, particularly Virginians, drew a direct connection between Hamilton’s plan and “English executive corruption,” warning that it threatened “the existence of American liberty”. This ideological clash “led to the creation of an opposition party in the United States,” with “distinct Federalist and Republican parties” forming. This debate placed “governmental promotion of economic development and corruption at the center of American politics for the next seventy years”.
The concept of “corruption” itself held deep meaning for Americans in this era, shaped by centuries of political philosophy. It was understood broadly, encompassing not just bribery (venal corruption), but also “systematic corruption,” where elites in control of government awarded privileges to consolidate power. The framers of the Constitution were “haunted by the specter of future desolation” and “anxious to trust no individual with power”. They studied ancient Roman and contemporary British history, seeing Britain as a “failed polity” due to the king’s use of “wealth and patronage to gain influence over British parliamentarians, undermining constitutional government”. This fear led them to design a system with checks and balances, debating even the size of the House of Representatives to make it harder to “buy” members and prevent legislative corruption.
Beyond the federal level, a crucial development from the 1780s to the 1840s was the emergence of a “constitutional structure of state governments that mandated free economic entry and competition” to combat systematic corruption. This involved eliminating the pressure for special corporate privileges by enacting “general incorporation laws” which allowed “unlimited entry into corporate status via an administrative procedure”. States also began requiring bond referendums for borrowing and forbidding state and local investment in private corporations to prevent the “classic case of systematic corruption” seen in New York’s Albany Regency, which used bank charters to dominate state politics.
The anxieties of the period also manifested in other ways. The 1798 Alien Enemies Act was passed, reflecting a climate of political tension and fear of foreign influence. This was further amplified in 1799, when Rev. Jedidiah Morse warned his congregation about “Illuminati” influence in the U.S., explicitly linking it to Thomas Jefferson. These fears, while seemingly conspiratorial, were symptomatic of a deeply divided society grappling with rapid change, the perceived decay of civic virtue, and a profound distrust of concentrated power, whether political or financial.
In essence, the final quarter of the 18th century was a crucible for the American experience, defined by the immediate aftermath of revolutionary conflict, the perilous path of early financial innovation, and a fundamental struggle to establish a republican government resilient against the deep-seated fears of corruption and wealth concentration that were already so evident in colonial life. The challenges of this period laid the groundwork for the ongoing class conflicts and financial debates that would shape the nation for decades to come.