It happened today - October 3, 2015

On this day in history, a government debauched its money. Which doesn’t narrow the field much, now does it? You can’t guess which government but you can guess that on plenty of other days one or another did so. Sometimes on consecutive days.

In this case it was the Continental Congress and the year was 1776. And actually what the Congress did was to borrow money to try to undebauch the currency. But borrowing to back unsound money only works if it’s a short-term desperate measure, buying time to do something about the monetary policy that’s causing the problem, namely printing more money than you have in real assets, essentially taxing without consent.

The way it works is that when a government increases the money supply faster than the economy grows, it has a larger share of the total amount of money than it did. It therefore gets to buy a larger share of the total economy than it did. But since the economy didn’t get larger, each dollar is worth less and everyone who didn’t get to print their own now has less real wealth.

There’s not much they can do about it because all dollars, francs or whatever it may be taste like chicken. Eventually people start refusing to accept the money, at least at face value, and if things get bad enough they won’t take it at all and insist on barter, gold or foreign money. But they have to refuse everyone’s debased money, not just the government’s, because there’s no way to tell them apart. And everyone refuses theirs.

Now the Continental Congress had a legitimate problem. It had to win a war without the ability to collect taxes, lacking both the legal authority and the administrative capacity given the war it was busy not winning for most of the next four years. But appeals to patriotism and pleas of necessity only take you so far.

Ultimately the Revolution succeeded and the new national government eventually made some effort to clean up the mess. But the simple fact is that you can print money far faster than you can borrow it and, indeed, if you didn’t have to print it you probably wouldn’t have to borrow it. And while the United States became a great nation, the expression “not worth a Continental” underlined for years the fact that it did so in part on a tried and false monetary expedient of substituting paper for real wealth to grab resources in a crisis.