History of Continental Currency
July 22, 1775, was when Congress issued $2 million in bills of credit, thus creating the American colonists' first independent currency, the Continental currency.
Although the Massachusetts Bay colony had issued its own bills of credit in 1690, the Continental was the first currency to be mass distributed for the colonists.
The Continental rapidly became worthless, thus spawning the phrase: "Not worth a Continental." Hyperinflation, and its connection to the overprinting of fiat currency, is a history whose lessons are vital to both current and future economic situations.
In the Beginning
In 1775, American revolutionaries lacked the funds necessary to fight the British, so the Continental currency was issued to pay for the war. Backed by nothing, the overprinting (a 100 percent increase in a single year alone) of Continental currency devalued the notes until, as George Washington said, "A wagonload of currency will hardly purchase a wagonload of provisions." It also didn't help that the currency could be counterfeited with ease. The failure of the Continental left the United States burdened with a heavy war debt. Eventually, the economic instability led to the abandonment of the Articles of Confederation, followed by the drafting of the Constitution to create a more centralized federal government with the power to regulate the value of currency, backed by silver and gold.
Lesson
The history of the Continental is a testament to what can eventually happen to all fiat currency throughout history. It usually starts as a means to repay a debt when there's not enough silver or gold in the treasury and the government does not wish to default. The printing of paper currency then increases as easy credit creates a false sense of wealth and prosperity, but eventually, inflation caused by the overprinting devalues the currency until people lose faith in it and refuse to use it. Once that happens, the notes become worthless, and a new currency must be created, often by turning to gold and/or silver.
Misconceptions
Hard-money economists often point to the Continental as a reason why fiat currency is a bad idea and to demonstrate the importance of "hard" money such as silver, gold or any currency backed by such. Not everyone agrees with that view (often by pointing to Lincoln's "greenbacks"), but one thing history does show is that uncontrolled inflation of the money supply--which is very easy to do with fiat currency--often has disastrous consequences.
Theories/Speculation
It is important to note that the general history of money is often rife with conspiracies, both factual and theoretical, especially when it comes to banking establishments. The history of the Continental currency is no different. One such historical documentary by William Still, "Money Masters: How the International Bankers Gained Control of America," borders on conspiracy theory, but also provides much insight into the history of money in general and has a segment about the Continental, giving an alternative view to its collapse. It also contends that fractional reserves banking--not fiat currency in itself--is the prime cause of inflation, recessions and depressions.
Warning
Failure to understand and learn from the history of money, specifically how the Continental ended up worthless, dooms us to repeat the same mistakes. And the mistakes done at the economic level can and do lead to disasters such as the Great Depression, and the hyperinflationary depression that led to the eventual destruction of the Weimar Republic in Germany after World War I.
