8. The American Revolution

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Length: {6:30 minutes}

Summary of Chapter 8: The American Revolution

By the mid-1700s, the British Empire, despite nearing its height of power, was burdened by substantial debt due to four costly wars in Europe. To finance these wars, the British government had borrowed heavily from the Bank of England, leading to a significant national debt. Consequently, Britain sought to raise revenues from its American colonies to make interest payments.

In contrast, the American colonies were not yet affected by the concept of a privately owned central bank and faced a severe shortage of precious metal coins. This scarcity prompted the colonies to experiment with printing their own paper money, known as Colonial Scrip, which proved successful. It provided a stable medium of exchange and fostered unity among the colonies. Benjamin Franklin was a strong proponent of this system.

Franklin, during his stay in London, explained that the colonies’ prosperity was due to their ability to issue their own currency. This debt-free money, printed in the public interest, was not backed by gold or silver, making it a fiat currency. The Bank of England, feeling threatened by this, influenced the British Parliament to pass the Currency Act of 1764, which restricted the colonies from issuing their own money and required taxes to be paid in gold or silver coins. This move forced the colonies onto a gold or silver standard, leading to economic depression and widespread unemployment.

Franklin argued that this economic strife, caused by the loss of their ability to issue currency, was a fundamental cause of the American Revolution. By the time of the first shots at Lexington in 1775, the colonies had been drained of gold and silver, forcing them to print money to finance the war. This led to severe inflation, rendering the Continental currency nearly worthless by the end of the war.

The chapter highlights that while the fiat currency of the colonies had been effective during times of peace, it became problematic during the war due to over-issuance. This historical period is often used to argue both for and against fiat currencies and the gold standard.

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