Philadelphia Reflections

Foreground: Parliament Irks the Colonial Merchants

Charles Townshend

Charles Townshend, Chancellor of the Exchequer under King George III in 1766-67, had a reputation for abrasively witty behavior, in addition to which he did carry a grudge against American colonial legislatures for circumventing his directives when earlier he had been in charge of Colonial Affairs. His most despised action against the Colonies, the Stamp Act, seems to have been only a small part of a political maneuver to frustrate an opposition vote of no confidence. The vote had taken the form of lowering the homeland land tax from four to three shillings (an action understood to be a vote of no confidence because it unbalanced the budget, which he then re-balanced by raising the money in the colonies.) The novelist Tobias Smollett subsequently produced a scathing depiction of Townshend's heedless arrogance in Humphry Clinker, but at least in the case of the Stamp Act, its sting was more in its heedlessness of the colonies than vengeance against them. One can easily imagine the loathing this rich dandy would inspire in sobersides like George Washington and John Adams. After Townshend was elevated in the British cabinet, almost anything became a possibility, but it was a fair guess he might continue to satisfy old scores with the colonies. When King George's mother began urging the young monarch to act like a real king, Townshend was available to help. On the other hand, the Whig party in Parliament had significant sympathy with the colonial position, as a spill-over from their main uproar about John Wilkes which need not concern us here. Vengefulness against the colonies was not widespread in the British government at the time, but colonists could easily believe any Ministry which appointed the likes of Townshend might well abuse power in other ways before such time as the King or a more civilized Ministry could arrive on the scene to set things right. It was vexing that a man so heedless as Townshend could also carry so many grudges. Things did ease when Townshend suddenly died of an "untended fever", in 1767.

Whatever the intent of those Townshend Acts, one clear message did stand out: paper money was forbidden in the colonies. Virginia Cavaliers might be more upset by the 1763 restraints on moving into the Ohio territories, and New England shippers might be most irritated by limits on manufactures in the colonies. But prohibiting paper money seriously damaged all colonial trade. Some merchants protested vigorously, some resorted to smuggling, and others, chiefly Robert Morris, devised clever workarounds for the problems which had been created. Paper currency might be vexingly easy to counterfeit, but it was safer to ship than gold coins. In dangerous ocean voyages, the underlying gold (which the paper money represents) remains in the vaults of the issuer even if the paper representing it is lost at sea. Theft becomes more complicated when money is transported by remittances or promissory notes, so a merchant like Morris would quickly recognize debt paper (essentially, remittance contracts acknowledging the existence of debt) as a way to circumvent such inconveniences. In a few months, we would be at war with England, where adversaries blocking each other's currency would be routine. By that time, Morris had perfected other systems of coping with the money problem. In simplified form, a shipload of flour would be sent abroad and sold, the proceeds of which were then used to buy gunpowder for a return voyage; as long as the two transactions were combined, actual paper money was not needed. Another feature is more sophisticated; by keeping this trade going, short-term loans for one leg of the trip could be transformed into long-term loans for many voyages. Long-term loans pay higher rates of interest than short-term loans; it would nowadays be referred to as "riding the yield curve." This system is currently in wide use for globalized trade, and Lehman Brothers were the main banker for it in 2008. And as a final strategy, having half the round-trip voyage transport innocent cargoes, the merchant could increase personal profits legitimately, while cloaking the existence of the underlying gun running on the opposite leg of the voyage. If the ship is sunk, it can then be difficult to say whether the loss of such a ship was military or commercial, insurable or uninsurable. In the case of a tobacco cargo, the value at the time of departure might well be different from the value later. Robert Morris became known as a genius in this sort of trade manipulation, and later his enemies were never able to prove it was illegal. Ultimately, a ship captain always has the option of moving his cargo to a different port.

Other colonists surely responded to a shortage of currency in similar resourceful ways, including barter and the Quaker system of maintaining individual account books on both sides of the transaction, and "squaring up" the balances later but eliminating many transaction steps. Wooden chairs were also a common substitute as a medium of exchange. But "Old Square-toes," Thomas Willing, experienced in currency difficulties, and his bold, reckless younger partner Morris displayed the greatest readiness to respond to opportunity. Credit and short-term paper were fundamental promises to repay at a certain time, commonly with a front-end discount taking the place of interest payment. The amount of discount varied with the risk, both of disruption by the authorities, and the risk of default by the debtor. This discount system was rough and approximate, but it served. Quite accustomed to borrowing through an intermediary, who would then be directed to repay some foreign creditor, Morris, and Willing added the innovation of issuing promissory notes and selling the contract itself to the public at a profit. Thus, written contracts would effectively serve as money. A cargo of flour or tobacco represented value, but that value need only be transformed into cash when it was safe and convenient to do so.

The Morris-Willing team had already displayed its inventiveness by starting a maritime insurance company, thereby adding to their reputation for meeting extensive obligations; they established an outstanding credit rating. Although primarily in the shipping trade, the firm was also involved in trade with the Indians. There, they invented the entirely novel idea of selling their notes to the public, essentially becoming underwriters for the risk of the notes, quite like the way insurance underwriters assumed the risk of a ship sinking. Their reputation for ingenuity in working around obstacles was growing, as well as their credibility for prompt and reliable repayment. In modern parlance, they established an enviable "track record." A creditor is only interested in whether he will be repaid; satisfied with that, he doesn't care how rich or how poor you are. The profits from complex trading were regularly plowed back into the business; one observer estimated Robert Morris's cash assets at the start of the Revolution were no greater than those of a prosperous blacksmith. It didn't matter; he had credit.

In the event, this prohibition of colonial paper money did not last very long, so profits from it were not immense. But ideas had been tested which seemed to work. Today, transactions devised at Willing and Morris are variously known as commercial credit, financial underwriting, and casualty insurance. In 1776, Robert Morris would be 42 years old.

Originally published: Wednesday, March 23, 2011; most-recently modified: Friday, May 17, 2019