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  • Online publication date: December 2014

1 - Financial and Economic Background

Summary

By 1846 the United States possessed a rich history of war financing and economic development reaching back over two hundred years. Both successful innovation and abject failure crowned the efforts of the colonists and early Americans to develop a financial system capable of funding public endeavours and private enterprise. In the beginning, colonial governments relied on sources as varied as paper money, taxes paid in kind, tobacco warehouse receipts and loans from local merchants to finance military campaigns. Lessons were learned, forgotten and relearned. One lesson absorbed early by colonial officials was that current means (taxes) were insufficient for the massive outlays required by warfare and, further, likely to be rejected by the populace as too burdensome. Like European states they turned to various schemes of borrowing. The provincial officials also observed that some methods used to finance military efforts were admirably suited as economic stimulants during periods of slow trade. The financial and economic environment in which the Mexican–American War was financed was shaped by past experimentation and evolution. This chapter is devoted to placing the process in a historical context.

During the colonial period the British Americans funded their military efforts against the French and their Native American allies largely with bills of credit issued by the provincial governments. Massachusetts pioneered this method in 1690 and, as warfare became more extensive and expensive in the eighteenth century, one colony after another found it necessary to follow the Bay colony's example. The paper money, the first in the British Empire, passed as currency alongside the gold and silver coins then in circulation. The value of the bills, other than faith and trust, lay in the provision making them receivable for provincial taxes and other public dues.

As the eighteenth century advanced the wartime expediency became a technique to stimulate trade by increasing the money supply and by financing agricultural expansion. In a raw and developing country like North America, capital, if it does not exist or cannot be imported, must be created. The colonial governments loaned capital to merchants and farmers in the form of paper money and accepted mortgages and other debt obligations as collateral.