Hyperinflation and Debt in Virginia Before and During the Revolution

Beginning in the 17th century, the American colonies began printing their own paper money to settle debts due to a lack of coins coming from Great Britain. This paper money was a promise from the colony that the paper's holder could exchange it to the colonial government for the amount of coin listed. The crown was not pleased with the development, because as far as it was concerned, only the king could issue money. London's irritation was not enough to lead it to do something, though, so the practice continued successfully until the buildup to the Revolutionary War. The colonies printed more money to fund the Revolution in hopes that it would end quickly and give the colonies time to find coins to back up the paper money. As the Revolution continued with no end in sight, the problems began.

Virginia's financial situation during the Revolution was dire. Much of the money raised by taxes in previous years had gone straight to the Royal Treasury, leaving the colonial government strapped for cash. On top of that, many Virginia farmers and plantation owners were laden with crippling debts to English merchants. These debts were huge and could usually be inherited, so that several generations of many Virginia families found themselves in hock to London merchants. Thomas Jefferson estimated that Virginians owed British merchants over £2 million. To add insult to injury, money printed in Virginia was quickly losing its value against the British pound sterling, and many collectors refused to accept Virginia paper money to settle debts with English merchants.

On November 27, 1777, the Continental Congress passed a resolution recommending that the states seize and sell loyalists' property. In response, the Virginia Assembly passed a law sequestering British property that passed on January 22, 1778; the British owner kept the title to the property, but the Virginia government would administer the property and collect any profits from it. This law included a program designed by Jefferson to help relieve Virginians of their British debts; a Virginia citizen could pay any money they owed a British subject to the recently-formed Virginia Loan Office instead. The Virginia Loan Office would give the Virginia debtor a certificate of payment that would relieve the debtor of any obligation to repay that debt. The 1778 law said nothing about whether the Virginia government was required to pay the British creditor.

The Treaty of Paris that ended the Revolutionary War included a provision that all genuine debts Americans owed British merchants before the war were to be paid in British pounds sterling.

In 1787, the Virginia Assembly passed a law stating that it would only be liable for debts that Virginia debtors had paid to the Virginia Loan Office up to the original amount of the debt plus six percent interest, and that it would pay in Virginia paper money. So, if a Virginian incurred a debt from a British merchant for 5,000 British pounds sterling in 1770, then paid £5,000 to the Virginia Loan Office in 1778, the state of Virginia would only be liable for £5,000 plus six percent interest per year, payable in Virginia paper money (which was still worth considerably less than British pounds sterling at that time).

Several of the cases at Wythe's High Court of Chancery involved British debtors who wanted to be paid the full value of their debt suing Virginia debtors who asserted that their debt had been cleared by a payment to the Virginia Loan Office. Wythe demonstrated his integrity by requiring the debtor to honor the British debt. Wythe was hardly a fan of the British crown, but in the case of Page v. Pendleton, Wythe said that under the law of the United States, British debts from before the War must be honored. To hold otherwise, Wythe thought, would be to succumb to basest demagoguery. Wythe's decision was deeply unpopular at the time, but the U.S. Supreme Court would agree with him years later in the case of Ware v. Hylton.