Virginia Hyperinflation and Debt

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; as far as it was concerned, only the king could issue money. London's irritation was not enough to lead it to do something, however, 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 prior years went 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 usually inherited, and several generations of many Virginia families found themselves in hock to London merchants. Thomas Jefferson estimated that in 1774 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 on January 22, 1778, that sequestered British property. 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 then give the Virginia debtor a certificate of payment that relieved the debtor of further 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. But 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 about 1/1000 of its British equivalent).

Several of the cases at Wythe's High Court of Chancery involved British debtors who, wanting to be paid the full value of their debt, sued Virginia debtors who asserted that their debt had been cleared by a payment to the Virginia Loan Office. Wythe consistently held for the creditor, and required 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 after several procedural delays partly brought about by three Virginia Supreme Court justices recusing themselves, Page dropped his appeal in 1799. The U.S. Circuit Court for the District of Virginia overruled Wythe's decision in the unrelated case of Ware v. Hylton. The U.S. Supreme Court, however, agreed with Wythe and reversed the Circuit Court.