Continental Currency

• The Bottom Line: The Continental Currency is a historical ghost that haunts modern finance, serving as the ultimate cautionary tale against the dangers of rampant money printing, the illusion of wealth without value, and the eventual, catastrophic collapse of a currency not backed by tangible assets or fiscal discipline.
• Key Takeaways:
• What it is: America's first national paper money, issued by the Continental Congress between 1775 and 1779 to fund the Revolutionary War. It ultimately became worthless due to massive overprinting.
• Why it matters: It's a stark, real-world lesson in inflation and a reminder that the value of any fiat_currency, including today's US Dollar, rests on public confidence and sound government finance, not just a printing press.
• How to use it: Use its lessons as a mental model to appreciate the true value of owning productive hard_assets and businesses with durable pricing_power, which act as a fortress against the slow erosion or rapid collapse of a currency's purchasing_power.

Imagine you have a crisp $100 bill. You know it can buy you a nice dinner, a full tank of gas, or a couple of movie tickets. Now, imagine that next year, that same $100 bill can only buy you a single cup of coffee. A few years later, it can't even buy a gumball. That's not a fantasy; it's the real-life story of the Continental Currency. In 1775, the American colonies were on the brink of war with the most powerful empire on Earth: Great Britain. Wars are incredibly expensive, and the fledgling Continental Congress had a huge problem. It had no gold or silver to speak of, and it lacked the authority to directly tax its citizens. How could it possibly pay soldiers, buy gunpowder, and feed an army? The answer seemed simple, almost magical: print money. The Congress began issuing paper bills called “Continentals.” Initially, people were patriotic and accepted the new currency. It worked. The war effort was funded. But as the war dragged on and expenses mounted, the Congress did the only thing it could: it printed more. And more. And more. Simultaneously, the individual states started printing their own currencies, and the British waged economic warfare by flooding the colonies with counterfeit Continentals. Soon, the country was drowning in a sea of paper money. People aren't fools. They quickly realized that while the number of paper bills was exploding, the actual amount of goods and services in the economy—the bread, boots, and bullets—was not. A farmer who sold his wheat for a stack of Continentals one day found he couldn't buy a new plow with them the next. Confidence evaporated. The currency entered a death spiral. Prices for everyday goods skyrocketed, not because the goods were more valuable, but because the money was becoming worthless. This culminated in the famous phrase, “not worth a Continental,” a bitter, everyday expression for anything utterly valueless. By 1781, the currency had effectively ceased to circulate. It had lost 99.9% of its value. You literally needed a wheelbarrow full of money to buy a loaf of bread.

“A wagon load of money will scarcely purchase a wagon load of provisions.” - George Washington, 1779

The Continental Currency is the story of a promise broken. The government promised each bill was worth a certain amount of real value (initially, Spanish Milled Dollars), but by printing endlessly, they broke that promise, destroying the savings of an entire generation and teaching a lesson that echoes in finance to this day.

The tale of the Continental Currency may seem like ancient history, but for a value investor, it is a foundational text. It's not about a specific stock or a balance sheet; it's about the very ground we stand on—the stability and reliability of the currency in which all assets are measured. 1. It Exposes the Fragility of Fiat Currency A value investor is obsessed with intrinsic_value—the real, underlying worth of a business. The Continental story is the ultimate proof that a piece of paper, by itself, has no intrinsic value. Its value comes from a collective belief system, a social contract with the government that issues it. When that government acts irresponsibly, the contract is broken, and the “value” vanishes into thin air. This forces a value investor to constantly ask: “What am I really holding? A claim on a productive enterprise, or just a pile of government promises?” 2. It is the Ultimate Lesson in Inflation Warren Buffett has called inflation a “giant corporate tapeworm” that silently eats away at investment returns. The Continental Currency is not just a tapeworm; it's the creature from Alien. It showed how currency debasement acts as a stealth tax on savers. Every dollar held in cash or fixed-income assets became a melting ice cube. For a value investor, whose goal is to increase real purchasing power over the long term, understanding this threat is paramount. The goal is not to simply have more dollars, but to have dollars that can buy more stuff in the future. The Continental is a stark reminder that these two goals are often not the same. 3. It Redefines the Margin of Safety Benjamin Graham taught us to buy assets for significantly less than their intrinsic value. This is the classic margin of safety. But the Continental experience adds another layer to this concept: a macroeconomic margin of safety. Your true safety doesn't just come from buying a cheap stock. It comes from owning high-quality, resilient businesses that can survive and thrive even if the currency they operate in is being mismanaged. A company that sells a unique product, owns irreplaceable assets, and can raise its prices to keep pace with inflation has a structural margin of safety that a government bond, denominated in a depreciating currency, simply does not. The lesson is to build a portfolio that is resilient not just to market downturns, but to the potential folly of monetary policy.

You cannot calculate a ratio for a historical event, but you can apply its profound lessons as a filter for your investment decisions. This acts as a “macro” checklist to complement your “micro” analysis of individual companies.

When assessing the long-term environment for your investments, consider the lessons of the Continental by asking these questions:

1. 1. Scrutinize the Issuer's Finances: Just as you'd analyze a company's balance sheet, look at the government's. Is the national debt growing at an unsustainable rate? Are deficits being funded primarily through money printing (often called “quantitative easing” in modern terms) rather than productive growth? A government with its financial house in order is more likely to maintain a stable currency.
2. 2. Prioritize Businesses with Pricing Power: The ultimate defense against inflation is owning a business that can pass rising costs onto its customers without losing them. Think of companies with powerful brands (like Apple or Coca-Cola), essential services (like a key utility or railroad), or unique intellectual property. These businesses aren't just passive victims of inflation; they can adapt to it. A wheat farmer in 1779 could simply demand more and more worthless Continentals for his grain. A great business does the same with modern currency.
3. 3. Be Wary of Long-Term “Paper” Promises: The Continental story shows the immense risk of lending money to a desperate government for a long period at a fixed rate. Today, this means being deeply skeptical of long-term government bonds, especially when interest rates are low and government debt is high. You are locking in a low return in a currency that is almost certain to lose purchasing power over the next 10, 20, or 30 years.
4. 4. Distinguish “Nominal” Gains from “Real” Gains: Always adjust your thinking for inflation. If your portfolio is up 8% but inflation is 5%, your real return is only 3%. The Continental era was one of hyper-nominal gains—prices went to the moon!—but catastrophic real losses. A value investor must always be focused on the real, inflation-adjusted return.

Let's illustrate the lesson with a modern scenario. Imagine it's a period of rising inflation, where the government is running large deficits and the central bank is creating a lot of new money. You have capital to invest for the next 30 years. You have two choices: 1. “The Fiat Promise”: A 30-Year U.S. Treasury Bond paying a fixed 4% interest rate per year. 2. “The Productive Asset”: Shares in “Steady Brew Coffee Co.,” a dominant global coffee chain with immense brand loyalty and stores on every corner. Let's analyze this through the lens of the Continental Currency's lessons.

The Value Investor's Conclusion: The lessons of the Continental Currency would scream at the investor to choose Steady Brew Coffee Co. The bond is a pure bet on the long-term stability of a fiat currency. The business, however, is an ownership stake in a real, productive enterprise that can protect itself from currency debasement. It possesses an intrinsic value independent of the whims of the government's printing press.

Framing the Continental story as an investment tool requires understanding what it teaches well and where the analogy can be stretched too thin.

• Clarity on Currency Risk: It is the clearest historical example of currency risk in American history, making an abstract concept brutally tangible.
• Highlights the Value of Real Assets: It provides the ultimate argument for preferring ownership of productive businesses, real estate, and commodities over long-term holdings of cash or government bonds.
• A Behavioral Anchor: Remembering “not worth a Continental” can be a powerful behavioral check against speculating in assets with no intrinsic value or getting complacent about the long-term threat of inflation.

• Context is Critical: The Continental Congress had no power to tax to back its currency. The modern U.S. government has immense taxing power, which provides a much stronger (though not infinite) foundation for the dollar.
• Don't Over-Correct into Extremism: The lesson is not to abandon the financial system, bury gold in the backyard, and never trust a dollar again. The U.S. dollar is the world's reserve currency, and the U.S. economy is vastly more complex and resilient. The story is a cautionary tale about risk, not a prophecy of imminent doom.
• Deflation is Also a Danger: While the Continental teaches a lesson about inflation, its opposite—deflation (a general fall in prices)—can be equally destructive. In a deflationary spiral, cash and government bonds become more valuable. The core lesson is about the dangers of monetary instability in either direction.

• inflation
• fiat_currency
• purchasing_power
• intrinsic_value
• margin_of_safety
• pricing_power
• hard_assets
• federal_reserve
• warren_buffett