america and paper currency -- 6/22/22

Today's selection -- from The Economy of Colonial America by Edwin J. Perkins. American colonies were pioneers in the use of paper currency as a form of exchange, and most of their efforts were viewed as successful:
"Scholars are divided about whether [paper currency as] form of payment eventually superseded specie as the main component of the money stock in some regions. Roger Weiss argued that paper money rarely approached one-half of any colony's total money stock, except for certain periods in Pennsylvania, New York, and Virginia. On the other hand, several monetary historians have accepted as reasonably accurate an estimate made by Alexander Hamilton in the 1780s that paper constituted three-fourths of the total colonial money supply on the eve of independence.

"The North American colonies were among the earliest political units in modern history to test the viability of paper currency as a medium of exchange and to persist in its use. The Chinese had preceded the colonies in issuing sizable volumes of paper notes, but they abandoned the practice in the fifteenth century. No European state had previously authorized the issuance of paper money on a vast scale. In the mother country, the Bank of England and the government Treasury issued notes and Exchequer bills in the eight­eenth century, but these instruments were never made legal tender in the payment of private debts. The high denominations of these notes and bills, a £20 ($1,800) minimum for the Bank of England and a £100 ($9,000) minimum for the Treasury after 1709, effectively prevented them from circulating widely and becoming an everyday medium of exchange.

"Most economic and political leaders in England strongly favored an exclusively specie system. They viewed paper currency as, at best, a novel aberration. For some, it was a matter of deep-seated principle: paper money violated a presumed economic axiom; it was inherently unsound and probably corrupt. Since it had no underlying base, paper currency was certain to depreciate in value and disrupt, if not destroy, any economy. Most of the king's ministers associated with the administration of colonial affairs were prejudiced in varying degrees against paper money, although they frequently condoned its issuance as a temporary expedient.

1652 pine tree shilling

"In the colonies, on the other hand, paper currency was widely supported -- by merchants as well as farmers -- as a legitimate feature of the financial system. The focus of colonial leadership was on practicalities rather than abstract monetary principles. The relative degree of consensus was surprising, given the very controversial course of American monetary history in the nineteenth century. With the possible exception of political battles in New England, few irreconcilable arguments broke out between hard money diehards and paper-money advocates. Indeed, the colonial paper-money issue defies easy class analysis, as Leslie Brock argued in a penetrating dissertation written in 1941, but only recently published. Although paper normally depreciated to the detriment of creditors, it was enthusiastically endorsed by most members of the elite economic classes who dominated colonial legislatures and were often creditors in domestic transactions.

"The various colonial legislatures had a mixed record in terms of the general management of their currency issues. As Elmus Wicker has observed, we must make a sharp distinction between some of the earlier questionable practices and the much more responsible policies which prevailed over the last quarter of the colonial era. During the first half of the eighteenth century, several colonies, most notably South Carolina, Rhode Island, and Massachusetts, performed poorly as judged on the basis of high rates of depreciation and price instability. After 1750, however, no evidence exists that any colony managed its paper money ineptly.

"The initial emission of paper currency came in Massachusetts in 1690, and the circumstances of its issuance set a pattern that was repeated in colony after colony. An underfinanced military campaign against French Quebec failed, and the returning soldiers who had not been paid the promised wages were on the verge of mutiny. The colony's treasury was almost empty, and with no banks or other private sources of loanable funds, the Massachusetts legislature fell upon the expedient of creating and issuing £7,000 ($630,000) in paper bills of credit. In an effort to uphold the value of the bills, they were made legal tender in the payment of provincial taxes, and after 1691 at a 5 percent advance over the face amount. Upon their receipt at the Treasury, the bills were to be promptly destroyed. Thus, this detour from established financial practices was designed to be temporary and self-liquidating. In this first instance, the paper bills were retired in due course, and the monetary experiment was deemed a huge success.

"In later years in Massachusetts and elsewhere, new emergencies continually arose, and colonial legislatures resorted to printing and issuing paper money to finance government expenditures. Usually a financial crisis had military origins, and the imperial officials in London reluctantly approved (invariably after the fact) fresh emis­sions of paper.

"Since this system functioned so effectively from the colonists' standpoint, legislatures discovered other reasons for authorizing new emissions. In some cases, especially Pennsylvania in the 1720s, the justification was the stimulation of lethargic trade; in other cases -- ­for example, Maryland in 1733 -- the explanation was merely the convenience of the inhabitants because of a shortage of specie and commodity money for daily transactions. As time passed, the expi­ration dates of the individual issues lengthened from merely two or three years to ten or more years; old bills received in tax payments were not always burned, but occasionally reissued; and a colony's various emissions began to overlap one another in time. When a colony's paper depreciated heavily, as happened in New England and South Carolina during the first half of the eighteenth century, the legislature often authorized an exchange of 'new' tenor bills for the outstanding 'old' tenor bills at some fixed ratio. In short, the perpetuation of a long series of temporary emissions gave many colonies de facto a permanent system of paper currency to supple­ment the local supply of specie and commodity money.

"The terms of currency issues differed in all thirteen colonies, which makes generalization difficult. Variations existed in the back­ing for the bills, the length of issue, the method of retirement, interest-rate features, and legal-tender provisions. For our purposes, the issues can be divided in two broad categories, with the source of funds for retirement, whether public tax revenues or loan repay­ments by private citizens, the distinguishing characteristic. In most colonies both types were outstanding at the same time.

"Given the universally modest level of taxation and the correspond­ingly small accumulation of specie in almost every colony's treasury, legislatures frequently authorized the emission of paper currency to pay pressing military expenses and other outstanding government debts. The economic consequences were twofold. This action meant that those who accepted the paper bills in payment had actually been forced to make involuntary loans to the colonial government. Simultaneously, it postponed until the assigned retirement date of the bills the collection of taxes for ongoing expenses, which explains in large part why such legislative acts were popular, since, given the option, most individuals -- then and now -- preferred to delay taxes rather than pay them currently.

"In some instances, the paper bills carried no interest rate, and thus became a 'free' loan for the colonial government. (The green­back dollars issued during the Civil War, some of which were never retired from circulation, remain with us today as examples of an interest-free loan forced upon holders by government.) On other occasions, even within the same colony, the terms of issue provided for the acceptance of the bills in the payment of future taxes at some stated premium, often 5 percent. In yet another variation, the in­terest associated with a given issue of currency compounded during the years it remained outstanding.

"In addition to the fairness of compensating noteholders for ac­cepting paper in lieu of specie, the interest-rate feature served to hold up the value of the currency and diminish or even prevent its depreciation. The only drawback was that many individuals began to view the bills as investments rather than everyday money as the retirement date approached. When citizens hoarded interest-bearing paper currency for its investment qualities, they prevented its wide circulation and denied the colony the convenience of an expanded money supply. Michener has questioned whether issues held exten­sively for investment purposes should be counted as part of the money stock because of low transactions velocity.

"Not every issue was the result of a financial crisis or emergency; some legislatures simply voted to increase the local money supply in the hope of stimulating domestic trade and attracting more foreign commerce. Richard Lester has wrinen extensively about new cur­rency issues in Pennsylvania in 1723 and 1729 which were intended to boost economic activity and overcome mild recessions. According to Lester, the emissions were very successful, and the legislature largely achieved its goals.

"Convinced of the beneficial effects of an increased money supply in New York and Pennsylvania, the Maryland legislature, in 1733, decided to test the usefulness of paper as a medium of exchange. Much of the Pennsylvania paper had already spilled over the Mary­land border and was readily accepted in local trade. The Maryland currency was distributed throughout the colony on a per capita basis to all persons subject to taxation. Every taxable individual was given 30 shillings ($135), with the amounts allocated for taxable indentured servants and slaves turned over to their masters.

"In all the cases cited above, the legislatures relied solely on pro­vincial tax revenues to provide sufficient funds to retire the currency issues. As a rule, special taxes were imposed for this purpose. Two common sources of revenue were property taxes and head taxes. But there were also other systems of retirement. In the Chesapeake colonies an export tax on tobacco shipments went toward retiring the outstanding paper. Maryland, for example, built up a substantial sinking fund from the collection of export taxes on tobacco; the colony's tax revenues were transmitted to London and invested in the stock of the Bank of England. As a result, that colony had the most secure currency system on the mainland if measured in terms of the likelihood of redeeming its currency at face value. In other instances, legislatures voted a special tax assessment only in the last year or two before scheduled retirement. The impending imple­mentation of plans to collect special fees led many legislatures to consider favorably alternative proposals to reissue the old currency or replace it with a fresh emission of paper bills."



Edwin J. Perkins


The Economy of Colonial America


Columbia University Press


Copyright 1988 Columbia University Press


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