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article number 485
article date 09-15-2015
copyright 2015 by Author else SaltOfAmerica
We Have No Form of Money, How did we Trade? 1660-1760
by Chester W. Wright


Capital is one of the four classes into which economists have divided the agents of production. As an agent of production, and one that has become increasingly important as time passes, it is essential to society that conditions shall be such as to foster its accumulation and further its most economical use. In determining these conditions the financial institutions of a country play a vital part.

The supply of capital is commonly said to be determined by the amount of wealth produced that it is possible to save—the savable fund—and by the willingness of those who can save to save—the effective desire of accumulation.

The savable fund depends on how much surplus is produced over and above what is necessary for subsistence.

The effective desire of accumulation depends on those conditions that make a person willing to forgo immediate consumption of wealth for the sake of having more in the future, such conditions as foresight for possible future wants and such social security as makes it probable that one who saves, or those for whom he saves, will in the future enjoy the fruits of his sacrifice and not be deprived of them.

For its most economical use, it is desirable that such capital as has been saved shall be used in the process of production by those who can make it most productive.

Since those who own capital are often not in a position to use it in the most productive manner themselves, it is desirable that there should be facilities for transferring it to those who can so use it. This is done, where the owner does not use it himself, by lending it to others or investing it in enterprises, the control of which rests chiefly or entirely with others.

Some borrowing is for the purpose of obtaining money to be used in consumption. A borrower is said to receive credit from the lender. This credit is based on all the factors that create a belief in the lender that the borrower will be able and willing to repay the debt when it falls due.

It is therefore clear that the better the facilities existing for lenders to determine with accuracy the credit of borrowers, the greater the likelihood that capital will flow into the hands of those who will use it most productively. Credit institutions increase the mobility of capital and facilitate its transfer.

In carrying out this transfer or distribution of capital, exchange takes place, an exchange of present control of funds for a promise to return them in the future, usually with interest. To carry out this exchange a form of market organization is necessary.

The more highly organized the market, the larger the group of those who have capital to lend, and the larger the group of those who wish to borrow capital who are thus brought together, the more complete the information available to each, the greater the security, and the better the facilities for the transfer of capital, the greater are the chances of its being distributed so as to be used in a way to promote the most economical satisfaction of society’s wants.

It is for the furthering of this process of accumulating and distributing the capital of industrial society and facilitating all the necessary transactions that our financial institutions have developed and function. These functions and objectives should be kept in mind in the study of the actual conditions affecting the accumulation and distribution of capital in the colonies, to which we now turn.


The Supply of Capital

As has already been pointed out, the process of establishing the colonies necessitated a considerable outlay of capital which was provided by the “adventurers,” proprietors, and others who promoted colonization and by those who migrated to this country with their accumulated savings.

Europe thus furnished the initial supply.

The further increase in the supply came from two sources: the additional inflow from Europe and the accumulation that took place within the colonies through the saving of the surplus wealth that they produced.

Although we have no means of measuring it, we can be certain that the first of these two sources was relatively unimportant. The steady inflow of immigrants added something to Europe’s contribution; but for the most part these people were poor, having little in the way of worldly goods to bring and often insufficient funds to pay for their passage across, so their contribution to the supply of capital thus brought was small.

Another, and one of the most important, ways in which European capital was obtained was through the credit that British merchants extended to the colonists to enable them to buy goods.

As the wealth producing power of the colonies increased and their prospects of great economic development became more certain, the willingness to extend this credit became greater.

Typically, such advances were made to the merchant traders of the Northern colonies importing goods from England or to the wealthy Southern planters purchasing goods or slaves. Man of the latter group, apparently more inclined to live up to or beyond their income, were often heavily in debt as a result, and it was among them that much the larger proportion of indebtedness to Great Britain was found when the question of payment of such debts arose after the Revolution.*

* Prof. M. W. Jernegan believes that the tobacco planters just before the Revolution were generally losing money and were living off their capital in land and British credit.

This fact, too, was not without significance in their attitude at the time of the Revolution. That the amount of such trading credits must have been considerable can be judged from the fact that about a decade before the Revolution the total was estimated at from £3 million to £5 million.

Outside of trade not much foreign capital appears to have been invested in the colonies. In the case of some of the larger manufacturing enterprises it is found occasionally, and doubtless small amounts flowed into all branches of economic activity.

Although some of the foreign private credit that the colonists obtained from abroad was diverted to consumption, most of it was added to the productive power of the country, though of course the interest earned was usually returned abroad.

For the greater portion of their supply of capital the colonists were dependent upon the amount that they could accumulate as savings from the product of their own activities.

With the growth of population and the supply of labor, the introduction of slightly better methods and more suitable crops in agriculture, the expansion of the fisheries and lumbering, the rise of manufactures, and the development of trade which occurred with expansion of the markets—in short with all economic advance—the productive capacity of the colonies rapidly grew.

And as the annual output of wealth per capita increased, the savable fund was augmented.

One factor in this was the comparative freedom from the destruction of wealth through the ravages of war, from which the continent of Europe suffered so much. Such losses from war as occurred fell chiefly upon the colonists’ foreign commerce; aside from Indian depredations, the destruction of wealth in the colonies from this cause was relatively small.

Nor did the cost of carrying on war elsewhere greatly deplete their economic resources. This outlay—and it was a large item—was met chiefly by Britain; though the portion borne by the colonists was slight, they had difficulty in paying it. In these ways the conditions in the colonies promoted the rapid increase of the savable fund.


The Willingness to Save

Conditions were also favorable to saving—the effective desire of accumulation was strong. The comparative absence of property losses in war, the stability of governmental legal institutions, and the general security of property rights as then recognized offered assurance to those who saved that they would be permitted to enjoy the fruit of their abstinence and so served as inducement.

The ambition and industry of the colonists promoted the production of wealth; thrift and frugality furthered its accumulation as capital. The energy of the Scotch-Irish, the shrewdness and thrift of the Quakers, the ascetic morality of the Puritans frowning upon high living without discouraging thrift, all played an important part in the process.

The absence of this widespread thrift was most marked among the easy going, hospitable, luxury-loving planters of the South; even they often accumulated large estates and many slaves, though debts were apt to accompany the process.

Such facilities as the modern savings bank were not available then, but they were less needed. The demand for capital was so universal and the opportunities open to everyone for its use, even in small amounts, were so numerous (in part a product of the lack of specialization), that there was little difficulty in finding close at hand, either in some activity of the individual or among his neighbors in the community, a chance to use it profitably.

These same conditions made the lack of good means of communication and the relative scarcity of credit facilities for the easy distribution of capital a less serious obstacle in the way of its being used where most needed than would otherwise have been the case.

Nor were corporate securities, such as people of today so commonly invest in, generally available; though we do read of some buying and selling of the stock of English companies.

Provincial bills of credit, other than those used in circulation, representing the debts of the colonies were sometimes sold and, in a small way, afforded a chance to invest savings. Some, too, hoarded small amounts of specie (coin, usually of precious metal) for a time of need.

But most of the saved wealth was quickly absorbed in some undertaking in the extractive industries or trade or manufactures in which the owner or some neighbor in the vicinity was interested.

The supply of capital in any community thus grew chiefly through local accumulations. It should be noted, too, that while this supply was increasing, the colonists were raising large families and also using a considerable amount of their income to better their standard of living.

Yet such were the conditions in this rapidly growing country that, in spite of the inroads of these increasing family expenditures upon the savable fund, the accumulation of capital in the colonies advanced at a fairly rapid rate, especially during the eighteenth century.


The Demand for Capital

In a new and rapidly developing country the demand for capital is always great. Such a country has not had time to accumulate a supply to meet its steadily expanding wants and the opportunities for its use, which, though apt to vary greatly in different lines, are to be found in practically every branch of economic activity.

Yet most lines of business as carried on in colonial times did not necessitate a large amount of capital. Typically small-scale production prevailed and, in the absence of the extensive use of machinery which marks modern production, particularly in manufacturing, an individual who had at his command only a small amount of capital was in a position to engage in such industries without a serious handicap.

Only in a few lines of activity do we find relatively large amounts used in carrying on an enterprise. Foreign trade and shipping were the most important capitalistic enterprises of the day; through them the merchant princes of the period accumulated and invested their fortunes.

It was because of the relatively large amount of capital required for the purchase of ships and goods for trade that people often joined together as partners, sharing in the profits and losses in proportion to their investment.

Outside of foreign trade the largest amounts of wealth used in single enterprises were found in the case of the Southern plantations where the sums invested in land, slaves, and plantation equipment by the owner are often very considerable.

In manufacturing, on the other hand, the capital invested in any one plant was seldom very large; during the eighteenth century it was usually possible for a person out of his own savings, to accumulate a sum sufficient to engage in such enterprises, though here, as in every line, a small amount of temporary borrowing on account was common.

As the mass of those engaged in local trade and farming used relatively little capital, the plantation owners of the South (to whom might be added the descendants of the large landholders in New York) and the merchant traders of the North made up the great portion of the wealthy classes of the colonial period; the rise of this moneyed aristocracy enabled it to play an increasingly important part in the economic, political, and social life of the times.

The common medieval objection to taking interest, which had become embodied in the canon law, was challenged at the time of the Reformation by such men as Calvin, and in England the charging of a fixed rate of interest was first made legal in 1545, the maximum rate being set at 10 per cent.

Subsequent acts reduced this rate to 8 per cent in 1624, 6 per cent in 1660, and 5 per cent in 1713, at which level it remained until the repeal of all usury acts in 1854.

In time practically all the colonies fixed their own legal interest rates. In 1661 Massachusetts fixed the rate at 8 per cent, in 1692 Maryland adopted 6 per cent; during the eighteenth century this latter rate came to be the one most generally chosen, though by 1776 some colonies permitted 7 or 8 per cent and in Virginia 5 per cent was the maximum.

What the actually prevailing rates were and whether the usury laws were commonly evaded, as is likely, we have little basis for judging. It seems probable that the nominal rates were about the maximum allowed, although there were many devices for securing a higher return in practice, and in a money market so decentralized and so lacking in organization as was found in the colonies there must have been marked variations.

According to Franklin the prevailing interest rates were between 6 and 10 per cent.


Colonial Money

Wherever trade or exchange of goods exists some form of circulating medium or money is desirable to facilitate the process.

Money facilitates exchange by performing certain functions usually classified as:

- (1) serving as a standard of value, that is, a common denominator by which the values of goods are measured;
- (2) serving as a standard of deferred payments, whereby values borrowed at one time to be returned later are specified in terms and amounts of this standard;
- (3) serving as a medium whereby goods are exchanged for money, which can then be re-exchanged for goods, instead of exchanging goods direct for other goods as under a system of barter.

Sometimes, too, money is used as a storehouse of value, that is, it affords a convenient method by which to keep wealth.

In the early period of settlement, when there was little trade and it was largely confined to each locality and money was scarce, the system of barter was generally used. Where each community was relatively self-sufficing economically and the commodities exchanged were small in number and in general demand, this system of barter, in spite of its obvious cumbersomeness, was not so serious an obstacle to exchange as would be the case today.

Hence, barter was common, particularly in the rural and frontier sections, throughout the colonial period. The difficulties of pure barter were in part overcome by the fact that the colonists did have what served as a standard of value or money of account. This was the English system of reckoning values in terms of pounds, shillings, and pence.

The problem of securing a satisfactory medium of exchange or money was a serious one throughout the colonial period, and the unsatisfactory character of the various mediums used proved a constantly disturbing factor in trade and industry.

In order to understand the history of colonial circulating medium at least three important facts must be kept in mind since each had a marked influence upon that history and, in truth, on much of the subsequent monetary history of the country as well.

(1) A currency made up of gold and silver specie is expensive, and as the colonies did not themselves produce gold and silver they had to obtain it elsewhere by trade. Since the colonies were poor and did not want to go to this expense, they sought cheaper substitutes.

(2) Capital was scarce and credit facilities poor and many believed that these deficiencies could be in part overcome by a more abundant supply of money. Also there was a large debtor class, which realized that an increase in the quantity of the circulating medium would tend to decrease its value and so enable them to pay off their debts more easily with the cheaper money, where those debts were expressed in terms of the circulating medium. This fact we shall see has been a very important influence throughout the monetary history of the country.

(3) The revenue of the colonial governments was small and the people were strongly opposed to taxation. There was; therefore, especially in times of unusually heavy expenditures, a great temptation to borrow by using the colony’s credit.*

* “Why tax the people,” in effect said one member of the Virginia assembly, “when the colony can pay its expenses by setting the printing press at work?” Such an appeal has not lost its force even today.

The use of its credit by a colony very generally took the form of paper money, often called "bills of credit,” which became a part of the circulating medium. In fact, as we shall see, the disturbing reaction of the fiscal needs of the government upon the circulating medium has been an unfortunate feature of our economic history down to this day.


Commodities Used as Money

At first, in the absence of any appreciable supply of specie (coin), the colonists used as a medium of exchange such commodities as were immediately available and widely traded in each section: tobacco, wheat, corn, cattle, beaver skins, and the Indian wampum.

Laws were passed providing that various dues and taxes could be paid in such commodities; often official salaries were fixed in the same way.

The unsatisfactory manner in which these commodities performed the functions of money well illustrates the characteristics desirable in a good circulating medium.

In the first place, although the commodities did possess the advantage over paper money of having value independent of their use as money, that value was far from stable, being subject to rapid and marked fluctuations. Although the laws providing for the receipt of such commodities for taxes usually specified at how many pence each pound of tobacco or other commodity was to be reckoned, the market price often varied widely there from.

If it went above the legal ratio the taxpayer suffered or found another less expensive medium for payment; if the market price fell below the legal ratio, as was generally the case, the real revenue of the colony suffered.

A similar difficulty is illustrated by the well-known case of the Virginia parsons. Their salaries were fixed by law at a certain sum payable in tobacco, valued at a fixed price. When tobacco fell in price they suffered; when it happened to rise to a high figure, the colony passed a law permitting payment in cash at a rate below that at which tobacco was selling and so reduced the amount the parsons received.

It is obvious that such an unstable standard of value and of deferred payments hindered and disturbed all business by its uncertainty and brought unjust gains and losses to debtors and creditors, as well as to producers and consumers.

Other difficulties in the functioning of these forms of money also arose. The commodities used were not uniform in quality; one pound of tobacco might be much better than another and beaver skins varied greatly in value. Attempts were made to grade and standardize the commodities, but the situation was complicated and was a constant source of dispute.

Another difficulty arose from the fact that, unlike gold or silver, these commodities were more or less perishable and great care had to be taken of them to prevent deterioration. For this reason the colonies often suffered losses on the goods paid in as taxes and any person who held this form of currency was likely to suffer in the same way.

The fact that the commodities used as money were not easily transportable and were very bulky in proportion to their value caused further inconvenience, and necessitated warehouses for storing them in any quantity. In Virginia the use of transferable warehouse receipts for tobacco so stored helped to overcome one inconvenience.

In short, when tested by such characteristics of a good circulation medium as stability of value, durability, homogeneity, and transportability, all these commodities were less satisfactory than gold or silver; they did, however, generally possess a fair degree of divisibility and cognizability and had value independent of their use as money.

Because of these defects the commodities used could not economically perform the functions of money; trade and exchange were seriously hampered and much injustice resulted. Hence the colonists found it desirable to secure a better circulating medium.


Colonial Specie Money

One striking feature of the situation as regards specie money was that almost none was coined in the colonies They produced no gold or silver and not much copper and the poverty of the colonial governments made them disinclined to go to the expense of importing bullion (usually gold or silver) and minting it.

The best known example of such attempt was that of Massachusetts where the Pine-tree shilling was coined between 1652 and 1684. This coin was made to contain 22.5 per cent less bullion than the English shilling, apparently with the definite purpose and expectation that it would not flow out of the colony.

This was based on the economic principle that cheap money drives out dear money, commonly known as Gresham’s law. Though there were attempts to establish a mint in some of the other colonies, very little seems to have come of them, and England generally opposed any such action as infringing upon royal prerogatives.

In the absence of coins minted in the colonies such specie as circulated was of British or foreign origin. Some British coin was brought by those who migrated to this country, some was brought in by traders or by vessels stopping at the ports, and some bullion came in to pay the expenses which the British army or navy incurred. But the amount of specie received from these sources was not large since England prohibited the export of her coins.

The bulk of the colonial specie was of Spanish origin a result due primarily to two things:
- (1) The Spanish possessions in Mexico and South America were then producing the great portion of the world’s output of silver and from this source it was being distributed over the world through the channels of trade.
- (2) The trade of the colonies with the West Indies showed a favorable balance and a part of this was settled by specie payments chiefly of Spanish mintage.

There was also a balance favorable to the colonies in the trade with southern Europe and, though it appears to have been more generally settled by bills of exchange drawn on England, it doubtless brought in some specie in addition.

The basis of the Spanish coinage was the silver piece of eight "reals" until about 1728, when Spain began to coin the dollar in its place; this coin, with a slightly smaller bullion content, Congress later adopted as the unit of our monetary system.

There were also the "pistareen," equal to two reals, and the "pistole" equivalent to about four dollars.

During the eighteenth century a considerable amount of gold was being produced in Brazil, then a possession of Portugal; from this source gold began to flow into the colonies, chiefly in the form of the Portuguese "johannes", or "joe," and the "moidore," equal respectively to about sixteen and six Spanish dollars.

In addition to the Spanish and Portuguese coins there was some French specie and a miscellaneous assortment from the mints of other European countries.

Until well into the eighteenth century the specie and bullion spent in the colonies by the pirates was another source of supply.

Though the total supply of specie existing in the colonies is unknown, it has been estimated at around $1 million in 1700 and at $10 million to $12 million about 1775.

One difficulty arising from the presence of this foreign coin was that ii did not coincide with the English system of pounds, shillings, and pence which was the money of account.

This not only complicated reckonings but opened an opportunity for legislation designed to attract foreign specie by overvaluing it. Thus the Spanish piece of eight had a bullion content equal to about 4s.(shilling) 6d.(pence) sterling; yet the various colonies passed laws specifying that it was to be accepted at a higher value ranging from 4s. 8d., to 8s.

Each colony hoped by so doing to attract the Spanish silver; but they either failed to understand or ignored the fact that any such gain could be only temporary that in their rivalry they would only counteract one another’s efforts, and that in the long run the result would tend to be only a higher level of prices for commodities.

Annual indices of wholesale prices of 20 commodities in Philadelphia, 1720-1774 (arithmetic average). Base: monthly average, 1741-1745. (Based on Bezanson, Grey and Hussey, “Prices in Colonial Pennsylvania.”)

Like so much economic legislation we shall find, particularly in the field of money, they sought to obtain certain results by the easy method of merely passing a law without first attempting to obtain a clear idea of the economic forces and principles involved in the problem upon the action of which the ultimate success of the law would depend.

As one governor of New York wrote, “ ‘Tis not in the power of men or angels to beat the people of this continent out of a silly notion of their being gainers by the augmentation of the value of plate.”

The colonial rivalry in these measures to attract foreign specie was most active near the end of the seventeenth century. In 1704 a royal proclamation set 6s. as the maximum value at which the piece of eight was to be accepted in the colonies—whence the term “proclamation money “—but outside of Virginia and Maryland this limitation was generally evaded.

Complaints about the Scarcity of Money

Another illustration of much that was ignorant or unwise in monetary legislation is afforded by the colonial paper-money issues. The complaints about the scarcity of money so constantly made in all the colonies, were an important factor in numerous issues of paper money that marked the currency history of the eighteenth century.

The reasons underlying this popular cry were various and, as it is a cry that constantly reappears in the country’s economic history, it is very important to understand these reasons and the extent to which they may be thought to justify an effort to increase the supply of money or credit.

The most common reasons back of this complaint may be classified as follows.

First, the scarcity of capital, always marked in a new and rapidly developing country, made it difficult for many people to find loanable funds that they could borrow; this tended to make interest rates high. Except temporarily, this difficulty could not be overcome by increasing the supply of money since in the long run the increase raised the price of goods and services and necessitated borrowing just so much more money to buy the same quantity as before.

Second, the debtor class always stands to gain by the rise in prices which is expected to result from an increased supply of money, since by selling their goods or services at a higher price it is just so much easier for them to pay off their debts.

Obviously their creditors stand to lose in the process since the purchasing power of the money repaid them has thus been reduced.

However, if the general price level has fallen in the period intervening between the creation of a debt and the date when repayment is due, the debtor can justly argue that an increase in the supply of money designed to raise prices to the former level is equitable so far at least as the debtor-creditor relationship is concerned.

Historically, it is under these latter circumstances that the most insistent complaints about the scarcity of money have arisen from the debtor class.

The aforementioned circumstances are also a factor in the third cause for complaints that arise about a scarcity of money when, for whatever reason, producers find difficulty in selling goods or consumers in buying them, a condition which in time of depression becomes widespread.

Although an increase in the circulating medium may have little effect in removing the fundamental causes of the trouble, its stimulating influence will provide some relief even if only temporary.

Moreover, there are cases where the main immediate cause of the difficulty is a rather sudden decrease in the supply of available money. Such cases were not uncommon the colonies where, in the small communities with poor facilities for securing loans quickly from elsewhere, the effects of war or a severe drop the price of a dominant staple or the retirement of a large issue of paper money might seriously deplete the customary supply of money, and a temporary addition might have a beneficial stabilizing effect.

Much less frequent are the cases where long-run trends create a relatively enduring scarcity of money leading to a prolonged decline in the general price level and in which measures designed to increase the circulating medium may be considered justifiable.

A fourth cause of complaint may arise not because of a scarcity of circulating medium in general but because some particular element in the medium essential for certain transactions has become scarce, such as small change, or one of the metals in a bimetallic system, or specie in any form.

In the colonies the last-named was the most common basis for this type of complaint. In the eighteenth century, especially when widespread resort to paper money had driven most of the specie out of general circulation, it was not uncommon for some event, particularly the reaction of war upon foreign trade, to drain off much of the small stocks of specie kept in private hoards to be used for certain domestic payments or in meeting foreign debts for which paper money could not be employed.

This was a frequent difficulty and one not subject to quick remedy in a world that required months instead of hours or minutes to shift control over specie from country to country, even assuming a loan could be obtained.

It will be clear from the foregoing that complaints about the scarcity of money need to be approached in a rather skeptical attitude when the question as to their justification is under consideration. Certain of the difficulties that are the basis of such complaints, as the scarcity of capital cannot be remedied by more money; most of the other causes for complaint, where there can be said to be a legitimate basis, are of a temporary character.

The important thing is to make sure that any addition to the circulating medium that is made to meet this need is not excessive and also only temporary, though experience shows this is very difficult to accomplish.

Compared with others, the number of cases where the basis of the complaint is a real scarcity of some duration—say a decade or more—is relatively small, yet it is such that generally have the soundest justification.

As long as there is always a large group that stands to gain temporarily, if not in the long run, through an increase in the supply of money or credit and as long as there is a still larger group that believes, however mistakenly, that it will also gain while the groups that will lose are inert, ignorant, or weak in numbers, the demands for this form of relief are very apt to be met, as will appear frequently in the subsequent narrative.


The Issues of Paper Money

The first issues of paper money in the colonies and, later, the largest issues were not due to complaints about the scarcity of money but to the need for extraordinary revenue arising from war expenditures and the difficulty in meeting this need, partly owing to the general hostility to taxation and partly to the lack of ready facilities for borrowing by other means than resort to the printing press.

There then began that disturbing reaction of the fiscal needs of the government upon the monetary and credit structure which has continued to be a source of trouble down to this day.

The first regularly authorized issue was put out by Massachusetts in 1690 to help pay the expenses of the military expedition against Canada, since the unpaid soldiers refused to wait for taxes to be collected and threatened to mutiny.

Next came South Carolina in 1703 when notes were issued to meet the outlay involved by the attack on the Spaniards; before Queen Anne’s War was over, New Hampshire, Rhode Island, Connecticut, New York, New Jersey, and North Carolina had joined the list.

Though not generally made legal tender these bills of credit were usually acceptable for taxes and were accompanied with provisions for levying taxes to provide funds for their retirement within a few years—the policy favored by the British authorities at this time.

King George’s War led to new issues for purposes of defense and brought the first issues for this objective in Pennsylvania and Delaware. Finally, the French and Indian War, during which Virginia and Georgia fell back upon this expedient, led to a larger batch of issues than ever before.

A second type of colonial paper-money issues was the notes put out in response to the complaints about the scarcity of money and credit. Though seldom so large as those arising from fiscal needs, they were to be found in practically all the colonies and tended to augment the general monetary confusion.

These notes were commonly put out as loans to individuals in limited amounts, bearing about 5 per cent interest, repayable over a period of several years, and secured by land or other property. The first regularly authorized public loan bank of this type was started in South Carolina in 1712 and the plan was so popular that it was at once opted elsewhere.

Colonies having experienced the effects of this simple use of the printing press in meeting wartime needs now sought reasons for continuing its use in time of peace. Issues now began to be put out to meet ordinary fiscal needs and also to replace or, if funds were not at hand, to pay off the war issues that were being retired, on the ground that otherwise a scarcity of money would develop.

The method of putting out an issue as a loan made a special appeal to all those who wished to borrow and also to those wishing to lower taxes, because the interest received yielded a revenue which in some cases proved sufficient to meet the ordinary expenditures of the province.

Massachusetts adopted this device in 1714; the next year Rhode Island started upon her notorious career which brought forth nine such issues; New Hampshire adopted the plan in 1717. A period of depression led Pennsylvania, Delaware, and New Jersey to authorize loan issues in 1723, and North Carolina started in 1729.

In Maryland the opposition to such action was not overcome until 1733, at which time a portion of the issue was given away to hasten the process of getting it into circulation.

In 1737 New York authorized an issue to be used chiefly for loans but partly to pay debts. Georgia adopted the idea in 1755 and Virginia would have done so at the same time but for the governor’s veto.

A third type of paper circulating medium, though used only for a brief period and never large in volume, served to add to the confusion. This was similar in purpose and character to that put out by the public loan banks but was issued by groups of private individuals.

Generally the notes were secured by real estate—whence the term “land bank”—and a promise of the borrower to repay with interest within a specified time. In substance it was a device whereby a group borrowed the notes and then used them to buy goods or pay debts, provided they could find others willing to accept them.


Several proposals for such a scheme were formulated in Massachusetts in the latter part of the seventeenth century though whether any notes were actually issued is not clear.

The decade between 1730 and 1740 brought the fruition of such schemes in New Hampshire, Connecticut, South Carolina, and Massachusetts, those of the last-named colony being the most famous.

The controversy aroused there led to an appeal to the English authorities, which in 1741 resulted prohibiting all issues of this type by extending to the colonies the Bubble Act of 1720.

The extent to which these various types of paper money were employed in the different colonies varied greatly. In New Jersey, Pennsylvania, Delaware, and Maryland they were rather carefully controlled; any resulting depreciation was so slight that it has been claimed that their use there had a beneficial stabilizing influence.

In New York the issues were fairly moderate up to 1746 when marked depreciation set in; in Virginia, though starting late, the issues soon became excessive.

The greatest excesses, however, were found in the Carolinas and in New England. In the former the paper money fell to about one-tenth its value in sterling; in Massachusetts and Connecticut by 1750 the depreciation was about the same.

At that time, however, Massachusetts took advantage of the receipt of a large amount of bullion sent over by England to reimburse the colony for its outlay in the recent war and redeemed all of its paper money at the ratio of about 7 1/2 in paper for one in specie. This example was at once followed by Connecticut.

The most extreme case was Rhode Island for there the governmental setup provided fewer checks upon popular demands than existed in practically all the other colonies. One issue followed another in quick succession and in rising amounts until 1750 when nine had been authorized and only England’s intervention stopped still more. The depreciation on the early issues finally reached 23 to 1.

The experience of the colonies only too well illustrates the temptations and dangers involved in the resort to paper money. Once started on the downward path, the impulse to continue was hard to resist.

So new issues followed, frequently before the old had been retired through the receipts from taxes, and, since the levying of adequate taxes was constantly postponed, the outstanding issues steadily rose in amount.

As depreciation then set in, specie was driven from circulation and prices rose. The rise in the price level then led to renewed complaints of the scarcity of money and the demand for still more.

As Bullock says, “The experience of the colonies demonstrates conclusively the impossibility of satisfying the desire for ‘more money’ by issuing paper currency.”

Theoretically, such a situation as existed in the colonies where credit institutions were poorly developed and where the supply of money was subject to rather violent fluctuations, there was more than usual that could be said in favor of the use of paper money as a stabilizing factor provided the issue were properly controlled. Practically, such control is extremely difficult at the best and in the colonies it was seldom really attempted.

Perhaps the best that can be said of the device as actually employed in most of the colonies is that, in a social organization where the influence of the well-to-do groups was fairly strong, it proved one of the chief means whereby a large group of the less wealthy, chiefly the debtors, were able to manipulate conditions affecting the distribution of wealth to their own advantage.

Moreover, the scarcity of specie of which the colonists so frequently complained was fundamentally, though not necessarily in every case, due to their own action in putting out such quantities of paper money.

They generally put the blame for this scarcity upon the outflow of specie to England to meet an unfavorable trade balance, either ignorant or unmindful of the principle that even in those days there was sufficient freedom in the movement of goods and specie in international trade so that their specie would not have been permanently drained off had they chosen to remain on a specie basis.


This attitude will appear less surprising if we remember that it was not until after the controversy aroused in England over the issue of inconvertible paper during the Napoleonic Wars that this principle secured general acceptance.

Nonetheless there were those in the colonies who clearly recognized the real cause of the scarcity of specie. In proof, they pointed to the fact that the disappearance of specie from general circulation soon followed the advent of depreciated paper and that, when Massachusetts retired its paper money and forbade the acceptance of that of its neighbors, specie returned to general circulation and the resulting greater stability of the currency proved a decided stimulus to the colony’s trade and enabled it to divert trade from Rhode Island where paper was still used.

Because of the widespread evils and abuses that arose from these paper-money issues and, more especially, because of the resulting losses to British creditors, England finally resorted to more determined measures to put an end to them.

After the private bank issues had been made illegal in 1741, the next move was taken in 1751 by an Act of Parliament which forbade the four New England colonies to issue any bills of credit in the future and declared that thereafter no bills of credit should be made legal tender.

Exceptions to the general prohibition allowed issues of treasury notes to meet current expenses or the emergencies of war, but only provided they were accompanied by adequate safeguards to ensure prompt retirement. All outstanding issues were required to be called at the date of their maturity which could not be postponed.

Finally, in 1764 Parliament extended this prohibition to the rest of the colonies but without providing for the exceptions. This action aroused widespread antagonism among the colonists, particularly in the groups that stood to benefit by cheap money.

In spite of the fact that, in the absence of any general willingness among the colonists to place an effective check upon excessive issues, such a prohibition was fundamentally sound the colonists looked upon it as a great hardship and an infringement of their rights.

It must be admitted that the act of 1764 was unfortunately timed. Coming after the close of a war during which inflationary influences had been very marked and just when a business depression was setting in, it increased the difficulties of the next few years and accentuated the hostility toward England.

Probably the number of colonist. who felt that they were injured by the prohibition of paper-money issues was larger than in the case of any other essentially economic restriction imposed by Great Britain at this period.


Other Forms of Credit Instruments

In addition to the paper-money issues there were other forms of credit instruments that existed in the colonies and functioned as substitutes for money. Lacking anything like modern commercial banks, borrowing from private individuals was widespread and to a limited extent the promissory notes thus created passed on endorsement from one person to another.

Much more widely employed were the treasury bills issued in the form of promissory notes by the provincial treasurers when funds were lacking to meet payments due, though their use was limited by the fact that they were apt to be drawn for considerable sums and in odd amounts, and might bear interest.

As trade between the different commercial ports expanded, domestic bills of exchange drawn by one mercantile house upon another came into use. Ordinarily they were based upon a sale of merchandise but sometimes represented the making of a loan.

A particularly useful credit instrument that also served as an important substitute for money was the foreign bill of exchange. This was usually drawn on England by those who were exporting goods to that country; for payment they drew against the person or firm to whom the goods had been sent.

It was also used at times as a means for borrowing from England, the colonist by previous arrangement being allowed to draw such bills against some Englishmen who thus gave him credit and the colonist at some later date repaying the amount so borrowed.

These bills were bought by people who had imported goods from England or for other reasons had debts due in England, and were sent to the creditors in England who then collected the money from the people against whom the bills had been drawn.

Another means for obtaining English funds was provided by the bills drawn on the British treasury in payment for expenditures in the colonies incurred by that government. In this way the risks and greater expense involved in the actual shipment of specie were avoided.

As it was the Southern colonies, particularly the tobacco colonies, that sent most of the exports to England and as their imports from England, according to the official figures, were commonly less in value than those exports, the supply of bills on England in that section was greater than the demand.

In the other colonies the situation was reversed.

Hence it was frequently customary for such colonies as Maryland and Virginia to sell their surplus supply of bills on England to the colonists in the North, who then used them to meet their debts in England.

In a similar way the merchants of the Northern colonies trading to the West Indies or southern Europe, where the balance of trade was favorable, often accepted bills on London instead of specie in exchange for their goods and used these to pay for their heavy imports from England. In such ways the growth in the use of this economical credit instrument in the place of money was a distinct gain in facilitating both colonial and international trade.

It need scarcely be pointed out that its successful use depended on business honesty and adequate laws to protect the bill-holders in case they were not paid when the bill came due.


The Economic Efficiency of Colonial Currency

From the foregoing description of colonial currency it will be clear that the colonies had to deal in a circulating medium that was anything but satisfactory and efficient. The difficulties under which they labored where barter was in vogue or commodities were used as money, have already been suggested.

When specie or paper money was available, only some of these difficulties were eliminated. The innumerable varieties of foreign specie had to be reckoned in terms of the money of account, pounds, shillings, and pence; where laws fixed the ratio at which such coins were to be accepted, they varied from time to time as well as from colony to colony.

If the specie had been clipped too much, as was often the case, it had to be weighed and the value figured accordingly.

In the case of the paper money the various issues were even more numerous and confusing. Their value was a always uncertain; they might be redeemed at par and they might not; when not legal tender some people would be willing to accept them and others refuse; if one kept them for a while they might be worth less; they also might be worth more, though such was less apt to be the case.

If one went into a shop to buy a pair of shoes and inquired the price, he wouId be asked whether he intended to pay in hard money (that is, specie), barter, credit, or paper money and the price would vary accordingly. If a man loaned money or gave credit, he could seldom be certain whether the sum eventually paid back would have the same value as that loaned; if he borrowed money, he faced similar uncertainties.

The mere awkwardness and waste of time involved were the least of the evils. The uncertainties and needless financial risks thus created affected a vast volume of business transactions; debtors or creditors suffered, trade was hindered, credit impaired, the free flow of capital obstructed, and widespread unjust losses and undeserved gains resulted.

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