is excerpted from A
History of Money and Banking in the United States (2002).
An MP3 audio file of this article, read by Matthew Mezinskis,
medieval China, which invented both paper and printing centuries
before the West, the world had never seen government paper money
until the colonial government of Massachusetts emitted a fiat
paper issue in 1690.
was accustomed to launching plunder expeditions against the prosperous
French colony in Quebec. Generally, the expeditions were successful,
and would return to Boston, sell their booty, and pay off the
soldiers with the proceeds. This time, however, the expedition
was beaten back decisively, and the soldiers returned to Boston
in ill humor, grumbling for their pay. Discontented soldiers are
ripe for mutiny, so the Massachusetts government looked around
in concern for a way to pay the soldiers. It tried to borrow £3,000–£4,000
from Boston merchants, but evidently the Massachusetts credit
rating was not the best.
Massachusetts decided in December 1690 to print £7,000 in
paper notes and to use them to pay the soldiers. Suspecting that
the public would not accept irredeemable paper, the government
made a twofold pledge when it issued the notes: that it would
redeem them in gold or silver out of tax revenue in a few years
and that absolutely no further paper notes would be issued. Characteristically,
however, both parts of the pledge went quickly by the board: the
issue limit disappeared in a few months, and all the bills continued
unredeemed for nearly 40 years. As early as February 1691, the
Massachusetts government proclaimed that its issue had fallen
“far short” and so it proceeded to emit £40,000 of new money
to repay all of its outstanding debt, again pledging falsely that
this would be the absolute final note issue.
found that the increase in the supply of money, coupled with a
fall in the demand for paper because of growing lack of confidence
in future redemption in specie, led to a rapid depreciation of
new money in relation to specie. Indeed, within a year after the
initial issue, the new paper pound had depreciated on the market
by 40 percent against specie.
the government moved against this market evaluation by use of
force, making the paper money compulsory legal tender for all
debts at par with specie, and by granting a premium of 5 percent
on all payment of debts to the government made in paper notes.
This legal-tender law had the unwanted effect of Gresham’s
law: the disappearance of specie circulation in the colony.
In addition, the expanding paper issues drove up prices and hampered
exports from the colony. In this way, the specie “shortage” became
the creature rather than the cause of the fiat-paper issues. Thus,
in 1690, before the orgy of paper issues began, £200,000
of silver money was available in New England; by 1711, however,
with Connecticut and Rhode Island having followed suit in paper
money issue, £240,000 of paper money had been issued in
New England but the silver had almost disappeared from circulation.
then, Massachusetts’s and her sister colonies’ issue of paper
money created rather than solved any “scarcity of money.” The
new paper drove out the old specie. The consequent driving up
of prices and depreciation of paper scarcely relieved any alleged
money scarcity among the public. But since the paper was issued
to finance government expenditures and pay public debts, the government,
not the public, benefited from the fiat issue.
had emitted another huge issue of £500,000 in 1711 to pay
for another failed expedition against Quebec, not only was the
remainder of the silver driven from circulation, but, despite
the legal-tender law, the paper pound depreciated 30 percent against
silver. Massachusetts pounds, officially 7 shillings to the silver
ounce, had now fallen on the market to 9 shillings per ounce.
Depreciation proceeded in this and other colonies despite fierce
governmental attempts to outlaw it, backed by fines, imprisonment,
and total confiscation of property for the high crime of not accepting
the paper at par.
a further “shortage of money” due to the money issues, Massachusetts
decided to press on; in 1716, it formed a government “land bank”
and issued £100,000 in notes to be loaned on real estate
in the various counties of the province.
so dramatically that the tide of opinion in Massachusetts began
to turn against paper, as writers pointed out that the result
of issues was a doubling of prices in the past 20 years, depreciation
of paper, and the disappearance of Spanish silver through the
operation of Gresham’s law. From then on, Massachusetts, pressured
by the British Crown, tried intermittently to reduce the bills
in circulation and return to a specie currency, but was hampered
by its assumed obligations to honor the paper notes at par of
its sister New England colonies.
another losing expedition against the French led Massachusetts
to issue an enormous amount of paper money over the next several
years. From 1744 to 1748, paper money in circulation expanded
from £300,000 to £2.5 million, and the depreciation
in Massachusetts was such that silver had risen on the market
to 60 shillings an ounce, ten times the price at the beginning
of an era of paper money in 1690.
every colony but Virginia had followed suit in fiat-paper-money
issues, and Virginia succumbed in the late 1750s in trying to
finance part of the French and Indian War against the French.
Similar consequences – dramatic inflation, shortage of specie,
massive depreciation despite compulsory par laws – ensued
in each colony. Thus, along with Massachusetts’s depreciation
of 11-to-1 of its notes against specie compared to the original
par, Connecticut’s notes had sunk to 9-to-1 and the Carolinas’
at 10-to-1 in 1740, and the paper of virulently inflationist Rhode
Island to 23-to-1 against specie. Even the least-inflated paper,
that of Pennsylvania, had suffered an appreciation of specie to
80 percent over par.
study of the effects of paper money in New Jersey shows how it
created a boom-bust economy over the colonial period. When new
paper money was injected into the economy, an inflationary boom
would result, to be followed by a deflationary depression when
the paper money supply contracted.
the end of King George’s war with France in 1748, Parliament began
to pressure the colonies to retire the mass of paper money and
return to a specie currency. In 1751, Great Britain prohibited
all further issues of legal-tender paper in New England and ordered
a move toward redemption of existing issues in specie. Finally,
in 1764, Parliament extended the prohibition of new issues to
the remainder of the colonies and required the gradual retirement
of outstanding notes.
the lead of Parliament, the New England colonies, apart from Rhode
Island, decided to resume specie payment and retire their paper
notes rapidly at the current depreciated market rate. The panicky
opponents of specie resumption and monetary contraction made the
usual predictions in such a situation: that the result would be
a virtual absence of money in New England and the consequent ruination
of all trade. Instead, however, after a brief adjustment, the
resumption and retirement led to a far more prosperous trade and
production – the harder money and lower prices attracting
an inflow of specie. In fact, with Massachusetts on specie and
Rhode Island still on depreciated paper, the result was that Newport,
which had been a flourishing center for West Indian imports for
western Massachusetts, lost its trade to Boston and languished
in the doldrums.
as one student of colonial Massachusetts has pointed out, the
return to specie occasioned remarkably little dislocation, recession,
or price deflation. Indeed, wheat prices fell by less in Boston
than in Philadelphia, which saw no such return to specie in the
early 1750s. Foreign-exchange rates, after the resumption of specie,
were highly stable, and “the restored specie system operated after
1750 with remarkable stability during the Seven Years War and
during the dislocation of international payments in the last years
before the Revolution.”
outlawed by government decree, specie remained in circulation
throughout the colonial period, even during the operation of paper
money. Despite the inflation, booms and busts, and shortages of
specie caused by paper issues, the specie system worked well overall:
a silver standard … in the absence of institutions of the
central government intervening in the silver market, and in
the absence of either a public or private central bank adjusting
domestic credit or managing a reserve of specie or foreign exchange
with which to stabilize exchange rates. The market … kept
exchange rates remarkably close to the legislated par …. What
is most remarkable in this context is the continuity of the
specie system through the seventeenth and eighteenth centuries.
to government paper, private bank notes and deposits, redeemable
in specie, had begun in western Europe in Venice in the 14th century.
Firms granting credit to consumers and businesses had existed
in the ancient world and in medieval Europe, but these were “money
lenders” who loaned out their own savings. “Banking” in the sense
of lending out the savings of others only began in England with
the “scriveners” of the early 17th century. The scriveners were
clerks who wrote contracts and bonds and were therefore in a position
to learn of mercantile transactions and engage in money lending
however, no banks of deposit in England until the civil war in
the mid-17th century. Merchants had been in the habit of storing
their surplus gold in the king’s mint for safekeeping. That habit
proved to be unfortunate, for when Charles I needed money in 1638,
shortly before the outbreak of the civil war, he confiscated the
huge sum of £200,000 of gold, calling it a “loan” from the
owners. Although the merchants finally got their gold back, they
were understandably shaken by the experience, and forsook the
mint, depositing their gold instead in the coffers of private
goldsmiths, who, like the mint, were accustomed to storing the
valuable metal. The warehouse receipts of the goldsmiths soon
came to be used as a surrogate for the gold itself. By the end
of the civil war, in the 1660s, the goldsmiths fell prey to the
temptation to print pseudo warehouse receipts not covered by gold
and lend them out; in this way fractional-reserve banking came
private banks existed in colonial America, and they were short-lived.
Most prominent was the Massachusetts Land Bank of 1740, issuing
notes and lending them out on real estate. The land bank was launched
as an inflationary alternative to government paper, which the
royal governor was attempting to restrict. The land bank issued
irredeemable notes, and fear of its unsound issue generated a
competing private silver bank, which emitted notes redeemable
in silver. The land bank promptly issued over £49,000 in
irredeemable notes, which depreciated very rapidly. In six months’
time the public was almost universally refusing to accept the
bank’s notes and land-bank sympathizers vainly accepting the notes.
The final blow came in 1741, when Parliament, acting at the request
of several Massachusetts merchants and the royal governor, outlawed
both the land and the silver banks.
aspect of both the Massachusetts Land Bank and other inflationary
colonial schemes is that they were advocated and lobbied for by
some of the wealthiest merchants and land speculators in the respective
colonies. Debtors benefit from inflation and creditors lose; realizing
this fact, older historians assumed that debtors were largely
poor agrarians and creditors were wealthy merchants and that therefore
the former were the main sponsors of inflationary nostrums. But,
of course, there are no rigid “classes” of debtors and creditors;
indeed, wealthy merchants and land speculators are often the heaviest
debtors. Later historians have demonstrated that members of the
latter group were the major sponsors of inflationary paper money
in the colonies.
Government paper redeemable in gold began in the early 9th century,
and after three centuries the government escalated to irredeemable
fiat paper, with the usual consequences of boom-bust cycles, and
runaway inflation. See Gordon Tullock, “Paper Money – A Cycle
in Cathay,” Economic History Review 9, no. 3 (1957): 393–96.
The only exception was a curious form of paper money issued five
years earlier in Quebec, to become known as “card money.” The
governing intendant of Quebec, Monsieur Mueles, divided
some playing cards into quarters, marked them with various monetary
denominations, and then issued them to pay for wages and materials
sold to the government. He ordered the public to accept the cards
as legal tender, and this particular issue was later redeemed
in specie sent from France.
Donald L. Kemmerer, “Paper Money in New Jersey, 1668–1775,”
New Jersey Historical Society, Proceedings 74 (April 1956):
Before Massachusetts went back to specie, it was committed to
accept the notes of the other New England colonies at par. This
provided an incentive for Rhode Island to inflate its currency
wildly, for this small colony, with considerable purchases to
make in Massachusetts, could make these purchases in inflated
money at par. Thereby Rhode Island could export its inflation
to the larger colony, but make its purchases with the new money
before Massachusetts prices could rise in response. In short,
Rhode Island could expropriate wealth from Massachusetts and impose
the main cost of its inflation on the latter colony.
If Rhode Island was the most inflationary of the colonies, Maryland’s
monetary expansion was the most bizarre. In 1733, Maryland’s public
land bank issued £70,000 of paper notes, of which £30,000
was given away in a fixed amount to each inhabitant of
the province. This was done to universalize the circulation of
the new notes, and is probably the closest approximation in history
of Milton Friedman’s “helicopter” model, in which a magical helicopter
lavishes new paper money in fixed amounts of proportions to each
inhabitant. The result of the measure, of course, was rapid depreciation
of new notes. However, the inflationary impact of the notes was
greatly lessened by tobacco still being the major money of the
new colony. Tobacco was legal tender in Maryland and the paper
was not receivable for all taxes.
Roger W. Weiss, “The Colonial Monetary Standard of Massachusetts,”
Economic History Review 27 (November 1974): 589.
Ibid., p. 591.
During the 16th century, before the rise of the scriveners, most
English moneylending was not even conducted by specialized firms,
but by wealthy merchants in the clothing and woolen industries,
as outlets for their surplus capital. See J. Milnes Holden, The
History of Negotiable Instruments in English Law (London:
Athlone Press, 1955), pp. 205–06.
Once again, ancient China pioneered in deposit banking, as well
as in fractional-reserve banking. Deposit banking per se began
in the 8th century AD, when shops would accept valuables, in return
for warehouse receipts, and receive a fee for keeping them safe.
After a while, the deposit receipts of these shops began to circulate
as money. Finally, after two centuries, the shops began to issue
and lend out more receipts than they had on deposit; they had
caught on to fractional-reserve banking. Tullock, “Paper Money,”
On the Massachusetts Land Bank, see the illuminating study by
George Athan Billias, “The Massachusetts Land Bankers of 1740,”
University of Maine Bulletin 61 (April 1959). On merchant
enthusiasm for inflationary banking in Massachusetts, see Herman
J. Belz, “Paper Money in Colonial Massachusetts,” Essex Institute,
Historical Collections 101 (April 1965): 146–63; and
Herman J. Belz, “Currency Reform in Colonial Massachusetts, 1749–1750,”
Essex Institute, Historical Collections 103 (January 1967):
66–84. On the forces favoring colonial inflation in general,
see Bray Hammond, Banks
and Politics in America (Princeton, N.J.: Princeton University
Press, 1957), chap. 1; and Joseph Dorfman, The
Economic Mind in American Civilization, 1606–1865
(New York: Viking Press, 1946), p. 142.
For an excellent biographical essay on colonial money and banking,
see Jeffrey Rogers Hummel, “The Monetary History of America to
1789: A Historiographical Essay,” Journal of Libertarian Studies
2 (Winter 1978): 373–89. For a summary of colonial monetary
experience, see Murray N. Rothbard, Conceived
in Liberty, vol.
2, Salutary Neglect, The American Colonies in the First
Half of the Eighteenth Century (New Rochelle, N.Y.: Arlington
House, 1975), pp. 123–40. A particularly illuminating analysis
is in the classic work done by Charles Jesse Bullock, Essays
on the Monetary History of the United States (New York: Greenwood
Press,  1969), pp. 1–59. Up-to-date data on the period
is in Roger W. Weiss, “The Issue of Paper Money in the American
Colonies, 1720–1774,” Journal of Economic History
30 (December 1970): 770–84.
N. Rothbard (1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and chief academic
officer of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report, and appointed Lew as his
literary executor. See