America’s First Experiment With Paper (Fiat) Money

George Washington—surveyor, farmer, soldier, and statesman—by no means considered himself as an economist however expertise taught him an awesome deal about fiat (unbacked) paper cash. When the Congress foisted it on his Continental Military and tried to pay for meals with it, his males suffered privation.

In contrast, the close by British ate effectively as a result of they paid in gold and silver. A couple of years later, in 1787, Washington declared that the inevitable results of paper cash are “to spoil commerce, oppress the trustworthy, and open the door to each species of fraud and injustice.”

The hyperinflation of the continental {dollars} that Congress printed between 1775 and 1780 was not the primary paper cash episode in North America. Almost a century earlier than, New England supplied the setting for an particularly attention-grabbing case in financial historical past. Washington could effectively have recognized of it.

The late Austrian Faculty economist Murray Rothbard briefly talked about it in a 1963 article for the Basis for Financial Schooling titled, Mercantilism: A Lesson for Our Instances. He wrote,

Massachusetts has the doubtful distinction of getting promulgated the primary governmental paper cash within the historical past of the Western world—certainly, within the historical past of your entire world outdoors of China. The fateful challenge was made in 1690, to pay for a plunder expedition towards French Canada that had failed drastically. However even earlier than this, the main males of the colony have been busy proposing paper cash schemes. 

The expedition to which Rothbard referred grew out of King William’s Struggle (1688-1697), which unfold from Europe into England’s North American colonies. In August 1690, underneath the command of Sir William Phips, 34 ships and a couple of,000 males departed Boston on a mission to grab Quebec in New France (French Canada).

The troops have been to be paid out of the booty that Phips anticipated to seize as soon as he took Quebec, however by late fall he returned to Massachusetts defeated and empty-handed. Mutiny threatened as the boys demanded cost. Its treasury depleted, the federal government of the colony selected December 10 to emit a sum of seven,000 kilos in paper cash.

The ill-fated Quebec expedition, nevertheless, price far more than 7,000—an estimated 50,000 kilos, in truth. On February 3, 1691, the federal government belched out one other batch of paper and declared that it could possibly be utilized in cost of taxes.

The Massachusetts paper cash of 1690-91 was “backed” solely by the nice religion of the colonial authorities, not by specie or land as had been the case for earlier paper monies. The troops and different collectors weren’t pleased about that (the paper immediately started to depreciate) however occasions in fast succession prevented each a revolt and a runaway inflation.

In Could, the federal government handed a legislation limiting the whole emission to 40,000 kilos. It locked away the printing presses so nobody may print any extra. In October, it destroyed no less than 10,000 kilos of it that had been paid to the Treasury in taxes. Moreover, by 12 months’s finish it levied 30,000 kilos in new taxes for the aim of retiring the majority of the rest. And Phips himself dipped into his private fortune to purchase a lot of the remainder with gold.

Twenty-five years later, the Western World’s first expertise in paper hyperinflation came about in France. From 1715 to 1720, with none of the provisions that restrained the Massachusetts paper of 1690-91, France printed till its cash grew to become totally nugatory.

Debasing a nation’s cash is a time-honored occupation of extra governments than we are able to depend. Earlier than paper, it took the type of “clipping” cash, typically till they grew to become too small to flow into, or by mixing junk metals in with the valuable ones. The traditional Israelites have been criticized for it by the prophet Isaiah (“Thy silver has grow to be dross”). The Romans financed their welfare/warfare state by repeatedly debauching the forex. The German micro-states famously did it through the Thirty Years’ Struggle (1618-48), and so on., and so on. At the least the Massachusetts Bay Colony within the late seventeenth Century nipped it within the bud relatively rapidly.

A gold or silver normal, by the way in which, doesn’t imply paper cash can’t be printed. It merely implies that paper is a redeemable substitute for the true factor. When their cash is “backed” by gold or silver, individuals could choose the comfort of paper, and believe in it, in the event that they know they’ll redeem it on demand.

Why did Massachusetts embark upon a short-lived experiment in unbacked paper cash in 1690? Why didn’t it merely do because it and different colonial governments had completed earlier than, specifically, instantly provide to redeem the paper into coin or land? The bills of warfare don’t inform the total story right here.

Historian Richard Sylla notes that Massachusetts misplaced each its constitution and its mint in 1684. Till these have been restored, it had no alternative however to interact in what he calls “financial innovation.”

Increasing on that thesis, historian Dror Goldberg explains that and not using a constitution after 1684, all land within the colony reverted to the King, and nobody however the King may provide his land to anyone. Till a brand new constitution could possibly be negotiated, London prohibited the colony from working a mint, which closed the door to backing the paper with coin. The perfect that Massachusetts may do was to challenge paper with nothing greater than a obscure promise to redeem it in one thing of worth at some later date. As Goldberg places it, “…whereas paper cash needed to be issued to pay the troops, it needed to look as if it was not cash.”

To Massachusetts’ credit score, the paper cash of 1690-91 was not pressured on anybody. The federal government didn’t declare it to be authorized tender, which means nobody was required to make use of it to settle money owed. Not even the troops have been required to just accept it or to make use of it in any funds. It was rapidly restricted and retired. All which means to the extent the paper was profitable, it was as a result of it mimicked a tough cash normal greater than it was a real experiment in long-term, unbacked and irredeemable paper cash. In impact, the notes have been short-term IOUs.

George Washington’s skepticism of paper cash nonetheless stands. The Massachusetts expertise of 1690-91 doesn’t make a case for unbacked paper cash except measures are taken virtually instantly to both destroy or to again it, during which case one should ask, why hassle with it within the first place?

This text initially appeared at

The Massachusetts Paper Cash of 1690 by Dror Goldberg (Journal of Financial Historical past, December 2009)

A Historical past of American Forex by William Graham Sumner

Tracts Referring to the Forex of Massachusetts Bay, 1682-1720 by Andrew McFarland Davis

Colonial Forex Reprints, 1682-1751, Vol. 1 by Andrew McFarland Davis

Mercantilism: A Lesson for Our Instances by Murray N. Rothbard

Financial Improvements in America by Richard Sylla (Journal of Financial Historical past, March 1982)

When Cash Goes Dangerous (free eBook) by Lawrence W. Reed

The place Have All of the Financial Cranks Gone? by Lawrence W. Reed

The Instances That Tried Males’s Financial Souls by Lawrence W. Reed


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