Friday, August 28, 2009

Massachusetts Notes: The Perfect Money

Massachusetts Notes: The Perfect Money
Thomas Allen

Many fiat money reformers, such as Charles Norburn,[1] identify the Massachusetts note and other colonial paper money as the perfect money. This money was perfect because the government issued it, it was interest free, and precious metal did not back it. Some notes did give the promise of redemption in gold or silver at some future date, which was often postpone. 

This paper focuses on the notes issued by Massachusetts because it was the first colony to issue legal tender paper money. It is probably the most cited colonial currency by fiat money reformers. 

Massachusetts first issued its paper money in 1690. At first its notes were merely promises to pay. However, in 1692, Massachusetts made its notes full legal tender for all public and private debts. With these notes, the government of Massachusetts paid its expenses and financed public works. It also made long-term, low-interest loans to private individuals. Interest on these loans was a source of government revenue. "There was unrivaled prosperity"[2]—so claim fiat money reformers.

Massachusetts resorted to paper money to pay its soldiers. During King William’s War, the army failed to acquire plunder from its expedition against the French in Quebec to pay the soldiers. As the soldiers needed payment and its treasury was empty and it could not borrow the money, the government paid them with bills of credit, paper money, or government notes.

In December 1690, it issued £7000 in paper notes. The notes were issued interest free and were not legal tender. People could use these notes to pay taxes or to exchange for commodities in the treasury. The government promised to pay these notes in specie received as tax payments, but it did not impose a time limit on the redemption.[3] It also promised to issue no more notes. Like all governments, it lied. It continued to issue paper money for the next 60 years. Thus, "the colony virtually went into the banking business by anticipating the taxes with bonds which were to serve the people as ‘paper money.’"[4]

In February 1691, it issued an additional £40,000 of notes. These notes were used to pay all of the colony’s debts.[5] Along with this issuance came the promise to issue no more notes. The notes immediately depreciated to 12 or 14 shillings in the pound[6] (one pound equals 20 shillings). Thus, the soldiers, who had received the notes at par, were cheated out of two-fifths of their real pay. Naturally, the government blamed the people for its notes depreciating.

The notes circulated poorly until tax time approached. Then people sought them to pay taxes. They could obtain them at a discount and use them to pay taxes at par.

To force its notes to circulate, Massachusetts made its notes legal tender for all payments in 1692. It accepted them in payment of taxes at a 5 percent premium.[7] Furthermore, it promised to redeem its notes in twelve months. By that action, it attempted to make its notes equal to silver.

Until 1704, the government redeemed its notes each year. The redemption kept the notes at or near par with silver. These early notes essentially functioned as bills of anticipation of taxes. However, new notes quickly replaced the redeemed notes.

The promise not to issue additional notes, the government did not keep. It continued to issue notes with a promise to pay each new issuance in silver in a year. However, it kept delaying payment. Then it began extending the time for redemption. ". . . in 1704 the time for redemption was extended to two years, in 1709 to four years, in 1710 to five years, in 1711 to six years, and later [1722[8]] to thirteen years."[9]

These delays in redemption caused the people to resist taxation not only to pay the outstanding notes, but also to pay current expenditures. During the next several years more notes were issued: 1706, £10,000; 1707, £22,000; 1708, £10,000; 1709, £60,000; 1710, £40,000.[10]

In 1711, Massachusetts issued £500,000 in notes to pay for another failed pillaging of Quebec during Queen Anne’s War. Before this issuance, the Massachusetts note had stabilized around seven shillings to an ounce of silver. With this issuance, Massachusetts notes fell to nine shillings per ounce of silver.[11]

The notes of 1711 differed from the earlier issues. The earlier notes were based on public credit and secured by the pledge of taxes. Massachusetts issued the notes of 1711 to Boston merchants to enable them to obtain material for the war.[12]

By 1714, Massachusetts was again discussing how to overcome its shortage of money. It had succeeded in driving silver from the colony and leaving behind a pile of depreciating government notes. Instead of deciding how to reduce the quantity of government notes and to bring silver coins back to the colony, the people debated the best way to issue more paper money.

The government decided to establish a public land bank to issue legal tender notes. The land bank printed and lent paper money to buy land. Land purchased with the notes secured the loan.

In 1714, £50,000 in notes or loan bills were issued and lent for real estate security. The borrowers paid 5-percent interest and paid off the loan at the rate of one-fifth per year for five years. The government did not obligate itself to redeem these notes with tax receipts. It also got the interest to spend without any outlay of capital.[13]

In 1716, the land bank issued £100,000 in notes. This issuance increased the colony’s money supply by 40 percent.[14] The value of Massachusetts notes quickly dropped, and prices rapidly rose.

In 1721 and 1728, the land bank issued more notes and brought the total notes that it had issued to £260,000.[15] Its notes were in addition to the notes that the government had issued earlier.

People who received loans from the land bank benefitted at the expense of the other people in the community. Borrowers spent their notes on goods and services before prices rose. With their loans, they got control of things in the community and with lower rates than others had to pay. (The interest on loans from the land bank was below the market rate.) As their borrowing removed capital from the loan market, they caused interest rates for other loans to rise. Thus, public loans caused the interest rate for private loans to rise. (Interest rates rose for two reasons: (1) withdrawal of loadable capital and (2) fear of currency depreciation.)[16]

The land bank lent money mostly to buy land. Land secured the loan. Most members of the legislature were land owners. They were in effect using the land bank that they created to buy land with loans that carried below market interest rates. They lent themselves newly printed notes.

To increase the value of its money, the government began reducing the notes in circulation. Notes used to repay loans were retired.

Unfortunately, for Massachusetts, it was obliged to honor legal tender notes issued in the other New England colonies. By now, other colonies had acquired Massachusetts’ habit of printing legal tender government notes. Thus, the value of paper money continued to decline.

In 1720, the government dropped the 5 percent tax paying premium. The premium had long failed to keep its notes at par.

As money depreciated, people began to demand the issuance of even more paper money. In 1721, Massachusetts issued another £50,000.[17]

To overcome the depreciation of its currency, the government fixed the value of silver in terms of its notes for payment of previous obligations. The value of silver varied with the year of the contract.

Under pressure of the King, whom creditors were pressuring demanding sound money in the colonies, the royal governor of Massachusetts reduced the notes in circulation by half. He limited the issuance of new notes to £30,000 per year, and these notes had to be paid (redeemed) in a year.[18]

However, the governor’s actions did not stop the inflation. Rhode Island was on a binge of paper money printing, and its money was honored in Massachusetts. Thus, Massachusetts notes fell to 19 shillings per ounce of silver in 1733. By the late 1730s, they had depreciated to 27 shillings per ounce.[19]

In 1739, the King demanded reducing the quantity of notes and redeeming them by a specific date. The £250,000 of notes in circulation had to be reduced to the £30,000 limit by 1741.[20]

To circumvent this order, some wealthy merchants established a private land bank that made loans for real and personal property. It issued more than £49,000 in notes redeemable in nothing. Not being legal tender, most people refused to accept the private land bank’s notes. Later that year (1741), Parliament outlawed land banks in Massachusetts.

Another war with France, King George’s War, and another invasion of Canada lead to another issue of government notes. By 1744, £300,000 of Massachusetts notes were outstanding. The quantity rose to nearly £2.5 million in 1748. Massachusetts notes depreciated to 60 schillings to an ounce of silver.[21] When the limit on the quantity of new notes fell, so did the promise to redeem them within a year. Now the government pledged to redeem them in 25 years from issuance.

By 1750, the value of the Massachusetts note had depreciated so much that £11 in Massachusetts notes exchanged for £1 sterling or a lost of more than 90 percent.[22] When Massachusetts began its adventure into the perfect monetary system of government notes in the 1690s, the exchange rate was at par.

To increase the value of its money, the government began retiring its notes. Between 1702 and 1750, Massachusetts had issued £4,634,700 in notes. It retired £2,814,900 of them, leaving £1,819,800 outstanding.[23]

After King George’s War, Parliament gave Massachusetts 653,000 ounces of silver and 10 tons of copper,[24] to reimburse it for its war expenditures. Massachusetts used this money to redeem its paper money at its current rate of 7½ to 1.[25] Thus, it returned to specie by canceling most of the face value of its outstanding notes.

Paper money adherents predicted that redemption would remove most of the money from the colony and that it would be disastrous. After a short adjustment, prices fell and trade and production increased. Specie flowed into the colony. John Adams noted that when Massachusetts paper money ceased circulating in 1750, "a silver currency taking its place immediately, and supplying every necessity and every convenience."[26]

In 1751, Parliament forbad all further issues of legal tender notes in New England. This prohibition had little effect Massachusetts because it had already returned to specie. Nevertheless, its agent in London remonstrated against the act.

With its legal tender notes, the Massachusetts government succeeded in driving silver money out to the colony or into hiding. "In 1690, before the orgy of paper began, 200,000 pounds of silver money were available in New England; by 1714, 240,000 pounds of paper money had been issued in New England but the silver had disappeared from circulation."[27] Massachusetts’ inferior paper notes displaced superior silver coins.

About Massachusetts notes driving silver money out of circulation, one person wrote around 1720, "As to silver and gold we never had much of it in the country; but we can very well remember, that before we had paper money, there was a sufficiency of it current in the country, and as the bills of credit came in and multiplied, the silver ceased and was gone."[28]

About the depreciation of the Massachusetts note, Rothbard wrote, "If the original par between sterling and the dollar is taken as 100, then sterling in Massachusetts was down to 133 in 1702 (one dollar equaling six shillings). By 1740, Massachusetts sterling had depreciated to 550, and by 1750 to 1,100—a depreciation of 11 to 1 compared with par."[29]

Massachusetts notes were "merely a forced credit with no other security than the good-will and the chance of future prosperity of the government."[30]

Still, people demanded paper money. The Massachusetts government began issuing interest-bearing treasury notes in 1755 for borrowed money. These notes were not legal tender. Nevertheless, people used them as a medium of exchange.

Besides the government of Massachusetts, the biggest winners from Massachusetts notes were the large debtors, who generally were wealthy merchants, and speculators. The losers included nondebtors, lenders, people on fixed income, charitable endowments, and laborers.

Massachusetts legal tender notes caused all sorts of distress and demoralized the people. They wiped out the inheritance of orphans and the savings of the elderly. Trustees and executives who held other people’s money often delayed payment as delay enabled them to pay with cheaper money. Thus, they devoured widows’ houses.[31]

As usual, laborers lost from the inflation (currency depreciation). Their wages lag inflation. In 1712, when the Massachusetts note was worth eight shillings per ounce of silver, the average laborer earned five shillings per day. In 1730, an ounce of silver was worth 29 shillings in Massachusetts notes while the average laborer received only 12 shillings a day. Thus, prices as represented by silver rose 3.5 times while wages roes only 2.5 times.[32]

Massachusetts Judge Seawall remarked, "The diminution of the value of the bills of public credit, is the cause of much oppression in the Province."[33]

As with all fiat paper money issued by governments, Massachusetts’ paper money led to corruption. One pamphleteer wrote in 1743 that these government notes issued on loans "to themselves, Members of the Legislature, and to other Borrowers, their Friends, at easy and fallacious Lays, to be repaid at very long Periods; and by their provincial Laws made a Tender in all Contracts, Trade and Business, whereby Currencies, various and illegal, have been introduced which from their continued and depreciated nature in the Course of many Years have much oppressed Widows and Orphans and all other Creditors."[34] The perfect money was more of a curse than a blessing.

Being legal tender irredeemable government notes, Massachusetts notes destroyed capital. They destroyed the incentive to save, which provides the capital needed for industry. The value of currency continuously changed and trended downward.

As money, the Massachusetts note was of poor quality. It did function as a medium of exchange although a poor medium of exchange. However, it lacked or poorly provided the other services of money. As a store of value, it was a failure. It also functioned poorly as a measure of value since its value frequently changed, usually downward.

Contrary to what fiat money reformers claim, Massachusetts prospered more after it abandoned legal tender government notes than it did while it was issuing them.[35]

Although the colonists seldom objected to following the mother country in her follies, especially wars, they objected strongly when she halted their worst folly—the issue of paper money. A cause of the American Revolution was the British government’s forbidding the colonies to issue legal tender paper money after 1751 for New England and 1764 for the other colonies.

Massachusetts’ experience has been repeated many times since. Fiat money adherents never learn anything from history. Fiat money losses value whether issued by governments or bankers.

When fiat money loses value (purchasing power), fiat money advocates hunt for someone to blame. That someone is usually the banker. The problem is never with fiat money itself. The Massachusetts fiasco could hardly be blamed on bankers. It was governmental from beginning to end. If it were not, fiat money reformers would not cite it as a classic example to follow. They would not consider it the perfect money.[36]

Fiat money is like a narcotic. Once it infects a person, he has difficulty in abandoning it. Even after the fiat money adherent suffers from the destructive effects of fiat money, he wants more. Like the drug addict, he sees the solution to the pain as a larger dose. Yet the next greater issue of fiat money leads to more economic pain. Like the drug addict, he has great difficulty in abandoning the cause of his problems, He remains caught in a vicious whirlpool of ever depreciating currency as he demands ever more money to be issued.

Contrary to what fiat money reformers claim, Massachusetts’ paper money was disastrous. It did postpone levying taxes. However, it caused economic havoc. Massachusetts succeeded in quickly debasing its money.The following table shows the lost of purchasing power of Massachusetts notes. Silver is used as a proxy for general prices.

The increase in the price of silver in Massachusetts notes is a good approximation of the increase in general prices for two reasons. First, silver was the standard money. Second, imports from outside New England had to be paid for with silver as Massachusetts notes had no value outside New England.


1. Charles S. Norburn, Honest Money: The United States Note (Fletcher: New Puritan Library, 1983), pp. 8-9, 125-126.
2. Norburn, p. 126.
3. Frank Fenwick Mcleod "The History of Fiat Money and Currency Inflation in New England from 1620 to 1789," Annals of the American Academy of Political and Social Science, 12 (Sept. 1898), p. 61,, Apr. 23, 2008. Davis Rich Dewey, Financial History of the Untied States (8th ed., 1922, rpt; New York: Elibron Classic, 2005), pp. 21-22. Murray N. Rothbard, Conceived in Liberty, II, "Salutary Neglect": The American Colonies in the First Half of the 18th Century (New Rochelle: Arlington House Publishers, 1975), p. 130. Horace White, Money and Banking (Boston: Ginn & Co., 1896), p. 120.
4. Mcleod, p. 61.
5. Dewey, p. 21. Rothbard, p. 131.
6. White, p. 120.
7. Mcleod, p. 62. Rothbard, p. 131. White, pp. 120-121.
8. Rothbard, p. 131.
9. Dewey, p. 23.
10. Mcleod, p. 63.
11. Rothbard, p. 132.
12. Dewey, p. 23. Rothbard, p. 132.
13. Dewey, p. 23. Mcleod, pp. 65-66.
14. Rothbard, p. 132.
15. Dewey, p. 23.
16. White, pp. 131-132.
17. Rothbard, p. 133.
18. Ibid.
19. Ibid.
20. Ibid., p. 135.
21. Ibid., p. 137.
22. Dewey, p. 28. White, p. 123.
23. Dewey, p. 29.
24. Mcleod, p. 74.
25. Dewey, p. 29. Rothbard, p. 137.
26. William Brough, The Natural Law of Money (1909, rpt.; New York: Cosimo Classics, 2005) p. 86.
27. Rothbard, pp. 131-132.
28. Mcleod, p. 69.
29. Rothbard, p. 137.
30. Mcleod, p. 64.
31. White, p. 130.
32. Rothbard, p. 135.
33. Mcleod, p. 71.
34. White, p. 123.
35. Mcleod, p. 76.
36. Norburn, p. 8.

Copyright © 2009 by Thomas Coley Allen. 

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