WEBVTT NOTE 3. Government Paper Money 1 00:00:00.000 --> 00:00:02.000 Government Paper Money 2 00:00:02.000 --> 00:00:07.000 Apart from medieval China, which invented both paper and printing centuries before the West, 3 00:00:07.000 --> 00:00:15.000 the world had never seen government paper money until the colonial government of Massachusetts admitted a fiat paper issue in 1690. 4 00:00:15.000 --> 00:00:21.000 Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony in Quebec. 5 00:00:21.000 --> 00:00:29.000 Generally, the expeditions were successful, and would return to Boston, sell their booty, and pay off the soldiers with the proceeds. 6 00:00:29.000 --> 00:00:38.000 This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill humor, grumbling for their pay. 7 00:00:38.000 --> 00:00:45.000 Discontented soldiers are ripe for mutiny, so the Massachusetts government looked around in concern for a way to pay the soldiers. 8 00:00:45.000 --> 00:00:53.000 It tried to borrow 3,000 to 4,000 pounds from Boston merchants, but evidently the Massachusetts credit rating was not the best. 9 00:00:53.000 --> 00:00:59.120 Finally, Massachusetts decided in December 1690 to print 7,000 pounds in paper notes 10 00:00:59.120 --> 00:01:01.560 and to use them to pay the soldiers. 11 00:01:01.560 --> 00:01:05.320 Suspecting that the public would not accept irredeemable paper, the government made a 12 00:01:05.320 --> 00:01:10.080 two-fold pledge when it issued the notes, that it would redeem them in gold or silver 13 00:01:10.080 --> 00:01:14.840 out of tax revenue in a few years, and that absolutely no further paper notes would be 14 00:01:14.840 --> 00:01:15.840 issued. 15 00:01:15.840 --> 00:01:21.080 Characteristically, however, both parts of the pledge went quickly by the board. 16 00:01:21.080 --> 00:01:24.880 The issue limit disappeared in a few months, and all the bills continued to unredeem for 17 00:01:24.880 --> 00:01:26.700 nearly 40 years. 18 00:01:26.700 --> 00:01:32.040 As early as February 1691, the Massachusetts government proclaimed that its issue had fallen 19 00:01:32.040 --> 00:01:38.120 far short, and so it proceeded to emit 40,000 pounds of new money to repay all of its outstanding 20 00:01:38.120 --> 00:01:43.300 debt, again pledging falsely that this would be the absolute final note issue. 21 00:01:43.300 --> 00:01:47.380 But Massachusetts found that the increase in the supply of money, coupled with a fall 22 00:01:47.380 --> 00:01:56.380 The 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. 23 00:01:56.380 --> 00:02:05.380 Indeed, within a year after the initial issue, the new paper pound had depreciated on the market by 40% against specie. 24 00:02:05.380 --> 00:02:15.380 By 1692, 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 25 00:02:15.380 --> 00:02:21.340 and by granting a premium of 5% on all payment of debts to the government made in paper notes. 26 00:02:21.340 --> 00:02:25.540 This legal tender law had the unwanted effect of Gresham's Law, the disappearance of 27 00:02:25.540 --> 00:02:28.260 species circulation in the colony. 28 00:02:28.260 --> 00:02:34.500 In addition, the expanding paper issues drove up prices and hampered exports from the colony. 29 00:02:34.500 --> 00:02:39.980 In this way, the species shortage became a creature rather than the cause of fiat paper 30 00:02:39.980 --> 00:02:40.980 issues. 31 00:02:40.980 --> 00:02:48.100 Thus, in 1690, before the orgy of paper issues began, 200,000 pounds of silver money was 32 00:02:48.100 --> 00:02:50.140 available in New England. 33 00:02:50.140 --> 00:02:55.100 By 1711, however, with Connecticut and Rhode Island having followed suit in paper money 34 00:02:55.100 --> 00:03:00.780 issue, 240,000 pounds of paper money had been issued in New England, but the silver had 35 00:03:00.780 --> 00:03:03.420 almost disappeared from circulation. 36 00:03:03.420 --> 00:03:09.200 Ironically then, Massachusetts and her sister colonies' issue of paper money created rather 37 00:03:09.200 --> 00:03:11.860 have then solved any scarcity of money. 38 00:03:11.860 --> 00:03:14.380 The new paper drove out the old specie. 39 00:03:14.380 --> 00:03:19.340 The consequent driving up of prices and depreciation of paper scarcely relieved any alleged money 40 00:03:19.340 --> 00:03:21.860 scarcity among the public. 41 00:03:21.860 --> 00:03:26.360 But since the paper was issued to finance government expenditures and pay public debts, 42 00:03:26.360 --> 00:03:30.960 the government, not the public, benefited from the fiat issue. 43 00:03:30.960 --> 00:03:36.240 After Massachusetts had admitted another huge issue of 500,000 pounds in 1711 to pay for 44 00:03:36.240 --> 00:03:40.880 For another failed expedition against Quebec, not only was the remainder of the silver driven 45 00:03:40.880 --> 00:03:47.160 from circulation, but despite the legal tender law, the paper pound depreciated 30% against 46 00:03:47.160 --> 00:03:48.160 silver. 47 00:03:48.160 --> 00:03:52.920 Massachusetts Pounds, officially 7 shillings to the silver ounce, had now fallen on the 48 00:03:52.920 --> 00:03:55.940 market to 9 shillings per ounce. 49 00:03:55.940 --> 00:04:00.080 Depreciation proceeded in this and other colonies despite fierce governmental attempts to outlaw 50 00:04:00.080 --> 00:04:05.760 it, backed by fines, imprisonment, and total confiscation of property for the high crime 51 00:04:05.760 --> 00:04:08.960 of Not Accepting the Paper at Par 52 00:04:08.960 --> 00:04:13.560 Faced with a further shortage of money due to the money issues, Massachusetts decided 53 00:04:13.560 --> 00:04:14.920 to press on. 54 00:04:14.920 --> 00:04:20.680 In 1716, it formed a government land bank and issued £100,000 in notes to be loaned 55 00:04:20.680 --> 00:04:24.080 on real estate in the various counties of the province. 56 00:04:24.080 --> 00:04:27.760 Prices rose so dramatically that the tide of opinion in Massachusetts began to turn 57 00:04:27.760 --> 00:04:32.280 against paper as writers pointed out that the result of issues was a doubling of prices 58 00:04:32.280 --> 00:04:37.200 in the past 20 years, the depreciation of paper and the disappearance of Spanish silver 59 00:04:37.200 --> 00:04:39.620 through the operation of Gresham's Law. 60 00:04:39.620 --> 00:04:44.240 From then on, Massachusetts, pressured by the British Crown, tried intermittently to 61 00:04:44.240 --> 00:04:49.140 reduce the bills in circulation and return to a specie currency, but was hampered by 62 00:04:49.140 --> 00:04:54.640 its assumed obligations to honor the paper notes at par of its sister New England colonies. 63 00:04:54.640 --> 00:04:59.840 In 1744, another losing expedition against the French led Massachusetts to issue an enormous 64 00:04:59.840 --> 00:05:21.840 From 1744 to 1748, paper money in circulation expanded from 300,000 pounds to 2.5 million pounds, 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. 65 00:05:21.840 --> 00:05:27.720 By 1740, every colony but Virginia had followed suit in fiat paper money issues, and Virginia 66 00:05:27.720 --> 00:05:32.520 succumbed in the late 1750s in trying to finance part of the French and Indian War against the 67 00:05:32.520 --> 00:05:39.360 French. Similar consequences, dramatic inflation, shortage of specie, massive depreciation despite 68 00:05:39.360 --> 00:05:46.120 compulsory PAR laws ensued in each colony. Thus, along with Massachusetts' depreciation 69 00:05:46.120 --> 00:05:51.040 of 11 to 1 of its notes against specie compared to the original PAR, Connecticut's notes 70 00:05:51.040 --> 00:05:57.600 had sunk to 9 to 1 and the Carolinas at 10 to 1 in 1740, and the paper of virulently 71 00:05:57.600 --> 00:06:04.140 inflationist Rhode Island to 23 to 1 against specie. Even the least inflated paper, that 72 00:06:04.140 --> 00:06:09.800 of Pennsylvania, had suffered an appreciation of specie to 80% over par. 73 00:06:09.800 --> 00:06:14.640 A detailed study of the effects of paper money in New Jersey shows how it created a boom-bust 74 00:06:14.640 --> 00:06:19.920 economy over the colonial period. When new paper money was injected into the economy, 75 00:06:19.920 --> 00:06:24.440 An inflationary boom would result to be followed by a deflationary depression when the paper 76 00:06:24.440 --> 00:06:26.520 money supply contracted. 77 00:06:26.520 --> 00:06:31.320 At the end of King George's War with France in 1748, Parliament began to pressure the 78 00:06:31.320 --> 00:06:36.240 colonies to retire the mass of paper money and return to a specie currency. 79 00:06:36.240 --> 00:06:41.780 In 1751, Great Britain prohibited all further issues of legal tender paper in New England 80 00:06:41.780 --> 00:06:45.480 in order to move toward redemption of existing issues in specie. 81 00:06:45.480 --> 00:06:50.480 Finally, in 1764, Parliament extended the prohibition of new issues to the remainder 82 00:06:50.480 --> 00:06:55.000 of the colonies and required the gradual retirement of outstanding notes. 83 00:06:55.000 --> 00:06:59.000 Following the lead of Parliament, the New England colonies, apart from Rhode Island, 84 00:06:59.000 --> 00:07:03.520 decided to resume specie payment and retire their paper notes rapidly at the current depreciated 85 00:07:03.520 --> 00:07:05.220 market rate. 86 00:07:05.220 --> 00:07:10.400 The panicky opponents of specie resumption and monetary contraction made the usual predictions 87 00:07:10.400 --> 00:07:14.960 in such a situation, that the result would be a virtual absence of money in New England 88 00:07:14.960 --> 00:07:20.260 and the consequent ruination of all trade. Instead, however, after a brief adjustment, 89 00:07:20.260 --> 00:07:24.740 the resumption and retirement led to a far more prosperous trade in production, the harder 90 00:07:24.740 --> 00:07:30.240 money and lower prices attracting an inflow of specieology. In fact, with Massachusetts 91 00:07:30.240 --> 00:07:35.380 on specieology and Rhode Island still on depreciated paper, the result was that Newport, which 92 00:07:35.380 --> 00:07:40.100 had been a flourishing center for West Indian imports for Western Massachusetts, lost its 93 00:07:40.100 --> 00:07:53.100 In fact, as one student of Colonial Massachusetts has pointed out, the return to specie occasioned remarkably little dislocation, recession, or price deflation. 94 00:07:53.100 --> 00:08:01.100 Indeed, wheat prices fell by less in Boston than in Philadelphia, which saw no such return to specie in the early 1750s. 95 00:08:01.100 --> 00:08:17.100 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. 96 00:08:17.100 --> 00:08:25.100 Not being outlawed by governmental decree, specie remained in circulation throughout the colonial period, even during the operation of paper money. 97 00:08:25.100 --> 00:08:34.100 Despite the inflation, booms and busts, and shortages of specie caused by paper issues, the specie system worked well overall. 98 00:08:34.100 --> 00:08:40.100 Here was the silver standard, in the absence of institutions of the central government intervening in the silver market, 99 00:08:40.100 --> 00:08:50.100 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. 100 00:08:50.100 --> 00:08:54.100 The market kept exchange rates remarkably close to the legislated par. 101 00:08:54.100 --> 00:08:58.100 What is most remarkable in this context is the continuity of the species system through 102 00:08:58.100 --> 00:09:00.100 the 17th and 18th centuries.