WEBVTT NOTE 26. Inflation and Paper Money 1 00:00:00.000 --> 00:00:05.560 Volume 2, Part 2, Intercolonial Developments 2 00:00:05.560 --> 00:00:12.520 Volume 2, Chapter 26, Inflation and the Creation of Paper Money 3 00:00:12.520 --> 00:00:18.600 So far we have been concentrating on the leading developments in each colony in the first half 4 00:00:18.600 --> 00:00:25.560 of the 18th century, in the domestic affairs, so to speak, peculiar to the colony. 5 00:00:25.560 --> 00:00:32.000 Now let us turn to the increasingly important experiences that were common to several or 6 00:00:32.000 --> 00:00:38.520 all of the colonies, experiences that helped to impart a greater degree of community in 7 00:00:38.520 --> 00:00:45.440 colonies that originated as completely separate and independent entities. 8 00:00:45.440 --> 00:00:48.400 Among these we can distinguish two categories. 9 00:00:48.400 --> 00:00:55.400 First, events and developments that, while still chiefly domestic to the colonies, permeated 10 00:00:55.400 --> 00:01:02.400 some or all of them, for example, such new developments as paper money, or such intellectual 11 00:01:03.520 --> 00:01:10.520 currents as the Great Awakening. Second, Foreign Affairs, that is the emergence of common relations 12 00:01:11.760 --> 00:01:17.880 and problems outside the colonies, specifically relations with Great Britain and the British 13 00:01:17.880 --> 00:01:24.880 Empire, with the other European colonies in North America, France and Spain, and with 14 00:01:24.880 --> 00:01:32.440 the Indians, The Last Two Spheres Often Blending. Many of the predominantly domestic questions, 15 00:01:32.440 --> 00:01:40.520 of course, had external ramifications, particularly vis-à-vis Great Britain. Turning first to 16 00:01:40.520 --> 00:01:47.580 domestic developments shared by the various colonies in the first half of the 18th century, 17 00:01:47.580 --> 00:01:54.840 One of the most important was the creation of an entirely new and destructive economic 18 00:01:54.840 --> 00:02:04.020 device, paper money. Apart from isolated China during the Middle Ages, money had always emerged 19 00:02:04.020 --> 00:02:11.260 on the market as a useful commodity, whether goods like tobacco and grain, as in the colonies, 20 00:02:11.260 --> 00:02:16.300 or the more widely used but more expensive gold and silver. 21 00:02:16.300 --> 00:02:22.240 In any case, the monetary commodity could only be produced as other goods were, by the 22 00:02:22.240 --> 00:02:30.240 use of labor and capital to transform material resources into more desirable forms, for example 23 00:02:30.240 --> 00:02:35.020 by growing and picking tobacco, or by mining gold. 24 00:02:35.020 --> 00:02:50.020 Again, as in the case of other goods, the monetary commodity could then be acquired either by direct production or by purchasing some other good or service and exchanging it for money. 25 00:02:50.020 --> 00:03:20.020 National monetary units were not regarded as independent entities in any sense, but merely national names for units of weight of gold or silver, hence foreign coins of varying weights of gold and silver could and did easily circulate throughout the world, if unhampered by government regulations, since their value rested in their specie content rather than in their name. 26 00:03:20.020 --> 00:03:26.780 In the 17th century, money was gold or silver, or some other commodity, and there was no 27 00:03:26.780 --> 00:03:32.540 way to increase its stock except by purchasing more of the metal. 28 00:03:32.540 --> 00:03:40.340 The kings and princes, it is true, found a way to increase their share by debasement, 29 00:03:40.340 --> 00:03:47.480 devaluating the specie content of the national coin and unit, and keeping the remainder, 30 00:03:47.480 --> 00:03:51.120 The Seniorage for Themselves 31 00:03:51.120 --> 00:03:57.040 Credit exchanges and merchant banking developed during the flowering of commercial capitalism 32 00:03:57.040 --> 00:04:03.960 of the medieval northern Italian cities. At first, these banking transactions promoted 33 00:04:03.960 --> 00:04:10.720 the advance of the market and of commercial capitalism without adding to or disturbing 34 00:04:10.720 --> 00:04:17.800 the Supply of Money. Eventually, however, some of the bankers began to accept deposits 35 00:04:17.800 --> 00:04:25.280 of money for safekeeping and then began profiting on their depositor's money by lending out 36 00:04:25.280 --> 00:04:32.800 the money or lending newly minted deposit claims on the money deposits. In this way, 37 00:04:32.800 --> 00:04:39.840 new money or rather new evidences of money was pumped into the economy essentially out 38 00:04:39.840 --> 00:04:45.840 and by means of virtual embezzlement of depositors' funds. 39 00:04:45.840 --> 00:04:51.840 Deposit banking did not loom large in the Italian or European economy, however, and 40 00:04:51.840 --> 00:04:59.840 failures by deposit bankers in Venice led to government banking based on true money warehouse principles. 41 00:04:59.840 --> 00:05:09.840 In 1587, Venice established a deposit bank in which deposits were matched 100% by money in the bank's vaults. 42 00:05:09.840 --> 00:05:16.840 Therefore, no fraudulent or inflationary increase of the money supply could take place. 43 00:05:16.840 --> 00:05:28.840 By 1619, however, the government's need for funds and the temptation to cheat brought about a relaxation of the 100% rule, 44 00:05:28.840 --> 00:05:35.840 Rule. Soon the 100% principle was followed by new banks created in other cities, especially 45 00:05:37.000 --> 00:05:44.000 at Amsterdam in 1609 and at Hamburg ten years later. In England, commercial banking began 46 00:05:46.100 --> 00:05:53.100 in the mid-17th century with gold being deposited for safekeeping with London goldsmiths, who 47 00:05:53.100 --> 00:05:59.900 who issued notes, or book claims, as evidences of gold deposited there. 48 00:05:59.900 --> 00:06:10.900 Since the depositors were the true owners of the gold, there were not supposed to be much more warehouse receipts than gold in the vaults. 49 00:06:10.900 --> 00:06:22.900 But eventually, the goldsmiths began to yield to the temptation of fraudulently increasing the money supply through issue of pseudo-warehouse receipts. 50 00:06:22.900 --> 00:06:29.440 Yet, before the late 17th century, there was no important amount of bank money or bank 51 00:06:29.440 --> 00:06:36.920 issues beyond gold or silver, and that generally ancillary to other financial business, and 52 00:06:36.920 --> 00:06:40.220 none at all in the American colonies. 53 00:06:40.220 --> 00:06:46.300 And there was no case at all concerning the issue of government paper money, let alone 54 00:06:46.300 --> 00:06:54.260 Government paper made a compulsory medium for payment of all debts, legal tender. 55 00:06:54.260 --> 00:07:01.300 We have seen above that when money remains exclusively a commodity, or as simply warehouse 56 00:07:01.300 --> 00:07:08.980 receipts fully representing the money commodity in the warehouse, it must be obtained by production 57 00:07:08.980 --> 00:07:17.180 or by exchange of goods, but bank money or government money, whether as tangible notes 58 00:07:17.180 --> 00:07:25.500 or demand deposits, is an increase in the effective money supply virtually out of thin 59 00:07:25.500 --> 00:07:27.740 air. 60 00:07:27.740 --> 00:07:32.640 What are the economic consequences of such an increase? 61 00:07:32.640 --> 00:07:38.740 The important point about the economics of money is that once a commodity is chosen as 62 00:07:38.740 --> 00:07:46.860 As money, by the market, any amount of its supply is optimal. In short, no social benefit 63 00:07:46.860 --> 00:07:53.640 is ever conferred by an increase in the supply of money in society. This contrast to other 64 00:07:53.640 --> 00:07:59.880 useful goods is due to the fact that money is used only for exchange of other goods. 65 00:07:59.880 --> 00:08:05.220 It does not, like other goods, perform its service by being used up in production or 66 00:08:05.220 --> 00:08:12.220 Money exchanges with all other goods on terms set by the market. These terms, established 67 00:08:13.820 --> 00:08:20.820 by the interplay of market supply and demand, constitute the array of money prices in society. 68 00:08:21.960 --> 00:08:28.960 If the supply of money in society should increase, the purchasing power of each unit of money 69 00:08:28.960 --> 00:08:38.400 A unit of money relative to goods will fall. That is, prices will rise. If the supply of 70 00:08:38.400 --> 00:08:46.600 money should decline, then the purchasing power of each unit will rise. Prices will 71 00:08:46.600 --> 00:08:55.660 fall. In short, an increase in the money supply only dilutes the effectiveness of each unit 72 00:08:55.660 --> 00:09:03.900 of Money, for instance, the gold ounce. A fall in the supply raises the power of each 73 00:09:03.900 --> 00:09:12.260 unit to do its work. Whatever happens to the supply of money, prices will thus adjust themselves 74 00:09:12.260 --> 00:09:18.620 so as to carry on the work of exchange as efficiently as possible. No one size of the 75 00:09:18.620 --> 00:09:26.460 The money stock, then, is better than any other. An increase in the supply of gold or 76 00:09:26.460 --> 00:09:34.540 silver, therefore, confers no social benefit by increasing the supply of money. Prices 77 00:09:34.540 --> 00:09:40.960 will rise, and the public will be no better off than before. The addition, however, does 78 00:09:40.960 --> 00:09:47.960 does confer a social benefit by increasing the non-monetary uses of gold or silver, but 79 00:09:48.680 --> 00:09:55.680 the creation through book accounts or paper issues does not yield this indirect benefit. 80 00:09:56.480 --> 00:10:03.480 This creation is wholly parasitical. If the creation of bank money or government paper 81 00:10:04.480 --> 00:10:10.880 is not socially useful, this does not mean that its economic consequences are trivial 82 00:10:10.880 --> 00:10:17.880 or Unimportant. Quite the contrary. For the creation of paper money severs the vital market 83 00:10:18.960 --> 00:10:25.960 link between production and income. For now, non-producers are able, so to speak, to counterfit 84 00:10:29.160 --> 00:10:36.160 to create their own money and to use it to bid away resources from genuine producers. 85 00:10:36.160 --> 00:10:50.160 Money creation, in short, redistributes income and wealth from producers to legalized counterfeiters and to the witting or unwitting beneficiaries of this counterfeiting. 86 00:10:50.160 --> 00:11:04.160 Second, this redistribution is affected by subtle and silent means, and this does not raise the opposition provoked by the more direct bludgeon of, say, taxation and government spending. 87 00:11:04.160 --> 00:11:14.280 Third, the inflation, issue of notes or deposits beyond the stock of specie, weakens and ultimately 88 00:11:14.280 --> 00:11:21.480 wrecks the integrity of the monetary unit, for the unit now must embrace pseudo-warehouse 89 00:11:21.480 --> 00:11:30.520 receipts and fraudulent dollars or pounds or francs which do not at all represent actual 90 00:11:30.520 --> 00:11:34.000 Capital Weights of the Money Commodity 91 00:11:34.000 --> 00:11:40.160 As a result, all the users of the money will be hurt and will find their money declined 92 00:11:40.160 --> 00:11:47.560 in value. In fact, the market will quickly tend to depreciate the paper money or bank 93 00:11:47.560 --> 00:11:53.720 notes in relation to genuine money, and this might happen even if government bolsters the 94 00:11:53.720 --> 00:12:00.720 The use of money by force, for example, by declaring it legal tender. 95 00:12:00.720 --> 00:12:07.340 Creation of paper, or bank money, inflation, therefore, confers a special privilege on 96 00:12:07.340 --> 00:12:14.340 some groups, at the expense of the producers and at the expense of the society's money. 97 00:12:15.520 --> 00:12:22.220 The groups that benefit include the first issuers and receivers of the new money, those 98 00:12:22.220 --> 00:12:29.020 Those who sell to them and generally those whose selling prices rise because of the inflation 99 00:12:29.020 --> 00:12:35.860 before a rise in the prices of the goods they have to buy. These groups gain by imposing 100 00:12:35.860 --> 00:12:43.220 losses on those to whom the new money is the last to trickle down. That is, those whose 101 00:12:43.220 --> 00:12:50.460 buying prices rise before the prices of the goods or services they have to sell. Debtors 102 00:12:50.460 --> 00:12:56.860 always gain from the rise in prices caused by inflation. They can then pay back their 103 00:12:56.860 --> 00:13:03.160 loans in money of lower purchasing power than they had borrowed. Furthermore, if the new 104 00:13:03.160 --> 00:13:08.880 money is loaned out by government or banks, debtors may benefit from the artificially low 105 00:13:08.880 --> 00:13:15.880 interest rate on the loan. Creditors, conversely, are always among the groups injured by inflation, 106 00:13:15.880 --> 00:13:23.200 Inflation, for they receive the inferior money. An interest return on further loans is artificially 107 00:13:23.200 --> 00:13:29.880 lowered if the new issue appears on the loan market. Landowners generally benefit from 108 00:13:29.880 --> 00:13:37.680 inflation. Land prices usually rise more rapidly than most other prices, and lowered interest 109 00:13:37.680 --> 00:13:43.920 rates have a particularly strong impact in raising the values of an extremely durable 110 00:13:43.920 --> 00:13:50.920 American historians, recognizing the interest of debtors in promoting inflation as a 111 00:14:13.920 --> 00:14:21.920 have generally made a grievous error in applying this insight to the American past. 112 00:14:21.920 --> 00:14:34.920 They have assumed that debtors and creditors are fixed identifiable classes and that debtors have consisted of poor farmers and creditors of wealthy urban merchants. 113 00:14:34.920 --> 00:14:38.920 The fallacies in this disastrous typology are numerous. 114 00:14:38.920 --> 00:14:47.340 Debtor and Creditor refer not to fixed occupational categories. A man is not born into the status 115 00:14:47.340 --> 00:14:54.040 of debtor or creditor, and anyone may shift continually from one category to the other, 116 00:14:54.040 --> 00:15:01.720 or to neither one. Farmers may be in debt or out of it, and may even be creditors. Merchants 117 00:15:01.720 --> 00:15:08.220 are notoriously creditors and debtors both, and they may shift at any time from a net 118 00:15:08.220 --> 00:15:15.220 Creditor, to a Net Debtor Position, or vice-versa. And debtors are not necessarily poor. Indeed, 119 00:15:15.860 --> 00:15:21.100 it is precisely the wealthy who generally go most heavily into debt. After all, poor 120 00:15:21.100 --> 00:15:27.100 people generally do not possess a very good credit rating, and therefore are not often 121 00:15:27.100 --> 00:15:34.100 able to borrow even if they want to. Landowners are often debtors, but they may more likely 122 00:15:34.100 --> 00:16:04.100 As befitted their undeveloped economies, the American colonies during the seventeenth century largely relied for their money on their staple, and hence their most widely marketable commodities. For example, tobacco in the Chesapeake Bay colonies, rice in South Carolina, poultry and corn and other grain in the north, and wampum in trade with the United States. 123 00:16:04.100 --> 00:16:08.220 with the Indians There has been much lamenting among historians 124 00:16:08.220 --> 00:16:14.400 about the scarcity of money in the colonies, reflected in the various commodity monies 125 00:16:14.400 --> 00:16:20.980 and imposed by the Crown's prohibition on either colonial mints or the import of coin 126 00:16:20.980 --> 00:16:27.060 from England. The supply of commodity monies was, in the first place, appropriate for the 127 00:16:27.060 --> 00:16:32.880 low level of economic development and the limited scope of especially the internal economy 128 00:16:32.880 --> 00:16:40.360 of the Colonies. Second, while lack of a mint was inconvenient, it was not important, for 129 00:16:40.360 --> 00:16:47.800 gold and silver, bullion or coin, could be bought, imported, at any time they were deemed 130 00:16:47.800 --> 00:16:54.840 necessary. And so they were. Neither did the colonies suffer irretrievably from the imposed 131 00:16:54.840 --> 00:17:01.720 lack of English coin. By the late seventeenth century, abundant Spanish silver coin and 132 00:17:01.720 --> 00:17:09.040 Brazilian gold coin existed in the colonies, coin that was used in urban centers and in 133 00:17:09.040 --> 00:17:16.420 foreign trade, where wampum and the other commodities were not highly welcome as money. 134 00:17:16.420 --> 00:17:21.740 Commodity money flourished within the rural districts, where indeed much trade was carried 135 00:17:21.740 --> 00:17:28.360 on by simple barter without even a commodity intermediary of exchange. 136 00:17:28.360 --> 00:17:35.040 While mercantilist fallacy and hoarding of species led England to keep its species out 137 00:17:35.040 --> 00:17:41.680 of the colonies, Americans continued to keep their accounts in English units. 138 00:17:41.680 --> 00:17:48.280 The English shilling consisted of 86 grains of silver, while the most popular coin in 139 00:17:48.280 --> 00:17:55.080 the colonies, the Spanish piece of eight, or dollar, obtained from the West Indies trade, 140 00:17:55.080 --> 00:18:22.440 The colonies, too, were prisoners of mercantilist fallacies and were also concerned to force 141 00:18:22.440 --> 00:18:30.440 to remain in the colony, that is, to force it not to be used to its best advantage in importing goods. 142 00:18:30.440 --> 00:18:37.440 Consequently, they decided to juggle the standards of weight of money and debased the money. 143 00:18:37.440 --> 00:18:45.440 The process began as early as 1642 when the government of Massachusetts arbitrarily decreed 144 00:18:45.440 --> 00:18:49.440 that the Spanish dollar be valued at five shillings. 145 00:18:49.440 --> 00:18:56.640 Connecticut followed a year later. This meant that the Massachusetts and Connecticut shillings, 146 00:18:56.640 --> 00:19:03.360 as the units of account, were now arbitrarily devalued in terms of dollars. The aim of this 147 00:19:03.360 --> 00:19:09.680 juggling was to attract dollars into the colony. If a silver coin could be worth five shillings 148 00:19:09.680 --> 00:19:14.760 instead of four and a half, then coins would be attracted into the place where they were 149 00:19:14.760 --> 00:19:38.760 In short, debasement of the unit of account, as in all currency devaluations, amounted to an artificial lowering of Massachusetts and Connecticut prices in terms of dollars, so that exports from these colonies received in mercantilist fashion an artificial subsidy. 150 00:19:38.760 --> 00:19:45.760 If exports were encouraged by the debasement, imports from abroad were similarly discouraged, 151 00:19:46.800 --> 00:19:53.680 and this could only injure the colonial consumers dependent on foreign goods. This sort of artificial 152 00:19:53.680 --> 00:20:00.180 stimulus and burden could only be temporary, however. Soon domestic prices stimulated by 153 00:20:00.180 --> 00:20:07.180 the increased demand would increase proportionately to the fall in value and the exporter's windfall 154 00:20:07.180 --> 00:20:17.180 As soon as one colony began the process of debasement, others followed, to avoid species flowing elsewhere. 155 00:20:17.180 --> 00:20:33.180 Soon, indeed, the colonies began to engage in a disastrous competitive debasement, continually spurred to greater heights by the catching up of domestic prices, by the wearing off, in short, of the narcotizing dose. 156 00:20:33.180 --> 00:20:40.640 The process, as we can see, was ruinously inflationary. The supply of money increased, 157 00:20:40.640 --> 00:20:47.280 to be sure, not through an increase of paper tickets or claims to money, but by artificially 158 00:20:47.280 --> 00:20:56.240 increasing the nominal units of money in terms of actual money. In 1645, Virginia raised 159 00:20:56.240 --> 00:21:06.200 The value of the dollar to six shillings, and from 1671 to 1697, nine colonies advanced 160 00:21:06.200 --> 00:21:13.840 the dollar and, to make the matters more confusing, at varying rates. The general level was six 161 00:21:13.840 --> 00:21:20.000 shillings to the dollar, but New York advanced the dollar to six shillings nine pence, and 162 00:21:20.000 --> 00:21:31.480 Virginia and Maryland had an additional incentive for debasement of the shilling. Many of their 163 00:21:31.480 --> 00:21:36.880 planter oligarchs were in debt to English merchants, and they were eager to repay shilling 164 00:21:36.880 --> 00:21:45.420 debts in appreciated dollars. But for similar reasons, the English creditors were determined 165 00:21:45.420 --> 00:21:53.260 that these colonies not devalue. So Virginia and Maryland were restricted in further debasement, 166 00:21:53.260 --> 00:21:59.460 Virginia being forced to lower its valuation to five shillings. The result was that the 167 00:21:59.460 --> 00:22:07.580 tobacco colonies soon lagged behind the others and coin began to drain from there to Boston, 168 00:22:07.580 --> 00:22:13.760 Philadelphia and New York. This meant, however, that southern planters began to buy their 169 00:22:13.760 --> 00:22:28.640 England finally decided to stop the competitive debasement and to insist on a uniform evaluation 170 00:22:28.640 --> 00:22:35.080 of money throughout the colonies. The English decree was, in fact, not only overdue but 171 00:22:35.080 --> 00:22:42.960 also excessively lenient. In 1704, the Crown proclaimed six shillings as the maximum value 172 00:22:42.960 --> 00:22:49.280 of Spanish Dollars, thus allowing a one-third rise from the real free market value of four 173 00:22:49.280 --> 00:22:55.640 shillings six pence. The proclamation had no provision for enforcement, however, and 174 00:22:55.640 --> 00:23:02.640 so the northern colonies and South Carolina continued to stamp a higher value on the dollar 175 00:23:02.640 --> 00:23:09.000 than did Virginia and Maryland. Consequently, Parliament enacted the proclamation into law 176 00:23:09.000 --> 00:23:14.400 in 1707 with penalties for violations. 177 00:23:14.400 --> 00:23:20.280 The colonies soon found another way to juggle monetary standards fraudulently and at the 178 00:23:20.280 --> 00:23:24.320 same time evade the regulations. 179 00:23:24.320 --> 00:23:29.520 Forced to assign a certain shilling value to Spanish dollars, the colonies turned to 180 00:23:29.520 --> 00:23:33.280 arbitrary changes in the value of silver itself. 181 00:23:33.280 --> 00:23:39.480 The true sterling value of silver, gauged by the silver content of English money, was 182 00:23:39.480 --> 00:23:47.520 five shillings two pence per ounce of silver. At the depreciation of silver set by Parliament's 183 00:23:47.520 --> 00:23:53.880 maximum of six shillings to the dollar, an ounce of silver was worth six shillings ten 184 00:23:53.880 --> 00:24:00.360 pence. But the colonies now began to raise the shilling value of silver generally to 185 00:24:00.360 --> 00:24:07.360 When England properly protested this patently crude violation of the law, the assemblies 186 00:24:09.180 --> 00:24:15.680 of Massachusetts and New York refused to appropriate money for the government, except at their 187 00:24:15.680 --> 00:24:21.480 own proclaimed higher rates, and thus won their way. Neither did the other colonies 188 00:24:21.480 --> 00:24:26.880 bother to obey the law, with the exception of Maryland and Virginia, where the maximum 189 00:24:26.880 --> 00:24:32.740 Maximum continued to be rigorously enforced. Indeed, Virginia set silver even lower than 190 00:24:32.740 --> 00:24:40.340 the proclaimed maximum at five shillings two pence per ounce. Jealous of the royal sovereignty 191 00:24:40.340 --> 00:24:48.700 and its alleged right to monopolize the mint, the Crown forbade mints in the colonies. During 192 00:24:48.700 --> 00:24:54.980 the Republican era, however, Massachusetts, alone of the colonies, established a mint 193 00:24:54.980 --> 00:25:04.380 in 1652. The mint was leased by Massachusetts to John Hall, who was allowed a fixed rate 194 00:25:04.380 --> 00:25:11.780 of seniorage on each coin. In minting pine tree shillings, Massachusetts propelled the 195 00:25:11.780 --> 00:25:20.900 debasement process, coining the shilling at 72 grains instead of the full weight of 86. 196 00:25:20.900 --> 00:25:26.180 This amounted to an evaluation of six shillings to the dollar. 197 00:25:26.180 --> 00:25:32.340 The existence of the mint was one of the Crown's grievances against the recalcitrant Bay Colony, 198 00:25:32.340 --> 00:25:38.940 and in 1684 it forced the Massachusetts Mint to close down. 199 00:25:38.940 --> 00:25:45.420 The colonies, including Massachusetts, vainly attempted to thwart economic law by barring 200 00:25:45.420 --> 00:25:51.220 and the export of species, but they could not succeed even with extraordinary powers 201 00:25:51.220 --> 00:25:57.340 of search and such penalties as outright confiscation of estates. 202 00:25:57.340 --> 00:26:02.620 It soon began to dawn on the colonists that there was a far easier way to inflate the 203 00:26:02.620 --> 00:26:08.900 money supply and to a far greater extent than by juggling the standards of weight or value 204 00:26:08.900 --> 00:26:14.860 of money, the creation of money out of mere paper. 205 00:26:14.860 --> 00:26:23.020 In 1641, the English mercantilist Henry Robinson hailed the Italian banks, able to inflate 206 00:26:23.020 --> 00:26:26.340 bank notes beyond the stock of specie. 207 00:26:26.340 --> 00:26:32.700 Nine years later, William Potter, in The Key of Wealth, argued with consistent logic that 208 00:26:32.700 --> 00:26:39.180 if an increase of money is beneficial, a perpetual increase would be still better. 209 00:26:39.180 --> 00:26:45.340 The creator of numerous such schemes, Potter would have his notes secured by the nation's 210 00:26:45.340 --> 00:26:47.380 land. 211 00:26:47.380 --> 00:26:54.220 Potter failed to see that the price of land increases along with other assets in an inflation, 212 00:26:54.220 --> 00:26:57.820 so that land would hardly check a paper inflation. 213 00:26:57.820 --> 00:27:03.740 He also failed to see the essence of bank money and its value as a claim to standard 214 00:27:03.740 --> 00:27:04.740 money. 215 00:27:04.740 --> 00:27:12.560 A loan bank to issue vast quantities of new money, particularly a land bank to lend on 216 00:27:12.560 --> 00:27:17.740 landed security, naturally enchanted leaders in New England. 217 00:27:17.740 --> 00:27:25.740 In 1663, Governor John Winthrop Jr. of Connecticut urged land banking upon his fellow members 218 00:27:25.740 --> 00:27:28.660 of the English Royal Society. 219 00:27:28.660 --> 00:27:35.060 Taking the lead in proposing a land bank was the influential Reverend John Woodbridge of 220 00:27:35.060 --> 00:27:41.700 Newbury, Massachusetts. Woodbridge, directly inspired by Potter, proposed a bank that would 221 00:27:41.700 --> 00:27:50.860 issue and lend notes. Woodbridge tried the scheme abortively in 1671 and 1681, and then 222 00:27:50.860 --> 00:27:56.880 Martin set forth his views in trying to organize a fund bank in 1682. 223 00:27:56.880 --> 00:28:04.980 Increased money, wrote the reverend, in a nutshell, multiplies trading, increaseth manufacture 224 00:28:04.980 --> 00:28:11.280 and provisions for domestic use and foreign return, abateth interest. 225 00:28:11.280 --> 00:28:17.820 The first land bank proposal, with a good chance of being established, came in Massachusetts 226 00:28:17.820 --> 00:28:20.140 in 1686. 227 00:28:20.140 --> 00:28:25.860 It is also a particularly instructive example of the kinds of forces behind the inflationist 228 00:28:25.860 --> 00:28:33.860 proposals. The originators of the scheme were emphatically NOT poor, debtor farmers. On 229 00:28:33.860 --> 00:28:39.620 the contrary, they were precisely the ruling oligarchy of Massachusetts. 230 00:28:39.620 --> 00:28:48.420 The year 1686 saw Massachusetts ruled by Joseph Dudley and his associates in plunder. On assuming 231 00:28:48.420 --> 00:28:57.420 In his office, Dudley and his council appointed a committee of leading merchants and other citizens to study trade conditions. 232 00:28:57.420 --> 00:29:07.420 The committee, led by Captain John Blackwell, reported with a proposal for a bank whose notes would be forced on the people as legal tender. 233 00:29:07.420 --> 00:29:14.420 The plan was to include all the leading oligarchs of the Dudley era in the directorship of the bank. 234 00:29:14.420 --> 00:29:24.420 Dudley himself, William Stoughton, Waite Winthrop, Simon Lind, Alicia Hutchinson, Alicia Cook, and others. 235 00:29:24.420 --> 00:29:34.420 No notes were to be issued below 20 shillings in denomination to ensure that the bank would be largely limited to the wealthiest citizens. 236 00:29:34.420 --> 00:29:42.420 The bank was to have no species capital whatever, though individual directors were to bear responsibility. 237 00:29:42.420 --> 00:29:47.420 The plan was abandoned with the arrival of Andros. 238 00:29:47.420 --> 00:29:56.420 The Glorious Revolution in 1688 inspired new talk of the Blackwell Bank, but again the proposal fell through. 239 00:29:56.420 --> 00:30:02.420 Paper money finally came to Massachusetts not in the form of a land bank's notes, 240 00:30:02.420 --> 00:30:09.420 but as the first issue of government paper money in the world, apart from medieval China. 241 00:30:09.420 --> 00:30:17.820 There is a single exception, the card money of Quebec. In 1685, the governing Intendant 242 00:30:17.820 --> 00:30:25.260 of Quebec, Monsieur Mules, decided to augment his funds by dividing some playing cards into 243 00:30:25.260 --> 00:30:32.540 quarters, marking them with various denominations, and then issuing them to pay for wages and 244 00:30:32.540 --> 00:30:39.340 materials. Mules took the precaution of ordering the public to accept the cards that 245 00:30:39.340 --> 00:30:46.660 is Legal Tender. The cards were later redeemed with species sent from France. Used repeatedly 246 00:30:46.660 --> 00:30:52.820 in Quebec, the money became playing tickets rather than playing cards. 247 00:30:52.820 --> 00:30:58.580 Paper money can be issued either by government for direct spending or by a bank, public or 248 00:30:58.580 --> 00:31:06.120 private, that lends out money to the public. While the former is cruder and more flagrant, 249 00:31:06.120 --> 00:31:10.920 It actually has less harmful repercussions on the economy, for given the same amount 250 00:31:10.920 --> 00:31:17.320 of monetary issue, lending out the new money inflicts additional distortion on the loan 251 00:31:17.320 --> 00:31:24.480 market and interest rates, which fact generates the familiar features of the boom-bust trade 252 00:31:24.480 --> 00:31:25.880 cycle. 253 00:31:25.880 --> 00:31:33.360 The fateful plunge of Massachusetts into pay-for-money came through direct spending rather than lending. 254 00:31:33.360 --> 00:31:38.400 Massachusetts had engaged in an expedition of plunder against French Quebec, an expedition 255 00:31:38.400 --> 00:31:44.000 it hoped would more than pay for itself, but as luck would have it, the expedition failed 256 00:31:44.000 --> 00:31:50.440 ignominiously, and Massachusetts was faced with the grave problem of paying the salaries 257 00:31:50.440 --> 00:31:56.680 of its soldiers, who were on the edge of mutiny. The Massachusetts government tried to borrow 258 00:31:56.680 --> 00:32:02.560 from three to four thousand pounds from Boston merchants, but evidently its credit rating 259 00:32:02.560 --> 00:32:09.040 was far too low, proceeding upon the principle that if it could not raise money it must print 260 00:32:09.040 --> 00:32:16.840 its own. Massachusetts decided in December 1690 to issue £7,000 in paper note. Now the 261 00:32:16.840 --> 00:32:24.360 government knew that it could not simply print paper, irredeemable in species, labelled pounds, 262 00:32:24.360 --> 00:32:29.540 for then no one would have accepted the money. The market value of the money would then have 263 00:32:29.540 --> 00:32:35.620 Plummetside sharply in relation to dollars or sterling. Massachusetts, therefore, made 264 00:32:35.620 --> 00:32:42.540 a twofold pledge as it issued the notes. It promised to redeem the notes in specie out 265 00:32:42.540 --> 00:32:49.820 of revenue in a few years, and it pledged to issue no further bills. In fact, the bills 266 00:32:49.820 --> 00:32:56.820 continued in use for almost forty years, and the pledge limit evaporated in a few months. 267 00:32:56.820 --> 00:33:03.140 The heady attraction of printing one's own money is always enough to overcome initially 268 00:33:03.140 --> 00:33:13.180 timid limits. As early as February 1691, Massachusetts acknowledged that the emission fell far short, 269 00:33:13.180 --> 00:33:20.540 and so it proceeded to issue 40,000 pounds of new money to repay all of the colony's 270 00:33:20.540 --> 00:33:26.300 Again, pledging this issue to be the final limit. 271 00:33:26.300 --> 00:33:33.300 Massachusetts indeed found very quickly that its scarcity of money could not be relieved 272 00:33:33.300 --> 00:33:36.000 by creating more. 273 00:33:36.000 --> 00:33:42.140 In that era, when people still had the right to own gold and silver, the loss of value 274 00:33:42.140 --> 00:33:50.140 of each unit of money was dramatized and intensified by market discounting of paper against speech 275 00:33:50.140 --> 00:34:05.140 These discounts reflected not only the increase in the supply of money but also rises or declines in its demand, governed largely by shifts in public confidence in the value of the new money. 276 00:34:05.140 --> 00:34:13.140 The Massachusetts notes, in fact, began to depreciate against specie almost as soon as they were issued. 277 00:34:13.140 --> 00:34:19.940 were issued. In a year they had depreciated by as much as 40 percent. Two pamphlets issued 278 00:34:19.940 --> 00:34:26.940 in 1691 berated the people for being delinquent in permitting the notes to depreciate. They 279 00:34:28.060 --> 00:34:34.180 did not think to criticize the issue itself. The author of the pamphlets lamented that 280 00:34:34.180 --> 00:34:41.180 while some private bills were passing at par with specie, our people in this pure air be 281 00:34:41.180 --> 00:34:55.220 In 1692, however, the government moved to the use of force and eliminated the discount 282 00:34:55.220 --> 00:35:02.220 in two ways, by making the government issues compulsory legal tender for all debts, and 283 00:35:02.220 --> 00:35:08.740 by granting a premium of 5 percent on all payment of debts to the government made in 284 00:35:08.740 --> 00:35:11.020 the paper notes. 285 00:35:11.020 --> 00:35:17.460 From that point on, Massachusetts turned on the monetary engine for its public expenditures. 286 00:35:17.460 --> 00:35:23.540 The notes were still supposed to be redeemed eventually in tax revenues. At first the pledges 287 00:35:23.540 --> 00:35:30.380 were one year ahead, so that notes issued in 1702 were to be paid out of pledged tax 288 00:35:30.380 --> 00:35:38.340 revenues in 1703. As time went on, however, the future kept receding further and further, 289 00:35:38.340 --> 00:35:42.620 and more and more years of future revenue were pledged in advance. 290 00:35:42.620 --> 00:35:51.700 By 1714, six years of Massachusetts revenue were so pledged, and by 1722, future pledges 291 00:35:51.700 --> 00:35:54.460 stretched ahead by thirteen years. 292 00:35:54.460 --> 00:36:01.740 The artificial maintenance of the paper at par had the unwanted effect of Gresham's law, 293 00:36:01.740 --> 00:36:08.500 That when a poor and a superior money are kept at an artificial ratio by the government, 294 00:36:08.500 --> 00:36:16.300 the money undervalued by government will disappear into exports or hoards, and only the overvalued 295 00:36:16.300 --> 00:36:18.780 money will remain in circulation. 296 00:36:18.780 --> 00:36:26.820 In 1690, before the orgy of paper began, 200,000 pounds of silver money were available in New 297 00:36:26.820 --> 00:36:27.820 England. 298 00:36:27.820 --> 00:36:36.940 By 1714, 240,000 pounds of paper money had been issued in New England, but the silver 299 00:36:36.940 --> 00:36:40.820 had disappeared from circulation. 300 00:36:40.820 --> 00:36:45.900 Massachusetts had increased the inferior money in circulation at the expense of displacing 301 00:36:45.900 --> 00:36:47.700 the superior. 302 00:36:47.700 --> 00:36:54.060 Furthermore, market depreciation against silver had only been checked for a time. 303 00:36:54.060 --> 00:37:00.900 The push of the Massachusetts issues over the brink came in 1711 when 500,000 pounds 304 00:37:00.900 --> 00:37:07.020 in notes were issued to pay merchants for the failure of another plunder, Expedition 305 00:37:07.020 --> 00:37:09.220 Against Quebec. 306 00:37:09.220 --> 00:37:16.480 The issue led to the hoarding and exporting of silver and to a 30 percent depreciation 307 00:37:16.480 --> 00:37:22.780 against silver, for while the Massachusetts money was officially 7 shillings to the silver 308 00:37:22.780 --> 00:37:36.300 by 1714, Massachusetts, after a generation of hopefully alleviating its so-called scarcity 309 00:37:36.300 --> 00:37:44.100 of money, found itself, with its silver gone and with the paper money, despite its efforts, 310 00:37:44.100 --> 00:37:46.980 rapidly depreciating. 311 00:37:46.980 --> 00:37:53.860 It was faced, therefore, with yet another shortage of money and with a crossroads. Either 312 00:37:53.860 --> 00:38:00.380 it could begin to return from paper to silver, or it could embark on a massive, eventually 313 00:38:00.380 --> 00:38:07.880 more than self-defeating issue of yet more paper money. The former course was not seriously 314 00:38:07.880 --> 00:38:15.140 considered. Instead, a conflict arose on the proper inflationary path to follow. Merchants 315 00:38:15.140 --> 00:38:20.920 and Debtors wanted to enjoy some of the blessings of cheap money, and a group of them tried 316 00:38:20.920 --> 00:38:28.260 to reactivate the Land Bank Plan of 1688. The leader of the private land bank scheme 317 00:38:28.260 --> 00:38:35.180 was John Coleman, a prominent Boston merchant and real estate speculator. Other leading 318 00:38:35.180 --> 00:38:42.080 supporters were Edward Lide, a Boston merchant and a heavy debtor in the 1711 expedition 319 00:38:42.080 --> 00:38:49.620 Against Quebec, Timothy Thornton, Boston Ship Builder and Real Estate Speculator, John 320 00:38:49.620 --> 00:38:54.720 Oulton and William Payne, Boston Real Estate Speculators. 321 00:38:54.720 --> 00:39:01.200 The equally eminent objectors, headed by Attorney General Paul Dudley, son of the governor, 322 00:39:01.200 --> 00:39:04.520 prevailed with plans for further government issue. 323 00:39:04.520 --> 00:39:10.320 Specifically, the private land bank was rejected by the general court and a public land bank 324 00:39:10.320 --> 00:39:33.680 The 1716 issue added at once a huge 40% to the colony's paper supply, and prices were 325 00:39:33.680 --> 00:39:39.320 raised so rapidly that objections to paper money began to be voiced. 326 00:39:39.320 --> 00:39:48.220 An anonymous pamphleteer in The Present Melancholy Circumstances, 1719, and, in addition to The 327 00:39:48.220 --> 00:39:56.300 Present Melancholy Circumstances, 1719, pointed out that monetary issues had led to a doubled 328 00:39:56.300 --> 00:40:03.060 cost of living in twenty years, to depreciation and to the disappearance of Spanish silver 329 00:40:03.060 --> 00:40:06.740 through the operation of Gresham's Law. 330 00:40:06.740 --> 00:40:12.020 The author advocated calling in some of the notes in order to increase the value of the 331 00:40:12.020 --> 00:40:13.020 money. 332 00:40:13.020 --> 00:40:19.180 He trenchantly concluded that a law can penalize and restrict, but it can't change men's minds 333 00:40:19.180 --> 00:40:24.100 to make them think a piece of paper is a piece of money. 334 00:40:24.100 --> 00:40:32.180 By 1718 Massachusetts had made a valiant effort to reduce its bills in circulation by allowing 335 00:40:32.180 --> 00:40:36.340 retirement of notes as loans were repaid. 336 00:40:36.340 --> 00:40:41.220 But by this time, the other colonies had taken a lesson from Massachusetts, and New England 337 00:40:41.220 --> 00:40:47.300 colonies were bound to honor each other's notes. Long Island had already issued forty 338 00:40:47.300 --> 00:40:54.180 thousand pounds in legal tender loan bills. As a result, the price of silver in New England 339 00:40:54.180 --> 00:41:01.260 shillings continued its disquieting rise. By 1720, it had climbed to thirteen shillings 340 00:41:01.260 --> 00:41:08.260 with depreciation worsening and silver disappearing, the cry arose once more against a shortage 341 00:41:10.540 --> 00:41:17.260 of money, and John Coleman returned to the fray, again urging a private land bank to 342 00:41:17.260 --> 00:41:24.260 emit 200,000 pounds in notes. Coleman urged farmers to support such a bank since the increased 343 00:41:24.260 --> 00:41:29.660 since the increased currency would raise prices of farm produce and land. 344 00:41:29.660 --> 00:41:34.760 Coleman also urged a law that would prohibit the depreciation of banknotes 345 00:41:34.760 --> 00:41:39.060 and would fix the price of silver at 8 shillings per ounce. 346 00:41:39.060 --> 00:41:42.960 Such a law would have been impossible to enforce 347 00:41:42.960 --> 00:41:45.560 and would have aggravated the shortage of silver 348 00:41:45.560 --> 00:41:50.960 by artificially overvaluing paper in relation to specie. 349 00:41:50.960 --> 00:41:55.960 Coleman denounced the government bank for not being inflationary enough. 350 00:41:55.960 --> 00:42:02.960 The agitation for a private land bank was joined by the Reverend John Wise, but without success. 351 00:42:02.960 --> 00:42:09.960 Another public issue of £50,000 in 1721 was enough to quiet the agitation, 352 00:42:09.960 --> 00:42:17.960 which was evidently concerned with more inflation rather than with private as against public banking. 353 00:42:17.960 --> 00:42:24.960 Throughout the colonies the crown, propelled by English creditors, was a continuing force for sound money, 354 00:42:24.960 --> 00:42:30.960 and its embattled governors attempted to veto paper issues and to moderate the inflationary drive. 355 00:42:30.960 --> 00:42:38.960 But the legislatures often threatened to withhold executive salaries and even issued money on their own authority. 356 00:42:38.960 --> 00:42:46.960 Increasing royal pressure on Massachusetts, imposed especially by Governor Jonathan Belcher after 1730, 357 00:42:46.960 --> 00:42:53.560 managed to reduce the notes in circulation by one-half by 1741. 358 00:42:53.560 --> 00:43:01.560 Belcher steadily enforced a limit of 30,000 pounds of notes per year to be payable in one year's time. 359 00:43:01.560 --> 00:43:07.560 Neighboring Rhode Island, however, with its elected governor, was able to go hog wild, 360 00:43:07.560 --> 00:43:14.560 and its note issue, being acceptable in Massachusetts, thwarted the Belcher reductions. 361 00:43:14.560 --> 00:43:23.200 Thus, Rhode Island emitted 100,000 pounds of notes in 1733 alone. As a result, silver 362 00:43:23.200 --> 00:43:31.560 rose further to 19 shillings per ounce, and by the late 1730s to 27 shillings an ounce. 363 00:43:31.560 --> 00:43:37.760 The other colonies followed the lead of Massachusetts during Queen Anne's War to pay for military 364 00:43:37.760 --> 00:43:44.760 Spenditures. South Carolina was the first to issue paper in 1703 to pay for an abortive 365 00:43:45.240 --> 00:43:51.240 plunder expedition against St. Augustine. Rhode Island began its reckless career of 366 00:43:51.240 --> 00:43:58.120 inflation in 1710 to pay for its share of an aggressive expedition against Port Royal 367 00:43:58.120 --> 00:44:05.120 in Nova Scotia. By 1740, the following colonies had indulged in paper issue for government 368 00:44:05.120 --> 00:44:12.560 Government Spending, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, South 369 00:44:12.560 --> 00:44:20.480 Carolina and North Carolina. Public loan banks were initiated by South Carolina in 1712 for 370 00:44:20.480 --> 00:44:29.280 loans on real or personal estates. Almost all the other colonies followed suit. By 1740, 371 00:44:29.280 --> 00:44:35.040 only Virginia had refused to join the ranks. The Carolinas indeed had indulged so heavily 372 00:44:35.040 --> 00:44:49.040 It is noteworthy that the price of silver rose to 30 shillings in 1730, and paper money played a large role in South Carolina's rebellion against the proprietary, which had refused to assent to paper money. 373 00:44:49.040 --> 00:45:03.040 Other struggles between legislature and governor took place in New Hampshire, where during the 1730s, the legislature refused all funds for five years in order to win its way for paper issues. 374 00:45:03.040 --> 00:45:14.040 and in New Jersey and New York which did the same. In all cases, the legislature was able to use its control of funds to win its point. 375 00:45:14.040 --> 00:45:23.040 Down to the middle of the 18th century, Virginia was content with a decidedly non-inflationary form of paper money. 376 00:45:23.040 --> 00:45:31.880 From 1713 on, the Virginia government established public tobacco warehouses, which issued warehouse 377 00:45:31.880 --> 00:45:40.720 receipts called tobacco notes, backed 100% by the amount of tobacco in the warehouse. 378 00:45:40.720 --> 00:45:46.520 These notes then functioned as a perfect equivalent to commodity money and tobacco. 379 00:45:46.520 --> 00:45:52.320 By the time of the French and Indian War in the late 1750s, however, Virginia moved to 380 00:45:52.320 --> 00:45:59.320 to issue paper money as part of the financing of its role in the war effort. Interestingly 381 00:45:59.360 --> 00:46:05.160 enough, the first advocate of government paper issues in Virginia during the French and Indian 382 00:46:05.160 --> 00:46:12.160 War was Landon Carter, one of the largest and most influential tobacco planters in Virginia. 383 00:46:14.520 --> 00:46:20.740 Most reckless of the colonies was Rhode Island, which was also particularly lax in waiving 384 00:46:20.740 --> 00:46:31.260 The Loan Banks in Rhode Island were controlled by a few government favorites, or sharers, 385 00:46:31.260 --> 00:46:37.380 who loaned out the money at 5% higher than they bought the new issues from the government. 386 00:46:37.380 --> 00:46:43.460 The sharers often sold this 5% guaranteed privilege to others for premiums as high as 387 00:46:43.460 --> 00:46:44.460 35%. 388 00:46:44.460 --> 00:46:53.400 In 1759, over 50,000 pounds of outstanding loans in Rhode Island were found to be unpaid 389 00:46:53.400 --> 00:46:59.720 and uncollectible, and this constituted a full 11 percent of the outstanding note issue 390 00:46:59.720 --> 00:47:03.240 for the land banks of that colony. 391 00:47:03.240 --> 00:47:09.120 The Rhode Islanders had a particular economic incentive for their wild issue of new money. 392 00:47:09.120 --> 00:47:15.480 A small colony with many purchases to make in Massachusetts Bay, Rhode Island's money 393 00:47:15.480 --> 00:47:22.360 was accepted at par in the neighboring colony. Hence the incentive for Rhode Islanders to 394 00:47:22.360 --> 00:47:27.800 print themselves new money that could easily be spent before prices in Massachusetts could 395 00:47:27.800 --> 00:47:33.880 rise by the same amount, thus imposing the main cost of their inflation upon the people 396 00:47:33.880 --> 00:48:03.880 of the World. 397 00:48:03.880 --> 00:48:08.880 and the manipulation of the new notes, which of course quickly depreciated. 398 00:48:08.880 --> 00:48:16.880 However, the impact of the new paper was greatly lessened by tobacco still being the major money of the colony. 399 00:48:16.880 --> 00:48:23.880 Tobacco was legal tender in Maryland, and the paper was not receivable for all taxes. 400 00:48:23.880 --> 00:48:31.880 All the colonial paper was made legal tender, it being recognized that otherwise the paper would not be accepted in private debts. 401 00:48:31.880 --> 00:48:39.460 The legal tender was at the official par value in specie, but this coercion was not enough, 402 00:48:39.460 --> 00:48:45.840 as we have seen to prevent grievous depreciation even though backed by fines, imprisonment 403 00:48:45.840 --> 00:48:52.640 and complete confiscation of property in punishment for not accepting the paper at par. 404 00:48:52.640 --> 00:48:58.680 And as we have also seen, complaints of a scarcity of money followed each new emission 405 00:48:58.680 --> 00:49:04.840 of Paper, and set up a clamor for still more accelerated inflation. Hardest hit by the 406 00:49:04.840 --> 00:49:12.360 severe depreciation of all the notes were non-debtors, especially creditors, fixed income 407 00:49:12.360 --> 00:49:19.500 groups, charitable endowments, and laborers, whose wages, as has generally been true, rose 408 00:49:19.500 --> 00:49:26.640 less than prices. Thus in 1712, when silver in Massachusetts was priced at 8 shillings 409 00:49:26.640 --> 00:49:42.180 In 1730, with silver appreciated to 29 shillings an ounce, wages were only 12 shillings a day. 410 00:49:42.180 --> 00:49:47.640 In short, the price of silver, a reflection of the price movements of imports and indeed 411 00:49:47.640 --> 00:49:54.420 of prices in general, rose three and one-half times, while wages had risen only two and 412 00:49:54.420 --> 00:49:56.540 one-half times. 413 00:49:56.540 --> 00:50:03.660 By 1740, the indefatigable Coleman was ready to renew agitation for a private land bank 414 00:50:03.660 --> 00:50:05.720 in Massachusetts. 415 00:50:05.720 --> 00:50:12.580 The critical factor in amassing support was the change in Massachusetts' land policy. 416 00:50:12.580 --> 00:50:19.220 Before 1720, the province had required actual settlement before granting new land to private 417 00:50:19.220 --> 00:50:22.180 persons or groups. 418 00:50:22.180 --> 00:50:28.660 But after that date, Massachusetts engaged in an orgy of grants to land speculators who 419 00:50:28.660 --> 00:50:36.460 held title to the virgin land until they could resell to actual settlers at a profit. 420 00:50:36.460 --> 00:50:42.580 This land speculation was particularly rampant during the 1730s. Much of the land was on 421 00:50:42.580 --> 00:50:47.700 the New Hampshire border, where a boundary dispute prevailed with a neighboring colony. 422 00:50:47.700 --> 00:50:53.540 The new host of land speculators was anxious for an inflationary land bank. 423 00:50:53.540 --> 00:50:59.380 Through the 1730s, the Massachusetts General Court had been able to evade Governor Belcher's 424 00:50:59.380 --> 00:51:05.100 restrictions on paper issues by postponing debates on redemption. 425 00:51:05.100 --> 00:51:13.300 Finally in 1739, the Crown insisted the bills be called in and redeemed on the dates due. 426 00:51:13.300 --> 00:51:20.000 This meant that the 250,000 pounds of paper in circulation would have to be reduced to 427 00:51:20.000 --> 00:51:25.840 the annual 30,000 pound limit by 1741. 428 00:51:25.840 --> 00:51:31.740 One way to evade this restriction, however, would be to set up a private land bank, and 429 00:51:31.740 --> 00:51:36.220 at the invitation of the General Court for suggestions for ways to inflate the money 430 00:51:36.220 --> 00:51:41.300 supply, John Coleman resubmitted his old scheme. 431 00:51:41.300 --> 00:51:47.060 While it was largely a land bank emitting irredeemable notes, Coleman broadened the 432 00:51:47.060 --> 00:51:51.860 appeal by permitting loans on personal property as well. 433 00:51:51.860 --> 00:51:58.820 It was also proposed that loans be repayable, not only in bank notes, but also in such commodities 434 00:51:58.820 --> 00:52:05.880 as hemp and iron, the aim being to subsidize local manufacture of these products. 435 00:52:05.880 --> 00:52:11.340 A competing group of merchants made a rather sounder proposal, the notes of which bank 436 00:52:11.340 --> 00:52:17.720 could at least be redeemable in specie after fifteen years. Both proposals were led by 437 00:52:17.720 --> 00:52:23.120 prominent and wealthy citizens. While the competing silver bank was backed by such wealthy 438 00:52:23.120 --> 00:52:31.320 Boston merchants as James Bowden, Samuel Wells, Joshua Winslow and Andrew Oliver, the subscribers 439 00:52:31.320 --> 00:52:38.240 The first two and directors of the Land Bank included Samuel Adams, a wealthy Boston brewer, 440 00:52:38.240 --> 00:52:44.600 Peter Chardon, son-in-law of Coleman and one of Boston's wealthiest merchants, the wealthy 441 00:52:44.600 --> 00:52:53.360 Roxbury lawyer and landowner Robert Auchmuty, George Leonard of Norton, a large iron manufacturer 442 00:52:53.360 --> 00:52:59.720 and one of the biggest landowners in New England, and Samuel Watts, a merchant who owned a third 443 00:52:59.720 --> 00:53:05.480 of the Land in Chelsea. Throughout the towns of Massachusetts, large landowners and land 444 00:53:05.480 --> 00:53:11.760 speculators were conspicuous in the ranks of land bank subscribers. The Assembly favored 445 00:53:11.760 --> 00:53:18.760 the land bank, but Governor Belcher and the Council refused to agree to either scheme. 446 00:53:18.760 --> 00:53:23.560 Failing to obtain incorporation, both the land bank and the silver bank proceeded to 447 00:53:23.560 --> 00:53:30.560 The New Land Bank issued over £49,000 in notes, a hardly risky enterprise, since the bank could issue pure money without having to redeem it in cash. 448 00:53:53.560 --> 00:53:58.640 and Anything Else Governor Belcher promptly and properly used 449 00:53:58.640 --> 00:54:05.640 his position to warn the people of Massachusetts against this private inflation. He warned 450 00:54:05.640 --> 00:54:12.280 that the notes were unsound and tended to defraud men of their substance. Belcher also 451 00:54:12.280 --> 00:54:17.000 formed an alliance with the Silver Bank, persuading the latter to make its bills far 452 00:54:17.000 --> 00:54:37.000 The Silver Bank refused to accept land bank notes, while the Governor removed all government officials who received or paid land bank notes, going to the extent of prohibiting lawyers from receiving the notes when pleading cases before the Council. 453 00:54:37.000 --> 00:54:50.000 Many merchants and businessmen, including 145 in Boston and 74 in Newport, publicly agreed not to accept any of the unsound land bank notes. 454 00:54:50.000 --> 00:54:58.000 The idea of a land bank for one's own creation of money out of thin air enchanted many in Massachusetts. 455 00:54:58.000 --> 00:55:05.440 The number of subscribers to this open sesame for profit soon swelled from nearly 400 to 456 00:55:05.440 --> 00:55:11.980 over 900. Moreover, petitions for more land banks arose in several other towns and counties 457 00:55:11.980 --> 00:55:19.040 in the province. The enthusiasm indeed for the land bank was easily comprehensible. A 458 00:55:19.040 --> 00:55:26.200 majority of assemblymen were themselves subscribers. But if stockholders were delighted, the note-holders 459 00:55:26.200 --> 00:55:32.280 were not. In six months' time, the public was almost universally refusing to accept 460 00:55:32.280 --> 00:55:39.000 the notes. Inflationists are always prone to blame everyone but themselves for the consequences 461 00:55:39.000 --> 00:55:47.080 of their own actions. As the land bank notes began to depreciate and to be refused in trade, 462 00:55:47.080 --> 00:55:52.840 land bankers began to mutter about a march on Boston to try to force merchants to accept 463 00:55:52.840 --> 00:55:59.840 The Final Blow to the Mysterious Land Bank was delivered by Parliament, which in 1741 464 00:56:01.160 --> 00:56:08.160 granted the request of several Massachusetts merchants and of Governor Belcher, and outlawed 465 00:56:08.280 --> 00:56:14.520 land banks in Massachusetts. The prohibition covered the silver bank as well. 466 00:56:14.520 --> 00:56:19.600 We have noted the predominance of the wealthy and of large land speculators in forming the 467 00:56:19.600 --> 00:56:25.480 and the Land Bank. Unfortunately, historians have been misled by two contemporary opponents 468 00:56:25.480 --> 00:56:34.480 of the bank who denounced its supporters as being plebeians and insolvents of low condition. 469 00:56:34.480 --> 00:56:39.880 In those days, being poor and insolvent was deemed a reproach rather than an automatic 470 00:56:39.880 --> 00:56:46.520 badge of merit, and it is important not to be misled by the denunciations of contemporary 471 00:56:46.520 --> 00:56:53.520 Hardly had the land bank and a return to sounder money begun, however, when the vast expenses 472 00:56:54.800 --> 00:57:01.800 on the self-defeating expedition against Lewisburg on Cape Breton Island led to a great inflation 473 00:57:03.200 --> 00:57:10.200 and expansion of paper money in Massachusetts. In 1744, the total amount of paper money outstanding 474 00:57:10.200 --> 00:57:16.680 The total paper money outstanding in Massachusetts was 300,000 pounds. With large amounts of 475 00:57:16.680 --> 00:57:22.260 new paper issued beginning in February, the total supply of notes in Massachusetts rose 476 00:57:22.260 --> 00:57:31.260 to 1,500,000 pounds in two years. In a short while, circulation of paper notes totaled 477 00:57:31.260 --> 00:58:01.260 The price of silver rose to sixty shillings an ounce, tenfold the amount at the beginning of the century. Original, self-imposed limits on no issue had long since been forgotten, and early promises of yearly redemption 478 00:58:01.260 --> 00:58:07.540 Inflation were also forgotten as the period of future pledges of revenue gradually lengthened 479 00:58:07.540 --> 00:58:09.820 to 25 years. 480 00:58:09.820 --> 00:58:16.100 In some colonies, interest and principal on the loans were in extensive default. 481 00:58:16.100 --> 00:58:24.300 The saga of paper money inflation and its depreciation was repeated from colony to colony. 482 00:58:24.300 --> 00:58:30.820 Demands for more money, leading to depreciation in higher prices, set up further and accelerated 483 00:58:30.820 --> 00:58:37.000 clamor for yet more money to alleviate the continuing scarcity. 484 00:58:37.000 --> 00:58:43.760 If the original par between sterling and the dollar is taken at 100, then sterling in Massachusetts 485 00:58:43.760 --> 00:58:51.880 was down to 133 in 1702, $1 equaling 6 shillings. 486 00:58:51.880 --> 00:59:03.540 By 1740, Massachusetts sterling had depreciated to 550 and by 1750 to 1100, a depreciation 487 00:59:03.540 --> 00:59:12.540 of 11 to 1 compared with par. Depreciation in Connecticut had reached 9 to 1 by that time 488 00:59:12.540 --> 00:59:20.660 and in North Carolina and South Carolina depreciation had reached 10 to 1. In virulently inflationist 489 00:59:20.660 --> 00:59:44.140 After the end of King George's War, parliament decided to grant Massachusetts a substantial 490 00:59:44.140 --> 00:59:49.860 sum as compensation for its expenditures during the war. 491 00:59:49.860 --> 01:00:10.860 The United States wisely decided to use the funds to return to a hard money, and to redeem the paper at the current depreciated rate of $7.50 to $1. Connecticut followed with retirement of paper at a rate of $8.56 to $1, and New Hampshire retired some notes a few years later. 492 01:00:10.860 --> 01:00:17.620 Panicky opponents of specie resumption made the predictions, usually made in such a situation, 493 01:00:17.620 --> 01:00:22.820 the result would be a virtual absence of money in the colony and the consequent ruination 494 01:00:22.820 --> 01:00:29.820 of all trade. They even threatened an uprising, and thus provoked a right act for its suppression. 495 01:00:30.940 --> 01:00:36.660 After a temporary adjustment, however, this resumption, of course, led to a far more 496 01:00:36.660 --> 01:00:43.580 for prosperous trade and production, the harder money and lower price attracting an inflow 497 01:00:43.580 --> 01:00:50.180 of specie. In fact, the prosperity wrought by hard money was dramatically embodied in 498 01:00:50.180 --> 01:00:55.700 the blow delivered to Newport. Newport had been a flourishing center of West Indian imports 499 01:00:55.700 --> 01:01:02.700 for sections of Massachusetts, but after 1750, with Massachusetts on specie and Rhode Island 500 01:01:02.700 --> 01:01:09.940 And Rhode Island still on depreciated paper, Newport lost its trade to Boston and languished 501 01:01:09.940 --> 01:01:11.500 in the doldrums. 502 01:01:11.500 --> 01:01:16.940 The English government, at the behest of the understandable complaints of English merchants 503 01:01:16.940 --> 01:01:24.460 and creditors defrauded by paper money, opposed the issue of paper money in the colonies. 504 01:01:24.460 --> 01:01:31.420 Royal governors had tried to repress the inflation, but were defeated by the assembly's appropriations. 505 01:01:31.420 --> 01:01:38.420 Finally, Parliament in 1751 prohibited all further legal tender issues of paper money 506 01:01:39.300 --> 01:01:45.940 in New England. Bills were to be redeemed when due. The colonies could still issue Treasury 507 01:01:45.940 --> 01:01:52.940 notes for a brief period, but not with legal tender powers. However, Virginia, the last 508 01:01:53.020 --> 01:02:00.020 colony to succumb to the lure of money creation, joined the pack in 1755, as did the new colony 509 01:02:00.020 --> 01:02:03.060 What did the New Colony of Georgia? 510 01:02:03.060 --> 01:02:09.540 By the 1760s, Virginia paper had fallen to a discount of 50 to 60 percent. 511 01:02:09.540 --> 01:02:15.020 It attempted to form a public loan bank, but that was vetoed by the governor. 512 01:02:15.020 --> 01:02:22.900 In 1764, Parliament finally extended the prohibition of any further monetary issues from New England 513 01:02:22.900 --> 01:02:29.900 to all the other colonies, and it also required the gradual retirement of outstanding notes. 514 01:02:30.020 --> 01:02:36.780 The leniency on retirement, however, as well as the provisions for treasury notes, managed 515 01:02:36.780 --> 01:02:42.300 to keep a great deal of paper and circulation for the remainder of the colonial period. 516 01:02:42.300 --> 01:02:47.260 Although the new notes could not be legal tender, they were somewhat maintained in value 517 01:02:47.260 --> 01:02:51.100 by being made receivable in taxes. 518 01:02:51.100 --> 01:02:59.980 All in all, by 1774, the estimated monetary circulation in the American colonies was $14 519 01:02:59.980 --> 01:03:06.500 million, of which 50 to 60 percent was paper notes. 520 01:03:06.500 --> 01:03:12.920 We have indicated that the drive for paper money was led by prominent men in each colony. 521 01:03:12.920 --> 01:03:20.360 The economic arguments were highly simplistic, basically that more money was needed and therefore 522 01:03:20.360 --> 01:03:27.480 should be printed. The Reverend Cotton Mather added such typical arguments as that money 523 01:03:27.480 --> 01:03:34.480 is a counter and paper money would be an advantage in never leaving the colony, that is, it wasn't 524 01:03:34.480 --> 01:03:41.100 really money since it could not be used for imports. Mather also denounced hoarding because 525 01:03:41.100 --> 01:03:46.600 it obstructed the circulation of money. It was often maintained that paper money did 526 01:03:46.600 --> 01:03:54.840 not depreciate, but rather that silver appreciated due to demands for its export. Such an argument 527 01:03:54.840 --> 01:04:00.920 was used, for example, by Benjamin Franklin in his venal campaign for paper notes that 528 01:04:00.920 --> 01:04:07.940 he personally would be paid to print. Laying blame on the export of species as if it were 529 01:04:07.940 --> 01:04:15.240 an uncaused act of God was typical. Thus Massachusetts thought that prohibition on the export of 530 01:04:15.240 --> 01:04:22.020 of Silver would arrest the depreciation of paper. Of course it did not. It should be 531 01:04:22.020 --> 01:04:27.360 noted that the most enthusiastic supporters of the public land banks and paper money in 532 01:04:27.360 --> 01:04:33.640 Pennsylvania were the merchants who were able to lobby effectively in England with the aid 533 01:04:33.640 --> 01:04:39.860 of Quaker bankers and merchants there. The wealthy merchant and land speculator, Francis 534 01:04:39.860 --> 01:04:45.380 Thomas Rall was one of the leaders of the paper money movement in Pennsylvania. On the 535 01:04:45.380 --> 01:04:52.280 other hand, the proprietary, whose accruing quid-rents were fixed in terms of money, strongly 536 01:04:52.280 --> 01:05:00.500 opposed rotten and vile paper money. In notoriously inflationist Rhode Island, Governor Richard 537 01:05:00.500 --> 01:05:07.740 Ward, a prominent Newport merchant, argued in 1740 that paper money had been spent on 538 01:05:37.740 --> 01:05:43.940 Merchants took the lead in opposition. At various times opposition to paper was expressed 539 01:05:43.940 --> 01:05:50.620 by Samuel Sewell, Thomas Hutchinson, and other prominent merchants of Boston, by merchants 540 01:05:50.620 --> 01:05:58.420 of Salem, Philadelphia, Hartford, Newport, and South Carolina, and by leaders of Providence 541 01:05:58.420 --> 01:06:05.900 in New York City. In 1750 a group of citizens of Rhode Island astutely charged that the 542 01:06:05.900 --> 01:06:13.580 The main insiders of inflation were big landlords who had mortgaged their land in loans from 543 01:06:13.580 --> 01:06:21.420 the government and who now wished to pay their debts in a relatively worthless currency. 544 01:06:21.420 --> 01:06:27.060 In its argumentation, the opposition began to develop the analysis of pay-for-money that 545 01:06:27.060 --> 01:06:33.660 we have set forth above. The opponents pointed out, for example, that there is no sense to 546 01:06:33.660 --> 01:06:48.660 They added that the clamor about scarcity was always worse after paper money had been issued than before. 547 01:06:48.660 --> 01:06:54.660 Thus, five keen Rhode Island legislators wrote in 1740 that 548 01:06:54.660 --> 01:06:59.660 this bank would probably so far depreciate the whole paper currency 549 01:06:59.660 --> 01:07:08.660 that we shall have in reality a less medium of exchange and all complaints of scarcity of money greatly increased. 550 01:07:08.660 --> 01:07:15.660 And we have noted the contributions of the anonymous author of The Present Melancholy Circumstances 551 01:07:15.660 --> 01:07:23.660 in remarking the consequences of paper money in depreciation and in driving out specie. 552 01:07:23.660 --> 01:07:30.660 Unquestionably, the leading hard-money theoretician of the colonial era was Dr. William Douglas, 553 01:07:31.180 --> 01:07:37.440 a Scottish physician and scientist who had settled in Boston. Douglas, whose contributions 554 01:07:37.440 --> 01:07:43.260 were commended by Adam Smith and by important classical economists in the next century, 555 01:07:43.260 --> 01:07:50.260 began his rise to influence with his discourse concerning the currencies of the British plantations 556 01:07:50.260 --> 01:08:20.260 in America, Boston 1740. 557 01:08:20.260 --> 01:08:25.460 on Debtors, and the depreciation caused by paper money issues. 558 01:08:25.460 --> 01:08:30.300 Douglas understood that paper issues were a form of taxation on the public. 559 01:08:30.300 --> 01:08:36.100 He also saw that it is the increase of paper that renders the balance of trade unfavorable 560 01:08:36.100 --> 01:08:39.660 by adding to spending for imported goods. 561 01:08:39.660 --> 01:08:45.060 And finally, Douglas realized that increasing the quantity of money only depreciates the 562 01:08:45.060 --> 01:09:13.060 Douglas was inconsistent enough to favor private banknotes redeemable in specie, which would not exceed a certain vague proportion of specie reserve. 563 01:09:13.060 --> 01:09:21.060 One important repercussion of the land bank controversy was its effect on political representation in Massachusetts. 564 01:09:21.060 --> 01:09:37.060 Far from a seaboard aristocracy being dominant in the assembly, the law of 1692 had established representation in the assembly of one or two from each town, with the exception of Boston, which could send four. 565 01:09:37.060 --> 01:09:44.060 This meant that as the colony grew and new towns were created, the assembly became more 566 01:09:44.540 --> 01:09:51.540 and more heavily dominated by the rural towns. Furthermore, each representative had to be 567 01:09:51.720 --> 01:09:58.720 a resident of the particular town. Indeed, the small towns regarded themselves as over-represented. 568 01:09:59.460 --> 01:10:04.580 The smallest towns were not compelled to send representatives if they didn't want to, and 569 01:10:04.580 --> 01:10:10.980 The next smaller towns were repeatedly trying to extend this cost-saving privilege to themselves. 570 01:10:10.980 --> 01:10:18.080 Thus, the cost and trouble of sending representatives were usually deemed greater than the advantages 571 01:10:18.080 --> 01:10:20.180 to be gained. 572 01:10:20.180 --> 01:10:25.620 Often towns accepted fines by the lower house rather than to bother sending representatives. 573 01:10:25.620 --> 01:10:31.900 Undoubtedly, this lackadaisical attitude reflected the relative unimportance of government in 574 01:10:31.900 --> 01:11:01.900 The Land Bank controversy, however, spurred the Massachusetts towns to sending more of their full complement to the legislature. Alarmed that the assembly could use its increasing numbers to overwhelm the council, Governor William Shirley vetoed the division of old towns into new, and urged that in the future, no new districts have power of representation. This restriction on representation from new districts 575 01:11:01.900 --> 01:11:08.180 of New Population Centers was adopted by the British government and enforced in Massachusetts 576 01:11:08.180 --> 01:11:15.100 for almost two decades. Since the lower house already far outnumbered the council and chose 577 01:11:15.100 --> 01:11:21.660 each new council annually and jointly with the old, the Massachusetts assembly was therefore 578 01:11:21.660 --> 01:11:28.000 already in effective control of the council. The new policy thus provided an irritant to 579 01:11:28.000 --> 01:11:33.600 to Colonial Relations Without Affecting the Basic Dominance of the Massachusetts Lower 580 01:11:33.600 --> 01:11:39.480 House. By the early 1760s, the Crown was progressively 581 01:11:39.480 --> 01:11:45.520 forced to modify the ban on representation of new towns. The close of the French and 582 01:11:45.520 --> 01:11:51.920 Indian War led to a rapid population expansion in Maine, and the new Maine towns clamored 583 01:11:51.920 --> 01:11:58.620 for Representation. The Lords of Trade finally agreed and consented to representation from 584 01:11:58.620 --> 01:12:04.640 new towns in Massachusetts proper, although they still balked at representation from newly 585 01:12:04.640 --> 01:12:12.500 divided towns. Finally, in 1767, the Crown gave up completely and abandoned its futile 586 01:12:12.500 --> 01:12:16.940 attempt to check the power of the assembly by restricting its representation.