- - Thursday, December 7, 2017


As the United States faces a national debt of more than $20 trillion as a result of profligate spending — and looks to raise that ante with tax cuts — it should be noted that this untoward policy was begun exactly 327 years ago on Dec. 10. Massachusetts became the first colony to borrow money by issuing a paper currency — and the first in the history of Western Civilization (the Chinese were actually the inventors, putting forth notes as early as 806 A.D.).

The standard for currency in the British colonies had always been backing in gold, silver or copper. Of course, most American residents had little of these precious metals and utilized commodity currency. In other words, they traded goods they produced with one another.

But the Bay Colony’s government made colossal mistakes in foreign policy, betting that the British navy could easily defeat French Canada in King William’s War, begun in 1688 and lasting until 1697, and that Massachusetts soldiers volunteering to help in the endeavor would be paid by the booty derived from the defeated Canadians. Indeed, a victory in April 1690 against Acadia (a colony in northeastern French Canada) had been a resounding success, and the final blow against Quebec seemed to be a done deal.

No matter that in August 1690 Sir William Phips had 32 ships and 2,000 men to overtake Quebec, his mission was a total failure, and Massachusetts volunteers wanted their money, as did creditors who had supplied arms. Because indebtedness was a no-no under Britain royal relations with Massachusetts, the colonial government had only two choices: tax citizens for the shortfall or issue promissory or paper money notes. The first option would take time, the second wouldn’t.

So on Dec. 10, 1690, the legislature or General Court of Massachusetts legitimized 7,000 pounds in paper money. The bills came in four denominations: 5 shillings, 10 shillings, 20 shillings and five pounds.

As an inducement to soften the tendency of citizens not wanting to accept paper dough, Massachusetts within a few months offered a 5 percent add-on to the value when used for tax payments. And the paper bills could be redeemed by holders for hard currency — provided, of course, the government had it.

Not surprisingly, you can figure out what happened. By February 1691, the government liked the option of meeting its obligations with paper money so much that it went again to the printing presses, then in May, too, limiting the total size of the emissions to no more than 40,000 pounds or almost six times the initial one. And, not surprising also, the government had to worry about counterfeiting and took all sorts of precautions to mark each bill with a number so as to check it off when redeemed.

But the real problem was that merchants refused to accept the new money. About a fourth of the total disbursed went to pay taxes, and the shortfall was made up by taxes on the general public so as to retire all the emissions. Old fiscal habits were hard to break, however, and the paper money machine resumed no matter the 1691 limit — so much so that inflation became a problem, as did the British Parliament, which eventually on Sept. 21, 1751, greatly restricted new printings.

Not until May 25, 1775, did another Bay Colony paper currency come forth. The printer was a silversmith-engraver named Paul Revere, and the recipients would be soldiers assembling for a faceoff with the Brits in an area of Boston called Breed’s Hill (aka Bunker Hill).

And every other colony followed the example of Massachusetts. A few issued paper money prudently, for example, Pennsylvania, which backed its issuance in land holdings. Most did not.

When the Continental Congress got into the act, the sum was enormous by war’s end: $241,552,780. And inflation made the money fall in value, leading to the phrase, “not worth a Continental.” A good case can be made that monetary uncertainty through the era of the Revolution and afterward led to the calling of the Constitutional Convention. No historian made that argument more forcefully than Charles A. Beard in 1913 with publication of “An Economic Interpretation of the Constitution of the United States.” Although arguing that his approach was revolutionary but fragmentary, Beard went through the personal financial status of each the members of the Constitutional Convention, concluding that economic self-interest was an important ingredient in their quest for a strong government for their class.

Of course, members of that convention never contemplated the rise of a Federal Reserve system, that although not actually printing money, induced the Treasury Department to do so.

And the rest, as they say, is history.

What’s in your wallet?

Thomas V. DiBacco is professor emeritus at American University.

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