Currency and Finance in the 18th Century
By James E. Newell - German Regiment, 1st Continental Regiment of Foot
In the 20th century, we find it difficult to place ourselves in the mindset of the 18th century. In the words of one historian, "One finds it necessary to disencumber his mind of prejudices unconsciously imbibed". We take for granted the plentiful supply of coins and paper money, all of which is "Legal Tender". This means that American currency must be accepted "for all debts public and private". We may be unaware, however, that this ability to be guaranteed that all of our money will be accepted was not officially adopted in this country until a joint resolution of Congress of June 5th, 1933. It had only been granted to small coins in 1853.
Colonial America could never produce enough to buy goods needed for economic development, and therefore there was a constant unfavorable balance of trade. In addition, there was neither a plentiful supply of currency, nor the guarantee, in many cases, that what you had would be accepted. The century began with specie, or coins, as the major currency available in this country. Almost none of it was English, however, since it was illegal to remove English currency from the Mother country, nor was it legal to import silver or gold.
What was available was largely Spanish and Portuguese coins, and historians, particularly Perkins, disagree widely as to how much of that was actually in circulation in areas of this continent other than in Massachusetts. He argues that specie was plentiful at some times and not at others. Massachusetts, with its dominance of the shipping trade with the West Indies, never had a shortage of available coinage.
There were, at best, several problems with using coinage as the major method of trade. Then, as now, the value of foreign money varied from time to time, not to mention the habit many people had of clipping the edges of silver coins. Early in the century, several colonies purposely increased the value of foreign coins from 125% to 180% in an attempt to attract them away from neighbors. The English attempted to control this by declaring a standard exchange rate for Spanish dollars, the famous "pieces-of-eight". They also established set rates for different percentages of reduction from the original weight.
The other problem, falling prices, became particularly acute in the 1730's, and that resulted in merchants, and others who had the ability to do so, hoarding the available coins. Sir William Keith, in a letter to the Board of Trade on December 12, 1723, proposed that paper currency be officially issued to inflate prices and discourage hoarding. The Board ignored his idea.
In the western world, the 18th century was the height of Mercantilism. >The only way to become "rich" was in accumulating land or other property, including coinage.
Bartering and Commodity Money
Since there was not yet a wide division of labor and most people farmed, the lack of currency was not as much of a problem as it would be later. Some form of bartering was the method of exchange available for domestic transactions within the colony. Jewels, gold rings and earrings, gold plate, deerskins, wampum, slaves and servants, and agricultural products were all bartered or used to pay taxes at one time or another in the colonies.
Some agricultural products such as tobacco in Virginia were highly regulated by the Colony. Left to the open market, growers would often attempt to make payment in inferior products. Thus, Virginia was forced to establish central storehouses where a grower would bring his crop, have it graded for quality and receive receipts indicating the value in English money. The grower could then use the receipts ("transfer notes") to make purchases locally. Except for the French and Indian War years, this system lasted in Virginia from 1742, when it was made legal, until 1775. Other agricultural products also were subject to rates set by the colonial assemblies. South Carolina examples of this "Commodity Money" were 2s/bushel for "corne" or 2s6p/bushel for "indian pease". One didn't even need to have the commodity in hand. "Ready Money" was the process of buying on credit to be paid back in 12 months with the harvested crop.
Some merchants issued tokens as change, however those could only be used in the store where received.
Bills of Exchange
Barter worked well within the colony, however another arrangement was necessary for transactions with England. Merchants and other businessmen utilized "Bills of Exchange" for this purpose. A Ship Owner would send a load of lumber, pig iron, tobacco, or some other commodity to England to be sold there. Since no currency could leave England, his money was held by a "Commission Merchant" in London. Should the owner of that money wish to purchase something in England, he would send a "Bill of Goods" to his merchant in London who would buy the items and ship them to America, crediting the American's account. This worked well for a large merchant. A small shop owner who wished to purchase stock for his store probably would not have any credit in England and would need to buy some credit, at a markup of course. The ship owner or other financier would sell the smaller merchant a "Sterling Bill of Exchange". This is the method financiers such as Haym Solomon used to make their fortunes, which, in his case, he used to help fund the Revolution.
The rate of exchange between "Sterling Bills of Exchange" and American paper money varied beyond colonial control due to trade balances. If more imports were received than exports sent, the Bills didn't stay in this country very long and were more valuable. As a rule, Pennsylvania, New Jersey, New York, and Delaware were stable but the tobacco states suffered. Products in New England and the middle colonies were not large enough to produce substantial direct returns to England. In these Colonies, products were sent to the West Indies in exchange for sugar, specie, molasses or bills of exchange in England and imports were paid for with these.
The only other option for the small merchant would be to hoard coins and send them to England to make his purchases. This is the reason it was said at the time, that "specie was a commodity for export and not a medium of exchange".
Land Banks and Fiat Money
Paper money had been in use since 1690 when Massachusetts issued £7,000 to pay the troops returning from a failed expedition against Quebec, however it was considered "inherently unsound and probably corrupt". Thus, against the better judgment of almost everyone at the time, it became necessary to utilize paper currency on a regular basis for a number or unavoidable reasons.
The first of these came about originally as families (and their cleared land) grew in size and they needed to increase the size of their farms. There was no ready method of obtaining relatively large amounts of money to purchase more land. There were no lending institutions at the time so the various colonies formed "Land Banks". The Colony would print "Fiat money" which they would then lend to the farmer at an interest rate, usually of 5%.
The going rate on the open market, if you could get a loan, was 8%. The amount that could be borrowed was up to 50% of the value of your property for a maximum of £100. The farmer could then pay back the loan over a period of years, usually eight, in equal yearly installments. These notes were retired as paid back, burned, and new issues made to keep a constant supply of money in circulation.
The management of these loans was handled differently in each colony with some running the operation with local town boards (New England), some with county agencies (NJ & NY), and some with province level agencies (PA). Of all the colonies, Virginia never had loan offices. The process worked better in the Middle Atlantic Colonies than in New England due principally to the difference in the productivity of the land and in the care taken in management by the middle colonies. On October 25, 1724, John Logan, in a letter to T. Story, reported that land values rose with the issue of paper money.
Benjamin Franklin suggested in 1765, that a continental land bank be formed instead of the Stamp Act. The idea of a colonies-wide land bank had been considered by England herself, as a means of providing a circulating medium, as far back as 1754 but rejected by the colonies when it was learned that the interest from the land bank would be subject to appropriation by the King for needs in England.
Colonial governments, in the 18th century, were well aware of the effect of money on the overall economy, and currency was occasionally printed to counter depression, or as in Pennsylvania, "intended for the benefit of the poor and industrious sort at an easy interest to relieve them from the present difficulties they labor under".
In 1733, Maryland issued "a bounty of thirty shillings per taxable" to each Freeman over the age of 15. Exceptions were ministers of the Church of England, imported male servants and slaves over 15. In 1731, they authorized, but never issued, £30,000 to be used for payment to growers to distroy by burning, an over-abundance of tobacco. These payments were to be financed through special taxes on liquors, Negroes, and Irish servants. The Loan bill of 1737 in New York was essentially monetary inflation to stimulate languishing businesses.
Governments did not need much in the way of local taxes since they had excise and other profitable sources of revenue, most officials were paid by user fees instead of receiving salaries, and expenses were usually held down to between £5,000 (PA & NY) and £10,000 per year.
Periods of war, however, required much more in the way of expenditures and more in the way of revenue "for the King's use" and "the annoying of his majesty's enemies". These times required what is called "Currency Finance" and the other reason for issuing paper currency. If a colony could anticipate income from local taxes of £5,000 in each of the following four years, they could issue £20,000 in paper money, sometimes called "bills of credit" or "treasury notes", to buy supplies, pay soldiers, etc. For the next four years taxes could be paid only in that money. New York issued a 20 year "long bill" to be paid back with taxes on import and sale of beer, wine, and liquor.
Whether short or long term, until retired, these bills also became an "imaginary specie", because they were not convertible into gold or silver. They did function to stimulate business by making local purchases possible. In actuality they were never fully redeemed since late in the redemption period, the notes were so spread out as to be difficult to accumulate for payment of taxes. At that point, they were left to circulate.
The process was well regulated and didn't cause problems except in New England and the Carolinas. In New England the problem was, again, over issue, as it was in North Carolina. In South Carolina, the whole concept was met with resistance by the population who considered "commodity money" the "money of the province". These issues were usually also "legal tender" which would cause problems with England as time went on.
England and the wealthy merchants in this country didn't like the idea of funding emergencies through the issuance of paper money, particularly since it wasn't convertible, on demand, to precious metals. The merchants were, however, reluctantly sympathetic because there really was no alternative. They were, aware, however, that the amount in circulation couldn't exceed by much, the needs of trade or the issue would be depreciated. The upper classes were thus adamant that the ability to print money be controlled by the aristocratic class and larger merchants who could be counted on to redeem the currency on time and not over-issue.
In a book entitled Ways and Means for the Inhabitants of Delaware to Become Rich, published in Philadelphia in 1725, Francis Rawle states:
"...due care ought to be had to
preserve the value of our
Paper-Currency...continuing the care already taken in the
Security, and also restricting the sum in a due proportion
to the Trade of this River: For a great excess in that
respect will inevitably debase the value of it, tho' a reasonable
plenty is advantageous in increasing Trade and Navigation,
which cannot thrive without it."
This had become a problem in New England where Massachusetts didn't use "Currency Finance" at all, preferring to borrow from the residents through the sale of what were, in effect, treasury notes that were used as currency. Other Colonies, notably Rhode Island, printed huge amounts of tax anticipation currency, far more than they ever hoped to redeem. Since colonies normally accepted each other's currency, Rhode Island caused rampant inflation, not only at home but also in Massachusetts.
English Attempts at Regulation
Because of these abuses, England attempted, in a number of steps, to regulate the American paper money. In 1751, at the end of King George's War, regulations were adopted prohibiting land banks and prohibiting the creation of "legal tender" in New England. In The Currency Act of 1764, these regulations were extended to the other colonies, terminating in Pennsylvania, with 40 years of successful and trouble-free loan office activity. Parliament had excluded the middle colonies, but the King personally, bowing to pressure from English merchants, included them. The act also included a requirement that long-term issues be redeemed on time.
Actually, the middle colonies continued to issue paper, and New York was officially allowed to renew their land bank in 1771, Pennsylvania, theirs in 1773 and New Jersey, theirs in 1774. The English Merchants redoubled their efforts in response, and in 1775, England prohibited all paper money in the colonies.
The major problem was, as mentioned, the possibility of over issue or failure to redeem. This would cause deflation in the value of the money, and the merchants were understandably concerned with shipping goods that might be paid for at rates lower than when they were shipped. Being "legal tender" would require that the merchants accept that payment, at least in the colony issuing it. This caused the big "creditors/debtors issue". Legal tender bills were seen as instruments of "debtor-depreciator-conspirators".
Colonies in the 17th and 18th centuries, regardless of the mother country, all had the same purpose: to enhance the economy of the mother country. Colonies had no inherent rights of their own. Thus, European merchants could and did exert major pressure on their governments to control the actions of colonies whether in the areas of manufacturing, trade, or in the issuance of money.
Even if the notes were redeemed promptly, there could be problems. After the French and Indian War, the American Colonies were able to retire their war notes within the ten years after the war. This was partially due, it must be admitted, to grants by Parliament of a total of £64,079 in specie and £110,082 in Pennsylvania currency during the war. England was not able to retire their debts as fast, however, due to problem collecting taxes from their already overburdened citizens. They decided that the Americans, having paid off their own war debts, should now start helping to pay off England's debt. This was only logical since the Colonies were considered to exist only to benefit the mother country. What the Colonists might think of the idea was not even a consideration.
It is not well understood today, however, that the relatively small taxes proposed by England were only part of the story. The regulation, by England, of attempts by the colonies to facilitate their own internal economies was the other half. This control culminated, of course, in the outright ban on printed money announced in 1775. Alexander Hamilton is considered correct in claiming that paper money was 3/4 of the total money supply on the "eve of the revolution". By this time, paper money had become, for the population, the "ancient system" and had existed as long as most people could remember. If placed into effect, the prohibition of the use of paper money would have destroyed the budding American economy.
England had increasingly restrained, but never once tried to positively help solve the problem of an adequate currency in the colonies. They simply denied the colonies recourse to their own measures which in most cases were working well. As Franklin predicted in 1764, they consistently helped loosen the hold of the Mother Country on her American Provinces.
Ironically, the Revolutionary War demonstrated the weaknesses of "currency financing" in a really major period of need. First, the Continental Congress issued paper with no ability to redeem the notes. The colonies had been adamant that the central government not share their taxing power. By the end of 1776, the Congress had printed $25,000,000 in continental currency, very close to the limit that the entire economy could absorb, not counting the fact that each individual state was also printing money. Their choice was to continue printing or abandon the war — "any quantity of brown paper" would serve. That the "continental dollar" devalued disastrously is thus not surprising.
The individual colonies didn't fare much better since they found it necessary to print far more paper, just to keep up with the war effort, than they could expect to redeem in any reasonable period of time. George Washington, in his ledger book, lists costs in both dollars and in "lawful money", which was colonial pounds according to the official depreciation scale adopted by Congress.
The worst fears of the aristocrats and merchants came true. They concluded that the problems were because the "policy of government is dictated by the multitude". Many left outright and many more, when Britain lost the war, chose to move to England or to other English colonies. They completely missed the fact that the problems were largely beyond the control of Congress. Although true to their prejudices, they missed the opportunity to be part of the beginning of the greatest economy the world has ever seen.
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Copyright © 1997 James E. Newell. All rights reserved.