How Americans Invented Modern Money, 1607-1692
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How Americans Invented Modern Money, 1607-1692 Dror Goldberg Department of Economics, Bar Ilan University, Israel Department of Economics, Leonard N. Stern School of Business, New York University (visiting, Spring 2012) February 2012 Abstract English America experienced the fastest monetary evolution in history. Within less than a century, simple commodity money was followed by sophisticated commodity money, coins, banknotes, and an original invention of fiat money – which spread from there to the rest of the world. I attribute this evolution to English influence. The political turbulence in seventeenth century England resulted in civil wars and revolutions that turned on and off England’s overbearing regulation, of not only currency but also of religion, land, trade, piracy, and the colonial polity itself. This inadvertently propelled the important evolution of money in America and especially in Massachusetts. 1 Note This document is a preliminary and incomplete sketch of a monograph I am writing under an advance contract with The University of Chicago Press. Only the most general sources are listed in the end. Please do not cite without permission. Comments are welcomed at [email protected]. 1. Introduction Much of monetary history consists of the evolution of money from simple commodity money (agricultural produce such as grain) to sophisticated commodity money (such as gold pieces), followed by coins, banknotes, and eventually unbacked, legal tender paper money (fiat money). It took humanity about 6,000 years to complete the evolution in 1971. Colonial Massachusetts went through the exact same sequence in just 60 years. Moreover, at the end of this brief period, the Massachusetts government was the original inventor of fiat money in the West. This spectacular evolution is important not only in its own right, but also because its end product was the first great American invention. Fiat money spread from there to the rest of the world, and the controversy regarding the consequences has been renewed by the current crisis. The great variety of different types of money in America has long been noticed by economic historians. Following the colonists’ complaints, it has been universally attributed to a chronic coin shortage. Three main theories have been offered as an explanation. They explain more the variety of moneys than the sequence of innovation. The mainstream view, cemented by historian Curtis Nettels, is that deficiency of staple goods compared with the colonists’ desired high standard of living resulted in a balance 2 of payments deficit, which had to be settled with coin. Financial historian Richard Sylla argued that the main problem was the exceptional rate of population growth in Massachusetts (the lead inventor), which required more money – of whatever type – for the growing population. Finally, a regulatory theory focuses on English prohibitions on local mints and coin import from England. My recent work generalizes the effect of English regulation by showing that land regulation resulted in the fall of a major land bank scheme, and – together with the coin regulation – led to the invention of fiat money. In this paper I look at the big picture and behind the scenes. I argue that all of these issues were symptoms of a single underlying problem – membership in an overbearing, regulating English empire which faced its worst ever turmoil throughout the seventeenth century. The coin regulation affected the colonies from the very first moment. The trade balance was negative in every colony at the beginning. The resulting reversion to stone-age money was a universal phenomenon all over the European colonies in America. The turning point was the regulation of religion in England. It led unlikely immigrants (Puritan middle class families) to settle in an unlikely territory (a cold and relatively barren New England). This led directly to an exceptionally severe trade imbalance and a very high population growth – the two non-regulatory theories mentioned above. As a result of this and thanks to its exceptionally high human and physical capital, Massachusetts took the lead in monetary innovation. It charged forward, leaving almost all colonies behind, towards coinage, banking, and fiat money. This progress was propelled at every step by transformational English political events (Civil Wars, regicide, Restoration, Glorious Revolution), further English regulation (of religion, coin, land, trade, piracy, and the colonial polity), and English monetary innovations 3 (private coinage, land banking, goldsmith-banking). This process lasted all the way to 1692, when the invention of fiat money was completed. I begin with background on England in Section 2, and a rudimentary theory of monetary innovation in Section 3. I then discuss money in the colonies before Massachusetts (Section 4) and in early Massachusetts (Section 5), colonial coinage and banking after the regicide (Section 6), and the political and monetary upheavals in Massachusetts from 1675 to 1689 (Section 7). Two digressions follow before reaching the punch line of fiat money: The French Canadian card money of 1685 is discussed in Section 8, and Section 9 is a biography of the presumed inventor of fiat money. Section 10 recounts the fiat money of 1690-92. Section 11 is an epilogue. Section 12 concludes. 2. English Background, 1603-1697 2.1. Politics The end of the Tudor dynasty in 1603 brought the Scottish house of Stuart to the English throne. King James I enjoyed 22 years of tranquility thanks to his talent of not getting into trouble. His son Charles I risked everything for the Anglican church. He did not allow Puritan ministers to purge remnants of Catholicism from the church. Ministers were punished and fired for not following the approved rituals. Parliament was unhappy and in 1629 Charles prorogued it, thus losing his ability to impose constitutionally permissible taxes. After 11 years of “personal rule,” his religious enthusiasm drove him to meddle in Scottish affairs. The Scots responded by invading England. Charles had to resort to Parliament to get funds. Parliament did not give up the opportunity and in 1642 the power struggle led to Civil War. 4 In 1649 the losing king was executed by a military regime headed by the Puritan Oliver Cromwell. Various constitutional experiments followed and failed, so that by 1660 Parliament ordered restoration of monarchy. The dead king’s son, Charles II, returned from exile. He was busy at first fighting the Dutch, the Great Fire of London and the Plague. Internal conflict was resumed in the mid 1670s. Having no legitimate sons, Charles’s throne was destined to go to his Catholic brother James. To deal with the public’s objection, Charles revoked charters of local jurisdictions and corporations in an attempt to increase his control, and renewed persecution of Puritans in the early 1680s. In 1685 Charles II died and James II was crowned. He courted the support of Puritans, and tried to rig elections for a Parliament which would revoke anti-Catholic laws. In 1688 members of the elite invited his son-in-law and nephew William of Orange to invade from Holland. William invaded and started the Glorious Revolution. After James escaped to France, in 1689 William was crowned with wife Mary. The terms dictated by Parliament tipped the constitutional scales in favor of Parliament but William drafted England to his Dutch-Protestant war against France. The war lasted until 1697. 2.2. Money and Banking In 1603 England had mostly silver coin and some gold coin. Both types of money were old, worn and severely clipped. Most of England was fully monetized since the late Middle Ages. What set England apart from the continent was the royal coinage monopoly which gave it a unified coinage. The state’s power over coin was strengthened in the legal “case of mixed money” in 1605. It was ruled that after a debasement a debtor could offer the debased coins and not the older coins. Legally, the value of money was not its 5 metallic content but the king’s will. In the following decade James I tried to introduce token coinage because a shortage of small change made trade difficult. The public resented and rejected it due to inflationary fears, producing illegal private lead coins instead. The abolition of monarchy in 1649 opened the gates to a flood of private coinage. Thousands of small businesses throughout England issued their own token coinage. It was suppressed by the new king in 1672. Throughout the century, in accordance with bullionist ideology that defined the wealth of a state by its stock of precious metal, export of English coin was illegal. Counterfeiting coin was high treason. Only in 1696 would a recoinage take place, returning the coins to their previous value. England’s financial system was backward relative to Europe. To save on costs of coin shipment, merchants used bills of exchange like all Europeans, but when the Exchequer borrowed coin from financiers it gave them as receipts wooden tallies, on which the amount of debt was marked by cuts in the wood. This was replaced only in 1667 by paper bonds called ‘orders’ which were marketed to the general public. Five years later the Exchequer defaulted and no more orders were issued under the Stuarts. Soldiers and sailors were often paid in debt instruments which acknowledged the state’s debt to them. In the army these were called debentures and in the navy they were called tickets. In the Civil Wars debentures were routine, but in 1667 the use of tickets in the navy was not received well. Sailors defected to the coin-paying Dutch and led the successful and traumatic Dutch attack on the main naval base in Chatham. Formal banking did not exist in the early Stuart days. Proposals for a royal bank were not implemented. Merchants used to deposit their money for safe-keeping in the Tower of London.