How Americans Invented Modern , 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, , , and an original invention of – 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 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.

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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 Please do not cite without permission.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, 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 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 ). 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, ), further English regulation (of religion, coin, land, trade, piracy, and the colonial polity), and English monetary innovations

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(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.

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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 , 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. In 1640, Charles I was desperate for funds due to the Scottish war so

6 he stole that money. The Tower’s reputation gone, this led to the development of banking by goldsmiths. They began to rise to prominence during the Interregnum and they became an indispensible part of London finance by 1680, perhaps because they introduced private, backed paper money, as well as checks.

Large-scale banking could not rise due to the lack of royal credibility. Nobody in his right mind would put a big pile of money in some big bank, for the Stuarts to grab.

After the removal of the Stuarts, in 1694 Parliament authorized a corporation – The Bank of England – to help financing the war. It would take decades before its bills would transform from large-denomination bonds into full fledged paper money.

Another development of the seventeenth century was land banking, which seems to be an English idea. After the Civil Wars much land was confiscated from the royal family, its followers, and Anglican churches. Soldiers and officers were paid with debentures which could be used to buy that land. A large secondary market developed, in which high-liquidity officers usually bought hungry soldiers’ debentures. This financial use of land gave some people the idea of having a bank based on land. The idea was to have people depositing their land titles and getting in return small denomination paper money issued by the same bank. This type of banking was tried but no bank scheme ever materialized under the Stuarts. In the Parliament authorized short-lived land banks.

Englishmen may have known about earlier paper moneys. Marco Polo told about paper money in China, backed by the death penalty for any who refuses it. Instead of the government standing ready to convert the money into a commodity, it forced private sellers to do so. There were episodes of siege money in Europe when a party ran out of coin and issued a paper substitute until the siege was over. That money was supposed to

7 be redeemed in coin immediately. The most widespread and recent case was the paper moneys briefly issued by Dutch cities in the 1570s during war with Spain. English records also have obscure, vague references to leather money in earlier times.

The only contemporary paper money was that of the Swedish Stockholms Banco.

A semi-private bank, it was authorized in 1661 to print paper to replace in circulation huge coins. Fraudulent over-issue soon followed. The bank was closed in 1663 and was reorganized as a public bank in 1668. It would not issue paper money again until after 1700. Other European banks, the most famous of which was the Bank of

Amsterdam, did not issue paper money or checks but only non-negotiable receipts for depositors. Transfers were made only at the bank in its books.

2.3. The Scientific and Intellectual Revolutions

The Scientific Revolution of the seventeenth century was important in England. James I had intellectual pretensions. He had the Bible translated anew and wrote about the existence of witches. One of his most senior executives was the polymath Francis Bacon.

Bacon called for sustained effort to learn nature in order to use it so as to improve the condition of human living. His research agenda was picked up with enthusiasm mostly by the Puritans who believed that the final days were coming. At the return of Jesus all the secrets of the world were about to be revealed to the elect. Making advancement in the understanding of nature proved to oneself and to society that he was of the elect. A group of scholars set up the Invisible College in the 1640s. They presented and discussed new practical ideas to improve the quality of life. After the Restoration, they transformed into the Royal Society of London. The Scientific Revolution reached a climax with the 1687 publication of Isaac Newton’s Principia.

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Together with the enormous variety of political and religious ideas and experiments that surfaced during and after the Civil Wars (e.g., republicanism, communism, and Quakerism), some historians call the entire phenomenon ‘The

Intellectual Revolution.’ The entire century was marked by a general, unprecedented willingness to throw aside ancient authorities and to experiment bold, untried ideas.

3. A Theory of Monetary Innovation

Necessity is the mother of invention, according to Plato. In the case of money, this means more than the usual demand for money. There is a critical role for regulation. As argued by financial historian Richard Sylla, many times there was a need to increase the quantity of money, but government regulation did not allow that. It was therefore the demand for money combined with regulation that led to invention of a new form of money that got around the regulation.

But this is not the entire story. One needs to be able to think about an invention and implement it. Otherwise, argues economic historian Joel Mokyr, Medieval Italians would have invented the airplane, as their long distance trade gave them the incentive to do so. I take a reconciling view that usually necessity (demand) is the mother of invention but capability (supply) is the father of invention. An invention is more likely to occur if there is both high demand for it and a high supply of potential solutions.

This section lists the characteristics of a society which determine its need for money, the restrictions it faces, and its ability to invent money. First of all, there needs to be demand for trade. This is determined by the variety of goods which are made in that society. Specialization in production forces those not producing food to trade. The level of income is also important. Only food producers who have a surplus of food may want

9 to trade it away for other goods. Cultural habits, usually based on social origin, also determine whether one feels the need for a large variety of goods or not. Another factor is the nature of the average household. A household with father, mother and children has demand for a far greater variety of goods than a one-man household. Servants and slaves are out of the market economy, getting all their needs from their master and delivering to him all their produce. Finally, war requires more payments than usual by the government to troops and suppliers.

After people decide that they want to buy goods, the question of payment arises.

One problem with coin could be its quality, as discussed in Section 2. Another potential problem with coin is its quantity. Although the quantity theory of money advocated since

David Hume promises that prices will always decline enough to accommodate a low money supply, this is not true in practice because the lowest denominations of coin form a lower bound. Coin is not perfectly divisible. Once this bound is reached, the prices will be too high for the quantity of money available, and so there will be scarcity of money.

The problem gets worse if the population is growing and the money supply does not keep up with it. Population growth is in turn related to the nature of households that was mentioned above. Shortage of coin was usually blamed on trade imbalances. A society that sold to other societies less than it bought from them had to pay for the balance in coin.

Book credit and personal IOUs could postpone a coin payment, or replace it when they could be set off against each other. Credit might require legal enforcement by the government. An alternative to law is reputation in the community. A defaulting debtor might never again get credit from anyone in the community. To work best, reputation

10 which spreads through word of mouth requires that the community be small, stable and cohesive. Credit usually also requires minimal literacy and numeracy.

The society can face legal constraints on the creation of local money. Other societies, including an imperial core, might prohibit the export of their money to that society. The extent of respecting these constraints depends on the fidelity of the society to the sovereign government. It is the combination of many prohibitions with a rebellious spirit that is determined to get around them, which could induce and allow innovation.

Some people are more likely than others to invent a new form of money, and they are not equally distributed across societies. Studies of technological innovation refer to four categories of people who might innovate: Scientists, who understand how nature works; engineers, who implement that knowledge into a physical object; technicians, who produce, maintain, and debug that object; and users.

In the context of money, which is now studied in the social sciences, there are two groups analogous to scientists: All intellectuals in general, and specifically scientists.

Those with high education have probably read the Aristotle-Plato debate on whether money was its metallic value or a mere symbol. They may have read about paper money precedents in other countries. Courses in logic prepared them to even participate in monetary debates. A scientific approach was likely to help understanding money and so scientists were well positioned to think about money. Among others, Copernicus and

Newton did. Even without the mathematical tools of modern economics, those able to formulate abstract models of causality could lead the way. Especially in the seventeenth century scientists had the potential to become money inventors, since they were the ones

11 most exposed to the skepticism of the Scientific Revolution. Must money be based on metal?!

The analogue to engineers has two dimensions – physical and legal. Designing and producing a durable object which is difficult to counterfeit requires specialized skills and expensive machinery. Money usually needs to be implemented in law as well. Laws can recognize privately created money or create money from scratch. Knowledge of commercial law could help, including bills of exchange, setoff, and assignability and negotiability of debts. Non-monetary parts of the legal system, such as constitutional law, tax law, and property law, could affect the limits and opportunities for monetary innovation. The legislator also needs to want to solve a monetary problem, and presumably the more democratic a society is, the more attentive the legislator is to such issues. The legislator must also have low risk aversion, a willingness to try something new that could end in disaster.

The analogue to technicians also refers to physical and legal aspects of money.

There must be, for example, or printing press workers who can replace defective money and maintain the equipment. Judges are the technicians who maintain and debug the functioning of money by ruling on cases where the legal aspects of money are disputed in practice.

The analogue to users is all those who use money, but some people use money – and its alternatives – more than others. Financiers deal with money and financial instruments on a regular basis. Merchants deal in foreign money and bills of exchange.

Both groups could develop a better understanding of the essence of money, its limitations, and the potential for improvement. Merchants are also the ones most likely to

12 know in real time about developments elsewhere. Even the merchants’ neighbors in a major port city are more likely to be exposed to such new ideas from incoming businessmen, travelers and immigrants. Hearing about foreign ideas is not enough. One must also be culturally open to accepting new ideas from other cultures, even from enemies or supposedly inferior nations.

4. Early Colonization, 1607-1629

The first charter of 1606 gave the Virginia Company an explicit permission to mint its own local coinage for use in the colony, but the early days of Virginia were chaotic, and new charters in 1609 and 1612 did not mention coinage. The colony was supposed to operate as a commune for the first few years and due to the troubles it was effectively under military rule. Most of the immigrants were servants and so they were out of the market. Not many survived the seven years of servitude due to the tropical diseases, and new ones were continually sent over. Demand for trade was therefore low.

Even former servants were still young, poor, illiterate, single men. They had low income, low material needs and low demand for trade. The lack of a middle class resulted in a lack of cities and towns. The communities were small, which could have implied easy use of credit, but of a transient nature because of the high mortality. Illiteracy did not help credit. The few educated, adventurous nobles consumed the produce of their own large estates. They traded only directly with England and not with their neighbors.

They were almost all gone within a generation.

Although tobacco was profitable, the balance of payments was never good enough because the colonists paid for shipping and insurance. English coin was therefore generally missing. The first form of payment was land because the company had nothing

13 else to give. It gave it to prospective colonists in return for their risk and effort. Quickly tobacco became the mainstay of the colony, and as surpluses were created and the communal life style dismantled, tobacco began to be used – probably spontaneously – for internal trade and debt payments. Eventually, the rates and quality had to be regulated.

The universal growing of tobacco retarded specialization in production and further reduced demand for trade.

While the demand for money was low, the capacity to invent new money was even lower. The reversion to the stone-age use of the most common agricultural produce was all that could be achieved. The nobles did not care about the daily problems of the people and neither did the company. An assembly was created in 1619 but by 1624 the colony was taken over by the king, assuring that not much attention will be given to the simple people, and assuring that coin regulations would be obeyed.

Bermuda was settled shortly after Virginia and was the first colony to have its own coinage. Due to the low level of development the coins were probably produced in

England and then shipped to Bermuda. They disappeared from circulation and were replaced by tobacco by 1620. The frozen fishermen base in Newfoundland also received a charter which authorized coinage. Since colonization efforts failed to materialize probably no coins were ever made. All the following charters did not allow coinage.

Plymouth was the poorest colony. Not backed by powerful merchants or politicians, the few Pilgrims never obtained a charter and barely survived in the new land.

Plymouth also began as a commune. Demand for trade was moderate. The Pilgrims were poor but not of poor background, and had families. Their demand for English goods could not be met with tobacco because the climate and soil were not appropriate, but it

14 was not very high anyway because they were content with poor, independent life. They formed small, tight communities and were literate, and thus could easily use credit. Their capacity to invent was fairly low. They were mostly peasants and artisans. Some were printers in the Dutch Republic but could not bring the required capital. The leaders had only little high education. If they had any potential to invent it was because of two factors. One was international relations. They relied a lot on the Natives at the beginning due to their poverty. Coming from exile in the Dutch Republic, at least those who were printers in Leiden probably heard about the local siege money. They easily formed relations with New Amsterdam. Another factor was the lack of charter that allowed them freedom to do whatever they wanted. Like Virginia, Plymouth quickly started using its agricultural surplus – grain – as its money. The area between Plymouth and New

Amsterdam was the natural habitat of seashells which were used by Natives to produce the jewelry-money wampum. It was adopted by both colonies, with New Amsterdam perhaps introducing it to Plymouth.

In the north, the Dutch and the French established trading posts to obtain fur of beaver and other animals hunted by Natives. Both Fort Orange and Quebec were similar to Jamestown in their social and political organization. Naturally, fur became the local money. All these earliest colonies, as well as the later Maryland, Carolina and New

Jersey, would not progress beyond their stone-age money until the end of the century.

The focus for innovation shifted to the new Puritan colonies of New England.

5. Massachusetts Takes the Lead, 1629-1649

The political and religious troubles of the late 1620s led some leading Puritans to consider the settlement of New England. Since New England was granted to the Council

15 of New England in 1620, legal tricks – aided by the cover of war with France – were used in 1629 to obtain on part of that territory a charter that could be taken out of England.

The decision to relocate a few months later transformed a commercial corporation into a near-sovereign colony.

About a thousand immigrants arrived in 1630. This was a huge quantity in comparison to the initial population of older colonies. The original plan to have one city was frustrated by problems of water supply and disease that forced the establishment of towns around the Massachusetts Bay. The immigrants brought a large number and variety of goods, including livestock, to make sure they would not face the kind of starvation that plagued the older colonies. A functioning government was in place from the beginning.

Dissenters were quickly banished.

The population was starkly different from that in the older colonies. Middle class families were the core. Entire extended families arrived together, nearly emptying some villages in England. Ministers arrived with their flocks. Many of the leaders were mid- level officials in England, graduated from Cambridge, or had background in law. There were less than a handful of nobles, and no multitude of ignorant peasants. The exodus lasted throughout the personal rule of Charles I. Almost 1000 immigrants arrived every year. The older immigrants’ income was based on selling goods to the new immigrants.

Massachusetts was commercialized from the beginning and so it immediately faced the problem of debt payments. It had an orderly legal system, and therefore it could resort to formal credit in spite of the large population. In 1631 corn at market value was recognized for discharging all debts, unless coin or fur were specified in the contract.

This order was useful but incomplete. An unusually attentive legislature after 1634 (when

16 the towns started electing deputies to the legislature) was quick to respond. From 1635 taxes could be paid in merchantable grain at a rate of five shillings the bushel. This order specified the minimal quality of grain that was to be accepted by the treasury, to prevent taxpayers from dumping their worst grain on the treasury. The set rate prevented disputes about the market value.

The grain values set for taxes varied over the years, and they form the longest and most stable monetary tradition of seventeenth century Massachusetts. The default form of payment until 1691 would be grain, not coin. From an initial value for grain in general, the law expanded quickly to differentiate between types of grain, probably because of divergence of market values. Usually the list included wheat, rye, barley, and corn. These orders were far more sophisticated than those of Virginia and Plymouth. The standard of

“merchantable” grain probably affected many transactions. Many sellers probably received grain of threshold quality just because they knew that an exogenous entity – the treasury – would accept it from them in tax payments. What the treasury accepted therefore mattered for private market transactions, and this was an important lesson in monetary theory.

In 1635 the tricky ways of getting the charter and moving it to America were exposed back in England. The king wanted to revoke the charter and the colony prepared for an invasion. In the middle of war preparations, the General Court found the time to exclude English farthing coins from the legal money supply and replace them with lead bullets. This puzzling first monetary invention of Massachusetts can be explained by recalling that in England the king tried to force token coin on the population which minted lead coin instead. The 1635 order was probably a symbolic step to signal

17 independence from England. Standardized to fit muskets, the bullets were not different from metallic ball-shaped weights used as money in the Middle East before the invention of coinage.

Both because they were from the middle class and because they had families, the population required a large variety of English manufactures which could not be produced locally. The climate and soil were not fit for tobacco. Therefore Massachusetts had to buy much more from England than the other colonies did, and it had far less to sell to

England. A severe trade imbalance resulted.

By 1637 it was bad enough that wampum was adopted as additional money.

Wampum proved to the Puritans that they could use inside their society a money they did not esteem as intrinsically valuable. It was accepted at first only because someone outside of that society (Native America) thought it had intrinsic value. Once legally recognized, the treasury – obliged to accept it in taxes – became another external anchor of wampum circulation in the private economy. The lesson: An intrinsically useless, inconvertible object would circulate if accepted for taxes. This lesson could not be learned in England beyond the level of small change token. Wearing the form of paper money in 1690, this would be a lesson that Massachusetts would teach the rest of the world.

The families reproduced at a spectacular rate. Children were virtually guaranteed cheap land further to the west. Unlike Plymouth, there was plenty of capital to buy land from Natives and to clear it for agriculture. Therefore there was no reason to limit reproduction due to economic considerations. The cold climate was free of tropical diseases and so mortality was low. The population therefore grew quickly. The towns were ideal for credit, their population being small, stable and cohesive. was too

18 large from the beginning. As the main port of entry, it always had immigrants en route to other towns and colonies. These could not be trusted with credit and therefore Boston needed more money. Intolerance dispersed the Puritan population and inadvertently created more small communities and colonies that could use credit. Roger Williams and the Antinomians founded Rhode Island. More extreme colonists founded New Haven and others went on good terms to Connecticut. By 1640, the significance of religion resulted in the founding of a college (Harvard) and importation of a printing press, putting

Massachusetts intellectually way ahead of the other colonies.

In 1640, the return of Parliament stopped the immigration and even reversed it.

The Massachusetts economy was based on immigration and thus fell to a deep recession.

The surplus was sold from then on to the English Caribbean colonies which completely specialized in tobacco and sugar. Massachusetts ships took those products to England and bought manufactures there. Massachusetts became the great intermediary and carrier of north Atlantic trade. It even delivered fish from Newfoundland to Spain and controlled the inter-colonial coastal trade. The number of transient people in Boston, including merchants and foreigners, increased. While increasing the need for money, trade also exposed Bostonians to news about monetary developments and new moneys, such as the

Spanish piece of eight. To encourage importation of such coin, governments competed in over-valuing it in tax payments.

6. Colonial Coinage and Banking, 1649-1675

Events in England again changed everything for the colonists. The execution of the king and abolition of monarchy implicitly abolished the royal coinage prerogative. Virginia at once considered opening a mint, but did not, perhaps because it was a center of royalists

19 and did not want to annoy both the exiled royal family and Cromwell. Massachusetts was in the exact opposite position, not caring about the royals and usually on good terms with

Cromwell. In 1652 Massachusetts authorized the first mint in North America. Perhaps it followed the flourishing of private minting in England. It finally had monetary arrangements befitting the sovereign country it almost became during the Interregnum.

Coinage was joined by orders over-valuing it in domestic tax payments and prohibiting its export. Cromwell enacted the first Navigation Act which restricted direct colonial trade with other nations, but it was not yet enforced in New England.

Founded shortly after Massachusetts, Maryland’s economy and money imitated

Virginia. At the end of the 1650s Maryland had special coinage made in England but the

Restoration put an end to this attempt. While harming colonial minting, the Restoration was accidentally good for colonial banking. In 1660 one land bank promoter got permission from the king to experiment the idea in Barbados. Nothing came of it. Two years later the Restoration would bring John Winthrop Jr. to London. This eldest son of

Massachusetts’ governor was a legal scholar and North America’s only scientist. He arrived as governor of Connecticut to get a charter. Winthrop also became a member of the new Royal Society of London, where he presented a plan for a bank. All we know is that he said the plan was for a bank not based on land. He would not have said so on a coin-based bank. His colony also accepted grain for tax payments and was the first to initiate shipment-saving setoffs between town treasuries and the colonial treasury. The bank was therefore based, probably, either on clearing of debts and credits, or on agricultural produce.

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A public bank of the latter type did arise in 1669 in Antigua, where tobacco had been currency and was to be deposited in return for paper money. The leading colonist was Samuel Winthrop, John’s brother. This was probably no coincidence. The bank was abolished in 1675 after notes were fraudulently over-issued.

Charles II sent commissioners in 1664 to take over New Amsterdam but also to observe the older colonies. They reported the Massachusetts minting but nothing was done because the king was too busy at home. In 1671 there was a first attempt by minister

John Woodbridge to create a land-based clearinghouse in Boston.

7. Paradise Lost, 1675-1689

In 1675 King Philip’s War with Natives broke. Before a key battle, the Massachusetts government promised to grant land to its soldiers. Later all the colony’s public lands were legally made a collateral for the colony’s debts. After a year of brutal fighting which inflicted heavy losses on the colonists, the Natives were either subdued or destroyed. At least some soldiers cashed the promise and were granted land in return for their service.

Shortly before the war was over, a spy from England arrived. Edward Randolph returned to London with a long list of accusations against Massachusetts and started a campaign to revoke the Massachusetts charter. He emphasized the violation of the royal coinage prerogative, interpreting it as high treason because the coins were debased. The colony’s agents in London had to apologize only for the coinage offense, and the king was angry that minting still continued after that. Lobbying required money but the colony was weakened by war. At the time, Charles was revoking as many charters as he could.

He was aided by Anglicans who had gone to Massachusetts for economic reasons and pushed for a change that would give them equal rights. Part of the Puritan elite also aided

21 the king, thinking it would help their speculative rush on the lands won from the Natives in the war. One of them, the colony’s agent Joseph Dudley switched sides. In 1684 the charter was revoked. The mint was probably shut down at about the same time. Randolph was rewarded for his services by becoming the customs collector in Boston and he made considerable effort to finally enforce the Navigation Acts. This made it much more difficult to obtain Spanish coin. Even laws against piracy were enforced after the peace with the Dutch, further reducing the inflow of Spanish coin.

With both polity, trade, piracy, and coinage regulated to the point of death by

England, English regulation almost saved the money supply by accident. Due to renewed domestic persecution of Puritans, some immigrated from England to Boston. One of them was John Blackwell, who was the master of debenture trading after the Civil Wars. In the early 1680s he was involved in one of the failed land bank projects in London. He took the prospectus to Boston in 1684. As Cromwell’s Treasurer-at-War, he was a celebrity in

Boston. He joined the land speculation with Dudley and others, and waited for a new form of government. This one arrived in May 1686. The was to include all the New England colonies. It had no assembly and was headed by Dudley as temporary president. Blackwell made Dudley a co-director of his bank plan and got the plan approved by the Council in September. The Council promised to make the notes of this nominally private bank acceptable for all debts and even for taxes.

Sir Edmund Andros arrived from England in December 1686 as governor. The money situation was so bad at the time that one town paid its taxes in its main produce –

(empty) buckets. Andros did not help. His most important policy was regulation, in fact invalidation, of all land titles. He frustrated the speculators, had a crony take over land

22 registration, and started informing everyone that their titles were defective. He argued that the lands reverted to the crown upon the charter’s revocation, Natives were not eligible to sell land, towns were not incorporated and so could not grant lands, and the grants were not sealed. Presumed land owners had to petition him for a survey of the land and title confirmation. In general, Andros had no respect for property rights, including those of the Puritan churches and the college. Granting some land to his cronies, he provoked legal battles and complaints in London by colonial agents.

The bank plan continued to progress privately and banknotes were already printed. Then on July 5th, 1688, Andros received a new commission that did not rebuke his land policy and even gave him New York and New Jersey. Emboldened by this, a week later he prosecuted notable land owners for supposedly invading the king’s land.

With land titles gone, the bank was aborted four days later, on July 16th, 1688.

Blackwell then became Governor of Pennsylvania, where the elite approached him about a bank plan. He put them on hold while corresponding with William Penn about it, but then news of the Glorious Revolution arrived and nothing was done. Boston also heard the news, and an April 1689 revolution dismantled the Dominion.

8. ’s Card Money: 1685 and Beyond

French Canada came to rely on an annual shipment of standard French coin from France.

In 1685 a shipment was late, at a time when a French military reinforcement guarded the colony from recently agitated Natives. Jacques de Meulles, the law-trained intendant who was in charge of all military and financial affairs, improvised a temporary money from playing cards. He created small, convenient denominations, signed the cards, and forced all sellers to accept them at par with coin. He promised redemption in coin once that

23 would arrive and fulfilled the promise when the coin arrived a few months later. It was in fact European siege money implanted in America without modifications.

By 1691 Massachusetts would know about this money. One possible route of information flow is through French-ruled Acadia (Nova Scotia). After redeeming the cards, Meulles surveyed Acadia. He stayed there all of the 1685-86 winter with a former governor. The Acadian elite was close to, and dependent upon, Boston merchant John

Nelson who served as their main provider and banker. By marriage Nelson was related to the Massachusetts leadership and had been a diplomat to Quebec. He was a leader in the

1689 revolution. He may have learned from Acadia about the card money.

There could have been other ways for Massachusetts to learn about the card money. First, the revocation of the Edict of Nantes in 1685 led to an Huguenot exodus from France and its colonies. Dozens of them reached the Dominion and a committee was appointed to collect contributions for them. Second, many French fur traders lived in the woods between the French and English colonies. They spent their money in New

France but traded with New York and New England. Third, the woods were also the route for deserters from the cold, militaristic .

9. The Massachusetts Legislator: The Case of Elisha Hutchinson

Backed by taxes, fiat money had to be invented in a legislature and not in the marketplace like the previous forms of money. How could legislators have had the knowledge necessary for such an intellectual breakthrough? I examine the background of Elisha

Hutchinson, who would have a prominent role in that invention. Born in Boston in 1641, he was eldest son of Edward and grandson of Anne (the center of the Antinomian

Controversy). Edward was a merchant who invested in land. In his mid twenties Elisha

24 married the daughter of a merchant and entered both lines of business. He helped his father’s trading with Rhode Island and the Caribbean islands and would handle bills of exchange all his life. He also became a professional land surveyor. His captain father was the highest ranking fatality of King Philip’s War. A year later Elisha’s wife died and he married the widow of another merchant. He thus inherited much land all over New

England, and led the largest speculative land venture. In mayor-less Boston, from 1678 he was regularly elected member of city council, judge of the local court, and inspector of weights and measures in the market. In 1679 he became militia captain. In 1680-83 he was elected to the colony’s lower house, serving as substitute speaker and member of key military, land, legal and financial ad-hoc committees. As a leader of the country party which opposed compromise with England, in 1684-85 he was elected to the upper house.

That was also the executive authority (governor’s council) and the supreme court.

In the Dominion’s appointed government there was no place for him. In 1686 he headed the Huguenot aid committee, settling some of them on his own land. He was a partner in Blackwell’s bank. He inherited land in , which was then part of New

York. A New York official took his land in 1686 and in 1687 that official ran Andros’s campaign against Dominion land titles. Elisha quickly went to England to lobby against

Andros’s land policy. Joining the lobbying of Harvard President , he witnessed the lingering damage to the colony’s image caused by the Boston mint. He visited the and saw the goldsmiths’ notes in their heyday. He was still in

London during the Boston revolution.

Hutchinson’s diverse experience was so common in early Massachusetts that nobody wrote his biography (although his grandmother and grandson governor/historian

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Thomas were celebrities). The Boston elite specialized in neither sources of income nor public activities. This would help inventing a new money, as we will see below.

10. Making Money, 1689-1692

In 1689 the colonists resumed their pre-Dominion government as a caretaker government, without formally resurrecting the charter. The Massachusetts lobbyists asked the king to restore their charter. Hutchinson returned in late 1689 and joined the upper house. As part of the Anglo-French war, the English colonies were at war with Canada and formed an alliance. Massachusetts was assigned to occupy Acadia. Hutchinson, promoted to major, was in the logistics committee that prepared the expedition. He interrogated a French prisoner and recommended attacking the main towns of Canada: “it might easily be accomplished, and plunder enough taken to defray all the charges.” Acadia surrendered peacefully and the emboldened Massachusetts now targeted Quebec City. In June,

Hutchinson was appointed again to the logistics committee. In August he was elected tax commissioner of Boston. The 2000-men fleet sailed to Quebec, which had just seen its third series of card money. In October, Hutchinson was in a committee to calculate the public debt. The fleet required a 20 times increase in taxes, which were legislated in

November. Taxpayers holding claims against the treasury, such as debentures, were to offset them against their tax liabilities. Hutchinson headed a committee that tried to get a loan to pay the troops.

Also in November the troops returned – defeated, starving, frozen, and sick, with none of the plunder that Hutchinson expected. Massachusetts was broken militarily, spiritually and financially. In late November, John Nelson happened to appear before the council as attorney of the captured Acadian governor. It would have been timely for him

26 to tell the council about Canadian card money. On December 10th, the General Court convened for a special session. A draft bearing that date states: “This bill of twenty shillings, due from the Massachusetts Colony to the possessor shall be in value equal to money, and shall be accordingly accepted by the Treasurer, and receivers subordinate to him, in all public payments; and for any stock at any time in the Treasury.” The “stock” was grain, the usual tax receipts. If there would be any, it would be used to redeem this bill. Otherwise, the bill could be used to pay taxes. That was all. It was not forced on troops, sellers, or private creditors, and did not credibly promise coin, land, or even grain.

Two weeks later, a committee was authorized to issue 7000 pounds to troops who wish to receive these bills. This was about one sixth of the debt.

Never before has history seen such a weak money. It wasn’t even called money but “bills.” But there was nothing else that could be done. While begging the king to restore the charter, the colonists could not anger him by violating the coinage prerogative again. They could not issue coin or impose anything on any soldier, seller or private creditor. They could, however, impose the bill on the issuing government itself – in tax payments. Andros’s ruling that all land reverted to the king was not yet overruled by the new king. The lobbyists in London were working hard to obtain such a decision, so at that moment it would have been risky to back the colony’s paper money with the

“king’s” land, even if land backing was the hottest financial idea.

Understanding all these diplomatic problems, realizing the power of taxes in supporting money, and believing that tax-paying sellers will accept paper money from troops, required understanding of numerous issues: The constitutional problem with

England, the land situation, legislation, taxation, trade, finance, and the military. It should

27 come as no surprise that the head of the paper money committee was Elisha Hutchinson – a diplomat, land surveyor, land speculator, land banker, legislator, judge, tax commissioner, merchant, market regulator, military officer, and friend of Huguenots.

Treasurer John Phillips was listed second in the five-men committee.

The paper money fell to a large discount. Blackwell, recently returning from

Pennsylvania, wrote an open letter to Hutchinson, supporting the money. Increase

Mather’s son, the minister Cotton, wrote a similar letter to the treasurer. Both cited the

Canadian money as a positive example. The discount disappeared quickly and the full debt of the expedition was monetized. The recurring provisions in tax laws about grain and its valuation were gone forever. In late 1691 a new charter was obtained. Once it arrived in 1692, there was no reason to disguise the new money any more. It was extended to cover private debts, as any proper money does.

11. Epilogue: 1692-2012

The money in your wallet and bank account is essentially the same as the money created in Massachusetts in 1690-92. Now it is called ‘legal tender’ for paying debts and taxes, and it is neither backed by, nor redeemable in, gold or anything else.

This monetary revolution, in which money’s acceptability became anchored in monetary obligations rather than goods, was kept quiet for political reasons. Wars and recessions caused the other continental English colonies to fruitfully adopt the

Massachusetts invention. The distant British paid attention only when the taxes required to absorb the notes were postponed further into the future, causing high inflation.

Regulation returned as the Currency Acts of 1751 and 1764. This regulation did not stimulate more monetary innovation as it did in the seventeenth century because

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Americans ran out of monetary ideas. Instead, the regulation helped Americans come up with a political idea – Independence. The implementation of this idea was critically supported by paper money itself, which died in a hyperinflationary martyrdom. Before the United States returned to metal, it set an example to Europe. Russia and France started financing wars with fiat money. In 1797 the British suspended convertibility. By

1800, only the United States, Great Britain, France, Russia, and (Medieval) China had used unbacked paper money on a massive scale. Is it a coincidence that these became the permanent members of the United Nations Security Council a century and a half later?

While the Gold Standard dominated the nineteenth century, it became conventional wisdom that in time of serious war, paper money should take over. Nobody ever again debased their gold coins to finance wars. Both sides in the U.S. Civil War printed money, and in 1914 all countries left gold. Unbacked paper money then became both the villain and the hero. The hyperinflation in Germany derailed a young democracy and set the world on a course to disaster, but abandoning gold was the way out of the

Great Depression and its deflation. Paper money then lost its convertibility to gold, and in

1971 the weak quantitative anchor that tied it to gold was gone as well.

In the past decade paper money has been once again the villain and the hero. It is blamed for causing the housing bubble, but the way out of the recession was to print much more of it. It is inherently a mixed blessing, much like another American wartime invention – nuclear energy. Released in moderate, controlled quantities, both have non- negligible economic benefits. However, when released quickly and in large quantities, both have an enormous power which should be handled very carefully.

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12. Conclusions

Based on the tax law and contract law of an early modern government, fiat money both reflected the growing importance of the state and helped shaping it further. But it was born because of the disorderly English state of the seventeenth century. England provided

America with restricting regulations across the board and even a war, but its own turbulence released and sent to America new ideas about money. The unintended consequence was the fastest and most consequential monetary evolution in history.

In terms of American historiography, this story seems to belong in the Imperial

School: The emigration from England is an integral part of the Massachusetts story and not just a prelude, there is continuing English interference, and there is a role to English colonies that are not in the United States. In fact, there is a role to other nations: The

Natives, the Dutch, the French, and the Spanish provided the English colonies with new forms of money upon which the English improved. This places the story also in the more recent Atlantic History school. There is even a trace of the old Frontier Hypothesis, in the

Daniel Boorstin variety which emphasized the triumph of practicality over ideology.

Tossing metal out of the concept of money was one spectacular example of that.

Of all the colonies of all the nations, the Puritan colonies led the way. They had the best population growth, educated leadership, merchants, physical equipment, rebellious attitude towards English regulation, and attentive government. They had the worst trade balance and the lowest risk aversion. All these factors made them leaders in monetary innovation. No other colony came close. Among the Puritan colonies, the economic and financial center in Massachusetts was naturally the dominant place.

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