During the first half of the eighteenth century, there was a limited amount of specie or “hard money” in the American Colonies. There were three reasons for this: there were no established gold or silver mines; there was restrictive trade with the French and Spanish West Indies, and there were debt payments to the merchants in England. These factors forced the colonies to use a monetary system based upon “fiat” currency for their day-to-day expenses. This type of currency was “representative (or token) money that was created and issued by the colony, but was not convertible by law into anything other than itself, and had no fixed value in terms of an objective standard.” The currency was issued “on loan” or “on credit.” The way the “on loan” system worked was as follows:
- A colonial government printed “bills,” declared them legal tender that could be used to meet public and private debts, and paid them out to creditors at a low interest rate;
- At the time of issue, a provision was made for calling in or “retiring” the bills. The provision, “on credit,” meant “a tax would be levied for the next five years, from the proceeds … one-fifth of the bills were retired annually;” the second provision, “on loan,” meant “the legislature established a loan office … [that] placed bills out on loan in limited sums on … mortgage on landed property … Interest on the loan was payable annually, and … the principal was repaid … in installments running over eight or ten years.” 
- With the bills a colonist could make purchases and pay creditors;
- The creditors, by doing the same, put the bills into circulation;
- As colonists repaid the “land bank” or paid taxes, a percentage of the bills were retired, that is, taken out of circulation, and burned.
The system was used in all of the colonies. South Carolina opened a land bank in 1712; Massachusetts in 1714; Rhode Island in 1715; New Hampshire in 1717; Pennsylvania, Delaware, and New Jersey in 1723; North Carolina in 1729; Maryland in 1731; Connecticut in 1732; New York in 1737; and Virginia in 1755. The system was effective because it produced sufficient money through interest to meet most of the administrative costs of the colonial governments. The costs were low because officials drew fees not salaries and almost all public services were handled by the local not state governments. Massachusetts had the highest costs of 18,000 pounds a year apart from war expenses and Pennsylvania the lowest cost at 3,000 pounds per year. In between were colonies like New York at 5,000 and South Carolina at 8,000.
There was no common set of regulations regarding the bills, i.e. some could be used for purchases but not repayment of debt, some could not be used in private transactions, some paid interest, etc… Each colony printed different amounts. When too many were issued or they were retired slowly while new were already being issued, their value depreciated. Land Banks were successful in the Middle colonies, but a failure in the New England colonies. There were two reasons for this: the amount of bills issued and the kind of security against which the bills were loaned. In the Middle colonies, a moderate amount of money was issued on the security of good and profitable farmland; in the New England colonies a larger amount of money was issued on the security of less valuable land. Land banks were not well accepted by the merchants in New England because, more often than not in place of land, taxes needed to be pledged for the redemption. This was the “on credit” system. By 1739, one sterling bill of credit was equivalent to five Massachusetts’ bills, however in New York, Pennsylvania, and New Jersey, all middle colonies, one sterling bill of credit was equivalent to one point seven of their bills.
In 1751, at the request of the merchants in who feared that the colonists would attempt to make debt payments with the depreciated bills, Parliament passed the New England Currency Act. It did not do away with the money system, but rather established rules for continuing it. The Act forbid the New England colonies to issue any new bills, and forbid them to use existing bills to pay their private debts to the merchants; however, they were allowed to use existing bills to pay their public debts and taxes. The Board of Trade’s responsibility was to make sure that any new law met the following conditions: the amount of bills a colony was issuing was reasonable, the redemption “fund’ was adequate and the bills were retired within a limited period of time. The Board understood the necessity for emissions and for the most part was reasonable when a colony wanted to create a land bank, but it was adamant that the emissions could not be used as legal tender when paying private debts. The Board managed the system through each colony’s governor and through the use of a “suspension clause.” If any of the conditions were in question, then a “suspending clause” had to be added to the measure. The clause was a safeguard for the Crown, Parliament, the Board and the London merchants. It stated that the measure was suspended from operating until the Assembly had received approval from the Crown. If the colonial legislature refused to add the clause, the governor was to reject the measure.
The governors were required to enforce the Act of 1751. If they were remiss, they would be required to “pay the sum of one thousand pounds, and shall be immediately dismissed from his government, and for ever after rendered incapable of any public office or place of trust”.
In times of emergency such as a war a colonial government printed fiat money as needed, but each time, a tax had to be attached for its redemption. Imposts and excise taxes were the primary forms, but if more money was needed, the colonial government would either extend the term of the tax or commit a second tax such as a poll and property tax. Between 1751 and the end of the War, a colony either managed the system or was its own worst enemy. Those that managed it well were Virginia, Pennsylvania, New Jersey, Delaware, Maryland, Massachusetts, Connecticut, New Hampshire, Georgia, andSouth Carolina. Those that did not manage the system well and were problematic for the others were Rhode Island who issued enormous sums of money to preferred individuals and North Carolina.
In December 1763 and January 1764, Lord Hillsborough and the Board of Trade conducted a series of hearings to determine whether the Act of 1751 should be extended. He had three basic beliefs: first, the larger the quantity of bills of exchange, the lesser the value of other commodities; second, a flood of bills could only be followed by depreciation; and third, paper (bills) did away with specie. Six former governors agreed that it “would be highly expedient and proper” to extend the Act, but this time to all of the colonies. On February 9, 1764, the Board submitted to Parliament a series of proposals. They would form the basis of the second Currency Reform Act that would pass two months later. The Act required existing “bills” to be retired at their “call in” dates in all of the colonies and forbid their use as legal tender to pay anypublic orprivate debts after September 1. The Act immediately caused a decline or depreciation in the value of the existing bills, since no one even in the colonies was obligated to accept them.
By the end of 1765, twenty percent of the money that been put into circulation since 1760 had already been “called in” and retired. This significantly reduced the amount in circulation and the colonists’ abilities to engage in trade with each other and with England. Francis Fauquier, the Governor of Virginia, reported “circulating Currency [had] grown very scarce [and] people were really distressed for Money of any kind to satisfy their Creditors.” In Maryland the last of its bills were “called in” by the end of 1765, so she and New Jersey were forced to rely upon Pennsylvania’s “bills as its circulating medium.” South Carolina, a significant trading partner with England, did not have enough bills to take care of its own “inland” trade because over twenty five percent of them were being used in North Carolina and Georgia. On January 14, 1766, Pennsylvania sent a petition to the House of Commons asking for the Act’s repeal; it was presented by Benjamin Franklin. Over the next twelve months it appeared that the House of Commons, the London Committee of North American Merchants, Lord Shelburne, and the Duke of Grafton were in support of the repeal. Unfortunately, on May 13, 1767, two days after the final meeting between the colonial agents and members of the Ministry at which the finishing touches were put on the formal petition for repeal, Lord Townshend, the Chancellor of the Treasury, presented a series of Acts for levying duties upon the colonies. Due to pressure from farmers, Parliament had recently reduced the land tax in England by 25%; this caused a shortfall in the Treasury over and above the additional income needed to pay for the soldiers permanently stationed in the colonies. This turned Parliament’s attention away from anything related to the Currency Act.
For the next three year, Lord Hillsborough would remain adamant in his position regarding a repeal: “This Matter has already received so full a Discussion at the Board of Trade, at the Privy Council, and in each House of Parliament, and so strong and unanimous a Determination that paper Currency with a legal Tender is big with Frauds, and full of Mischief to the Colonies, and to Commerce in general that I apprehend no Consideration of a possible local Inconvenience will induce a deviation from the sound principles of the Act of Parliament relative hereto.”
Then on May 14, 1770, seemingly from out of nowhere, New York’s four year old petition for the creation of a land bank and the emission of 120,000 pounds was granted by Parliament. This begs the question, Why? The answer might be found in the person of Frederick, Lord North, who was made the new First Lord of the Treasury on January 31, 1770. As soon as he took office he displayed an attitude of reconciliation towards the colonies. On April 9, all of the Townshend Acts including the New York Restraining Act but not the tax on tea were repealed. In the summer New York decided to abandon the Non-Importation agreement that all of the colonies had agreed to. Was this something that North had hoped would occur and then might spread to the other colonies? There is no evidence to support this conclusion, but it is a reasonable conjecture.
It took three years before another concession was approved. This time it followed the appointment of Lord Dartmouth as the new Secretary of State for the Colonies on August 14, 1772. On May 4, 1773, Parliament extended the New York concession to all of the Colonies; they were empowered to “create and issue Certificates, Notes, Bills or Debentures on the Security of any Taxes or Duties given and granted to his Majesty, and to make a legal Tender to the Public Treasurer in Discharge of any Taxes, Duties or other Debts due to or payable at or in the Public Treasury.” This allowed paper money to be used to pay all public debts, however, private debts (specifically to the British merchants) were still excluded.
Nine months later, New Jersey was granted a land bank and four months after that, Pennsylvania was granted a land bank.
By 1775 the Board of Trade admitted that the colonial bills of credit had a “vary salutary Effect, by enabling the planters to Extend their Improvements, to open new Channels of Commerce, to take off a greater Quantity of the Manufactures of Great Britain, and to pay for them with that Gold and Silver, which, was it not for the Advantage of this paper medium must be retained in Order to answer the purposes of Circulation.” [FEATURED IMAGE AT TOP: Three pence Colonial currency from the Province of Pennsylvania. Signed by Thomas Wharton. Printed by Benjamin Franklin and David Hall.]
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