Conceived in Liberty (118 page)

Massachusetts indeed found very quickly that its “scarcity of money” could not be relieved by creating more. In that era when people still had the right to own gold and silver, the loss of value of each unit of money was dramatized and intensified by market discounting of paper against specie. These discounts reflected not only the increase in the supply of money, but also rises or declines in its demand, governed largely by shifts in public confidence in the value of the new money.

The Massachusetts notes in fact began to depreciate against specie almost as soon as they were issued. In a year they had depreciated by as much as forty percent. Two pamphlets, issued in 1691, berated the people for being “delinquent” in permitting the notes to depreciate; they did not think to criticize the issue itself. The author of the pamphlets lamented that while some private bills were passing at par with specie, “our people (in this pure air) be so sottish as to deny credit to the government, when tis of their own choosing.” In 1692, however, the government moved to the use of force and eliminated the discount in two ways: by making the government issues compulsory legal tender for all debts, and by granting a premium of five percent on all payment of debts to the government made in the paper notes.

From that point on, Massachusetts turned on the monetary engine for its public expenditures. The notes were still supposed to be redeemed eventually in tax revenues. At first the pledges were one year ahead, so that notes issued in 1702 were to be paid out of pledged tax revenues in 1703. As time went on, however, the future kept receding further and further, and more and more years of future revenue were pledged in advance. By 1714, six years of Massachusetts revenue were so pledged, and by 1722, future pledges stretched ahead by thirteen years.

The artificial maintenance of the paper at par had the unwanted effect of “Gresham’s law”: that when a poor and a superior money are kept at an artificial ratio by the government, the money undervalued by government will disappear into exports or hoards, and only the overvalued money will remain in circulation. In 1690, before the orgy of paper began, 200,000 pounds of silver money were available in New England; by 1714, 240,000 pounds of paper money had been issued in New England but the silver had disappeared
from circulation. Massachusetts had increased the inferior money in circulation, at the expense of displacing the superior. Furthermore, market depreciation against silver had only been checked for a time. The push of the Massachusetts issues over the brink came in 1711, when 500,000 pounds in notes were issued to pay merchants for the failure of another plunder expedition against Quebec. The issue led to the hoarding and exporting of silver,
and
to a thirty-percent depreciation against silver. For while the Massachusetts money was officially seven shillings to the silver ounce, it had now fallen on the market to nine shillings per ounce.

By 1714, Massachusetts, after a generation of hopefully alleviating its so-called scarcity of money, found itself with its silver gone and with the paper money, despite its efforts, rapidly depreciating. It was faced therefore with yet another “shortage of money” and with a crossroads: either it could begin to return from paper to silver or it could embark on a massive, eventually more than self-defeating, issue of yet more paper money. The former course was not seriously considered; instead a conflict arose on the proper inflationary path to follow. Merchants and debtors wanted to enjoy some of the blessings of cheap money, and a group of them tried to reactivate the land-bank plan of 1688. The leader of the private land-bank scheme was John Colman, a prominent Boston merchant and real estate speculator. Other leading supporters were Edward Lyde, a Boston merchant and heavy debtor in the 1711 expedition against Quebec; Timothy Thornton, Boston shipbuilder and real estate speculator; John Oulton and William Pain, Boston real estate speculators. The equally eminent objectors, headed by Attorney General Paul Dudley, son of the governor, prevailed with plans for further government issue. Specifically, the private land bank was rejected by the General Court and a public land bank established instead. The latter’s notes were made legal tender and in 1716 it issued 100,000 pounds in notes to be loaned in real estate in the various counties.

The 1716 issue added at once a huge forty percent to the colony’s money supply, and prices were raised so rapidly that objections to paper money began to be voiced. An anonymous pamphleteer in
The Present Melancholy Circumstances...
(1719) and
An Addition to the Present Melancholy Circumstances
(1719) pointed out that monetary issues had led to a doubled cost of living in twenty years, to depreciation and to the disappearance of Spanish silver through the operation of Gresham’s law. The author advocated calling in some of the notes in order to increase the value of the money. He trenchantly concluded that a law can penalize and restrict, “but it can’t change men’s minds to make them think a piece of paper is a piece of money.”

By 1718, Massachusetts had made a valiant effort to reduce its bills in circulation, by allowing retirement of notes as loans were repaid. But by this time the other colonies had taken a lesson from Massachusetts, and New England colonies were bound to honor each other’s notes. Long Island had already issued 40,000 pounds in legal tender “loan bills.” As a result, the
price of silver in New England shillings continued its disquieting rise: by 1720 it had climbed to thirteen shillings per ounce.

With depreciation worsening and silver disappearing, the cry arose once more against a “shortage of money” and John Colman returned to the fray, again urging a private land bank to emit 200,000 pounds in notes. Colman urged farmers to support such a bank, since the increased currency would raise prices of farm produce and land. Colman also urged a law that would prohibit the depreciation of banknotes, and would fix the price of silver at eight shillings per ounce. Such a law would have been impossible to enforce and would have aggravated the shortage of silver by artificially overvaluing paper in relation to specie. Colman denounced the government bank for not being inflationary enough. The agitation for a private land bank was joined by the Reverend John Wise, but without success. Another public issue of 50,000 pounds in 1721 was enough to quiet the agitation, which was evidently concerned with more inflation rather than with private as against public banking.

Throughout the colonies the Crown, propelled by English creditors, was a continuing force for sound money, and its embattled governors attempted to veto paper issues and to moderate the inflationary drive. But the legislatures often threatened to withhold executive salaries and even issued money on their own authority. Increasing royal pressure on Massachusetts, imposed especially by Governor Jonathan Belcher after 1730, managed to reduce the notes in circulation by one-half by 1741; Belcher steadily enforced a limit of 30,000 pounds of notes per year to be payable in one year’s time. Neighboring Rhode Island, however, with its elected governor, was able to go hog-wild, and its note issue, being acceptable in Massachusetts, thwarted the Belcher reductions. Thus Rhode Island emitted 100,000 pounds of notes in 1733 alone. As a result, silver rose further, to nineteen shillings per ounce, and by the late 1730s, to twenty-seven shillings an ounce.

The other colonies followed the lead of Massachusetts during Queen Anne’s War, to pay for military expenditures. South Carolina was the first to issue paper—in 1703, to pay for an abortive plunder expedition against St. Augustine. Rhode Island began its reckless career of inflation in 1710, to pay for its share of an aggressive expedition against Port Royal in Nova Scotia.

By 1740 the following colonies had indulged in paper issue for government spending: Massachusetts, Connecticut, Rhode Island, New York, New Jersey, South Carolina, and North Carolina. Public loan banks were initiated by South Carolina in 1712, for loans on real or personal estates. Almost all the other colonies followed suit. By 1740, only Virginia had refused to join the ranks. The Carolinas, indeed, had indulged so heavily that the price of silver rose to thirty shillings in 1730, and paper money played a large role in South Carolina’s rebellion against the proprietary, which had refused to assent to paper money. Other struggles between legislature and governor took place in New Hampshire, where during the 1730s the legislature refused all funds for five years in order to win its way for paper issues; and in New Jersey and
New York, which did the same. In all the cases, the legislature was able to use its control of funds to win its point.

Down to the middle of the eighteenth century, Virginia was content with a decidedly noninflationary form of paper money. From 1713 on, the Virginia government established public tobacco warehouses, which issued warehouse receipts called “tobacco notes,” backed one hundred percent by the amount of tobacco in the warehouse. These notes then functioned as a perfect equivalent to commodity money in tobacco. By the time of the French and Indian War in the late 1750s, however, Virginia moved to issue paper money as part of the financing of its role in the war effort. Interestingly enough, the first advocate of government paper issues in Virginia during the French and Indian War was Landon Carter, one of the largest and most influential tobacco planters in Virginia.

Most reckless of the colonies was Rhode Island, which was also particularly lax in waiving repayment of interest and even principal on the loans. The loan banks in Rhode Island were controlled by a few government favorites, or “sharers,” who loaned out the money at five percent higher than they bought the new issues from the government. The sharers often sold this five-percent guaranteed privilege to others for premiums as high as thirty-five percent. In 1759 over fifty thousand pounds of outstanding loans in Rhode Island were found to be unpaid and uncollectible, and this constituted a full eleven percent of the outstanding note issue for the land banks of that colony.

The Rhode Islanders had a particular economic incentive for their wild issue of new money. A small colony with many purchases to make in Massachusetts Bay, Rhode Island’s money was accepted at par in the neighboring colony. Hence the incentive for Rhode Islanders to print themselves new money that could easily be spent before prices in Massachusetts could rise by the same amount—thus imposing the main cost of their inflation upon the people of Massachusetts.

If Rhode Island was the most inflationary of the colonies, Maryland was the most bizarre. In 1733 Maryland’s public land bank issued 70,000 pounds of paper notes. Of these, 40,000 pounds were loaned out in the usual manner of landed security; but the remaining notes were
given away
in a fixed amount to each inhabitant of Maryland. This was done to spend and universalize the circulation of the new notes, which, of course, quickly depreciated. However, the impact of the new paper was greatly lessened by tobacco still being the major money of the colony. Tobacco was legal tender in Maryland and the paper was not receivable for all taxes.

All the colonial paper was made legal tender, it being recognized that otherwise the paper would not be accepted in private debts. The legal tender was at the official par value in specie, but this coercion was not enough, as we have seen, to prevent grievous depreciation even though backed by fines, imprisonment, and complete confiscation of property in punishment for not accepting the paper at par. And as we have also seen, complaints of a scarcity of money
followed each new emission of paper, and set up a clamor for still more accelerated inflation.

Hardest hit by the severe depreciation of all the notes were nondebtors, especially creditors, fixed-income groups, charitable endowments, and laborers, whose wages—as has generally been true—rose less than prices. Thus in 1712, when silver in Massachusetts was priced at eight shillings per ounce, wages of laborers averaged five shillings a day; in 1730, with silver appreciated to twenty-nine shillings an ounce, wages were only twelve shillings a day. In short, the price of silver (a reflection of the price movements of imports and indeed of prices in general) rose three and one-half times, while wages had risen only two and one-half times.

By 1740 the indefatigable Colman was ready to renew agitation for a private land bank in Massachusetts. The critical factor in amassing support was the change in Massachusetts land policy. Before 1720, the province had required actual settlement before granting new land to private persons or groups. But after that date, Massachusetts engaged in an orgy of grants to land speculators, who held title to the virgin land until they could resell to actual settlers at a profit. This land speculation was particularly rampant during the 1730s; much of the land was on the New Hampshire border, where a boundary dispute prevailed with the neighboring colony. The new host of land speculators was anxious for an inflationary land bank.

Through the 1730s the Massachusetts General Court had been able to evade Governor Belcher’s restrictions on paper issues by postponing debates on redemption. Finally, in 1739, the Crown insisted the bills be called in and redeemed on the dates due. This meant that the 250,000 pounds of paper in circulation would have to be reduced to the annual 30,000-pound limit by 1741. One way to evade this restriction, however, would be to set up a private land bank, and at the invitation of the General Court for suggestions for ways to inflate the money supply, John Colman resubmitted his old scheme. While it was largely a land bank emitting irredeemable notes, Colman broadened the appeal by permitting loans on personal property as well. It was also proposed that loans be repayable, not only in banknotes but also in such commodities as hemp and iron—the aim being to subsidize local manufacture of these products. A competing group of merchants made a rather sounder proposal, the notes of which bank could at least be redeemable in specie after fifteen years. Both proposals were led by prominent and wealthy citizens.
*
The Assembly
favored the land bank, but Governor Belcher and the Council refused to agree to either scheme. Failing to obtain incorporation, both the land bank and the silver bank proceeded to print new money anyway, during 1740, and Belcher was not able to persuade the Assembly to outlaw these emissions.