Conceived in Liberty (119 page)

The new land bank issued over 49,000 pounds in notes, a hardly risky enterprise since the bank could issue pure money without having to redeem it in anything else. Governor Belcher promptly and properly used his position to warn the people of Massachusetts against this private inflation. He warned that the notes were unsound and “tended to defraud men of their substance.” Belcher also formed an alliance with the silver bank, persuading the latter to make its bills far sounder by agreeing to redeem them in specie upon demand. The silver bank refused to accept land-bank notes, while the governor removed all government officials who received or paid land-bank notes, going to the extent of prohibiting lawyers from receiving the notes when pleading cases before the Council. Many merchants and businessmen—including 145 in Boston, and seventy-four in Newport—publicly agreed not to accept any of the unsound land-bank notes.

The idea of a land bank for one’s own creation of money out of thin air enchanted many in Massachusetts. The number of subscribers to this open sesame for profit soon swelled from nearly 400 to over 900. Moreover, petitions for more land banks arose in several other towns and counties in the province. The enthusiasm, indeed, for the land bank was easily comprehensible; a majority of assemblymen were themselves subscribers. But if stockholders were delighted, the note holders were not. In six months’ time the public was almost universally refusing to accept the notes.

Inflationists are always prone to blame everyone but themselves for the consequences of their own actions. As the land-bank notes began to depreciate, and to be refused in trade, land bankers began to mutter about a march on Boston to try to force merchants to accept the notes. The final blow to the mischievous land bank was delivered by Parliament, which in 1741 granted the request of several Massachusetts merchants and of Governor Belcher, and outlawed land banks in Massachusetts. The prohibition covered the silver bank as well.

We have noted the predominance of the wealthy and of large land speculators in forming the land bank. Unfortunately, historians have been misled by two contemporary opponents of the bank who denounced its supporters as being “plebeians” and “insolvents” of “low condition.” In those days being poor and insolvent was deemed a reproach rather than an automatic badge of merit, and it is important not to be misled by the denunciations of contemporary opponents.

Hardly had the land bank and a return to sounder money begun, however, when the vast expenses on the self-defeating expedition against Louisbourg, on Cape Breton Island, led to a great inflation and expansion of paper money
in Massachusetts. In 1744, the total amount of paper money outstanding in Massachusetts was 300,000 pounds. With large amounts of new paper issued beginning in February, the total supply of notes in Massachusetts rose to 1,-500,000 pounds in two years. In a short while, circulation of paper notes totalled 1.9 million pounds, and by 1748, the outstanding sum of paper money in Massachusetts had risen almost to 2.5 million pounds. The price of silver rose to sixty shillings an ounce, tenfold the amount at the beginning of the century. Original self-imposed limits on note issue had long since been forgotten, and early promises of yearly redemption were also forgotten as the period of future pledges of revenue gradually lengthened to twenty-five years. In some colonies, interest and principal on the loans were in extensive default.

The saga of paper-money inflation and its depreciation was repeated from colony to colony. Demands for more money, leading to depreciation and higher prices, set up further and accelerated clamor for yet more money to alleviate the continuing “scarcity.” If the original par between sterling and the dollar is taken as 100, then sterling in Massachusetts was down to 133 in 1702 (one dollar equaling six shillings). By 1740, Massachusetts sterling had depreciated to 550, and by 1750 to 1,100—a depreciation of 11 to 1 compared with par. Depreciation in Connecticut had reached 9 to 1 by that time, and in North Carolina and South Carolina depreciation had reached 10 to 1. In virulently inflationist Rhode Island, sterling had sunk to 23 to 1. The least-depreciated paper was the least inflated, in Pennsylvania, but even here specie had appreciated to eighty percent over par.

Finally, after the end of King George’s War, Parliament decided to grant Massachusetts a substantial sum as compensation for its expenditures during the war. Massachusetts wisely decided to use the funds to return to a hard money, and to redeem the paper at the current depreciated rate of 7
¹
/
₂
to 1. Connecticut followed with retirement of paper at a rate of 8
⁵
/
₆
to 1, and New Hampshire retired some notes a few years later. The panicky opponents of specie resumption made the predictions usually made in such a situation: the result would be a virtual absence of money in the colony and the consequent ruination of all trade. They even threatened an uprising, and thus provoked a riot act for its suppression. After a temporary adjustment, however, this resumption, of course, led to a far more prosperous trade and production—the harder money and lower price attracting an inflow of specie. In fact, the prosperity wrought by hard money was dramatically embodied in the blow delivered to Newport. Newport had been a flourishing center of West Indian imports for sections of Massachusetts. But after 1750, with Massachusetts on specie and Rhode Island still on depreciated paper, Newport lost its trade to Boston and languished in the doldrums.

The English government, at the behest of the understandable complaints of English merchants and creditors defrauded by paper money, opposed the issue of paper money in the colonies. Royal governors had tried to repress the inflation,
but were defeated by the Assemblies’ appropriations. Finally, Parliament in 1751 prohibited all further legal-tender issues of paper money in New England. Bills were to be redeemed when due. The colonies could still issue treasury notes for a brief period, but not with legal-tender powers. However, Virginia, the last colony to succumb to the lure of money creation, joined the pack in 1755 as did the new colony of Georgia. By the 1760s, Virginia paper had fallen to a discount of fifty to sixty percent. It attempted to form a public loan bank, but that was vetoed by the governor. In 1764, Parliament finally extended the prohibition of any further monetary issues from New England to all the other colonies, and it also required the gradual retirement of outstanding notes. The leniency on retirement, however, as well as the provisions for treasury notes, managed to keep a great deal of paper in circulation for the remainder of the colonial period. Although the new notes could not be legal tender, they were somewhat maintained in value by being made receivable in taxes. All in all, by 1774, the estimated monetary circulation in the American colonies was $14 million, of which fifty to sixty percent was paper notes.

We have indicated that the drive for paper money was led by prominent men in each colony. The economic arguments were highly simplistic—basically that more money was needed and therefore should be printed. The Reverend Cotton Mather added such typical arguments as that “money is a counter” and paper money would be an advantage in never leaving the colony (that is, it wasn’t really money since it could not be used for imports). Mather also denounced “hoarding” because it obstructed the circulation of money. It was often maintained that paper money did
not
depreciate, but rather that silver
appreciated,
due to demands for its export. Such an argument was used, for example, by Benjamin Franklin in his venal campaign for paper notes that he personally would be paid to print. Laying blame on the export of specie—as if it were an uncaused act of God!—was typical; thus Massachusetts thought that prohibition on the export of silver would arrest the depreciation of paper. Of course it did not!

It should be noted that the most enthusiastic supporters of the public land banks and paper money in Pennsylvania were the merchants, who were able to lobby effectively in England with the aid of Quaker bankers and merchants there. The wealthy merchant and land speculator Francis Rawle was one of the leaders of the paper-money movement in Pennsylvania. On the other hand, the proprietary, whose accruing quitrents were fixed in terms of money, strongly opposed “rotten” and “vile” paper money. In notoriously inflationist Rhode Island, Governor Richard Ward, a prominent Newport merchant, argued in 1740 that paper money had been spent on valuable public works and contended that its depreciation was due to the wickedness of the merchants rather than to economic law. The most prominent advocates of paper money in Rhode Island, it should be noted, were the Wanton family of Newport, two brothers of which were respectively the wealthiest merchant and the leading shipbuilder in the colony.

If merchants were the leaders in agitating for paper money, other merchants took the lead in opposition. At various times opposition to paper was expressed by Samuel Sewall, Thomas Hutchinson, and other prominent merchants of Boston; by merchants of Salem, Philadelphia, Hartford, Newport, and South Carolina; and by leaders of Providence and New York City. In 1750, a group of citizens of Rhode Island astutely charged that the main inciters of inflation were big landlords who had mortgaged their land in loans from the government, and who now wished to pay their debts in a relatively worthless currency.

In its argumentation the opposition began to develop the analysis of paper money that we have set forth above. The opponents pointed out, for example, that there is no sense to complaints of “scarcity” of money, since one can always
buy
specie on the market. They added that the clamor about “scarcity” was always worse
after
paper money had been issued than before. Thus, five keen Rhode Island legislators wrote in 1740 that “this bank would probably so far depreciate the whole paper currency, that we shall have in reality a less medium of exchange, and all complaints of scarcity of money greatly increased.” And we have noted the contributions of the anonymous author of
The Present Melancholy Circumstances
... in remarking the consequences of paper money in depreciation and in driving out specie.

Unquestionably the leading hard-money theoretician of the colonial era was Dr. William Douglass, a Scottish physician and scientist, who had settled in Boston. Douglass, whose contributions were commended by Adam Smith and by important classical economists in the next century, began his rise to influence with his
Discourse Concerning the Currencies of the British Plantations in America
(Boston, 1740). The
Discourse
was also an important statement of the Massachusetts opposition to the land bank. Douglass wove together the various strands of our analysis. He understood the various fallacies of the scarcity-of-money outcry; the workings of Gresham’s law; the distress that paper wreaked on creditors, laborers, and fixed-income groups, and the special privilege it conferred on debtors; and the depreciation caused by paper-money issues. Douglass understood that paper issues were a form of taxation on the public. He also saw that it is the increase of paper that renders the balance of trade unfavorable by adding to spending for imported goods. And finally, Douglass realized that increasing the quantity of money only depreciates the value of each unit, so that a larger supply of money does no better or greater work for society than a smaller. Conversely, specie instead of paper notes will lower prices, attract specie, and balance foreign trade. Douglass, however, was inconsistent enough to favor private bank notes redeemable in specie, which would not exceed a certain vague proportion of specie reserve.

One important repercussion of the land-bank controversy was its effect on political representation in Massachusetts. Far from a “seaboard aristocracy” being dominant in the Assembly, the law of 1692 had established representation in the Assembly of one or two from each town with the exception of
Boston, which could send four. This meant that as the colony grew and new towns were created, the Assembly became more and more heavily dominated by the rural towns. Furthermore, each representative had to be a resident of the particular town. Indeed, the small towns regarded themselves as overrepresented: the smallest towns were not compelled to send representatives if they didn’t want to, and the next smaller towns were repeatedly trying to extend this cost-saving privilege to themselves. Thus the cost and trouble of sending representatives were usually deemed greater than the advantages to be gained. Often towns accepted fines by the lower house rather than to bother sending representatives. Undoubtedly this lackadaisical attitude reflected the relative unimportance of government in the daily lives of the people.

The land-bank controversy, however, spurred the Massachusetts towns to sending more of their full complement to the legislature. Alarmed that the Assembly could use its increasing numbers to overwhelm the Council, Governor William Shirley vetoed the division of old towns into new, and urged that in the future no new districts have power of representation This restriction on representation from new population centers was adopted by the British government and enforced in Massachusetts for almost two decades. Since the lower house already far outnumbered the Council and chose each new Council annually and jointly with the old, the Massachusetts Assembly was therefore already in effective control of the Council. The new policy thus provided an irritant to colonial relations without affecting the basic dominance of the Massachusetts lower house.

By the early 1760s the Crown was progressively forced to modify the ban on representation of new towns. The close of the French and Indian War led to a rapid population expansion in Maine, and the new Maine towns clamored for representation. The Lords of Trade finally agreed and consented to representation from new towns in Massachusetts proper, although they still balked at representation from newly divided towns. Finally, in 1767, the Crown gave up completely and abandoned its futile attempt to check the power of the Assembly by restricting its representation.