Easy money is perhaps New England’s least famous contribution to humanity. Around the world, currency is still mostly in the form of legal tender paper money. It’s a special type of paper money. Unlike numerous types of paper money in history, it is not convertible to gold upon demand. Nor is its quantity “backed” or restricted in any way by its issuer’s gold stock. In general, it is not forced on sellers in private spot transactions. It is just a pure legal tender money.
This means that creditors cannot reject payments of obligations in that object. Most critically, these creditors include the tax authority, and no other object has this status. Every taxpayer must obtain legal tender money in order to pay taxes. This legal status distinguishes the dollar from bitcoin, both of which have no intrinsic value and no relation to gold. It is a major reason why bitcoin hasn’t and probably couldn’t replace the dollar. And it is a major reason why governments can inflate their money at will. Taxpayers still have to obtain it, typically by selling goods and services for it. For the government, it is easy money.
This device, of flimsy appearance but enormous power, was invented in the colony of Massachusetts Bay in the period 1690-1692. From there it spread to other colonies. Because of the Revolutionary War, the idea spread to Europe. Monetary history would never be the same. No country ever again manipulated the content of its gold coins, as they had for two millennia, in order to finance a war. The printing press took over war finance.
Why Massachusetts Puritans?
Why and how did the Massachusetts Puritans invent this new type of money? They numbered 50,000 people at the edge of Western civilization, far less numerous and far less sophisticated than the great financial centers of Amsterdam and London. The first step to answering this question is to recognize that the innovative legal tender paper money was not born in a normal economy. Its invention did not simply replace precious metal coins. The items eligible for use as tax payments in 1690 Massachusetts, just before the invention of legal tender paper money, didn’t just include coins. They also included wheat, barley, barley malt, rye, maize, peas, oats, beef and pork.
It was a very odd monetary economy that saw its roots in the beginning of the English colonization of America. Let’s then take a journey further back in time – and space – all the way to Pocahontas.
Pocahontas’ husband, John Rolfe, started tobacco planting in Jamestown in the 1610s. Quickly everyone who could became a tobacco planter. The planters desperately needed European goods and food. And so when European ships came for their tobacco the planters exchanged all their tobacco – but also most of their coins – for European products. As a result, very few coins remained for domestic circulation. Tobacco quickly emerged as the alternative to coins. By 1624, even the colony’s budget was expressed in pounds of tobacco.
A Pattern of Easy Money
The pattern repeated itself in all the non-Iberian colonies: maize in Plymouth, sugar in Barbados, boards in Maine, beaver furs in Canada and whalebones in Long Island. Each colony adopted its main product as money. As a matter of course, in 1630 the young colony of Massachusetts Bay adopted three official currencies: English silver coins, grains and beaver furs.
But Massachusetts soon became different because its people were different. Relatively affluent, highly educated and commercially oriented, the Massachusetts Puritans were not content with using commodities as money. They also had the means and the expertise to try something better. An unusual period of experimentation began. In 1635, lead bullets were adopted as small change. Bullets served in their traditional role in the 1637 Pequot War, which gave Massachusetts access to Long Island shores. That was the production center of wampum – the seashell jewelry/money of Native Americans. So in 1637, Massachusetts made wampum legal tender for small debts.
In 1639, the colony legalized bullion brought by privateers for tax payments. In 1642, Massachusetts was the first colony to recognize foreign (Spanish and Dutch) coins and to encourage their imports. The abolition of monarchy in England annulled the royal minting prerogative, leading Massachusetts to be the only colony to open a mint (in 1652).
But royalty returned in 1660, and in the late 1670s King Charles II pressed Massachusetts on the issue of the independent mint, which was seen as nothing short of treason. It was shut down in 1682. At the same time, a private bank started operations in Boston. It issued banknotes awkwardly backed by land titles rather than coins. The bank ceased operations shortly thereafter, perhaps because England threatened to abolish all land titles in Massachusetts.
In 1684, the charter of the Massachusetts Bay Company was annulled in England, and in 1686 a new regime was imposed by the new king, James II. This Dominion of New England was a pure dictatorship, unlike the colony’s General Court, which was a democracy among male church members. Another attempt at a land bank was made, but it was aborted as soon as the English dictator, Sir Edmund Andros, invalidated all land titles.
With local coins gone and bank projects in ruin, in 1688 Massachusetts was not much better, in terms of its existing currency, than when it was founded in 1630. Some English coins and grains still facilitated daily transactions within the colony. But the monetary laboratory that operated there during these six decades was not entirely in vain. It was powered by English America’s largest merchants, concentrated in Boston, and by graduates of English America’s only college (Harvard). As a merchant republic, Massachusetts was similar to previous hubs of financial innovation – Venice and Amsterdam. The shocks of both the new environment and England’s constitutional upheavals caused Massachusetts to replicate humanity’s monetary history in 60 years: seashell jewelry, grains, uncoined precious metal, coins and banknotes.
Then came the Glorious Revolution in England. It soon inspired a revolution in Boston, which dismantled the Dominion and restored the charter government de facto. The Glorious Revolution also dragged the English colonies into their first war with French Canada. The revolutionary Massachusetts government lobbied the monarchs William and Mary to restore their charter at the same time that they launched expensive attacks on distant Canada. In the fall of 1690, these two tasks collided on the beaches below Quebec City. Massachusetts tried to occupy the French colony, counting on God to provide a Puritan victory over Catholics. The expected plunder was supposed to pay the soldiers. But it was not to be. The soldiers returned defeated in November, ravaged by smallpox, frozen and hungry, and demanded pay for their horrible three-month journey.
The government promptly increased taxes enormously, but it would have taken too much time to collect them (in coin, grains, and other goods). The soldiers were “mutinous,” reported Boston pastor Cotton Mather. Mather and the elite knew that the very same place they tried to occupy (Quebec) was in the habit of issuing paper money (manually, from playing cards!). The Canadian money was in the Old World style: It was forced on all sellers under penalty and the government committed to exchange it for incoming French silver coins. As the intellectual capital of English America, Massachusetts had printing presses and thus had the technical ability to easily pull off a paper money issue. The problem was a constitutional one: William and Mary, considering restoration of the colony’s charter, would not have been happy seeing Massachusetts once again violating the royal monopoly on money creation. What to do?
The government, experienced in monetary innovation, figured out a solution: There will not be “paper money” but only “bills.” No private party will be forced to accept them – no sellers in the markets, not even the soldiers. The soldiers will be informed that they can receive the “bills” if they want, instead of waiting for tax proceeds to be collected, and taxpayers will be informed that they can discharge their enormous tax obligations with these “bills.” That is, only tax collectors will be forced to accept the bills.
In modern parlance, the bills were only legal tender for taxes. Officially, it was not money at all, and thus England should not care. I call it “easy money” because it was money that was easy to issue – no need for precious metal and a mint – and it was made in a dishonest way to fool England.
The bills were enacted into law on December 24, 1690. Printing soon began. The issue of the bills was handed to a committee of five bay merchants,. They included Elisha Hutchinson, grandson of the religious dissident, Anne, and grandfather of the governor and historian, Thomas; Treasurer John Phillips, Mather’s father-in-law; and Adam Winthrop – the first Harvard graduate of that famous name.
In January 1691, the bills were given to soldiers but the public was reluctant to accept the bills. Members of the elite rushed to save the new experiment. Among them were Cotton Mather, who wrote a fiery pamphlet, and the rich Sir William Phips (leader of the Quebec expedition). Phips reputedly exchanged some of his own coins for bills to establish their credit. It worked.
England, as planned, did not care about this experiment. In October 1691, William and Mary granted a new charter to the Province of Massachusetts Bay. Upon the charter’s arrival in 1692, the new government understood that it no longer had to fear England’s reaction regarding its money-issuing activities. In the summer it decided that the “bills of credit” (as they came to be known) will be legal tender not only for taxes but for any monetary obligation. In this step, the bills became identical in legal status to England’s silver coins. However, since they were not made of precious metal, they were identical to our modern currency. Ironically, this time of brilliant innovation was also the summer of Salem witch trials.
The Expedient of Easy Money
Mather later summarized his people’s ingenuity.
“In this extremity they presently found out an expedient, which may serve as an example, for any people in other parts of the world, whose distresses may call for a sudden supply of money to carry them through any important expedition.”
Mather, the mad genius of Boston, was right. Founder John Winthrop did not think of paper money when he said in 1630: “We shall be a city upon a hill. The eyes of all people are upon us.” But in the context of money that was what eventually happened.
Of course, silver and later gold made a comeback, again and again, to prevent inflation, only to be discarded during wars. Gold coins disappeared from American shops and homes in the Great Depression. Gold remained behind the scenes until 1971, loosely “backing” an ever-increasing amount of paper dollars. Only foreign central banks had the legal right to convert the dollars they held into U.S. gold. But the system came under pressure of increasing government expenditures: The Vietnam War, President Johnson’s War on Poverty and the war on gravity (the Space Program) cost so much money that the dollar’s relation to gold lost its credibility. In 1971 President Richard Nixon “suspended” the convertibility promise, and in fact, took the entire world off gold.
Since then, our currency is Massachusetts currency. If and when it a digital version replaces it, its legal status will remain the same. Even if it disappears from shops in favor of electronic payments of various sorts, it still forms the foundation of the monetary and financial systems. These systems consist mostly of promises to pay “dollars” – the paper money and token coins issued by the federal government.
And it all started in a futile attempt of New Englanders to occupy Quebec.
Dror Goldberg is the author of Easy Money: American Puritans and the Invention of Modern Currency, to be published by the University of Chicago Press in April 2023.