[fulltitle]

Without Prejudice.

Colonial paper notes functioned as currency but actually were bills of credit, that is, short term public loans to the government. Previously, currency had been limited to coins with an intrinsic value based on their gold, silver or copper content; similar to the value of commodity items used in bartering. Now, for the first time, the money itself had no intrinsic value other than the value of the paper on which it was printed. Rather, the value of the notes came from the fact they were issued by and accepted by the government of the colony in payment of debts.



The process would occur as follows. The colony would authorize the printing of a specified quantity of notes which it would then use to pay creditors. The creditors would, in turn, use the notes to make other purchases and so put them into circulation. With each currency emission the colony would also authorize a tax equaling the amount of the emission. In practice individuals would pay the tax using the notes, and in this way the emission would be taken out of circulation. This system has been called "currency finance" as the currency was printed to pay government debts based on anticipated or future tax income. As long as colonies had the ability to retire older emissions the system would work. If previous emissions could not be retired when newer emissions were issued then the new emissions would simple add to the quantity of paper in circulation. A continually increasing supply (or oversupply) of paper would naturally cause prices to rise and the value of the money to decline. The key to this system was for the colonies to only print as much money as they could expect to collect in taxes. [more...]