Bills of Credit...

[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...]

[Shoonra]

One of the intriguing monetary situations in the (Pre-Independence) colonies is that, while the colonists were obliged to purchase a great many goods being shipped from England, and expected to pay for these imported goods with genuine English coinage, the English govt had (deliberately, I think) not provided the colonies with enough official currency to go around. As coins minted in England were sent back to England to pay for goods sent from England, the colonies ran out of conventional currency.

This is a major reason behind colonial paper money. Some of it officially represented English units of currency, much as poker chips represent units of money. Some of it actually represented locally produced goods, such as tobacco; there would be paper money that represented, say, 100 pounds of cured tobacco in a particular storehouse, much the way modern checks represent money in a particular bank account. The colonists also made use of foreign (non-Brit) coinage, such as Spanish silver reals, Austrian thalers, and the like.

[mrg]

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