Department of Economics

Is Paper Money Just Paper Money? Experimentation and Local Variation in the Fiat Paper Monies Issued by the Colonial Governments of British North America, 1690-1775: Part I

Department of Economics
University of Delaware
Working Paper #2012-07

Is Paper Money Just Paper Money? Experimentation and Local Variation in the Fiat Paper Monies Issued by the Colonial Governments of British North America, 1690-1775: Part I

Farley Grubb

ABSTRACT

The British North American colonies were the first western economies to rely on  legislative-issued fiat paper monies as their principal internal media of exchange. This system arose piecemeal. It was monetary experimentation on a grand scale. In the absence of banks and treasuries that exchanged local fiat monies at fixed rates for specie monies (outside monies) on demand, colonial governments experimented with other ways to anchor their fiat monies to real values in the economy. These mechanisms included  tax-redemption, interest-bearing notes, land-backed mortgage loans, sinking funds, and legal tender laws. The structure and performance of these mechanisms are explained.
 

[The colonies] cannot keep Gold and Silver among them sufficient for the Purposes of their internal Commerce... Paper Bills called Bills of Credit or Paper Money have  therefore in the colonies long been substituted for real Money. Various Ways of issuing these and on different Foundations, have at different Times been thought of and practised.... On the whole no Method has been found to give any Degree of fixed, steady, uniform Value to Bills of Credit in America ... Benjamin Franklin, 13 Feb. 1767

JEL Codes: E-42, E-50, F-31, G-10, H-60, K-29, N-11, N-21, N-41

Keywords:  Adam Smith, barter, bearer bonds, Benjamin Franklin, bills of credit, colonial America currency substitution, fiat currency, interest-bearing money, legal tender, paper money, quantity theory of money, sinking fund, specie money, tax-redemption.

The Lerner College is home to a state-of-the-art financial trading facility, the $1.4 million student-led Blue Hen Investment Fund, a student-managed restaurant and hotel, a high-technology development center of a global bank and a start-up experience for students with new business ideas.

Lerner College faculty - like Anu Sivaraman, who is among Social Media Marketing Magazine’s “Top 100 Marketing Professors on Twitter” and MBAprograms.org’s “Top 50 Marketing Professors on Twitter” - are thought leaders who command attention from influential business audiences, economists and policy makers.

All Lerner College departments offer experience-driven learning and emphasize evidence-based analytics methods to enrich the student experience. Here, finance students visit New York City’s financial districts for a first-hand look at markets trading and to meet with UD alumni.

Charles W. Horn, AS75, and wife Patricia, recently made a $3 million commitment to enhance and expand entrepreneurial studies.

  • Alfred Lerner College of Business & Economics
    303 Alfred Lerner Hall  •  Newark, DE 19716  •  USA  •  ©