In 1706 the colonial assembly of Barbados, a British colony, enacted legislation that led to one of the more unusual monetary experiments in history, creating a fiat domestic currency that was virtually legal tender. The legislation sparked a strong protest from merchants, slave traders, and other English traders, the creditors in the economy of Barbados. The British Board of Trade acted to force the redemption of the paper money, but the episode reveals the secret war between debtors and creditors that often surfaces when monetary institutions are evolving.
Sir Bevill Granville, the lieutenant-governor at the time, favored a party of debt-ridden planters in the colonial assembly. With Granville’s patronage, the planter party, controlling leadership positions in the assembly, successfully sponsored the legislation, which passed in the lower house by a vote of 10 to 9. The planters clothed their proposal in arguments citing the shortage of coin as a contributing factor to the declining state of trade. To assure the successful execution of the plan, the assembly adopted the Triennial Act, which extended its own life for three years.
This proposal to create a locally issued paper money allowed each planter to receive “bills of credit” equaling in value to one quarter of the planter’s estate. The institution issuing these bills was a bank, and the bank manager was called the holder. Among other duties the holder had sole responsibility for appraising the estates of the planters, one of the many objections of the creditors. The legislation called for the acceptance of the bills at face value in all domestic transactions, and required creditors to forfeit half of a debt for refusing to accept the bills in payment. Planters had to redeem the bills in one year, or renew them. Renewed bills remained in circulation. When the planters who first drew the bills failed to redeem them or were unable to pay the interest and renew them, they faced something like a foreclosure sale on that part of their property pledged as security for the bills.
The major flaw of the bills in the eyes of the creditors was that they paid no interest to their holders. The planters paid 5 percent interest on the bills, which went to the bank to cover the administrative cost of issuing, redeeming, and renewing the bills. The merchants and traders who received the bills in payment earned no interest while they held them, a factor that assured the rapid depreciation of the bills in value.
The Royal African Company, a slave-trading company, was among the major critics of the law, and vigorously objected, with other merchants and traders, to the British Board of Trade. The British government recalled Granville, and sent as a replacement Mitford Crowe, an individual in good standing with the merchants. The British government ordered Barbados to redeem the bills held by creditors involuntarily. Meanwhile leadership in the assembly lost confidence in the new bills, and, failing to persuade the assembly to take action, dissolved it, calling for new elections. The new election became a battleground for a clash between creditors and debtors, and the creditors came out on top. The new assembly passed the Relief Act of 1707, which forced planters to redeem their paper bills in one year or face foreclosure auctions.
The experience of colonial Barbados illustrates the difficulty of developing a fiat money standard acceptable to creditors, who bear the burden when money loses its value. Perhaps there is a lesson in the fact that the same New World that flooded the Old World with an influx of precious metals, was also inventive in coming up with new variants of paper money.