The Currency Act of 1751 sought to restrict the issuance of fiat paper money and to ban its use as legal tender for the settlement of private debts in the New England colonies.
The beginning of the eighteenth century saw several New England colonies, led by Massachusetts, issue fiat paper currency. They turned to paper currency partly because of the financial pressures of wars involving the French and the Indians, and partly as a measure to relieve domestic shortages of acceptable mediums of exchange for financing business activity. Colonial governments issued paper currency on the condition that they would accept the currency as payment for taxes at a future time, perhaps within a year or possibly as long as seven years later. When governments issued more paper currency than they reclaimed in taxes, the paper currency lost value relative to British currency, and colonial prices inflated.
British merchants who had claims of debt against the colonists suffered because the depreciated currency they had to accept in repayment had less value than the credit they had extended.
The Act of 1751 opened by citing the failure of previous acts of Parliament to stem the tide of depreciating paper currency in New England, and by observing that because of the legal-tender status of this paper currency “all debts of late years have been paid and satisfied with a much less value than was contracted for, which hath been a great discouragement and prejudice to trade and commerce.”
The act provided that:
- Effective 29 September 1751 governors, councils, or assemblies in Connecticut, Massachusetts Bay, New Hampshire, or Rhode Island, were forbidden to enact legislation authorizing the issuance of additional bills of credit (paper currency), and could not extend the period of outstanding bills of credit. Any actions along these lines were “declared to be null and void, and of no force or effect whatsoever.”
- Colonial governments were required to retire all outstanding bills of credit at the scheduled date.
- Colonial governments could issue bills of credit to finance current government expenditures if sufficient taxes were levied to retire the bills within two years.
- In the event of unusual public emergencies, such as war or invasion, bills of credit could be issued in excess of what the government would reclaim in taxes within two years. These extra bills had to pay interest and be reclaimed by a tax fund within five years.
- None of the bills issued after 29 September 1751 were to be legal tender in private transactions, and none of the bills then in circulation should be legal tender.
The act allowed governments to continue to issue bills of credit as an instrument of government finance, but prohibited the attachment of the legal-tender sanction for settling private debts. The Currency Act of 1751 was followed by the Currency Act of 1764, which applied the same principles to the remaining colonies. The latter act sought to deny the legal-tender status of paper currency even in the payment of public debts. This was a confusing point, however, and the colonial governments continued to issue paper currency that could be used in payment of taxes. The Currency Act of 1773 clarified the issue by specifically allowing colonial governments to issue paper currency that was legal tender for the payment of public debts. The 1773 act allowed the use of paper currency as legal tender for the payment of taxes but, in deference to British creditors, not for private debts.
The Currency Act of 1751, and its sister act, the Currency Act of 1764, contributed to a shortage of circulating money in the American colonies, adding to the discontent that led up to the American Revolution. The American colonies were not blessed with the abundance of gold and silver mines found in the Spanish colonies. The hard specie that was won by exporting goods to Europe had to be used to import the numerous European goods needed in the American colonies. Entrepreneurs in the American colonies enjoyed practically unlimited supplies of natural resources, but harnessing these resources required a rapidly growing domestic money supply, with opportunities for borrowing money as the need arose. Because the availability of money fell far short of the business opportunities afforded by such a land, the colonists tried to find ways to invent their own money supply. The failure of the British to appreciate the need for an elastic money supply in a land of boundless resources contributed to the tension that resulted in revolution.