Guernsey Island, second largest of the Channel Islands, home to the famous Guernsey dairy cows, boasts of one of the more interesting paper money experiments in monetary history. The parliament of Guernsey Island, called the States, hit upon the scheme of issuing paper money to pay for the construction of public facilities, and in turn reclaiming the paper money in payment for rent on the use of the finished facilities.
In April 1815 the Guernsey States appointed a committee to investigate a proposal for enlarging the Guernsey meat market. The committee recommended the issuance of 1-pound State notes, beginning with a 3,000 pound issue. These one-pound notes were earmarked to pay the costs of material and wages for construction of the enlarged Guernsey meat market. According to the plan, those who used the building would have to pay rent in these one-pound notes. As these notes fell into the hands of the government of Guernsey as payment for rent, they would be destroyed, and therefore canceled. According to the committee report:
Thus at the end of ten years, all the Notes would be cancelled and the States would be in possession of an income of 150 pounds per annum, which would be a return to the 3,000 pounds spent by them. Looked at from all sides, the scheme shows nothing but the greatest advantage for the public and for the States.
In 1820 and 1821 the Guernsey States issued over 4,000 pounds in 1-pound notes to pay off its public debt. In 1826 the States authorized another paper issue of 1-pound notes to pay for Elizabeth College and parochial schools. This authorization set a limit of 20,000 pounds on notes in circulation.
In 1827 the States authorized another issue of 11,000 pound notes to pay for improvements to Rue de la Fontaine, a street adjoining the market. Again the rents related to the project would reclaim the notes, leading to their cancellation. Other note issues were approved.
In 1828 the States appointed the Finance Committee “to replace the used and worn-out Notes by new Notes, payable at the same time as the destroyed notes would have been.” In 1829 a member of the Finance Committee observed that the volume of notes in circulation had risen to 48,183.
The Guernsey States experiment with paper money is one of the most interesting in history. It was a successful and productive use of a paper money issue that commanded value independent of a gold standard. It never climaxed in an inflationary finale that seemed to be the outcome of a merciless logic inherent in all the early issues of paper money. One important characteristic that distinguished the Guernsey paper money experiment from other early experiments was this: Unlike earlier paper money, often inspired by wartime expenditures, the Guernsey paper money issue went to pay for the production of durable, income-earning wealth. Therefore the nongold wealth of the community kept pace with the growth in paper money even though the amount of gold in the community may have declined.