The colonial government of the Massachusetts Bay Colony has the dubious distinction of being the first to issue paper money in America. The first hesitant steps toward the issuance of paper money occurred in 1676 when the colonial government raised a loan from provincial merchants and issued treasury receipts as an acknowledgment of debt, expecting these receipts to circulate as currency. Public lands secured the loan.
In 1690 the Massachusetts Assembly enacted legislation that authorized the government to issue paper money. The immediate circumstance that forced the hand of the assembly was the need to pay soldiers returning from a war expedition into Canada. Paper money is similar to many other inventions in that pressures of war often serve to speed up its development and acceptance, a theme that can be explored into the twentieth century.
Although war expenditures provided the immediate pretext for the paper money issue, broader concerns helped create a political environment receptive to the issuance of paper money. In 1686 the governor’s council cited the “great decay of trade and obstructions to manufactures and commerce in this country, and multiplicity of debts and suits thereupon, principally occasioned by the present scarcity of coin” (Nettels, 1934). William Penn later commented that “the want of money to circulate trade has put Boston herself upon thinking of tickets to supply the want of coin” (Nettels, 1934). The law of 1690 also mentioned “the present poverty and calamities of the country, and through a scarcity of money, the want of an adequate measure of commerce” (Nettels, 1934).
Historically, paper money has either taken the form of bank notes, precursors to the modern Federal Reserve Note in the United States, or bills issued directly by government treasuries. The Massachusetts paper money was of the latter variety. The government issued the paper money and levied taxes that could be paid with the paper money. As long as the paper money issue was commensurate with the tax levy, the money maintained its value.
The first bills issued by the Massachusetts colonial government were not legal tender for all debts. The legislation of 1692 specified that the bills be accepted “in all payments equivalent to money,” effectively making the bills legal tender. Bills issued between 1702 and 1712 were not legal tender, although after 1710 these bills could be used to stay out of debtors’ prison until legal-tender currency could be obtained.
The Massachusetts paper money held its value reasonably well until 1713. Bills issued in 1709 were not redeemable in taxes until four years beyond the issue date, and the period of redemption for paper money issued between 1710 and 1712 was postponed for six or seven years. During the interim between issuance and redemption the bills earned 5 percent interest, but many more bills were issued than were needed to pay taxes. The bills depreciated in value and hard specie flowed out in foreign trade.
In 1716 the assembly established a public bank that issued bank notes secured by land.
In 1748 over 2 million pounds of paper money were in circulation when Massachusetts received a large reimbursement from England for war expenses, and used the proceeds to redeem paper money at about 20 percent of its face value. Gresham’s law that bad money drives out good money had played out its ruthless logic in Massachusetts as paper money virtually displaced the specie. After 1720 the English government began to restrict the ability of colonial governments to issue paper money with legal-tender status. Experiences of the colonial governments with paper money led members of the Constitutional Convention to endow the Congress of the federal government with the sole privilege to coin money.