Encyclopedia of Money: Tabular Standard in Massachusetts Bay Colony

During two separate periods of rapid inflation, the Massachusetts Bay Colony put in practice a tabular standard in which debts payable in shillings were adjusted for changes in the purchasing power of the paper currency. Under the tabular standard, a 100 percent rise in the price level meant debtors owed twice as many shillings as they had borrowed. Without the protection of a tabular standard, the money that came back to creditors in repayment for loans had less purchasing power than the money they first loaned out.

The first experiment with a tabular standard occurred in 1742, when the legislature authorized a new issue of paper currency. At the same time the legislature enacted a so-called equity law, requiring the repayment of all debts of five years duration and contracted after March 1742 at a rate of 6 2/3 paper shillings to an ounce of silver. The most innovative portion of the law, however, empowered justices of the Massachusetts courts, in adjudicating disputes involving debts paid in paper currency, to “make Amends for the depreciating of said Bills from their present stated Value,” which was 6 2/3 shillings to an ounce of silver. That is, the justices could force debtors to pay more than 6 2/3 shillings to an ounce of silver to compensate creditors for the erosion in purchasing power of their money while it was loaned out. (Creditors often do not fully anticipate inflation and do not charge enough interest to compensate for inflation.) Every six months the purchasing power of the new bills was adjusted according to “the Rates that said Bills then commonly pass at in Proportion to Silver and Bills of Exchange payable in London.”

Debtors complained that the equity law only considered the exchange ratio between paper shillings and silver, which might only reflect speculative activity, and ignored the cost of living in paper shillings, which was more pertinent to their lives. In 1747 the legislature amended the equity law to provide that “when any valuation shall be made of the bills … in pursuance of said act [1742] … regard shall be had not only to silver and bills of exchange, but to the prices of provisions and other necessaries of life” (Lester, 1939). This law did not remove all disagreement about the rate of depreciation of the bills, but it diffused the issue until 1749 when Massachusetts received from England a large reimbursement for war expenditures and began redeeming its paper money.

The colonial legislature faced similar problems during the American Revolution when Massachusetts soldiers complained that their pay, set at the time of enlistment, had lost all but a tiny fraction of its purchasing power. To encourage reenlistment, the legislature computed the original pay in terms of what it would buy in Indian corn, beef, sheep wool, and sole leather, and compensated the soldiers accordingly for the balance owed them in four bond issues, bearing 6 percent interest. The bond issues matured in 1781, 1782, 1783, and 1784, successively.

Soldiers refusing to enlist received similar bonds maturing in 1785, 1786, 1787, and 1788. The legislature indexed the principal and interest on these bonds to the prices of four staple commodities. A statement on the face of these bonds read:

both principal and interest to be paid in the then current money of said state [Massachusetts], in a greater or less sum, according as five bushels of corn, sixty-eight pounds and four-sevenths parts of a pound of beef, ten pounds of sole leather shall then cost, more or less, than one hundred and thirty pounds current money, at the then current prices of the said articles.

(Lester, 1939)

The advent of fiat paper currency opened the possibility of episodes of rapid inflation that was unheard-of in monetary systems based upon precious metal standards, such as gold and silver. Rapid bouts of inflation wiped out the claims of creditors against debtors, setting the creditors against the debtors, and making the hidden seam separating debtors and creditors a major point of social division and political discontent. Massachusetts Bay Colony demonstrated Yankee ingenuity in developing a scheme for balancing the interest of creditors and debtors at a time when inflationary finance was inevitable.