In the last half of the eighteenth century the colonial government of Virginia was the last of the colonial governments to have recourse to paper currency. Paper money was not completely new to Virginia because tobacco notes, essentially warehouse receipts for stored tobacco, had circulated as money since early in the eighteenth century. Later, however, the Virginia colonial government issued fiat paper currency that was declared legal tender.
The circumstances that pushed Virginia to the paper currency brink were hardly rare in the history of paper money. Robert Carter Nicholas, a member of the House of Burgesses at the time but not a friend of paper money, explained the rationale as follows:
Money, the acknowledged Sinews of War was necessary, immediately necessary; Troops could not be levied and supported without it; of Gold and Silver, there Was indeed some, what Quantity I do not know, in the Hands of Individuals, but The Publick could not command it. Did there not result from hence a Necessity Of our having Recourse to a Paper Currency, as the only Resource from which we Could draw Relief?
The crisis that led to the issuance of paper currency was the encroachment of the French in what is now western Pennsylvania. After Major General George Washington returned from an expedition against the French and reported to the colonial governor about the military situation, the Virginia House of Burgesses in February 1754 authorized the treasurer to borrow 10,000 pounds at 6 percent interest. The treasurer reported back that there was no money to be had or borrowed. Metallic coinage, flowing out to Europe to pay for imports faster than it flowed in, was hard to come by in colonial Virginia.
At first the House of Burgesses balked at the issuance of paper money, but in May 1755 the Burgesses authorized the issuance of 20,000 pounds of legal-tender treasury notes for the use of General Edward Braddock. When Braddock’s expedition met with disaster shortly thereafter, the Burgesses authorized another 40,000 pounds. Further issues were made in 1756. The legal-tender status of these notes drew protests, at first ineffective, from British merchants not wanting to accept depreciated paper money in payment of debts.
In 1757 the Burgesses seized upon the idea of slashing government expenditures by exchanging interest-bearing treasury notes for noninterest-bearing notes. It voted to issue 100,000 pounds in noninterest-bearing notes to retire the interest-bearing notes still in circulation. To attract additional support for the idea of noninterest-bearing notes, the Burgesses authorized the issuance of an additional 80,000 pounds in noninterest-bearing notes to aid in the war effort. Although not paying interest, these notes were legal tender and were to be retired in the payment of taxes.
After 1762 the exchange rate between Virginia’s paper currency and the British pound began to rise significantly, meaning that more of Virginia’s paper currency was needed to buy British currency, usually about 40 percent more. Thus, 140 pounds of Virginia paper currency was needed to buy 100 British pounds. This currency depreciation forced British creditors to accept cheap paper, which was legal tender, in payment of debts owed by Virginia’s colonists. As Virginia’s paper currency was convertible into ever fewer British pounds, British merchants became more impatient with their losses. Parliament finally passed the Currency Act of 1764, which banned paper money as legal tender in private and public debts. The act applied only to the colonies south of New England because the Currency Act of 1751 had applied similar principles to New England. Virginia continued to issue paper money until the Constitution of the United States put the authority to issue money with the federal government.
Brock, Leslie V. 1975 The Currency of the American Colonies: 1700–1764.
Ernst, Joseph Albert. 1973. Money and Politics in America, 1755–1775.