Exchequer orders of payment, which appeared during the seventeenth century, were the first paper money issued by the English government. The orders were what might be called state notes, in contrast to bank notes, which completely displaced state notes as circulating money in England, and later the United States. State notes are issued by government treasuries to finance government spending. Bank notes are liabilities of banks and are secured by the assets and investments of the issuing bank. Virtually all paper money today is bank notes issued by central banks.
In 1667 Parliament authorized Charles II to issue paper orders, or assignments of revenue, to whoever advanced cash or supplied goods to the government. A record book kept a list of the Exchequer orders according to their order of issuance. As tax revenue poured in, the Exchequer redeemed in cash the orders in the same sequence as they were issued. The first order issued was the first redeemed and so on. At first, the government assigned revenue from a particular tax to redeem an issue of orders, but later the government issued orders for redemption out of general revenue.
The Exchequer orders supplemented and eventually replaced tallies, which were the notched wooden sticks split into matching parts. Tallies served the same purpose as the orders but were not as amendable to written endorsements, and therefore were not as suitable as currency. The orders, like the tallies, were negotiable; that is, they were transferable to another party with a written endorsement. This rendered them serviceable as a medium of exchange.
The government issued Exchequer orders to department heads who either paid for supplies with orders or discounted orders to goldsmiths in return for cash. As a loan to the government, orders bore interest, sometimes as high as 8 to 10 percent, a handsome interest rate to goldsmiths who paid depositors as much as 6 percent interest to attract funds for discounting orders. The goldsmiths made a ready market for the orders, rendering them liquid and even more acceptable as money. The orders supplemented the scarce coinage in the English economy and offered an interest-bearing investment in small denominations (20 pounds or so) for the small investor.
In late 1671 the market for Exchequer orders became saturated, even at the high interest rates, and the goldsmiths stopped discounting orders for the government. On 2 January 1672 Charles II issued a proclamation, the infamous Stop of the Exchequer, suspending the redemption of the orders. The goldsmiths were left with vast holdings of unredeemable orders, and many went bankrupt. Interest payments were suspended until 1677. The money owed by the government later became part of the British public debt, but the credit of the British Crown was seriously impaired, and the issuance of Exchequer orders came to an end.
In 1696 the English government began issuing Exchequer bills. These bills paid interest, were acceptable in payment of most taxes, transferable by written endorsement, and convertible into cash on demand at the Bank of England. The popularity of these bills as a form of currency, allowed the government to drop the interest rate to as low as 1 percent per annum. Private banks complained that the bills competed with their own bank notes.
Later, in the eighteenth century, the government’s financing requirements outgrew the small denomination Exchequer bills, around 20 pounds, that were payable on demand. The government opted for bills paying higher interest rates and payable after a fixed time period. These bills were not suitable as a medium of exchange, and bank notes became the only paper money circulating in England.
The experience with the Exchequer orders struck a hard blow against the credibility of state paper money in England. If the Exchequer orders had turned out to be a successful experiment in paper money, England might have developed a monetary system based on state paper money, rather than bank notes.
