Land Bank System (American Colonies)

During the first half of the eighteenth century, land banks infused paper currency into the economies of the American colonies, helping to relieve the shortage of money that hampered trade and industry. Aside from two short-lived exceptions, these were public banks, functioning under the auspices of colonial governments.

Land banks loaned paper money to citizens who put up collateral in the form of some sort of real estate, such as farmland or houses in town. Borrowers ran the risk of forfeiting their property in the event of default, although the land banks, as public institutions, enjoyed reputations for extending the terms for debtors in difficulty. The real estate nevertheless stood as security maintaining the value of the paper money, and foreclosure was a legitimate weapon. When foreclosure failed to produce sufficient revenue to redeem the paper currency, then governments were usually obliged to make good the paper money. The borrowers paid interest on the loans, which in most colonies went to pay governmental expenses. Often a local public board of property-owning citizens acted as a loan board, approving and disapproving loans as it saw fit. In other cases provincial officials at a higher level made these decisions. These boards or officials received an allotment of paper currency for issuance in a given locality.

During the seventeenth century several proposals were floated for organizing private land banks in the American colonies, particularly in Massachusetts, but invariably the colonial assemblies refused to grant charters for these private ventures. In 1712 South Carolina led the way in the land bank movement when it established the first public land bank in the American colonies. Other colonies quickly followed the example set by South Carolina. Massachusetts founded a land bank in 1714, Rhode Island in 1715, New Hampshire in 1717, New Jersey and Pennsylvania in 1723, North Carolina in 1729, Maryland in 1731, Connecticut in 1732, and New York in 1737.

The English government viewed all colonial paper money as a threat to English creditors who faced severe loses if colonists sought to wipe out debts with a round of inflation. In 1720 royal governors in America received orders from London to suspend the operation of any land bank, pending approval from the Privy Council. Both American and English officials, however, were slow to take action. The land bank in Massachusetts remained in operation until 1730 and the land banks in the other colonies until 1740.

The saga of the land banks is another chapter in the struggle of the American colonies to fill the vacuum in the colonial money supply left by the outflow of hard specie in payment for European imports. England aggravated the money shortage by squashing efforts to mint coins in the colonies and severely restricting the authority of colonial governments to issue paper money. After the American Revolution, the Articles of Confederation granted state governments authority to establish mints and issue paper currency. The United States Constitution gave Congress sole authority to coin money and regulate the money supply.