Monetary History

8/12/2019 Monetary History

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o u r n d o l s ~ m n mSrud;r. Vol. 2 No. 4 pp 311 189Pcrpmon P n r r Ltd. 1918. Printed in nat Bnlain.

TH E MONETARY HISTORY OF AME RICA TO 1789:A HISTORIOG RAPHICAL ESSAYJEFFREY ROGERS HUMMEL

Deportment of Hiclory University of exas

In no other field is the crucial importance oftheory to history more obvious than in the fieldof economic history. One s knowledge of theconcrete historical events may remain unchang-ed, but if the economic theory applied to thoseevents is altered, then one s entire historical in-terpretation will of necessity be modified. Ahistorical account can be factually accurate andyet, if the informing economic theory is faulty,give a totally false interpretation. Furthermore,the validity of the theory, in economics at least,is often decided a priori to history, on someother basis. This procedure is not objectionableif the historian s theoretical paradigm is ex-plicit. However, it makes the task ofhistoriography more complex. One must notonly consider the overt interpretations and ex-planations offered by different historians; onemust also determine each historian s theoreticalframework, whether explicit or implicit, andsubject it to theoretical criticism.

The monetary history of the British coloniesin America and of the United States prior to theadoption of the Constitution in 1789 isextremely varied. Many different monetary ex-periments were tried by colonial and stategovernments. Unfortunately, the monetarytheory used by current historians is flawed and,consequently, their rendering of the period isunsatisfactory. In this paper, I will firstdescribe how changing monetary theories havebeen reflected in the historical accounts. Then Iwill criticize the current accounts and, using themonetary theory developed by Austrianeconomist^,^ offer a more accurate reinter-pretation of the monetary history of the period.

Before proceeding to an examination of

specific historians, it is necessary to understanda few key concepts and to be familiar with ageneral overview of the specific events. Themonetary history of America to 1789 can beconveniently divided into three periods: the col-onial period (up to 1775), the revolutionaryperiod (1775 1781), and the confederationperiod (1781 1789). Each period is distinctive,and while some historians have treated allthree, many have confined themselves to one orthe other.

The colonial period contained the greatestvariety of monetary practices, but these can beroughly divided into three categories.(1) Manipululion of the unit of account

The monetary standard for accounting pur-poses in the colonies was the English pound,shilling, and pence. However, most of the coinsin the colonies were Spanish or Portuguese. Thestandard Spanish dollar contained 387 grains ofsilver, while the English silver shilling weighed86 grains. Therefore a dollar should have beenworth four shillings and six pence. The col-onies, in the hope of attracting foreign coin andspecie, arbitrarily overvalued the dollar interms of shillings, or in other words, devaluedthe unit of account. This technique was firstadopted in 1642 when Massachusetts declaredthe Spanish dollar equal to five shillings. Othermethods used to attain the same results were,instead of devaluing the shilling in terms ofdollars, to devalue the shilling in terms of silveror gold. Either way, the process led to com-peting devaluations, as high as seven shillingsand six pence to the dollar, and differentmonetary standards in each colony. Anotherexpedient employed to hold coins by the col-onies was to forbid their export.


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374 JEFFREY ROC3ERS HUMMEL2) ills of creditBills of cred it were simply fiat pape r money.They were issued in one of two ways. O ne waywas for the government to print the money andthen spend it to cover expenditures, usually thefinancing of a war effort. Future taxes would

be pledged towards retiring the bills. The billswould be withdrawn from circulation by beingpaid directly as taxes or by being redeemed inspecie that had been collected through taxes.Often, however, when the pledged taxes camedue, the bills would be reissued rather thanwithdrawn. This type of currency finance wasfirst employed in Massachusetts in 1690 andeventually em braced at o ne time or another byall the colonies.[The other way of issuing bills of credit wasthrough land banks. Instead of spending themoney directly, the issuer would loan themoney out at interest with land as security.When the principal on the loan was repaid, thebills might either be reloaned or retired. Theissuer could be a gro up of private individuals orthe government. Although private land bankswere frequently proposed, they only operatedbriefly during the 1740s in Massachu~etts.[~'Government land banks appeared in all thecolonies.

It shou ld be noted that the term bills ofcredit is used here in the generic sense, in-cluding both types of paper money. Sometimesthe term is used to refer only to paper moneypaid ou t directly t o cover government expenses.The term is a misnomer, anyway, because inneither ca se was the bill of credit a credit instru -ment. It did not represent borrowings of thegovernment repayable in m oney at some futuredate; it was money. This was true despite thefac t that bills of cred it sometimes paid interest.Colonial governments also engaged in actualborrowing. For this they issued treasury notescomparable to private bills of exchange, andthese, of course, were credit instruments andno t money. Unfortu nately, the colonial govern-ments blurred the distinction between credittransactions (involving the exchange of a pre-sent good f or a claim to a future good) and cur-rent transactions (involving the exchange of apresent good for a present good) not only bypaying interest o n som e bills of credit but also

by issuing so-called treasury notes tha t were,in fact, paper money.3) Legal tenderAlthough often treated in conjun'ction withbills of credit, the practice of legal tender is

conceptually distinct. Legal tender could be oftw o types. Pub lic legal tender established whatwould be accepted as money for payment oftaxes, quit-rents, and other public levies. Bydeclaring something public legal tender, thegovernment obviously helped foster its use asmoney. Private legal tender decreed what thegovernment would perm it t o be used in the pay-men t of debts and the fulfillment of contracts.It had the effect of fixing the value of themonetary go od in terms of the unit of account.For instance, when tobacco was declared legaltender, it had to be set at a certain rate ofpounds of tobacco to shillings. This fixed ratewas either set by sta tute or left up to the courts .If two o r more go od s were legal tender, then theexchange rate between them was officially fix-ed. E xchan ge rates set by statu te never coincid-ed with market exchange rates; exchange ratesse t on an ad hoc basis by the courts mightpossibly d o so. Th e discrepancy between legalan d ma rket rates of exchange was the source ofperennial complaints by creditors, because itallowed debtors to pay their debts with over-valued money. Private legal tender a t differenttimes was used to fix the exchange rates bet-ween quite a variety of goods: wampum andspecie, tobacco and specie, heavy coins andlight coins, paper money and specie, gold andsilver, etc. Paper money was frequently, hutno t always, declared private legal tender by theissuing colony. De facto, paper money wasalways public legal tender (if only a t the lo anhank that had issued it or fo r the taxes pledgedtoward its redemption), although Parliamen-tary restrictions p revented this f rom always be-ing formally admitted.Oth er monetary experiments of limited scopeand less interest include Massachusetts' suc-cessful but temporary running of a mint bet-ween 1652 an d 1684' an d Virginia's sy stem oftobacco warehouses wi th ful ly backedwarehouse receipts circulating as moneysubstitutes.


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75HE MONETARY HISTORY OF AMERICA TO 789: A HISTORIOGRAPH ICAL ESSAYGreat Britain also had an impact on its col-

onies' monetary practices. Throughout the col-onial period, Britain prohibited the export ofEnglish coins to the colonies and 'forbade theestablishment of colonial mints. Too much,however, has been made of these restrictions.The ban on exports applied only to Britishcoins, and not to specie, which could be freelyexported. ~h 'us , ritish coins could be melteddown and exported without hindrance. Also,the restriction did not apply to foreign coins.

England looked askance at the colonies'competitive devaluations of their units of ac-count, and in 1704, the Crown proclaimed thatsix shillings to the dollar was the maximumdevaluation permitted. Because of widespreadevasion, Parliament enacted this proclamationinto law in 1707.

The British government was particularlyunhappy with colonial bills of credit. At first itattempted to restrain the colonies through in-structions to the royal governors and suspen-sion clauses. When this proved ineffective,Parliament passed the Currency Act of 1751.This act applied only to New England. It con-fined the issue of paper money solely to impor-tant government expenses, it placed limits onthe quantity issued and the period of redemp-tion, and it barred making paper moneyprivate legal tender. The Currency Act of 1764covered the rest of the colonies, and it pro-hibited making bills of credit legal tender,public or private.

During the revolutionary period, the Con-tinental and state governments financed the wareffort through massive emissions of bills ofcredit. A serious hyperinflation resulted. Allstates made the bills of credit legal tender, andmost of them instituted formal price fixing.Eventually, the paper money became worthless.At the end of the revolutionary period, theBank of North America was founded. It was anationally chartered bank which loaned outpaper money bank notes. It operated with afractional specie reserve, and most of its loanswere made to the government. The remainderwere made to private individuals againstvarious forms of security.

With the confederation period, not only hadthe emission of Continental paper money ceas-

ed, but the Bank of North America lost its na-tional charter and became a state chartered in-stitution. National coinage legislation wasdiscussed, but nothing was enacted. Many ofthe states returned to the issue of bills of credit.Three states chartered banks.

During the colonial period, monetary policywas an important and controversial issue. Thedebate was recorded in a rich pamphletliterature. On the hard-money side, the leadingpartisan was Dr. William Douglass, a Scottishphysician and scientist who had settled inBoston. His most famous pamphlet, ADiscourse Concerning the Currencies of theBritish Plantations in America , was publishedin 1740. In it, he contended that There cantherefore be no other proper Medium of Trade,but Silver, or Bills of Exchange and Notes ofHand payable in Silver at a certain (I sos orPeriod, which by a currant Discount are reduci-ble to Silver ready Money, at any Time. Heheld paper money in scorn. To make a Bill orNote bearing no Interest and not payable tillafter a dozen or score of Years, a legalTender in Payment of Debts, is the highestof despotick and arbitrary Go~ernment. ~''Douglass felt that increasing the quantity ofmoney only depreciated the value of eachmonetary unit and caused price inflation. Infla-tion hurt creditors, laborers, and those livingon fixed incomes, and represented an insidiousform of taxation. Legal tender laws coupledwith paper money drove specie out of circula-tion, increased the foreign exchange rate, andbrought about an unfavorable balance of trade.Only a specie currency could maintain stableprices, attract specie, and balance foreigntrade. If banks issued paper money, it must bebacked by a fractional specie reserve.

Douglass' most formidable opponent wasBenjamin Franklin. His Modest Enquiry intothe Nature and Necessity of a Paper-Currencyappeared in Philadelphia in 1729 and hasbecome a classic. Franklin argued that Thereis a certain proportinate Quantity of Money re-quisite to carry on the Trade of Country freelyand currently; More than which would be of noAdvantage in Trade, and Less, if much less, ex-


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76 JEFFREY RCU ERS HUMMELceedingly detrimental to it. t@l The colonieSsuffered from a scarcity of money, brought onby an unfavorable balance of trade, and thisscarcity depressed the economy. Issuing papermoney brought economic prosperity and, ifdone in moderation, could avoid depreciation.In addition, since paper money was cheaper, itprovided the benefits of a medium of exchangeat far less cost than specie.

The pamphlets of Franklin and Douglassshow the emergence of two opposing schools:the advocates of hard (metallic) money and theadvocates of managed money. Without toomuch simplification, most historians treatingthis question fall into one of these two schools.Variations exist within each position, but mostof the arguments that historians subsequentlyadopted were anticipated by Douglass orFranklin.

The hard-money school's interpretationdeveloped earliest. Its theoretical underpinningwas the quantity theory of money, which statesthat the value of money depends upon the sup-ply of money and the demand for it. If the sup-ply decreases, other things remaining equal, thevalue of money will go up and the price ofgoods will fall. Conversely, if the quantity ofmoney is increased, the value of money will falland prices rise. Modern writers often accuse theold hard-money advocates of using a crudequantity theory in which the demand for moneyis ignored. This is untrue; even the earlieststatements of the quantity theory make explicitthe ceteris paribus assumption on which theyare based. The old hard-money theoreticiansdid not ignore the demand for money; theymerely thought that it was fairly stable in theshort-term, a question which economists stillargue over.

The hard-money school's policy goal wasmoney that maintained a stable value. Whetherthis goal was achieved could be measured intwo ways, by the stability of the exchange ratebetween colonial monies and English money orby the stability,of prices. Hard-money writersusually focused on one or the other, although afew considered both. The policy prescriptionmost likely to achieve this goal, according to

these writers, was the adoption of the preciousmetals, gold or silver, as the monetary stan-dard. If governments were permitted to printmoney, they would inevitably print too muchand cause depreciation. Only specie could berelied upon to provide stability.

William M. Gouge, the Jacksonianeconomist, was the first hard-money theoreti-cian to write a monetary history of the UnitedStates. Published in 1833, it was entitledShort History of Paper Money and Banking inthe United state^.^^ Gouge's initial fourchapters are on colonial commodity money,colonial paper money, Continental papermoney, and the Bank of North America,respectively. Although now outdated, Gouge'shistorical research was impressive for the time.He condemned legal tender laws, devaluationsof the unit of account, and bills of credit. Heincluded tables showing the depreciation ofboth colonial and Continental paper money.He even attacked the Bank of North America.In that respect he went much further thanDouglass before him or most hard-moneywriters afterwards by consistently opposing allpaper money, even when issued by hanks withspecie reserves.

Despite its pioneering research, Gouge'swork was primarily polemical. Following it,however, came several works devoted solely tohistorical scholarship. In 1839 Joseph B. Felt, aclergyman working in the Massachusetts ar-chives, wrote An Historical Account ofMassachusetts Currency. ' Henry Bronson ex-amined the monetary records of Connecticutand published the results in the Papers of theNew Haven Colony Historical Society in1865.'sl The next year, John H. Hickcox's AHistory of the Bilk of Credit or Paper MoneyIssued by New Yor k from 1709 to 1789''01ap-peared. At the same time, Henry Phillips com-piled the two volume Historical Sketches ofPaper Currency of the American ColoniesPrior to the Ado ption of the Federal Constitu-tion.' ] in his first volume, Phillips reprintedan 837 pamphlet on Rhode Island by Elisha R.Potter,' ] and included essays of his own onPennsylvania, New Jersey, and Virginia, with atwo page discussion of Vermont's paper-moneyissue of 1781. The second volume he devoted to


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377HE MONETARY HISTORY OF AM ERICA TO 789: A HISTORIOGRAPHICAL ESSAYContinental money.Because these works were scholarly effortsand, more importantly, because they were lessconcerned with the economic impact of papermoney than with the details of when bills wereemitted and how many, their theoretical biaswas not pronounced. Nevertheless, Felt, Bron-son and Potter can be placed without reserva-tion in the hard-money camp. Phillips andHickcox are not as easy to position. Phillips didcondemn as harmful the issues of Virginia, NewJersey, and the Continental Congress, but withPennsylvania, a colony noted for the restraintof its policies and the relative lack of deprecia-tion by its currency, he concluded that the issueof fiat money was prudent and successful.Hickcox reached a similar conclusion withregard to New York.In 1874, William Graham Sumner made abrief monetary survey of the period prior to1789 in A History of American Currency.lalThis work, as Sumner himself admitted, wassketchy and rough, merely pointing the direc-tion toward further research. Its treatment ofboth the colonial and confederation periodsfocused mostly on New England and took ahard-money attitude. One of Sumner's conten-tions was that the unfavorable balance of tradeof the colonies was due to a preference forforeign goods and capital over specie on thepart of the colonists. The first edition of AlbertS Bolles' The Financial History of the Un itedStatesl ] was published also in 1874. Bollesdismissed the colonial experience with the state-ment: Paper money had been tried in all theColonies, and nowhere had the experimentworked satisfactorily, save inPennsylvani.a. [ ~ His first volume, based onmuch new research, covered national financeduring the revolutionary and confederationperiods and confirmed the hard-money posi-tion. Sumner examined the same territory ineven greater detail in his two volume TheFinancier and Finances of the AmericanRevolution. These volumes, unlike hisprevious work, were scholarly and authorita-tive. The book combined a financialhistory of the American Revolution with abiography of Robert Morris. In it emergedwhat has become the standard interpretation.

The Continental paper money used to financethe Revolution was seriously over-issued andgenerated a hyperinflation. Sumner denouncedpaper money for causing a social palsy .' ]He took a favorable view of Morris and ap-proved of the Bank of North America as asound financial scheme. Charles J. Bullocktook nearly the identical stance in his work onthe same topic, The Finances of the UnitedStates from 1775 to 1789, With EspecialReference t o the Budget.Im1His work only dif-fered from Sumner's in that it was an institu-tional rather than a political history. Anotherinstitutional history relating to national financepublished at this time was Lawrence Lewis,Jr.'s brief History o the Bank of NorthAmerica: The First Bank Chartered in theU ni t ed S t a t e~ . l ' ~ ]ewis viewed his subjectpositively.While Bolles, Sumner, and Bullock wereworking out the hard-money position on na-tional finance, a number of studies bolsteredthe hard-money case at the state and coloniallevel. Charles H J Douglas' The FinancialHistory of Massachusetts from the Organiza-tion of the Massachusetts Bay Colony to theA m e r i c a n R e v ~ l u t i o n [ ~ ~ ~ave extensive spaceto monetary affairs. Douglas blamedMassachusetts' paper-money policies on themasses of impoverished debtors. WilliamZebina Ripley's The Financial History ofVirginia, 1609177612'' devoted two chaptersto monetary issues. Ripley praised Virginia, thelast colony to issue bills of credit, for avoidingthe temptation for so long. C. W Macfarlane,in his article on Pennsylvania Paper Curren-~y , [~ resented extensive price series formany commodities. Macfarlane's price infor-mation was taken from colonial newspapersand was amazingly complete. Although a hard-money advocate, Macfarlane was forced to ad-mit that bills of credit had suffered littledepreciation in Pennsylvania. The moststrenuous opponents of paper money will hard-ly deny, that under such circumstances [asprevailed in Pennsylvania] the value of almostany currency might be maintained. The dif-ficulty is, that few legislative bodies are likely tobe as wise as the Assembly of Pennsylvaniaseems to have been during this period. lZf1


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78 J FFR Y ROG RS HUMM LFrank Fenwick McLeod wrote The History ofFiat Money and Currency Inflation in NewEng land from 1620 to 1789 . '1 He fou nd thatthe fluctuating a nd complicated currencyretarded business and crippled commerce.I n f l a t i o n w as t r i u m p h a n t , b u s i n e s sparalyz ed .[2a1 Charles Bullock gatheredtogether th ree of his studies in his Essays on theMonetary History of the United Twoof them gave the history of paper money instates that had not previously been treated,North Carolina and New Hampshire. Thethird, Three C enturies of Cheap Money in theUnited States , was a general comm entary.The culmination of these colony and statestudies, and perhaps the premier work of thehard-money school, was the massive twovolume Currency and Banking in the Provinceof Massachusetts Bay by Andrew McFarlandDavis.[ ' Imposingly researched , it examinedin detail the political struggles surroundingMassachusetts' currency and banking legisla-tion throug h the Parliame ntary ban of 1751. Italso surveyed policies in other New Englandcolonies. It analyzed the economic conse-quences of the various policies, blaming thebills of credit for driving specie out of circula-tion a nd raising exchange rates. Davis' resear-ches led to his editing, in four volumes underthe title of Colonial Currency Reprints,1682 1751,[ 1 the colonial pamphlet literatureon money.Eventually, the hard-money position foundits way into mo re general secondary works andtexts. One of the most popular of these wasHorace White's Money and Banking: II-lustrated by American Hist~ry . [ '~lWhitedevoted several chapters to colonial commoditymoney, legal tender, bills of credit, colonialbanking, and the Bank of North America.The pamphlets and records of the colonialperiod are filled with accounts of the distressand demoralization caused by depreciatedpaper made legal tender , he wrote; the em is-sion of bills of credit on loan was, in effect, aconspiracy of needy landow ners against the resto f t h e c o m m ~ n i t y . [ ~ ~ later editions of A.Barton Hepburn's A History o f Currency in theUnited S t a t e ~ [~ ' llso included chapters presen-ting the hard-money line on colonial and Con-

tinental paper money. Hepburn even denounc-ed the practices of Pennsylvania. Finally, thehard-money case was cautiously but ablydefended in Davis Rich Dewey's FinancialHistory of the United Sta tes1 ]One notion th at has often been attributed tothe hard-money scho ol is that paper money wasalways instituted a t the behest of po or, a grariandebtors. The hard-money school did recognizethat depreciating money helped debtors andhurt creditors, giving debtors an incentive forsupporting paper money, but they did notnecessarily equate debtor interests withagra rian o r lower-class interests. Only Douglass,Bullock, and White hinted a t such an explana-tion, and none of them developed it at anylength. If the poor-agrarian-debtor thesis cameto dominate historical interpretations, the hard-money school is not responsible. The respon-sibility really belongs to the historians of theprogressive school, none of whom wrotespecifically on money .

After the turn of the century, the hard-money school began to lose its prominence.This was in part due to the increasing pop ular-ity of the ideas of managed m oney. Even beforethe Keynesian revolution, economists were con-cluding that government management of themoney supply would be much more efficientthan reliance upon the precious metals. Thefirst signs of a shift in historical interpretationcame with the publication of several new colonystudies. Clarence P Gould's Money andTransportation in Maryland, 1720 1765 'lappeared in 1915, and in 1923 Kathryn LBehrens published her Paper Money inMaryland, 1727 1789.[a41 ould, who devotedonly one chapter t o transportation, was almostecstatic over Maryland's paper-money policy.Considering the peculiar benefits to grain andtobacco culture, the conveniences offered totrade, the exceptionally high exchange that th ebills maintained throughout most of their life,and the faithful redemption of every shilling a tface value, it is hardly to o much t o say that thiswas the m ost successful paper money issued byany o f the colonies. ['61 B ehrens, whose study


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THE MO NETARY HISTORY OF AMERICA TO 1789: A HISTORIOGRAPHICAL ESSAY 379extended into the revolutionary period, was on-ly slightly less enthusiastic, and she agreed thatAs a colony Maryland had solved the problem

of paper Although not assubstantial as the studies of Gould andBehrens, Richard S. Rodney's ColonialFinances in De laware [371lso saw paper moneyas necessary and beneficial. Another state studypublished about the same time was WilliamEstill Heath's article, The Early ColonialMoney System of Georgia , a purely descrip-tive account that took no position on thedesirability of paper

In 1934 Curtis Putnam Nettels applied thenew interpretation foreshadowed in the worksof Gould and Behrens to all the colonies. Hisbook, The Money Supply of the American Col-onies Before 1720,[381was the first generaltreatment from the managed-money school.Actually, over half the book discussed not thecolonial money supply but the colonial balanceof payments. Nettels' consideration of thisissue, however, provided the groundwork forhis argument that the unfavorable balance ofpayments caused a chronic shortage of moneyin the colonies:

The colonies as a debtor region were con-fronted with a continuous adverse balance ofpayments, and their available specie was repeatedlydrawn away to creditors in Europe. The scarcity ofspecie in Am erica gave birth to a widespread belief thatprices of colonial products were ruinously low becausemoney was wanting. One solution of these dif-ficulties appeared t o be an enlargement of the volumeof c~rrency . [ ~ lOn this basis, Nettels justified all of the col-onial monetary experiments: the making ofcommodity money legal tender, the devaluationof the unit of account, and the issue of bills ofcredit. All of them were efforts by the coloniststo attain some economic independence.

Even more outspoken in his defense of col-onial monetary practices was the economistRichard A. Lester. In his book, Monetary Ex-periments: Early American and Recent Scan-d i n a ~ i a n , ~ ~ ]e refined Nettels' argumentabout the shortage of money. Precious metalswere too expensive a form of money for the col-onies. By using cheaper paper money, the col-onists were conserving resources and makingthemselves wealthier. Previous historians had

distorted the colonial experience by ignoringthe middle colonies. Since there was relativelylittle depreciation in the middle colonies, mostof the writers have played up the experience ofthe New England colonies. There the deprecia-tion of the currency was more extreme. Thiswas due to a peculiar currency arrangementin which the paper money of each NewEngland colony was freely accepted withoutdiscount in the other New Englandcolonies .1421Thus, each colony had a built-inincentive to issue bills of credit withoutrestraint. The middle colonies, on the otherhand, particularly Pennsylvania, used soundmoney management to avoid depressions andstimulate the economy. Lester argued thatwithout currency emissions, prices would havefallen and depression would have resulted. Inshort, our colonial forefathers were muchmore intelligent on money matters than hither-to they have been given credit for being .t431

Although he provided a strong theoreticaljustification for the managed-money school,Lester's research was limited. The work thatfinally nailed down the managed-money inter-pretation historically was Leslie Van HornBrock's dissertation, The Currency of theAmerican Colonies, 1700 1764: A Study inColonial Finance and Imperial Relations .t441Overlapping and bringing forward Nettels' ac-count through the Currency Act of 1764, it wasthoroughly researched and has become thestandard treatment of the subject. It gave ahistory of the monetary policies in each colony,in the process confirming the conclusion thaton the whole paper money was salutary.Because of the specie drain, it was needed, andmost colonies issued it with enough restraint tobe successful.

Although the managed-money triumvirate ofNettels, Lester, and Brock has supplanted thehard-money school, both groups share certainprinciples. Both accept the quantity theory ofmoney, and both have, at least implicitly,stability of purchasing power as their policy ob-jective. They differ as to the most efficientmeans of attaining that objective. Even on thehistorical record, their differences are not asgreat as at first they might seem. The hard-money advocates freely admitted that the


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38 JEFFREY ROGERS HUMMELmonetary policy of Pennsylvania resulted inrelatively less depreciation. As Gouge put it,All things go by comparison. The credit billsof Pennsylvania were so much better than thoseof the other Governments, but it was not afact that they never sunk below the value of thegold and silver which was current in the colonybefore the first emission of its Forthe hard-money school, Pennsylvania's ex-perience was exceptional; the prevailing tenden-cy was toward massive depreciation. Themanaged-money school, on the other hand, ad-mitted that even in Pennsylvania some fall inexchange rates took place just not enough tobe concerned about. They also agreed that inNew England and during the Revolution toomuch money did result in serious inflation. Forthem, however, these cases were aberrations ex-plained by extenuating circumstances (war, forinstance); Pennsylvania's experience wastypical.While Nettels, Lester, and Brock were revis-ing the interpretation of colonial finance, a fewhistorians were doing additional research on therevolutionary period. Ralph V Harlow'sSome Aspects of Revolutionarygave a broad overview of the issue of papermoney by the Continental Congress and thevarious states. William B. Norton, in PaperCurrency in Massachusetts during the Revolu-tion ,[ I noted the relative conservatism ofMassachusetts' monetary policies during theRevolution. Massachusetts placed greaterreliance on borrowing than on bills of creditand attempted scrupulously to repay creditors.Neither of these works attempted to revise theprevious negative historical verdict on revolu-tionary bills of credit. Also important wasAnne Bezanson's Prices and Inflation Duringthe American Revolution [481which providedincredibly complete price series for the period.Earlier Bezanson had coauthored with RobertD. Gray and Miriam Hussey a similar bookabout Prices in Colonial TheBezanson-Gray-Hussey series were those usedby Lester in his study of Pennsylvania currency.William I. Davisson's Essex County PriceTrends: Money and Markets in 17th CenturyMa ss ac hu ~e tt s ,[ ~~ 1ave colonial pricestatistics for a different area and an earlier cen-

tury. Davisson's figures only went up to 1685,before the first paper-money emission, but theycovered the years during which theMassachusetts mint operated, which Davissonfelt had had a stabilizing influence on prices.The most recent study of colonial prices is JohnJ. McCusker's Money and Exchange in Europeand America 1600 1775: AThis monumental work of research gives serieson the exchange rates between all the coloniesand London, painstakingly pieced togetherfrom a huge array of contemporaryquotations.Most of the research done after Nettels,Lester, and Brock has built upon or refinedtheir approach. Theodore Thayer's generalcommentary on The Land-Bank System in theAmerican was not totally un-critical. He felt that land banks had failed inNew England, both because they over-issuedmoney and because the security they requiredwas inadequate. Nevertheless, in four coloniesPennsylvania, New Jersey, New York, andMaryland the system was on the whole suc-cessful and is deserving of more attention thanit has been given. [531E James Ferguson, inhis Currency Finance: An Interpretation ofColonial Monetary Practices ,[541 ostensiblydealt with both the land bank and currencyfinance methods of emitting bills of credit,although he gave greater consideration to thelatter. He surveyed the historical literature anddid battle, again, with the hard-money school.An effort will be made to show that in themiddle colonies, from New York to Maryland,paper money was successful. Secondly, it willbe argued that except in New England and theCarolinas, paper money did not engender anygreat conflict between broad classes of thep o p u l a t i ~ n . [ ~ ~ ~erguson later reworked hisarticle and made it the first chapter of his book,The Power of the Purse: A History ofAmerican Public Finance 1776 1790.[561Thebook was a welcome addition to the literatureon finance during the revolutionary and con-federation periods, but its analysis of the Con-tinental inflation was quite standard.Ferguson's real contribution was his coverageof the debt and taxation questions. He alsopainted a less favorable picture of Robert Mor-


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THE MONETARY HISTORY OF AMERICA TO 789: A HISTORIOGRAPHICAL ESSAY 38ris than had Sumner. Bray Hammond's highlyoverrated Banks and Politics in America: Fromthe Revo lution to the Civil addressed itsfirst two chapters to pre-1789 monetary history.Predictably, Hammond thought highly of theBank of North America. He, alone amonghistorians, even praised Rhode Island's emis-sions of paper money. His main purpose,however, was to discredit the myth that papermoney was supported by poor, agrariandebtors. O n the contrary, the dem and for papermoney, claimed Hammond, whether bills ofcredit, Continentals, or bank notes, came fromsophisticated merchants and commercial in-terests.Of the few state studies done afte r 1941whenBrock wrote his dissertation, the only one notholding t o the managed-money line was DonaldL. Kemmerer's Paper M oney in New Jersey,1668 1775 .1581Kemmerer, in fact, found aboom bust cycle accompanying New Jersey'spaper money policies. When new paper-moneywas injected into the econom y, an inflationaryboom would result. When the money wasredeemed, a deflationary depression followed.Kemm erer concluded that the method of sud-denly expand ing and gradually contracting thepaper-money supply was largely responsible forboth Peter E. Ellertsen, on the otherhand, thought much more highly of NewJersey's policies in his article, Prosperity andPaper Money: The Loan Office Act of1723 .[801Looking at a shorter time span, hedecided that the loan office was responsible forNew Jersey's great prosperity. Richard M.Jellison's Paper Currency in Colonial SouthCarol ina : A R ea p p ra i~ al ~ ~was a lsofavorable. The first period, from 1703 to1731, was one of much experimentation andmay be characterized by depreciation. Theyears following 1731 witnessed not only com-plete acceptance of the medium bu t also stabili-ty in its value. t621Jellison's conclusions weresignificant because managed-money historianshad usually conceded that South Carolina'spaper-money policies were as bad as those inNew England.~e31Bray Hammond was probably the most vocalin his efforts to debunk the poor-agrarian-debtor thesis, but he was not the most per-

suasive. Ten years earlier, Joseph D orfman, inhis examination of the colonial monetarydebate in The Economic Mind in AmericanCivilization discovered that Contrary to thetradition that historians have perpetuated, acritical analysis of the contemporary literatureindicates that the proponents as well as thecritics [of paper money] were not poor debtorsor agrarians, but for the most part officials,ministers, merchants, and men of substanceand learning in general . [ B 4 1 Dorfman's conclu-sion was confirmed by George Athan Billias. InThe Massachusetts Land Bankers of 1740,[851Billias systematically investigated the pro-ponen ts and opponents of Massachusetts' 1740land-bank scheme and found that the poor-agrarian-debtor thesis did not hold. Herman J.Belz, in two journal article^,[^^^ extended thedescription of political forces battling overpaper money in Massachusetts both forwardand backward from 1740. Although he foundsome agrarian support for paper moneyschemes, Belz agreed that the most significantsuppo rt came from merchant groups.Along w ith the political forces within the col-onies fighting over monetary policy, historianshave explored the implications of the moneyissue for the colonial relationship with GreatBritain. Some argue that the colonists' frustra-tions with British monetary restrictions con-tributed to the Revolution. Robert M. Weirfound in his article, North Carolina's Reac-tion to the Currency Act of 1764, [e71that thiswas true in North Carolina. Jack P . Greene andRichard J. Jellison, in The Currency Act of1764 in Imper ia l Colonia l Rela t ions ,1764 1776 ,[881 examined the various eva-sions of the Currency Act that occurred in allthe colonies outside of New England and thecolonial effort to get the act reinterpreted,modified, or repealed. They decided that theact was an important psychological irritant inBritish -Am erican relations. Lawrence H. Gip-son's Virginia Planter Debts before theAmerican R e v o l u t i ~ n ~ ~ ~ ~escribed the genesisof the Currency Act of 1764 and showed how itoriginated from the desire of British creditorsto protect themselves from Virginia's monetarylegislation. Jack M. Sosin's discussion of theCurrency Act and the colonial reaction to it in


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38 JEFFREY ROGERS HUMM LImperial Regulation of Colonial PaperMoney, 1764- 1773 [701treated in less detailthe material covered by Gipson and Greene andJellison and reached the same conclusion.One area of monetary history that has cap-tured the interest of at least one historian is

counterfeiting. Counterfeiting was endemic incolonial and revolutionary America, and attimes caused very serious problems for the col-onies' paper money issues. The counterfeitingof Continentals was especially serious. KennethScott investigated this topic in his book,Counterfeiting in Colonial Am erica , 17 I and innumerous articles and monographs on in-dividual colonies. [ 7 2Many of Scott's contributions appeared innumismatic journals, which have a special in-terest in counterfeiting. Although largely ig-nored by mainstream historians, thenumismatic discussions of colonial money areexcellent references. Often they are more com-prehensive and thorough with regard to suchmatters as the dates, the quantities, and thedenominations of paper money emissions. EricP. Newman's The Early Paper Money ofAmerica is the standard numismatic guide,superseding all previous catalogues and pro-viding extensive bibliographical references tothe remainder of the numismatic literature.[731

The writings on the political ramifications ofmonetary policy so far discussed those ofBillias, Greene and Jellison, Sosin, and theothers if not directly reinforcing themanaged-money school's interpretation, are atleast consistent with it. Only a few recentwritings have contradicted the managed-moneyorthodoxy in any fashion. The first of these,ML. Burstein's Colonial Currency and Contem-porary Monetary Theory: A Reviewwas highly technical and not basedon a wide range of secondary material (let aloneprimary sources), but it did contain somethoughtful theorizing. Burstein comparedfigures on Pennsylvania's money supply withdata on prices in Pennsylvania and England,the exchange rate, and interest rates. His con-clusion was that reasonably long-run

elasticities of liquidity preference [were1 veryhigh What that means is thatchanges in the money supply did not matter. Inthe long-run, prices in Pennsylvania were com-parable to those in London and the exchangerate was stable regardless of what happened tothe quantity of money. By reaching this conclu-sion, Burstein struck at the heart of both thehard-money and managed-money schools. Ineffect, the demand for money was so flexiblethat the colonists could absorb into their cashbalances as much money as was printed and themuch touted money shortgage was a mirage.This premise, that money does not matter, issuch an important feature of modern Keynesianeconomics that it is a wonder that no one beforehad applied it to the colonial experience. Un-fortunately, even if one accepted Burstein'stheoretical premise, his use of limited datamade his conclusions highly tentative.Another author who questioned the wholequantity-theory framework was Joseph AlbertErnst. One of Ernst's early contributions, anarticle entitled Colonial Currency: A ModestInquiry into the Uses of the Easy Chair and theMeaning of the Colonial System of FreelyFloating International E~change ,~~']as areply to Burstein. Ernst expanded the article in-to a chapter of his book, Money and Politics inAmerica, 1755- 1775: A Study in the CurrencyAct of 1764 and the Political Economy ofRevolution.[771Like Burstein, Ernst contendedthat the quantity of money did not really matterinternationally for the determination of ex-change rates. Exchange rates were governed bychanges in the balance of payments, which inturn were determined by the sale of colonial ex-ports, the purchase of imports by colonists, andthe inflow of English capital. Unlike Burstein,Ernst inconsistently maintained that the quanti-ty of money did matter domestically, and he ac-cepted the managed-money school's positionon the necessity of printing money to alleviatethe specie shortgage. The rest of his book was adiscussion of the politics surrounding the Cur-rency Act of 1764 in which Ernst argued for anew economic interpretation of theRevolution.[781He covered much the same ter-ritory as Weir, Greene and Jellison, Gipson,and Sosin, but in doing so he presented an ac-


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THE MONETARY HISTORY OF AMERICA TO 789: A HISTORIOG RAPHICAL ESSAY 383count of colonial monetary practices thatstarted in 1764, where Brock leaves off.

While Burstein and Ernst both attacked thequantity-theory framework used by the hard-money and managed-money schools, theirpolicy recommendations were more congenialwith managed money. In Ernst's case thisfollowed from his acceptance of the domesticimportance of the money supply. In Burstein'scase, since the quantity of money does not mat-ter, there cobld be no serious objection to in-creasing it through the printing press. Only onerecent writer has disputed the managed-moneyschool's policy recommendations: Roger W.Weiss, in his article, The Issue of PaperMoney in the American Colonies,1720 1774 .1791Weiss argued that the col-onies suffered from no real scarcity of specie.Using data from Pennsylvania and Boston, heattempted to demonstrate that even without theemission of paper money, prices would haverisen rather than fallen.[801Colonial moneyissues were not well managed anyway; Theirvolume changed erratically and with a largeamplitude. This was due to the fact that theissues were made to meet the needs of the col-onial treasuries and these needs rose greatly intimes of He adds that it should beclear that a monetary system, the changes inwhose issues of paper money depend on the er-ratic fiscal needs of government, will not verywell serve the need for maintaining a stablemoney supply or of balancing the internationalmovements of specie .[821By casting doubt onthe government's ability to manage the moneyand by denying the colonial shortage of specie,Weiss is resurrecting the hard-money approach.More recently, Weiss has bolstered his conclu-sions with a study of The Colonial MonetaryStandard of Massachusetts .~831

In appraising the state of historical researchon money in America before 1789, one glaringdeficiency is immediately obvious. There is nogeneral overall treatment of the monetary prac-tices in the states during the confederationperiod. Despite the seeming importance of thisperiod toward influencing the monetary ar-

rangements in the Constitution, it is usuallytreated as an addendum to the revolutionary orcolonial period. Some, though not all, of thestate studies go through to 1789 [841

The revolutionary period is adequatelycovered by both general and specific works, butthey all share a common interpretation. Allagree that bills of credit issued by the Continen-tal and state governments resulted in a serioushyperinflation. Some controversy exists overthe Bank of North America, the character ofRobert Morris, and the necessity of bills ofcredit for the war effort, but the really in-teresting questions in this period seem to lieoutside the field of monetary history.

In contrast to the two later periods, the col-onial period has both an extensive literatureand rousing controversy. The main problem isthat the older works of the hard-money schoolare, for the most part, theoretically superior tothe newer treatments by the managed-moneyschool, but the newer treatments are historical-ly sounder than the older, out of date works.To get a competely accurate picture of the col-onial monetary experience, one must consultthe newer works for data and the older worksfor theory.

Consider some of the justifications for thecolonial monetary policies that have graced thewritings, from Franklin to Ferguson, of themanaged-money school. By the far the mostpervasive is the claim that due to an un-favorable balance of trade, the colonies suf-fered from a chronic shortage of money. Thebest rejoinder to that claim is still the one givenby Adam Smith: No complaint, however, ismore common than that of a scarcityof money.Money, like wine, must always be scarce withthose who have neither wherewithal to buy it,nor credit to borrow

Money is a medium of exchange. When agood is used as money, it is desired so that itcan be exchanged for other goods. It is not usedup in consumption or production. Therefore,any stock of the monetary good, within certainvery wide physical limits, can perform themonetary function with equal facility. There isno optimal supply of money. Increases in thestock of money confer no social benefit;decreases cause no harm. A smaller stock of


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84 JEFFREY ROGERS HUMMELmoney simply requires that a given monetaryunit have greater purchasing power or, in otherwords, that prices be lower.Most writers, even Sumner, White, and someof the other members of the hard-moneyschool, have denigrated the colonial use oftobacco, wampum, and other commodities asmoney. They ignore that fact that all money,even gold and silver, emerges on the marketwhen some commodity previously only used forconsumption or production is employed as amedium of exchange because of its widemarketability. Gold and silver are moredurable, portable, and divisible than othercommodity monies, but the colonial use of theirstaples and other less satisfactory commoditiesas monies befitted their low level of economicdevelopment. The colonial domestic economywas just not that complex.The colonial trade with England and otherareas, in contrast, was highly developed, andhere it is argued that the colonists' unfavorablebalance of trade drained away their specie.However, regional trade balances are merelyaggregations of individual trade balances.Every individual has his own balance ofpayments for any given period, during which hewill add to, subtract from, or leave unchangedhis own cash holdings. Any net flows of moneyin regional balances of payment result solelyfrom changes in the demand for money. Specieand foreign coins were readily available, and allthat colonists had to do was to trade for them.The balance of trade was not an exogeneouscondition foisted by circumstances upon thecolonists; it resulted from their own marketpreferences. The colonists evidently preferredto import British goods rather than invest in animproved domestic monetary system , pointout James Shepherd and Gary Walton. Theirpreference was to substitute other forms ofmedia for specie, rather than to manage withless British and European manufacturedThe lament that the colonists couldnot pay their debts to English merchantsbecause an unfavorable balance of trade haddrained off all their specie is no more valid thanthe excuse given by an individual debtor that hecannot repay the money he owes to a bankbecause he had an unfavorable balance of

payments thatAnother argument cites as evidence of ashortage of money the fact that interest rateswere too high or that money was too tight .This argument confuses a shortage of moneywith the scarcity of capital. The interest rate isnot the price for money; rather it is the price inthe time market. All individuals discount thefuture against the present, but different in-dividuals do so at different rates. The interestrate is the premium received by savers forforegoing present consumption. Savings mustoccur for capital to accumulate, and high in-terest rates indicate that immediate consump-tion is more important to the economy thancapital accumulation. The high interest rates incolonial America reflected the scarcity ofcapital. Usury laws probably converted thecapital scarcity into a shortage, making savingsunavailable at the legal rate. The way toalleviate the scarcity was as happenedthrough time to save morePrinting new money can seemingly alleviatethe scarcity of capital if it is injected throughthe loan market, as in the case of colonial landbanks. The supply of loanable funds increasesand the interest rate falls. However, this fall ininterest is not matched by an increase in realsaving. No one has foregone present consump-tion. Therefore, the investments induced by thefall in interest rates are really malinvestments,misallocating resources. This generates aboom bust trade cycle. The new money entersthe loan market, interest rates fall, and in-vestments are induced. As the new money cir-culates throughout the economy, the new in-vestments turn out to be malinvestments andthey suffer losses; a depressionThis explains the apparent prosperity thatfollowed the first emission of new money, andthe boom bust cycle noted by Kemmerer inNew Jersey. It also exposes the fallacy inLester's defense of managed money for preven-ting depressions. Lester equates falling priceswith depression. Actually, during severalhistorical periods, secularly falling prices andeconomic prosperity have existed simultaneous-ly. A depression is a cluster of business failurescaused by the distortion of interest rates thataccompanies the injection of new money in the


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THE MO NETARY HISTORY OF AMERICA TO 789: A HISTORIOGRAPHICAL ESSAY 85loan mark et. T he prosperity of the boom phaseof the cycle is merely an illusion.In one sense, however, the clamor over theshortage of money in the colonies was valid.Colonial governments were continuously ex-periencing such a shortage. To finance a warthrough taxes collected in the fo rm of tobaccoo r wampum was inconvenient and difficult. T orequire citizens who did not ordinarily usespecie to pay taxes in that form was burden-some. The connection between the colonialwars a nd the issue of paper money was no coin-cidence, nor was the connection between over-due tax debts and paper money in Shaysrebellion. Paper money was often demandedbecause it would make tax payments easier. Inthe case of the revolutionary bills of credit,paper money was issued in lieu of taxesaltogether.When managed-money advocates argue thatpaper money is less expensive tha n specie, theyare thinking in terms of macro-economic ag-gregates tha t never influence people s econo micactions. No o ne ever decides o n the basis of theoverall cost to society to use a paper shillingrath er th an a silver shilling. Ind ividuals only actaccording to the specific array of costs andprices facing them, and if the prices they payand earn are the same in both paper an d silvershillings, then it will be a matter of indifferenceto them which they use. The importantecono mic fac t is tha t paper money is less expen-sive to the person or institution issuing it.Specie can only be acquired by tradingsomething that was produced for it. Papermoney can just be created and spent. Conse-quent ly , the i ssuing of paper moneyredistributes wealth an d income. Economically,it is no different f rom counterfeiting.Th e hard-money school was correct in notingthat paper money depreciates. The quantitytheory of money holds true to the extent thatprices are always higher after the issue of newmoney than they otherwise would have beenThe price level, however, might not changedramatically because other factors go into itsdeter min ation . By resting th e case against papermoney solely on depreciation, they leftthemselves open in those cases, like Penn-sylvania, where the depreciation was relatively

limited. Even if there is no depreciation, theprinting of paper money always has distribu-tion effects. It always shifts resources from pro-ducers to the non-producing issuers and theirprivileged favorites. This makes paper moneyobjectionable even when there is little deprecia-tion.Th e first gainer is the issuer of paper m oney,who spends it fo r somethin g he wants. Since hehas prod uced nothing in exchange for the pur-chased good, someone else must lose. This isaccomplished either thr oug h a rise in prices, tothe extent th at the new money circulates, or adecrease in cu rrent consu mp tion, to the extenttha t th e new money is held in cash balances. Inon e case the new money creates a hidden tax oncash holdings; in the other, a forcible loan atzero interest. In addition to the first issuer,those w hose incomes rise before th e prices theypay also benefit. Those who ar e hurt the mostare those facing prices tha t go up before theirincomes. Individuals on fixed incomes lose.Debto rs gain at the expense of creditors. Deb-tors, furthermore, are not always poor, andquite often during th e colonial period they werewealthy merchants an d landowners. Merchantsmay be debtors and creditors both, and theymay shift back and forth. If the new money isinjected through the loan market, it temporarilylowers interest rates which benefits mer-chants and businessmen who wish to expandtheir operations. The price of durable goods,like land, is very sensitive to interest rates. Afall in interest tends to raise the price of land , solandow ners also ben efit.1g01Land speculatorswho are also debtors doubly benefit. Thus, thepolitical revisionism of the managed-moneyschool is the one area where their reinterpreta-tion of events has merit. The support ofwealthy merchants and landowners for papermoney makes theoretical sense.corollary of the quantity theory of moneyis the purchasing power parity theory, whichclaims that the exchange rate between coex-isting monies will tend to equate to their pur-chasing power. If dollars can buy five timesmo re th an shillings, then th e exchange rate willtend t o be five shillings per do llar. T his theoryallowed the hard-mo ney school to measure thedepreciation of paper m oney through the fall in


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86 JEFFREY ROGERS HUMMELits exchange rate with English sterling. Ernstargued that the purchasing power parity theoryis oversimplified; that exchange rates betweenLondon and America were determined by thevalue of imports bought, and the value of ex-ports sold, and the value of capital flows.Ernst s argument is a o sequitur. No pur-chasing power parity theorist has ignored theoperation of supply and demand in the deter-mination of exchange rates. These very forcesare the ones that bring about purchasing power

For example, if a colony should increase itsmoney supply, the price of its domestic pro-ducts will rise. This makes foreign goodsrelatively cheaper. Imports will increase, andexports will decrease. These factors combinedwill drive up the exchange rate until the point isreached where purchasing power parity isrestored. If the exchange rate is not at parity, iffor instance the dollar will buy only five timesmore than a shilling, but the exchange rate is sixshillings per dollar, then individuals can profitby trading dollars for shillings and buying pro-ducts. This lowers the shilling demand fordollars and products that can be bought withdollars and raises the dollar demand for shill-ings and products that can be bought with shill-ings. This will drive down the exchange ratetoward five shillings per dollar.[821The purchasing power parity theory holdswhether the monies coexist in the samegeographical area or are employed mainly indifferent areas. Government fixing of the ex-change rate is totally unnecessary. When thegovernment does fix the exchange rate, it neverfixes it at the market parity rate. As a conse-quence, one of the monies is overvalued whilethe other is undervalued. In the example above,if the government fixed the rate a t six shillingsper dollar, shillings are artificially undervaluedand dollars are artificially overvalued. In-dividuals will increase their demand for shill-ings and decrease their demand for dollars. Anyprice denominated at the fixed rate of six shill-ings to the dollar when the market rate is fiveshillings to the dollar will be paid in dollars.Since the exchange rate cannot adjust, a surplusof dollars and a shortage of shillings willemerge. This result is a classic illustration of

Gresham s Law; bad money has driven outgood, or more precisely stated, money ar-tificially overvalued by government has drivenout of circulation money artificially under-valued.

The monetary history of the colonies offersmany demonstrations of the operation ofGresham s Law. Through legal tender laws theexchange rate between different monies was fix-ed. Usually specie was artificially undervalued.Tobacco drove out specie, or paper moneydrove out specie, or light coins drove out heavycoins. The colonial juggling of the unit of ac-count was a special kind of rate fixing. It didnot usually fix the exchange rate between twodifferent monies, because the colonial shillingswere allowed to float in terms of British shill-ings, but merely changed the denomination ofthe existing money. Suddenly, a coin that waspreviously worth five shillings was now worthsix shillings. This encouraged the importationof coins, gave a boost to exports, anddiscouraged imports. The effect was tem-porary, however as prices would immediatelyrise in terms of the new unit of account so thatthe same coin would purchase the same quanti-ty of goods as before.

In short, the hard-money school was basical-ly correct. The colonial and revolutionarymonetary experience was a continuous streamof government failures. There was no shortageof money. That complaint provided the excusefor governments and special interests toplunder the economy through the printing ofpaper money. In the New England colonies, thedepreciation was so severe that the monetarysystem was nearly wrecked, as it finally wasthroughout America during the Revolution.Even though depreciation was more mild in themiddle colonies, the printing of money still haddistribution effects. In all the colonies, themonetary policies were erratic and subservientto the fiscal appetite of governments. Whenbills of credit were emitted through land banks,they had the further undesirable effect ofdistorting interest rates. Paper money did notgenerate prosperity, it generated theboom bust trade cycle. At the same time, legaltender laws drove specie out of circulation. Onthe whole, it was an abysmal record.


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TH E MONETARY HISTORY O F AMERICA TO 1789: A HISTORIOGRAPHICAL ESSAY 387NOT S

1. Th e seminal work on Austrian mo netary theory is Lud-wig von M ises, The Theory of Mone y and Credit newen]. ed., (1953; reprint ed., New York, 1971). See alsothe app ropriate sections of Mises, Human Action 3rdrev. ed., (Chicago, 1%6), and Murray Roth bard,ManEconom y and State 2 v., (Princeton, 1962).Rothbard's What has Government Done to OurMoney? (Santa Ana, 1964), is a good, brief introduc-tion to Austrian monetary theory. Rothbard has ap-plied Austrian theory to the colonial experience in thesecond volume of his history of the American Revolu-tion, Conceived in Liberty I1 (New R ochelle, 1975), pp.123- 140. Rothbard provides one of the best shortsurveys of colonial monetary policies, and I have reliedon it heavily in this paper.2. In Mar yland in 1733, bills of credit, in addition to be-ing used to finance government expenditures, werepassed out to all the inhabitants as compensation forthe tobacco destroyed in Maryland's price-support pro-gram. Economists are fond of abstracting from thedistribution effects of increases in the money supply byconsidering the case where a helicopter flies over andevenly distributes the new money among the people.This is the only case, as far as I know, where thehelicopter effect has actually been approximated inpractice.

3 Sometimes private land bank proposals envisionedloans on personal property as well as land. Usuallythere was no provision for any specie reserve fund toredeem notes, but a private spec ie bank did ope ratebriefly also in Massachusetts.4. Virginia unsuccessfully tried to mint copper coins.Maryland's attemp t to establish a mint proved unsuc-cessful. A numismatic history of these early mints isSylvester S. Crosby, The Early Coins of America andthe Laws Governing Their Issue (1875; reprint ed.,New York, 1970).5. Andrew McFarland Davis, ed., Colonial CurrencyReprints I68 2 1751, 111, (1911; reprint ed ., NewYork, 1964), pp. 309, 326. Davis' four volume work isa compilation of most of the pamphlet literature oncolonial money with an excellent introductory essay.Douglass' pamphlet was also reprinted in AmericanEconomic Association, Economic Studies 2 (1897),no. 5, with a biographical essay by Charles J. Bullock.Joseph Dorfman, The Economic Mind in AmericanCivilization 1606- 1865, also covers the monetarydebate, although he does not d o justice to D ouglass.See also Harry E. Miller, Banking T heor ies in theUnited States before 1860, (Cambridge, 1927).6. Davis, Colonial Currency Reprints 11, p. 336.Franklin's pam phlet can also be found in Jared Sparks,ed., The Works of Benjamin Franklin 11, (Boston,1836), pp. 254-277. Frank lin's advocacy of paper

money was not without ulterior motives. As he so char-mingly put it in his Autobiography (reprint ed., NewYork, 1940), p. 82:It [the pamphlet] was well receiv'd by the commo npeople in general; but the rich men dislik'd it, for it in-creas'd and strengthen'd the clamor for more money,and they happening to have no writers among themthat w ere able to answer it, their opposition slaken'd,and the point was carried by a majority in the House.Mv friends there. who conceiv'd I had been of some

service, thought it fit t o reward me by em ploying me inprinting the money; a very profitable jobb an d a greathelp to me.7. (1833; reprin t ed., New York , 1968). The full title wasA Short History of Paper Money and Banking in theUnited States Including an Account ofProv incia1andContinental Paper Mon ey. To Whichis Prefixed an Zn-quiry into the Principles of the System with Con-siderations of its Effects on Morals and Happiness.The W hole Intended as a Plain Exposition of the Wayin which Paper Money and Money Corporations Af-fect the Interests of Different Portions of the Com -munity. The reprint edition includes an introductoryessay by Joseph Dorfman.8. (Boston, 1839).9. A Historical Account of Conn ecticu t Currency, Con-tinental Money, and the Finances of Revolution, NewHaven Colony Historical Society, Papers 1 (1865),pp. 1 192.10. With a Description o f the Bills and Catalogue of theVariousIssues (1866; reprint ed., New York, 1969).11. (1865, 1866; reprin t ed., New York, 1972).12. A Brief Account of the Emissions of Paper MoneyMade by the Colony of Rhode Island (Providence,1837). Potter's pamphlet was also reprinted later bySidney S. Rider under the title Some Account of Billsof Credit or Paper Money of Rhode Island from theFirst Issues in 1710 to the Final Issue in 1786 , RhodeIsland Historical Tracts no. 8, (1880).13. (1874; reprint ed., New York, 1968).14. 3 v. All references are to the 4th ed., (1884; reprinted.,New York, 1896).15. Zbid. I, p. 29.16. (1891; reprin t ed., New York, 1968). See also Sumner'sA Histor y of Banking in the United States (New York,1896).17. Zbid. I, p. 6018. University of Wisconsin, Bulletin: Econom ic PoliticalScience and History Series 1, no. 2, (M adison, 1895).19. (Philadelphia, 1882).20. Columbia University, Studies in History Economicsand Public Law 2nd ed., 1, no. 44 (New York, 1897).The first edition was published in 1892.21. Co lumb ia College, Studies in History Economics andPublic Law 4, no. 1, (New York, 1893).22. American Academy of Political and Social Science,Annals 8 (July, 1896), pp. 50- 126.23. Zbid. p 74.24. American Academy of Political and Social Science,Annals 12 (Sep, 1898). pp. 229 249.25. Zbid. p. 245.26. (New York , 1900).27. American Economic Association, Publications 3rdser., 1, no. 4; 2, no. 2, (New York, 1900, 1901).28. op. cit.29. 5th ed., (Boston, 1911). The first edition of this workwas published in 1896. White also wrote New York'sColonial Currency , Sound Currency 5 (1 Mar , 1898),pp. 50 6430. Zbid. pp. 86 87.31. Rev. and enl. ed., (1924; reprint ed., New York, 1967).The first edition, Histo ry of the Coinage and Currencyin the United States and the Perennial Contest forSound Money (1903; reprint ed., New York, 1968),omitted mention of colonial and revolutionarymonetary policies.


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THE MO NETARY HISTORY OF AMERICA TO 1789: A HISTORIOGRAPHICAL ESSAY 379extended into the revolutionary period, was on-ly slightly less enthusiastic, and she agreed thatAs a colony Maryland had solved the problem

of paper Although not assubstantial as the studies of Gould andBehrens, Richard S. Rodney's ColonialFinances in De laware [371lso saw paper moneyas necessary and beneficial. Another state studypublished about the same time was WilliamEstill Heath's article, The Early ColonialMoney System of Georgia , a purely descrip-tive account that took no position on thedesirability of paper

In 1934 Curtis Putnam Nettels applied thenew interpretation foreshadowed in the worksof Gould and Behrens to all the colonies. Hisbook, The Money Supply of the American Col-onies Before 1720,[381was the first generaltreatment from the managed-money school.Actually, over half the book discussed not thecolonial money supply but the colonial balanceof payments. Nettels' consideration of thisissue, however, provided the groundwork forhis argument that the unfavorable balance ofpayments caused a chronic shortage of moneyin the colonies:

The colonies as a debtor region were con-fronted with a continuous adverse balance ofpayments, and their available specie was repeatedlydrawn away to creditors in Europe. The scarcity ofspecie in Am erica gave birth to a widespread belief thatprices of colonial products were ruinously low becausemoney was wanting. One solution of these dif-ficulties appeared t o be an enlargement of the volumeof c~rrency . [ ~ lOn this basis, Nettels justified all of the col-onial monetary experiments: the making ofcommodity money legal tender, the devaluationof the unit of account, and the issue of bills ofcredit. All of them were efforts by the coloniststo attain some economic independence.

Even more outspoken in his defense of col-onial monetary practices was the economistRichard A. Lester. In his book, Monetary Ex-periments: Early American and Recent Scan-d i n a ~ i a n , ~ ~ ]e refined Nettels' argumentabout the shortage of money. Precious metalswere too expensive a form of money for the col-onies. By using cheaper paper money, the col-onists were conserving resources and makingthemselves wealthier. Previous historians had

distorted the colonial experience by ignoringthe middle colonies. Since there was relativelylittle depreciation in the middle colonies, mostof the writers have played up the experience ofthe New England colonies. There the deprecia-tion of the currency was more extreme. Thiswas due to a peculiar currency arrangementin which the paper money of each NewEngland colony was freely accepted withoutdiscount in the other New Englandcolonies .1421Thus, each colony had a built-inincentive to issue bills of credit withoutrestraint. The middle colonies, on the otherhand, particularly Pennsylvania, used soundmoney management to avoid depressions andstimulate the economy. Lester argued thatwithout currency emissions, prices would havefallen and depression would have resulted. Inshort, our colonial forefathers were muchmore intelligent on money matters than hither-to they have been given credit for being .t431

Although he provided a strong theoreticaljustification for the managed-money school,Lester's research was limited. The work thatfinally nailed down the managed-money inter-pretation historically was Leslie Van HornBrock's dissertation, The Currency of theAmerican Colonies, 1700 1764: A Study inColonial Finance and Imperial Relations .t441Overlapping and bringing forward Nettels' ac-count through the Currency Act of 1764, it wasthoroughly researched and has become thestandard treatment of the subject. It gave ahistory of the monetary policies in each colony,in the process confirming the conclusion thaton the whole paper money was salutary.Because of the specie drain, it was needed, andmost colonies issued it with enough restraint tobe successful.

Although the managed-money triumvirate ofNettels, Lester, and Brock has supplanted thehard-money school, both groups share certainprinciples. Both accept the quantity theory ofmoney, and both have, at least implicitly,stability of purchasing power as their policy ob-jective. They differ as to the most efficientmeans of attaining that objective. Even on thehistorical record, their differences are not asgreat as at first they might seem. The hard-money advocates freely admitted that the


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38 JEFFREY ROGERS HUMMELmonetary policy of Pennsylvania resulted inrelatively less depreciation. As Gouge put it,All things go by comparison. The credit billsof Pennsylvania were so much better than thoseof the other Governments, but it was not afact that they never sunk below the value of thegold and silver which was current in the colonybefore the first emission of its Forthe hard-money school, Pennsylvania's ex-perience was exceptional; the prevailing tenden-cy was toward massive depreciation. Themanaged-money school, on the other hand, ad-mitted that even in Pennsylvania some fall inexchange rates took place just not enough tobe concerned about. They also agreed that inNew England and during the Revolution toomuch money did result in serious inflation. Forthem, however, these cases were aberrations ex-plained by extenuating circumstances (war, forinstance); Pennsylvania's experience wastypical.While Nettels, Lester, and Brock were revis-ing the interpretation of colonial finance, a fewhistorians were doing additional research on therevolutionary period. Ralph V Harlow'sSome Aspects of Revolutionary Finance 14s1gave a broad overview of the issue of papermoney by the Continental Congress and thevarious states. William B. Norton, in PaperCurrency in Massachusetts during the Revolu-ti~n ,[~'Inoted the relative conservatism ofMassachusetts' monetary policies during theRevolution. Massachusetts placed greaterreliance on borrowing than on bills of creditand attempted scrupulously to repay creditors.Neither of these works attempted to revise theprevious negative historical verdict on revolu-tionary bills of credit. Also important wasAnne Bezanson's Prices and Inflation Duringthe American which providedincredibly complete price series for the period.Earlier Bezanson had coauthored with RobertD. Gray and Miriam Hussey a similar bookabout Prices in Colonial TheBezanson-Gray-Hussey series were those usedby Lester in his study of Pennsylvania currency.William I. Davisson's Essex County PriceTrends: Money and Markets in 17th CenturyMa ss ac hu ~e tt s ,[ ~~ 1ave colonial pricestatistics for a different area and an earlier cen-

tury. Davisson's figures only went up to 1685,before the first paper-money emission, but theycovered the years during which theMassachusetts mint operated, which Davissonfelt had had a stabilizing influence on prices.The most recent study of colonial prices is JohnJ. McCusker's Money and Exchange in Europeand America 1600 1775: AThis monumental work of research gives serieson the exchange rates between all the coloniesand London, painstakingly pieced togetherfrom a huge array of contemporaryquotations.Most of the research done after Nettels,Lester, and Brock has built upon or refinedtheir approach. Theodore Thayer's generalcommentary on The Land-Bank System in theAmerican Colonie~ ,[~~~as not totally un-critical. He felt that land banks had failed inNew England, both because they over-issuedmoney and because the security they requiredwas inadequate. Nevertheless, in four coloniesPennsylvania, New Jersey, New York, andMaryland the system was on the whole suc-cessful and is deserving of more attention thanit has been E James Ferguson, inhis Currency Finance: An Interpretation ofColonial Monetary Practices ,[541 ostensiblydealt with both the land bank and currencyfinance methods of emitting bills of credit,although he gave greater consideration to thelatter. He surveyed the historical literature anddid battle, again, with the hard-money school.An effort will be made to show that in themiddle colonies, from New York to Maryland,paper money was successful. Secondly, it willbe argued that except in New England and theCarolinas, paper money did not engender anygreat conflict between broad classes of thep o p u l a t i ~n . [ ~~~erguson later reworked hisarticle and made it the first chapter of his book,The Power of the Purse: A History ofAmerican Pub lic Finance 1776 1790.C s ] Thebook was a welcome addition to the literatureon finance during the revolutionary and con-federation periods, but its analysis of the Con-tinental inflation was quite standard.Ferguson's real contribution was his coverageof the debt and taxation questions. He alsopainted a less favorable picture of Robert Mor-


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THE MONETARY HISTORY OF AMERICA TO 789: A HISTORIOGRAPHICAL ESSAY 38ris than had Sumner. Bray Hammond's highlyoverrated Banks and Politics in America: Fromthe Revo lution to the Civil addressed itsfirst two chapters to pre-1789 monetary history.Predictably, Hammond thought highly of theBank of North America. He, alone amonghistorians, even praised Rhode Island's emis-sions of paper money. His main purpose,however, was to discredit the myth that papermoney was supported by poor, agrariandebtors. O n the contrary, the dem and for papermoney, claimed Hammond, whether bills ofcredit, Continentals, or bank notes, came fromsophisticated merchants and commercial in-terests.Of the few state studies done afte r 1941whenBrock wrote his dissertation, the only one notholding t o the managed-money line was DonaldL. Kemmerer's Paper M oney in New Jersey,1668 1775 .1581Kemmerer, in fact, found aboom bust cycle accompanying New Jersey'spaper money policies. When new paper-moneywas injected into the econom y, an inflationaryboom would result. When the money wasredeemed, a deflationary depression followed.Kemm erer concluded that the method of sud-denly expand ing and gradually contracting thepaper-money supply was largely responsible forboth Peter E. Ellertsen, on the otherhand, thought much more highly of NewJersey's policies in his article, Prosperity andPaper Money: The Loan Office Act of1723 .[801Looking at a shorter time span, hedecided that the loan office was responsible forNew Jersey's great prosperity. Richard M.Jellison's Paper Currency in Colonial SouthCarol ina : A R ea p p ra i~ al ~ ~was a lsofavorable. The first period, from 1703 to1731, was one of much experimentation andmay be characterized by depreciation. Theyears following 1731 witnessed not only com-plete acceptance of the medium bu t also stabili-ty in its value. t621Jellison's conclusions weresignificant because managed-money historianshad usually conceded that South Carolina'spaper-money policies were as bad as those inNew England.~e31Bray Hammond was probably the most vocalin his efforts to debunk the poor-agrarian-debtor thesis, but he was not the most per-

suasive. Ten years earlier, Joseph D orfman, inhis examination of the colonial monetarydebate in The Economic Mind in AmericanCivilization discovered that Contrary to thetradition that historians have perpetuated, acritical analysis of the contemporary literatureindicates that the proponents as well as thecritics [of paper money] were not poor debtorsor agrarians, but for the most part officials,ministers, merchants, and men of substanceand learning in general . [ B 4 1 Dorfman's conclu-sion was confirmed by George Athan Billias. InThe Massachusetts Land Bankers of 1740,[851Billias systematically investigated the pro-ponen ts and opponents of Massachusetts' 1740land-bank scheme and found that the poor-agrarian-debtor thesis did not hold. Herman J.Belz, in two journal article^,[^^^ extended thedescription of political forces battling overpaper money in Massachusetts both forwardand backward from 1740. Although he foundsome agrarian support for paper moneyschemes, Belz agreed that the most significantsuppo rt came from merchant groups.Along w ith the political forces within the col-onies fighting over monetary policy, historianshave explored the implications of the moneyissue for the colonial relationship with GreatBritain. Some argue that the colonists' frustra-tions with British monetary restrictions con-tributed to the Revolution. Robert M. Weirfound in his article, North Carolina's Reac-tion to the Currency Act of 1764, [e71that thiswas true in North Carolina. Jack P . Greene andRichard J. Jellison, in The Currency Act of1764 in Imper ia l Colonia l Rela t ions ,1764 1776 ,[881 examined the various eva-sions of the Currency Act that occurred in allthe colonies outside of New England and thecolonial effort to get the act reinterpreted,modified, or repealed. They decided that theact was an important psychological irritant inBritish -Am erican relations. Lawrence H. Gip-son's Virginia Planter Debts before theAmerican R e v o l u t i ~ n ~ ~ ~ ~escribed the genesisof the Currency Act of 1764 and showed how itoriginated from the desire of British creditorsto protect themselves from Virginia's monetarylegislation. Jack M. Sosin's discussion of theCurrency Act and the colonial reaction to it in


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38 JEFFREY ROGERS HUMM LImperial Regulation of Colonial PaperMoney, 1764- 1773 [701treated in less detailthe material covered by Gipson and Greene andJellison and reached the same conclusion.One area of monetary history that has cap-tured the interest of at least one historian is

counterfeiting. Counterfeiting was endemic incolonial and revolutionary America, and attimes caused very serious problems for the col-onies' paper money issues. The counterfeitingof Continentals was especially serious. KennethScott investigated this topic in his book,Counterfeiting in Colonial Am erica , 17 I and innumerous articles and monographs on in-dividual colonies. [ 7 2Many of Scott's contributions appeared innumismatic journals, which have a special in-terest in counterfeiting. Although largely ig-nored by mainstream historians, thenumismatic discussions of colonial money areexcellent references. Often they are more com-prehensive and thorough with regard to suchmatters as the dates, the quantities, and thedenominations of paper money emissions. EricP. Newman's The Early Paper Money ofAmerica is the standard numismatic guide,superseding all previous catalogues and pro-viding extensive bibliographical references tothe remainder of the numismatic literature.[731

The writings on the political ramifications ofmonetary policy so far discussed those ofBillias, Greene and Jellison, Sosin, and theothers if not directly reinforcing themanaged-money school's interpretation, are atleast consistent with it. Only a few recentwritings have contradicted the managed-moneyorthodoxy in any fashion. The first of these,ML. Burstein's Colonial Currency and Contem-porary Monetary Theory: A Reviewwas highly technical and not basedon a wide range of secondary material (let aloneprimary sources), but it did contain somethoughtful theorizing. Burstein comparedfigures on Pennsylvania's money supply withdata on prices in Pennsylvania and England,the exchange rate, and interest rates. His con-clusion was that reasonably long-run

elasticities of liquidity preference [were1 veryhigh What that means is thatchanges in the money supply did not matter. Inthe long-run, prices in Pennsylvania were com-parable to those in London and the exchangerate was stable regardless of what happened tothe quantity of money. By reaching this conclu-sion, Burstein struck at the heart of both thehard-money and managed-money schools. Ineffect, the demand for money was so flexiblethat the colonists could absorb into their cashbalances as much money as was printed and themuch touted money shortgage was a mirage.This premise, that money does not matter, issuch an important feature of modern Keynesianeconomics that it is a wonder that no one beforehad applied it to the colonial experience. Un-fortunately, even if one accepted Burstein'stheoretical premise, his use of limited datamade his conclusions highly tentative.Another author who questioned the wholequantity-theory framework was Joseph AlbertErnst. One of Ernst's early contributions, anarticle entitled Colonial Currency: A ModestInquiry into the Uses of the Easy Chair and theMeaning of the Colonial System of FreelyFloating International E~change ,~~']as areply to Burstein. Ernst expanded the article in-to a chapter of his book, Money and Politics inAmerica, 1755- 1775: A Study in the CurrencyAct of 1764 and the Political Economy ofRevolution.[771Like Burstein, Ernst contendedthat the quantity of money did not really matterinternationally for the determination of ex-change rates. Exchange rates were governed bychanges in the balance of payments, which inturn were determined by the sale of colonial ex-ports, the purchase of imports by colonists, andthe inflow of English capital. Unlike Burstein,Ernst inconsistently maintained that the quanti-ty of money did matter domestically, and he ac-cepted the managed-money school's positionon the necessity of printing money to alleviatethe specie shortgage. The rest of his book was adiscussion of the politics surrounding the Cur-rency Act of 1764 in which Ernst argued for anew economic interpretation of theRevolution.[781He covered much the same ter-ritory as Weir, Greene and Jellison, Gipson,and Sosin, but in doing so he presented an ac-


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THE MONETARY HISTORY OF AMERICA TO 789: A HISTORIOG RAPHICAL ESSAY 383count of colonial monetary practices thatstarted in 1764, where Brock leaves off.

While Burstein and Ernst both attacked thequantity-theory framework used by the hard-money and managed-money schools, theirpolicy recommendations were more congenialwith managed money. In Ernst's case thisfollowed from his acceptance of the domesticimportance of the money supply. In Burstein'scase, since the quantity of money does not mat-ter, there cobld be no serious objection to in-creasing it through the printing press. Only onerecent writer has disputed the managed-moneyschool's policy recommendations: Roger W.Weiss, in his article, The Issue of PaperMoney in the American Colonies,1720 1774 .1791Weiss argued that the col-onies suffered from no real scarcity of specie.Using data from Pennsylvania and Boston, heattempted to demonstrate that even without theemission of paper money, prices would haverisen rather than fallen.[801Colonial moneyissues were not well managed anyway; Theirvolume changed erratically and with a largeamplitude. This was due to the fact that theissues were made to meet the needs of the col-onial treasuries and these needs rose greatly intimes of He adds that it should beclear that a monetary system, the changes inwhose issues of paper money depend on the er-ratic fiscal needs of government, will not verywell serve the need for maintaining a stablemoney supply or of balancing the internationalmovements of specie .[821By casting doubt onthe government's ability to manage the moneyand by denying the colonial shortage of specie,Weiss is resurrecting the hard-money approach.More recently, Weiss has bolstered his conclu-sions with a study of The Colonial MonetaryStandard of Massachusetts .~831

In appraising the state of historical researchon money in America before 1789, one glaringdeficiency is immediately obvious. There is nogeneral overall treatment of the monetary prac-tices in the states during the confederationperiod. Despite the seeming importance of thisperiod toward influencing the monetary ar-

rangements in the Constitution, it is usuallytreated as an addendum to the revolutionary orcolonial period. Some, though not all, of thestate studies go through to 1789 [841

The revolutionary period is adequatelycovered by both general and specific works, butthey all share a common interpretation. Allagree that bills of credit issued by the Continen-tal and state governments resulted in a serioushyperinflation. Some controversy exists overthe Bank of North America, the character ofRobert Morris, and the necessity of bills ofcredit for the war effort, but the really in-teresting questions in this period seem to lieoutside the field of monetary history.

In contrast to the two later periods, the col-onial period has both an extensive literatureand rousing controversy. The main problem isthat the older works of the hard-money schoolare, for the most part, theoretically superior tothe newer treatments by the managed-moneyschool, but the newer treatments are historical-ly sounder than the older, out of date works.To get a competely accurate picture of the col-onial monetary experience, one must consultthe newer works for data and the older worksfor theory.

Consider some of the justifications for thecolonial monetary policies that have graced thewritings, from Franklin to Ferguson, of themanaged-money school. By the far the mostpervasive is the claim that due to an un-favorable balance of trade, the colonies suf-fered from a chronic shortage of money. Thebest rejoinder to that claim is still the one givenby Adam Smith: No complaint, however, ismore common than that of a scarcityof money.Money, like wine, must always be scarce withthose who have neither wherewithal to buy it,nor credit to borrow

Money is a medium of exchange. When agood is used as money, it is desired so that itcan be exchanged for other goods. It is not usedup in consumption or production. Therefore,any stock of the monetary good, within certainvery wide physical limits, can perform themonetary function with equal facility. There isno optimal supply of money. Increases in thestock of money confer no social benefit;decreases cause no harm. A smaller stock of


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84 JEFFREY ROGERS HUMMELmoney simply requires that a given monetaryunit have greater purchasing power or, in otherwords, that prices be lower.Most writers, even Sumner, White, and someof the other members of the hard-moneyschool, have denigrated the colonial use oftobacco, wampum, and other commodities asmoney. They ignore that fact that all money,even gold and silver, emerges on the marketwhen some commodity previously only used forconsumption or production is employed as amedium of exchange because of its widemarketability. Gold and silver are moredurable, portable, and divisible than othercommodity monies, but the colonial use of theirstaples and other less satisfactory commoditiesas monies befitted their low level of economicdevelopment. The colonial domestic economywas just not that complex.The colonial trade w

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