y 1690, Massachusetts owed a massive debt to its soldiers after a failed expedition to capture Quebec from the French. Internal discontent and renewed oversight from the mother country put the colony’s leadership in a double bind. It was not powerful enough to flout the interests of its own citizens, but it also couldn’t afford to disobey imperial dictates when it tried to meet local challenges.
Charles II had forbidden the colony from resuming its earlier practice of minting its own coins from valuable metals, a prerogative the crown reserved to itself. And in revoking the colony’s original charter in 1664, Charles II made all its land titles uncertain, upending the commodity that the colonists most often used as the basis for credit. Banks, then as now, made loans in exchange for mortgaged assets, primarily land. Banknotes backed by such assets circulated as money in the colony, including as payment for taxes. Legal uncertainty as to the validity of land titles stuck at the foundation of this system. Meanwhile, any hard currency that flowed into the colony immediately flowed out again to pay trade debts. So there was no hope of the colonial government raising capital by borrowing it—the method England itself began to revolutionize with the founding of the Bank of England in 1694.
The legal-tender law of 1690—the centerpiece of Mr. Goldberg’s study—met all these challenges at once. It converted the debt the colony owed to its soldiers into “small, conveniently denominated, standardized, easily transferable, stamped pieces,” he writes. Other governments had attempted to solve their fiscal problems by printing paper and trying to force everyone else to accept it as money, with disastrous consequences. Massachusetts was the first to give paper currency genuine value by requiring only that the government accept its notes as payment for taxes. Since the colonial government could force its citizens to pay taxes, its willingness to accept its own notes made everyone else willing to accept them, too. Two years later, after risk of a veto from the king had diminished, the colony expanded the legal-tender act to make its notes lawful payment for both taxes and debts. With that additional change, Massachusetts’s notes became, Mr. Goldberg says, “nearly identical to the currency of the early twenty-first century.”
xxx
The colonists, Mr. Goldberg argues, had brought about a conceptual shift. The foundation of the monetary system had moved “from tangible assets (coin, goods, land) to monetary obligations involving the state.” Massachusetts recognized that the power to tax—though intangible—is an economic asset that can be monetized like any other.
From ‘Easy Money’ Review: The Currency and the Commonwealth – WSJ:
xxx
Snippings 