The Origins of Fiat Money in the West
Posted by Orrin Woodward on November 8, 2010
The following history of money was learned by reading my new favorite economist, Murray Rothbard. His History of Money is a mighty tome, which will scare many readers off, but has so many nuggets in it, that I felt led to summarize just a portion on this blog. I want to personally thank the Mises Institute for providing access to Rothbard’s works. Here is my summary of the beginning of fiat paper money in the West. All factual details were pulled from Rothbard’s ground breaking research.
Outside of the medieval Chinese, who invented both paper and printing hundreds of years before the West, colonial Massachusetts was the first government to issue fiat paper money. In fact, the colonial Americans were the reigning experts on fraudulent paper money issues, backed by nothing more than the misplaced trust the colonist had for their state governments. The dismal monetary history began with a failed plundering expedition against the French colony of Quebec. The Massachusetts government had grown accustomed to victorious raids against Quebec, typically paying the colonial recruits out of the proceeds lifted from the defeated French. But in 1690, the New England colonials were defeated, causing a small problem for Massachusetts, but a huge problem for West. The lesson learned by local colonial New England politicians have been co-opted by money hungry politicians of today, making fiat money the standard operating procedure out of every financial mess caused by over promising and under delivery bureaucrats in Washington. See the chart below, that I found online, displaying the alarming drop in the purchasing power of the USA dollar through fiat monetary policies.
The soldiers arrived back in Boston ill tempered, demanding payment of their money, regardless of the outcome of the raid. Hosting discontented soldiers with weapons, along with the will to use them, in the city was not an enjoyable sight for Boston citizens. Rejected in an attempt to raise the funds from local merchants, the governmental leaders struck upon an idea that still echos through society. Massachusetts concluded that printing £7,000 of paper notes, using them to pay the soldiers, was safer than having soldier unpaid within the city. Concerned that the public would not accept the paper, the government made several pledges in an attempt to alleviate the public’s suspicion. First, that it would redeem the paper notes in gold or silver out of tax revenues over the next couple of years, and second, that no more notes would be issued. Not surprisingly, both parts of the pledge were disregarded as fast as government politicians could say, “Free Money.” The bills went unredeemed for over forty years, while other notes were issued when money was needed. It took less than four months for more notes to be issued, ignoring the pledge wholesale in government’s greed for free funds. By February of 1691, another £40,000 of unbacked paper notes was issued to make up for a shortage of government funds, politicians proclaiming boldly, and falsely, that this would be the last issue of notes.
Massachusetts had stumbled across the SFN (Something For Nothing) formula, and not withstanding the number of pledges to stop issuing notes, the local politicians were like kids running loose in a candy store while the owner sleeps behind the counter. Government induced fiat paper inflation was born and bred upon the shores of America. The increasing supply of paper money, along with the growing lack of confidence in the paper, since it wasn’t backed by anything, but the level of trust colonist had in the local politicians, depreciated by over 40 percent, as compared to the gold and silver specie (coins). Like all governments, when they are busted with their hands in the candy, Massachusetts used force to make the “greedy”, “traitorous”, merchants take paper on par with specie. This simply kicked in Gresham’s law, driving real money underground, while everyone bought and sold using paper (no better than Parker Bros Monopoly money) in the New England economy. Citizens are not stupid, why use real specie, when paper money is worth 40 percent less and other citizens are forced, by law, to take it on par with gold and silver specie. The corresponding shortage of coins drove more of the egregious behavior that caused the inflation in the first place. Over £240,000 of paper money was issued by 1711, but during the same time, specie had all but disappeared. The shortage of gold and silver didn’t cause the need for paper money, but the paper money enacted Gresham’s law, which caused the predictable shortage of specie.
I will save you the blow by blow details, offered in Rothbard’s book, of Massachusetts further inflationary printing of paper issues, but needless to say, New England government leaders did not prove trustworthy. Learning the history of fiat paper issues in Colonial America should be enough to scare all American citizens into demanding gold backed dollars, but sadly, few are willing to learn from history. The British Crown, finally intervened, halting the mad rush into insolvency, caused by SFN paper induced fever suffered by local New England government leaders. But before the British intervened, from 1744 to 1748, paper money expanded from, are you ready for this, £300,000 to £2.5 million! The depreciation of Massachusetts money was to such an extent that silver had risen to over sixty shillings an ounce, over ten times the price that it sold before the ‘paper money mania.’
There is much more to say on inflation and the purposeful depreciation of the American dollar for the benefit of Washington bureaucrats, but I will save it for another day. Just one question before I end, “Do you think today’s politicians are more trustworthy than the local Massachusetts politicians were in their day?” If you answer the question the same way that I did (a resounding no), then why do we allow the Federal Reserve to do the dirty work of today’s politicians? In an obvious effort to subvert the direct printing of fiat money by government, through the use of a Federal Reserve (that isn’t federal, and has no reserves), but merely prints the money for our bureaucrats and loans it back to our government at taxpayers expense, government is bilking its citizens that it should be protecting. Some may wonder why I bother to read this stuff, let alone share it with others, but I believe my duty is clear; wherever there is injustice, and I sit back and do nothing, I become an enabler to that injustice. My conscience will not allow me to sit back and do nothing, hopefully, others similarly endowed with conscience, will educate themselves and the injustice will end. God Bless, Orrin Woodward