discontent and civil disobedience. And at the end of each cycle there was rampant inflation and economic chaos.
In 1703, South Carolina declared that its money was "a good payment and tender in law" and then added that, should anyone refuse to honor it as such, they would be fined an amount equal to
"double the value of the bills so refused." By 1716, the penalty had been increased to "treble the value."
THE PRINTING PRESS AND INFLATION
Benjamin Franklin was an ardent proponent of fiat money
during those years and used his great influence to sell the idea to the public. We can get some idea of the ferment of the times by noting that, in 1736, writing in his
In 1737, Massachusetts devalued its fiat currency by 66%, offering one dollar of new currency for three of the old. The promise was made that, after five years, the new money would be fully redeemed in silver or gold. The promise was not kept.
By the late 1750s, Connecticut had price inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300% 4 Naturally, these inflations all had to come to an end and, when they did, they turned into equally massive deflations and depressions. It has been shown that, even in colonial times, the classic booms and busts which modern economists are fond of blaming on an "unbridled free market" actually were direct manifestations of the expansion and contraction of fiat mone|
which no longer was governed by the laws of supply and demand.
1 Statutes at Large of South Carolina, II. 211,665, as cited by George Bancroft, A
2. Leonard W. Labaree, ed.,
3. P r o v i n c e L a w s , II. 826, cited by Bancroft, p. 14.
4. Ron Paul and Lewis Lehrman,
5 See Donald L. Kemmerer, "Paper Money in New Jersey, 1668-1775,' New Jersey Historical Society,
FOOL'S GOLD
159
By this time, coins had completely disappeared from the scene.
S o m e were in private hoards, but most of them had been exported to other countries, leaving the colonies with little choice but to use fiat money or barter. Merchants from abroad were interested in neither of those, however, and international trade ground almost to a halt.
A BLESSING IN DISGUISE
The experiment with fiat money was a calamity to the colonists, but it was also a thorn in the side of the Bank of England. The bank had used its influence with the Crown to forbid the colonies to mint their own coins or to establish local banks. This meant that, if the colonists wanted the convenience of paper money, they would be forced to use the notes issued by the Bank of England. No one had anticipated that the colonial governments would be so inventive as to create their own
By then, their fiat money was heavily discounted in the market place and the governments were able to buy back their own currency for pennies on the dollar.
The decree from the British Parliament, although heavily
resented by the colonists, turned out to be a blessing in disguise.
The paper notes of the Bank of England never did become a primary medium of exchange. Probably because of their recent bad experience with paper money, the colonists merely brought what few gold and silver coins they had out of hiding and returned to a true commodity-money system. At first, the doomsdayers predicted this would spell further ruin for the colonial economy.
"There isn't enough money" was the all-too-familiar cry. But there was, indeed, quite enough for, as we have already seen,
TOBACCO BECOMES MONEY
There was, in fact, a period in which other commodities became accepted as a secondary medium of exchange. Such items as nails, lumber, rice, and whisky filled the monetary void, but tobacco was the most common. Here was a commodity which was in great
demand both within the colonies and for overseas commerce. It had intrinsic value; it could not be counterfeited; it could be divided into almost any denominational quantity; and its supply 160
