Conceived in Liberty Volume 2 - Ludwig von Mises Institute

in Massachusetts in 1686. It is also a particularly instructive example of the
kinds of forces behind the inflationist proposals. The originators of the
scheme were emphatically not poor debtor-farmers. On the contrary, they were
precisely the ruling oligarchy of Massachusetts.
The year 1686 saw Massachusetts ruled by Joseph Dudley and his associates
in plunder. On assuming office, Dudley and his Council appointed a committee
of leading merchants and other citizens to study trade conditions. The
committee, led by Captain John Blackwell, reported with a proposal for a
bank whose notes would be forced on the people as legal tender. The plan
was to include all the leading oligarchs of the Dudley era in the directorship
of the bank: Dudley himself, William Stoughton, Wait Winthrop, Simon
Lynde, Elisha Hutchinson, Elisha Cooke, and others. No notes were to be issued
below twenty shillings in denomination, to ensure that the bank would be
largely limited to the wealthiest citizens. The bank was to have no specie capital
whatever, though individual directors were to bear responsibility. The plan
was abandoned with the arrival of Andros. The Glorious Revolution, in 1688,
inspired new talk of the Blackwell bank, but again the proposal fell through.
Paper money finally came to Massachusetts not in the form of a land bank's
notes, but as the first issue of government paper money in the world, apart
from medieval China.* Paper money can be issued either by government for
direct spending, or by a bank, public or private, that lends out money to the
public. While the former is cruder and more flagrant, it actually has less
harmful repercussions on the economy. For, given the same amount of monetary
issue, lending out the new money inflicts additional distortion on the
loan market and interest rates, which fact generates the familiar features of
the boom-bust trade cycle.**
The fateful plunge of Massachusetts into paper money came through direct
spending rather than lending. Massachusetts had engaged in an expedition of
plunder against French Quebec, an expedition it hoped would more than pay
for itself. But as luck would have it, the expedition failed ignominiously, and
Massachusetts was faced with the grave problem of paying the salaries of its
soldiers who were on the edge of mutiny. The Massachusetts government
tried to borrow from three to four thousand pounds from Boston merchants,
but evidently its credit rating was far too low. Proceeding upon the principle
that if it could not raise money it must print its own, Massachusetts decided
in December 1690 to issue 7,000 pounds in paper notes. Now the government
knew that it could not simply print paper irredeemable in specie labeled
*There is a single exception: the Card Money of Quebec. In 1685 the governing
intendant of Quebec, Monsieur Meules, decided to augment his funds by dividing some
playing cards into quarters, marking them with various denominations, and then issuing
them to pay for wages and materials. Meules took the precaution of ordering the public
to accept the cards (that is, legal tender); the cards were later redeemed with specie
sent from France. Used repeatedly in Quebec, the money became playing tickets rather
than playing cards.
**For an explanation, see Murray N. Rothbard, America's Great Depression, 2d ed.
(Los Angeles: Nash, 1972), pt. 1.
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