Conceived in Liberty Volume 2 - Ludwig von Mises Institute

pounds; for then no one would have accepted the money. The market value
of the money would then have plummeted sharply in relation to dollars or
sterling. Massachusetts therefore made a twofold pledge as it issued the notes.
It promised to redeem the notes in specie out of revenue in a few years and it
pledged to issue no further bills. In fact, the bills continued in use for almost
forty years and the pledge limit evaporated in a few months. The heady
attraction of printing one's own money is always enough to overcome initially
timid limits. As early as February 1691, Massachusetts acknowledged that the
emission "fell far short," and so it proceeded to issue 40,000 pounds of new
money to repay all of the colony's debts, again pledging this issue to be the
final limit.
Massachusetts indeed found very quickly that its "scarcity of money" could
not be relieved by creating more. In that era when people still had the right
to own gold and silver, the loss of value of each unit of money was dramatized
and intensified by market discounting of paper against specie. These discounts
reflected not only the increase in the supply of money, but also rises or
declines in its demand, governed largely by shifts in public confidence in the
value of the new money.
The Massachusetts notes in fact began to depreciate against specie almost as
soon as they were issued. In a year they had depreciated by as much as forty
percent. Two pamphlets, issued in 1691, berated the people for being "delinquent"
in permitting the notes to depreciate; they did not think to criticize
the issue itself. The author of the pamphlets lamented that while some private
bills were passing at par with specie, "our people (in this pure air) be so sottish
as to deny credit to the government, when tis of their own choosing." In
1692, however, the government moved to the use of force and eliminated the
discount in two ways: by making the government issues compulsory legal
tender for all debts, and by granting a premium of five percent on all payment
of debts to the government made in the paper notes.
From that point on, Massachusetts turned on the monetary engine for its
public expenditures. The notes were still supposed to be redeemed eventually
in tax revenues. At first the pledges were one year ahead, so that notes issued
in 1702 were to be paid out of pledged tax revenues in 1703. As time went
on, however, the future kept receding further and further, and more and
more years of future revenue were pledged in advance. By 1714, six years of
Massachusetts revenue were so pledged, and by 1722, future pledges stretched
ahead by thirteen years.
The artificial maintenance of the paper at par had the unwanted effect of
"Gresham's law": that when a poor and a superior money are kept at an artificial
ratio by the government, the money undervalued by government will
disappear into exports or hoards, and only the overvalued money will remain
in circulation. In 1690, before the orgy of paper began, 200,000 pounds of
silver money were available in New England; by 1714, 240,000 pounds of
paper money had been issued in New England but the silver had disappeared
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