Conceived in Liberty Volume 2 - Ludwig von Mises Institute

New York, which did the same. In all the cases, the legislature was able to
use its control of funds to win its point.
Down to the middle of the eighteenth century, Virginia was content with a
decidedly noninflationary form of paper money. From 1713 on, the Virginia
government established public tobacco warehouses, which issued warehouse
receipts called "tobacco notes," backed one hundred percent by the amount of
tobacco in the warehouse. These notes then functioned as a perfect equivalent
to commodity money in tobacco. By the time of the French and Indian War in
the late 1750s, however, Virginia moved to issue paper money as part of the
financing of its role in the war effort. Interestingly enough, the first advocate
of government paper issues in Virginia during the French and Indian War
was Landon Carter, one of the largest and most influential tobacco planters
in Virginia.
Most reckless of the colonies was Rhode Island, which was also particularly
lax in waiving repayment of interest and even principal on the loans. The
loan banks in Rhode Island were controlled by a few government favorites, or
"sharers," who loaned out the money at five percent higher than they bought
the new issues from the government. The sharers often sold this five-percent
guaranteed privilege to others for premiums as high as thirty-five percent. In
1759 over fifty thousand pounds of outstanding loans in Rhode Island were
found to be unpaid and uncollectible, and this constituted a full eleven percent
of the outstanding note issue for the land banks of that colony.
The Rhode Islanders had a particular economic incentive for their wild
issue of new money. A small colony with many purchases to make in Massachusetts
Bay, Rhode Island's money was accepted at par in the neighboring
colony. Hence the incentive for Rhode Islanders to print themselves new
money that could easily be spent before prices in Massachusetts could rise by
the same amount—thus imposing the main cost of their inflation upon the
people of Massachusetts.
If Rhode Island was the most inflationary of the colonies, Maryland was
the most bizarre. In 1733 Maryland's public land bank issued 70,000 pounds
of paper notes. Of these, 40,000 pounds were loaned out in the usual
manner of landed security; but the remaining notes were given away in a
fixed amount to each inhabitant of Maryland. This was done to spend and
universalize the circulation of the new notes, which, of course, quickly depreciated.
However, the impact of the new paper was greatly lessened by tobacco
still being the major money of the colony. Tobacco was legal tender in Maryland
and the paper was not receivable for all taxes.
All the colonial paper was made legal tender, it being recognized that otherwise
the paper would not be accepted in private debts. The legal tender was
at the official par value in specie, but this coercion was not enough, as we have
seen, to prevent grievous depreciation even though backed by fines, imprisonment,
and complete confiscation of property in punishment for not accepting
the paper at par. And as we have also seen, complaints of a scarcity of money
134