Massachusetts 1690: The First Western Fiat Experiment

Massachusetts 1690, the first Western fiat experiment. By Joshua Mahorter,

this first experiment with government-issued bills of credit presents a natural historical

test case for modern monetary theory, MMT, particularly its claims about chartalism and the

state's role in originating money. This took place in the Massachusetts Bay

colony in 1690. Given that the US is MMT's favorite example of a monetary sovereign,

the first issuance of government paper money in the Western world ought to be significant.

Given the claims of MMT and the relatively recent extant history of colonial America,

there is surprisingly little MMT writing that addresses the Massachusetts case,

though my research was, of course, limited. Timoyne and Ray mentioned Massachusetts a handful of

times in a paper saying, we now turn to the most contentious aspect of MMT. MMT argues that economies,

such as the Massachusetts colonies, are sufficiently complex to shed light on the fiscal

and monetary operations of contemporary economies with monetarily sovereign governments.

One post from an intro to MMT page on Facebook called the Massachusetts Bay Colonies a textbook

application of MMT. Economist and economist historian David Glasner cited Gordon Wood,

an intellectual historian of the American Revolutionary Era, saying the following concerning

paper money in the Massachusetts Bay Colony in 1690, almost from the beginning of American history,

Americans have relied on paper money. Indeed, the Massachusetts Bay Colony in 1690

was the first government in the Western world to print paper currency in order to pay its debts.

Although this paper money was not redeemable in species,

the Massachusetts government did accept it in payment for taxes.

Because Americans were always severely short of gold and silver, the commercial benefits of

such paper soon became obvious. Not only the 13 British colonies, but following the revolution,

the new states and the Continental Congress all came to rely on the printing of paper money

to pay most of their bills. From an MMT perspective, much could seemingly be made of the fact

that the Massachusetts Bay Colonial government was able to issue paper money and accept the bills

for a tax settlement. However, the all-important question is why these bills were

immediately accepted and whether tax receivability is a sufficient explanation for the general

acceptance of the bills of credit. From an MMT perspective, much could seemingly be made of the

fact that the Massachusetts Bay Colonial government was able to issue paper money and accept the bills

in payment of taxes without immediate redemption. Yet the crucial question is not whether the

government could declare the notes receivable, but why they were only imperfectly and conditionally

accepted and whether tax receivability alone is sufficient to explain their general purchasing power.

The historical records suggest that something more than tax settlement was required to secure

confidence in the bills of credit. The event and context. In 1690, the Massachusetts Bay

colony issued what is widely regarded as the first government issued paper money in the Western

world. The bills of credit were introduced to pay soldiers returning from a failed expedition

against Quebec. At a time when the colony lacked sufficient species to meet its obligations,

given that these notes were not initially convertible into gold or silver,

the episode is frequently cited as an early example of fiat currency and is therefore a

particular relevance to debates over chartalism. If taxation alone can generate monetary value,

the Massachusetts experiment should provide early historical confirmation of that claim.

Following the Quebec misadventure and when the attempts to secure a loan of 3,000 to 4,000 pounds

from Boston merchants failed, the government resolved in December 1690 to issue 7,000 pounds

in bills of credit to meet its obligations. Significantly, the notes were introduced amid public

skepticism about irredeemable paper. To facilitate acceptance, the government pledged that the bills

would be redeemed in gold or silver out of future tax revenues and that no further emissions would

occur, but these promises were short-lived. Rothbard wrote concerning this episode

characteristically however both parts of the pledge went quickly by the board. The issue

limit disappeared in a few months and all the bills continued unredeemed for nearly 40 years.

As early as February 1691, the Massachusetts government proclaimed that its issue had fallen

far short and so it proceeded to emit 40,000 pounds of new money to repay all of its outstanding debt.

Again, pledging falsely that this would be the absolute final notice you.

But Massachusetts found that the increase in the supply of money coupled with a fall and demand

for paper because of growing lack of confidence in future redemption in species led to a rapid

depreciation of new money in relation to species. Indeed, within a year after the initial issue,

the new paper pound had depreciated on the market by 40 percent against species.

Even in what is often described as an early fiat experiment, public acceptance was secured not

by tax receivability alone, but by explicit promises of species redemption and limits on quantity.

Wood, as quoted in the introduction, observes that the Massachusetts paper was not redeemable in

species, though it was accepted for taxes. Yet contemporary evidence indicates that the notes were

introduced with explicit promises of future redemption in goal or silver and with assurances that

no further emissions would occur. The public's initial acceptance appears to have depended upon these

pledges. The subsequent depreciation of the bills as emissions expanded suggests that expectations

of convertibility and restraint, rather than tax receivability alone, played a decisive role

in their valuation. Was this chartalism? When dealing with MMT and the related

chartalist claims, it is key to realize that there are different forms of chartalism, namely

chartalism proper or seiform theory and neo-chartalism, functional chartalism.

In the former, the central idea of the alternative view,

chartalism is that the value of money is based on the power of the issuing authority

and not by any embody or backing precious metal. Hence, chartalists give a central role to the

state in the evolution and use of money. In cartalism proper seiform theory,

money's value is said to rest on the power of the issuing authority rather than on prior market

valuation. With the evolution of money linked to the state's ability to command resources

through its taxing and spending power, in the latter, neo-chartalism is presented as a modern

post-cansian approach, drawing on nap, inness, and learner, and set to generate very different

conclusions regarding the origins and functions of money, monetary sovereignty, and prices.

L. Randall Ray argues, the neo-chartalism approach begins with the recognition

that no matter what might have been the case in the long-distant past, the nearly universal

situation today is one in which the nation's state establishes the unit of account to be used

within its boundaries. Both chartalism and neo-chartalism avoid the catalactic questions of monetary

theory altogether. Further, some presentations of MMT invoked chartalism, not merely as a description

of modern fiat regimes, but as an account of monetary origins. Yet, when confronted with early

historical cases of state paper emissions in already monetized economies, the argument often shifts

from origin to institutional description. This raises the question of whether chartalism

is best understood as a theory of monetary origination, or as a theory of monetary maintenance within

an established state currency system. Clearly, this event cannot be used to demonstrate

strong chartalism, or chartalism proper. C form theory, the claim that money is fundamentally

a state-issued fiat token deriving its value from tax receivability, because well-established

commodity monies already circulated prior to the paper emission, including in Massachusetts.

The Massachusetts bills did not create a monetary system by fiat. They entered an economy in

which gold and silver already functioned as media of exchange and standards of valuation.

This case also fails to effectively demonstrate neo-chartalism. The events of 1690 to 1692

indicate that taxation and state decree were insufficient by themselves to establish and maintain

purchasing power independent of convertibility and redemption expectations within an already

monetized economy. Despite tax receivability, legal tender provisions, and later coercive

reinforcement. The bills still depreciated relative to species. Their initial acceptance appears

to have depended less on tax settlement alone than on expectations of redemption and limits

on quantity. Such features are more consistent with money substitutes, claims to money proper

than with autonomous fiat. A money system, redemption promises, and conditional acceptance.

The ability of the Massachusetts government to issue paper bills of credit in 1690 presuppose

the existence of an already functioning monetary system. Gold and silver circulated as media of

exchange prior to the emission and the bills were denominated and valued relative to that pre-existing

standard. The bills of credit were introduced into and priced relative to that existing system.

The episode therefore cannot be cited as evidence of money originating through state decree alone.

These colonial bills of credit were accepted initially, not as autonomous

government fiat tokens, but as money substitutes, claims ultimately redeemable in species

money proper. Rothbard in a key phrase noted that, suspecting that the public would not accept

irredeemable paper, the government made a twofold pledge when it issued the notes that it would

redeem them in gold or silver out of tax revenue in a few years that absolutely no further paper notes

would be issued. The conditional nature of the public's acceptance is revealed by subsequent events.

As the government expanded the issue beyond its original pledge and redemption was delayed,

confidence eroded. The bills began to depreciate relative to species, suggesting that their initial

acceptance at or near par depended not merely on taxes but on expectations of redemption,

even if not honored and limitation of printing. When the notes came to be regarded not as money

substitutes, but as irredeemable fiat subject to political discretion, their value correspondingly

declined. All that said, there are economic reasons why people would have accepted and used these

bills of credit. For one, the paper bills were understood to be money substitutes, which could be

redeemed in real money later even if not right away. This could only take place in a system in which

money and its value has already been established. Following that, it is true that these bills of credit

could be used to pay taxes, which was also true of species, money proper, and this might have

encouraged acceptance and use. After further monetary inflation and resultant depreciation,

the government tried to force acceptance through legal tender and compulsory par laws,

bringing reshams law into play and driving species out of circulation.

In that legal environment, people would have been incentivized to spend their bills of credit

and use them to pay taxes. However, they likewise would be incentivized to hold species.

Conclusion

While this salient episode in colonial monetary history cannot be said to definitively

refute neocartalism, it does not comport with strong, seiform, chartless claims regarding

monetary origins. The Massachusetts experiment unfolded within an already monetized economy,

and the bills of credit derived their initial acceptance, not from tax receivability alone,

but from expectations of redemption and limits on issue.

A subsequent depreciation of the notes suggests that tax settlement, while relevant,

was insufficient by itself to anchor stable purchasing power.

At most, the episode indicates that governments may temporarily leverage a pre-existing monetary

system by issuing paper claims framed as money substitutes. It does not demonstrate that money

originates or derives its value solely from state decree or taxation. For more content like this,