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exchange that he has been called “the father of paper money.” Unlike
Cotton Mather, who went to Harvard at the age of 12, Franklin was
self-taught. He learned his trade on the job, and his trade happened
to be printing. In 1729, he wrote and printed a pamphlet called “A
Modest Enquiry into the Nature and Necessity of a Paper-Currency,”
which was circulated throughout the colonies. It became very popular,
earning him contracts to print paper money for New Jersey,
Pennsylvania, and Delaware.4
Franklin wrote his pamphlet after observing the remarkable effects
that paper currency had had in stimulating the economy in his home
province of Pennsylvania. He said, “Experience, more prevalent than
all the logic in the World, has fully convinced us all, that [paper money]
has been, and is now of the greatest advantages to the country.” Paper
currency secured against future tax revenues, he said, turned
prosperity tomorrow into ready money today. The government did
not need gold to issue this currency, and it did not need to go into
debt to the banks. In America, the land of opportunity, this ready
money would allow even the poor to get ahead. Franklin wrote,
“Many that understand . . . Business very well, but have not a Stock
sufficient of their own, will be encouraged to borrow Money; to trade
with, when they have it at a moderate interest.”
He also said, “The riches of a country are to be valued by the
quantity of labor its inhabitants are able to purchase and not by the
quantity of gold and silver they possess.” When gold was the medium
of exchange, money determined production rather than production
Chapter 3 - Experiments in Utopia

determining the money supply. When gold was plentiful, things got
produced. When it was scarce, men were out of work and people
knew want. The virtue of government-issued paper scrip was that it
could grow along with productivity, allowing potential wealth to
become real wealth. The government could pay for services with paper
receipts that were basically community credits. In this way, the
community actually created supply and demand at the same time. The
farmer would not farm, the teacher would not teach, the miner would
not mine, unless the funds were available to compensate them for
their labors. Paper “scrip” underwrote the production of goods and
services that would not otherwise have been on the market. Anything
for which there was a buyer and a producer could be produced and
traded. If A had what B wanted, B had what C wanted, and C had
what A wanted, they could all get together and trade. They did not
need the moneylenders™ gold, which could be hoarded, manipulated,
or lent only at usurious interest rates.

Representation Without Taxation

The new paper money did more than make the colonies
independent of the British bankers and their gold. It actually allowed
the colonists to finance their local governments without taxing the people.
Alvin Rabushka, a senior fellow at the Hoover Institution at Stanford
University, traces this development in a 2002 article called
“Representation Without Taxation.” He writes that there were two
main ways the colonies issued paper money. Most colonies used both,
in varying proportions. One was a direct issue of notes, usually called
“bills of credit” or “treasury notes.” These were I.O.U.s of the
government backed by specific future taxes; but the payback was
deferred well into the future, and sometimes the funds never got
returned to the treasury at all. Like in a bathtub without a drain, the
money supply kept increasing without a means of recycling it back to
its source. However, the funds were at least not owed back to private
foreign lenders, and no interest was due on them. They were just
credits issued and spent into the economy on goods and services.
The recycling problem was solved when a second method of issue
was devised. Colonial assemblies discovered that provincial loan offices
could generate a steady stream of revenue in the form of interest by
taking on the lending functions of banks. A government loan office called
a “land bank” would issue paper money and lend it to residents

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(usually farmers) at low rates of interest. The loans were secured by
mortgages on real property, silver plate, and other hard assets.
Franklin wrote, “Bills issued upon Land are in Effect Coined Land.”
New money issued and lent to borrowers came back to the loan office
on a regular payment schedule, preventing the money supply from
over-inflating and keeping the values of paper loan-office bills stable
in terms of English sterling. The interest paid on the loans also went
into the public coffers, funding the government. Colonies relying on
this method of issuing paper money thus wound up with more stable
currencies than those relying heavily on new issues of bills of credit.
The most successful loan offices were in the middle colonies “
Pennsylvania, Delaware, New York and New Jersey. The model that
earned the admiration of all was the loan office established in
Pennsylvania in 1723. The Pennsylvania plan showed that it was
quite possible for the government to issue new money in place of taxes
without inflating prices. From 1723 until the French and Indian War
in the 1750s, the provincial government collected no taxes at all. The
loan office was the province™s chief source of revenue, supplemented
by import duties on liquor. During this period, Pennsylvania wholesale
prices remained stable. The currency depreciated by 21 percent against
English sterling, but Rabushka shows that this was due to external
trade relations rather than to changes in the quantity of currency in
circulation. 5
Before the loan office came to the rescue, Pennsylvania had been
losing both business and residents due to a lack of available currency.
The loan office injected new money into the economy, and it allowed
people who had been forced to borrow from private bankers at 8
percent interest to refinance their debts at the 5 percent rate offered
by the provincial government. Franklin said that this money system
was the reason that Pennsylvania “has so greatly increased in
inhabitants,” having replaced “the inconvenient method of barter”
and given “new life to business [and] promoted greatly the settlement
of new lands (by lending small sums to beginners on easy interest).”
When he was asked by the directors of the Bank of England why the
colonies were so prosperous, he replied that they issued paper money
“in proper proportions to the demands of trade and industry.” The
secret was in not issuing too much, and in recycling the money back
to the government in the form of principal and interest on government-
issued loans.
The paper currencies of the New England colonies “ Massachusetts,
Rhode Island, Connecticut and New Hampshire “ were less successful
Chapter 3 - Experiments in Utopia

than those of the middle colonies, mainly because they failed to limit
their issues to these “proper proportions,” or to recycle the money
back to the government. The paper money of the New England
colonies helped to finance development and growth that would not
otherwise have occurred, but the currencies did not maintain their
value, because bills of credit were issued in far greater quantities than
the provincial governments ever hoped to redeem. Because the money
was pumped into the economy without flowing back to the
government, the currency depreciated and price inflation resulted.

King George Steps In

Rapid depreciation of the New England bills eventually threatened
the investments of British merchants and financiers who were doing
business with the colonies, and they leaned on Parliament to prohibit
the practice. In 1751, King George II enacted a ban on the issue of all
new paper money in the New England colonies, forcing the colonists
to borrow instead from the British bankers. This ban was continued
under King George III, who succeeded his father in 1752.
In 1764, Franklin went to London to petition Parliament to lift the
ban. When he arrived, he was surprised to find rampant unemploy-
ment and poverty among the British working classes. “The streets
are covered with beggars and tramps,” he observed. When he asked
why, he was told the country had too many workers. The rich were
already overburdened with taxes and could not pay more to relieve
the poverty of the working classes. Franklin was then asked how the
American colonies managed to collect enough money to support their
poor houses. He reportedly replied:
We have no poor houses in the Colonies; and if we had some,
there would be nobody to put in them, since there is, in the
Colonies, not a single unemployed person, neither beggars nor tramps.6
His English listeners had trouble believing this, since when their
poor houses and jails had become too cluttered, the English had actu-
ally shipped their poor to the Colonies. The directors of the Bank of
England asked what was responsible for the booming economy of the
young colonies. Franklin replied:
That is simple. In the colonies we issue our own money. It is
called Colonial Scrip. We issue it to pay the government™s
approved expenses and charities. We make sure it is issued in
proper proportions to make the goods pass easily from the

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producers to the consumers. . . . In this manner, creating for
ourselves our own paper money, we control its purchasing
power, and we have no interest to pay to no one. You see, a
legitimate government can both spend and lend money into
circulation, while banks can only lend significant amounts of
their promissory bank notes, for they can neither give away nor
spend but a tiny fraction of the money the people need. Thus,
when your bankers here in England place money in circulation,
there is always a debt principal to be returned and usury to be
paid. The result is that you have always too little credit in
circulation to give the workers full employment. You do not have
too many workers, you have too little money in circulation, and that
which circulates, all bears the endless burden of unpayable debt and
usury. 7
Banks were limited to lending money into the economy; and since
more money was always owed back in principal and interest (or
“usury”) than was lent in the original loans, there was never enough
money in circulation to pay the interest and still keep workers fully
employed. The government, on the other hand, had two ways of getting
money into the economy: it could both lend and spend the money into
circulation. It could spend enough new money to cover the interest due on
the money it lent, keeping the money supply in “proper proportion”
and preventing the “impossible contract” problem ” the problem of
having more money owed back on loans than was created by the
loans themselves.
After extolling the benefits of colonial scrip to the citizens of
Pennsylvania, Franklin told his listeners, “New York and New Jersey
have also increased greatly during the same period, with the use of
paper money; so that it does not appear to be of the ruinous nature
ascribed to it.” Jason Goodwin observes that it was a tricky argument
to make. The colonists had been stressing to the mother country how
poor they were ” so poor, they were forced to print paper money for
lack of precious metals. Franklin™s report demonstrated to Parliament
and the British bankers that the pretext for allowing paper money
had been removed. The point of having colonies was not, after all, to
bolster the colonies™ economies. It was to provide raw materials at
decent rates to the mother country. In 1764, the Bank of England
used its influence on Parliament to get a Currency Act passed that
made it illegal for any of the colonies to print their own money.8 The
colonists were forced to pay all future taxes to Britain in silver or gold.

Chapter 3 - Experiments in Utopia

Anyone lacking in those precious metals had to borrow them at interest
from the banks.
Only a year later, Franklin said, the streets of the colonies were
filled with unemployed beggars, just as they were in England. The
money supply had suddenly been reduced by half, leaving insufficient
funds to pay for the goods and services these workers could have
provided. He maintained that it was “the poverty caused by the bad
influence of the English bankers on the Parliament which has caused
in the colonies hatred of the English and . . . the Revolutionary War.”
This, he said, was the real reason for the Revolution: “The colonies
would gladly have borne the little tax on tea and other matters had it
not been that England took away from the colonies their money, which
created unemployment and dissatisfaction.” John Twells, an English
historian, confirmed this view of the Revolution, writing:
In a bad hour, the British Parliament took away from America
its representative money, forbade any further issue of bills of
credit, these bills ceasing to be legal tender, and ordered that all
taxes should be paid in coins. Consider now the consequences:
this restriction of the medium of exchange paralyzed all the
industrial energies of the people. Ruin took place in these once
flourishing Colonies; most rigorous distress visited every family
and every business, discontent became desperation, and reached
a point, to use the words of Dr. Johnson, when human nature
rises up and asserts its rights.9
Alexander Hamilton, the nation™s first Treasury Secretary, said
that paper money had composed three-fourths of the total money
supply before the American Revolution. When the colonists could
not issue their own currency, the money supply had suddenly shrunk,
leaving widespread unemployment, hunger and poverty in its wake.
Unlike in the Great Depression of the 1930s, people in the 1770s were
keenly aware of who was responsible for their distress. One day they
were trading freely with their own paper money. The next day it was
gone, banned by order of a king an ocean away, who demanded
tribute in the coin of the British bankers. The outraged populace
ignored the ban and went back to issuing their own paper money. In
his illuminating monetary history The Lost Science of Money, Stephen
Zarlenga quotes historian Alexander Del Mar, who wrote in 1895:
[T]he creation and circulation of bills of credit by revolutionary
assemblies . . . coming as they did upon the heels of the strenuous
efforts made by the Crown to suppress paper money in America
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[were] acts of defiance so contemptuous and insulting to the
Crown that forgiveness was thereafter impossible . . . [T]here
was but one course for the Crown to pursue and that was to
suppress and punish these acts of rebellion . . . . Thus the Bills of
Credit of this era, which ignorance and prejudice have attempted to
belittle into the mere instruments of a reckless financial policy were
really the standards of the Revolution. They were more than this:
they were the Revolution itself!10

The Cornerstone of the Revolution

Like Massachusetts nearly a century earlier, the colonies suddenly
found themselves at war and without the means to pay for it. The
first act of the new Continental Congress was to issue its own paper
scrip, popularly called the Continental. Most of the Continentals were
issued as I.O.U.s or debts of the revolutionary government, to be
redeemed in coinage later. 11 Eventually, 200 million dollars in
Continental scrip were issued. By the end of the war, the scrip had
been devalued so much that it was essentially worthless; but it still
evoked the wonder and admiration of foreign observers, because it
allowed the colonists to do something that had never been done
before. They succeeded in financing a war against a major power,
with virtually no “hard” currency of their own, without taxing the


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