The American colonial financial crisis of the late 1740s was the confluence of a number of growing currency problems throughout the British colonies, exacerbated by war and trade issues. Periods of hyperinflation, shortages of specie, the uneven quality of colonial paper currencies, the costs of wars with France, and trade issues with Britain all contributed to the colonial crisis.
Hyperinflation was particularly problematic in the colonies of Massachusetts, Rhode Island, Connecticut, and New Hampshire. During the 1740s, the annual inflation rate was above 19 percent. (By comparison, during the period of high inflation in the United States in the 1970s, it never rose above 13.3 percent.) Inflation increased the price of basic commodities, such as molasses, by 60 percent from 1745 to 1749. Extreme increases in the prices of raw goods created a nightmare for British trade, which counted on a supply of cheap colonial raw materials for their manufactured goods. Parliament was pressured to enact the Currency Act of 1751, which prevented the colonies from printing their own paper money. The resulting lack of money in circulation, along with the high cost of goods, ultimately caused riots in the streets of Boston.
Currency problems had plagued the colonies from the start. Great Britain promoted a barter system for goods from its American colonies because it gave an advantage to British manufacturing and the goods were carried in British ships. Colonial exports of skins, ginseng, and tobacco were paid for in English goods such as clothing, pewter, and glass windows. The colonists preferred to receive specie (gold and silver coins) as payment, but coins were in short supply. Unlike Spain, Britain did not have colonial gold and silver mines as a source of the precious metals needed to make additional specie.
The best source of coins for the colonies was from piracy, as British and colonial pirates and adventurers captured Spanish treasure ships sailing between Spain and its colonies. The most common coin in the British colonies was the Spanish dollar, which could be divided into eight pieces. The activities of such pirates were welcomed by the colonists and were responsible for the wide circulation of the Spanish dollar. More coins in circulation helped improve the terms of trade for colonial merchants and farmers, because a currency-based trade is more efficient than barter.
The king of England had refused to allow the colonies to mint their own coins. During King William’s War (1689–1697), when British colonists first began to pay for their own defense forces, the king had allowed the colonies to pay soldiers in paper money known as “bills of credit.” Slowly, the creation of these bills of credit by fiat outpaced the silver in circulation, which was needed to lend the bills legitimacy. This resulted in inflation throughout the colonial economies from 1710 to 1750. These bills of credit were backed by the colonial governments and had to be accepted for goods; thus, they had the attributes of paper money. Like our paper money today, the bills of credit were not backed by silver or gold. Inflation increased as spending on King George’s War (1744–1748) and on the French and Indian War (1754–1763) put more of this paper money into circulation and created demand for more goods.
The tight trade links between British merchants and the colonies exacerbated colonial inflation. English merchants had begun accepting these bills of credit as payment for the goods they shipped to the colonies. As the value of the bills began depreciating because of inflation in the colonies, British merchants began to charge more for their goods in compensation. A spiral of inflation began.
The currency crisis created local economic turmoil and recession as well as inflation. In the 1740s, the rate of inflation was in the double digits, creating street riots. American traders were at odds with British merchants as their barter system broke down. Another problem arose because the New England colonies could not collect taxes from farmers and merchants who were not making any money. Small farmers found themselves in deep debt to merchants in Boston, who made the currency shortage in the colonies—and thus the recession—worse by shipping much-needed colonial coins to Great Britain in return for goods.
The colony tried another form of bills of credit backed by land, known as the Land Bank. In effect, the Land Bank would create more paper money and allow more money in circulation. The idea was extremely popular with the colonists. The governor and the king did not like the idea of the Land Bank, however, judging it would further increase inflation and allow colonists to escape full payment for goods. The Land Bank idea went forward because it was popular in elections but ultimately failed. The father of Samuel Adams, one of America’s founding fathers, was one of those who went bankrupt when the Land Bank failed.
The combination of the economic downturn and inflation made life miserable in the colonies. Shortages of silver required customers to supply their own old silver if they wished new silver implements made. The shortage of currency prevented landholders from paying taxes, which in turn often resulted in their property being seized. Merchants could not sell their goods because their buyers lacked currency.
In Massachusetts, political pressure mounted for reform as tax revenues dropped, trade tightened for lack of money, and street protests continued. Massachusetts began currency reforms in 1750, which offered a way out of the crisis, but the other colonies refused to join it. Massachusetts worked with Great Britain to retire bills of credit through the payment of specie to the colony. Colonists had four months to turn in the bills, after which they became worthless. No future paper money would be allowed. Shortfalls would be covered by additional taxes. Massachusetts also banned the use of paper money from other colonies. The state could still issue bills backed by specie but retained an exception in case of a major war.The immediate effect was a shortage of currency, which made things worse in the colony for a brief period. But Massachusetts issued a new type of paper currency called a Treasury Note, which was redeemable in specie and earned interest while it was held. Although Massachusetts had not planned for these treasury bills to circulate, they did and became a type of currency. The backing of these bills with specie restored confidence in the colony’s currency. The Massachusetts reform proved highly successful as prices fell and inflation declined. By the 1740s, the Boston Land Bank had circulated these new land-backed notes at an alarming rate, and Parliament used the old Bubble Act of 1720 to restrict the practice.
Finally, Parliament moved to further restrict paper money in 1751.Britain passed the Currency Act of 1751 to impose the Massachusetts reform on Rhode Island, New Hampshire, and Connecticut. More wealthy colonists and some farmers who owned bills of credit from the Land Bank were bankrupted. New England once again suffered a mild recession. The Currency Act did not apply to the middle and southern colonies, which at the time had a stable currency. Unfortunately New York, Pennsylvania, and Delaware continued to print bills to finance the French and Indian War. Eventually, all the colonies would be covered under the Currency Act of 1764. Virginia remained a special case because of its direct tobacco trade with Great Britain. Virginia’s high currency demands during the French and Indian War allowed it to continue issuing paper bills.
Economists still use the hyperinflation in colonial Massachusetts as a case study for understanding modern-day inflation. It is striking that this colonial inflation was far more problematic than even America’s experience with high inflation in the 1970s. The currency reforms that arose in Massachusetts and that Britain imposed on the colonies helped to return some stability to colonial economies. The failure of individual currencies from each colony would ultimately lead to the use of a common currency, under a common government.
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