Creature From Jekyll Island by G. Edward

Good, to make Money more plentiful.'2 The printing of money was apparently a major, time-consuming operation.

In 1737, Massachusetts devalued its fiat currency by 66%, offering one dollar of new currency for three of the old. The promise was made that, after five years, the new money would be fully redeemed in silver or gold. The promise was not kept.

By the late 1750s, Connecticut had price inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300% 4 Naturally, these inflations all had to come to an end and, when they did, they turned into equally massive deflations and depressions. It has been shown that, even in colonial times, the classic booms and busts which modern economists are fond of blaming on an 'unbridled free market' actually were direct manifestations of the expansion and contraction of fiat mone|

which no longer was governed by the laws of supply and demand.

1 Statutes at Large of South Carolina, II. 211,665, as cited by George Bancroft, A Plea for the Constitution (Originally published by Harpers in 1886. Reprinted in Sewanee, Tennessee: Spencer Judd Publishers, 1982), p. 7.

2. Leonard W. Labaree, ed., The Papers of Benjamin Franklin (New Haven: Yale University Press, 1960), Vol. 2, p. 159.

3. P r o v i n c e L a w s , II. 826, cited by Bancroft, p. 14.

4. Ron Paul and Lewis Lehrman, The Case for Gold (Washington, D.C.: Cato Institute, 1982), p. 22. Also Sutton, The War on Gold, p. 44.

5 See Donald L. Kemmerer, 'Paper Money in New Jersey, 1668-1775,' New Jersey Historical Society, Proceedings 74 (April 1956): pp. 107-144, as cited by Paul and Lehrman, The Case for Gold, p. 22.

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By this time, coins had completely disappeared from the scene.

S o m e were in private hoards, but most of them had been exported to other countries, leaving the colonies with little choice but to use fiat money or barter. Merchants from abroad were interested in neither of those, however, and international trade ground almost to a halt.

A BLESSING IN DISGUISE

The experiment with fiat money was a calamity to the colonists, but it was also a thorn in the side of the Bank of England. The bank had used its influence with the Crown to forbid the colonies to mint their own coins or to establish local banks. This meant that, if the colonists wanted the convenience of paper money, they would be forced to use the notes issued by the Bank of England. No one had anticipated that the colonial governments would be so inventive as to create their own paper money. So, in 1751, Great Britain began to pressure the colonies to redeem all of their currency and withdraw it from circulation. This they eventually did, and at bargain prices.

By then, their fiat money was heavily discounted in the market place and the governments were able to buy back their own currency for pennies on the dollar.

The decree from the British Parliament, although heavily

resented by the colonists, turned out to be a blessing in disguise.

The paper notes of the Bank of England never did become a primary medium of exchange. Probably because of their recent bad experience with paper money, the colonists merely brought what few gold and silver coins they had out of hiding and returned to a true commodity-money system. At first, the doomsdayers predicted this would spell further ruin for the colonial economy.

'There isn't enough money' was the all-too-familiar cry. But there was, indeed, quite enough for, as we have already seen, any amount is sufficient.

TOBACCO BECOMES MONEY

There was, in fact, a period in which other commodities became accepted as a secondary medium of exchange. Such items as nails, lumber, rice, and whisky filled the monetary void, but tobacco was the most common. Here was a commodity which was in great

demand both within the colonies and for overseas commerce. It had intrinsic value; it could not be counterfeited; it could be divided into almost any denominational quantity; and its supply 160

THE CREATURE FROM JEKYLL ISLAND

could not be increased except by the exertion of labor. In other words, it was regulated by the law of supply and demand, which gave it great stability in value. In many ways, it was an ideal money. It was officially adopted as such by Virginia in 1642 and a few years later by Maryland, but it was used unofficially in all the other colonies, as well. So close was the identity of tobacco with money that the previous fiat currency of New Jersey, not a tobacco growing state, displayed a picture of a tobacco leaf on its face. It also carried the inscription: 'To counterfeit is Death.' Tobacco was used in early America as a secondary medium of exchange for about two-hundred years, until the new Constitution declared that money was, henceforth, the sole prerogative of the federal government.

The primary currency at that juncture, however, was still gold and silver coin, or specie, as it is called. And the immediate result of returning to a sound monetary unit was a rapid recovery from the economic stagnation previously inflicted by the booms and busts of fiat money. Trade and production rose dramatically, and this, in turn, attracted an inflow of gold and silver coin from around the world, filling the void that had been created by years of worthless paper. The law of supply and demand was visibly at work. For a while, Massachusetts had returned to specie while Rhode Island remained on fiat money. The result was that Newport, which had been the trade center for the West Indies, lost its trade to Boston and became an empty port.2 After the colonies had returned to coin, prices quickly found their natural equilibrium and then stayed at that point, even during the Seven Years War and the disruption of trade that occurred immediately prior to the Revolution. There is no better example of the fact that economic systems in distress can and do recover rapidly if government does not interfere with the natural healing process.

WAR BRINGS A RETURN OF FIAT MONEY