Financial History 145 Spring 2023 - Page 21

could discharge their enormous tax obligations with these “ bills .” Officially , it was not money at all , and thus England was expected not to care .
The bills were enacted into law on December 24 , 1690 , and printing soon began . Lacking the bureaucracy of an Old World state or a modern country , the Massachusetts legislature regularly assigned any work of importance to an executive committee . Such committees normally included members from both houses of the legislature ( the upper house , the Council , was also the supreme executive authority ). Very often , committees also included private men who were experts on the relevant issues . It was thus entirely natural for the bills to be handled by a committee of five men : Councilor Elisha Hutchinson , Treasurer John Phillips , the speaker of the lower house and two former bankers . As usual in Massachusetts financial committees , all these men were merchants from the Boston area , as there were no greater financial experts around . The committee had considerable discretion regarding the quantity , denominations and timing of the issue of the bills . Its actions could affect inflation . Since the committee conducted open market purchases , I call it retroactively the Massachusetts Open Market Committee .
While the committee ’ s appointment was natural for its time and place , it is surprising that its checks and balances were very similar to those of the modern Federal Open Market Committee . The 1690 committee had three men representing the executive and legislature and two men representing the private sector . Today , this ratio is 7:5 . While surprising , it is not a coincidence : The American system of checks and balances , which prominently includes the private sector , has been in place long before independence . It was forgotten in the First and Second Banks of the United States and in the original Federal Reserve Act , and may explain why these institutions survived only for a combined period of 62 years . The FOMC has survived since 1935 .
The novel money was not immediately understood by the Massachusetts population . Two open letters , by a visiting English financier and by local pastor Cotton Mather , were printed to promote the money ’ s acceptance . While misleadingly giving Canada ’ s card money and European banks as relevant examples , the authors also made the correct point that paying taxes with these bills was merely a setoff operation with the Treasury . Everyone was experienced with setoff as a method of settling debts without coins .
The population was soon convinced , and so the plan worked : The bills were accepted as money , and England did not care . In October 1691 , William and Mary granted a new charter to the Province of Massachusetts Bay . Upon the charter ’ s arrival in 1692 , the new government no longer had to fear England ’ s reaction regarding its money-issuing activities . It therefore made the “ bills of credit ” ( as they came to be known ) legal tender not only for taxes , but for any monetary obligation . This is also the legal status of our modern currency .
The same Cotton Mather , as a historian , praised his people ’ s ingenuity : “ In this extremity they presently found out an expedient , which may serve as an example , for any people in other parts of the world , whose distresses may call for a sudden supply of money to carry them through any important expedition .” Indeed , the invention spread to the other English colonies and later to Europe . No longer would kings debase their gold coins to finance wars ; the printing presses took center stage .
Gold made a comeback , again and again , to prevent inflation , only to be discarded again during wars . Gold coins disappeared from American shops and homes in the Great Depression . Gold remained behind the scenes , loosely “ backing ” an everincreasing amount of paper dollars . Only foreign central banks had the legal right to convert the dollars they held into US gold . The commitment collapsed under the cost of three wars : The Vietnam War , President Johnson ’ s War on Poverty and the war on gravity ( the Space Program ). The dollar ’ s relation to gold lost its credibility , and when Nixon “ suspended ” the convertibility promise in 1971 , he took the entire world off gold . Since then , our currency is Massachusetts currency . The Central Bank Digital Currency that may replace it will be equipped with the same legal status .
The story of 1690 Massachusetts has lessons for the present not only regarding the FOMC , whose structure was recently challenged in Congress ( Senator Toomey ’ s Federal Reserve Accountability Act ), but also regarding Bitcoin and “ Modern
Monetary Theory .” Both of these hyped post-2008 phenomena make grave mistakes , somewhat opposite to each other , regarding legal tender currency . Bitcoin ideology ignores legal tender status at its peril , and its zealous advocates cannot comprehend why the entire world population still hasn ’ t switched to it . One major reason is that you can ’ t pay your taxes in Bitcoin , and no sane money-issuing government would allow that .
MMT economists , on the other hand , understand perfectly well the power of legal tender status for modern money , and it serves as their starting point . They are also correct in the next theoretical step : Because taxpayers must obtain legal tender currency , regardless of the inflation rate , governments can easily make as much money as they want and people will still accept it . And here MMT becomes Weimar-level dangerous : MMT sees this troubling fact as a cause for celebration — a cheap device with which to eliminate ( not just reduce ) all social and climatic problems . The prudent conclusion is the opposite : Because modern currency can be abused so easily , we need to be extremely careful . Devices such as independent central banks , politically balanced monetary policy committees with a significant role to the private sector , price stability mandates and formal inflation targets should be employed to avert that great danger . Mather ’ s above quote may seem like the first MMT pronouncement in history , but in fact the extremely disciplined Puritans increased taxes first and printed money later — at the exact same amount . MMT is all about denying such discipline .
Indeed , modern currency — legal tender notes and coins with no intrinsic value — is a double-edged sword , like any great invention . And a great invention it is , one that should make us revise the common assessment of the finances of colonial America . It wasn ’ t just about pathetic tobacco currency , chronic inflation and the absence of banking . Colonial America was also the birthplace of modern currency and even of politically balanced open market committees .
Dror Goldberg is the author of Easy Money : American Puritans and the Invention of Modern Currency , published by the University of Chicago Press in March 2023 .
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