Colonial Script: Fiat Money That Worked

It is well known that the Continental, colonial script issued by congress, failed, it is less well known that the currency was undermined by British counterfeiters.

It is also overlooked that the colonies successfully used colonial script (fiat money) togetehr with European money to boost teh money supply, promote economic activity, and reduce the tax burden.

The Good Old Days of Gold and Silver
http://home.comcast.net/~zthustra/pdf/gold_and_silver.pdf

Category:

People & Blogs

Tags:

• colonial
• script
• fiat
• money
• continental
• gold
• silver

[MrPloppy1]

It sounds as if scrip was just a different form of commodity money & not an unbacked fiat money like FRNs. It was a land standard instead of a gold standard. If scrip was honest the amount of issued currency could not exceed the amount of land that it represented. In other words, if a colony had 100k acres of unclaimed land it could only issue 100k acres worth of currency. I assume the bearer of scrip could redeem it for land as the bearer of gold notes could redeem theirs for gold coin?

[zthustra]

@MrPloppy1

This is NOT to say that silver and gold do not have commodity value, it is only to say that when coined, the value of the coin was established and declared by FIAT. The value was stamped into the coin by sovereign authority and subjects where obligated to accept the coin as being the value inscribed and to return the coins as tax. It was the requirement that the coins be used for taxes and other official purposes (FIAT) that gave the coin it monetary value. Read about "monetta".

[MrPloppy1]

@zthustra That's not how money works under a gold standard. Today if you cut a dime in half it's magical value is gone--it becomes worthless. Under a gold standard half a silver dime that's been cut in two is worth half a dime. The silver is the money not the arbitrary value in units that is stamped on it. Dollars, pounds, francs were all just different national units of WEIGHT in silver/gold.

I'm the same mass whether I weigh 200 pounds, 90 KG or 14 stone.

[zthustra]

@MrPloppy1

The "magic" of a gold or silver coin WAS higher that the commodity value of the gold or silver used to make the coin. That is why the system worked so well then and doesn't work so well now.

I like your use of "magic" as a substitute for "fiat", I'm going to start using that myself. The magic value of a bit of paper with green ink stamped on it is the same as the magic value of a bit of shiny metal with the king's crest stamped into it.

Read State Theory of Money.

[zthustra]

@MrPloppy1

Assumptions are funny things. Pennsylvania issued scrip to pay for goods and services. IF you owned land, you could borrow scrip from the government against the value of your land in the same manner that people borrow today, except that the interest rate was much lower. Most of the money went into circulation by government spending and not by lending. Lending some money created a kind of land tax and the repayment of the loan reduced the money supply and kept inflation at bay.

[zthustra]

@MrPloppy1

No, you could NOT redeem your scrip for land. Read State Theory of Money to understand why money issued by the sovereign power has value as a medium of exchange.

[shanedk]

Irrelevant. If there's no one else there, there's no barter system for the money to be useful in. This is just like saying that hot air balloons are useless because they won't work on the moon!

[shanedk]

But in economics, EVERYTHING derives value from utility, so again I don't know what your point is.

[MrPloppy1]

@zthustra Of course gold coinage is worth more then "raw" gold in the same way that milled lumber is worth more than cut timber.

I did read up on the state theory. I understand that it is the modern way of think of money. I don't think it was how money was thought of when gold was money.

Do you think that a govt that was minting gold coins & stamping "1" on them one day, & using the same weight coin, stamped the numeric value of "2" the next day would double the purchasing power of the coin?

[MrPloppy1]

@zthustra After re-reading the Adam Smith quote, & if I understand it correctly now, it sounds like the colonial govt was acting as a bank. They were issuing loans to landowners in the form of scrip (that could circulate as a money substitute like bank notes) with land as collateral. I would think if a landowner had land worth 100 pounds sterling, for example, that would be the maximum amount of his scrip/loan. So it sounds like they were still using a gold standard in an indirect way.

[zthustra]

@MrPloppy1

Like ALL real money, scrip was fiat money. Commodities are for barter and trade, money is credit now for payment later, a deferral of payment. Even silver and gold coins are tokens now, the real payment comes later when the tokens are exchanged for goods and services.

Scrip was issued by the colony to people from which the colony demanded goods or services and then was demanded back as tax. This is how it was done in Rome where early coins were tribute. See state theory of money.

[tensforme]

Yes, the British had counterfeited about 500,000,000 pounds worth of continentals. You are correct, and shanedk is wrong.