fis200_week1_reading3 (1)

fis200_week1_reading3 (1) - CHAPTER 3 M ONEY IN AMERIC A A...

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MONEY IN MONEY IN AMERIC AMERIC A A From Colonial Silver and Paper to the Turmoil of 1929 The American colonies that later became the United States quickly evolved along the same path the ancient world had taken thousands of years earlier. Beaver pelts, fish, and corn served as early forms of money. Wampum, a string of beads made from the inside shell of clams or mussels, gained a wide popularity. Rice was used as money in South Carolina, and tobacco was money in Virginia, where ware- house receipts for tobacco served as paper money. In time, gold and silver were imported to serve as monetary media and traded by their weight and fineness. English coins circulated, and also French, Por- tuguese, Spanish, and Brazilian coins. The leading coin was the Span- ish silver dollar, which had become common all over the world as a product of the prolific Spanish silver mines in Latin America. Massachusetts began an early soft-money cycle when it enacted laws in 1642 that set a value on the Spanish silver dollar higher than its weight in silver, in effect devaluing the coin, as part of a mercan- tilist plan to increase exports. Connecticut and other colonies fol- lowed, and a round of competitive devaluations swept the colonies. The English government halted the practice in 1707, only nine years after England itself had established a standardized metallic currency. Unredeemable government paper money in the American colonies first appeared in Massachusetts in 1690 to pay soldiers after a failed plunder expedition to the French colony in Quebec. Massa- chusetts, which couldn’t pay the soldiers, offered them notes that CHAPTER 3 39
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were supposed to be redeemable in specie after several years, but the redeemability date was repeatedly postponed. This was reasonably successful, so the government issued more money to pay off all its debts; the result was a devaluation of the paper currency. The infla- tionary policies met widespread opposition, and Massachusetts re- frained from big issuances of government paper until 1744, when another failed expedition against Quebec led to huge issuances and a devaluation of 11:1 against metallic silver, the original par value. By 1750, every colony but Virginia had followed the example of Massa- chusetts, with the identical results: 9:1 devaluation in Connecticut, 10:1 in the Carolinas, and 23:1 in Rhode Island, for example. The English government eventually stepped in and straightened out the wayward colonies and legislated a return to a metallic cur- rency. In 1751, Britain prohibited further issues of legal tender paper in New England colonies, and in 1764 it had extended the prohibi- tion and retirement of outstanding notes to all colonies. Government paper money had been outlawed. The New England colonies quickly retired their paper notes at the market rate and made a smooth return to a specie standard. The result was increased economic activity in the New England colonies, as a reliable and stable unit of measure- ment facilitated trade, investment, and production. Rhode Island
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