is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

Prometheus Shackled: Goldsmith Banks and England’s Financial Revolution after 1700

Author(s):Temin, Peter
Voth, Hans-Joachim
Reviewer(s):Grossman, Richard S.

Published by EH.Net (December 2013)

Peter Temin and Hans-Joachim Voth, Prometheus Shackled: Goldsmith Banks and England’s Financial Revolution after 1700.  New York: Oxford University Press, 2013.  ix + 214 pp. $40 (hardcover), ISBN: 978-0-19-994427-9.

Reviewed for EH.Net by Richard S. Grossman, Department of Economics, Wesleyan University.

Economic historians spend a lot of time writing about banking.  The report of the editors of the Journal of Economic History presented to the annual meeting of the Economic History Association typically includes a breakdown of the subfields of submitted manuscripts.  Money and banking is often one of the more popular areas of research.

For a variety of reasons – notably lack of an extensive paper trail – the vast majority of economic history research on banking focuses on the nineteenth and twentieth centuries.  So the profession should be especially grateful to Peter Temin and Hans-Joachim Voth for their new volume on eighteenth century London goldsmith banking, Prometheus Shackled.

The authors are well-known to readers of EH.Net.  Peter Temin is an emeritus professor at MIT and one of our most eminent economic historians.  He published his first book almost 50 years ago and has by now authored or edited, alone or with others, 20 books – including three in 2013.  Hans-Joachim Voth is a professor at Universitat Pompeu Fabra and also a prominent, widely-published member of the economic history tribe.

The first chapter describes the rise of the “middling” classes in London, which includes those who will eventually become the principal savers and borrowers.  The second chapter discusses the financial revolution that allowed England to raise money more efficiently, including the establishment of the Bank of England.  The third chapter charts the rise of goldsmith bankers, in particular Hoare’s Bank (and a main competitor, Child’s Bank), from which the authors gathered the majority of their archival data.  This chapter presents details on the evolution of the goldsmith banking business, including information on balance sheet size and composition, as well as return on equity and assets of Hoare’s and Child’s, supplemented with more fragmentary data on other goldsmith bankers.  The subsequent chapter analyzes the identity of the lenders to and borrowers from the goldsmith banks, using Hoare’s as a model of a successful example, and takes a detailed look at the impact of the usury ceiling and the consequences of reducing that ceiling in 1714.

Chapter 5 discusses the South Sea Bubble in detail and the ability of Hoare’s and its clients to profitably “ride” the bubble.  Chapter 6 describes the evolution of the work of the goldsmith banks and the adoption of more routinized practices, a chapter the authors call: “The Triumph of Boring Banking.”  A final substantive chapter, the only chapter that directly addresses the main thesis presented in the book’s title, speculates that Britain’s constrained financial system – especially the combination of usury laws and a large government debt – slowed economic growth during the early phase of the Industrial Revolution.

The book will be welcome to anyone looking for a clearer picture of goldsmith banking.  The authors have made good use of the archives of Hoare’s Bank, supplemented with more fragmentary records of other institutions.  Hoare’s archives are bolstered by the happy fact that the bank has been in business in the same address since before 1700, meaning that no documents have been lost in a move to another location or through amalgamation with another institution.

The strongest parts of the book – many of which have appeared as journal articles – are those that rely on detailed analyses of the data from Hoare’s records.  For example, chapter 4 presents a nice analysis of the changes in Hoare’s accounts after 1714 when the usury ceiling was lowered to 5 percent from 6 percent.  This natural experiment reinforces the authors’ suspicion that the bank’s customary loan rate was, in fact, generally set equal to the usury limit.  Further, the authors are able to identify how lowering the usury ceiling affected credit rationing, as higher quality creditors continued to be able to secure loans, while lower quality borrowers were presumably rationed out of the market.  This study was previously published in the Economic Journal.   Chapter 5 presents an interesting micro study on bubbles, examining how Hoare’s was able to “ride” the South Sea Bubble, which was previously published in the American Economic Review.

When the authors stray from Hoare’s, they are on less firm ground.  The first two chapters are neither as well argued nor as articulately written as those that are more directly tied to Hoare’s.  Additionally, despite acknowledging difficulties in generalizing from the experience of Hoare’s, the authors do so anyway: given that the Industrial Revolution was centered more than 150 miles away from 37 Fleet Street, this may be more problematic than they admit.

We can only hope that this book inspires even more archival-based research on this neglected era.  In the meantime, this useful volume will provide a welcome starting point for future researchers.

Richard S. Grossman is a professor of economics at Wesleyan University and a visiting scholar at the Institute for Quantitative Social Science, Harvard University.  His is the author of WRONG: Nine Economic Policy Disasters and What We Can Learn from Them, which was published in November 2013 by Oxford University Press.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (December 2013). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):18th Century

The Protestant Ethic Thesis

Donald Frey, Wake Forest University

German sociologist Max Weber (1864 -1920) developed the Protestant-ethic thesis in two journal articles published in 1904-05. The English translation appeared in book form as The Protestant Ethic and the Spirit of Capitalism in 1930. Weber argued that Reformed (i.e., Calvinist) Protestantism was the seedbed of character traits and values that under-girded modern capitalism. This article summarizes Weber’s formulation, considers criticisms of Weber’s thesis, and reviews evidence of linkages between cultural values and economic growth.

Outline of Weber’s Thesis

Weber emphasized that money making as a calling had been “contrary to the ethical feelings of whole epochs…” (Weber 1930, p.73; further Weber references by page number alone). Lacking moral support in pre-Protestant societies, business had been strictly limited to “the traditional manner of life, the traditional rate of profit, the traditional amount of work…” (67). Yet, this pattern “was suddenly destroyed, and often entirely without any essential change in the form of organization…” Calvinism, Weber argued, changed the spirit of capitalism, transforming it into a rational and unashamed pursuit of profit for its own sake.

In an era when religion dominated all of life, Martin Luther’s (1483-1546) insistence that salvation was by God’s grace through faith had placed all vocations on the same plane. Contrary to medieval belief, religious vocations were no longer considered superior to economic vocations for only personal faith mattered with God. Nevertheless, Luther did not push this potential revolution further because he clung to a traditional, static view of economic life. John Calvin (1509-1564), or more accurately Calvinism, changed that.

Calvinism accomplished this transformation, not so much by its direct teachings, but (according to Weber) by the interaction of its core theology with human psychology. Calvin had pushed the doctrine of God’s grace to the limits of the definition: grace is a free gift, something that the Giver, by definition, must be free to bestow or withhold. Under this definition, sacraments, good deeds, contrition, virtue, assent to doctrines, etc. could not influence God (104); for, if they could, that would turn grace into God’s side of a transaction instead its being a pure gift. Such absolute divine freedom, from mortal man’s perspective, however, seemed unfathomable and arbitrary (103). Thus, whether one was among those saved (the elect) became the urgent question for the average Reformed churchman according to Weber.

Uncertainty about salvation, according to Weber, had the psychological effect of producing a single-minded search for certainty. Although one could never influence God’s decision to extend or withhold election, one might still attempt to ascertain his or her status. A life that “… served to increase the glory of God” presumably flowed naturally from a state of election (114). If one glorified God and conformed to what was known of God’s requirements for this life then that might provide some evidence of election. Thus upright living, which could not earn salvation, returned as evidence of salvation.

The upshot was that the Calvinist’s living was “thoroughly rationalized in this world and dominated by the aim to add to the glory of God in earth…” (118). Such a life became a systematic living out of God’s revealed will. This singleness of purpose left no room for diversion and created what Weber called an ascetic character. “Not leisure and enjoyment, but only activity serves to increase the glory of God, according to the definite manifestations of His will” (157). Only in a calling does this focus find full expression. “A man without a calling thus lacks the systematic, methodical character which is… demanded by worldly asceticism” (161). A calling represented God’s will for that person in the economy and society.

Such emphasis on a calling was but a small step from a full-fledged capitalistic spirit. In practice, according to Weber, that small step was taken, for “the most important criterion [of a calling] is … profitableness. For if God … shows one of His elect a chance of profit, he must do it with a purpose…” (162). This “providential interpretation of profit-making justified the activities of the business man,” and led to “the highest ethical appreciation of the sober, middle-class, self-made man” (163).

A sense of calling and an ascetic ethic applied to laborers as well as to entrepreneurs and businessmen. Nascent capitalism required reliable, honest, and punctual labor (23-24), which in traditional societies had not existed (59-62). That free labor would voluntarily submit to the systematic discipline of work under capitalism required an internalized value system unlike any seen before (63). Calvinism provided this value system (178-79).

Weber’s “ascetic Protestantism” was an all-encompassing value system that shaped one’s whole life, not merely ethics on the job. Life was to be controlled the better to serve God. Impulse and those activities that encouraged impulse, such as sport or dance, were to be shunned. External finery and ornaments turned attention away from inner character and purpose; so the simpler life was better. Excess consumption and idleness were resources wasted that could otherwise glorify God. In short, the Protestant ethic ordered life according to its own logic, but also according to the needs of modern capitalism as understood by Weber.

An adequate summary requires several additional points. First, Weber virtually ignored the issue of usury or interest. This contrasts with some writers who take a church’s doctrine on usury to be the major indicator of its sympathy to capitalism. Second, Weber magnified the extent of his Protestant ethic by claiming to find Calvinist economic traits in later, otherwise non-Calvinist Protestant movements. He recalled the Methodist John Wesley’s (1703-1791) “Earn all you can, save all you can, give all you can,” and ascetic practices by followers of the eighteenth-century Moravian leader Nicholas Von Zinzendorf (1700-1760). Third, Weber thought that once established the spirit of modern capitalism could perpetuate its values without religion, citing Benjamin Franklin whose ethic already rested on utilitarian foundations. Fourth, Weber’s book showed little sympathy for either Calvinism, which he thought encouraged a “spiritual aristocracy of the predestined saints” (121), or capitalism , which he thought irrational for valuing profit for its own sake. Finally, although Weber’s thesis could be viewed as a rejoinder to Karl Marx (1818-1883), Weber claimed it was not his goal to replace Marx’s one-sided materialism with “an equally one-sided spiritualistic causal interpretation…” of capitalism (183).

Critiques of Weber

Critiques of Weber can be put into three categories. First, Weber might have been wrong about the facts: modern capitalism might have arisen before Reformed Protestantism or in places where the Reformed influence was much smaller than Weber believed. Second, Weber might have misinterpreted Calvinism or, more narrowly, Puritanism; if Reformed teachings were not what Weber supposed, then logically they might not have supported capitalism. Third, Weber might have overstated capitalism’s need for the ascetic practices produced by Reformed teachings.

On the first count, Weber has been criticized by many. During the early twentieth century, historians studied the timing of the emergence of capitalism and Calvinism in Europe. E. Fischoff (1944, 113) reviewed the literature and concluded that the “timing will show that Calvinism emerged later than capitalism where the latter became decisively powerful,” suggesting no cause-and-effect relationship. Roland Bainton also suggests that the Reformed contributed to the development of capitalism only as a “matter of circumstance” (Bainton 1952, 254). The Netherlands “had long been the mart of Christendom, before ever the Calvinists entered the land.” Finally, Kurt Samuelsson (1957) concedes that “the Protestant countries, and especially those adhering to the Reformed church, were particularly vigorous economically” (Samuelsson, 102). However, he finds much reason to discredit a cause-and-effect relationship. Sometimes capitalism preceded Calvinism (Netherlands), and sometimes lagged by too long a period to suggest causality (Switzerland). Sometimes Catholic countries (Belgium) developed about the same time as the Protestant countries. Even in America, capitalist New England was cancelled out by the South, which Samuelsson claims also shared a Puritan outlook.

Weber himself, perhaps seeking to circumvent such evidence, created a distinction between traditional capitalism and modern capitalism. The view that traditional capitalism could have existed first, but that Calvinism in some meaningful sense created modern capitalism, depends on too fine a distinction according to critics such as Samuelsson. Nevertheless, because of the impossibility of controlled experiments to firmly resolve the question, the issue will never be completely closed.

The second type of critique is that Weber misinterpreted Calvinism or Puritanism. British scholar R. H. Tawney in Religion and the Rise of Capitalism (1926) noted that Weber treated multi-faceted Reformed Christianity as though it were equivalent to late-era English Puritanism, the period from which Weber’s most telling quotes were drawn. Tawney observed that the “iron collectivism” of Calvin’s Geneva had evolved before Calvinism became harmonious with capitalism. “[Calvinism] had begun by being the very soul of authoritarian regimentation. It ended by being the vehicle of an almost Utilitarian individualism” (Tawney 1962, 226-7). Nevertheless, Tawney affirmed Weber’s point that Puritanism “braced [capitalism’s] energies and fortified its already vigorous temper.”

Roland Bainton in his own history of the Reformation disputed Weber’s psychological claims. Despite the psychological uncertainty Weber imputed to Puritans, their activism could be “not psychological and self-centered but theological and God-centered” (Bainton 1952, 252-53). That is, God ordered all of life and society, and Puritans felt obliged to act on His will. And if some Puritans scrutinized themselves for evidence of election, “the test was emphatically not economic activity as such but upright character…” He concludes that Calvinists had no particular affinity for capitalism but that they brought “vitality and drive into every area … whether they were subduing a continent, overthrowing a monarchy, or managing a business, or reforming the evils of the very order which they helped to create” (255).

Samuelsson, in a long section (27-48), argued that Puritan leaders did not truly endorse capitalistic behavior. Rather, they were ambivalent. Given that Puritan congregations were composed of businessmen and their families (who allied with Puritan churches because both wished for less royal control of society), the preachers could hardly condemn capitalism. Instead, they clarified “the moral conditions under which a prosperous, even wealthy, businessman may, despite success and wealth, become a good Christian” (38). But this, Samuelsson makes clear, was hardly a ringing endorsement of capitalism.

Criticisms that what Weber described as Puritanism was not true Puritanism, much less Calvinism, may be correct but beside the point. Puritan leaders indeed condemned exclusive devotion to one’s business because it excluded God and the common good. Thus, the Protestant ethic as described by Weber apparently would have been a deviation from pure doctrine. However, the pastors’ very attacks suggest that such a (mistaken) spirit did exist within their flocks. But such mistaken doctrine, if widespread enough, could still have contributed to the formation of the capitalist spirit.

Furthermore, any misinterpretation of Puritan orthodoxy was not entirely the fault of Puritan laypersons. Puritan theologians and preachers could place heavier emphasis on economic success and virtuous labor than critics such as Samuelsson would admit. The American preacher John Cotton (1582-1652) made clear that God “would have his best gifts improved to the best advantage.” The respected theologian William Ames (1576-1633) spoke of “taking and using rightly opportunity.” And, speaking of the idle, Cotton Mather said, “find employment for them, set them to work, and keep them at work…” A lesser standard would hardly apply to his hearers. Although these exhortations were usually balanced with admonitions to use wealth for the common good, and not to be motivated by greed, they are nevertheless clear endorsements of vigorous economic behavior. Puritan leaders may have placed boundaries around economic activism, but they still preached activism.

Frey (1998) has argued that orthodox Puritanism exhibited an inherent tension between approval of economic activity and emphasis upon the moral boundaries that define acceptable economic activity. A calling was never meant for the service of self alone but for the service of God and the common good. That is, Puritan thinkers always viewed economic activity against the backdrop of social and moral obligation. Perhaps what orthodox Puritanism contributed to capitalism was a sense of economic calling bounded by moral responsibility. In an age when Puritan theologians were widely read, Williams Ames defined the essence of the business contract as “upright dealing, by which one does sincerely intend to oblige himself…” If nothing else, business would be enhanced and made more efficient by an environment of honesty and trust.

Finally, whether Weber misinterpreted Puritanism is one issue. Whether he misinterpreted capitalism by exaggerating the importance of asceticism is another. Weber’s favorite exemplar of capitalism, Benjamin Franklin, did advocate unremitting personal thrift and discipline. No doubt, certain sectors of capitalism advanced by personal thrift, sometimes carried to the point of deprivation. Samuelsson (83-87) raises serious questions, however, that thrift could have contributed even in a minor way to the creation of the large fortunes of capitalists. Perhaps more important than personal fortunes is the finance of business. The retained earnings of successful enterprises, rather than personal savings, probably have provided a major source of funding for business ventures from the earliest days of capitalism. And successful capitalists, even in Puritan New England, have been willing to enjoy at least some of the fruits of their labors. Perhaps the spirit of capitalism was not the spirit of asceticism.

Evidence of Links between Values and Capitalism

Despite the critics, some have taken the Protestant ethic to be a contributing cause of capitalism, perhaps a necessary cause. Sociologist C. T. Jonassen (1947) understood the Protestant ethic this way. By examining a case of capitalism’s emergence in the nineteenth century, rather than in the Reformation or Puritan eras, he sought to resolve some of the uncertainties of studying earlier eras. Jonassen argued that capitalism emerged in nineteenth-century Norway only after an indigenous, Calvinist-like movement challenged the Lutheranism and Catholicism that had dominated the country. Capitalism had not “developed in Norway under centuries of Catholic and Lutheran influence,” although it appeared only “two generations after the introduction of a type of religion that produced the same behavior as Calvinism” (Jonassen, 684). Jonassen’s argument also discounted other often-cited causes of capitalism, such as the early discoveries of science, the Renaissance, or developments in post-Reformation Catholicism; these factors had existed for centuries by the nineteenth century and still had left Norway as a non-capitalist society. Only in the nineteenth century, after a Calvinist-like faith emerged, did capitalism develop.

Engerman’s (2000) review of economic historians shows that they have given little explicit attention to Weber in recent years. However, they show an interest in the impact of cultural values broadly understood on economic growth. A modified version of the Weber thesis has also found some support in empirical economic research. Granato, Inglehart and Leblang (1996, 610) incorporated cultural values in cross-country growth models on the grounds that Weber’s thesis fits the historical evidence in Europe and America. They did not focus on Protestant values, but accepted “Weber’s more general concept, that certain cultural factors influence economic growth…” Specifically they incorporated a measure of “achievement motivation” in their regressions and concluded that such motivation “is highly relevant to economic growth rates” (625). Conversely, they found that “post-materialist” (i.e., environmentalist) values are correlated with slower economic growth. Barro’s (1997, 27) modified Solow growth models also find that a “rule of law index” is associated with more rapid economic growth. This index is a proxy for such things as “effectiveness of law enforcement, sanctity of contracts and … the security of property rights.” Recalling Puritan theologian William Ames’ definition of a contract, one might conclude that a religion such as Puritanism could create precisely the cultural values that Barro finds associated with economic growth.


Max Weber’s thesis has attracted the attention of scholars and researchers for most of a century. Some (including Weber) deny that the Protestant ethic should be understood to be a cause of capitalism — that it merely points to a congruency between and culture’s religion and its economic system. Yet Weber, despite his own protests, wrote as though he believed that traditional capitalism would never have turned into modern capitalism except for the Protestant ethic– implying causality of sorts. Historical evidence from the Reformation era (sixteenth century) does not provide much support for a strong (causal) interpretation of the Protestant ethic. However, the emergence of a vigorous capitalism in Puritan England and its American colonies (and the case of Norway) at least keeps the case open. More recent quantitative evidence supports the hypothesis that cultural values count in economic development. The cultural values examined in recent studies are not religious values, as such. Rather, such presumably secular values as the need to achieve, intolerance for corruption, respect for property rights, are all correlated with economic growth. However, in its own time Puritanism produced a social and economic ethic known for precisely these sorts of values.


Bainton, Roland. The Reformation of the Sixteenth Century. Boston: Beacon Press, 1952.

Barro, Robert. Determinants of Economic Growth: A Cross-country Empirical Study. Cambridge, MA: MIT Press, 1997.

Engerman, Stanley. “Capitalism, Protestantism, and Economic Development.” EH.NET, 2000.

Fischoff, Ephraim. “The Protestant Ethic and the Spirit of Capitalism: The History of a Controversy.” Social Research (1944). Reprinted in R. W. Green (ed.), Protestantism and Capitalism: The Weber Thesis and Its Critics. Boston: D.C. Heath, 1958.

Frey, Donald E. “Individualist Economic Values and Self-Interest: The Problem in the Protestant Ethic.” Journal of Business Ethics (Oct. 1998).

Granato, Jim, R. Inglehart and D. Leblang. “The Effect of Cultural Values on Economic Development: Theory, Hypotheses and Some Empirical Tests.” American Journal of Political Science (Aug. 1996).

Green, Robert W. (ed.), Protestantism and Capitalism: The Weber Thesis and Its Critics. Boston: D.C. Heath, 1959.

Jonassen, Christen. “The Protestant Ethic and the Spirit of Capitalism in Norway.” American Sociological Review (Dec. 1947).

Samuelsson, Kurt. Religion and Economic Action. Toronto: University of Toronto Press, 1993 [orig. 1957].

Tawney, R. H. Religion and the Rise of Capitalism. Gloucester, MA: Peter Smith, 1962 [orig., 1926].

Weber, Max, The Protestant Ethic and the Spirit of Capitalism. New York: Charles Scribner’s Sons, 1958 [orig. 1930].

Citation: Frey, Donald. “Protestant Ethic Thesis”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL

Money in the American Colonies

Ron Michener, University of Virginia

“There certainly can’t be a greater Grievance to a Traveller, from one Colony to another, than the different values their Paper Money bears.” An English visitor, circa 1742 (Kimber, 1998, p. 52).

The monetary arrangements in use in America before the Revolution were extremely varied. Each colony had its own conventions, tender laws, and coin ratings, and each issued its own paper money. The monetary system within each colony evolved over time, sometimes dramatically, as when Massachusetts abolished the use of paper money within her borders in 1750 and returned to a specie standard. Any encyclopedia-length overview of the subject will, unavoidably, need to generalize, and few generalizations about the colonial monetary system are immune to criticism because counterexamples can usually be found somewhere in the historical record. Those readers who find their interest piqued by this article would be well advised to continue their study of the subject by consulting the more detailed discussions available in Brock (1956, 1975, 1992), Ernst (1973), and McCusker (1978).

Units of Account

In the colonial era the unit of account and the medium of exchange were distinct in ways that now seem strange. An example from modern times suggests how the ancient system worked. Nowadays race horses are auctioned in England using guineas as the unit of account, although the guinea coin has long since disappeared. It is understood by all who participate in these auctions that payment is made according to the rule that one guinea equals 21s. Guineas are the unit of account, but the medium of exchange accepted in payment is something else entirely. The unit of account and medium of exchange were similarly disconnected in colonial times (Adler, 1900).

The units of account in colonial times were pounds, shillings, and pence (1£ = 20s., 1s. = 12d.).1 These pounds, shillings, and pence, however, were local units, such as New York money, Pennsylvania money, Massachusetts money, or South Carolina money and should not be confused with sterling. To do so is comparable to treating modern Canadian dollars and American dollars as interchangeable simply because they are both called “dollars.” All the local currencies were less valuable than sterling.2 A Spanish piece of eight, for instance, was worth 4 s. 6 d. sterling at the British mint. The same piece of eight, on the eve of the Revolution, would have been treated as 6 s. in New England, as 8 s. in New York, as 7 s. 6 d. in Philadelphia, and as 32 s. 6 d. in Charleston (McCusker, 1978).

Colonists assigned local currency values to foreign specie coins circulating there in these pounds, shillings and pence. The same foreign specie coins (most notably the Spanish dollar) continued to be legal tender in the United States in the first half of the nineteenth century as well as a considerable portion of the circulating specie (Andrews, 1904, pp. 327-28; Michener and Wright, 2005, p. 695). Because the decimal divisions of the dollar so familiar to us today were a newfangled innovation in the early Republic and because the same coins continued to circulate the traditional units of account were only gradually abandoned. Lucius Elmer, in his account of the early settlement of Cumberland County, New Jersey, describes how “Accounts were generally kept in this State in pounds, shillings, and pence, of the 7 s. 6 d. standard, until after 1799, in which year a law was passed requiring all accounts to be kept in dollars or units, dimes or tenths, cents or hundredths, and mills or thousandths. For several years, however, aged persons inquiring the price of an article in West Jersey or Philadelphia, required to told the value in shillings and pence, they not being able to keep in mind the newly-created cents or their relative value . . . So lately as 1820 some traders and tavern keepers in East Jersey kept their accounts in [New] York currency.”3 About 1820, John Quincy Adams (1822) surveyed the progress that had been made in familiarizing the public with the new units:

“It is now nearly thirty years since our new monies of account, our coins, and our mint, have been established. The dollar, under its new stamp, has preserved its name and circulation. The cent has become tolerably familiarized to the tongue, wherever it has been made by circulation familiar to the hand. But the dime having been seldom, and the mille never presented in their material images to the people, have remained . . . utterly unknown. . . . Even now, at the end of thirty years, ask a tradesman, or shopkeeper, in any of our cities, what is a dime or mille, and the chances are four in five that he will not understand your question. But go to New York and offer in payment the Spanish coin, the unit of the Spanish piece of eight [one reale], and the shop or market-man will take it for a shilling. Carry it to Boston or Richmond, and you shall be told it is not a shilling, but nine pence. Bring it to Philadelphia, Baltimore, or the City of Washington, and you shall find it recognized for an eleven-penny bit; and if you ask how that can be, you shall learn that, the dollar being of ninety-pence, the eight part of it is nearer to eleven than to any other number . . .4 And thus we have English denominations most absurdly and diversely applied to Spanish coins; while our own lawfully established dime and mille remain, to the great mass of the people, among the hidden mysteries of political economy – state secrets.”5

It took many more decades for the colonial unit of account to disappear completely. Elmer’s account (Elmer, 1869, p. 137) reported that “Even now, in New York, and in East Jersey, where the eighth of a dollar, so long the common coin in use, corresponded with the shilling of account, it is common to state the price of articles, not above two or three dollars, in shillings, as for instance, ten shillings rather than a dollar and a quarter.”

Not only were the unit of account and medium of exchange disconnected in an unfamiliar manner, but terms such as money and currency did not mean precisely the same thing in colonial times that they do today. In colonial times, “money” and “currency” were practically synonymous and signified whatever was conventionally used as a medium of exchange. The word “currency” today refers narrowly to paper money, but that wasn’t so in colonial times. “The Word, Currency,” Hugh Vance wrote in 1740, “is in common Use in the Plantations . . . and signifies Silver passing current either by Weight or Tale. The same Name is also applicable as well to Tobacco in Virginia, Sugars in the West Indies &c. Every thing at the Market-Rate may be called a Currency; more especially that most general Commodity, for which Contracts are usually made. And according to that Rule, Paper-Currency must signify certain Pieces of Paper, passing current in the Market as Money” (Vance, 1740, CCR III, pp. 396, 431).

Failure to appreciate that the unit of account and medium of exchange were quite distinct in colonial times, and that a familiar term like “currency” had a subtly different meaning, can lead unsuspecting historians astray. They often assume that a phrase such as “£100 New York money” or “£100 New York currency” necessarily refers to £100 of the bills of credit issued by New York. In fact, it simply means £100 of whatever was accepted as money in New York, according to the valuations prevailing in New York.6 Such subtle misunderstandings have led some historians to overestimate the ubiquity of paper money in colonial America.

Means of Payment – Book Credit

While simple “cash-and-carry” transactions sometimes occurred most purchases involved at least short-term book credit; Henry Laurens wrote that before the Revolution it had been “the practice to give credit for one and more years for 7/8th of the whole traffic” (Burnet, 1923, vol. 2, pp. 490-1). The buyer would receive goods and be debited on the seller’s books for an agreed amount in the local money of account. The debt would be extinguished when the buyer paid the seller either in the local medium of exchange or in equally valued goods or services acceptable to the seller. When it was mutually agreeable the debt could be and often was paid in ways that nowadays seem very unorthodox – with the delivery of chickens, or a week’s work fixing fences on land owned by the seller. The debt might be paid at one remove, by the buyer fixing fences on land owned by someone to whom the seller was himself indebted. Accounts would then be settled among the individuals involved. Account books testify to the pervasiveness of this system, termed “bookkeeping barter” by Baxter. Baxter examined the accounts of John Hancock and his father Thomas Hancock, both prominent Boston merchants, whose business dealings naturally involved an atypically large amount of cash. Even these gentlemen managed most of their transactions in such a way that no cash ever changed hands (Baxter, 1965; Plummer, 1942; Soltow, 1965, pp. 124-55; Forman, 1969).

An astonishing array of goods and services therefore served by mutual consent at some time or other to extinguish debt. Whether these goods ought all to be classified as “money” is doubtful; they certainly lacked the liquidity and universal acceptability in exchange that ordinarily defines money. At certain times and in certain colonies, however, specific commodities came to be so widely used in transactions that they might appropriately be termed money. Specie, of course, was such a commodity, but its worldwide acceptance as money made it special, so it is convenient to set it aside for a moment and focus on the others.

Means of Payment – Commodity Money

At various times and places in the colonies such items as tobacco, rice, sugar, beaver skins, wampum, and country pay all served as money. These items were generally accorded a special monetary status by various acts of colonial legislatures. Whether the legislative fiat was essential in monetizing these commodities or whether it simply acknowledged the existing state of affairs is open to question. Sugar was used in the British Caribbean, tobacco was used in the Chesapeake, and rice in South Carolina, each being the central product of their respective plantation economies. Wampum signifies the stringed shells used by the Indians as money before the arrival of European settlers. Wampum and beaver skins were commonly used as money in the northern colonies in the early stages of settlement when the fur trade and Indian trade were still mainstays of the local economy (Nettels, 1928, 1934; Fernow, 1893; Massey, 1976; Brock, 1975, pp. 9-18).

Country pay is more complicated. Where it was used, country pay consisted of a hodgepodge of locally produced agricultural commodities that had been monetized by the colonial legislature. A list of commodities, such as Indian corn, beef, pork, etc. were assigned specific monetary values (so many s. per bushel or barrel), and debtors were permitted by statute to pay certain debts with their choice of these commodities at nominal values set by the colonial legislature.7 In some instances country pay was declared a legal tender for all private debts although contracts explicitly requiring another form of payment might be exempted (Gottfried, 1936; Judd, 1905, pp. 94-96). Sometimes country pay was only a legal tender in payment of obligations to the colonial or town governments. Even where country pay was a legal tender only in payment of taxes it was often used in private transactions and even served as a unit of account. Probate inventories from colonial Connecticut, where country pay was widely used, are generally denominated in country pay (Main and Main, 1988).8

There were predictable difficulties where commodity money was used. A pound in “country pay” was simply not worth a pound in cash even as that cash was valued locally. The legislature sometimes overvalued agricultural commodities in setting their nominal prices. Even when the legislature’s prices were not biased in favor of debtors the debtor still had the power to select the particular commodity tendered and had some discretion over the quality of that commodity. In late 17th century Massachusetts the rule of thumb used to convert country pay to cash was that three pounds in country pay were worth two pounds cash (Republicæ, 1731, pp. 376, 390).9 Even this formula seems to have overvalued country pay. When a group of men seeking to rent a farm in Connecticut offered Boston merchant Thomas Bannister £22 of country pay in 1700, Bannister hesitated. It appears Bannister wanted to be paid £15 per annum in cash. Country pay was “a very uncertain thing,” he wrote. Some years £22 in country pay might be worth £10, some years £12, but he did not expect to see a day when it would fetch fifteen.10 Savvy merchants such as Bannister paid careful attention to the terms of payment. An unwary trader could easily be cheated. Just such an incident occurs in the comic satirical poem “The Sotweed Factor.” Sotweed is slang for tobacco, and a factor was a person in America representing a British merchant. Set in late seventeenth-century Maryland, the poem is a first-person account of the tribulations and humiliations a newly-arrived Briton suffers while seeking to enter the tobacco trade. The Briton agrees with a Quaker merchant to exchange his trade goods for ten thousand weight of oronoco tobacco in cask and ready to ship. When the Quaker fails to deliver any tobacco, the aggrieved factor sues him at the Annapolis court, only to discover that his attorney is a quack who divides his time between pretending to be a lawyer and pretending to be a doctor and that the judges have to be called away from their Punch and Rum at the tavern to hear his case. The verdict?

The Byast Court without delay,
Adjudg’d my Debt in Country Pay:
In Pipe staves, Corn, or Flesh of Boar,
Rare Cargo for the English Shoar.

Thus ruined the poor factor sails away never to return. A footnote to the reader explains “There is a Law in this Country, the Plaintiff may pay his Debt in Country pay, which consists in the produce of the Plantation” (Cooke, 1708).

By the middle of the eighteenth century commodity money had essentially disappeared in northern port cities, but still lingered in the hinterlands and plantation colonies. A pamphlet written in Boston in 1740 observed “Look into our British Plantations, and you’ll see [commodity] Money still in Use, As, Tobacco in Virginia, Rice in South Carolina, and Sugars in the Islands; they are the chief Commodities, used as the general Money, Contracts are made for them, Salaries and Fees of Office are paid in them, and sometimes they are made a lawful Tender at a yearly assigned Rate by publick Authority, even when Silver was promised” (Vance, 1740, CCR III, p. 396). North Carolina was an extreme case. Country pay there continued as a legal tender even in private debts. The system was amended in 1754 and 1764 to require rated commodities to be delivered to government warehouses and be judged of acceptable quality at which point warehouse certificates were issued to the value of the goods (at mandated, not market prices): these certificates were a legal tender (Bullock, 1969, pp. 126-7, 157).

Means of Payment – Bills of Credit

Cash came in two forms: full-bodied specie coins (usually Spanish or Portuguese) and paper money known as “bills of credit.” Bills of credit were notes issued by provincial governments that were similar in many ways to modern paper money: they were issued in convenient denominations, were often a legal tender in the payment of debts, and routinely passed from man to man in transactions.11 Bills of credit were ordinarily put into circulation in one of two ways. The most common method was for the colony to issue bills to pay its debts. Bills of credit were originally designed as a kind of tax-anticipation scrip, similar to that used by many localities in the United States during the Great Depression (Harper, 1948). Therefore when bills of credit were issued to pay for current expenditures a colony would ordinarily levy taxes over the next several years sufficient to call the bills in so they might be destroyed.12 A second method was for the colony to lend newly printed bills on land security at attractive interest rates. The agency established to make these loans was known as a “land bank” (Thayer, 1953).13 Bills of credit were denominated in the £., s., and d. of the colony of issue, and therefore were usually the only form of money in circulation that was actually denominated in the local unit of account.14

Sometimes even the bills of credit issued in a colony were not denominated in the local unit of account. In 1764 Maryland redeemed its Maryland-pound-denominated bills of credit and in 1767 issued new dollar-denominated bills of credit. Nonetheless Maryland pounds, not dollars, remained the predominant unit of account in Maryland up to the Revolution (Michener and Wright, 2006a, p. 34; Grubb; 2006a, pp. 66-67; Michener and Wright, 2006c, p. 264). The most striking example occurred in New England. Massachusetts, Connecticut, New Hampshire, and Rhode Island all had, long before the 1730s, emitted paper money in bills of credit known as “old tenor” bills of credit, and “old tenor” had become the most commonly-used unit of account in New England. The old tenor bills of all four colonies passed interchangeably and at par with one another throughout New England.

Beginning in 1737, Massachusetts introduced a new kind of paper money known as “new tenor.” New tenor can be thought of as a monetary reform that ultimately failed to address underlying issues. It also served as a way of evading a restriction the Board of Trade had placed on the Governor of Massachusetts that limited him to emissions of not more than £30,000. The Massachusetts assembly declared each pound of the new tenor bills to be worth £3 in old tenor bills. What actually happened is that old tenor (abbreviated in records of the time as “O.T.”) continued to be the unit of account in New England, and so long as the old bills continued to circulate, a decreasing portion of the medium of exchange. Each new tenor bill was reckoned at three times its face value in old tenor terms. This was just the beginning of the confusion, for yet newer Massachusetts “new tenor” emissions were created, and the original “new tenor” emission became known as the “middle tenor.”15 The new “new tenor” bills emitted by Massachusetts were accounted in old tenor terms at four times their face value. These bills, like the old ones, circulated across colony borders throughout New England. As if this were not complicated enough, New Hampshire, Rhode Island, and Connecticut all created new tenor emission of their own, and the factors used to convert these new tenor bills into old tenor terms varied across colonies (Davis, 1970; Brock, 1975; McCusker, pp. 131-137). Connecticut, for instance, had a new tenor emission such that each new tenor bill was worth 3½ times its face value in old tenor (Connecticut, vol. 8, pp. 359-60; Brock, 1975, pp. 45-6). “They have a variety of paper currencies in the [New England] provinces; viz., that of New Hampshire, the Massachusetts, Rhode Island, and Connecticut,” bemoaned an English visitor, “all of different value, divided and subdivided into old and new tenors, so that it is a science to know the nature and value of their moneys, and what will cost a stranger some study and application” (Hamilton, 1907, p. 179). Throughout New England, however, Old Tenor remained the unit of account. “The Price of [provisions sold at Market],” a contemporary pamphlet noted, “has been constantly computed in Bills of the old Tenor, ever since the Emission of the middle and new Tenor Bills, just as it was before their Emission, and with no more Regard to or Consideration of either the middle or new Tenor Bills, than if they had never been emitted” (Enquiry, 1744, CCR IV, p. 174). This occurred despite the fact that by 1750 only an inconsiderable portion of the bills of credit in circulation were denominated in old tenor.16

For the most part, bills of credit were fiat money. Although a colony’s treasurer would often consent to exchange these bills for other forms of cash in the treasury, there was rarely a provision in the law stating that holders of bills of credit had a legally binding claim on the government for a fixed sum in specie, and treasurers were sometimes unable to accommodate people who wished to exchange money (Nicholas, 1912, p. 257; The New York Mercury, January 27, 1759, November 24, 1760).17 The form of the bills themselves was sometimes misleading in this respect. It was not uncommon for the bills to be inscribed with an explicit statement that the bill was worth a certain sum in silver. This was often no more than an expression of the assembly’s hope, at the time of issuance, of how the bills would circulate.18 Colonial courts sometimes allowed inhabitants to pay less to royal officials and proprietors by valuing bills of credit used to pay fees, dues, and quit rents according to their “official” rather than actual specie values. (Michener and Wright, 2006c, p. 258, fn. 5; Hart, 2005, pp. 269-71).

Maryland’s paper money was unique. Maryland’s paper money – unlike that of other colonies – gave the possessor an explicit legal claim on a valuable asset. Maryland had levied a tax and invested the proceeds of the tax in London. It issued bills of credit promising a fixed sum in sterling bills of exchange at predetermined dates, to be drawn on the colony’s balance in London. The colony’s accrued balances in London were adequate to fund the redemption, and when redemption dates arrived in 1748 and 1764 the sums due were paid in full so the colony’s pledge was considered credible.

Maryland’s paper money was unique in other ways as well. Its first emission was put into circulation in a novel fashion. Of the £90,000 emitted in 1733, £42,000 was lent to inhabitants, while the other £48,000 was simply given away, at the rate of £1.5 per taxable (McCusker, 1978, pp. 190-196; Brock, 1975, chapter 8; Lester, 1970, chapter 5). Maryland’s paper money was so peculiar that it is unrepresentative of the colonial experience. This was recognized even by contemporaries. Hugh Vance, in the Postscript to his Inquiry into the Nature and Uses of Money, dismissed Maryland as “intirely out of the Question; their Bills being on the Foot of promissory Notes” Vance, 1740, CCR III, p. 462).

In 1690, Massachusetts was the first colony to issue bills of credit (Felt, 1839, pp. 49-52; Davis, 1970, vol. 1, chapter 1; Goldberg, 2009).19 The bills were issued to pay soldiers returning from a failed military expedition against Quebec. Over time, the rest of the colonies followed suit. The last holdout was Virginia, which issued its first bills of credit in 1755 to defray expenses associated with its entry into the French and Indian War (Brock, 1975, chapter 9). The common denominator here is wartime finance, and it is worthwhile to recognize that the vast majority of the bills of credit issued in the colonies were issued during wartime to pay for pressing military expenditures. Peacetime issues did occur and are in some respects quite interesting as they seem to have been motivated in part by a desire to stimulate the economy (Lester, 1970). However, peacetime emissions are dwarfed by those that occurred in war.20 Some historians enamored of the land bank system, whereby newly emitted bills were lent to landowners in order to promote economic development, have stressed the economic development aspect of colonial emissions – particularly those of Pennsylvania – while minimizing the military finance aspect (Schweitzer, 1989, pp. 313-4). The following graph, however, illustrates the fundamental importance of war finance; the dramatic spike marks the French and Indian War (Brock, 1992, Tables 4, 6).



That bills in circulation peaked in 1760 reflects the fact that Quebec fell in 1759 and Montreal in 1760, so that the land war in North America was effectively over by 1760.

Because bills were disproportionally emitted for wartime finance it is not surprising that the colonies whose currencies depreciated due to over-issue were those who shared a border with a hostile neighbor – the New England colonies bordering French Canada and the Carolinas bordering Spanish Florida.21 The colonies from New York to Virginia were buffered by their neighbors and therefore issued no more than modest amounts of paper money until they were drawn into the French and Indian War, by which time their economies were large enough to temporarily absorb the issues.

It is important not to confuse the bills of credit issued by a colony with the bills of credit circulating in that colony. “Under the circumstances of America before the war,” a Maryland resident wrote in 1787, “there was a mutual tacit consent that the paper of each colony should be received by its neighbours” (Hanson, 1787, p. 24).22 Between 1710 and 1750, the currencies of Massachusetts, Connecticut, New Hampshire, and Rhode Island passed indiscriminately and at par with one another in everyday transactions throughout New England (Brock, 1975, pp. 35-6). Although not quite so integrated a currency area as New England the colonies of New York, Pennsylvania, New Jersey, and Delaware each had bills of credit circulating within its neighbors’ borders (McCusker, 1978, pp. 169-70, 181-182). In the early 1760s, Pennsylvania money was the primary medium of exchange in Maryland (Maryland Gazette, September 15, 1763; Hazard, 1852, Eighth Series, vol. VII, p. 5826; McCusker, 1978, p. 193). In 1764 one quarter of South Carolina’s bills of credit circulated in North Carolina and Georgia (Ernst, 1973, p. 106). Where the currencies of neighboring colonies were of equal value, as was the case in New England between 1710 and 1750, bills of credit of neighboring colonies could be credited and debited in book accounts at face value. When this was not the case, as when Pennsylvania, Connecticut, or New Jersey bills of credit were used to pay a debt in New York, an adjustment had to be made to convert these sums to New York money. The conversion was usually based on the par values assigned to Spanish dollars by each colony. Indeed, this was also how merchants generally handled intercolonial exchange transactions (McCusker, 1978, p. 123). For example, on the eve of the Revolution a Spanish dollar was rated at 7 s. 6 d. in Pennsylvania money and at 8 s. in New York money. The ratio of eight to seven and a half being equal to 1.06666, Pennsylvania bills of credit were accepted in New York at a 6 and 1/3% advance (Stevens, 1867, pp. 10-11, 18). Connecticut rated the Spanish dollar at 6 s., and because the ratio of eight to six is 1.333, Connecticut bills of credit were accepted at a one third advance in New York (New York Journal, July 13, 1775). New Jersey’s paper money was a peculiar exception to this rule. By the custom of New York’s merchants, New Jersey bills of credit were accepted for thirty years or more at an advance of one pence in the shilling, or 8 and 1/3%, even though New Jersey rated the Spanish dollar at 7 s, 6 d., just as Pennsylvania did. The practice was controversial in New York, and the advance was finally reduced to the “logical” 6 and 2/3% advance by an act of the New York assembly in 1774.23

Means of Payment – Foreign Specie Coins

Specie coins were the other kind of cash that commonly circulated in the colonies. Few specie coins were minted in the colonies. Massachusetts coined silver “pine tree shillings” between 1652 and the closing of the mint in the early 1680s. This was the only mint of any size or duration in the colonies, although minting of small copper coins and tokens did occur at a number of locations (Jordan, 2002; Mossman, 1993). Colonial coinage is interesting numismatically, but economically it was too slight to be of consequence. Most circulating specie was minted abroad. The gold and silver coins circulating in the colonies were generally of Spanish or Portuguese origin. Among the most important of these coins were the Portuguese Johannes and moidore (more formally, the moeda d’ouro) and the Spanish dollar and pistole. The Johanneses were gold coins, 8 escudos (12,800 reis) in denomination; their name derived from the obverse of the coin, which bore the bust of Johannes V. Minted in Portugal and Brazil they were commonly known in the colonies as “joes.” The fractional denominations were 4 escudo and 2 escudo coins of the same origin. The 4 escudo (6,400 reis) coin, or “half joe,” was one of the most commonly used coins in the late colonial period. The moidore was another Portuguese gold coin, 4,000 reis in denomination. That these coins were being used as a medium of exchange in the colonies is not so peculiar as it might appear. Raphael Solomon (1976, p. 37) noted that these coins “played a very active part in international commerce, flowing in and out of the major seaports in both the Eastern and Western Hemispheres.” In the late colonial period the mid-Atlantic colonies began selling wheat and flour to Spain and Portugal “for which in return, they get hard cash” (Lydon, 1965; Virginia Gazette, January 12, 1769; Brodhead, 1853, vol. 8, p. 448).

The Spanish dollar and its fractional parts were, in McCusker’s (1978, p. 7) words, “the premier coin of the Atlantic world in the seventeenth and eighteenth centuries.” Well known and widely circulated throughout the world, its preeminence in colonial North America accounts for the fact that the United States uses dollars, rather than pounds, as its unit of account. The Spanish pistole was the Spanish gold coin most often encountered in America. While these coins were the most common, many others also circulated there (Solomon, 1976; McCusker, 1978, pp. 3-12).

Alongside the well-known gold and silver coins were various copper coins, most notably the English half-pence, that served as small change in the colonies. Fractional parts of the Spanish dollar and the pistareen, a small silver coin of base alloy, were also commonly used as change.24

None of these foreign specie coins were denominated in local currency units, however. One needed a rule to determine what a particular coin, such as a Spanish dollar, was worth in the £., s., and d. of local currency. Because foreign specie coins were in circulation long before any of the colonies issued paper money setting a rating on these coins amounted to picking a numeraire for the economy; that is, it defined what one meant by a pound of local currency. The ratings attached to individual coins were not haphazard: They were designed to reflect the relative weight and purity of the bullion in each coin as well as the ratio of gold to silver prices prevailing in the wider world.

In the early years of colonization these coin values were set by the colonial assemblies (Nettels, 1934, chap. 9; Solomon, 1976, pp. 28-29; John Hemphill, 1964, chapter 3). In 1700 Pennsylvania passed an act raising the rated value of its coins, causing the Governor of Maryland to complain to the Board of Trade of the difficulties this created in Maryland. He sought the Board’s permission for Maryland to follow suit. When the Board investigated the matter it concluded that the “liberty taken in many of your Majesty’s Plantations, to alter the rates of their coins as often as they think fit, does encourage an indirect practice of drawing the money from one Plantation to another, to the undermining of each other’s trade.” In response they arranged for the disallowance of the Pennsylvania act and a royal proclamation to put an end to the practice.25

Queen Anne’s proclamation, issued in 1704, prohibited a Spanish dollar of 17½ dwt. from passing for more than 6 s. in the colonies. Other current foreign silver coins were rated proportionately and similarly prohibited from circulating at a higher value. This particular rating of coins became known as “proclamation money.”26 It might seem peculiar that the// proclamation did not dictate that the colonies adopt the same ratings as prevailed in England. The Privy Council, however, had incautiously approved a Massachusetts act passed in 1697 rating Spanish dollars at 6 s., and attorney general Edward Northey felt the act could not be nullified by proclamation. This induced the Board of Trade to adopt the rating of the Massachusetts act.27

Had the proclamation been put into operation its effects would have been extremely deflationary because in most colonies coins were already passing at higher rates. When the proclamation reached America only Barbados attempted to enforce it. In New York Governor Lord Cornbury suspended its operation and wrote the Board of Trade that he could not enforce it in New York while it was being ignored in neighboring colonies as New York would be “ruined beyond recovery” if he did so (Brodhead, 1853, vol. 4, pp. 1131-1133; Brock, 1975, chapter 4). A chorus of such responses led the Board of Trade to take the matter to Parliament in hopes of enforcing a uniform compliance throughout America (House of Lords, 1921, pp. 302-3). On April 1, 1708, Parliament passed “An Act for ascertaining the Rates of foreign Coins in her Majesty’s Plantations in America” (Ruffhead, vol. 4, pp. 324-5). The act reiterated the restrictions embodied in Queen Anne’s Proclamation, and declared that anyone “accounting, receiving, taking, or paying the same contrary to the Directions therein contained, shall suffer six Months Imprisonment . . . and shall likewise forfeit the Sum of ten Pounds for every such Offence . . .”

The “Act for ascertaining the Rates of foreign Coins” never achieved its desired aim. In the colonies it was largely ignored, and business continued to be conducted just as if the act had never been passed. Pennsylvania, it was true, went though a show of complying but even that lapsed after a while (Brock, 1975, chapter 4). What the act did do, however, was push the process of coin rating into the shadows because it was no longer possible to address it in an open way by legislative enactment. Laws that passed through colonial legislatures (certain charter and proprietary colonies excepted) were routinely reviewed by the Privy Council, and if found to be inconsistent with British law, were declared null and void.

Two avenues remained open to alter coin ratings – private agreements among merchants that would not be subject to review in London, and a legislative enactment so stealthy as to slip through review unnoticed. New York was the first to succeed using stealth. In November 1709 it emitted bills of credit “for Tenn thousand Ounces of Plate or fourteen Thousand Five hundred & fourty five Lyon Dollars” (Lincoln, 1894, vol. 1, chap. 207, pp. 695-7). The Lyon dollar was an obscure silver coin that had escaped being explicitly mentioned in the enumeration of allowable values that had accompanied Queen Anne’s proclamation. Since 15 years previously New York had rated the Lyon dollar at 5 s. 6 d., it was generally supposed that that rating was still in force (Solomon, 1976, p. 30). The value of silver implied in the law’s title is 8 s. an ounce – a value higher than allowed by Parliament. Until 1723, New York’s emission acts contained clauses designed to rate an ounce of silver at 8 s. The act in 1714, for instance, tediously enumerated the denominations of the bills to be printed, in language such as “Five Hundred Sixty-eight Bills, of Twenty-five Ounces of Plate, or Ten Pounds value each” (Lincoln, 1894, vol. 1, chap. 280, pp. 819). When the Board of Trade finally realized what New York was up to it was too late: the earlier laws had already been confirmed. When the Board wrote Governor Hunter to complain, he replied, in part, “Tis not in the power of men or angels to beat the people of this Continent out of a silly notion of their being gainers by the Augmentation of the value of Plate” (Brodhead, vol. 5, p. 476). These colony laws were still thought to be in force in the late colonial period. Gaine’s New York Pocket Almanack for 1760 states that “Spanish Silver . . . here ‘tis fixed by Law at 8 s. per Ounce, but is often sold and bought from 9 s. to 9 s. and 3 d.”

In 1753 Maryland also succeeded using stealth, including revised coin ratings inconsistent with Queen Anne’s proclamation in “An Act for Amending the Staple of Tobacco, for Preventing Fraud in His Majesty’s Customs, and for the Limitation of Officer’s Fees” (McCusker, 1978, p. 192).

The most common subterfuge was for a colony’s merchants to meet and agree on coin ratings. Once the merchants agreed on such ratings, the colonial courts appear to have deferred to them, which is not surprising in light of the fact that many judges and legislators were drawn from the merchants’ ranks (e.g. Horle, 1991). These private agreements effectively nullified not only the act of Parliament but also local statutes, such as those rating silver in New York at 8 s. an ounce. Records of many such agreements have survived.28 There is also testimony that these agreements were commonplace. Lewis Morris remarked that “It is a common practice … [for] the merchants to put what value they think fit upon Gold and Silver coynes current in the Plantations.” When the Philadelphia merchants published a notice in the Pennsylvania Gazette of September 16, 1742 enumerating the values they had agreed to put on foreign gold and silver coins, only the brazenness of the act came as a surprise to Morris. “Tho’ I believe by the merchants private Agreements amongst themselves they have allwaies done the same thing since the Existence of A paper currency, yet I do not remember so publick an instance of defying an act of parliament” (Morris, 1993, vol. 3, pp. 260-262, 273). These agreements, when backed by a strong consensus among merchants, seem to have been effective. Decades later, Benjamin Franklin (1959, vol. 14, p. 232) recollected how the agreement that had offended Morris “had a great Effect in fixing the Value and Rates of our Gold and Silver.”

After the New York Chamber of Commerce was founded in 1768, merchant deliberations on these agreements were recorded. During this period, the coin ratings in effect in New York were routinely published in almanacs, particularly Gaine’s New-York pocket almanac. When the New York Chamber of Commerce resolved to change the rating of coins and the minimum allowable weight for guineas the almanac values changed immediately to reflect those adopted by the Chamber (Stevens, 1867, pp. 56-7. 69).29


The coin rating table above, reproduced from The New-York Pocket Almanack for the Year 1771 shows how coin-rating worked in practice in the late colonial period. (Note the reference to the deliberations of the Chamber of Commerce.) It shows, for instance, that if you tendered a half joe in payment of debt in Pennsylvania, you would be credited with having paid £3 Pennsylvania money. If the same half joe were tendered in payment of a debt in New York you would be credited with having paid £ 3 4 s. New York money. In Connecticut it would have been £2 8 s. Connecticut money.30

The colonists possessed no central bank and colonial treasurers, however willing they might have been to exchange paper for specie, sometimes found themselves without the means to do so. That these coin ratings were successfully maintained for decades on end was a testament to the public’s faith in the bills of credit, which made them willing to voluntarily exchange them for specie at the established rate. Writing in 1786 and attempting to explain why New Jersey’s colonial bills of credit had retained their value, “Eugenio” attributed their success to the fact that it possessed what he called “the means of instant realization at value.” This awkward phrase signified the bills were instantly convertible at par. “Eugenio” went on to explain why:

“It is true that government did not raise a sum of coin and deposit the same in the treasury to exchange the bills on demand; but the faith of the government, the opinion of the people, and the security of the fund formerly by a well-timed and steady policy, went so hand in hand and so concurred to support each other, that the people voluntarily and without the least compulsion threw all their gold and silver, not locking up a shilling, into circulation concurrently with the bills; whereby the whole coin of the government became forthwith upon an emission of paper, a bank of deposit at every man’s door for the instant realization or immediate exchange of his bill into gold or silver. This had a benign and equitable, a persuasive, a satisfactory, and an extensive influence. If any one doubted the validity or price of his bill, his neighbor immediately removed his doubts by exchanging it without loss into gold or silver. If any one for a particular purpose needed the precious metals, his bill procured them at the next door, without a moment’s delay or a penny’s diminution. So high was the opinion of the people raised, that often an advance was given for paper on account of the convenience of carriage. In the market as well as in the payment of debts, the paper and the coin possessed a voluntary, equal, and concurrent circulation, and no special contract was made which should be paid or whether they should be received at a difference. By this instant realization and immediate exchange, the government had all the gold and silver in the community as effectually in their hands as if those precious metals had all been locked up in their treasury. By this realization and exchange they could extend credit to any degree it was required. The people could not be induced to entertain a doubt of their paper, because the government had never failed them in a single instance, either in war or in peace (New Jersey Gazette, January 30, 1786).”

Insofar as colonial bills of credit were convertible on demand into specie at the rated specie value of coins, there is no mystery as to why those bills of credit maintained their value. How merchants maintained and enforced such accords, however, is relatively inscrutable. Some economists are incredulous that private associations of merchants could accomplish the feat. The best evidence on this question can be found in a pamphlet by a disgruntled inhabitant complaining of the actions of a merchants’ association in Antigua (Anon., 1740), which provides a tantalizing glimpse of the methods merchants used.

Means of Payment – Private debt instruments

This leaves private debt instruments, such as bank notes, bills of exchange, notes of hand, and shop notes. It is sometimes asserted that there were no banks in colonial America, but this is something of an overstatement. There were several experiments made and several embryonic private banks actually got notes into circulation. Andrew McFarland Davis devoted an entire volume to banking in colonial New England (Davis, 1970, vol. 2; Perkins 1991 ). Perhaps the most successful bank of the era was established in South Carolina in 1731. It apparently issued notes totaling £50,000 South Carolina money and operated successfully for a decade.31 However, the banks that did exist did not last long enough or succeed in putting enough notes in circulation for us to be especially concerned about them.

Bills of exchange were similar to checks. A hypothetical example will illustrate how they functioned. The process of creating a bill of exchange began when someone obtained a balance on account overseas (in the case of the colonies, that place was often London). Suppose a Virginia tobacco producer consigned his tobacco to be sold in England, with the sterling proceeds to remain temporarily in the hands of a London merchant. The Virginia planter could then draw on those funds, by writing a bill of exchange payable in London. Suppose further that the planter drew a bill of exchange on his London correspondent, and sold it to a Virginia merchant, who then transmitted it to London to pay a balance due on imported dry goods. When the bill of exchange reached London, the dry goods wholesaler who received it would call on the London merchant holding the funds in order to receive the payment specified in the bill of exchange.

Bills of exchange were widely used in foreign trade, and were the preferred and most common method for paying debts due overseas. Because of the nature of the trade they financed, bills of exchange were usually in large denominations. Also, because bills of exchange were drawn on particular people or institutions overseas, there was an element of risk involved. Perhaps the person drawing the bill was writing a bad check, or perhaps the person on whom the bill was drawn was himself a deadbeat. One needed to be confident of the reputations of the parties involved when purchasing a bill of exchange. Perhaps because of their large denominations and the asymmetric information problems involved, bills of exchange played a limited role as a medium of exchange in the inland economy (McCusker, 1978, especially pp. 20-21).

Small denomination IOUs, called “notes of hand” were widespread, and these were typically denominated in local currency units. For the most part, these were not designed to circulate as a medium of exchange. When someone purchased goods from a shopkeeper on credit, the shopkeeper would generally get a “note of hand” as a receipt. In the court records in the Connecticut archives, one can find the case files for countless colonial-era cases where an individual was sued for nonpayment of a small debt.32 The court records generally include a note of hand entered as evidence to prove the debt. Notes of hand sometimes were proffered to third parties in payment of debt, however, particularly if the issuer was a person of acknowledged creditworthiness (Mather, 1691, p. 191). Some individuals of modest means created notes of hand in small denominations and attempted to circulate them as a medium of exchange; in Pennsylvania in 1768, a newspaper account stated that 10% of the cash offered in the retail trade consisted of such notes (Pennsylvania Chronicle, October 12, 1768; Kimber, 1998, p. 53). Indeed, many private banking schemes, such as the Massachusetts merchants’ bank, the New Hampshire merchants’ bank, the New London Society, and the Land Bank of 1740 were modeled on private notes of hand, and each consisted of an association designed to circulate such notes on a large scale. For the most part, however, notes of hand lacked the universal acceptability that would have unambiguously qualified them as money.

Shop notes were “notes of hand” of a particular type and seem to have been especially widespread in colonial New England. The twentieth-century analogue to shop notes would be scrip issued by an employer that could be used for purchases at the company store.33 Shop notes were I.O.U.s of local shopkeepers, redeemable through the shopkeeper. Such an I.O.U. might promise, for example, £6 in local currency value, half in money and half in goods (Weeden, 1891, vol. 2, p. 589; Ernst, 1990). Hugh Vance described the origins of shop notes in a 1740 pamphlet:

“… by the best Information I can have from Men of Credit then living, the Fact is truly this, viz. about the Year 1700, Silver-Money became exceedingly scarce, and the Trade so embarassed, that we begun to go into the Use of Shop-Goods, as the Money. The Shopkeepers told the Tradesmen, who had Draughts upon them from the Merchants for all Money, that they could not pay all in Money (and very truly) and so by Degrees brought the Tradesmen into the Use of taking Part in Shop-Goods; and likewise the Merchants, who must always follow the natural Course of Trade, were forced into the Way of agreeing with Tradesmen, Fishermen, and others; and also with the Shopkeepers, to draw Bills for Part and sometimes for all Shop-Goods (Vance, 1740, CCR III, pp. 390-91).”

Vance’s account seems accurate in all respects save one. Merchants played an active role in introducing shop notes into circulation. By the 1740s shop notes had been much abused, and it was disingenuous of Vance (himself a merchant) to suggest that merchants had had the system thrust upon them by shopkeepers. Merchants used shop notes to expedite sales and returns. The merchant might contact a shopkeeper and a shipbuilder. The shipbuilder would build a ship for the merchant, the ship to be sent to England and sold as a way of making returns. In exchange the merchant would provide the builder with shop notes and the shopkeeper with imported goods. The builder used the shop notes to pay his workers. The shop notes, in turn, were redeemed at the shop of the shopkeeper when presented to him by workers (Boston Weekly Postboy, December 8, 1740). Thomas Fitch tried to interest an English partner in just such a scheme in 1710:

“Realy it’s extream difficult to raise money here, for goods are generally Sold to take 1/2 money & 1/2 goods again out of the buyers Shops to pay builders of Ships [etc?] which is a great advantage in the readier if not higher sale of goods, as well as that it procures the Return; Wherefore if we sell goods to be paid in money we must give long time or they will not medle (Fitch, 1711, to Edward Warner, November 22, 1710).”

Like other substitutes for cash, shop notes were seldom worth their stated values. A 1736 pamphlet, for instance, reported wages to be 6s in bills of credit, or 7s if paid in shop notes (Anonymous, 1736, p. 143). One reason shop notes failed to remain at par with cash is that shopkeepers often refused to redeem them except with merchandise of their own choosing. Another abuse was to interpret money to mean British goods; half money, half goods often meant no money at all.34


Colonial bills of credit were controversial when they were first issued, and have remained controversial to this day. Those who have wanted to highlight the evils of inflation have focused narrowly on the colonies where the bills of credit depreciated most dramatically – those colonies being New England and the Carolinas, with New England being a special focus because of the wealth of material that exists concerning New England history. When Hillsborough drafted a report for the Board of Trade intended to support the abolition of legal tender paper money in the colonies he rested his argument on the inflationary experiences of these colonies (printed in Whitehead, 1885, vol. IX, pp. 405-414). Those who have wanted to defend the use of bills of credit in the colonies have focused on the Middle colonies, where inflation was practically nonexistent. This tradition dates back at least to Benjamin Franklin (1959, vol. 14, pp. 77-87), who drafted a reply to the Board of Trade’s report in an effort to persuade Parliament to repeal of the Currency Act of 1764. Nineteenth-century authors, such as Bullock (1969) and Davis (1970), tended to follow Hillsborough’s lead whereas twentieth-century authors, such as Ferguson (1953) and Schweitzer (1987), followed Franklin’s.

Changing popular attitudes towards inflation have helped to rehabilitate the colonists. Whereas inflation in earlier centuries was rare, and even the mild inflation suffered in England between 1797 and 1815 was sufficient to stir a political uproar, the twentieth century has become inured to inflation. Even in colonial New England between 1711 and 1749, which was thought to have done a disgraceful job in managing its bills of credit, peacetime inflation was only about 5% per annum. Inflation during King George’s War was about 35% per annum.35

Nineteenth-century economists were guilty of overgeneralizing based on the unrepresentative inflationary experiences and associated debtor-creditor conflicts that occurred in a few colonies. Some twentieth-century economists, however, have swung too far in the other direction by generalizing on the basis of the success of the system in the Middle colonies and by attributing the benign outcomes there to the fundamental soundness of the system and its sagacious management. It would be closer to the truth, I believe, to note that the virtuous restraint exhibited by the Middle colonies was imposed upon them. Emissions in these colonies were sometimes vetoed by royal authorities and frequently stymied by instructions issued to royal or proprietary governors. The success of the Middle colonies owes much to the simple fact that they did not exert themselves in war to the extent that their New England neighbors did and that they were not permitted to freely issue bills of credit in peacetime.

A recent controversy has developed over the correct answer to the question – Why did some bills of credit depreciate, while others did not? Many early writers took it for granted that the price level in a colony would vary proportionally with the number of bills of credit the colony issued. This assumption was mocked by Ernst (1973, chapter 1) and devastated by West (1978). West performed simple regressions relating the quantity of bills of credit outstanding to price indices where such data exist. For most colonies he found no correlation between these variables. This was particularly striking because in the Middle colonies there was a dramatic increase in the quantity of bills of credit outstanding during the French and Indian War, and a dramatic decrease afterwards. Yet this large fluctuation seemed to have little effect on the purchasing power of those bills of credit as measured by prices of bills of exchange and the imperfect commodity price indices we possess. Only in New England in the first half of the eighteenth century did there seem to be a strong correlation between bills of credit outstanding and prices and exchange rates. Officer (2005) examined the New England episode and concluded that the quantity theory provides an adequate explanation in this instance, making the contrast with many other colonies (most notably, the Middle colonies) even more remarkable.

Seizing on West’s results Bruce Smith suggested that they disproved the quantity theory of money and provided evidence in favor of an alternative theory of money based on theoretical models of Wallace and Sargent, which Smith characterized as the “backing theory.”36 According to Smith (1985a, p. 534), the redemption provisions enacted when bills of credit were introduced into circulation on tax and loan funds were what prevented them from depreciating. “Just as the value of privately issued liabilities depends on the issuers’ balance sheet,” he wrote, “the same is true for government liabilities. Thus issues of money which are accompanied by increases in the (expected) discounted present value of the government’s revenues need not be inflationary.” One obvious problem with this theory is that the New England bills of credit which did depreciate were issued in exactly the same way. Smith’s answer was that the New England colonies administered their tax and loan funds poorly and New England’s poor administration accounted for the inflation experienced there.

Others who did not wholly agree with Smith – especially his sweeping refutation of the quantity theory – nonetheless pointed to the redemption provisions in explaining why bills of credit often retained their value (Wicker, 1985; Bernholz, 1988; Calomiris, 1988; Sumner, 1993; Rousseau, 2007). Of those who assigned credit to the redemption provisions, however, only Smith grappled with the key question; namely, why essentially identical redemption provisions failed to prevent inflation elsewhere.

Crediting careful administration of tax and loan funds for the steady value of some colonial currencies, and haphazard administration for the depreciation of others looks superficially appealing. The experiences of Pennsylvania and Rhode Island, generally thought to be the most and least successful issuers of colonial bills of credit, fit the hypothesis nicely. However, when one examines other cases, the hypothesis breaks down. Connecticut was generally credited with administering her bills of credit very carefully, yet they depreciated in lockstep with those of her New England neighbors for forty years (Brock, 1975, pp. 43-47). Virginia’s bills of credit retained their value even though Virginia’s colonial treasurer was discovered to have embezzled a sum equal to nearly half of Virginia’s total outstanding bills of credit and returned them to circulation (Michener, 1987, p. 247). North Carolina’s bills of credit held their value well in the late colonial period despite tax administration so notoriously corrupt it led to an armed revolt (Michener, 1987, pp. 248-9, Ernst, 1973, p. 221).

A competing explanation has been offered by Michener (1987, 1988), Brock (1992), McCallum (1992), and Michener and Wright (2006b). According to this explanation, the coin rating system operating in the colonies meant they were effectively on a specie standard with a de facto fixed par of exchange. Provided emissions of paper money did not exceed the amount needed for domestic purposes (“normal real balances,” in McCallum’s terminology) some specie would remain in circulation, prices would remain stable, and the fixed par could be maintained. Where emissions exceeded this bound specie would disappear from circulation and exchange rates would float freely, no longer tethered to the fixed par. Further emissions would cause inflation.37 This was said to account for inflation in New England after 1712, where specie did, in fact, completely disappear from circulation (Hutchinson, 1936, vol. 2, p. 154; Michener, 1987, pp. 288-94). If this explanation is correct, it would suggest that emissions of bills of credit ought to be offset by specie outflows, ceteris paribus.

Critics of the “specie circulated at rated values” explanation have frequently disregarded the ceteris paribus qualification and maintained that the theory implies specie flows always ought to be highly negatively correlated with changes in the quantity of bills of credit. This amounts to assuming the quantity of money demanded per capita in colonial America was nearly constant. If this were a valid test of the theory, one would be forced to reject it, because the specie stock fell little, if at all, in the Middle colonies in 1755-1760 as bills of credit increased, and when bills of credit began to decrease after 1760, specie became scarcer.

The flaw in critics’ reasoning, in my opinion, is that it assumes three unwarranted facts. First, that the demand for money, narrowly defined to mean bills of credit plus specie, was very stable despite the widespread use of bookkeeping barter; Second, that the absence of evidence of large interest rate fluctuations is evidence of the absence of large interest rate fluctuations (Smith, 1985b, pp. 1193, 1198; Letwin, 1982, p. 466); Third, that the opportunity cost of holding money is adequately measured by the nominal interest rate.38

With respect to the first point, colonial wars significantly influenced the demand for money. During peacetime, most transactions were handled by means of book credit. During major wars, however, many men served in the militia. Men in military service were paid in cash and taken far from the community in which their creditworthiness was commonly known, reducing both their need for book credit and their ability to obtain it. Moreover, it would have to give a shopkeeper pause and discourage him from advancing book credit to consider the real possibility that even his civilian customers might find themselves in the militia in the near future and gone from the local community, possibly forever. In each of the major colonial wars there is evidence suggesting an increase in cash real balances that could be attributed to the war’s impact on the book credit system. The increase in real money balances during the French and Indian War and the subsequent decrease can be largely accounted for in this way. With respect to the second point, fluctuations in the money supply are even compatible with a stable demand for money if periods when money is scarce are also periods when interest rates are high, as is also suggested by the historical record.39 It is true that the maximum interest rates specified in colonial usury laws are stable, generally in the range of 6%-8% per annum, often a bit lower late in the colonial era than at its beginning. This has been taken as evidence that colonial interest rates were stable. However, we know that these usury laws were commonly evaded and that market rates were often much higher (Wright, 2002, pp. 19-26). Some indication of how much higher became evident in the summer of 1768 when the Privy Council unexpectedly struck down New Hampshire’s usury law.40 News of the disallowance did not reach New Hampshire until the end of the year, at which time New Hampshire, having sunk the bills of credit issued to finance the French and Indian War during the 5 year interval permitted by the Currency Act of 1751, was in the throes of a liquidity crisis.41 Governor Wentworth reported to the Lords of Trade, that “Interest arose to 30 p. Ct. within six days of the repeal of the late Act.”42 By contrast, when cash was plentiful in Pennsylvania at the height of the French and Indian War, Pennsylvania’s “wealthy people were catching at every opportunity of letting out their money on good security, on common interest [that is, seven per cent].”43 With respect to the third point, the received theory that the nominal interest rate measures the opportunity cost of holding real money balances is derived from models in which individuals are free to borrow and lend at the nominal interest rate. Insofar as lenders respected the usury ceilings, borrowers were unable to borrow freely at the nominal interest rate. Recent work on moral hazard and adverse selection suggest that even private unregulated lenders forced to make loans in an environment characterized by seriously asymmetric information would be wise to ration loans by charging less than market clearing rates and limiting allowed borrowing. The creditworthiness of individuals was more difficult to determine in colonial times than today, and asymmetric information problems were rife. Under such circumstances, even an unregulated market rate of interest (if we had such data, which we don’t) would understate the opportunity cost of holding money for constrained borrowers.

The debate over why some colonial bills of credit depreciated, while others did not has spilled over into another related question: how much cash [i.e., paper money plus specie] circulated in the American colonies, and how much was in bills of credit, and how much was in specie? Clearly, if there was hardly any specie anywhere in colonial America, the concomitant circulation of specie at fixed rates could scarcely account for the stable purchasing power of bills of credit.

Determining how much cash circulated in the colonies is no easy matter, because the amount of specie in circulation is so hard to determine. The issue is further complicated by the fact that the total amount of cash in circulation fluctuated considerably from year to year, depending on such things as the demand for colonial staples and the magnitude of British military expenditure in the colonies (Sachs, 1957; Hemphill, 1964). The mix of bills of credit and specie in circulation was also highly variable. In the Middle colonies – and much of the most contentious debate involves the Middle colonies – the quantity of bills of credit in circulation was very modest (both absolutely and in per-capita terms) before the French and Indian War. The quantity exploded to cover military expenditures during the French and Indian War, and then fell again following 1760, until by the late colonial period, the quantity outstanding was once again very modest. Pennsylvania’s experience is not atypical of the Middle colonies. In 1754, on the eve of the French and Indian War, only £81,500 in Pennsylvania bills of credit were in circulation. At the height of the conflict, in 1760, this had increased to £446,158, but by 1773 the sum had been reduced to only £135,006 (Brock, 1992, Table 6). Any conclusion about the importance of bills of credit in the colonial money supply has to be carefully qualified because it will depend on the year in question.

Traditionally, economic historians have focused their attention on the eve of the Revolution, with a special focus on 1774, because of Alice Hanson Jones’s extensive study of 1774 probate records. Even with the inquiry dramatically narrowed, estimates have varied widely. McCusker and Menard (1985, p. 338), citing Alexander Hamilton for authority, estimated that just before the Revolution the “current cash” totaled 30 million dollars. Of the 30 million dollars, Hamilton said 8 million consisted of specie (27%). On the basis of this authority, Smith (1985a, p. 538; 1988, p. 22) has maintained that specie was a comparatively minor component in the colonial money supply.

Hamilton was arguing in favor of banks when he made this oft-cited estimate, and his purpose in presenting it was to show that the circulation was capable of absorbing a great deal of paper money, which ought to make us wonder whether his estimate might have been biased by his political agenda. Whether biased, or simply misinformed, Hamilton clearly got his facts wrong.

All estimates of the quantity of colonial bills of credit in circulation – including those of Brock (1975, 1992) that have been relied on by recent authors of all sides of the debate – lead inescapably to the conclusion that in 1774 there were very few bills of credit left outstanding, nowhere near the 22 million dollars implied by Hamilton. Calculations along these lines were first performed by Ratchford. Ratchford (1941, pp. 24-25) estimated the total quantity of bills of credit outstanding in each colony on the eve of the Revolution, and then added the local £., s., and d. of all the colonies (a true case of adding apples and oranges), converted to dollars by valuing dollars at 6 s. each, and concluded that the total was equal to about $5.16 million.

Ratchford’s method of summing local pounds and then converting to dollars is incorrect because local pounds did not have a uniform value across colonies. Since dollars were commonly rated at more than 6 s., his procedure resulted in an inflated estimate. We can correct this error by using McCusker’s (1978) data on 1774 exchange rates to convert local currency to sterling for each colony, obtain a sum in pounds sterling, and then convert to dollars using the rated value of the dollar in pounds sterling, 4½ s. Four and a half s. was very near the dollar’s value in London bullion markets in 1774, so no appreciable error arises from using the rated value. Doing so reduces Ratchford’s estimate to $3.42 million. Replacing Ratchford’s estimates of currency outstanding in New York, New Jersey, Pennsylvania, Virginia, and South Carolina with apparently superior data published by Brock (1975, 1992) reduces the total to $2.93 million. Even allowing for some imprecision in the data, this simply can’t be reconciled with Hamilton’s apparently mythical $22 million in paper money!

How much current cash was there in the colonies in 1774? Alice Hanson Jones’s extensive research into probate records gives an independent estimate of the money supply. Jones (1980, table 5.2) estimated that per capita cash-holding in the Middle colonies in 1774 was £1.8 sterling, and that the entire money supply of the thirteen colonies was slightly more than 12 million dollars.44 McCallum (1992) proposed another way to estimate total money balances in the colonies. McCallum started with the few episodes where historians generally agree paper money entirely displaced specie, making the total money supply measurable. He used money balances in these episodes as a basis for estimating money balances in other colonies by deriving approximate measures of the variability of money holdings over colonies and over time. Given the starkly different methodologies, it is remarkable that McCallum’s approach yields an answer practically indistinguishable from Jones’s.45

Various contemporary estimates, including estimates by Pelatiah Webster, Noah Webster, and Lord Sheffield, also suggest the total colonial money supply in 1774 was ten to twelve million dollars, mostly in specie (Michener 1988, p. 687; Elliot, 1845, p. 938). If we tentatively accept that the total money supply in the American colonies in 1774 was about twelve million dollars, and that only three million dollars worth of bills of credit remained outstanding, then fully 75% of the prewar money supply must have been in specie.

Even this may be an underestimate. Colonial probate inventories are notoriously incomplete, and the usual presumption is that Jones’s estimates are likely to be downwardly biased. Two examples not involving money illustrate the general problem. In Jones’s collection of inventories, over 20% of the estates did not include any clothes (Lindert, 1981, p. 657). In an independent survey of Surry County, Virginia probate records, Anna Hawley (1987, pp. 27-8) noted that only 34% of the estates listed hoes despite the fact that the region’s staple crops, corn and tobacco, had to be hoed several times a year.

In Jones’s 1774 database an amazing 70% of all estates were devoid of money. While the widespread use of credit made it possible to do without money in most transactions it is likely some estates contained cash that does not appear in probate inventories. Peter Lindert (1981, p. 658) surmised “cash was simply allocated informally among survivors even before probate took place.” McCusker and Menard (1985, p. 338, fn. 14) concurred noting “cash would have been one of the things most likely to have been distributed outside the usual probate proceedings.” If Jones actually underestimated cash holdings in 1774 the implication would be that more than 75% of the prewar money supply must have been specie.

That most of the cash circulating in the colonies in 1774 must have been specie seems like an inescapable conclusion. The issue has been clouded, however, by the existence of many contradictory and internally inconsistent estimates in the literature. By using them to defend his contention that specie was relatively unimportant, Smith (1988, p. 22) drew attention to these estimates.

The first such estimate was made by Roger Weiss (1970, p. 779), who computed the ratio of paper money to total money in the Middle colonies, using Jones’s probate data to estimate total money balances as has been done here; he arrived at a considerably smaller fraction of specie in the money supply. There is a simple explanation for this puzzling result: Weiss, whose article was published in 1970, based his analysis on Jones’s 1968 dissertation rather than her 1980 book. In her dissertation, Jones (1968, Tables 3 and 4, pp. 50-51) estimated the money supply in the three Middle colonies at £2.0 local currency per free white capita. Since £1 local currency was worth about £0.6 sterling, Weiss began with an estimated total money supply of £1.2 sterling per free white capita (equal to £1.13 per capita), rather than Jones’s more recent estimate of £1.8 sterling per capita.

Another authority is Letwin (1982, p. 467), who estimated that more than 60% of the money supply of Pennsylvania in 1775 was paper. Letwin used the Historical Statistics of the United States for his money supply data, and a casual back-of-the-envelope estimate that nominal balances in Pennsylvania were £700,000 in 1775 to conclude that 63% of Pennsylvania’s money supply was paper money. However, the data in Historical Statistics of the United States are known to be incorrect: Using Letwin’s back-of-the-envelope estimate, but redoing the calculation using Brock’s estimates of paper money in circulation, gives the result that in 1775 only 45.5% of Pennsylvania’s money supply was paper money; for 1774 the figure is 31%.46

That good faith attempts to estimate the stock of specie in the colonies in 1774 have given rise to such wildly varying and inconsistent estimates gives some indication of the task that remains to be accomplished.47 Many hints about how the specie stock varied over time in colonial America can be found in newspapers, legislative records, pamphlets and correspondence. Organizing those fragments of evidence and interpreting them is going to require great skill and will probably have to be done colony by colony. In addition, if the key to the purchasing power of colonial currency lies in the ratings attached to coins as I personally believe it does, then more effort is going to have to be paid in the future to tracking how those ratings evolved over time. Our knowledge at the moment is very fragmentary, probably because the politics of paper money has so engrossed the attention of historians that few people have attached much significance to coin ratings.

Economic historian Farley Grubb has proposed (2003, 2004, 2007) that the composition of the medium of exchange in colonial America and the early Republic can be determined from the unit of account used in arm’s length transactions, such as rewards offered in runaway ads and prices recorded in indentured servant contract registrations. If, for instance, a runaway reward is offered in pounds, shillings and pence, it means (Grubb argues) that colonial or state bills of credit were the medium of exchange used, while dollar rewards in such ads would imply silver. Grubb then uses contract registrations in the early Republic (2003, 2007) and runaway ads in colonial Pennsylvania (2004) to develop time series for hitherto unmeasurable components of the money supply and draws many striking conclusions from them. I believe Grubb is proceeding on a mistaken premise. Reversing Grubb’s procedure and using runaway ads in the early Republic and contract registrations in colonial Pennsylvania yields dramatically different results, which suggests the method is not useful. I have participated in this contentious published debate (see Michener and Wright 2005, 2006a, 2006c and Grubb 2003, 2004, 2006a, 2006b, 2007) and will leave it to the reader to draw his or her own conclusions.


1. Beginning in 1767, Maryland issued bills of credit denominated in dollars (McCusker, 1978, p. 194).

2. For a number of years, Georgia money was an exception to this rule (McCusker, 1978, pp. 227-8).

3. Elmer (1869, p. 137). Similarly, historian Robert Shalhope (Shalhope, 2003, pp. 140, 142, 147, 290) documents a Vermont farmer who continued to reckon, at least some of the time, in New York currency (i.e. 8 shillings = $1) well into the 1820s.

4. To clarify: In New York, a dollar was rated at eight shillings, hence one reale, an eighth of a dollar, was one shilling. In Richmond and Boston, the dollar was rated at six shillings, or 72 pence, one eighth of which is 9 pence. In Philadelphia and Baltimore, the dollar was rated at seven shillings six pence, or ninety pence, and an eighth of a dollar would be 11.25 pence.

5. In 1822, for example, P. T. Barnum, then a young man from Connecticut making his first visit to New York, paid too much for a brace of oranges because of confusion over the unit of account. “I was told,” he later related, “[the oranges] were four pence apiece [as Barnum failed to realise, in New York there were 96 pence to the dollar], and as four pence in Connecticut was six cents, I offered ten cents for two oranges, which was of course readily taken; and thus, instead of saving two cents, as I thought, I actually paid two cents more than the price demanded” (Barnum, 1886, p. 18).

6. One way to see the truth of this statement is to examine colonial records predating the emission of colonial bills of credit. Virginia pounds are referred to long before Virginia issued its first bills of credit in 1755. See, for example, Pennsylvania Gazette, September 20, 1736, quoting Votes of the House of Burgesses in Virginia, August 30, 1736 or the Pennsylvania Gazette, May 29, 1746, quoting a runaway ad that mentions “a bond from a certain Fielding Turner to William Williams, for 42 pounds Virginia currency.” Advertisements in the Philadelphia newspapers in 1720 promise rewards for the return of runaway servants and slaves in Pennsylvania pounds, even though Pennsylvania did not issue its first bills of credit until 1723. The contemporary meaning of “currency” sheds light on otherwise confusing statements, such as an ad in the Pennsylvania Gazette, May 12, 1763, where the advertiser offered a reward for the recovery of £460 “New York currency” that was stolen from him and then parenthetically noted “the greatest part of said Money was in Jersey Bills.”

7. For an example of a complete list, see Felt (1839, pp. 82-83).

8. Further discussion of country pay in Connecticut can be found in Bronson (1865, pp. 23-4).

9. Weiss (1974, pp. 580-85) cites a passage from an 1684 court case that appears to contradict this discount. However, inspecting the court records shows that the initial debt consisted of 34s. 5d. in money to which the court added 17s. 3d. to cover the difference between money and country pay, a ratio of pay to money of exactly 3 to 2 (Massachusetts, 1961, pp. 303-4). Other good illustrations of the divergence of cash and country pay prices can be found in Knight (1935, pp. 40-1) and Judd (1905, pp. 95-6). The multiple price system was not limited to Massachusetts and Connecticut (Coulter, 1944, p. 107).

10. Thomas Bannister to Mr. Joseph Thomson, March 8, 1699/1700 in (Bannister, 1708).

11. In New York, for instance, early issues were legal tender, but the Currency Act of 1764 put a halt to new issues of legal tender paper money; the legal tender status of practically all existing issues expired in 1768. After prolonged and contentious negotiation with imperial authorities, the Currency Act of 1770 permitted New York to issue paper money that was a legal tender in payments to the colonial government, but not in private transactions. New York made its first issue under the terms of the Currency Act of 1770 in early 1771 (Ernst, 1973).

12. Ordinarily, but not always. For instance, in 1731 South Carolina reissued £106,500 in bills of credit without creating any tax fund with which to redeem them (Nettels, 1934, pp. 261-2; Brock, 1975, p. 123). The Board of Trade repeatedly pressured the colony to create a tax fund for this purpose, but without success. That no tax funds had been earmarked to redeem these bills was common knowledge, but it did not make the bills less acceptable as a medium of exchange, or adversely affect their value. The episode contradicts the common supposition that the promise of future redemption played a key role in determining the value of colonial currencies.

13. Once the bills of credit were placed in circulation, no distinction was made between them based on how they were originally issued. It is not as if one could only pay taxes with bills of the first sort, or repay mortgages with bills of the second sort. Many colonies, to save the cost of printing, would reuse worn but serviceable notes. A bill originally issued on loan, upon returning to the colonial treasury, might be reissued on tax funds; often it would have been impossible, even in principle, for an individual to examine the bills in his possession and deduce the funds ostensibly backing them.

14. Late in the seventeenth century Massachusetts briefly operated a mint that issued silver coins denominated in the local unit of account (Jordon, 2002). On the eve of the Revolution, Virginia obtained official permission to have copper coins minted for use in Virginia (Davis, 1970, vol. 1, chapter 2; Newman, 1956).

15. The Massachusetts government, unable to honor redemption promises made when the first new tenor emission was first created, decided in 1742 to revalue these bills from three to one to four to one with old tenor as compensation. When Massachusetts returned to a specie standard, the remaining middle tenor bills were redeemed at four to one (Davis, 1970; McCusker, 1978, p. 133).

16. New and old tenors have led to much confusion. In the Boston Weekly News Letter, July 1, 1742, there is an ad pertaining to someone who mistakenly passed Rhode Island New Tenor in Boston at three to one, when it was supposed to be valued at four to one. Modern day historians have also occasionally been misled. An excellent example can be found in Patterson (1961, p. 27). Patterson believed he had unearthed evidence of outrageous fraud during the Massachusetts currency reform, whereas he had, in fact, simply failed to convert a sum in an official document stated in new tenor terms into appropriate old tenor terms. Sufro (1976, p. 247) following Patterson, made similar accusations based on a similar misunderstanding of New England’s monetary units.

17. That colonial treasurers did not unfailingly provide this service is implicit in statements found in merchant letters complaining of how difficult it sometimes became to convert paper money to specie (Beekman to Evan and Francis Malbone, March 10, 1769, White, 1956, p. 522).

18. Nathaniel Appleton (1748) preached a sermon excoriating the province of Massachusetts Bay for flagrantly failing to keep the promises inscribed on the face of its bills of credit.

19. Goldberg (2009) uses circumstantial evidence to suggest that Massachusetts was engaged in a “monetary ploy to fool the king” when it made its first emissions. In Goldberg’s telling of the tale, the king had been furious about the Massachusetts mint and officially issuing paper money that was a full legal tender would have been a “colossal mistake” because it would have endangered the colony’s effort to obtain a new charter, which was essential to confirm the land grants the colony had already made. The alleged ploy Goldberg discovered was a provision passed shortly afterwards: “Ordered that all country pay with one third abated shall pass as current money to pay all country’s debts at the same prices set by this court.” Since those with a claim on the Treasury were going to be tendered either paper money or country pay, and since Goldberg interprets this as requiring those creditors to accept either 3 pounds in paper money or 2 pounds in country pay, the provision was, in Goldberg’s estimation, a way of forcing the paper money on the populace at a one third discount. The shortchanging of the public creditors, through some mechanism not adequately explained to my understanding, was sufficient to make the new paper money a defacto legal tender.

There are several problems with Goldberg’s analysis. Jordan (2002, pp. 36-45) has recently written the definitive history of the Massachusetts mint, and he minutely reviews the evidence pertaining to the Massachusetts mint and British reaction to it. He concludes that “there was no concerted effort by the king and his ministers to crush the Massachusetts mint.” In 1692 Massachusetts obtained a new charter and passed a law making the bills of credit a legal tender. The new charter required Massachusetts to submit all its laws to London for review, yet the imperial authorities quietly ratified the legal tender law, even though they were fully empowered to veto it, which seems very peculiar if the legal tender status of the bills was as unpopular with the King and his ministers as Goldberg maintains. The smoking gun Goldberg cites appears to me to be no more than a statement of the “three pounds of country pay equals two pounds cash” rule that prevailed in Massachusetts in the late seventeenth century. In his argument, Goldberg tacitly assumes that a pound of country pay was equal in value to a pound of hard money; he observes that the new bills of credit initially circulated at a one third discount (with respect to specie) and that this might have arisen because recipients (according to his interpretation) were offered only two pounds of country pay in lieu of three pounds of bills of credit (Goldberg, p. 1102). However, because country pay itself was worth, at most, two thirds of its nominal value in specie, by Goldberg’s reasoning paper money should have been at a discount of at least five ninths with respect to specie.

The paper money era in Massachusetts brought forth approximately fifty pamphlets and hundreds of newspaper articles and public debates in the Assembly, none of which confirm Goldberg’s inference.

20. The role bills of credit played as a means of financing government expenditures is discussed in Ferguson (1953).

21. Georgia was not founded until 1733, and one reason for its founding was to create a military buffer to protect the Carolinas from the Spanish in Florida.

22. Grubb (2004, 2006a, 2006b) argues that bills of credit did not commonly circulate across colony borders. Michener and Wright (2006a, 2006c) dispute Grubb’s analysis and provide (Michener and Wright 2006a, pp. 12-13, 24-30) additional evidence of the phenomenon.

23. Poor Thomas Improved: Being More’s Country Almanack for … 1768 gives as a rule that “To reduce New-Jersey Bills into York Currency, only add one penny to every shilling, and the Sum is determined.” (McCusker, 1978, pp. 170-71; Stevens, 1867, pp. 151-3, 160-1, 168, 185-6, 296; Lincoln, 1894, vol. 5, Chapter 1654, pp. 638-9.)

24. In two articles, John R. Hanson (1979, 1980) argued that bills of credit were important to the colonial economy because they provided much-needed small denomination money. His analysis, however, completely ignores the presence of half-pence, pistareens, and fractional denominations of the Spanish dollar. The Spanish minted halves, quarters, eighths, and sixteenths of the dollar, which circulated in the colonies (Solomon, 1976, pp. 31-32). For a good introduction to small change in the colonies, see Andrews (1886), Newman (1976), Mossman (1993, pp. 105-142), and Kays (2001).

25. Council of Trade and Plantations to the Queen, November 23, 1703, in Calendar of State Papers, 1702-1703, entry #1299. Brock, 1975, chap. 4.

26. This, it should be noted, is what British authorities meant by “proclamation money.” Since salaries of royal officials, fees, quit rents, etc. were often denominated in proclamation money, colonial courts often found a rationale to attach their own interpretation to “proclamation money” so as to reduce the real value of such salaries and fees. In New York, for example, eight shillings in New York’s bills of credit were ostensibly worth one ounce of silver although by the late colonial period they were actually worth less. This valuation of bills of credit made each seven pounds of New York bills of credit in principle worth six pounds in proclamation money. The New York courts used that fact to establish the rule that seven pounds in New York currency could pay a debt of six pounds proclamation money. This rule allowed New Yorkers to pay less in real terms than was contemplated by the British (Hart, 2005, pp. 269-71).

27. Brock (1975). The text of the proclamation can be found in the Boston New-Letter, December 11, 1704. To be precise, the Proclamation rate was actually in slight contradiction to that in the Massachusetts law, which had rated a piece of eight weighing 17 dwt. at 6 s. See Brock (1975, p. 133, fn. 7).

28. This contention has engendered considerable controversy, but the evidence for it seems to me both considerable and compelling. Apart from evidence cited in the text, see for Massachusetts, Michener (1987, p. 291, fn. 54), Waite Winthrop to Samuel Reade, March 5, 1708 and Wait Winthrop to Samuel Reade, October 22, 1709 in Winthrop (1892, pp. 165, 201); For South Carolina see South Carolina Gazette, May 14, 1753; August 13, 1744; and Manigualt (1969, p. 188); For Pennsylvania see Pennsylvania Gazette, April 2, 1730, December 3, 1767, February 15, 1775, March 8, 1775; For St. Kitts see Roberdeau to Hyndman & Thomas, October 16, 1766, in Roberdeau (1771); For Antigua, see Anonymous (1740).

29. The Chamber of Commerce adopted its measure in October 1769, apparently too late in the year to appear in the “1770” almanacs, which were printed and sold in late 1769. The 1771 almanacs, printed in 1770, include the revised coin ratings.

30. Note that the relative ratings of the half joe are aligned with the ratings of the dollar. For example, the ratio of the New York value of the half joe to the Pennsylvania value is 64 s./60 s. = 1.066666, and the ratio of the New York value of the half joe to the Connecticut value is 64 s./48 s. = 1.3333.

31. This bank has been largely overlooked, but is well documented. Letter of a Merchant in South Carolina to Alexander Cumings, Charlestown, May 23, 1730, South Carolina Public Records, Vol XIV, pp. 117-20; Anonymous (1734); Easterby (1951, [March 5, 1736/37] vol. 1, pp. 309-10); Governor Johnson to the Board of Trade in Calendar of State Papers, 1731, entry 488, p. 342; Whitaker (1741, p. 25); and Vance (1740, p. 463).

32.I base this on my own experience reviewing the contents of RG3 Litchfield County Court Files, Box 1 at the Connecticut State Library.

33. Though best documented in New England, Benjamin Franklin (1729, CCR II, p. 340) mentions their use in Pennsylvania.

34. See Douglass (1740, CCR III, pp. 328-329) and Vance (1740, CCR III, pp. 328-329). Douglass and Vance disagreed on all the substantive issues, so that their agreement on this point is especially noteworthy. See also Boston Weekly Newsletter, Feb. 12-19, 1741.

35. Data on New England prices during this period are very limited, but annual data exist for wheat prices and silver prices. Regressing the log of these prices on time yields an annual growth rate of prices approximately that mentioned in the text. The price data leave much to be desired, and the inflation estimates should be understood as simply a crude characterization. However, it does show that New England’s peacetime inflation during this era was not so extreme as to shock modern sensibilities.

36. Smith (1985a, 1985b). The quantity theory holds that the price level is determined by the supply and demand for money – loosely, how much money is chasing how many goods. Smith’s version of the backing theory is summarized by the passage quoted from his article.

37. John Adams explained this very clearly in a letter written June 22, 1780 to Vergennes (Wharton, vol. 3, p. 811). Adams’s “certain sum” and McCallum’s “normal real balances” are essentially the same, although Adams is speaking in nominal and McCallum in real terms.

A certain sum of money is necessary to circulate among the society in order to carry on their business. This precise sum is discoverable by calculation and reducible to certainty. You may emit paper or any other currency for this purpose until you reach this rule, and it will not depreciate. After you exceed this rule it will depreciate, and no power or act of legislation hitherto invented will prevent it. In the case of paper, if you go on emitting forever, the whole mass will be worth no more than that was which was emitted within the rule.

38. One of the principle observations Smith (1985b, p. 1198) makes in dismissing the possible importance of interest rate fluctuations is “it is known that sterling bills of exchange did not circulate at a discount.” Sterling bills were payable at a future date, and Smith presumably means that sterling bills should have been discounted if interest made an appreciable difference in their market value. Sterling bills, however, were discounted. These bills were not payable at a particular fixed date, but rather on a certain number of days after they were first presented for payment. For example, a bill might be payable “on sixty days sight,” meaning that once the bill was presented (in London, for example, to the person upon whom it was drawn) the person would have sixty days in which to make payment. Not all bills were drawn at the same sight, and sight periods of 30, 60, and 90 days were all common. Bills payable sooner sold at higher prices, and bills could be and sometimes were discounted in London to obtain quicker payment (McCusker, 1978, p. 21, especially fn. 25; David Vanhorne to Nicholas Browne and Co., October 3, 1766. Brown Papers, P-V2, John Carter Brown Library). In the early Federal period many newspapers published extensive prices current that included prices of bills drawn on 30, 60, and 90 days’ sight.

39. Franklin (1729) wrote a tract on colonial currency, in which he maintained as one of his propositions that “A great Want of Money in any Trading Country, occasions Interest to be at a very high Rate.” An anonymous referee warned that when colonists complained of a “want of money” that they were not complaining of a lack of a circulating medium per se, but were expressing a desire for more credit at lower interest rates. I do not entirely agree with the referee. I believe many colonists, like Franklin, reasoned like modern-day Keynesians, and believed high interest rates and scarce credit were caused by an inadequate money supply. For more on this subject, see Wright (2002, chapter 1).

40. Public Record Office, CO 5/ 947, August 13, 1768, pp. 18-23.

41. New Hampshire Gazette and Historical Chronicle, January 13, 1769.

42. Public Record Office, Wentworth to Hillsborough, CO 5/ 936, July 3, 1769.

43. Pennsylvania Chronicle, and Universal Advertiser, 28 December 1767.

44. This should be understood to be paper money and specie equal in value to 12 million dollars, not 12 million Spanish dollars. The fraction of specie in the money supply can’t be directly estimated from probate records. Jones (1980, p. 132) found that “whether the cash was in coin or paper was rarely stated.”

45. McCallum deflated money balances by the free white population rather than the total population. Using population estimates to put the numbers on a comparable basis reveals how close McCallum’s estimates are to those of Jones. For example, McCallum’s estimate for the Middle colonies, converted to a per-capita basis, is approximately £1.88 sterling.

46. This incident illustrates how mistakes about colonial currency are propagated and seem never to die out. Henry Phillips 1865 book presented data on Pennsylvania bills of credit outstanding. One of his major “findings” was that Pennsylvania retired only £25,000 between 1760 and 1769. This was a mistake: Brock (1992, table 6) found £225,247 had been retired over the same period. Because of the retirements Phillips missed, he overestimated the quantity of Pennsylvania bills of credit in circulation in the late colonial period by 50 to 100%. Lester (1939, pp. 88, 108) used Phillips’s series; Ratchford (1941) obtained his data from Lester. Through Ratchford, Phillips’s series found its way into Historical Statistics of the United States.

47. Benjamin Allen Hicklin (2007) maintains that generations of historians have exaggerated the scarcity of specie in seventeenth and early eighteenth century Massachusetts. Hicklin’s analysis illustrates the unsettled state of our knowledge about colonial specie stocks.


Adams, John Q. “Report upon Weights and Measures.” Reprinted in The North American Review, Boston: Oliver Everett, vol. 14 (New Series, Vol. 5) (1822), pp. 190-230.

Adler, Simon L. Money and Money Units in the American Colonies, Rochester NY: Rochester Historical Society, 1900.

Andrew, A. Piatt. “The End of the Mexican Dollar.” Quarterly Journal of Economics, vol. 18, no. 3 (1904), pp. 321-56.

Andrews, Israel W. “McMaster on our Early Money,” Magazine of Western History, vol. 4 (1886), pp. 141-52.

Anonymous. An Essay on Currency, Charlestown, South Carolina: Printed and sold by Lewis Timothy, 1734.

Anonymous. Two Letters to Mr. Wood on the Coin and Currency in the Leeward Islands, &c. London: Printed for J. Millan, 1740.

Anonymous. “The Melancholy State of this Province Considered,” Boston, 1736, reprinted in Andrew McFarland Davis (ed.), Colonial Currency Reprints, Boston: The Prince Society, 1911, vol III, pp. 135-147.

Appleton, Nathaniel. The Cry of Oppression, Boston: J. Draper, 1748.

Bannister, Thomas. Thomas Bannister letter book, 1695-1708, MSS, Newport Historical Society, Newport, RI.

Barnum, Phineas T. The Life of P.T. Barnum, Buffalo: The Courier Company Printers, 1886.

Baxter, William. The House of Hancock, New York: Russell and Russell, Inc., 1965.

Bernholz, Peter. “Inflation, Monetary Regime and the Financial Asset Theory of Money,” Kyklos, vol. 41, fasc. 1 (1988), pp. 5-34.

Brodhead, John R. Documents Relative to the Colonial History of the State of New York, Albany, NY: Weed Parsons, Printers, 1853.

Brock, Leslie V. Manuscript for a book on Currency, Brock Collection, Accession number 10715, microfilm reel #M1523, Alderman Library special collections, University of Virginia, circa 1956. This book was to be the sequel to Currency of the American Colonies, carrying the story to 1775.

Brock, Leslie V. The Currency of the American Colonies, 1700-1764, New York: Arno Press, 1975.

Brock, Leslie V. “The Colonial Currency, Prices, and Exchange Rates,” Essays in History, vol. 34 (1992), 70-132. This article contains the best available data on colonial bills of credit in circulation.

Bronson, Henry. “A Historical Account of Connecticut Currency, Colonial Money, and Finances of the Revolution,” Printed in New Haven Colony Historical Papers, New Haven, vol. 1, 1865.

Bullock, Charles J. Essays on the Monetary History of the United States, New York: Greenwood Press, 1969.

Burnett, Edmund C. Letters to Members of the Continental Congress, Carnegie Institution of Washington Publication no. 299, Papers of the Dept. of Historical Research, Gloucester, MA: P. Smith, 1963.

Calomiris, Charles W. “Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental,” Journal of Economic History, 48 (1988), pp. 47-68

Cooke, Ebenezer. The Sot-weed Factor Or, A Voyage To Maryland. A Satyr. In which Is describ’d, the laws, government, courts And constitutions of the country, and also the buildings, feasts, frolicks, entertainments And drunken humours of the inhabitants of that part of America. In burlesque verse, London: B. Bragg, 1708.

Connecticut. Public Records of the Colony of Connecticut [1636-1776], Hartford CT: Brown and Parsons, 1850-1890.

Coulter, Calvin Jr. The Virginia Merchant, Ph. D. dissertation, Princeton University, 1944.

Davis, Andrew McFarland. Currency and Banking in the Province of the Massachusetts Bay, New York: Augustus M. Kelley, 1970.

Douglass, William.“A Discourse concerning the Currencies of the British Plantations in America &c.” Boston, 1739, reprinted in Andrew McFarland Davis (ed.), Colonial Currency Reprints, Boston: The Prince Society, 1911, vol III, pp.307-356.

Easterby, James H. et. al. The Journal of the Commons House of Assembly, Columbia: Historical Commission of South Carolina, 1951-.

Elliot, Jonathan. The Funding System of the United States and of Great Britain, Washington, D.C.: Blair and River, 1845.

Elmer, Lucius Q. C., History of the Early Settlement and Progress of Cumberland Conty, New Jersey; and of the Currency of this and the Adjoining Colonies. Bridgeport, N.J.: George F. Nixon, Publisher, 1869.

Enquiry into the State of the Bills of Credit of the Province of the Massachusetts-Bay in New-England: In a Letter from a Gentleman in Boston to a Merchant in London. Boston, 1743/4, reprinted in Andrew McFarland Davis (ed.), Colonial Currency Reprints, Boston: The Prince Society, 1911, vol IV, pp.149-209.

Ernst, Joseph A. Money and Politics in America, 1755-1775, Chapel Hill, NC: University of North Carolina Press, 1973.

Ernst, Joseph A. “The Labourers Have been the Greatest Sufferers; the Truck System in Early Eighteenth-Century Massachusetts,” in Merchant Credit and Labour Strategies in Historical Perspective, Rosemary E. Ommer, ed., Frederickton, New Brunswick: Acadiensis Press, 1990.

Felt, Joseph B. Historical Account of Massachusetts Currency. New York: Burt Franklin, 1968, reprint of 1839 edition.

Ferguson, James E. “Currency Finance, An Interpretation of Colonial Monetary Practices,” William and Mary Quarterly, 10, no. 2 (April 1953): 153-180.

Fernow, Berthold. “Coins and Currency in New-York,” The Memorial History of New York, New York, 1893, vol. 4, pp. 297-343.

Fitch, Thomas. Thomas Fitch letter book, 1703-1711, MSS, American Antiquarian Society, Worcester, MA.

Forman, Benno M. “The Account Book of John Gould, Weaver, of Topsfield, Massachusetts,” Essex Institute Historical Collections, vol. 105, no. 1 (1969), pp. 36-49.

Franklin, Benjamin. “A Modest Enquiry into the Nature and Necessity of a Paper Currency,” Philadelphia, 1729, reprinted in Andrew McFarland Davis (ed.), Colonial Currency Reprints, Boston: The Prince Society, 1911, vol. II, p. 340.

Franklin, Benjamin, The Papers of Benjamin Franklin, Leonard W. Labaree (ed.), New Haven, CT: Yale University Press, 1959.

Goldberg, Dror. “The Massachusetts Paper Money of 1690,” Journal of Economic History, vol. 69, no. 4 (2009), pp. 1092-1106.

Gottfried, Marion H. “The First Depression in Massachusetts,” New England Quarterly, vol. 9, no. 4 (1936), pp. 655-678.

Great Britain. Public Record Office. Calendar of State Papers, Colonial Series, London: Her Majesty’s Stationary Office, 44 vols., 1860-1969.

Grubb, Farley W. “Creating the U.S. Dollar Currency Union, 1748-1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?” American Economic Review, vol. 93, no. 5 (2003), pp. 1778-98.

Grubb, Farley W. “The Circulating Medium of Exchange in Colonial Pennsylvania, 1729-1775: New Estimates of Monetary Composition, Performance, and Economic Growth,” Explorations in Economic History, vol. 41, no. 4 (2004), pp. 329-360.

Grubb, Farley W. “Theory, Evidence, and Belief—The Colonial Money Puzzle Revisited: Reply to Michener and Wright.” Econ Journal Watch, vol. 3, no. 1, (2006a), pp. 45-72.

Grubb, Farley W. “Benjamin Franklin and Colonial Money: A Reply to Michener and Wright—Yet Again” Econ Journal Watch, vol. 3, no. 3, (2006b), pp. 484-510.

Grubb, Farley W. “The Constitutional Creation of a Common Currency in the U.S.: Monetary Stabilization versus Merchant Rent Seeking.” In Lars Jonung and Jurgen Nautz, eds., Conflict Potentials in Monetary Unions, Stuttgart, Franz Steiner Verlag, 2007, pp. 19-50.

Hamilton, Alexander. Hamilton’s Itinerarium, Albert Bushnell (ed.), St. Louis, MO: William Bixby, 1907.

Hanson, Alexander C. Remarks on the proposed plan of an emission of paper, and on the means of effecting it, addressed to the citizens of Maryland, by Aristides, Annapolis: Frederick Green, 1787.

Hanson John R. II. “Money in the Colonial American Economy: An Extension,” Economic Inquiry, vol. 17 (April 1979), pp. 281-86.

Hanson John R. II. “Small Notes in the American Economy,” Explorations in Economic History, vol. 17 (1980), pp. 411-20.

Harper, Joel W. C. Scrip and other forms of local money, Ph. D. dissertation, University of Chicago, 1948.

Hart, Edward H. Almost a Hero: Andrew Elliot, the King’s Moneyman in New York, 1764-1776. Unionville, N.Y.: Royal Fireworks Press, 2005.

Hawley, Anna. “The Meaning of Absence: Household Inventories in Surry County, Virginia, 1690-1715,” in Peter Benes (ed.) Early American Probate Inventories, Dublin Seminar for New England Folklore: Annual Proceedings, 1987.

Hazard, Samuel et. al. (eds.). Pennsylvania Archives, Philadelphia: Joseph Severns, 1852.

Hemphill, John II. Virginia and the English Commercial System, 1689-1733, Ph. D. diss., Princeton University, 1964.

Horle, Craig et. al. (eds.). Lawmaking and Legislators in Pennsylvania: A Biographical Dictionary. Philadelphia: University of Pennsylvania Press, 1991-.

Horle, Craig et. al. (eds.). Lawmaking and Legislators in Pennsylvania: A Biographical Dictionary. Philadelphia: University of Pennsylvania Press, 1991-.

House of Lords. The Manuscripts of the House of Lords, 1706-1708, Vol. VII (New Series), London: His Majesty’s Stationery Office, 1921.

Hutchinson, Thomas. The History of the Province of Massachusetts Bay, Cambridge, MA: Harvard University Press, 1936.

Jones, Alice Hanson. Wealth Estimates for the American Middle Colonies, 1774, Ph.D. diss., University of Chicago, 1968.

Jones, Alice Hanson, Wealth of a Nation to Be, New York: Columbia University Press, 1980.

Jordan, Louis. John Hull, the Mint and the Economics of Massachusetts Coinage, Lebanon, NH: University Press of New England, 2002.

Judd, Sylvester. History of Hadley, Springfield, MA: H.R. Huntting & Co., 1905.

Kays, Thomas A. “When Cross Pistareens Cut their Way through the Tobacco Colonies,” The Colonial Newsletter, April 2001, pp. 2169-2199.

Kimber, Edward, Itinerant Observations in America, (Kevin J. Hayes, ed.), Newark, NJ: University of Delaware Press, 1998.

Knight, Sarah K. The Journal of Madam Knight, New York: Peter Smith, 1935.

Lester, Richard A. Monetary Experiments: Early American and Recent Scandinavian, New York: Augustus Kelley, 1970.

Letwin, William. “Monetary Practice and Theory of the North American Colonies during the 17th and 18th Centuries,” in Barbagli Bagnoli (ed.), La Moneta Nell’economia Europea, Secoli XIII-XVIII, Florence, Italy: Le Monnier, 1981, pp. 439-69.

Lincoln, Charles Z. The Colonial Laws of New York, Vol V., Albany: James B. Lyon, State Printer, 1894.

Lindert, Peter H. “An Algorithm for Probate Sampling,” Journal of Interdisciplinary History, vol. 11, (1981).

Lydon, James G. “Fish and Flour for Gold: Southern Europe and the Colonial American Balance of Payments,” Business History Review, 39 (Summer 1965), pp. 171-183.

Main, Gloria T. and Main, Jackson T. “Economic Growth and the Standard of Living in Southern New England, 1640-1774,” Journal of Economic History, vol. 48 (March 1988), pp. 27-46.

Manigault, Peter. “The Letterbook of Peter Manigault, 1763-1773,” Maurice A. Crouse (ed.), South Carolina Historical Magazine, Vol 70 #3 (July 1969), pp. 177-95.

Massachusetts. Courts (Hampshire Co.). Colonial justice in western Massachusetts, 1639-1702; the Pynchon court record, an original judges’ diary of the administration of justice in the Springfield courts in the Massachusetts Bay Colony. Edited by Joseph H. Smith. Cambridge: Harvard University Press, 1961.

Massey, J. Earl. “Early Money Substitutes,” in Eric P. Newman and Richard G. Doty (eds.), Studies on Money in Early America, New York: American Numismatic Society, 1976, pp. 15-24.

Mather, Cotton. “Some Considerations on the Bills of Credit now passing in New-England,” Boston, 1691, reprinted in Andrew McFarland Davis (ed.), Colonial Currency Reprints, Boston: The Prince Society, 1911, vol. I, pp. 189-95.

McCallum, Bennett. “Money and Prices in Colonial America: A New Test of Competing Theories,” Journal of Political Economy, vol. 100 (1992), pp. 143-61,

McCusker, John J. Money and Exchange in Europe and America, 1600-1775: A Handbook, Williamsburg, VA: University of North Carolina Press, 1978.

McCusker, John J. and Menard, Russell R. The Economy of British America, 1607-1789, Chapel Hill, N.C.: University of North Carolina Press, 1985.

Michener, Ronald. “Fixed Exchange Rates and the Quantity Theory in Colonial America,” Carnegie-Rochester Conference Series on Public Policy, vol. 27 (1987), pp. 245-53.

Michener, Ron. “Backing Theories and the Currencies of the Eighteenth-Century America: A Comment,” Journal of Economic History, 48 (1988), pp. 682-92.

Michener, Ronald W. and Robert E. Wright. 2005. “State ‘Currencies’ and the Transition to the U.S. Dollar: Clarifying Some Confusions,” American Economic Review, vol. 95, no. 3 (2005), pp. 682-703.

Michener, Ronald W. and Robert E. Wright. 2006a. “Miscounting Money of Colonial America.” Econ Journal Watch, vol. 3, no. 1 (2006a), 4-44.

Michener, Ronald W. and Robert E. Wright. 2006b. “Development of the U.S. Monetary Union,” Financial History Review, vol. 13, no. 1 (2006b), pp. 19-41.

Michener, Ronald W. and Robert E. Wright. 2006c. “ Farley Grubb’s Noisy Evasions on Colonial Money: A Rejoinder ” Econ Journal Watch, vol. 3, no. 2 (2006c), pp. 1-24.

Morris, Lewis. The Papers of Lewis Morris,Eugene R. Sheridan, (ed.), Newark, NJ: New Jersey Historical Society, 1993.

Mossman Philip L. Money of the American Colonies and Confederation, New York: American Numismatic Society, 1993, pp. 105-142.

Nettels, Curtis P. “The Beginnings of Money in Connecticut,” Transactions of the Wisconsin Academy of Sciences, Arts, and Letters, vol. 23, (January 1928), pp. 1-28.

Nettels, Curtis P. The Money Supply of the American Colonies before 1720, Madison: University of Wisconsin Press, 1934.

Newman, Eric P. “Coinage for Colonial Virginia,” Numismatic Notes and Monographs, No. 135, New York: The American Numismatic Society, 1956.

Newman, Eric P. “American Circulation of English and Bungtown Halfpence,” in Eric P. Newman and Richard G. Doty (eds.) Studies on Money in Early America, New York: The American Numismatic Society, 1976, pp. 134-72.

Nicholas, Robert C. “Paper Money in Colonial Virginia,” The William and Mary Quarterly, vol. 20 (1912), pp. 227-262.

Officer, Lawrence C. “The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old Question,” Explorations in Economic History, vol. 42, no. 1 (2005), pp. 101-121.

Patterson, Stephen Everett. Boston Merchants and the American Revolution to 1776, Masters thesis, University of Wisconsin, 1961.

Phillips, Henry. Historical Sketches of the Paper Currency of the American Colonies, original 1865, reprinted New York: Burt Franklin, 1969.

Plummer, Wilbur C. “Consumer Credit in Colonial Pennsylvania,” The Pennsylvania Magazine of History and Biography, LXVI (1942), pp. 385-409.

Ratchford, Benjamin U. American State Debts, Durham, N.C.: Duke University Press, 1941.

Reipublicæ, Amicus. “Trade and Commerce Inculcated; in a Discourse,” (1731). Reprinted in Andrew McFarland Davis, Colonial Currency Reprints, vol. 2, pp. 360-428.

Roberdeau, Daniel. David Roberdeau letter book, 1764-1771, MSS, Pennsylvania Historical Society, Philadelphia, PA.

Rosseau, Peter L. “Backing, the Quantity Theory, and the Transition to the U.S. Dollar, 1723-1850,” American Economic Review, vol. 97, no. 2 (2007), pp. 266-270.

Ruffhead, Owen. (ed.) The Statutes at Large, from the Magna Charta to the End of the last Parliament, 1761, 18 volumes., London: Mark Basket, 1763-1800.

Sachs, William S. The Business Outlook in the Northern Colonies, 1750-1775, Ph. D. Dissertation, Columbia University, 1957.

Schweitzer, Mary M. Custom and Contract: Household, Government, and the Economy in Colonial Pennsylvania, New York:Columbia University Press, 1987.

Schweitzer, Mary M. “State-Issued Currency and the Ratification of the U.S. Constitution,” Journal of Economic History, 49 (1989), pp. 311-22.

Shalhope, Robert E. A Tale of New England: the Diaries of Hiram Harwood, Vermont Farmer, 1810–1837, Baltimore: John Hopkins University Press, 2003.

Smith, Bruce. “American Colonial Monetary Regimes: The Failure of the Quantity Theory and Some Evidence in Favor of an Alternate View,” The Canadian Journal of Economics, 18 (1985a), pp. 531-64.

Smith, Bruce. “Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas, Journal of Political Economy, 93 (1985b), pp. 1178-1211.

Smith, Bruce. “The Relationship between Money and Prices: Some Historical Evidence Reconsidered,” Federal Reserve Bank of Minneapolis Quarterly Review, vol 12, no. 3 (1988), pp. 19-32.

Solomon, Raphael E. “Foreign Specie Coins in the American Colonies,”in Eric P. Newman (ed.), Studies on Money in Early America, New York: The American Numismatic Society, 1976, pp. 25-42.

Soltow, James H. The Economic Role of Williamsburg, Charlottesville, VA: University of Virginia Press, 1965.

South Carolina. Public Records of South Carolina, manuscript transcripts of the South Carolina material in the British Public Record office, at Historical Commission of South Carolina.

Stevens John A. Jr. Colonial Records of the New York Chamber of Commerce, 1768-1784, New York: John F. Trow & Co., 1867.

Sufro, Joel A. Boston in Massachusetts Politics 1730-1760, Ph.D. dissertation, University of Wisconsin, 1976.

Sumner, Scott. “Colonial Currency and the Quantity Theory of Money: A Critique of Smith’s Interpretation,” Journal of Economic History, 53 (1993), pp. 139-45.

Thayer, Theodore. “The Land Bank System in the American Colonies,” Journal of Economic History, vol. 13 (Spring 1953), pp. 145-59.

Vance, Hugh. An Inquiry into the Nature and Uses of Money, Boston, 1740, reprinted in Andrew McFarland Davis, Colonial Currency Reprints, Boston: The Prince Society, 1911, vol. III, pp. 365-474.

Weeden, William B. Economic and Social History of New England, Boston, MA: Houghton, Mifflin, 1891.

Weiss, Roger. “Issues of Paper Money in the American Colonies, 1720-1774,” Journal of Economic History, 30 (1970), pp. 770-784.

West, Roger C. “Money in the Colonial American Economy,” Economic Inquiry, vol. 16 (1985), pp. 1-15.

Wharton, Francis. (ed.) The revolutionary diplomatic correspondence of the United States, Washington, D.C.: Government Printing office, 1889.

Whitaker, Benjamin. The Chief Justice’s Charge to the Grand Jury for the Body of this Province, Charlestown, South Carolina: Printed by Peter Timothy, 1741.

White, Phillip L. Beekman Mercantile Papers, 1746-1799, New York: New York Historical Society, 1956.

Whitehead, William A. et. al. (eds.). Documents relating to the colonial, revolutionary and post-revolutionary history of the State of New Jersey, Newark: Daily Advertising Printing House, 1880-1949.

Wicker, Elmus. “Colonial Monetary Standards Contrasted: Evidence from the Seven Years War,” Journal of Economic History, 45 (1985), pp. 869-84.

Winthrop, Wait. “Winthrop Papers,” Collections of the Massachusetts Historical Society, Series 6, Vol 5, Boston: Massachusetts Historical Society, 1892.

Wright, Robert E. Hamilton Unbound: Finance and the Creation of the American Republic, Westport, Connecticut: Greenwood Press, 2002.

Citation: Michener, Ron. “Money in the American Colonies”. EH.Net Encyclopedia, edited by Robert Whaples. June 8, 2003, revised January 13, 2011. URL

Origins of Commercial Banking in the United States, 1781-1830

Robert E. Wright, University of Virginia

Early U.S. commercial banks were for-profit business firms, usually structured as joint-stock companies. Many, but by no means all, obtained corporate charters from their respective state legislatures. Although politically controversial, commercial banks, the number and assets of which grew quickly after 1800, played a key role in early U.S. economic growth.1 Commercial banks, savings banks, insurance companies and other financial intermediaries helped to fuel growth by channeling wealth from savers to entrepreneurs. Those entrepreneurs used the loans to increase the profitability of their businesses and hence the efficiency of the overall economy.

Description of the Early Commercial Banking Business

As financial intermediaries, commercial banks pooled the wealth of a large number of savers and lent fractions of that pool to a diverse group of enterprising business firms. The best way to understand how early commercial banks functioned is to examine a typical bank balance sheet.2 Banks essentially borrowed wealth from their liability holders and re-lent that wealth to the issuers of their assets. Banks profited from the difference between the cost of their liabilities and the net return from their assets.

Assets of a Typical Commercial Bank

A typical U.S. commercial bank in the late eighteenth and early nineteenth centuries owned assets such as specie, the notes and deposits of other banks, commercial paper, public securities, mortgages, and real estate. Investment in real estate was minimal, usually simply to provide the bank with an office in which to conduct business. Commercial banks used specie, i.e. gold and silver (usually minted into coins but sometimes in the form of bars or bullion), and their claims on other banks (notes and/or deposits) to pay their creditors (liability holders). They also owned public securities like government bonds and corporate equities. Sometimes they owned a small sum of mortgages, long-term loans collateralized by real property. Most bank assets, however, were discount loans collateralized by commercial paper, i.e. bills of exchange and promissory notes “discounted” at the bank by borrowers.

Discount Loans Described

Most bank loans were “discount” loans, not “simple” loans. Unlike a simple loan, where the interest and principal fall due when the loan matures, a discount requires only the repayment of the principal on the due date. That is because the borrower receives only the discounted present value of the principal at the time of the loan, not the full principal sum.

For example, with a simple loan of $100 at 6 percent interest, of exactly one year’s duration, the borrower receives $100 today and must repay the lender $106 in one year. With a discount loan, the borrower repays $100 at the end of the year but receives only $94.34 today.3

Commercial Bank Liabilities

Commercial banks acquired wealth to purchase assets by issuing several types of liabilities. Most early banks were joint-stock companies, so they issued equities (“stock”) in an initial public offering (IPO). Those common shares were not redeemable. In other words, stockholders could not demand that the bank exchange their shares for cash. Stockholders who wished to recoup their investments could do so only by selling their shares to other investors in the secondary “stock” market. Because its common shares were irredeemable, a bank’s “capital stock” was its most certain source of funds.

Holders of other types of bank liabilities, including banknotes and checking deposits, could redeem their claims during the issuing bank’s open hours of operation, which were typically four to six hours a day, Monday through Saturday. A holder of a deposit liability could “cash out” by physically withdrawing funds (in banknotes or specie) or by writing a check to a third party against his or her deposit balance. A holder of a banknote, an engraved promissory note payable to the bearer very similar to today’s Federal Reserve notes,4 could physically visit the issuing bank to redeem the sum printed on the note in specie or other current funds, at the holder’s option. Or, a banknote holder could simply use the notes as currency, to make retail purchases, repay debts, make loans, etc.

After selling its shares to investors, and perhaps attracting some deposits, early banks would begin to accept discount loan applications. Successful applicants would receive the loan as a credit in their checking accounts, in banknotes, in specie, or in some combination thereof. Those banknotes, deposits, and specie traveled from person to person to make purchases and remittances. Eventually, the notes and deposits returned to the bank of issue for payment.

Balance Sheet Management

Early banks had to manage their balance sheets carefully. They “failed” or “broke,” i.e. became legally insolvent, if they could not meet the demands of liability holders with prompt specie payment. Bankers, therefore, had to keep ample amounts of gold and silver in their banks’ vaults in order to remain in business. Because specie paid no interest, however, bankers had to be careful not to accumulate too much of the precious metals lest they sacrifice the bank’s profitability to its safety. Interest-bearing public securities, like U.S. Six Percent bonds, often served as “secondary reserves” that generated income but that bankers could quickly sell to raise cash, if necessary.

When bankers found that their reserves were declining too precipitously they slowed or stopped discounting until reserve levels returned to safe levels. Discount loans were not callable.5 Bankers therefore made discounts for short terms only, usually from a few days to six months. If the bank’s condition allowed, borrowers could negotiate a new discount to repay one coming due, effectively extending the term of the loan. If the bank’s condition precluded further extension of the loan, however, borrowers had to pay up or face a lawsuit. Bankers quickly learned to stagger loan due dates so that a steady stream of discounts was constantly coming up for renewal. In that way, bankers could, if necessary, quickly reduce the outstanding volume of discounts by denying renewals.

Reduction of Information Asymmetry

Early bankers maintained profitability by keeping losses from defaults less than the gains from interest revenues.6 They kept defaults at an acceptably low level by reducing what financial theorists call “information asymmetry.” The two major types of information asymmetry are adverse selection, which occurs before a contract is made, and moral hazard, which occurs after contract completion. The information is asymmetrical or unequal because loan applicants and borrowers naturally know more about their creditworthiness than lenders do. (More generally, sellers know more about their goods and services than buyers do.) Bankers, in other words, must create information about loan applicants and borrowers so that they can assess the risk of default and make a rational decision about whether to make or to continue a loan.

Adverse Selection

Adverse selection arises from the fact that risky borrowers are more eager for loans, especially at high interest rates, than safe borrowers. As Adam Smith put it, interest rates “so high as eight or ten per cent” attract only “prodigals and projectors, who alone would be willing to give this high interest.” “Sober people,” he continued, “who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition.”

Adverse selection is also known as the “lemons problem” because a classic example of it occurs in the unintermediated market for used cars. Potential buyers have difficulty discerning good cars, the “peaches,” from breakdown-prone cars, the “lemons.” Sellers naturally know whether their cars are peaches or lemons. So information about the car is asymmetrical — the seller knows the true value but the buyer does not. Potential buyers quite rationally offer the average market price for cars of a particular make, model, and mileage. An owner of a peach naturally scoffs at the average offer. A lemon owner, on the other hand, will jump at the opportunity to unload his heap for more than its real value. If we recall that borrowers are essentially sellers of securities called loans, the adverse selection problem in financial markets should be clear. Lenders that do not reduce information asymmetry will purchase only lemon-like loans because their offer of a loan at average interest will appear too dear to good borrowers but will look quite appealing to risky “prodigals and projectors.”

Moral Hazard

Moral hazard arises from the fact that people are basically self-interested. If given the opportunity, they will renege on contracts by engaging in risky activities with, or even outright stealing, lenders’ wealth. For instance, a borrower might decide to use a loan to try his luck at the blackjack table in Atlantic City rather than to purchase a computer or other efficiency-increasing tool for his business. Another borrower might have the means to repay the loan but default on it anyway so that she can use the resources to take a vacation to Aruba.

In order to reduce the risk of default due to information asymmetry, lenders must create information about borrowers. Early banks created information by screening discount applicants to reduce adverse selection and by monitoring loan recipients and requiring collateral to reduce moral hazard. Screening procedures included probing the applicant’s credit history and current financial condition. Monitoring procedures included the evaluation of the flow of funds through the borrower’s checking account and the negotiation of restrictive covenants specifying the uses to which a particular loan would be put. Banks could also require borrowers to post collateral, i.e. property they could seize in case of default. Real estate, slaves, co-signers, and financial securities were common forms of collateral.

A Short History of Early American Commercial Banks

Colonial Experiments

Colonial America witnessed the formation of several dozen “banks,” only a few of which were commercial banks. Most of the colonial banks were “land banks” that made mortgage loans. Additionally, many of them were government agencies and not businesses. All of the handful of colonial banks that could rightly be called commercial banks, i.e. that discounted short-term commercial paper, were small and short-lived. Some, like that of Alexander Cummings, were fraudulent. Others, like that of Philadelphia merchants Robert Morris and Thomas Willing, ran afoul of English laws and had to be abandoned.

The First U.S. Commercial Banks

The development of America’s commercial banking sector, therefore, had to await the Revolution. No longer blocked by English law, Morris, Willing, and other prominent Philadelphia merchants moved to establish a joint-stock commercial bank. The young republic’s shaky war finances added urgency to the bankers’ request to charter a bank, a request that Congress and several state legislatures soon accepted. By 1782, that new bank, the Bank of North America, had granted a significant volume of loans to both the public and private sectors. New Yorkers, led by Alexander Hamilton, and Bostonians, led by William Phillips, were not to be outdone and by early 1784 had created their own commercial banks. By the end of the eighteenth century, mercantile leaders in over a dozen other cities had also formed commercial banks. (See Table 1.)

Table 1:
Names, Locations, Charter or Establishment Dates, and Authorized Capitals of the First U.S. Commercial Banks, 1781-1799

Name Location Year of Charter (Year of Establishment) Authorized Capital (in U.S. dollars)
Bank of North America Philadelphia, Pennsylvania 1781*/1782/1786** $400,000 (increased to $2,000,000 in 1787)
The Bank of New York Manhattan, New York (1784) 1791 $1,000,000
The Massachusetts Bank Boston, Massachusetts 1784 $300,000
The Bank of Maryland Baltimore, Maryland 1790 $300,000
The Bank of the United States Philadelphia, Pennsylvania 1791* $10,000,000
The Bank of Providence Providence, Rhode Island 1791 $500,000
New Hampshire Bank Portsmouth, New Hampshire 1792 $200,000
The Bank of Albany Albany, New York 1792 $260,000
Hartford Bank Hartford, Connecticut 1792 $100,000
Union Bank New London, Connecticut 1792 $50,000-100,000
Union Bank Boston, Massachusetts 1792 $400,000-800,000
New Haven Bank New Haven, Connecticut 1792 $100,000 (increased to $400,000 in 1795)
Bank of Alexandria Alexandria, Virginia 1792 $150,000 (increased to $500,000 in 1795)
Essex Bank Salem, Massachusetts (1792) 1799 $100,000-400,000
Bank of Richmond Richmond, Virginia (1792) n/a
Bank of South Carolina Charleston, South Carolina (1792) 1801 $200,000
Bank of Columbia Hudson, New York 1793 $160,000
Bank of Pennsylvania Philadelphia, Pennsylvania 1793 $3,000,000
Bank of Columbia Washington, D.C. 1793 $1,000,000
Nantucket Bank Nantucket, Massachusetts 1795 $40,000-100,000
Merrimack Bank Newburyport, Massachusetts 1795 $70,000-150,000
Middletown Bank Middletown, Connecticut 1795 $100,000-400,000
Bank of Baltimore Baltimore, Maryland 1795 $1,200,000
Bank of Rhode Island Newport, Rhode Island 1795 $500,000
Bank of Delaware Wilmington, Delaware 1796 $500,000
Norwich Bank Norwich, Connecticut 1796 $75,000-200,000
Portland Bank Portland, Maine 1799 $300,000
Manhattan Company New York, New York 1799# $2,000,000

Source: Fenstermaker (1964); Davis (1917)

* = National charter.
** = The Bank of North America gained a second charter in 1786 after its original Pennsylvania state charter was revoked. Pennsylvania, Massachusetts, and New York chartered the bank in 1782.
# = This firm was chartered as a water utility company but began banking operations almost immediately.

Banking and Politics

The first U.S. commercial banks helped early national businessmen to overcome a “crisis of liquidity,” a classic postwar liquidity crisis caused by a shortage of cash, and an increased emphasis on the notion that “time is money.” Many colonists had been content to allow debts to remain unsettled for years and even decades. After experiencing the devastating inflation of the Revolution, however, many Americans came to see prompt payment of debts and strict performance of contracts as virtues. Banks helped to condition individuals and firms to the new, stricter business procedures.

Early U.S. commercial banks had political roots as well. Many Revolutionary elites saw banks, and other modern financial institutions, as a means of social control. The power vacuum left after the withdrawal of British troops and leading Loyalist families had to be filled, and many members of the commercial elite wished to fill it and to justify their control with an ideology of meritocracy. By providing loans to entrepreneurs based on the merits of their businesses, and not their genealogies, banks and other financial intermediaries helped to spread the notion that wealth and power should be allocated to the most able members of post-Revolutionary society, not to the oldest or best groomed families.

Growth of the Commercial Banking Sector

After 1800, the number, authorized capital, and assets of commercial banks grew rapidly. (See Table 2.) As early as 1820, the assets of U.S. commercial banks equaled about 50 percent of U.S. aggregate output, a figure that the commercial banking sectors of most of the world’s nations had not achieved by 1990.

Table 2:
Numbers, Authorized Capitals, and Estimated Assets of Incorporated U.S. Commercial Banks, 1800-1830

Year No. Banks Authorized Capital (in millions $U.S.) Estimated Assets (in millions $U.S.)
1800 29 27.42 49.74
1801 33 29.17 52.66
1802 36 30.03 50.00
1803 54 34.90 58.69
1804 65 41.17 67.07
1805 72 48.87 82.39
1806 79 51.34 94.11
1807 84 53.43 90.47
1808 87 51.49 92.04
1809 93 55.19 100.23
1810 103 66.19 108.87
1811 118 76.29 142.65
1812 143 84.49 161.89
1813 147 87.00 187.23
1814 202 110.02 233.53
1815 212 115.23 197.16
1816 233 158.98 270.30
1817 263 172.84 316.47
1818 339 195.31 331.41
1819 342 195.98 349.66
1820 328 194.60 341.42
1821 274 181.23 345.93
1822 268 177.53 307.86
1823 275 173.67 283.10
1824 301 185.75 328.16
1825 331 191.08 347.65
1826 332 190.98 349.60
1827 334 192.51 379.03
1828 356 197.41 344.56
1829 370 201.06 349.72
1830 382 205.40 403.45

Sources: For total banks and authorized bank capital, see Fenstermaker (1965). I added the Bank of the United States and the Second Bank of the United States to his figures. I estimated assets by multiplying the total authorized capital by the average ratio of actual capital to assets from a large sample of balance sheet data.

Commercial banks caused considerable political controversy in the U.S. As the first large, usually corporate, for-profit business firms, banks took the brunt of reactionary “agrarian” rhetoric designed to thwart, or at least slow down, the post-Revolution modernization of the U.S. economy. Early bank critics, however, failed to see that their own reactionary policies caused or exacerbated the supposed evils of the banking system.

For instance, critics argued that the lending decisions of early banks were politically-motivated and skewed in favor of rich merchants. Such was indeed the case. Overly stringent laws, usually championed by the agrarian critics themselves, forced bankers into that lending pattern. Many early bank charters forbade banks to raise additional equity capital or to increase interest rates above a low ceiling or usury cap, usually 6 percent per year. When market interest rates were above the usury cap, as they almost always were, banks were naturally swamped with discount applications. Forbidden by law to increase interest rates or to raise additional equity capital, banks were forced to ration credit. They naturally lent to the safest borrowers, those most known to the bank and those with the highest wealth levels.

Early banks were extremely profitable and therefore aroused considerable envy. Critics claimed that bank dividends greater than six percent were prima facie evidence that banks routinely made discounts at illegally high rates. In fact, banks earned more than they charged on discounts because they lent out more, often substantially more, than their capital base. It was not unusual, for example, for a bank with $1,000,000 equity capital to have an average of $2,000,000 on loan. The six percent interest on that sum would generate $120,000 of gross revenue, minus say $20,000 for operating expenses, leaving $100,000 to be divided among stockholders, a dividend of ten percent. More highly leveraged banks, i.e. banks with higher asset to capital ratios, could earn even more.

Early banks also caused considerable political controversy when they attempted to gain a charter, a special act of legislation that granted corporate privileges such as limited stockholder liability, the ability to sue in courts of law in the name of the bank, etc. Because early banks were lucrative, politicians and opposing interest groups fought each other bitterly over charters. Rival commercial factions sought to establish the first bank in emerging commercial centers while rival political parties struggled to gain credit for establishing new banking facilities. Politicians soon discovered that they could extract overt bonuses, taxes, and even illegal bribes from bank charter applicants. Again, critics unfairly blamed banks for problems over which bankers had little control.

The Economic Importance of Early U.S. Commercial Banks

Despite the efforts of a few critics, most Americans rejected anti-bank rhetoric and supported the controlled growth of the commercial banking sector. They did so because they understood what some modern economists do not, namely, that commercial banks helped to increase per capita aggregate output. Unfortunately, the discussion of banks’ role in economic growth has been much muddied by monetary issues. Banknotes circulated as cash, just as today’s Federal Reserve notes do. Most scholars, therefore, have concentrated on early banks’ role in the monetary system. In general, early banks caused the money supply to be procyclical. In other words, they made the money supply expand rapidly during business cycle “booms,” thereby causing inflation, and they made the money supply contract sharply during recessions, thereby causing ruinous price deflation.

The economic importance of early banks, therefore, lies not in their monetary role but in their capacity as financial intermediaries. At first glance, intermediation may seem a rather innocuous process — lenders are matched to borrowers. Upon further inspection, however, it is clear that intermediation is a crucial economic process. Economies devoid of financial intermediation, like those of colonial America, grow slowly because firms with profitable ideas find it difficult to locate financial backers. Without intermediaries, search costs, i.e. the costs of finding a counterparty, and information creation costs, i.e. the costs of reducing information asymmetry (adverse selection and moral hazard), are so high that few loans are made. Profitable ideas cannot be implemented and the economy stagnates.

Intermediaries reduce both search and information costs. Rather than hunt blindly for counterparties, for instance, both savers and entrepreneurs needed only to find the local bank, a major reduction in search costs. Additionally, banks, as large, specialized lenders, were able to reduce information asymmetry more efficiently than smaller, less-specialized lenders, like private individuals.

By lowering the total cost of borrowing, commercial banks increased the volume of loans made and hence the number of profitable ideas that entrepreneurs brought to fruition. Commercial banks, for instance, allowed firms to implement new technologies, to increase labor specialization, and to take advantage of economies of scale and scope. As those firms grew more profitable, they created new wealth, driving economic growth.

Additional Reading

Important recent books about early U.S. commercial banking include:

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. New York: Cambridge University Press. 2000.

Cowen, David J. The Origins and Economic Impact of the First Bank of the United States, 1791-1797. New York: Garland Publishing, 2000.

Lamoreaux, Naomi. Insider Lending: Banks, Personal Connection, and Economic Development in Industrial New England. New York: Cambridge University Press, 1994.

Wright, Robert E. Origins of Commercial Banking in America, 1750-1800. Lanham, MD: Rowman & Littlefield. 2001.

Important recent overviews of the wider early U.S. financial sector are:

Perkins, Edwin J. American Public Finance and Financial Services, 1700-1815. Columbus: Ohio State University Press, 1994.

Sylla, Richard. “U.S. Securities Markets and the Banking System, 1790-1840.” Federal Reserve Bank of St. Louis Review 80 (1998): 83-104.

Wright, Robert. The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets, 1780-1850. New York: Cambridge University Press. 2002.

Classic histories of early U.S. banks and banking include:

Cleveland, Harold van B., Thomas Huertas, et al. Citibank, 1812-1970. Cambridge: Harvard University Press, 1985.

Davis, Joseph S. Essays in the Earlier History of American Corporations. New York: Russell & Russell, 1917.

Eliason, Adolph O. “The Rise of Commercial Banking Institutions in the United States.” Ph.D., diss. University of Minnesota, 1901.

Fenstermaker, J. Van. The Development of American Commercial Banking: 1782-1837. Kent,Ohio: Kent State University, 1965.

Fenstermaker, J. Van and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money: 1791-1837.” Journal of Money, Credit and Banking 18 (1986): 28-40.

Gras, N. S. B. The Massachusetts First National Bank of Boston, 1784-1934. Cambridge: Harvard University Press, 1937.

Green, George. Finance and Economic Development in the Old South: Louisiana Banking, 1804-1861. Stanford: Stanford University Press, 1972.

Hammond, Bray. Banks and Politics in America, from the Revolution until the Civil War. Princeton: Princeton University Press, 1957.

Hedges, Joseph Edward. Commercial Banking and the Stock Market Before 1863. Baltimore: Johns Hopkins Press, 1938.

Hunter, Gregory. The Manhattan Company: Managing a Multi-Unit Corporation in New York, 1799-1842. New York: Garland Publishing, 1989.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York. Johnson Reprint Corporation, 1968.

Schweikart, Larry. Banking in the American South from the Age of Jackson to Reconstruction. Baton Rouge: Louisiana State University Press, 1987.

Smith, Walter Buckingham. Economic Aspects of the Second Bank of the United States. Cambridge: Harvard University Press, 1953.

Wainwright, Nicholas B. History of the Philadelphia National Bank: A Century and a Half of Philadelphia Banking, 1803-1953. Philadelphia: Philadelphia National Bank, 1953.

1 Which is to say that they increased real per capita aggregate output. Aggregate output is the total dollar value of goods and services produced in a year. It can be measured in different ways, the two most widely used of which are Gross National Product (GNP) and Gross Domestic Product (GDP). The term per capita refers to the total population. Aggregate output may increase simply because of additional people, so economists must take population growth into consideration. Similarly, nominal aggregate output might increase simply because of price inflation. Real aggregate output means output adjusted to account for price changes (inflation or deflation). Real per capita aggregate output, therefore, measures the economy’s “size,” adjusting for changes in population and prices.

2 A balance sheet is simply a summary financial statement that lists what a firm owns (its assets) as well as what it owes (its liabilities).

3 Early bankers used the formula for present value familiar to us today: PV = FV/(1+i)n where PV = present value (sum received today), FV = future value (principal sum), i = annual interest rate, and n = the number of compounding periods, which in this example is one. So, PV = 100/1.06 = 94.3396 or $94.34.


5 In other words, banks could not demand early repayment from borrowers.

6In order to maintain bank revenues, bankers are willing, under competitive conditions, to take some risks and therefore to suffer some defaults. For example, making a simple year-long loan for $100 at 10 percent per annum, if the banker determines that the borrower represents, say, only a 5 percent chance of default, is clearly superior to not lending at all and foregoing the $10 interest revenue. Early U.S. banks, however, rarely faced such risk-return tradeoffs. Because the supply of bank loans was inadequate to meet the huge demand for bank loans, and because banks were constrained by usury law from raising their interest rates higher than certain low levels, usually around 6 to 7 percent, bankers could afford to lend to only the safest risks. Early bankers, in other words, usually faced the problem of too many good borrowers, not too few.

Citation: Wright, Robert. “Origins of Commercial Banking in the United States, 1781-1830″. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL

World Insurance: The Evolution of a Global Risk Network

Reviewer(s):Clark, Geoffrey

Published by EH.Net (August 2013)
Peter Borscheid and Niels Viggo Haueter, editors, World Insurance: The Evolution of a Global Risk Network. Oxford: Oxford University Press, 2012. xvi + 729 pp. $180 (hardcover), ISBN: 978-0-19-65796-4.

Reviewed for EH.Net by Geoffrey Clark, Department of History, State University of New York at Potsdam.

This massive volume on the spread and integration of insurance services internationally comes on the heels of two much less comprehensive collections of essays about insurance globalization during the past two centuries.[1]? Those earlier studies were self-consciously pioneering efforts to descry the contours of a convoluted and sprawling historical landscape that scholars had scarcely explored hitherto. Now, with the appearance of World Insurance: The Evolution of a Global Risk Network, the development and diffusion of insurance worldwide has received a definitive, although hardly final, treatment. For the first time, historians working across a range of subjects from finance and economic modernization to social welfare and even religion have access to a systematic account of how the insurance industry has transformed the risk environment faced by billions around the world and how that process has knit together the economies and fortunes of far flung societies and cultures.

That said, few readers will possess the fortitude to read this book cover to cover, an expectation that the editors wisely seem to have anticipated in their format. Peter Borscheid provides an admirably concise summary of the overarching themes in a general introduction, which is followed by six parts successively devoted to Europe, North America, Sub-Saharan Africa, the Middle East and Northern Africa, the Far East and Pacific, and Latin American and Caribbean. Each of those regional sections begins with another of Borscheid?s introductory overviews, followed by a number of essays focused on specific countries. This organization allows readers to easily survey the broad features of the international insurance business or to bore down into the experience of one region or nation. The geographical coverage is not uniform ? nor could it possibly be given the fact that in the modern era insurance services radiated largely from the UK and were taken up earliest and most strongly in Europe and North America. The vast disparities in global wealth and insurance penetration that persist to the present are reflected narratively in the eight chapters that cover individual European countries while only one chapter examines the national history of sub-Saharan nations, namely the quite exceptional case of South Africa. That telltale gap is also illustrated in Borscheid?s astonishing observation that (leaving South Africa aside) the total of insurance premiums currently paid in all of sub-Saharan Africa is just 1.5 times that spent in tiny Liechtenstein (p. 324).

One of the central themes running through the essays of World Insurance, and forcefully argued by Borscheid, is that the spread of insurance around the globe was closely tied to the migration of Europeans themselves rather than simply to the export of the insurance idea alone. In the nineteenth and early twentieth centuries insurance services were focused mainly on the property and lives of Europeans settled abroad. As late as 1950, to cite an extreme example, 99 percent of insurance policyholders in Ethiopia were foreign residents (p. 316). These essays offer several explanations for the slow adoption of the insurance habit by indigenous peoples. Widespread poverty in many regions simply made insurance policies unaffordable, while the persistence of community- and kin-based networks of mutual aid reduced the need for European-style insurance facilities. On the other hand, as G. Balachandran points out, colonial prejudices made Western insurers wary of extending insurance coverage to native populations. One insurance trade journal from 1891 objected that Indians were bad risks because they were prone to early death and were difficult to identify positively, a fact that invited fraud since ?as a rule, the native is … devoid of moral sense in the matter of truth? (p. 447). Finally, religious scruples have sometimes prevented the acceptance of insurance, especially in conservative Arabian Peninsula, because Sharia law does not recognize insurance contracts and forbids speculation on human life. In a move reminiscent of earlier European attempts to circumvent prohibitions on usury, insurers in Muslim lands have devised Takaful, a mutualized form of insurance that is Sharia-compliant.
Although one of the stated aims of World Insurance is to provide a cultural context to the rapid spread of insurance around the world (p. 1), the preponderance of attention is given to the economic and political dimensions of that development. The first wave of insurance globalization was carried out in the era of high liberalism as European powers established underwriting facilities in settler enclaves and then began to cultivate a local market in fire, property and casualty, and to a much lesser extent, life insurance. Towards the close of the nineteenth century European countries began to erect protectionist barriers to foreign insurers, a move replicated in following decades by Asian, African, and Latin American nations, who variously imposed reserve requirements, currency regulations, and discriminatory taxes on foreign companies in order to prevent capital outflows and to foster domestic insurance industries. In many cases these efforts succeeded in cultivating a home market, but at a price: many entrants into these fledgling markets were undercapitalized and poorly managed, prompting governments both in Europe and around the world to initiate periodic regulatory shakeouts of weak companies. In any case, the extent to which national insurance markets could truly be isolated from the global economy was limited by the excess risks ceded by domestic insurers to international reinsurers like Swiss Re (the company that, not coincidentally, sponsored this historical study of insurance internationalization). This protectionist era came to an end in the 1980s and 90s with the inauguration of what Jer?nia Pons Pons describes as the second wave of insurance globalization, which involved a relaxation of restrictions on foreign insurers; a string of mergers, acquisitions, and the creation of foreign subsidiaries; and the realization of greater efficiencies as the result of keener competition.
Opportunities for the spread of insurance have also fluctuated with the ebb and flow of programs either to socialize or to privatize insurance risks. The creation of the Soviet Union and the People?s Republic of China furnish the most dramatic examples of the wholesale transfer of insurance services to state control. But whether done in the name of socialism, fascism, social democracy, or anti-colonial nationalism, the assumption by the state of responsibility for the provision of health care and pensions, or compensation for losses due to fire, flood, or loss of life, all diminished or eliminated the latitude of insurance businesses operating across national boundaries. The recent return to an emphasis on less regulated private enterprise in providing insurance cover, as well as the more integrated delivery of financial services exemplified by bancassurance, is just the latest swing of the pendulum toward private control, now in the guise of multinational corporate power and a neo-liberal ideology. Whether the post-2008 financial debacle will induce a return to a more stringent regulatory environment and a new generation of statist approaches to insurance is a question that must await a sequel to Borscheid and Haueter?s imposing and standard-setting World Insurance.

1. Peter Borscheid and Robin Pearson, editors, Internationalisation and Globalisation of the Insurance Industry in the 19th and 20th Centuries (Marburg: Philipps-University, 2007); Robin Pearson, editor, The Development of International Insurance (London: Pickering & Chatto, 2010).

Geoffrey Clark is Professor of History at the State University of New York at Potsdam. He is the author of Betting on Lives: The Culture of Life Insurance in England, 1695-1775 and co-editor of The Appeal of Insurance. He is working on a study of slavery insurance in the late medieval Mediterranean.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2013). All EH.Net reviews are archived at

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Money in the Medieval English Economy: 973-1489

Author(s):Bolton, Jim
Reviewer(s):Munro, John

Published by EH.Net (June 2013)

Jim Bolton, Money in the Medieval English Economy: 973-1489.? Manchester: Manchester University Press, 2012.? xv + 317 pp.? $35 (paperback), ISBN: 978-0-7190-5040-4.

Reviewed for EH.Net by John Munro, Department of Economics, University of Toronto.

Embracing a most impressive range of research, cogently organized, penetrating in its analysis of all aspects of the medieval English economy related to money, and elegant in its prose, Bolton?s Money in the Medieval English Economy: 973-1489 is one of the most important books published in English medieval economic history during the past two decades.? Indeed, I do not know of any other comparable and equally comprehensive study of English medieval monetary history. The book is cast into two unequal parts.? Part I (pp. 3-86) is theoretical, beginning with the Fisher Identity and the relationships between money, population, and prices in the medieval economy, followed by uniformly excellent chapters on the roles of money in a developing market economy: in terms of? bullion supplies, coinage, and credit instruments.? The longer Part II (pp.? 87-309), analyses the changes in coinage and other forms of money, and then in more detail the changing roles of money in the actual economy, sector by sector, over three distinct eras: 973-1158, 1158-1351, and 1351-1489.
This section thus begins with the monetary reforms of Edgar of Mercia, first to be crowned and remain king of England, in 973; and it ends with Henry VII?s issue of the first gold sovereign coin, representing the value of one pound sterling, in October 1489 (the shilling came later).? A far more logical end-point would have been the onset of Henry VIII?s Great Debasement in 1542-44, as in Martin Allen?s recent, magisterial Mints and Money in Medieval England (2012), to which Bolton acknowledges his great indebtedness. Manchester University Press?s severe space limitations evidently prevented Bolton from extending his study beyond 1489, and also from including his 25-page bibliography, now available only online (URL on p.? 310).
Beyond the general objectives just outlined, Bolton?s book has two other major goals.? The first is achieved with great success: to prove, in chapters 6 and 7, that England did not acquire a fully-developed money economy until the era from 1158 to 1351, i.e., up to the onset of the Black Death.? In his fully justifiable view, a money economy essentially meant a well-functioning market economy, one that required not only a considerable expansion in the circulating coinage but also rapid population growth and the concomitant development of towns and villages with urban and regional fairs, the establishment of effective forms of royal taxation, the development of the requisite commercial, financial and legal institutions, especially those needed for various forms of credit; and for the latter, the spread of both literacy and numeracy.? He demonstrates that, while population growth from 1086 (Domesday Book) to 1300 at least doubled and may have tripled (from 2.0/2.5 million to 5.0/6.0 million), the money supply expanded by 27 to 40 fold: from ?25,000/?37,500 to more than ?1.0 million ? most of that from the 1220s, though attributing the major increases in coinage to the Central European silver mining booms of ca. 1160 to ca. 1230.? He cites Mayhew?s estimates (2004) that per capita GDP rose from ?0.18 in 1086 to ?0.78 in 1300 (and to ?1.52 in 1470: Table 9.2, p. 295). Depending on sources,? methodology, and population estimates, he contends that per capita supplies of silver coin rose from 3.2d/6.0d in 1042-1066 to 65.5d/101.3d in 1310 (Table 2.2, pp. 25-27).? Thereafter, the introduction of gold coinages (from 1343-51) created significant problems for both our estimates of money supplies and the well-being of the English domestic economy, especially since the English government consistently and seriously overvalued gold to the severe detriment of silver coinage supplies (in effect, England exported silver to acquire gold), given that silver coin was the chief mechanism for transacting domestic trade, wages, and other such payments.
That problem, however, leads us to his second goal, for which he is much less successful: to refute the current ?monetarist? views that later fourteenth- and fifteenth-century England experienced severe monetary scarcities (whether seen in terms of stocks or flows), most especially in silver coin supplies.? A disclaimer is in order: I am evidently one of those so-called monetarists under attack.? The tenor of the book becomes most evident in his statement (p. 75) that: ?It [the money supply] was not the sole determining factor [of price levels] as monetarist historians argue.?? I do not know of anyone who now does so.? That negative viewpoint may be deduced from his lengthy discussion, in his opening chapter, of the well-known and much abused Fisher Identity: M.V = P.T.? Thus, if one accepts the view that changes in V (velocity) and T (volume of transactions) cancel each other out, one might deduce that the price level P ? usually measured by the Consumer Price Index (CPI) ? is directly and proportionately a function of changes in M.?? But, even if some historians still use this antiquated formula, few if any economists do so, preferring? the modernized version in the form M.V = P.y (the occasionally-used equation M.V = GNP is unacceptable as an analytical tool). In this version, y, representing real net national income (or output), thus replaces the completely unmeasurable T; and V thus becomes the income velocity of high-powered money (however defined). Most economists now prefer even more to use the Cambridge ?cash balances? approach, with a demand-for-money equation: M = k.P.y, in which M, P, and y remain the same, while k represents that proportion of national income that the public collectively chooses to hold in non-earning real cash balances, according to determinants of liquidity preference, so that k is often sensitive to changes in interest rates.? Mathematically k is the reciprocal of V.

As may be deduced from either (revised) formula, an expansion in M may have been offset by some decline in V (with a lesser need to economize on coin use) and thus by some increase in k, and also by an increase in y:? especially if an increased M led to a decline in interest rates (with no changes in liquidity preference) and to a greater stimulus for investment and trade, so that P would have risen less than proportionately, if at all.? But the converse was not necessarily true, for the various forces contracting monetary stocks may also have constricted monetary flows: i.e., also reducing V and thereby increasing k.? These revised formulae clearly demonstrate that any analysis of changes in the price levels requires a detailed understanding of changes in both money stocks and money flows (especially liquidity preferences) but also changes in the real economy, as represented by y:? i.e., changes in population, technology, economic organizations, real capital investments, etc.? In my recent publications involving coinage debasements, I have sought to prove that in late-medieval and early-modern Europe, increases in M never resulted in proportional increases in the price level, even during Henry VIII?s Great Debasement (Munro 2011, 2012a, 2012b). None of this constitutes the supposed ?monetarism? that Bolton portrays, except to indicate that ?money matters? (a proposition that Bolton admittedly never denies).
Bolton?s specific goal, in the final two chapters, 8 and 9, is to prove that increases in the supply and use of various credit instruments fully offset the two supposed ?bullion famines?: those from ca. 1375 to ca. 1420 and from ca. 1440 to ca. 1480.? Indeed, his focus on the expanding role of credit allows him fully to accept the nature and extent of these two ?bullion famines? as portrayed by so-called ?monetarists,? in contrast to the published views of the current group of ?anti-monetarist? historians (such as Sussman 1990, 1993, 1995, 1998, 2003).? He thus accepts the three prevailing theses to explain that coinage scarcity: a severe decline in outputs of European silver and gold mines; the disruptions in the trans-Saharan African gold trade to the Mediterranean; and increased bullion outflows to the East, particularly for purchases of Asian spices and other luxury goods.? But this third thesis seems inconsistent with his view that late-medieval England always enjoyed a surplus in its balance of payments with the continent. I myself am far from convinced that any payments deficit with the East, so chronic from Roman times, became proportionately worse during the later-Middle Ages, especially because the specific evidence adduced in favor of this thesis (from Ashtor 1971, 1983) comes from the 1490s, when the Central European mining boom, having commenced in the 1460s (peaking in the 1530s) was supplying vast new quantities of silver to promote increased Venetian trade with the Levant (Munro 2003a).? The more significant of these factors, therefore, may have been the reduction in European inflows of African gold, from the 1370s: a trade that the Portuguese later sought to restore, from the 1440s, and with considerable success from the 1470s.
What Bolton neglects to consider as a major factor in these ?bullion famines? is changes in Cambridge k (and thus in V): i.e., an increased liquidity preference in the form of hoarding ? not by burying precious metals in the ground but by converting them into plate and jewelry, readily changeable back to coin, in times of war-induced taxation.? The one (other) historian who has given such emphasis to changes in liquidity preference and hoarding (?thesaurisation?), as a reaction to general economic pessimism and risk aversion in times of chronic plague, other forms of depopulation, economic contraction and periodic depressions, is Peter Spufford (1988); but Spufford still places greater emphasis on the roles of the European mining slump and bullion outflows to the East.

Bolton obviously does not wish to entertain the Spufford thesis ? which necessarily implies a decrease in the income velocity of money ? because he seeks to show that an increased use of credit fully offset the bullion famines by increasing either V or M or both.? In this debate, on the role of credit, his chief opponent is Pamela Nightingale (1990, 1997, 2004, 2010), and indeed the two have continued this debate is recent issues of the British Numismatic Journal (2011, 2013).? I continue to support Nightingale.? That might seem obvious for one accused of being a ?monetarist,? so that readers of this review must judge for themselves by a careful examination of their respective publications (and the others cited here).? In my view, Bolton fails to refute or contradict Nightingale?s two major propositions.? The first, and most important, is that the supply of credit remained essentially a function of the coined money supply, because most (if not all) credit transactions depended on the use of coin, and especially on the creditor?s confidence of being fully repaid in coin:? so that credit generally expanded with increases in the coined money supply and conversely contracted with any decline in the supply or circulation of coined money, often disproportionately.? On this important issue, Nightingale receives full support from many other monetary historians: Peter Spufford (1988), Nicholas Mayhew (1974, 1987, 1995, 2004), Reinhold Mueller (1984: for Italy), Frank Spooner (1972: for France), and most recently (if less strongly) Chris Briggs (for England: 2008, 2009).? Nightingale?s? second proposition, also endorsed by most of these historians, is that the wide variety of credit instruments used in late-medieval England were not yet negotiable, and thus, while affecting velocity (V), they did could not and did not add to the money supply (M) ? though the differences between the two may here be moot.? To be sure, many of these credit instruments were, and long had been, assignable ? transferable to third parties.? But as Eric Kerridge (1988) ? whom Bolton cites for other purposes ? long ago stressed: ?transferability is not negotiability,? a point that Michael Postan had also earlier made (1928, 1930), despite Bolton?s assertions to the contrary. The fully developed legal institutions required for secure negotiability of commercial bills, in protecting the full rights of assignees and bearers to claim and enforce payment on redemption, were first established in the Habsburg Netherlands by imperial legislation enacted in 1537 and 1541, as Herman Van der Wee has clearly demonstrated (1963, 1967, 1975, 2000),? Not until the early seventeenth century do we find comparable full-fledged English acceptance of negotiability and no national legislation until the Promissory Notes Act of 3 & 4 Anne c. 8 (1704).
Equally essential for full negotiability was the legal acceptance of discounting, a problem related to the issue of usury, given short shrift not only by Bolton but also by Nightingale and most other financial historians (except, notably, De Roover 1967, also in Kirschner 1974).? To be sure, we may fairly assume that many medieval creditors did disguise interest in a loan by increasing the amount stipulated for repayment; but disguising such implicit interest was far more difficult to achieve in discounting (selling a bill for less than face value before redemption).? As Van der Wee has also demonstrated for the Habsburg Netherlands, discounting, along with multiple transfers by endorsement, spread only after an imperial ordinance, issued in October 1540, explicitly permitted interest payments on commercial loans up to 12%.? He also demonstrated that nominal interest rates in the Netherlands dropped sharply in this era, by almost half: from 20.5% in 1511-15 to 11.0% in 1566-70; real rates dropped even further with the inflation of the Price Revolution.? Similarly, according Norman Jones (1989), an even sharper fall in English interest rates on commercial bills took place after Elizabeth I, in 1571, restored her father?s abortive statute (1545) permitting interest payments up to 10%: from about 30% in the 1560s to 10% by 1600, with further declines in the seventeenth century, to about 5% (see also Homer and Sylla 1997, pp. 89-143; Munro 2012c).? Bolton has also not taken account of the significantly increased restrictions on the use of credit in fifteenth century England, from both anti-usury and bullionist legislation, and also the prevailing social attitudes that remained deeply imbedded until the early Stuart era. As Lawrence Stone (1965) so aptly commented on Elizabethan England: ?Money will never become freely or cheaply available in a society which nourishes a strong moral prejudice against the taking of any interest at all. ? If usury on any terms, however reasonable, is thought to be a discreditable business, men will tend to shun it, and the few who practise it will demand a high return for being generally regarded as moral lepers.?
If we were to accept, instead, Bolton?s contentions that an increased use of credit fully offset the coined money scarcity evident in the two bullion famines, then we would then be hard pressed to explain the sharp deflation of these two periods.? Bolton evidently sees no need to do so, for his book, most surprisingly, contains no tables or graphs on the price level (CPI); he provides only one price graph, on relative prices for just wheat and oxen, from 1160 to 1350 (p. 183).? Demographic decline cannot itself explain the periods of deflation (apart from its possible impact on V).? For note that the Black Death (1348-49), quickly reducing population by about 40%, was followed by three decades of rampant inflation: when the Phelps Brown and Hopkins CPI (1451-75 = 100) rose from a quinquennial mean of 85.53 in 1341-45 to one of 136.40 in 1366-70, falling slightly to 127.35 in 1371-75.? Thereafter, the CPI fell to a low of 103.70 in 1421-25, for an overall decline of 23.94%, despite the 16.67% silver debasement of 1411-12.? Rising thereafter to a peak of 124.22 in 1436-40, the CPI fell by 25.40 % during the second ?bullion famine?: to a nadir of 92.667 in 1476-80, again despite the 20.0% silver debasement of 1464.? Recent alternative historical consumer prices indexes ? those by Robert Allen (2001) and Gregory Clark (2004, 2007), neither cited by Bolton ? show the same patterns of inflation and deflation demonstrated in the older Phelps Brown and Hopkins Composite Price index (1956, 1981: revised by Munro).
Bolton consequently does not take full account of the negative economic consequences of deflation.? If all relative prices had moved together in tandem, with proportional changes, then neither deflation nor inflation would matter. But price changes have never done so, especially factor prices in relation to commodity prices.? In general, deflation raises the burden of factor costs for borrowers and entrepreneurs, while inflation reduces that cost burden.? The most familiar such phenomenon is downward nominal-wage stickiness ? so widespread throughout Western Europe, unaffected by demographic factors, and persistent in England itself until 1920 (Smith 1776/1937; Phelps Brown and Hopkins 1955/1981; Munro 2003b).? But nominal interest rates and land rents were generally also sticky in this era, especially when defined by contracts, though for much shorter periods.? Thus all these real factor costs rose, at least in the short run, with the fall in the Consumer Price Index. If creditors were more reluctant to lend in times of monetary scarcity and depression, for fear of non-payment, debtors were also reluctant to borrow more in facing prospects of higher real costs in payments of both interest and the principal.? For both creditors and debtors that reluctance, in especially the mid fifteenth century, may have been due as much to the adverse circumstances of the commercial depressions that accompanied that bullion ?famine? and deflation (Hatcher 1996; Nightingale 1997; Bois 2000).
A final problem, and one that pervades much of the book, concerns the proper distinctions between bullion, coinage, and moneys-of-account, and the closely related problem of coin debasements.? Bolton ought to have followed the model set forth long ago by Sir Albert Feavearyear (1931/1963), whose absence from the bibliography is astonishing.? By this model, silver and gold coins, bearing the official stamp of the ruler, generally circulate by tale (official face value), commanding an agio or premium over bullion.? That agio represents the sum of the minting costs of brassage (for the mint-master) and seigniorage (a tax for the ruler), added to the mint?s bullion price; but also, for the public, it represents their savings on transaction costs in not having to weigh the coins and assay their proper fineness.? As Douglass North (1984, 1985) has demonstrated, transaction costs are always subject to considerable scale economies: thus they are a major burden in small-scale, low-valued silver transactions in retail trade and wage payments, but far less so in very large volume, high-valued transactions, especially those involving gold in wholesale and foreign trade and major debt transactions.? Bolton is very ambiguous on whether coins circulated by weight or by tale, ignoring the scale economies of transactions, but seemingly supporting the former view (despite his evidence presented on pp. 120-21).?
An increased tendency for coins to be accepted only by weight, in higher-valued transactions, arose when the quality of the circulating coinage inevitably deteriorated over the years and decades following a general recoinage: when its silver contents diminished through normal wear and tear, but especially when? the coinage became more and more corrupted by the nefarious practices of clipping, ?sweating? and counterfeiting ? none of which would? have been profitable had coins earlier circulated by weight. Such deterioration, the loss of public confidence, and growing refusals to accept coins by tale meant that all coins lost their former agio, with four consequences.? First, merchants, still accepting coins by tale, sought compensation for perceived silver losses by raising their prices; second, good, higher-weight coins were culled and hoarded or exported, often in exchange for foreign counterfeits (Gresham?s Law); and third, bullion ceased to flow to the mints, so that the king lost? his seigniorage revenues.? Fourth, the king consequently had no alternative but to debase his coinage to bring it in alignment with the current depreciated circulation, thereby restoring the agio and resuming the flow of bullion to the mints.? In Feavearyear?s view, this purely defensive reaction to coinage deterioration explains all English silver debasements before Henry VIII?s Great Debasement of 1542-52: in particular, the 10.00% silver reduction of 1351; the 16.66% reduction of 1411/12; the 20.00% reduction of 1464; and the 11.11% reduction of 1526 ? so that fine silver content of the penny fell from 1.332 g in 1279 to just 0.639 g in 1526.? Henry VIII?s Great Debasement was undertaken, however, for purely fiscal motives (as had long been the continental pattern): to augment seigniorage revenues. But the evidence on seigniorage rate changes indicates that such fiscal motives had also prevailed in Edward IV?s silver and gold debasements of 1464-65 (Munro 2011).
None of this analysis or any credible explanation for debasement can be readily found in Bolton, who even denies that English kings debased their coinages before the Great Debasement, on the overly literal grounds that the sterling silver fineness (92.5%) was always maintained (except for the 1336 issue of 10 dwt halfpence = 83.33% silver halfpence).? Almost all monetary historians define debasement instead as the reduction of the quantity of fine silver or gold in the money-of-account unit (pence, pound). That was achieved by a diminution in fineness (adding more base metal), and/or by a reduction in weight ? but also, for gold coins, by an increase in their official exchange rates.? Thus Edward IV?s initial debasement of gold in August 1464 was achieved by increasing the value of the traditional, physically-unchanged gold noble, from 6s 8d to 8s 4d.? In this respect, I also regret the absence, for a book on money in the medieval economy, of tables on English mint outputs (except for one graph on the Calais mint), in both pounds sterling and kilograms of fine metals, with related details on specific coinage issues in terms of weight, fineness, and mint charges ? though much of that information can be found in both Christopher Challis (1992) and Martin Allen (2011, 2012). ???
Other readers may, however, place much less emphasis on the issues raised in this review; and some, suspecting an unwarranted ?monetarist? bias in this review, may well support Bolton?s views, especially on the role of credit in the late-medieval economy.? Indeed, I must stress the significant contributions that Bolton has made in this field, especially those based on his ongoing research on the Borromei bankers (Milan), and the roles of other Italian merchant-banking firms in both English foreign and domestic trade, i.e. in London. As I indicated at the outset of the review, this book is one of the most important published in English economic history in the past two decades, and one in which the virtues well outweigh the defects.? I recommend that you buy it; if so, get the online bibliography now, before it disappears from the web.


Allen, Martin (2011), ?Silver Production and the Money Supply in England and Wales, 1086 – c. 1500,? Economic History Review, 64: 114-31.
Allen, Martin (2012), Mints and Money in Medieval England. Cambridge and New York: Cambridge University Press.
??? ???
Allen, Robert (2001), ?The Great Divergence in European Wages and Prices from the Middle Ages to the First World War,? Explorations in Economic History, 38: 411-47.

Ashtor, Eliyahu (1971), Les m?taux pr?cieux et la balance des payements du Proche-Orient ? la basse ?poque.? Paris: S.E.P.E.N.

Ashtor, Eliyahu (1983), Levant Trade in the Later Middle Ages.? Princeton: Princeton University Press.

Bois, Guy (2000), La grande d?pression m?di?vale: XIVe – XVe si?cles: le pr?c?dent d?une crise syst?mique. Paris: Presses Universitaires de France.

Bolton, James (2011), ?Was There a ?Crisis of Credit? in Fifteenth-Century England?? British Numismatic Journal, 81: 146-64.

Briggs, Chris (2008), ?The Availability of Credit in the English Countryside, 1400-1480,? Agricultural History Review, 56: 1-24.

Briggs, Chris (2009), Credit and Village Society in Fourteenth-Century England. Oxford and New York: Oxford University Press.

Challis, Christopher (1992), ed., A New History of the Royal Mint. Cambridge: Cambridge University Press.

Clark, Gregory (2004), ?The Price History of English Agriculture, 1209-1914,? Research in Economic History, 22: 125-81.

Clark, Gregory (2007), ?The Long March of History: Farm Wages, Population, and Economic Growth:? England, 1209-1869,? Economic History Review, 60: 97-135.

De Roover, Raymond (1967), ?The Scholastics, Usury, and Foreign Exchange,? Business History Review, 41: 257-71.
Feavearyear, Albert (1931/1963), The Pound Sterling: A History of English Money, 2nd rev. edn. by E. V. Morgan. Oxford: Clarendon Press, 1963.

Hatcher, John (1996), ?The Great Slump of the Mid-Fifteenth Century,? in Progress and Problems in Medieval England, ed. Richard Britnell and John Hatcher.? Cambridge and New York: Cambridge University Press, pp. 237-72.

Homer, Sidney, and Sylla, Richard, A History of Interest Rates, 3rd rev. edn.? New Brunswick, N.J.: Rutgers University Press, 1996, pp. 89-143

Jones, Norman (1989), God and the Moneylenders: Usury and Law in Early Modern England.? Oxford: Basil Blackwell.

Kerridge, Eric (1988), Trade and Banking in Early Modern England. Manchester, Manchester University Press.

Kirshner, Raymond (1974), ed., Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe: Selected Studies of Raymond de Roover. Chicago, University of Chicago Press.

Mayhew, Nicholas (1974), ?Numismatic Evidence and Falling Prices in the Fourteenth Century,? Economic History Review, 2nd ser., 27:? 1-15.

Mayhew, Nicholas (1987), ?Money and Prices in England from Henry II to Edward III,? Agricultural History Review, 35: 121-32.

Mayhew, Nicholas (1995), ?Population, Money Supply, and the Velocity of Circulation in England, 1300-1700,? Economic History Review, 48: 238-57.

Mayhew, Nicholas (2004), ?Coinage and Money in England, 1086 – 1500,? in Medieval Money Matters, ed. Diana Wood. Oxford: Oxbow Books, pp. 72-86.

Mueller, Reinhold (1984), ??Chome l’ucciello di passegio?: la demande saisonni?re des esp?ces et le march? des changes ? Venise au moyen ?ge,? in ?tudes d’histoire mon?taire, XIIe-XIXe si?cles, ed. John Day.? Lille: Presses universitaires de Lille, pp. 195-220.

Munro, John (2003a), ?The Monetary Origins of the ?Price Revolution?:? South German Silver Mining, Merchant-Banking, and Venetian Commerce, 1470-1540,? in Global Connections and Monetary History, 1470-1800, ed. Dennis Flynn, Arturo Gir?ldez, and Richard von Glahn.? Aldershot and Brookfield, Vt: Ashgate Publishing, pp. 1-34.

Munro, John (2003b), ?Wage-Stickiness, Monetary Changes, and Real Incomes in Late-Medieval England and the Low Countries, 1300-1500:? Did Money Matter?? Research in Economic History, 21: 185-297.

Munro, John (2011), ?The Coinages and Monetary Policies of Henry VIII (r. 1509-47),? in The Collected Works of Erasmus: The Correspondence of Erasmus, Vol. 14:? Letters 1926 to 2081, A.D. 1528, trans. Charles Fantazzi and ed. James Estes.? Toronto: University of Toronto Press, pp. 423-76.

Munro, John (2012a), ?The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe: with Special Reference to the Low Countries and England,? in Money in the Pre-Industrial World: Bullion, Debasements and Coin Substitutes, ed. John Munro, Financial History Series no. 20. London: Pickering & Chatto Ltd., pp. 15-32, 185-89 (endnotes).

Munro, John (2012b), ?Coinage Debasements in Burgundian Flanders, 1384-1482: Monetary or Fiscal Policies?? in Comparative Perspectives on History and Historians: Essays in Memory of Bryce Lyon (1920-2007), ed. David Nicholas, James Murray, and Bernard Bacharach.? Medieval Institute Publications, University of Western Michigan: Kalamazoo, pp. 314-60.

Munro, John (2012c), ?Usury, Calvinism and Credit in Protestant England: From the Sixteenth Century to the Industrial Revolution,? in Religione e istituzioni religiose nell?economia europea, 1000 -1800/ Religion and Religious Institutions in the European Economy, 1000 -1800, ed. Francesco Ammannati. Florence: Firenze University Press, pp. 155-84.
Munro, John, The Phelps Brown and Hopkins ?Basket of Consumables? Commodity Price Series and Craftsmen?s Wage Series, 1265-1700: Revised by John Munro, available online in Excel, at

Nightingale, Pamela (1990), ?Monetary Contraction and Mercantile Credit in Later Medieval England,? Economic History Review, 43: 560-75.

Nightingale, Pamela (1997), ?England and the European Depression of the Mid-Fifteenth Century,? Journal of European Economic History, 26: 631-56.

Nightingale, Pamela (2004), ?Money and Credit in the Economy of Late Medieval England,? in Medieval Money Matters, ed. Diana Wood.? Oxford: Oxbow Books, pp. 51-71.

Nightingale, Pamela (2010), ?Gold, Credit, and Mortality:? Distinguishing Deflationary Pressures on the Late Medieval English Economy,? Economic History Review, 63: 1081-1104.

Nightingale, Pamela (2013), ?A Crisis of Credit in the Fifteenth Century – Or of Historical Interpretation?? British Numismatic Journal, 83 (forthcoming).

North, Douglass (1984), ?Government and the Cost of Exchange in History,? Journal of Economic History, 44: 255-64.

North, Douglass (1985), ?Transaction Costs in History,? Journal of European Economic History, 14: 557-76.

Phelps Brown, E.H., and Hopkins, Sheila V. (1955), ?Seven Centuries of Building Wages,? Economica, 22 (87): 195-206; reprinted Phelps Brown and Hopkins (1981), A Perspective of Wages and Prices. London: Methuen, pp. 1-12

Phelps Brown, E. Henry; and Hopkins, Sheila V. (1956), ?Seven Centuries of the Prices of Consumables, Compared with Builders? Wage Rates,? Economica, 23 (92): 296-314: reprinted in Phelps Brown and Hopkins (1981), A Perspective of Wages and Prices.? London:? Methuen, pp. 13-39 (with price indexes not in the original).

Postan, Michael (1928), ?Credit in Medieval Trade,? Economic History Review, 1st ser., 1 (1928), 234-61, reprinted in Michael Postan (1973), Medieval Trade and Finance.? Cambridge: Cambridge University Press, pp. 1?27.

Postan, Michael (1930), ?Private Financial Instruments in Medieval England,? Vierteljahrschrift f?r Sozial- und Wirtschaftsgeschichte, 22 (1930), reprinted in Michael Postan (1973), Medieval Trade, pp. 28-64.

Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, ed. with introduction and notes by Edwin Cannan (1937), New York: Modern Library.

Spufford, Peter (1988), Money and Its Use in Medieval Europe, Cambridge: Cambridge University Press, pp. 339-62.

Spooner, Frank (1972), The International Economy and Monetary Movements in France, 1493-1725. Cambridge, MA: Harvard University Press.

Stone, Lawrence (1965), The Crisis of the Aristocracy, 1558-1641, Oxford: Clarendon Press; reissued 1979, with some corrections.

Sussman, Nathan (1990), ?Missing Bullion or Missing Documents: A Revision and Reappraisal of French Minting Statistics: 1385-1415,? Journal of European Economic History, 19:147 -62.

Sussman, Nathan (1995), ?Minting Trends in France and the Bullion Famine Hypothesis: Regional Evidence (1384-1415),? in Fra spezio e tempo: studi in onore di Luigi de Rosa, ed. I. Zili. Naples: Edizione scientifiche Italiane.

Sussman, Nathan (1998), ?The Late Medieval Bullion Famine Reconsidered,? Journal of Economic History, 58: 126-54.

Sussman, Nathan, and Zeria, Joseph (2003), ?Commodity Money Inflation: Theory and Evidence from France in 1350-1430,? Journal of Monetary Economics, 50: 1769-93.

Van der Wee, Herman (1967), ?Anvers et les innovations de la technique financi?re aux XVIe et XVIIe si?cles,? Annales: E.S.C., 22: 1067-89, republished as ?Antwerp and the New Financial Methods of the 16th and 17th Centuries,? in Van der Wee, Herman (1993), The Low Countries in the Early Modern World , trans. by Lizabeth Fackelman, Variorum Series: Aldershot, pp. 145-66.

Van der Wee, Herman (1975), ?Monetary, Credit, and Banking Systems,? in The Cambridge Economic History of Europe, Vol. V: The Economic Organization of Early Modern Europe, ed. E. E. Rich and Charles Wilson.? Cambridge: Cambridge University Press, pp. 290-393.

Van der Wee, Herman (2000), ?European Banking in the Middle Ages and Early Modern Period (476-1789),? in A History of European Banking, 2nd edn., ed. Herman Van der Wee and G. Kurgan-Van Hentenrijk,? Antwerp: Mercator, pp. 152-80.

John Munro is Professor Emeritus of Economics at the University of Toronto, specializing in the economic history of the late-medieval Low Countries and England, with a focus on money and textiles.? His recent publications in monetary history (2011 – 2012) are listed in the bibliography above; he has also recently published:? ?The Rise, Expansion, and Decline of the Italian Wool-Based Cloth Industries, 1100 -1730:? A Study in International Competition, Transaction Costs, and Comparative Advantage,? Studies in Medieval and Renaissance History, 3rd series, 9 (2012), 45-207.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2013). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):Medieval

The Economics of Edwin Chadwick: Incentives Matter

Author(s):Ekelund, Robert B.
Price, Edward O.
Reviewer(s):Singleton, John D.

Published by EH.Net (April 2013)

Robert B. Ekelund, Jr. and Edward O. Price III, The Economics of Edwin Chadwick: Incentives Matter. Cheltenham, UK: Edward Elgar, 2012. xi + 246 pp. $100 (hardcover), ISBN: 978-1-78100-503-3.

Reviewed for EH.Net by John D. Singleton, Department of Economics, Duke University.

To the extent that Edwin Chadwick is known to historians of economics, Robert Ekelund? (Professor Emeritus in Economics at Auburn University) and Edward Price (Professor Emeritus at Oklahoma State University) have helped inform this awareness through a number of articles over the past 35 years. The Economics of Edwin Chadwick: Incentives Matter collects these insights and aims to establish Chadwick?s import, both within classical economics and to modern economics. The book therefore combines exposition Chadwick?s writings and interpretation in modern terms and frameworks with comparisons to contemporary analysis and evaluation. Interested readers will discover an engaging and frequently thoughtful examination of Edwin Chadwick?s economics.

The book is organized into three parts totaling nine chapters. The first, ?Who Was Edwin Chadwick?? provides an introduction and useful biographical sketch of Chadwick?s life, while the second chapter presents the book?s overriding theme: Chadwick?s modernity. Two parts, ?The Regulation of Markets? and ?Law, Sociology, and Economics,? structure the discussions of the numerous areas to which Chadwick applied his economic analysis. His contributions in the areas of competitive bidding for exclusive contracts, the railways, funeral and burial markets, education, business cycles, criminal justice, sanitation and others are reviewed in turn. The final chapter offers the authors? reflections on Chadwick?s relevance for contemporary society.

Ekelund and Price argue throughout that ?cases and abstractions from the writings of Edwin Chadwick show that … he brought modern economics to the table in evaluating markets, public policy, and (what he believed to be) the appropriate division of roles between government and the private sector? (p. 45). Although this statement provokes ruminations about what ?modern? subsumes and what it means for an eighteenth-century writer to be so, the authors do not indulge these. They apply modernity to mean Chadwick?s ?use of concepts such as the ?common pool,? time and opportunity costs, the demand curve, marginal analysis, strategic behavior, public choice, implicit markets (as for ?accidents?), property rights and liability assignment? (p. 45). An additional aspect of the authors? claim is Chadwick?s marshaling of statistics to support his recommendations: ?Chadwick stands out as a pioneer in the science that requires evidence for reasoning and conclusions regarding economic and social policy? (p. 44).

The chapter detailing Chadwick?s analysis of the railways provides an illustrative example. Chadwick contended that the rail system of England was fraught with inefficiencies, such as monopoly, fragmentation, and waste, and supported nationalization. In making this argument, he offered statistics that compared costs and performance across six European countries which showed prices and the degree of price discrimination in England to be the highest.? ?According to Chadwick, railway operation and consolidation could be achieved through a bidding process and operation by the (or possibly a number) of franchisees after bidding is complete? (p. 79). Chadwick?s characteristic competition ?for the field? solution through franchise bidding appears elsewhere as well and is elaborated by the authors in a separate chapter.

Ekelund and Price do an excellent job of contextualizing Chadwick?s arguments regarding the railways by comparing them with the opinions of William Galt, Jules Dupuit, and A.T. Hadley and through examining his exchange with John Stuart Mill. Galt, like Chadwick, also advocated nationalization, though he supported the operation of the railways by the government. In contrast, Dupuit and Hadley had more optimistic perspectives on open competition. A letter by Mill to Chadwick in 1864 captures the debate: ?About the economical advantage, touched upon in your letter, of a consolidation of railways, you are not likely to find any help in the French economists. They are, nearly all of them, more hostile to consolidation and to government action that I am; and I am more so than you? (quoted on p. 88).

Chadwick?s analyses of criminal justice and sanitation in England display particular sophistication. Chadwick identified rent-seeking, free riding, common pool resources, and asymmetric information as systemic inefficiencies that a proposed reform must remedy. Although his insights do bear strong resemblances to familiar modern counterparts, the weakest aspect of the book is the intimation of relation without probing for genetic links. Taking the novelty of Chadwick seriously in areas like market failure needs an account that dialogues with the traditional narrative or the reader is left to wonder why and how such a prescient thinker became neglected by his antecessors. Moreover, the exercise of evaluating the veracity of Chadwick?s economics from the viewpoint of the matured doctrines inclines too many passages to the curious hobbyists? ? as opposed to the historians? ? interest.

In their concluding appraisal, Ekelund and Price suggest Chadwick?s modernity in a third sense: ?Economic theory is one thing ? the world as it actually exists is another. This might be the mantra of Edwin Chadwick as it is for most policymakers in all countries today? (p. 216). In other words, Chadwick was keenly aware of the constraints and trade-offs that must be faced when crafting policy. ?As such Chadwick originated a popular notion in the economics of regulation and institutions ? that no state of the world is nirvana, and that, before committing societal resource to use, all feasible alternatives must be examined? (p. 178). In the effort to apply economics in weighing costs and benefits, Chadwick?s struggles, at least, are undoubtedly modern.

John D. Singleton ( is coeditor with J. Daniel Hammond and Steven G. Medema of Chicago Price Theory (Edward Elgar, 2013) and author of ??Money is a Sterile Thing?: Martin Luther on the Immorality of Usury Reconsidered,? History of Political Economy, 2011.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (April 2013). All EH.Net reviews are archived at

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):19th Century

Law and Long-Term Economic Change: A Eurasian Perspective

Author(s):Ma, Debin
van Zanden, Jan Luiten
Reviewer(s):Sng, Tuan-Hwee

Published by EH.Net (June 2012)

Debin Ma and Jan Luiten van Zanden, editors, Law and Long-Term Economic Change: A Eurasian Perspective. Stanford: Stanford University Press, 2011. xiv + 358 pp. $65 (cloth), ISBN: 978-0-8047-7273-0.

Reviewed for EH.Net by Tuan-Hwee Sng, Department of Economics, National University of Singapore.

Researchers have long recognized the relationship between secure property rights and economic growth. Discussion on the subject, however, has often fallen into an oversimplified dichotomy between a ?progressive? West and a ?corrupt? East. As the editors of this volume — Debin Ma (London School of Economics) and Jan Luiten van Zanden (Utrecht University) — point out, the need to maintain some level of justice and fairness is probably shared by all societies. While they are not advocates of the revisionist view that the West?s decisive lead in the security of property only appeared with the advent of the industrial revolution, they recognize the need to study non-Western legal systems more systematically. Their admirable goal is to build ?a richer and subtler perspective on global legal traditions? that is ?much more than a simplistic tale of European exceptionalism.?

The volume brings together an impressive group of scholars with expertise on different parts of Eurasia to explore diverse aspects of property rights across space and time. Most of the 15 essays compiled in the volume originated in a conference on law and economic development held in Utrecht in 2007. Some of the questions that they addressed include: What are the main characteristics of a particular legal tradition? How did these characteristics evolve over time? How effective were different legal systems in the protection of property? Did differences in legal traditions contribute to the ?Great Divergence??

As one would expect from a collection of essays, many chapters in the volume are only loosely connected to one another under the broad theme of law and long-term economic growth. Some readers will enjoy the diversity. Others might have preferred a more focused comparative agenda. It is a matter of personal taste, but every reader should find something inside that is interesting and relevant to his/her own work.

The chapters are ordered from east to west, starting with Japan and ending with Britain. Very broadly, they can be classified into four groups: those arguing that an overly powerful state is the main obstacle to legal development; those seeking to explain the internal logic of individual legal systems without offering theories on ?what went wrong (right)?; those that analyze the transmission of legal institutions; and those that examine the performance of a specific institution in a local (British) context.

The State as an Obstacle to Legal Development

In the introduction, the editors offer a three-layer analytical framework to understand the evolution of law and legal institutions: culture provides the range of ideas; the state filters these ideas and selects those compatible with its interests; the ideas selected are then expressed as institutional rules. This is a simple yet powerful framework, with much food for thought.

Chapter 2, by John Haley, discusses the evolution of private law in the West and Japan. It argues that constraints on political power in Europe — itself the outcome of European geography, major tribal migrations between the third and the sixth centuries, the emergence of the church as a political player, and incessant warfare — prevented rulers in medieval Europe from adopting the kind of public-law system that emerged in imperial China. Instead, they were forced to accept adjudication as a principal means of maintaining order. According to Haley, the presence of similar political conditions (in particular, the existence of competing centers of power) also led to the development of an embryonic private-law order in early and medieval Japan. It was this ?shared institutional experience? that would allow Japan to adopt Western law successfully and with relative ease during the nineteenth century.

Recent revisionist scholarship has shown that the legal system in imperial China did a much better job of protecting property rights than previously thought. In Chapter 3, Debin Ma provides a critique of this view. Through a short review of the Chinese legal tradition, he argues that the imperial state?s desire to maintain its monopoly of power prevented the formation of an autonomous legal profession in China. Litigation masters who gave legal advice to ordinary people were driven underground as their presence was viewed by the state as a threat to a harmonious society, while court decisions continued to be made by magistrates with little legal expertise and whose primary concern was to satisfy the review from above. To Ma, ?[t]he rise of an independent legal profession in England and Western Europe and its absence in traditional China were merely reflective of two contrasting political structures at opposing ends of the Eurasian continent.?

The most theoretically oriented chapter in the volume is Metin Cosgel?s analysis of the adoption of legal and other innovations in the Ottoman Empire (Chapter 8). By building a theoretical framework to analyze interactions between a ruler, an organized religious and legal authority, and the citizenry, Cosgel suggests that the support of powerful groups in the society is an important factor that helps explain why the Ottoman state was quick to adopt some innovations (e.g. gunpowder technology) but not others (e.g. printing press, the legal concept of corporation).

In Chapter 10, Jerome Sgard asks why bankruptcy laws were first invented in medieval Europe and not elsewhere. Historically, societies without bankruptcy laws to manage commercial failures ex-post often imposed rules (e.g. usury laws) to prevent economic agents from taking too much risk ex-ante. While bankruptcy laws promote trade and investment by providing a mechanism to solve this dilemma, allowing the court to intervene in commercial affairs could also potentially lead to state predation. According to Sgard, it is therefore unsurprising that bankruptcy laws first emerged in northern Italy, where ?burghers and merchants could actually govern their local public affairs.? Republican institutions and bankruptcy statutes are natural complements.

Chapter 13, by Jaime Reis, studies the mortgage loan market in nineteenth-century Portugal. Using a new metric to identify the component in the interest rate that reflects institutional quality, Reis shows that creditor rights were weakly protected in Portugal between 1870 and 1910. By complementing his statistical analysis with a historical narrative, he argues that the relative high cost of credit observed cannot be attributed to flaws in the architecture of the Portuguese legal system. At root, the problem lies with political meddling with the judiciary and the appointment of judges based on political favoritism.

The Long-Term Evolution of Legal Arrangements

In Chapter 7, Anand Swamy?s insightful survey on land law in colonial India reflects the difficulties of promoting legal and economic development in traditional agrarian societies. In the late 1700s, the East India Company introduced a system of civil courts in Bengal with the belief that secure property rights would promote investment and growth. Over time, however, the colonists became increasingly worried that the court system, with its greater formalism and costs of access, might have disadvantaged poorer segments of society at a time when peasant demand for dispute resolution was rising due to the commercialization of agriculture. After the Mutiny of 1853, measures were readily adopted to curb the transfer of land. Ironically, concludes the author, ?at the height of its power, the colonial state was more fearful of market forces than at its insecure beginning.?

Akin to the situation in Colonial India, the judicial process in imperial China also placed much emphasis on the maintenance of social order. Mio Kishimoto points out in Chapter 4 that the imperial state in China saw the protection of private property rights as a means to reduce social tensions, not as an end in itself. An example used to illustrate the point was the imperial state?s willingness to tolerate the widespread custom of ?two masters to a land.? The custom weakened the rights of landowners by prohibiting them from replacing tenants at will and allowing a tenant to transfer cultivation rights without the landowner?s consent.

Kishimoto?s analysis is complemented by Harriet Zurndorfer?s case study (Chapter 5) on property litigation in sixteenth-century Huizhou (Anhui, China). The chapter discusses how population and commercial growth drove an increase in litigation and how the Chinese state and society coped with it.

Chapter 9, by Toru Miura, presents rich historical details on how legal institutions functioned in the Islamic Middle East. Miura highlights several unique features of the Islamic judicial system, including an emphasis on individual ownership, the reliance on oral testimonials instead of written documentation, and the role of the Islamic qadi as a mediator instead of a judge. Through a careful examination of the actual operation of the court, he shows that the Islamic court was far less arbitrary than commonly perceived.

The Transmission of Legal Institutions

The subject of institutional transmission features prominently in Chapters 6, 11, and 12, by Tirthankar Roy, Jessica Dijkman and Oscar Gelderblom, respectively. Roy traces the evolution of law in India between 1600 and 1900. Particular attention is paid to the way British colonial legislators, driven by a desire to secure the acquiescence of powerful communities to British rule, introduced the procedures of the common law system into India while preserving the content of India?s indigenous law. The result, however, was not a happy one. As multiple legal codes arose to reflect the diversity of the Indian society, the judicial process became unnecessarily costly in time and money. As Roy puts it, the colonial legal system was a ?monstrously inefficient hybrid.?

Dijkman?s chapter sets out to understand whether the development of debt litigation institutions in Holland between 1200 and 1350 led to its strong economic growth after 1350. She points out that many of the legal procedures for debt recovery used in medieval Holland were likely to be imports from the southern Low Countries. But unlike the case in colonial India, institutional transplantation worked well in medieval Holland. Dijkman?s analysis suggests that preexisting institutional similarities between the innovator and the follower matters. The towns of Holland could easily adopt innovations made by its neighbors because in most cases, doing so would require only modifying an existing institution rather than creating a new one.

In Chapter 12, Gelderblom surveys the institutions used by long-distance traders in Bruges, Antwerp, and Amsterdam between 1250 and 1650 to resolve disputes among themselves. He discusses how trade expansion led to the rise of consular courts in Bruges and Antwerp, and subsequently how, as business practices converged and local judges became more competent in adjudicating disputes among foreign merchants, local courts developed into the preeminent third party enforcer of contracts in the Low Countries.

Two British Institutions

Two chapters on Britain, one by Larry Neal on the London Stock Exchange and the other by Dan Bogart on the use of juries to approve infrastructural projects, conclude the volume. In Chapter 14, Neal describes the image of the pre-WWI London Stock Exchange as an entirely self-regulating entity as an ?illusion.? He argues that the exchange operated under the ?ever-present threat that the authorities could sanction the creation of a competing exchange,? and it was this fear of additional legislation that helped prevent the exchange from imposing self-interested restrictions on competition and innovation.

In the final chapter, Dan Bogart studies the link between British legal institutions and infrastructural development. After the Glorious Revolution, parliamentary acts gave juries, whose members often came from the landowning class, the authority to determine compensation for infrastructural projects such as roads, canals, and railways. Bogart finds empirical evidence showing that jury decisions were biased in favor of landowners. He warns, however, against taking the study as conclusive by pointing out that in pre-revolutionary France, infrastructural projects could take decades to receive the green light from the courts. By comparison, the system of juries, which often needed only a few months to reach a decision, could be more of a catalyst than an impediment to innovation.

Tuan-Hwee Sng is Assistant Professor of Economics at the National University of Singapore. He received his Ph.D. in economics from Northwestern University in 2011. His doctoral research has focused on the effects of geographic size on taxation and the quality of governance in Qing China and Tokugawa Japan, 1650-1850.

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (June 2012). All EH.Net reviews are archived at

Subject(s):Economywide Country Studies and Comparative History
Government, Law and Regulation, Public Finance
Geographic Area(s):Asia
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII

Debtor Nation: The History of America in Red Ink

Author(s):Hyman, Louis
Reviewer(s):Shester, Katharine L.

Published by EH.NET (November 2011)

Louis Hyman, Debtor Nation: The History of America in Red Ink.? Princeton, NJ: Princeton University Press, 2011.? xii + 378 pp.? $35 (hardcover), ISBN: 978-0-691-14068-1.

Reviewed for EH.Net by Katharine L. Shester, Department of Economics, Washington and Lee University.

In this book, Louis Hyman, Assistant Professor at Cornell?s ILR School, follows the evolution of America?s consumer credit system throughout the twentieth century.? His story begins in 1917, when personal debt existed only on the fringes of the economy, and continues through 2000, by which time the U.S. economy had become leveraged on debt.? America?s growing dependence on borrowing was supported by rising wages for much of the post-war period, but by the mid-1970s, consumer debt continued to grow amidst a much darker economic climate.? Real wage growth stagnated while the securitization of credit card and mortgage debt encouraged riskier lending.? At times near the end, the book reads as an ominous prelude to the current financial crisis.?

In the Introduction, Hyman states that historians have often neglected the history of business and politics in search for the ??human? face of capitalism,? and that in doing so, they have ?miss(ed) the opportunity to tell an all-too-human story of how our choices … have brought this debt-driven economy to pass? (p. 6).? In Debtor Nation, Hyman does just this, discussing the changing incentives that policymakers and investors faced and how their decisions collectively created and adapted the structure of American consumer debt.? He states that the ?profit motive, government policy, technological progress, and even chance all played necessary but not sufficiently all-encompassing roles? and that the ?shifts in lending and borrowing practices were neither inevitable nor obvious? (pp. 8-9, 2).?

Hyman?s story begins with the legalization of personal loans in 1917 (chapter 1).? Until this time, restrictive usury laws made it unprofitable for lenders to legally loan money to risky borrowers.? The Russell Sage Foundation, a nonprofit concerned with improving living conditions for the working class, led the push for higher interest rate ceilings in an attempt to protect the poor from loan sharks.? Installment credit was shortly introduced in the 1920s, in response to increased demands of the auto industry.? By 1920, the majority of people who could afford to pay cash for a car had already done so and the auto industry needed consumer financing to create additional demand.?

In chapter 2, Hyman discusses how the government?s policy response to the collapse of the housing market of the 1930s resulted in longer-term, amortized loans and a more unified mortgage network across the U.S.? Decreased demand for commercial loans required banks to look elsewhere for investment opportunities and commercial banks that were previously hesitant to invest in personal debt invested in FHA loans (chapter 3).? Credit continued to evolve during World War II when, in an attempt to fight off inflation, the government tried to curb consumer demand by establishing minimum down payments and maximum contract lengths for installment credit.? Without altering profit incentives, this regulation encouraged businesses to find a way around the restrictions and resulted in the expansion of revolving credit (chapter 4).?

Throughout the 1950s and 1960s, Americans ?borrowed their way to prosperity? (p. 132).? The value of extended loans increased annually, but rising incomes and tax incentives allowed the growth rate of outstanding debt to remain fairly constant.? Department stores led the way in credit innovation, loosening credit limits in an attempt to increase sales.? Store credit became so profitable that by the early 1960s, banks began competing with department stores by offering their own credit cards (chapter 5).?

By the mid-1960s, credit had become commonplace in middle-class Americans? lives, as ?Home buyers borrowed their mortgages, financed their cars, and charged their clothes? (p. 173).? Despite the widespread availability of credit for most (i.e., middle-class white men), discrimination existed, leading to a two-tiered credit system.? Activists and policymakers pushed for credit reform to promote credit ?fairness,? resulting in the emergence of objective, computer-based credit models, and increased credit availability to women and minorities (chapter 6).?
By the early 1980s, investment in credit card debt went from being marginally profitable to a leading investment and by the early 1990s it had become twice as profitable as investment in business loans (chapter 7).? Mortgage-backed securities became popular as the development of tranches allowed securities to have different maturities and interest rates.? The availability of credit cards continued to become more widespread and the securitization of credit card debt in the late 1980s lifted the capital bottleneck that constrained consumer spending.? By the end of the 1990s, credit card and mortgage debt was financed through securities markets.? The assumed risk of the debt was predicated on models based on data from only a few years, and the combination of more subprime borrowers, larger debt burdens, and floating interest rates created an economy highly sensitive to changes in the interest rate.? While Hyman?s story ends before the current financial crisis, the last chapter sets the stage well and after reading it, a crisis seems inevitable.? Hyman does address the current crisis in the Epilogue, stating that ?the current financial crisis, rooted in those credit instruments, occurred not because capitalism failed, but because it succeeded? and that the large expansion of consumer debt from the 1980s onward was due to the high returns to consumer lending (p. 284).?

Debtor Nation provides a detailed account of how corporations, banks, and government transformed America?s economy into an economy dependent and leveraged on debt.? It tells an important (and often underemphasized) story about the evolution of modern credit and stresses the economic incentives that businesses and politicians faced at every step.? Hyman largely leaves the demand-side of the story to others, but I would have liked to have learned more about the relative magnitude of consumer debt throughout the period.? In particular, I would have enjoyed seeing how the relative size of mortgage and credit card debt, as a proportion of income, changed over time.?

Overall, Hyman has written an insightful book about the evolution of U.S. credit markets.? Debtor Nation is particularly relevant given the recent financial crisis and after reading it, it is clear that a complete story of the crisis must begin decades earlier.? I recommend this book to anyone wanting to know more about U.S. credit markets, or about how the U.S. became so dependent on debt.?

Katharine L. Shester is an Assistant Professor of Economics at Washington and Lee University.? Her current research assesses the effects of public housing on community-level outcomes in the mid- to late-twentieth century.???

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2011). All EH.Net reviews are archived at

Subject(s):Business History
Financial Markets, Financial Institutions, and Monetary History
Household, Family and Consumer History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Heavenly Merchandize: How Religion Shaped Commerce in Puritan America.

Author(s):Valeri, Mark
Reviewer(s):Frey, Donald E.

Published by EH.NET (August 2010)

Mark Valeri, Heavenly Merchandize: How Religion Shaped Commerce in Puritan America. Princeton, NJ: Princeton University Press, 2010. xiii + 337 pp. $35 (cloth), ISBN: 978-0-691-14359-0.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest University.


Mark Valeri shows impressive mastery of a huge amount of colonial New England archival material, ranging from merchants? accounts, personal letters and legal filings, to Puritan ministers? sermons, tracts, and lectures. He also understands the major thinkers who shaped intellectual currents in England and America, during the period from the founding of Boston through the mid-eighteenth century. Valeri shapes all this into a comprehensive picture of the joint evolution of economics and Puritan teaching. Although Valeri does not explicitly address Max Weber?s Protestant ethic thesis, and even states that the book is not about Weber, I believe that his detailed portrayal of an evolving, multi-faceted Protestant ethic nevertheless shows Weber?s classic to be lacking in depth, with all the qualifications that fact raises.

Valeri frames this history as a sequence of overlapping stages, focusing upon a representative merchant for each of the stages. Valeri?s lens is specifically upon pious merchants, who believed that their commercial practices and ideals were compatible with their Puritan faith. That these merchants were not rebels from mainstream Puritan teaching makes Valeri?s case all the more compelling. Besides showing how religion shaped commerce, Valeri also shows that economics shaped religious teachings: Puritanism?s early suspicion of commerce eventually learned to stand on its head, evolving into an endorsement of commerce. Indeed, the book?s title is taken from the title of a colonial sermon that resorted to commercial metaphors to make its point.

Puritan merchant Robert Keayne is Valeri?s representative of the first stage (early Boston to 1650).? Keayne tried to hold to two moral codes that were incompatible at major points of intersection. The ?civic humanism? of merchant guilds idealized trade as a source of civic and national improvement and promoted professional practices such as keeping detailed accounts. Yet, Keayne also converted to Puritanism, which ?interpreted the market through a different conceptual framework? (p.26); this framework held that sinful humans, including merchants, and maybe especially merchants, were ?inescapably prone to avarice.? Further, as might be obvious, the norms of scripture were hardly the same as civic humanism. Thus, Keayne, the pious merchant, regularly heard sermons that ?warned that merchants were tempted to take advantage of their neighbors, forget their duty to the poor, and become self-interested,? and described an accounting mentality, which every merchant acquired as a matter of course, as a ?disguise for inhumaneness? (p. 31).?

The easy solution to Keayne?s dilemma would have been to reject orthodox Puritanism. Not surprisingly, many merchants flocked to the antinomian heresy, which ?condoned merchants? proclivities to follow their own regulations and rules? (p. 45). Yet, Keayne resolutely remained among the orthodox, faithfully submitting to censure from his church for his own business practices (though continuing to defend his own case). Keayne?s dual professions (one of faith, and one of livelihood) left him in a dilemma that lasted to his death, and was addressed in his bequest to the city. In this early era, Reformed religion recognized economic activity as another human arena requiring boundaries to define acceptable behavior.

With time, Puritan clergy did become more tolerant of trade — and ultimately, much more than merely tolerant. The second stage (1650- late 1680s) was marked by the restoration of the old royal line in England (following Puritan Cromwell?s interregnum). The restored monarchy forced upon New England royal governors not attuned to Puritanism; and Boston merchants inevitably came to conform to developing English trade practices.? According to Valeri, the new complexity of trade caused old Puritan certainties to blur. The Puritans knew ?that usury, oppression, and pure market pricing were wrong, but they lost the specific meaning of such terms in the swirl of contemporary techniques? (p. 90). As a result, Puritan churches ceased disciplining their merchant members for economic infractions.

Puritanism of this stage, however, did not simply abandon the field to rampant commerce. Calvin?s doctrine of divine providence opened the way to a new interpretive approach to commerce.? (In Reformed teaching, this doctrine held that God?s purposes control even the smallest events.) At the personal level, Puritan merchants like John Hull tempered their commercial striving in the belief that God?s providence ultimately dictated success or failure. But the clergy went further, arguing that, as with ancient Israel, God would punish an unrighteous society and reward a virtuous one (though in his hidden purposes, he just might not). ?At minimum, therefore, good government would be necessary for New England to be positioned to receive divine favor. And good government relied on specialized knowledge. Now, ?economic reform rested … in the responsibility of civic leaders to rule according to their social expertise? (p. 103). This exempted the churches from disciplining for more complex economic infractions. As long as merchants avoided ?gross excesses? and ?downright avarice,? their pursuit of profit was not subject to church censure (p. 105).? The merchant John Hull never encountered the censure faced by his predecessor, Keayne. Nevertheless, Puritan faith seems to have influenced Hull?s personal style, for he lived a relatively modest life and accumulated a relatively small estate.

The third stage (1690 to the mid-1710s) marked a shift toward technical, economic theories dominating even the clergy?s discussion of commerce. But the clergy ratcheted up the concept of divine providence to provide a new religious interpretation of what was happening. The Glorious Revolution (1688) providentially returned Protestants to power in England, and allowed for a grand harmonization of faith and economics: ?Protestantism led to wealth; wealth funded the empire; the empire combated Catholicism; the end of Catholicism brought civil liberties; and civil liberties allowed citizens to practice Protestant and market principles? (p. 134). Samuel Sewall was a merchant of this era. He was a writer who ?discovered a perfect congruence between political economy and the most intensely providential world view? (p. 172).? He envisioned God?s purpose to be a Protestant empire in America, funded by commerce.

With providence now drafted into the service of economics, the lead role in defining virtue and vice shifted to purely economic reasoning. For example, the dim Puritan view of luxury was relaxed on the say-so of economic theory, which claimed that hyper-consumption ?strengthened the commonwealth, promoted its independence, and therefore amounted to a social virtue? (p. 137). Ultimately, the clerical successors to the original Puritans ?jettisoned older puritan readings of Scripture for interpretations resting on scientific analyses, patriotic agendas, and practical necessity? (p. 154). They ?treated the language of political economy as a universal certainty, while discarding the original dictates of Reformed teaching? (p. 156).

The transformation of Puritan teachings continued between the 1710s and 1730s. Even the idea of divine providence was renovated: henceforth, it would be reduced to concepts acceptable to the Enlightenment. According to Boston clergy, ?God ruled humanity through a universal, which is to say natural, law? (p. 209) — a proposition consistent with Enlightenment views and Newtonian science.? Commerce became ?a series of natural exchanges, that, by the law of nature, coalesced into a balanced system? (p. 211).? No longer did clergy see the market as a temptation to evil, but glorified it as a natural mechanism ordained by God. It is little wonder, therefore, that the merchant Hugh Hall in this era was ?apparently oblivious to the moral ideas of classic puritanism? and so ?imported expensive and fashionable items, sold sugar and rum … sued his debtors, contributed to the unsettling fluctuation of fiscal values and prices, and dealt in slaves? (p. 224).? Hall?s deeds, which would have rated condemnation from earlier Puritan clergy, were congruent to the Enlightenment-soaked teachings of his religious mentors; these clerical successors to the early Puritans could ignore slave trading while emphasizing inner qualities that showed up more in style than in substance.

Valeri concludes with the revival era of the 1740s and 1750s, which was more of the same, but played in a new key. Clergy and merchants alike, whether for or against the evangelical revivals of the Great Awakening, understood the relationship between Protestantism and economics in the same way: the market was part of God?s natural design and, as such, was ?an arena for the exercise of virtue? (p. 241). As had been the case since at least 1700, ?virtue? was not defined in terms of the goodness of certain actions (and regulation of bad actions), but in terms of inner virtues such as ?equanimity, sincerity, and benevolence? (p. 235).? It is not surprising that pious merchants of the era ?worried about the corruption of personal inclinations yet expressed no reservations? about their business practices, which would have earned them censure by their Puritan ancestors (p. 242).? This era saw the hardening of an ideology, blessed by religion: the market was a ?natural law, a divine construct,? and a school for certain kind of social virtue. The market ?appeared to be a universal truth, whereas the old scriptural idioms … receded into anachronism? (p. 249).

Valeri carefully refrains from drawing conclusions that go beyond his immediate research. I wish he had been willing to extrapolate more, and so I will do so myself. As suggested above, this book raises questions about the adequacy of Max Weber?s classic ?Protestant ethic? thesis. (At a very, very high level of generalization, where specifics are too diluted to matter, Valeri?s work can be made to agree with Weber, in that religious ideas do indeed interact with economics. But beyond that, I see important differences.) The Puritan merchants studied by Valeri never seem so driven by insecurity about their election to seek affirmation of their salvation in economic success — as argued by Weber. In fact, according to my reading of Valeri?s work, the religious stimulus to (or affirmation of) economic activity increased to the degree that clergymen abandoned core Calvinist teachings and adopted secular, Enlightenment ideas.

This book also highlights two enduring alternative paradigms about the fundamental nature of economic systems. The early Puritans had viewed the market essentially as a human activity, and, as such, less than perfect. That being assumed, economic behavior needed boundaries defined by human institutions (churches and governments). The impact of commerce on the local community was a matter for regulation. By the time essentially secular Enlightenment ideas had been hallowed by eighteenth-century clergy, the market had ceased being a human invention and been transmuted into an expression of natural law and a divine construct (p. 249). As such, of course, the economy became sacred and untouchable — perhaps to be worshipped, but never to be reformed by mere mortals. The way was set toward nineteenth-century laissez-faire. The distinction between the economy as an imperfect human invention, always the proper object of reform, and the economy as an expression of some kind of perfection (perhaps general equilibrium), it seems to me, plays out to this day in contemporary politics and economics. As this book shows, these alternative paradigms are largely matters of faith.? Recognition of this might greatly improve contemporary political discourse.

My criticisms of the book are minor. As noted already, the book?s subtitle might have somehow indicated that half of the thesis was that commerce shaped religion, in addition to religion shaping commerce. Although merchants were highly significant in the New England economy, somewhat more attention might have been paid to other occupations. However, authors have to define some boundaries, and Valeri?s chosen emphasis makes sense. Valeri?s long discussions of colonial monetary problems can be defended because such problems were integral to the economic story he tells. However, in my opinion these discussions might have been pared without great damage to the thesis. However, these are minor suggestions. Overall, I found this book to be an outstanding contribution to our understanding of the working out of the Protestant ethic in colonial New England. Therefore, it is a major contribution to our understanding of American economic morality.


Donald E. Frey is author of America?s Economic Moralists: A History of Rival Ethics and Economics (2009).

Copyright (c) 2010 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2010). All EH.Net reviews are archived at

Subject(s):Business History
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):17th Century
18th Century