The Legal Tender of Paper Money in America
Copy: Yale University Library
This paper appears to be the “Hints of Arguments” Franklin told Jackson in the letter immediately below that he had drawn up for the use of the Duke of Grafton when the proposed bill for the repeal of the Currency Act should reach the House of Lords. The subject matter of the paper, its date, and the statement that it was “presented to one of the Ministry” all support this identification.
The copy appears to be in the hand of William Franklin. His father wrote Joseph Galloway, April 14, 1767, that he had sent Galloway “by the late Packets” the Board of Trade’s report on colonial currency “with two Papers of mine on the Subject”; below, p. 123. Most of the Board of Trade representation of Feb. 9, 1764, was printed in Pa. Chron., May 18–25, 1767, and in Pa. Gaz., May 28, 1767, and Franklin’s response to it appeared in each paper a week later. William Franklin was clearly involved in these appearances, for he reported to his father, June 10, on the printing of the response and on the “general Approbation” it had won, even within the proprietary party; below, p. 176. Almost certainly the “Hints of Arguments” prepared for the Duke of Grafton was the other paper Franklin had sent over to Galloway in the early spring and the present copy of it is one that William Franklin made, perhaps with the idea of having it too printed in the Philadelphia papers. So far as the editors have discovered, however, this paper remained unpublished throughout the period when the Currency Act of 1764 was a political issue and, in fact, it is believed to be printed here for the first time.
Feby. 13, 1767.
A Copy of a Paper on the legal Tender of Paper Money in America drawn up by Dr. B.F. and presented to one of the Ministry. Feby. 13, 1767
It is an old but true Observation, that whenever the Ballance of Trade is against a Country, its Gold and Silver must and will go out to pay that Ballance.
When a free and independent State observes its Gold and Silver by this means diminishing, it makes Laws to discourage and prohibit such Importations as are unnecessary.
Britain does this with regard to the Superfluities imported from France, which its People are fond of using.
The Colonies are as fond of the Superfluities and Luxuries imported to them from Britain.
But their Legislatures cannot restrain or forbid such Importations; because being dependent on Britain any Laws they might make for that Purpose would be and are immediately repeal’d here, as prejudicial to the Trade of this Country.
Paper Bills called Bills of Credit or Paper Money have therefore in the Colonies long been substituted for real Money.
Various Ways of issuing these and on different Foundations, have at different Times been thought of and practised.
An Imitation of the Bank of England, where every Bill is payable in Cash upon Sight, was the first that occur’d; but was immediately seen to be impracticable; first from the Difficulty (in a dependent Country as abovesaid and stript of its Cash) of always providing the Sum necessary to pay the Bills as they should be offered; and then the Certainty that if it could be provided, the whole Sum would be drawn out of the Bank by the Merchants as fast as by Trade they got the Bills into their Hands, in order to remit it to Britain in Discharge of their Debts. Thus the Bills would all soon be lodg’d again in the Bank, and not answer the Purposes of a Currency.
Bills then were struck by several of the Colony Governments, and emitted upon Loan on Land Security, to be paid in again at certain Periods with Interest. To give them a Value they were by Law made a legal Tender in Discharge of all Debts, and in Payment of all Taxes. By this Means they were as readily receiv’d as Bank Bills, the Conveniency to the Possessor where every one is oblig’d to take them being rather greater than where the Bank only is so oblig’d.
Where the Sums so emitted were moderate and did not exceed the Proportion requisite for the Trade of the Colony, such Bills retain’d a fix’d Value when compar’d with Silver without Depreciation for many Years. Thus in New-York for Forty Years past, Eight Shillings in Bills has been uniformly the Value of a Spanish Dollar, and for near the same Time, Seven Shillings and Six Pence in Bills has been the Value of a Dollar in West Jersey and Pensylvania. The Exchange indeed between the Colonies and Britain has at Times varied in a greater Proportion; but as when Bills of Exchange have been higher, more Silver as well as more Paper Money has been given for them, it appears that such high Price of Bills has been owing merely to their Scarcity or to a greater Demand for them, and not to any Depreciation of the Paper Currency.
In Times of War, when large Sums have been immediately wanted for the Defence of the Colonies, or to comply with the Requisition of the Crown, Bills of Credit have been sometimes issued in enormous Sums (not upon Loan, but to pay Troops, &c.) funded on Taxes which were to bring them in at distant Periods. The too great Quantity has, in some Colonies, occasioned a real Depreciation of these Bills, tho’ made a legal Tender: For the Plenty of Paper Money occasioning a readier Sale and greater Demand for British Manufactures, the Merchants had an increas’d Necessity for greater Quantities of Silver for Remittance to Britain, and to obtain it bid upon one another, offering more in Paper Money Per Ounce, thus raising the Silver, and depreciating the Paper Currency, knowing they could continually indemnify themselves by advancing from time to time the Price of their Goods.
As the Quantity of Paper Money has diminish’d in those Colonies, by the annual Portions of it called in and burnt, its Value has gradually recovered: for as it grew scarcer, less of it was laid out in Superfluities, the English Trade therefore was lessened, thence a less Demand for Silver to remit, thence Silver became cheaper, and so when compar’d with Silver the Paper Money was found to rise again in Value, as less of it would purchase the same Quantity of Silver.
This Irregularity, and the Injustice attending it, is avoided by keeping the Quantity of Paper Currency within due Bounds.
It is said by some, “That to make Paper Money a legal Tender is either unnecessary or it is unjust. If it be made and issued on good and secure Funds, and punctually called in at the prescribed Periods, it will be of Value equal to real Money, any Man will then readily take it without Compulsion, and therefore to make it a legal Tender is unnecessary. If not on good Funds, &c. it will not be of Value equal to Money, and then to make it a legal Tender is unjust.”
In Answer to this seemingly plausible Argument, it may be observed; that a Bill promising Payment at Distant Periods of Time, and not a legal Tender but depending solely on such distant Payment for its Value, how good soever the Security that the Payment shall be punctually made, is not and cannot possibly be of Value equal to the Sum express’d in it, but must suffer a Discount in Proportion to the Time. Hence the Discount will be greatest soon after the Bills are issued, that is, as soon as the Nature of them begins to be understood; and, as the Term of Payment approaches, the Discount will gradually become less till it amounts to nothing worth Notice.
But such a daily changing Medium is from that Circumstance inconvenient and unfit for the Purposes of Commerce, whose Measures ought to be as much as possible fix’d and certain, and easily understood, the common People being incapable of nice Computations.
Some of the Colonies of New England, who have been many Years restrained from Making Bills a legal Tender, have, in order to keep their Value, and prevent the Inconveniences of a Discount, issued Bills bearing Interest at 5 per Cent.
To facilitate Business and make ready Change in small Dealings, the Bills were of various Denominations from Ten Pounds downwards to Shillings, Sixpences, Groats and Threepences.
In a little Time after they were issued it became worth while to compute the Interest that had accrued on them. Tables were made showing the Interest arising on any Bill of any Sum for a Year, a Month, a Week, and a Day. And yet with all the Help these Tables could afford, it was a perplexing Thing to the common People to make these Computations, and took up Abundance of Time in Shops and Warehouses, to the great Hindrance of Business, there being sometimes in a Payment of Twenty Shillings, four, five, or more Bills of different Denominations, on which the Interest was to be computed.
But the growing Interest had another ill Effect. The Bills were intended for a Currency, and the Interest defeated that Intention. For they were gradually hoarded, and disappear’d long before the Expiration of the Term for which they were omitted: It being a great Convenience to Money’d People to have their Money at Interest, and yet all the while in their Possession, ready for advantageous Purchases if such should offer, which it would not be if out on Mortgages.5
On the whole no Method has been found to give any Degree of fixed, steady, uniform Value to Bills of Credit in America, but the making them a legal Tender in all Payments, and keeping the Quantity within reasonable Bounds.
The two neighboring Colonies of Pensylvania and Maryland afford striking Instances of the following Truths. 1st. That the best of Securities or Funds will not keep up the Value of Bills payable at distant Periods not a general legal Tender. 2dly. That Bills whose Funds cannot in their Nature ascertain any Value, may yet have their Value kept up, if made a legal Tender. And 3dly. that every Exception to the Universality of a legal Tender, operates to lessen in Proportion the Value of the Money.
Pensylvania, between the Years 1723 and 1730 issued about £80,000 on Loan, on Landed Security of at least double the Value of the Sums borrowed, for the Repayment of the Principal Sums with Interest in 16 Years. The Interest was to be apply’d to the Expences of Government, and the principal Sums to be burnt and destroyed.
Now it will appear on the least Consideration, that the double Security taken for the Repayment of these Bills could not at all secure them from either Discount or Depreciation; since tho’ they were to depreciate even so much as that 20s. should become worth in reality but 2s., yet the Government was bound to receive its own Bills at their nominal Value in Discharge of the Mortgage, and 100 such 20s. Bills would therefore redeem the Estate that had been mortgag’d for £100 as well and as effectually as if their original Value had been supported. But those Bills kept their Value being made a legal Tender in Discharge of all Debts Dues and Demands whatsoever.
Maryland about the same Time issued £90,000 on Loan, and on the same Landed Securitys, and moreover by Duties on their Tobacco lodg’d in the Bank of England as they rose, provided a sure Fund to pay off the Bills one Third at the End of 15 Years, the other two Thirds at the End of 30 Years, entitling by Law the Possessors of the Bills to Drafts on the Banks for any Quantity produced. But notwithstanding these Securities and this Fund, the Bills not being a general legal Tender, the Proprietors Quitrents, Clergy Dues, Law Fees, and Fees of publick Offices, together with all Sterling Debts, being excepted, the Bills tho’ struck at Par with Pensylvania Money, soon fell below it, so that 20s. Maryland Money, pass’d current as equal only to 12s. Pensylvania Money, and it would have fallen still lower but that it was a legal Tender in some Cases; for otherwise £100 of it when first issued considered as Notes subject to Discount for Time, was in Reality worth but £44 19s. 0d. As the term shorten’d it gradually recovered its Value in Proportion; but it grew at the same Time scarcer in current Payments beginning to be hoarded, and long before the Term expired it totally disappeared, and ceased to have its originally intended Use as a Medium of Trade: Having during its Course done a great deal of Injustice by its Variations of Value, first to Creditors while falling, and afterwards to Debtors all the while it was rising again. The Pensylvania Bills in the mean Time by their greater Stability, owing to their being a legal Tender in all Cases in Pensylvania, obtain’d such a Credit even in Maryland where no one was oblig’d to take them, that great Quantities of them were and still are continually current in that Province at their long accustomed Value of 7s. 6d. for a Spanish Dollar.
The People in America are so sensible of these Truths, that it is thought no Assembly, unless in Cases of the greatest Necessity, will make Paper Money that is not to be a legal Tender.
The Trade of Britain thither will then, for want of a Currency in the Country, be greatly impeded and lessened: And their granting Aids to the Crown render’d extremely difficult, if not impracticable, in my Opinion. But the Want of such Currency will be rather to the Advantage of the Colonies in the End, operating as a Sumptuary Law with regard to British Superfluities, and from Necessity introducing greater Frugality and Industry. But this Advantage they do not generally see, any more than Britain saw its Advantage in permitting such a Currency when it made the Act for restraining it.
Where Money is plenty Labour will be dear, and nothing will so certainly reduce the Price of Labour in America, and introduce Manufactures there, as keeping the Country without a plentiful Currency.
While they have Paper Money in Plenty, the Gold and Silver they obtain by Commerce with Spain, &c. is continually remitted hither. The Want of Paper Money, if the restraining Act is not repeal’d, will naturally oblige them to think of every Means by which the Gold and Silver may be here after retained.
The Middle Way, and what is best for the whole Empire on both Sides the Water, seems to me to be, to permit or rather enjoin6 the legal Tender, repealing totally the Act that forbids that Tender, and laying the Restraint rather on the Quantities to be emitted, so as to keep them within moderate Bounds. Most of the Colonies have indeed sufficient Discretion acquir’d by Experience to take Care of themselves in that particular. And when the British Merchant is taken Care of, as I presume he will be in the Repealing Act, the Colonists can then hurt only themselves by a depreciating Currency, and will generally be well on their Guard. But as there are some new Colonies that are as yet little acquainted with the Nature of Paper Money, it may, perhaps, be well for Government here to act as their Guardians and prevent their doing themselves a Mischief.
5. From these paragraphs it would appear that BF had lost the enthusiasm for interest-bearing paper currency that he had exhibited to the Pa. Assembly in January 1764; above, XI, 7–18.
6. Obviously BF is here using “enjoin” in its sense of “command,” not in the other sense of “forbid.”