Functions of Money

1
Functions of Money

• Medium of exchange
• Unit of account
• Store of value
• Acceptable as a standard of deferred payment
• Legal Tender - prescribed by law as what may be
  offered and must be accepted in payment of both
  private and public debts.

2
Was There a Money Shortage in Colonial America?

• Rising prices and enforced usury laws suggest
  money was not in short supply. There is evidence
  specie was in short supply.

3
Forms of Money in Colonial America

• Native American currency (furs and wampum)
• "Country Money" such as tobacco, rice, wheat,
  maize (i.e. "cash crops"). Tobacco was used in
  Virginia for nearly 200 years.
• Unofficial coinage, mostly foreign, such as
  Spanish and Portuguese coins. Also the
  Massachusetts Bay Colony operated a mint "Pine
  Tree Shillings". (1652-1684). British government
  stopped this because it infringed on the royal
  monopoly.
• The official British coinage (very scarce)
• Paper currency of various kinds.

4
The Bill of Credit

• 1696 - Massachusetts issued bills of credit to
  purchase goods. Not convertible but could be used
  to defray future tax liability.
• How did BOC function?
• BOC issued with promise to redeem in specie in
  the future. To redeem BOC, additional taxes had
  to be levied, taxes that could be paid with BOC.
  
• By 1730 this was the principal currency in the
  American colonies.
• Colonies also issued notes on loan backed by
  property as collateral
• (Land bank issues, mortgage loans). Again,
  notes not convertible.
• Bills of credit and land bank issues would
  eventually be retired by tax revenue, but this
  required that taxes be levied. The failure to
  levy taxes led to bank note depreciation.

5
Legal Tender and Bills of Credit

• Response to depreciation of notes Legal tender
  status (you must accept them at par as a mean of
  payment)
• The rational behind legal tender status was to
  protect borrowers by providing a means of payment
  that was beyond legal challenge.
• Legal tender laws were popular with farmers, not
  popular with creditors.
• 1751 1764 - British government prohibits the
  colonies from declaring notes legal tender.
• In 1773, the 1764 act is repealed with respect to
  public debt. In other words, the British
  parliament yielded to colonial pressures.
• The dispute over the right to issue paper money
  was a significant factor is provoking the
  American Revolution.

6
Financing the Revolution

• How do you finance a war?
• Reduce Government Expenditure
• Increase Taxes
• Borrow
• Print money
• Steal
• Which choice was available to the colonists?

7
The Continental Experience

• The Continentals were printed in quantities that
  exceeded in hope of redemption in specie,
  consequently the paper money depreciated in
  value.
• By the conclusion of the war the Continental had
  fallen one-thousandth of their nominal value
• Impact on the Constitution
• As a result of the Continental experience, the
  constitution voted down a bill that would have
  given the federal government the right to print
  currency. Another bill to deny this right to
  the federal government was also voted down. A
  bill denying the right to print and coin money to
  the states was voted in.