By James Blume
In 1692, the summer of the Salem Witch Trials, the colony of Massachusetts finalized its invention of modern currency. For the first time in history, a paper currency with no intrinsic value or credible promise of convertibility was voluntarily used in commerce. The Massachusetts paper “bills” were printed by the state, managed by committee, and dispersed through open market operations. At a time when money was inexorably tied to gold and silver coins, how did a small, religious colony invent such modern monetary institutions? This is the unlikely story told in Dror Goldberg’s Easy Money: American Puritans and the Invention of Modern Currency.
Combining history, law, and economics, Easy Money explains not just why the Massachusetts colony had the tools and people to innovate, but why the colony was uniquely situated to be the center of this monetary revolution. Unlike more natural candidates for transforming finance such as the commercial juggernauts of London and Amsterdam, Massachusetts was a tiny colony of 50,000 people that was far away from Europe’s scientific revolution. However, Massachusetts had a major advantage over its Old World peers—a necessity to innovate.
Throughout the 17th century, Massachusetts found itself chronically short on coins. With no Royal Mint and with nearly every coin being traded to outside merchants, the colony found itself in desperate need of currency. Goldberg traces Massachusetts’ effort to find a workable replacement to royal coins. While the tight knit Puritan communities could rely on complex webs of credit and IOUs for most internal trade, the colony required something more concrete for taxes and debt settlements. From 1630 to 1690 the colony tried to collect tax payments in everything from grain to beaver fur, Indian wampum, and lead bullets.
But it was in 1690-1692 that Massachusetts cracked the problem. During the Nine Years War the colony found itself on the brink of disaster. Massachusetts required a massive amount of funds to pay its army, but the treasury had no coins to finance the operation. The colony, with illiquid assets and a chronic coin shortage, needed a way to settle its debt, finance war operations, and collect taxes. The solution it invented was a tax setoff.
Because of the war, thousands of soldiers possessed debentures issued by the Massachusetts government for their service. While during the conflict these debentures could not credibly be redeemed for proper coins, they were valuable because they could be used in tax payments. However, for the average soldier, the denomination of these debentures was far too large to be used in everyday payments, so soldiers most often sold the debentures to merchants at a discount on a secondary market. Massachusetts’ stroke of genius was finding a way to transform these illiquid debentures into liquid currency.
A local government committee began to issue small denomination paper bills that were legal tender for Massachusetts taxes. Much like modern monetary committees, the Massachusetts committee used open market operations to distribute its new money. On the secondary market the committee agreed to buy all soldier’s debentures at face value with these new small-denomination paper bills. For example, if a solider was paid with a £100 debenture for his year in the army, he could now trade this debenture for 20 bills of £5 that he could freely use. This simple division of high denomination bills into smaller bills revolutionized money. These new paper bills were small enough that they could be used in everyday transactions, and because bill-holders could use the bills to offset their taxes, the currency was voluntarily accepted by the Massachusetts community. For the next two years, the colony tinkered with this invention until finally in 1692 Massachusetts had created modern paper currency.
These bills were not tied to a commodity of intrinsic value like gold or fur, and unlike other instances of paper currency, such as in China under the Mongols, the government was not forcing the bills in private transactions by law. Instead, the Massachusetts government understood that legal status as a tax setoff alone made the bills valuable. These bills circulated across the colony as money until they were retired when they were collected as taxes. Remarkably, in the early years of this new monetary experiment Massachusetts resisted the urge to over print the paper money. Goldberg attributes this self-discipline to institutional checks and balances in the committee and to the Puritan culture of self-restraint. However, the Massachusetts legislature would eventually succumb to temptation in the 18th century and subsequently suffered from chronic inflation.
Easy Money is divided into three parts. The first part introduces theories of money and a primer on English history during the 17th century. For a non-expert, Goldberg’s explanations of medieval credit settlements and economic definitions of money are easily approachable and well written. The second part of Easy Money sets up the long payoff for the monetary invention of 1690-1692. Goldberg follows the evolution of monetary ideas, describes the prominent figures, and keeps track of political events across the Atlantic in England. In the final part, Goldberg at last puts all the parts of the book together and describes and analyzes the invention of modern currency. In a very rewarding end, as all the dots come together, the reader rediscovers the same solution the Puritans did all those years ago. Goldberg concludes skeptically, applying the lessons of the Massachusetts colony to both cryptocurrencies like Bitcoin and doctrines like MMT that respectively under and overestimate the tax foundation of money.
If Easy Money has any faults, it is that the book ambitiously tries to combine too many fields of focus. While Goldberg successfully writes about the legal, historic, and economic elements of the currency, he is less successful when he tries to integrate biology scholarship in the final chapter. His comparison between Darwin’s finches and the evolution of ideas feels underdeveloped as Goldberg tries to condense them in a book under 300 pages.
Overall, Easy Money is a fascinating chapter of American financial history. Dror Goldberg masterfully translates difficult concepts into a readable narrative about the early Massachusetts colony. His work is proof that economics, law, and history belong together.
James Blume in a graduate of the University of Pennsylvania and a former undergraduate fellow at WIFPR.