Sunday, March 17, 2019

The Wonderful World of Money Printing in Pre-Revolution Massachusetts (According to MMTers)

By Robert Wenzel

Was there an early successful application of Modern Monetary Theory in the pre-revolutionary American colonies?

Stephen Mihm, an MMT advocate and associate professor of history at the University of Georgia, in a Bloomberg column claims there was a wonderful early case of MMT in Massachusetts in the 1690s.

According to Mihm, there was a "shortage" of money in Massachusetts in the 1690s and the government came to the rescue by printing money. In truth, there was no "shortage." Commerce was moving along nicely BUT the government didn't have enough money to pay the bills it had run up as a result of expeditionary operations in French Quebec. That was the problem. And the money printing that occurred to pay returning soldiers turned into a price inflationary disaster. But Mihm mentions nothing, in his telling, of the price inflationary disaster that ensued. According to him,  the money printing was just grand.

Here is a key snippet from his essay:
The MMT debate is endlessly complex and increasingly hysterical. But it does not represent an entirely new chapter in U.S. history. Several centuries ago, a handful of creative colonists in Massachusetts came up with a desperate but undeniably ingenious solution to their monetary woes that anticipated one of the key tenets of MMT. It worked — up to a point...

 [I]t’s helpful to go back in time to 1690s Massachusetts. Over the course of the seventeenth century, dissenting Puritans founded and developed the colony of Massachusetts into a thriving commercial hub. As the population and economy boomed, they faced a growing problem: a lack of money...

They had plenty of illiquid assets: land, agricultural produce, and other things. But for several complicated reasons, including trade imbalances, the colonists lacked a medium of exchange. Coins were extraordinarily scarce, posing an obstacle to economic growth.

The Puritans tried to solve the problem in different ways, like setting up a private mint and establishing private “land banks” (which used land titles as collateral for the issuance of paper notes). In each case, though, imperial officials quashed or thwarted these plans.

In 1689, Massachusetts did its part in the endless imperial wars of the era, sending soldiers on an abortive mission to capture part of French Canada. The soldiers returned, suffering from smallpox, and they understandably demanded payment for their services.

But there was a serious problem: The colonial government had no money, and failed to secure a loan. It fell to a small committee of prominent citizens to figure out what to do. The head of the committee was a man named Elisha Hutchinson...

Hutchinson and the others devised an unusual solution to the problem. They issued what is generally recognized as the first fiat currency in the Western world. The twenty-shilling notes they printed cheekily claimed that they “shall be in value equal to money” — meaning that they were equivalent to silver coin.

This was, on the face of it, preposterous. Massachusetts had no ability within its borders or beyond to compel people to accept the money at face value. Despite its promise to redeem the money at a “convenient time,” the colonial treasury could not do so when it first issued the bills...

Hutchinson and his allies spent before they taxed. And it was precisely that fact — that the money they injected into the economy would then be withdrawn via taxation — that gave the money its value. And it worked. The money circulated in the colony, greasing the wheels of commerce, and then disappearing at tax time.
This telling is simply misleading and not complete.

In Conceived in Liberty, Murray Rothbard gave a much fuller picture of the episode.

First, as far as Mihm's claim that the printed money disappeared at tax time.

Here is Rothbard on what really happened:
Massachusetts turned on the monetary engine for its public expenditures. The notes were still supposed to be redeemed eventually
in tax revenues. At first the pledges were one year ahead, so that notes issued in 1702 were to be paid out of pledged tax revenues in 1703. As time went on, however, the future kept receding further and further, and more and more years of future revenue were pledged in advance. By 1714, six years of Massachusetts revenue were so pledged, and by 1722, future pledges stretched ahead by thirteen years.
The price inflation as a result of the flood of new money was fierce. Here is that part of the story as told by Rothbard:
The Massachusetts notes in fact began to depreciate against specie almost as soon as they were issued. In a year they had depreciated by as much as forty percent.Two pamphlets, issued in 1691, berated the people for being "delinquent'' in permitting the notes to depreciate; they did not think to criticize the issue itself...In 1692, however, the government moved to the use of force and eliminated the discount in two ways: by making the government issues compulsory legal tender for all debts, and by granting a premium of five percent on all payment of debts to the government made in the paper notes.

From that point on, Massachusetts turned on the monetary engine for its public expenditures...

The 1716 issue added at once a huge forty percent to the colony's money supply, and prices were raised so rapidly that objections to paper money began to be voiced. An anonymous pamphleteer in The Present Melancholy Circumstances ... ( 1719) and An Addition to the Present Melancholy Circumstances (1719) pointed out that monetary issues had led to a doubled cost of living in twenty years, to depreciation and to the disappearance of Spanish silver through the operation of Gresham's law. The author advocated calling in some of the notes in order to increase the value of the money. He trenchantly concluded that a law can penalize and restrict, "but it can't change men's minds to make them think a piece of paper is a piece of money."...

Hardest hit by the severe depreciation of all the notes were nondebtors,
especially creditors, fixed-income groups, charitable endowments, and laborers, whose wages-as has generally been true-rose less than prices. Thus in 1712, when silver in Massachusetts was priced at eight shillings per ounce wages of laborers averaged five shillings a day; in 1730, with silver appreciated to twenty-nine shillings an ounce, wages were only twelve shillings a day. In short, the price of silver ( a reflection of the price movements of imports and indeed of prices in general) rose three and one-half times, while wages had risen only two and one-half times...

If the original par between sterling and the dollar is taken as 100, then sterling in Massachusetts was down to 133 in 1702 ( one dollar equaling six shillings). By 1740, Massachusetts sterling had depreciated to 5 50, and by 1750 to 1, 100-a depreciation of 11 to 1 compared with par...

Finally, after the end of King George's War, Parliament decided to grant Massachusetts a substantial sum as compensation for its expenditures during the war. Massachusetts wisely decided to use the funds to return to a hard money, and to redeem the paper at the current depreciated rate of 7 to 1...The panicky opponents of specie resumption made the predictions usually made in such a situation: the result would be a virtual absence of money in the colony and the consequent
ruination of all trade. They even threatened an uprising, and thus provoked a riot act for its suppression. After a temporary adjustment, however, this resumption, of course, led to a far more prosperous trade and production-the harder money and lower price attracting an inflow of specie. In fact, the prosperity wrought by hard money was dramatically embodied in the blow delivered to Newport. Newport had been a flourishing center of West Indian imports for sections of Massachusetts. But after 1750, with Massachusetts on specie and Rhode Island still on depreciated paper, Newport lost its trade to
Boston and languished in the doldrums.
So Mihm is correct about one thing. The pre-revolutionary Massachusetts money printing is a good glimpse into what happens when MMT-type policy is adopted.

As critics of MMT warn, it does lead to rampant price inflation and, as critics warn, the taxation to "sop up" excess money doesn't happen.

It is a disastrous policy prescription from start to finish.

Robert Wenzel is Editor & Publisher of and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.


  1. I located the following source material from part of the "Modern Money and Public Purpose" (gag me) program at Columbia Law School which also presented the debate between Warren Mosler and Robert Murphy back in 2013. The website is mostly gone now. The promoters were MMTers and the writer of the following article appears to be a “progressive”.

    The writer, Farley Grubb, is a professor at the University of Delaware. He seems to tell a similar story about the joys of colonial funny money. However, based upon his research, he determines that paper money is expressly banned and forbidden from being issued in the USA by either the federal or state governments. He's at a loss trying to determine why the drafters did such a wacky thing, but there it is.

    Before the U.S. Constitution, inside paper money was issued by state and national legislatures. After the U.S. Constitution, both state and national legislatures were banned from issuing paper money. Page 59

    VIII. Epilogue
    Today the U.S. has the same written Constitution in terms of monetary powers that the founding fathers created in 1787. Yet we have a national paper money that is backed not by specie but only by federal government taxes, or the good faith and credit of the federal government—a government that also has power to institute price and exchange rate controls on said currency (Rockoff). This paper money is also a legal tender, with the legal tender clause “This note is legal tender for all debts, public and private” printed on each note. It is issued by the Federal Reserve Banking system that, while only a quasi-government agency in the strict legal sense, is about as close to a national banking system incorporated by the federal government as one can get. Unless we take the original intent of the founding fathers in their debates and votes at the 1787 Convention on monetary/banking powers to be a devious ruse, then it is hard not to conclude that we have strayed far away from what they tried to prohibit constitutionally.
    Page 67-68

    The U.S. Constitution and Monetary Powers: An Analysis of the 1787 Constitutional Convention and Constitutional Transformation of the Nation's Monetary System Emerged

    NBER Working Paper No. w11783

    Farley Grubb University of Delaware - Economics; National Bureau of Economic Research (NBER)

    From the abstract: How the debate at the 1787 Constitutional Convention over these powers evolved and led the Founding Fathers to the specific powers adopted is presented and deconstructed. Why they took this path rather than replicate the successful colonial system and why they codified such powers into supreme law rather than leaving them to legislative debate and enactment are addressed.

  2. So how is it that we have paper money when the Constitution expressly forbids it?

    1. It appears that you've identified the one federal-government action that violates the wording of the Constitution. :-)

    2. Basically, because people accept it.
      We have the federal reserve banking system.
      And most people are in debt to the banks.
      So the banks can set the rules for how the debt is repayed. Paper money.

      For example, even if you don't have any debt, but let's say you want to buy a house from someone else. That someone else is in debt tonthe bank andnthe bank requires him to pay them in paper money.
      If you go up to the guy and offer to pay him 300 ounces of gold hor his house he will turn it down and require you to pay him in paper money so that he can pay the bank off.
      So by extension, we are all enslaved to using paper money from the banking system... Because people cant resist the temptation of borrowing paper money from the banks (taking out mortgages etc.)

  3. "But MMT is modern! I mean, it says so right in its name. Why are you clinging to old things, you dinosaur?"

    There, I just summed up the thinking of MMT'ers

  4. MMT is not modern. Mises cut it to shreds back in 1917 when he noted that Knapp's "state theory of money" was acatallactic. The "theory" is completely oblivious to the concept of exchange and/or from where money gains its value. We are dealing with extreme morons here. Check out the last paragraph of page 465: