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Colonial Scrip was a paper fiat money as opposed to specie issued by the colonies in the pre-revolution era, up until 1775. It was an altogether different money from Continental currency; which was money issued during the American Revolution, that depreciated rapidly, to fund the war effort.
Colonial Scrip was not backed by gold or silver and therefore the Colonies could control its purchasing power. This was a revolutionary concept in economics, because the conventional European mercantilist system of money required governments to borrow from banks and pay interest for those loans, as gold and silver were the only regarded forms of money. This is known as the debt-based money system, where banknotes are “bills of debt.” Colonial Scrip, however, were “bills of credit” created by the government, based on the credit of that government, and this meant that there was no interest to pay for the introduction of money. This went a considerable way towards defraying the expense of the Colonial governments and in maintaining prosperity. The Governments charged low interest when it loaned out this paper money to its citizens, with land as collateral, and this interest income lowered the tax burden on the people, contributing to prosperity.
The currency was born when a lack of gold and silver in the Colonies made trade hard to conduct, and a barter system prevailed. One by one, the Colonies began to issue their own paper money to serve as a medium of exchange to make trade vibrant. The Governments could then retire excess notes out of circulation by taxing the people, helping some Colonies generally avoid inflation. Each Colony had its own currency and some were better managed than others. It was banned by English Parliament in the Currency Act after Benjamin Franklin had explained the benefits of this currency to the British Board of Trade. Outlawing the circulating medium caused a depression in the Colonies, and Franklin and many others believed it to be the true cause of the American Revolution.
The Pennsylvania version of this currency was said to be the most effective, because they controlled the money supply and issued only enough notes so as to satisfy the demands of trade, preventing inflation. In 1938, Dr. Richard A. Lester, an economist at Princeton University, wrote that “The price level during the 52 years prior to the American Revolution and while Pennsylvania was on a paper standard was more stable than the American price level has been during any succeeding fifty-year period.” Pennsylvania established a “land bank” that allowed landowners to borrow Scrip with their land as collateral. They could borrow twice the value of their land, half of it representing actual land value, and the other half representing production potential of the land. The loan was to be retired over a set period of years, with the land onwership being restored to the citizen upon payment. When the loan was fully retired, another loan could be taken out.
Benjamin Franklin helped create the Pennsylvania Scrip, and in his autobiography he wrote of this currency:
The utility of this currency became by time and experience so evident as never afterwards to be much disputed
Franklin believed the shutting down of this paper money by Parliament in 1764 was the principal cause of the American Revolution, as did many other prominent Americans. Peter Cooper, founder of Cooper Union College, Vice-President of the New York Board of Currency, US Presidential Candidate in 1876, and one-time colleague of Secretary of the Treasury Albert Gallatin said in his 1883 book Ideas for a Science of Good Government:
After Franklin had explained…to the British Government as the real cause of prosperity, they immediately passed laws, forbidding the payment of taxes in that money. This produced such great inconvenience and misery to the people, that it was the principal cause of the Revolution. A far greater reason for a general uprising, than the Tea and Stamp Act, was the taking away of the paper money.
Adam SmithAdam Smith wrote of the Pennsylvania currency in his famed 1776 work The Wealth of Nations:
The government of Pennsylvania, without amassing any [gold or silver], invented a method of lending, not money indeed, but what is equivalent to money to its subjects. [It advanced] to private people at interest, upon [land as collateral], paper bills of credit…made transferable from hand to hand like bank notes, and declared by act of assembly to be legal tender in all payments…[the system] went a considerable way toward defraying the annual expense…of that…government [low taxes]. [Pennsylvania’s] paper currency…is said never to have sunk below the value of gold and silver which was current in the colony before the…issue of paper money.
- Currency Issues to Overcome Depressions in Pennsylvania, 1723 and 1729
- The Autobiography of Benjamin Franklin, Part XXIV
- Ideas for a Science of Good Government 1883
- Adam Smith: The Wealth of Nations, Book V:On the Revenue of the Sovereign or Commonwealth, Chapter II
- Creating the U.S. Dollar Currency Union,1748-1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?
- Miscounting Money of Colonial America