2021-02-15 15:14:30
A HISTORY OF MONEY AND BANKING IN THE UNITED STATES: THE COLONIAL ERA TO WORLD WAR II
#Book 1
#Part 3
SHILLING AND DOLLAR MANIPULATIONS By far the leading specie coin circulating in America was the Spanish silver dollar, defined as consisting of 387 grains of pure
silver. The dollar was divided into “pieces of eight,” or “bits,” each consisting of one-eighth of a dollar. Spanish dollars came into the North American colonies through lucrative trade with the West Indies. The Spanish silver dollar had been the world’s outstanding coin since the early sixteenth century, and was spread partially by dint of the vast silver output of the Spanish colonies in Latin America. More important, however, was that the Spanish dollar, from the sixteenth to the nineteenth century, was relatively the most stable and least debased coin in the Western world.
Since the Spanish silver dollar consisted of 387 grains, and
the English shilling consisted of 86 grains of silver, this meant the natural, free-market ratio between the two coins would be 4 shillings 6 pence per dollar. 3 Constant complaints, both by contemporaries and by some later historians, arose about an alleged “scarcity of money,” especially of specie, in the colonies, allegedly justifying numerous colonial paper money schemes to remedy that “shortage.” In reality, there was no such shortage. It is true that England, in a mercantilist attempt to hoard specie, kept minting for its own prerogative and outlawed minting in the colonies; it also prohibited the export of English coin to America. But this did not keep specie from America, for, as we have seen, Americans were able to import Spanish and other foreign coin, including English, from other countries. Indeed, as we shall see, it was precisely paper money issues that led, by Gresham’s Law, to outflows and disappearance of specie from the colonies.
In their own mercantilism, the colonial governments early tried to hoard their own specie by debasing their shilling standards in terms of Spanish dollars. Whereas their natural weights dictated a ratio of 4 shillings 6 pence to the dollar, Massachusetts, in 1642, began a general colonial process of competitive debasement of shillings. Massachusetts arbitrarily decreed that the Spanish dollar be valued at 5 shillings; the idea was to attract an inflow of Spanish silver dollars into that colony, and to subsidize Massachusetts exports by making their prices cheaper in terms of dollars. Soon, Connecticut and other colonies followed suit, each persistently upping the ante of debasement. The result was to increase the supply of nominal
units of account by debasing the shilling, inflating domestic prices and thereby bringing the temporary export stimulus to a rapid end. Finally, the English government brought a halt to this futile and inflationary practice in 1707.
But the colonial governments had already found another, and far more inflationary, arrow for their bow: the invention of government fiat paper money.
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