A Brief History of American Curre

Consider the American Dollar. Much to the chagrin of the Chinese, it is the most widely used currency. In fact, many countries use it as their official currency, and in many others, it might as well be. However, the dollar as we know it today has only been around since the 2nd Revolutionary War. For me, the most interesting time for American currency will be the focus of this post, the Colonial Period.

Currency at the time was dominated by resources. If you had access to silver, you had access to more currency. If you were a resource poor region like England or the Netherlands, this meant that you had to run a trade surplus to move currency into your country. What England saw in the New World was an opportunity

Currency?

Currency?

to acquire gold or silver to increase their coffers. Obviously the colonists brought British currency with them and you were expected to trade with the British using their currency. In fact, very quickly the British barred the import of silver into the New World, and decreed that all trading be done in silver. This quickly led to a deficit in money in the new colonies.

If there is no money to spend, obviously people can’t spend it. So, across the country, people came up with their own means of buying and selling. Barter was a frequent means of trading, but people also used wampum and any resource that was plentiful in the area. For a very long time, Tobacco was the de-facto currency in the Chesapeake Bay Area. That link is an absolutely fascinating read by the way, I would thoroughly recommend it.

For all its scarcity in Northern America, South America had vast amounts of gold and silver. Eventually a bunch of Spanish Silver pieces (strongly resembling the German “thaler” a term which eventually became “dollar”) made their way to the colonies. This effectively became a standard currency. However, because the population was far greater in North America, Spanish silver was in very high demand. The price for Spanish silver became outrageously overpriced, and in 1642, the Massachusetts General Court said that a Spanish silver piece was to be

This is a later version of what we were dealing with.

This is a later version of what we were dealing with.

exchanged at 3% higher than the British pound, this rate would steadily increase over the course of the century to 33% later on.

Massachusetts realized importing Spanish silver was no way to trade with England, so they opened up a mint in 1652, pricing the new Silver coins at 22% over the Pound (25% over the Spanish pound). They did this so their coinage would be kept locally. Despite this, the value of silver coinage rose. If you lived in any of the colonies, you could expect to trade with the British with any number of coins from the Netherlands, Spain, Spanish America and Germany. Rarely did you deal with the Pound. Adding to this confusion was the fact that the exchange rate for all of these coins varied depending on your location, whether it be a colony, Britain or any other European country. Despite this variety of coinage, the price of silver kept rising against legislation, and colonists had a severe lack of currency with which to make financial arrangements.

Then in 1685 something kind of cool happened. The French colony in Canada realized that it didn’t have enough silver to pay the troops it had garrisoned. So, they chopped up a deck of playing cards and said that the cards could be used for currency around the town. Anyone, not just soldiers, could use this new “currency”. Technically this is a promissory note but it functioned just as well as money.

The first true issue of public paper money, like many things in history, is rooted in a tactical folley. In 1690 a bunch of men were rounded up and sailed up to French Canada to take over a fort. They were promised half of the plunder from the raid in payment. In addition, the leader took out a loan which was to be re-payed with a quarter of the plunder. Well it turns out the raid failed, and everyone was pretty pissed about it. The British weren’t going to bail them out, and there was no money left in the colony’s treasury. So, the Massachusetts Bay Colony General Court printed £7,000 in paper currency, and basically said, take it or leave it, you’re getting paid with paper.

Economics 101 time. What happens if you just start dumping currency into a fixed system? That’s right, inflation. All of a sudden these soldiers were running around with paper that was literally worth nothing. Nobody was going to accept that crap in everyday business.

Massachusetts was a step ahead. They made it so you could pay your taxes, at a premium of 5%, with this new scrip. Then they could destroy the scrip in order to regulate the currency rate. In addition, being able to pay your taxes gave an air of legitimacy to the paper that was necessary. Massachusetts started exchanging paper for silver if there was any in the treasury.

The second issuance of scrip by Massachusetts

The second issuance of scrip by Massachusetts

At this point, the exchange rate for Spanish silver to English pounds had started to stabilize, especially in the South. They also had a pretty good deal going using tobacco, so they took a while to take to the concept of paper money. Despite their legitimizing of paper currency, Massachusetts still had inflation problems. Where they originally exchanged 6 pieces of paper for a Spanish dollar, by 1737 it was 26 pieces to a dollar. So to deal with this they issued a new set of paper currency, which they said was worth 3 times as much as the previous issuance. Obviously, issuing more currency did not help the inflation problem. Over the next 6 years they issued 3 more currency series, each “worth” more than the first. 5 points if you can tell me what effect this had on inflation. In addition to this, there was no standard of exchange between each piece of scrip and the British pound. Things were a mess. The Court actually printed out charts to give to local merchants to keep track of exchange rates.  Great Britain eventually bailed them out by shipping them a whole mess of silver, and Massachusetts bought up all the scrip at a strict rate, tightening up the supply. In exchange for this, the colony was barred from printing their own currency, which they adhered to, until the Revolution.

Pennsylvania tried something similar in 1723, but were more cautious. First off, they made it legitimate from the get-go. Whereas the Massachusetts currency was backed by the promise of British pounds, the Pennsylvania currency was backed by local commodities and debts.  In addition, Pennsylvania didn’t give the money away, they loaned it out, at 5%. Which not only meant an extra degree of legitimacy, it also meant that the debt would be re-payed back to the government, meaning no excess in the money supply.

There were many issuances of the Pennsylvania pound, and it was extremely successful. It was so successful that many, Ben Franklin included, credit the eventual British barring of their currency as being the strongest factor in the incitement of the 1st Revolutionary War. Back me up founder of Cooper Union College, Vice-President of the New York Board of Currency and US Presidential Candidate Peter Cooper:

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.

Anyways, that’s it for now. At some point in colonial times, each colony produced its own currency, but the stories of Massachusetts and Pennsylvania are by far the most important and interesting. Thought exercise for next week is to think about why you are able to use that dollar in exchange for goods and services.

Published in: on September 1, 2009 at 3:55 pm  Leave a Comment  
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The Amish Exemption

There are very few, if any, cultures and peoples that I respect more than the Amish. I can’t think of any off of the top of my head at the time of this writing. One moment truly opened my eyes to the depth of their beliefs. You may remember when there was the shooting at the Amish School House, it was truly a terrible bloodbath, if you can handle the gruesome the Wikipedia article sums it up pretty well. Regardless, the event was exceptional because of the reaction of the Amish people. Their response of forgiveness was overwhelming. The people comforted the parents and widow of the killer, set up a charity for his relatives and even attended his funeral. Whatever you think of their response, it is a testament to their beliefs that they were so forgiving at such a difficult time. I appreciate the Amish for their sense of community, their confidence in ideals and their robust work ethic. If I had to design a society from the ground up, I feel like it would very much resemble the Amish. For the record, I consider it a testament to the continuing viability of the American dream that these people can live live their way of life peacefully to this day.

Many people believe that the Amish do not pay taxes. This is only partially true. They do not pay Social Security Tax, as their belief system does not allow them to pay for insurance, as it shows that they do not believe in god’s will. This was not always the case, in the early days the IRS tried to levy taxes on an Amish man, going so far as to take half of his horses (he is a farmer who doesn’t use tractors, so this was rough). The Amish “fought” back, and the media got involved. Its a pretty amazing story:

Pay Unto Caesar – The Amish & Social Security

Published in: on August 24, 2009 at 11:32 am  Leave a Comment  
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American Dollars in the Past

The history of currency in the US is fascinating, probably more so than in any other country. That will be my next big project after my history of Jerusalem (Tuesday next week, be there). I found a website that has a bunch of neat pictures of old currency. Try this one on for size:

Cool huh

Cool huh

Honestly, that is a cool bill. The current 2 dollar bill has a picture of the signing of the Declaration of Idependence. But yeah, some moms and their kids are good too. Anyways, here’s the site for more:

Back in Time

Published in: on August 21, 2009 at 3:31 pm  Leave a Comment  
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The Dutch East India Company

The phrase “too big to fail” is getting thrown around a lot these days. Its been fun and terrifying to sit on the sidelines and watch our nation’s greatest comanies implode. Bankrupcies of this magnitude are by no means limited to this century. In fact, just as the fledgeling United States was spreading her wings or some bird metaphor, the Vereenigde Oost-Indische Compagnie (the Dutch name for the corporation, we’ll call it the VOC) was being taken over by the government, a move that would cripple the country with debt well into the next century. Perhaps there is a lesson to be learned? Probably not, we know what we’re doing.

A bond from the VOC

A bond from the VOC

The economic climate in the late 16th century was not advantageous to the Dutch. Portugal had exclusive control over the spice trade, and had no real relations with the Dutch.  Despite this, the Portuguese were unable to cope with the rising demand for pepper in Europe. In addition, the Portuguese, due to an alliance with Spain, were technically at war with the Dutch, and were getting spanked. Many Dutch had served on Portuguese vessels, and knew the trade routes very well. So, starting in 1598, enterprising Dutch all over the Republic would slap together a fleet, sail to the East Indies, and would come back, often to profits of 400%. This was however, not without its price. The Portuguese were obviously going to defend their trade routes, and some fleets would lose half their men in a single journey. When each fleet would return, they would liquidate their holdings, and would then do it all over again.

 Within 4 years their trade volume exceeded that of Portugal’s. It didn’t take long before the central hubs of trade in the Netherlands realized that it was to their benefit to pool their rescources. It meant that they could even out the risk and pool their rescources in defending their ships. It also meant that they would have greater control over supply and demand, again evening out the market. Finally, it meant that economy of scale would work in their favor, and they could outcompete anybody else. In 1602, the Dutch government allowed a 21 year charter for the VOC, giving them a monopoly over the trade, and also gave them the authority to wage war on their behalf. The company was run by elected governors from each of the six trading hubs in the Republic, I’ll call them the G17 (standing for the Gentlemen 17, as they were known).

 The VOC proceeded to dominate, both in terms of trade, and in terms of blowing stuff up. They set up their main center in the Asia in what is now Jakarta, the current capitol of Indonesia. One major problem was that the Asians really only wanted to trade their spices for gold and silver, of which there is a notable lack in the Netherlands. They had two options: 1. Create a trade surplus with other nations so they could get gold which was lame because it meant dealing with the people they had just screwed over, and it is a giant hassle, or 2: Create a separate trade network within Asia, and using the profits from that to fund their operation. They went with 2 beacause it is an awesome idea. By 1669, they had a force of 150 merchant ships, 40 warships, 50,000 employees, and a private army of 10,000 soldiers. If you had invested with the initial charter, you would have earned an annual dividend of 40%. In fact, over the history of the corporation, you could expect an average dividend of 18%. No joke.

 

VOC HQ in Amsterdam.

VOC HQ in Amsterdam.

1670 presented the first major obstacle of the VOC. First off, the Japanese sealed themselves off from the Western world. This meant that the VOC could no longer count on them for silver and gold. They made do, though it was just a major shakeup. The second thing is that there was a war with England, which drove the price of pepper up, and the English tried to get in on that action. The VOC did what they always did and flooded the market with more pepper and waited it out. This worked, but they eventually ceded significant parts of their empire to other corporations. In addition, the tastes of Europe at the time were changing, and it meant that the VOC had to diversify, which meant significantly lower profit margins. The vast profits they had enjoyed due to high margin spices and silks was no longer sustainable.

This marked the beginning of the end for the VOC. There were some major shakeups in Asia, which meant that the intra-Asian trading network they had developed fell apart. It also turned out that working for the VOC was not very good for you. Ship travel at the time was not distinctly unhealthy, especially during wartime, and this lead to a high mortality rate. The bookeeping of the VOC was also decentralized. As you may recall the corporation was made up of a confederation of 6 trading hubs, who each kept their own records. Because of this, it was difficult for them to balance dividends with revenue, as the cirrency was different in each city. In the later years, they ended up paying more in dividends than they brought back in revenue, a difference which they made up by borrowing money backed by future revenue, which was slowly declining. The icing on the cake was that the English got their act together and sank nearly half the ships in the VOC’s armada.

In 1796, the Dutch government took over the VOC and tried to float it, but by the turn of the century the corporation dissolved. The holdings were mostly taken over by the English and the Danes, and the Dutch government was stuck with their debt. One of the major failings of the VOC was thei inflexibility. To be fair, they were the first to ever have to a multinational corporation; however, their only stock offering was at the conception of the corporation, and they never changed up their Modus Operundi. Their bookkeeping method didn’t change for 200 years. Imagine if we still notated our doings on paper. They were also staunchly unable to drop Jakarta as a central hub, meaning all goods flowed through that port. This became extremely inefficient in the later years. There are many analogies to our current situation, and I will not be explicit about them, but for sure, we can take this as a cautionary tale.

Published in: on July 22, 2009 at 7:27 pm  Leave a Comment  
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Roman Currency

Consider this: in terms of area, the Roman currency system at its height was more widely used the the Euro is today (this will not be the case soon). Julius Caesar turned the currency into propeganda when he put his visage on a coin. One showed his support for different emporers based off of what coins you were using. Can you imagine that today? “I can’t accept that $10 bill, I don’t support Alexander Hamilton’s views on central banking.” Regardless, I found a brief article where some guy, using contemporary prices of bread, talks about the actual purchasing power of Roman denarii. Enjoy:

http://dougsmith.ancients.info/worth.html

Published in: on July 17, 2009 at 3:51 pm  Comments (1)  
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