Collection of the Museum of American Finance
Continental currency payable in Spanish milled dollars , 1775 . pay in ?” he would ask . To Knight ’ s surprise , the prices varied according to their answer .
In one instance , Knight describes in detail the haggling over the price of a penknife . When a customer offered “ pay as money ,” the price of the penknife was 12 pence . But with “ pay ,” the penknife could be had for eight pence . And if the customer had coins , they could have the knife for a sixpence . “ It seems a very intricate way of trade ,” Knight commented in her journal . She wanted to understand the intricacies . It turned out that there were basically four different types of money in use between Boston and New Haven : pay , coins , pay as money and trusting .
Pay is grain , pork , beef , etc . at the prices set by the General Court that year . Money is pieces of eight , ryalls or Boston or Bay shillings ( as they call them ) or good hard money as sometimes silver coin is termed by them ; also Wampum Indian beads which serves for change . Pay as money is provisions , as aforesaid one third cheaper than as the Assembly or General Court sets it ; and trust as they and the merchant agree for time .
Without quite knowing it , Knight was witnessing a new system of money — as debt — emerging in Colonial America .
Coins had always been in short supply back in Knight ’ s home town of Boston , but the General Court , as the Massachusetts legislature was called , did not want the colony to become a barter economy ; the assemblymen believed bartering made trading inefficient , which slowed down economic growth . So , the court had chosen to stick with English money — pounds , shillings and pence — as the currency of the colony . At the same time , it had legislated a system that made it easy to settle debts with goods instead of coins , up to a limit , by stipulating exactly what each good was worth in English money . For instance , a bushel of corn was worth four shillings , but corn could legally settle debts only up to a value of 40 shillings . Musket balls were less valuable , a farthing each — they settled debts up to 12 pence . Native American wampum — beads made of seashells — was small change . Thus , produce was allowed to settle debts by force of law , but only up to a threshold ; above the threshold , acceptance was voluntary .
Using English money , along with pay and pay as money , was certainly better than bartering , but the early colonists in Massachusetts , as well as in Connecticut , tended to prefer paying with debts , or what Knight had described as “ trust ,” and in time , it was this practice of using debt as a means of payment that would extend far beyond merchants and businesses to most of the early colonial governments .
As the Massachusetts General Court tried to develop a monetary system that could work smoothly without coins by valuing goods according to a common standard — using debt as a means of payment — other colonial legislatures were doing exactly the same .
It was the sheer scarcity of coins that pushed the North American colonies into collectively establishing a coherent monetary system without the use of coins to represent money , something not done on such a large scale before . And it was this unique experience that eventually gave birth to the American dollar ; a currency made of debts .
Debt as Money
Thomas Hancock was a man who knew all about using debt in business dealings . After starting his business in 1724 , he became one of the most successful colonial merchants . In part , this success was due to his ability to employ debts in transacting business and his ledgers reveal how he carried on trading despite the scarcity of coins .
As a prosperous merchant , Hancock liked to dress the part . He commissioned a local master tailor to make his trousers , jackets and waistcoats . When Hancock bought clothes from the tailor , he debited himself , on the ledger , the price of the clothes . When the tailor bought supplies at Hancock ’ s store , Hancock debited him the price .
Then he cleared the reciprocal indebtedness on the ledger . Paying for purchases by clearing debts became widespread in the colonies and by 1774 , country folk , city dwellers , merchants and colonial leaders were all accustomed to paying with debts instead of coins . The practice was soon adopted by local governments to pay for public goods , including defense against skirmishes with French colonials and Native Americans .
Defense spending was particularly important to the colonies . In the 1600s , the colonists ’ s clashes with French colonials and Native Americans were frequent , leading to Massachusetts assembling an expeditionary force against Quebec in 1689 . The government of Massachusetts , however , did not have enough coins to pay for the expenses of the war , so they intended to compensate their troops with the booty from Quebec . Alas , Massachusetts ’ s expedition was defeated , so
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