Collection of the Museum of American Finance
Four-shilling Massachusetts note issued in 1778 .
no booty was to be had , and the colony lacked the resources to pay the defeated soldiers . To appease the troops , who were of course citizens of Massachusetts , the legislature paid them with bills of credit that they could later use to pay taxes . The citizen soldiers then gave the bills back to the local tax receiver when their tax was due , and the town treasurer cleared the mutual indebtedness on its ledger .
It ’ s easy to imagine how the soldiers felt about this arrangement . Still , it worked reasonably well . It was what Knight would have called pay as trust , debt as money — or as close as you can get to it without banks .
Square Paper Bills
This was only the beginning . The Continental Congress , which governed the independent colonies — later , states — from 1775 to 1789 , soon enlarged the practice of paying with debt by issuing bills of credit to public officials . Those officials could then pay for supplies , guns , uniforms and rations with the bills , which were simply square pieces of printed paper . Each bill was a promise by Congress to pay a Spanish milled dollar , a heavy silver coin minted in Mexico and Peru and commonly used throughout North and South America , Europe and Asia . Congress ’ s square paper bills were basically primitive public debt securities intended to work as money .
And for a while they worked well . The problem , as we ’ ve seen with so many kinds of public debt security , was that their success led to an inevitable erosion in their purchasing power .
The Continental Congress planned to clear people ’ s debts against tax revenues . But the politics around the Articles of Confederation , agreed to in 1776 , did not encourage tax compliance . The payment of taxes was seldom enforced and most of the square dollars were not returned to the tax receivers , remaining in circulation instead . With Congress and the former colonies requiring resources to fight the English , they then had to print yet more bills . And still they did not enforce the payment of taxes . Each newly issued bill increased the number of square dollars in circulation . But each additional bill in circulation also reduced its purchasing power . In an effort to break the inflationary cycle , the Continental Congress issued levies to be paid in silver and gold coins , and published depreciation tables that set the value of square dollars in each new issue compared with the previous ones . These arrangements , perhaps not surprisingly , were ineffective , and the purchasing power of the bills of credit continued to erode .
Delegates to the Continental Congress , representatives from the 13 colonies that ultimately became the United States of America , were aware that the continual issue of bills was a problem , but felt they had no choice . What else could they do ? What would really help , they recognized , was access to a banking system , a business that many of the delegates , as pioneering merchants and businessmen , well understood . Congress could then exchange public debts for bank debts , and since bank debts have the purchasing power of coins , this would allow them to buy more supplies to fight the so-called Redcoats , the British , enemies of the revolution , without fear of an erosion in value .
There was only one problem : there were no banks in the colonies . Enter : John Hancock .
The House of Hancock
Before the war , colonial merchants like well-dressed Thomas Hancock and his brother John had made extensive use of bank money despite the lack of domestic institutions . The House of Hancock , as their business was known , was one of the most vital in the colonies — they sold everything from pickled pork to household wares and from gunpowder to whale oil .
14 FINANCIAL HISTORY | Summer 2024 | www . MoAF . org