Monetary History and Law
 

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All modern national currencies are designated by law as “legal tender.” Modern monetary theory either ignores this concept or misrepresents its meaning and its implications on the circulation of money.

THE LEGAL STATUS OF MONEY 

In this project I examine the plethora of methods used throughout history to support the circulation of intrinsically useless currency. I focus especially on Legal Tender. One reason that legal tender laws have been mostly ignored in the literature is the existence of myths about objects used as money with neither legal support nor intrinsic value (this is what economists - but not legal scholars - call "fiat money"). In "The Myths of "Fiat Money"" I evaluate all such claims regarding traditional societies. I find them to be baseless. An excerpt, relating to the most famous examples (seashells and stone money), is Famous Myths of "Fiat Money" [Journal of Money, Credit, and Banking 37(5), October 2005, 957-967]. In "The Myths of Modern "Fiat Money"" I do the same for coins and notes of modern societies. For a theoretical model of legal tender see my Monetary Theory page.

AMERICAN ORIGINS OF MODERN CURRENCY: 1685-1692

In 1971 gold was finally taken out of the monetary system. The world settled for the first time on intrinsically useless, inconvertible legal tender money. The notions of a government providing gold for notes or punishing sellers who reject its notes seem entirely alien to young generations in free countries, even though these were the common practices of the modern era. This type of money was born in Massachusetts in 1690. From there it spread to the rest of the world, but its pro-inflation bias led to its repeated suppression between wars, until 1971. In this project I examine how the legal tender law - originally used to solve contractual disputes - came to be the anchor of monetary systems.

One of the key contributors was the idea of issuing paper money at a discretionary amount without having the proper physical backing at hand in real time. In The Inventions and Diffusion of Hyperinflatable Currency I examine various claims to the origin of this idea and the transmission of information about monetary innovation between countries and across time. I find that the money improvised from playing cards in Canada in 1685 was an original re-invention that inspired Massachusetts. The Canadian money was supported by a credible promise of future convertibility and by forcing sellers to accept it, but these were not feasible solutions in Massachusetts of 1690. 

Backing paper money with land was one of the hottest ideas of the 17th century, especially in America. To understand why it was not executed in Massachusetts in 1690 it is necessary to understand the failed Boston land bank of the 1680s. It was myteriously aborted in 1688 at an advanced stage. In Why was America's First Bank Aborted? I show that this happened because the governor invalidated all the local land titles. This episode has larger ramifications on the debate regarding property rights and absolutism. In Property Rights under Absolutism: The Rise and Fall of America's First Bank, I show that the bank both rose and fell under the same absolutist constitution because in the beginning there was a local ruler and later came a non-local ruler. The episode is also an unusual independent evidence that under the Stuart monarchy property rights were not respected.
 
In The Massachusetts Paper Money of 1690 [Journal of Economic History 69(4), December 2009, 1092-1106] I put these and other pieces together. In order to appease the English king in that turbulent inter-charter period, the currency could not be legally supported in any way other than legal tender, thus leading to a remarkable monetary innovation. I also found that the most cited evidence on that money's performance was forged by the colony's nemesis.