The Legal Tender Blog: Inventions

Steal my wallet, please (July 24, 2023)

Who will be the first to get his/her hand chopped off by robbers? 

Risk and finance (July 11, 2023)

On this day in 1804, Alexander Hamilton died of his duel wounds. 

More than a century earlier, another great financier, John Law, also fought a duel (but won). 

The only thing resembling an almost-duel in Puritan Massachusetts was a confrontation involving Elisha Hutchinson, who would head the 1690 use of novel legal tender paper money.

So is low risk aversion necessary for designing novel, national financial systems? 

Of the two who did have duels - Hamilton and Law - their systems' fates were opposite to their duels' outcomes: Hamilton's system largely survived, Law's didn't. 

Technology and money (July 3, 2023)

In yet another great article Niall Ferguson finds technological and political analogies between the 17th and 21st centuries. 

May I add: 

Printing press (15th century) --> printed paper money (17th).* 

Computers & Internet (20th) --> digital online money (21st).**

* Not in England yet (banknotes of huge denominations), but in Sweden (1660s) and Massachusetts (1690s).

** Not necessarily bitcoin, other crypto, or CBDC, but, for now, the existence of most of the money supply as digital accounts available for use online.

Maine's Main Money (June 16, 2023)

Maine's main export commodity was boards. 

As in other colonies, the main export commodity also became the colony's currency.

This is from the colony's 1680s court records.

Adam Smith's monetary paradox (June 14, 2023)

Money, such as Smith's £20 bill, facilitates the division of labor he championed. But modern money was invented by people who practiced NON-division of labor. 

Massachusetts was a merchant republic. Its merchants were not only sellers & taxpayers but also councilors, legislators, judges, generals & tax collectors. This enabled them to better grasp money's circulation and devise a revolutionary money that relied on circulation thru the treasury rather than intrinsic value. 

Playing card money (June 8, 2023)

Happy 338th birthday to French Canada's playing card money.

Like Old World paper moneys it was forced on everyone under penalty and was redeemed in coins ASAP. It gave partial inspiration for the iredeemable legal tender bills of 1690 Massachusetts. 

Before there were shitcoins ... (June 7, 2023)

There were shitbonds. 

Guano-backed bonds were issued by Peru in the 19th century.

Opium-backed money (June 2, 2023)

Borat himself couldn't think of something so funny and outrageous:

Kazakhstan once backed paper money with opium! (source)

For "World No Tobacco Day" (May 31, 2023)

A decade after starting to grow tobacco, Virginia's budget was denominated in pounds of tobacco (source).

Tobacco became the only export commodity, almost the only locally produced commodity, and took on all the functions of money. 

Rent in early Boston (May 8, 2023)

Staying overnight at Hyatt Regency Boston Harbor I had a great view of the part of Logan Airport which was once Governor's Island. 

The annual rent for this island was once 1 hogshead of wine. In the 1630s it was granted by Massachusetts to its governor John Winthrop in lieu of a salary. The rent was soon changed to 2 bushels of apples. 

The place was eventually swallowed by Logan Airport. 

The birthplace of modern currency (May 5, 2023)

In Boston I visited the exact birthplace of modern currency - Old State House.

The current structure replaces the wooden Town House in which the Massachusetts legislature met, 1658-1711.

In the December 1690 session that General Court invented legal tender paper money. 

The father of modern currency (May 5, 2023)

In Boston's Granary Burial Ground I visited Elisha Hutchinson, who was in 1690 a councilor, merchant, major, judge, and the head of the committee that issued legal tender paper money.

I honored the still-obscure man with intrinsically useless, American legal tender money, like the one he and his colleagues invented in 1690. It's a quarter.

One of my book's chapters is his first-ever biography.  

Antigua: The first English issuer of paper money (April 26, 2023)

On this day in 1654 the English colony of Antigua passed the earliest known law establishing paper money in English America.

Paper money was issued in that slave colony for deposits of tobacco and was redeemable on demand. 

The system was terminated in the 1670s due to frauds. 

The stamp heard round the world (April 18-19, 2023)

2 Massachusetts revolutions (starting on these dates) and 2 American wars created and spread the idea of paper money throughout the world.

And 2 new books published by the University of Chicago Press tell the story of these currencies.

2 revolutions:

April 18, 1689: The population of Massachusetts Bay imitated England's Glorious Revolution, overthrew the Dominion of New England and resurrected its representative government.

April 19, 1775: First battles of the American Revolution in Lexington and Concord. 

2 wars: 

February 1690: Following the revolutions that deposed a French-allied king and his New England governor, an Anglo-French war that began in Europe spread to America. 

April 1775: The Revolutionary War begins.

2 paper moneys: 

December 1690: Massachusetts invents legal tender "bills of credit" to pay for the war. 

June 1775: The Continental Congress issues "bills of credit" to pay for the war. 

2 imitations:

The stamp heard round the colonies: In the 18th century the other English colonies imitated Massachusetts and printed money.

The stamp heard round the world: The French Revolution imitated the US and printed money. From there it spread throughout the world. 

2 new books by the University of Chicago Press:

On the 1690 money: Dror Goldberg. Easy Money: American Puritans and the Invention of Modern Currency.

On the 1775 money: Farley Grubb. The Continental Dollar: How the American Revolution Was Financed with Paper Money.

The problem of arrears (March 27, 2023)

In 1640-1660, England's rulers repeatedly lost control of the country because they failed to pay soldiers in silver coins: King in 1640, Parliament in 1647 & 1653, Richard Cromwell in 1659, and the army in 1659.

The problem would be solved for good by other Englishmen - in 1690 America. 

Necessity may be the mother of invention, but many necessities do not lead to invention. Ability is also needed. Massachusetts had ability.

"Preserving division" and monetary innovation (March 26, 2023)

Innovation scholars Drew Boyd and Jacob Goldenberg use the term "preserving division" in their book Inside the Box to describe an invention that divides a product into smaller chunks that preserve the product's properties but get extra benefits from the small size. E.g., memory stick, canned food.

Another example is the invention of coinage of precious metal. Each coin has the same intrinsic value of the original lump but also has standardization that eases its use in trade.

The invention of legal tender paper money in 1690 was also a preserving division, but a less trivial one. Massachusetts had given each soldier a debt insrument called "debenture" for a 3-months wage. It later swapped each debenture for several "bills" that had small, round denominations. The bills had the same physical and legal properties as the debenture: Transferable, paper, legal tender for taxes.

It thus turned a bond into currency. Modern currency.

So simple, so consequential. 

Can paper money be printed before it is invented? The old calendar paradox (March 25, 2023)

Alexander del Mar, a prolific 19th century monetary historian, had read that the first colonial paper money was born because Massachusetts failed to occupy Quebec in October 1690.

But he found evidence of a Massachusetts paper money dated "February 3, 1690." He skillfully mocked the conventional wisdom which he thought he refuted.

But he was wrong.

Until 1751, New Year's Day was March 25, not January 1. So Dec. 31, 1690 was followed by Jan. 1, 1690, and Mar. 24, 1690 was followed by Mar. 25, 1691.

So the bill of "February 3, 1690" that del Mar found was for us actually in February 1691. It came after the October 1690 invasion and the 1st issue of paper money in December 1690. The conventional wisdom was correct.

New historians, beware the pitfalls of old calendars. 

Ripe money (March 5, 2023)

On this day, 399 years ago, Virginia's Assembly ordered to attack Native Americans - but only in July.

War had started two years earlier with the 1622 Massacre, but the Assembly wanted to pay soldiers by looting the Indians' maize - which would have been ripe only in July.

War finance was a big headache. 

Shooting your way out of debt (March 4, 2023)

Was it ever legal to literally discharge a debt by shooting the creditor? 

Technically, yes. And not in the Wild West. 

On this day in 1635 Massachusetts made bullets legal tender for small debts. 

The law failed to specify either the method or velocity of tendering bullets to the creditor. 

Joking aside, this law proves that the Puritan colony was innovative on monetary affairs from an early age (it was five years old then). Like all colonies it suffered from shortage of coins. Bullets were an excellent alternative in that armed society, because everyone already had bullets at hand, just like we all have notes and coins.

Bewitched money? (March 1, 2023)

The Salem witch trials began on this day in 1692. The judges in the trials - members of the governor's council - also legislated modern currency into existence in 1690-1692.

Is there a contradiction between stupidity and brilliance?

No. Witchcraft research was mainstream science. For example, Harvard Fellow Cotton Mather was an exorcist, witch hunter and monetary theorist. 

The Military Revolution (February 24, 2023)

War costs exploded in the 16th century due to changes in strategy and tactics. This "Military Revolution" caught the early modern states with their bureaucracy and tax apparatus by surprise. Countless armies were paralyzed for lack of pay to soldiers, as the English example below shows. 

One such case, which happened to other Puritans at a distance of 3000 miles and 45 years, led to the invention of modern currency by "coining" the debt itself (see below under January 24, 2023).

I wrote a book about it. 

The Larry Summers of 1691 (February 12, 2023)

A Harvard professor, closely connected to Harvard's presidency and the country's Treasury, became the key public intellectual during a monetary crisis. Sounds familiar?

Meet Cotton Mather, born on this day 360 years ago, who promoted Massachusetts' novel paper money. Mather convinced a skeptical population to accept paper money which was only legal tender for taxes. See his open letter to the colony's Treasurer here. 

His father was then Harvard's president, his father-in-law the colony's Treasurer. Summers himself was Haravrd's president and Secretary of Treasury.

- "History doesn't repeat itself but it often rhymes" (Mark Twain). 

Monetary evolution (February 12, 2023)

For Darwin's birthday: 

Reading a sign in Hawaii was my eureka moment about evolution of ... money in colonial America. 

It happened at 10,000 ft, on top of the otherworldly Haleakala volcano on the magical island of Maui. 

Some of my insights are below, under December 8 & 12, 2022. 

War is the father of us all (Heraclitus) (February 8, 2023) 

Why did the British occupy Canada? 

It all began on this day in 1690, when Canadian soldiers & Indians destroyed Schenectady, NY. 

Long run: Canada was occupied.

Short run: Trying to occupy Canada, Massachusetts was driven by war costs to bankruptcy - and to a monetary revolution.

Coining debt (January 24, 2023)

In 1690, Massachusetts was prohibited by England from issuing proper money so it did something equally unprecedented: It minted the debt itself. How? 

Soldiers held named government bonds in large, non-round sums. The government converted them to bearer "bills" in small, round denominations. Both were legal tender for taxes; only the latter became money.  

Inflation? No, taxes were raised in the same amount. Puritan discipline. 

A doubly historic date in monetary history (December 24, 2022)

Happy 332nd birthday to the 1st legal tender paper money (and the 1st open market committee).

An immensely powerful double-edged sword in war and peace, second only to nuclear energy.

[Below "December the 10th" is the opening date of the legislative session. The law was enacted on the 24th] 

'Twas the Night before Christmas (December 24, 2022)

My 1690 Massachusetts edition 

The FIRST paper money in America (December 20, 2022)

The first issuer of paper money in America was Count Johan Maurits of Nassau, Governor of New Holland - a short-lived Dutch colony in Brazil. He issued it in 1640; he died on this day in 1679. 

For more on Counts and money see the great historian Brooks (1981).

The evolutionary power of periphery, punctuated equilibrium - and a monetary application (December 12, 2022)

Mutations in individuals in the main population of a species are drowned by the overwhelming majority. But peripheries with small populations, like islands, allow mutations to flourish. Sometimes the mature mutation is successful. It immigrates to the core and takes over it (this insight is attributed to the great evolutionary biologist Ernst Mayr). The fossil record in the core then shows a discrete jump in evolution (known as "punctuated equilibrium"), which really results from the mutation occurring, developing, and maturing elsewhere.

And in money? 

In the European core, powerful mints and kings killed ideas of unbacked paper money. But in the distant, neglected American periphery, European colonists used such money more freely. The American Revolution spread the idea to Europe, where it was adoped by the warring French and British. This first significant European paper money event cannot be explained by brief, failing European paper money precedents like John Law's. The mutation matured elsewhere - in America. 

Perhaps this can be called a punctuated monetary equilibrium. 

Adaptive radiation - the monetary application (December 8, 2022)

Darwin found that finches' beaks adapted to their different living conditions on different islands in the Galapagos archipelago. An original species thus radiated into several species. Evolutionary biologists call this "adaptive radiation."

European colonizing America created an archipelago of colonies, as they settled on separate islands or "islands" (small landed communities far from other colonists). These coin-using Europeans also radiated into different "species": The physical environment and market forces changed Virginians to users of tobacco as money. New Englanders became grain-users, Barbadians - sugar-users, Canadians - fur-users, Long Islanders - whalebone-users! 

The use of concepts from biological evolution to analyze economic development is discussed in detail here and here, among many books and articles.

Why did PURITANS, rather than other Americans, invent modern currency? (December 3, 2022)

American Puritans were the first to use paper money that was forced only on tax collectors (as legal tender), instead of precious metal coins.

The most relevant fact is that they were not the typical poor immigrants but educated, middle class people who left everything behind and moved 3000 miles to the Stone Age, just for the sake of religion. What is the relevance?

A. Education. At Harvard college they could get hints of non-metallic money from reading Plato, Aristotle and Hobbes. There was no other college north of Spanish Mexico as of 1690.

B. Belonging to the middle class, many of them were merchants. They turned Boston into English America's trade hub, with all the financial expertise that comes with it. Trade hubs, like Venice and Amsterdam before, and New York later, breed financial innovations. 

C. The very act of immigration proved low risk aversion, which is generally essential for inventors (says Joel Mokyr). 

D. Puritans were included in the category of "nonconformists" because they did not conform to Anglicanism. In Massachusetts they rebelled against English authority in general whenever possible. Nonconformity is also essential for inventors (says Mokyr).

E. Plain churches, plain clothes --> plain money? Puritans saw gold and statues in other churches as idolatry. Their plain wooden churches and plain clothes stated: spirit > matter. Perhaps they had the same attitude toward money: We don't need gold for money; we can do with something plain that performs the functions of money.

The parents of invention (October 23, 2022)

"Necessity is the mother of invention," said Plato. 

But ability matters for inventions, said Joel Mokyr. 

Having analyzed numerous monetary inventions in colonial America, I suggest:

"Necessity is the father of invention; 

ability is the mother of invention." 

Explanation: Ability, however obtained, often just sits there unused, until an outside event activates it. As Mokyr put it , "some exogenous change in the environment may bring about the activation of hitherto dormant useful knowledge."

For example, the US & Germany both had a "necessity" to invent nukes in World War II. Only war prompted the US to do it, and it the ability to do so; Germany also wanted but had no ability. 

With inspiration from Plato's biological analogy, we can say that this is similar to how an "exogenous" sperm "activates" a "dormant" egg (Mokyr's terms above).

Therefore: "Necessity is the father of invention; 

ability is the mother of invention." 

This sets Plato's biological analogy right, while recognizing the importance of ability.

Joel Mokyr and monetary innovation (October 10, 2022)

Like many others I hoped that Joel Mokyr would win the economics Nobel prize this year. But it went to banks/finance.

The impact of his research on technology and culture did reach monetary economics: In my book he is quoted more than any other scholar.

How come?

I can describe my book in 10 words: "Richard Sylla and Joel Mokyr talk about colonial monetary innovation."

The book is basically a dialogue in my head between two path-breaking works, one that should be a classic and one that is: Sylla's 1982 article "Monetary Innovation in America" and Mokyr's 1990 The Lever of Riches.

Sylla analyzed monetary innovation by focusing on necessity (demand) as the mother of invention, usually driven by regulation.

I add an application of Mokyr's analysis of ability to invent (supply) - developed by him in the contexts of technology and culture. Specifically, why was Massachusetts far more innovative than other colonies? Which of the following factors were relevant: the constitutional status within the English empire, the peculiar form of church-based government, the religious affiliation, the neighboring Indians, the weather, the elite, the middle class, the main economic activity, the scientific society, the college (Harvard), the printing presses?