These colonial premiums could be quite substantial. Moreover, to attract much-needed specie into the colonies, merchants bid the prices of the various silver and gold coins above their official British pound prices, as set by the British mint. By attaching a value to things, money accommodated the netting out of debts.Ĭolonial money first arose in the mid-seventeenth century as a unit of account for just such purposes. In this way, money acted as a unit of account. Fortunately, colonial creditors could tally debts in British pounds or colonial currencies even if these currencies were not readily available. People naturally hoped to net out some of these debts, but this is extremely difficult under barter. In an economy that depended heavily on barter, however, one could end up holding debts against many individuals and across a broad array of goods. Out of necessity, merchants and wealthy individuals frequently extended credit to others. In addition, shopkeepers and employers sometimes issued “shop notes,” a type of scrip-often in small denominations-redeemable at a specific store. Various other types of warehouse receipts, bills of exchange against deposits in London, and individuals’ promissory notes might also circulate as money. Some items, most famously tobacco in Virginia and Maryland, worked well in this way and became commodity monies directly or as backing for warehouse receipts. They accepted these goods hoping to pass them on in future trades. Barter, of course, was common, particularly in rural areas, but individuals often had to accept goods that they did not particularly need or want only because they had no other way to complete a transaction. Without the convenience of money, colonists resorted to many less-efficient methods of trading. This is not to say that specie did not circulate it did, but apparently never in sufficient abundance. The supply of specie depended on the colonies’ balance-of-payments position, and since the colonies often ran deficits, colonists frequently complained about the absence of “money” (specie). Whatever specie the colonies acquired through their trade with the Caribbean and southern Europe was lost when they imported finished goods from England. The mercantile policies of England kept the American colonies perpetually short of specie, the various silver and gold coins that served as money across the globe. The problem surfaced as soon as settlement reached a stage where agricultural households reaped surpluses, and a fledgling network of commercial activities-trade, processing, small-scale production-emerged. Money solves the double-coincidence-of-wants problem by being a general medium of exchange, and it allows one to decouple the timing of receipts and outlays by offering a means of deferred payment.Ī lack of money plagued colonial America. Making things always requires access to the goods necessary for their production before the final good is ready, but pure barter requires that receipts and outlays occur at the same time. That is difficult enough, but suppose you needed that specific thing today and had nothing to exchange until later. Under barter, if you have an item to trade, you must first find people who want it and then find one among them who has exactly what you desire. Money reduces the cost of engaging in economic exchange primarily by solving the double-coincidence-of-wants problem. Inflation in the colonies was not solely a problem of too much money chasing too few goods it had a fiscal component. The American colonies’ experiences with paper currency show that such trust depended on two important factors: that colonial governments did not issue too much paper and that colonial governments maintained the fiscal backing behind the currency. Precious metals do not back it, and its use stems only from people’s trust that governments and central banks will not undermine its purchasing power. Today’s money is fiat it has no intrinsic value. Traditionally, monies have kept their purchasing power by being made of precious metals-notably gold, silver, and copper-that had value outside of their monetary role. If money is to do its job well, it must maintain a stable value in terms of the goods and services that it buys. Absent money, we would all have to barter, which is time consuming and wasteful. By so doing, money allows individuals to specialize in what they do best, and specialization-as Adam Smith famously pointed out-increases a nation’s standard of living. Money is a societal invention that reduces the costs of engaging in economic exchange.
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