Dror Goldberg

The Massachusetts Paper Money of 1690

Modern currency originates in the inconvertible, legal tender paper money that Massachusetts devised in 1690. The circumstances that led to its creation are more complex than the typical story of wartime specie shortage. Due to temporary political constraints of that turbulent period, the currency could be neither backed by land nor imposed on anyone, as was then standard. Instead, it had to be disguised from England as a simple, private-seeming IOU. By pleasing both its pay-demanding troops and England, the government maximized its probability of survival subject to the constraints. “Monetary innovation, the development of new forms of money, has not received much systematic study from economic historians.” 1

Why was America's First Bank Aborted?

In 1686 the leadership of Massachusetts became involved in the first operational bank scheme in America. In 1688 this note-issuing bank was mysteriously aborted at an advanced stage. I suggest a new, simple explanation for the banks demise. The banks notes were supposed to be backed mostly by private land in Massachusetts, but a new royal governor invalidated all the land titles. This episode demonstrates the importance of clearly defined and enforced property rights for the development of financial institutions.

Property Rights Under Administrator-Dictators: The Rise and Fall of America's First Bank

In 1686 the leadership of Massachusetts was involved in the first operational bank scheme in America. In 1688 this note-issuing bank was mysteriously aborted at an advanced stage. It was a unique opportunity for financial development that did not arise again for decades. I suggest a new, simple explanation of the bank’s demise: The bank’s notes were supposed to be backed mostly by private land in Massachusetts, but the new royal governor invalidated all the land titles. As in contemporary England, absolutism’s disrespect of property rights prevented financial development.