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December 1, 2003

Representation Without Representation

The colonial roots of American taxation, 1700–1754


In a previous issue of Policy Review (August & September 2002), I published an article entitled “The Colonial Roots of American Taxation, 1607-1700.” In it, I described the mixed bag of public finance schemes in the American colonies’ first years — and the determination with which the continent’s earliest European settlers tried to avoid even relatively low taxes. It seems fair to say, overall, that the low taxes of those years contributed to the rapid growth of the colonies.

In this article, we will look at the first half of the eighteenth century, from 1700 to the beginning of the French and Indian War in 1754. It is a unique period in American history; the colonists discovered what we might call “representation without taxation,” a tax-free means by which to finance government based on the collection of interest payments on loans secured against the assets of borrowers. Representation without taxation came about partly by intent and partly by accident. Yet the lesson quickly spread throughout most of the colonies, and the low-tax colonial environment of the seventeenth century gave way almost to a no-tax environment in the first half of the eighteenth — again, not coincidentally, a time of rapid growth in the colonies.

 

Growth and money

Through natural growth and immigration, the population of the American colonies grew rapidly in the first half of the eighteenth century. In 1700, the estimated population of the colonies stood at 250,888, of whom 27,817 were Negroes.1 By 1750, the number reached 1,170,760, a more than fourfold increase, of whom 236,420 were Negroes (a nearly tenfold rise, reflecting the rapid growth in slavery and the diminishing relative importance of white indentured servants). The official establishment of Georgia in 1732 filled out the last of the original 13 colonies. (During the same period, the population of England grew far slower, from 5,026,877 to 5,739,364. Union with Scotland in 1707 added another 1,275,000 to this total.)

Despite some urban growth, the colonies remained largely agricultural communities. In 1700, the population of the five leading port cities of New York, Philadelphia, Boston, Charles Town (Charleston), and Newport was estimated at about 21,200. In 1743, that number had risen to 53,382 (which rose in turn to 72,881 in 1760). By 1754, Philadelphia had become the third largest city in the British Empire, surpassed only by London and Bristol. Although these numbers are small in modern terms, they were large by the standards of the mid-eighteenth century. By 1754, the American colonies had become a serious economic rival of the mother country. For example, Philadelphia merchants exported a large variety of natural products of the greater Philadelphia region, including agricultural products, animals and animal products, raw materials, and wooden products, among others, importing manufactured goods and other raw materials in return. Other ports specialized in the produce of their surrounding regions.

In general, incomes, wages, living standards, and the opportunity to own land in the colonies far surpassed those of the average man in Great Britain or continental Europe. The result was steady immigration to the American colonies.

During the first half of the eighteenth century, representative assemblies (lower houses of colonial legislatures) gained increasing control over internal colonial public finances, wresting the power of the purse from colonial governors and crown-appointed councils (upper houses). Representative assembly members were accountable to their electorates, which consisted of adult male taxpayers. Registered voters, who qualified on the basis of wealth or income or freeman status (and religious and other qualifications in some colonies), constituted less than half of all males, and voter turnout was often less than one-quarter of eligible voters. Taxation was a dominant issue in election campaigns during legislative proceedings. Elected legislators strongly resisted revenue measures proposed by the governors.

Colonial assemblies discovered that paper money could provide a means of colonial provincial finance without recourse to taxation. Their discovery was not that large issues of paper money resulting in inflation constituted a tax on cash holdings of individuals. Rather, they discovered that the provincial governments could generate a steady stream of revenue in the form of interest income by taking on the function of quasi-banks.

How did this discovery come about? During the seventeenth century, the monetary system in the colonies was a mixture of foreign coins, sterling bills of exchange, promissory notes, and commodity money or “country pay.” In 1690, Massachusetts issued “bills of credit” (government-issued paper money by another name) to pay returning soldiers from a failed expedition in Canada (see below). In general, colonial legislatures appropriated sufficient funds to pay government expenses on a yearly basis, and Massachusetts thus had no cash in its public treasury to meet extraordinary expenses.

Public accounts were kept in units of sterling, in pounds (£), shillings (s.), and pence (d.).2 Other forms of money were reckoned in terms of their value in sterling, either English sterling or the different colonial sterling units. This was true despite the fact that the most important coin to circulate in the colonies was the Spanish silver dollar (mostly minted in Mexico). The Spanish dollar contained a specific amount of silver. From 1601 to 1816 a troy ounce of silver was worth 5s. 2d. at the official English rate, making a standard Spanish dollar worth 4s. 6d. in terms of English sterling. However, a Spanish dollar was typically valued at 6s. in colonial sterling units, sometimes less and sometimes more depending on the colony in question.

Each colony maintained accounts in its own units of sterling. For example, there was Massachusetts sterling, Pennsylvania sterling, South Carolina sterling, and so on. Colonial sterling existed in two forms: 1) “proclamation money,” which, according to an order issued by Queen Anne in 1704 and legislation enacted in Parliament in 1707, stated that local sterling money in the form of Spanish and other coins could not be valued at more than 133.33 percent of English sterling, and 2) “current money,” which was the market value of each colony’s money in terms of English sterling. Current money was typically used as the unit of account, trade, and payment of taxes.

Current money in each colony fluctuated in value against English sterling and other colonies depending on its supply and demand influenced by world markets and local economic conditions. In 1720, for example, £133.33 of Pennsylvania currency was valued at £100 English sterling. By 1729, in terms of £100 English sterling, Pennsylvania currency had depreciated to £150, reaching a low of £184.56 in 1747, subsequently recovering to £166.66 in 1752. South (and North) Carolina had a less stable experience. Upon the introduction of paper money in 1702, £150 Carolina currency bought £100 English sterling, a level it retained through 1712 when North and South Carolina were split into two separate colonies. North Carolina currency depreciated to £1,200 by 1748 and South Carolina currency to £700 by the 1730s. Exchange rates fluctuated between each of the colonies and Britain, as well as between the colonies.

From a legal standpoint, colonial paper money was not official paper money. The British government did not allow colonial governments to issue official paper money, mint coins, or even establish local note-issuing private banks. Despite these restrictions, the colonists contrived to issue paper money in the form of bills known as “certificates of indebtedness.”

The first bills, issued in 1690 in Massachusetts, were called Colony or Old Charter bills. They became known as “bills of public credit,” or “bills of credit” for short, and were printed in denominations of 5s., 10s., 20s., and £5. Their issue was justified on the basis of borrowing for a specific public expenditure, namely, a military expedition against Quebec. The bills were not called money since none of the colonies had received the right to coin or print money. Nonetheless, bills of credit were inscribed as legal tender and valid payments for all obligations, including taxes and bills of exchange. The original issue in the amount of £7,000 was raised to £40,000 a year later. The law provided that a portion of the notes would be called in and retired (destroyed, burned) each year as specific revenues which were enacted to retire these notes were collected. These bills amounted to tax- or revenue-anticipation notes. By early 1693, most of the bills had been redeemed. Popular demand for bills of credit as a medium of exchange (in addition to, and in place of, less convenient bulky commodities or country pay) to facilitate commerce and payment of taxes led to their regular reissue. The issue of bills of credit in Massachusetts was followed by South Carolina (1703); New Jersey, New York, New Hampshire, and Connecticut (1709); Rhode Island (1710); North Carolina (1712); Pennsylvania (1723); Delaware (1723); Maryland (1733); Virginia (1755); and Georgia (1755). The frequency, amounts, and types of bills of credit varied among the colonies. Hereafter, the terms “bills of credit,” “paper money,” “notes,” and “currency” will be used interchangeably.

There were two main processes for issuing paper money. One was the direct issue of fiat notes by the colonial governments, backed by specific future taxes earmarked to redeem them over a specified period of time (e.g., Massachusetts in 1690). The second was the issue of notes through a government loan office, or a “land bank,” established by the colonial governments (which required an act of the colonial legislature and approval of the colonial governor). A land bank was not really a bank in that it did not accept deposits and provide other financial services. Loan office is a more accurate term. Some colonies relied largely on bills redeemed by earmarked taxes. Others relied largely on loan office notes. Most used both in varying proportions. Both sets of bills were almost always accepted in payments to the colonial government for land, taxes, fees, and other charges, and most enjoyed legal tender status in private transactions. In some instances, the British government disallowed the issue of bills of credit; in others, especially during wartime, it approved them.

Representation without taxation derives chiefly from the issue of loan-office money. In the case of tax-backed fiat money, the colonists could defer tax payments into the future and gain the immediate use of paper money as a medium of exchange to facilitate commercial transactions. The government, for its part, could gain access to expendable funds without imposing the full immediate burden of taxation. In the case of loan-office money, the colonists discovered that they could cut provincial taxes in half and, in some cases, eliminate provincial taxes altogether, using the interest collected on these notes to defray the costs of government. As a bonus, the colonies that relied largely on loan-office money enjoyed more stable currencies than those which relied more heavily on fiat, tax-backed money.

The specific details of the operations of loan offices varied among the colonies. In general, loan offices advanced currency to colonial residents, chiefly farmers, at relatively low rates of interest. Borrowers typically used the funds to improve their property and productive capacity. Loans were backed by mortgages on real property, by silver plate, other real assets and, in rare instances, slaves. Loans were to be repaid in annual installments over a specified period of years, with interest. Failure to repay in a timely manner could result in possession of the mortgaged asset, which would be auctioned to repay the loan office. Defaults were rare, usually no more than 2 percent of the value of outstanding loans. As was true for tax-anticipation notes, repayment required the cancellation and retirement of the bills, although they were often reissued, or new loan offices were established to reissue paid-in currency or issue new loans in order to maintain or increase the quantity of currency in circulation.

Loan-office money was a real property-backed currency, something of a forerunner for the colonial currency board monetary system that became standard practice throughout the British Empire in the mid-nineteenth century. All note issues were fully backed by real property or other hard assets valued at twice or more the quantity of paper money in circulation. The growth of population in the colonies, which increased the demand for land, largely insured against falling land values. Loan-office bills were relatively stable in terms of English sterling as compared with tax-anticipation notes.

The first public loan office was founded in South Carolina in 1712, followed by Massachusetts in 1714; Rhode Island in 1715; New Hampshire in 1717; Pennsylvania, Delaware, and New Jersey in 1723; Maryland and Connecticut in 1732; and New York in 1737. The colonies of North Carolina and Virginia did not establish loan offices, and Georgia established its loan office in 1755. The most successful loan offices were in the middle colonies, which receive the most detailed treatment in this essay.

 

Pennsylvania

In 1720, the economy of Pennsylvania fell upon hard times. The South Sea Bubble caused a credit crunch in England, which spilled over into the colonies. The profitable export of wheat to the West Indies diminished in the face of rising competition. Domestic commerce was hampered by the absence of a convenient medium of exchange since most silver coins were exported to pay for British imports.

Apart from duties received from protective tariffs imposed on imports from neighboring colonies, in 1723 the Pennsylvania legislature established a loan office and approved the issue of £45,000 in paper money, one-third in March and two-thirds in December, to owners of land and housing at 5 percent interest.3 Benjamin Franklin, in defense of the policy of issuing loan-office rather than tax-secured bills, wrote in 1729 in support of another currency issue that “Bills issued upon Land are in Effect Coined Land.”

The first act was followed by further issues of £30,000 in 1729 and a final release of £11,110 5s. in 1739. Altogether, more than £80,000 of Pennsylvania paper money was put in circulation, which was worth about £49,000 English sterling. Periodic reissues of currency in 1725, 1731, 1739, and 1746 were authorized to replace worn, tattered, and counterfeit bills, and re-loan payments of principal with a new due date for the re-loaned mortgages. (In 1746 and thereafter, Pennsylvania issued excise tax-backed bills for the governor’s use and to support British military expeditions during the French and Indian War. Relatively stable prices gave way to inflation as the volume of tax-backed bills rapidly increased.)

Between 1720 and 1755, wholesale prices of commodities in Philadelphia were relatively stable. The issue of paper money did not drive up prices of locally produced goods. The external value of Pennsylvania’s sterling currency suffered mild depreciation, after which it remained quite stable. In 1723, it took £140.37 Pennsylvania currency to buy £100 English sterling. Pennsylvania currency depreciated to £160.90 in 1732, falling further to £170 in 1734. It remained at or below that level for the next 10 years. Three years later, in 1747, it had declined to £183.78, but appreciated below £170 in 1751, where it remained until the advent of the French and Indian War. The depreciation of Pennsylvania currency against English sterling between 1723 and 1755 amounted to 21 percent. The fluctuations were due mainly to changes in trade relations reflecting the strength or weakness of Pennsylvania’s external accounts rather than changes in the quantity of Pennsylvania currency in circulation.

The first £15,000 authorized in the 1723 act were loaned out on security of land, houses, or silver plate at 5 percent interest for a period of 8 years. The second tranche of the first act extended loans for 12.5 years. The act of 1729 further extended the repayment period to 16 years, the same period for the 1739 emission. Loans were not to be less than £12 10s. or more than £100 (with provision for loans up to £200, less than 2 percent of all loans, in rare circumstances). The average loan was £64 13s. Loans could not be granted to individuals who assigned land on trust to relatives.

The history of each of the American colonies is replete with conflicts between the proprietors and their appointed governors, on the one hand, and the settlers who paid the expenses of government, on the other. In this regard, the Penn family was in constant conflict with the Pennsylvania Assembly, which sought to minimize the taxes of their constituents. No internal taxes could be imposed without the consent of the legislature

Fees and fines covered many of the costs of the provincial government. It collected neither property nor poll taxes between 1711 and 1755. (Township and county governments were somewhat more successful in collecting local taxes, but these were modest, one to three pence per pound of assessed wealth and a mild trade tax, and linked to local development.) However, apart from fines and fees, the limited activities of the provincial government were funded from just two sources. The most important was interest collected from the operations of the loan office. The remaining source of revenue came from import duties on and retail sales of liquor. It was argued that relative freedom from taxation, including all forms of direct taxation, contributed to Pennsylvania’s remarkable growth. The two sources of revenue were sufficient to meet the annual costs of government, no more than £5,000 in peacetime. (As late as 1775, Pennsylvania’s provincial expenditures were about £3,000. The French and Indian War ended this episode of representation without taxation in colonial Pennsylvania.)

 

Delaware

The three lower counties on the Delaware River, now constituting the State of Delaware, had the same governor and the same land office as the province of Pennsylvania.4 The first Delaware act of April 1723 provided for the issue of £5,000 in bills of credit, which were to be loaned in amounts ranging from £12 to £60 secured by first mortgages on real estate. To facilitate commerce, notes were issued in six different denominations ranging from 1s. to 20s. Principal was to be repaid in eight years by eight equal installments, with interest of 5 percent. Interest and principal were to be repayable with bills of credit, and the redeemed bills were to be withdrawn from circulation and burned. It was stipulated that the proceeds of interest were to be used to pay the general expenses of the provincial government.

A second issue of £6,000 was approved in November 1723 under similar terms. At the same time, a separate act of the Assembly reduced the legal rate of interest on private loans from 8 percent to 6 percent. As it became clear that most of the currency would be withdrawn from circulation by 1729, the Assembly authorized another issue of £12,000 to be lent and repaid in 16 years, stipulating that the interest was to defray the expenses of provincial government. The longer repayment schedule was enacted to slow the withdrawal of paper money, which had been found quite useful as a medium of exchange in place of bulky commodities, from circulation.

The growth of population and the repayment and destruction of £3,750 as loans were repaid led to a further issue of £12,000 in 1734. Five years later, £6,000 in new bills was issued to replace bills that had become worn and ragged. It was increasingly recognized that the interest paid on the loan-office bills had enabled the provincial government to erect and maintain its public buildings without any need for other explicit forms of taxation.

Loan-office bills were made legal tender, and counterfeiting was declared an offense punishable by death (so written on the face of the notes). As in Pennsylvania, interest, coupled with an excise tax on liquor sales, became the main basis of provincial finances, which sufficed for ordinary peacetime expenditures. Delaware currency maintained a good reputation and circulated on par with the paper money of Pennsylvania and New Jersey.

 

New Jersey

Although the first bills of credit, backed by a specific tax for the same period, were issued in 1709 to finance an expedition to Canada, loan-office bills did not commence for another 14 years. The New Jersey Assembly met in October 1723 to consider the need for paper money to cope with the scarcity of a proper internal medium of exchange suitable for increasingly large business transactions. This session was partly motivated by the establishment of a loan-office system in Pennsylvania in March and the fact that New York had recently distributed bills of credit. The governor signed a measure establishing New Jersey’s loan office on November 30, 1723.5

The law authorized £40,000 in legal tender currency, ranging from 1s. to £3 in New Jersey bills, to be loaned to any one individual in amounts between £12 10s. and £100. Each county in New Jersey was given a quota based on its share of the colonial population. A mortgage on lands or lots at least twice the value, and on houses at least three times the value, of the loan was required as security. Interest was set at 5 percent, well below the market rate of 8 percent. All debts were accorded a moratorium of four months to allow the new currency to be placed in circulation. For the first 10 years, £8 10s. was to be repaid on each £100 borrowed, with £7 10s. to be repaid for the last two years. Foreclosure would occur after a 30-day grace period following failure to repay any installment due. The outstanding loan could be repaid in full any time before the date of final payment, with these funds eligible for re-lending.

A portion of the funds was allocated to the government to pay off New Jersey’s public debt of £4,000, thus reducing taxes collected for that purpose. Although New Jersey’s law required the destruction of bills paid in to retire the notes, the Assembly refused to destroy the paper money paid in for interest.

A second issue of £20,000 was authorized in 1730. This law extended the repayment period to 16 years and provided that the principal paid in during the first 8 years could be re-loaned. This took account of the fact that the majority of notes issued in 1723 had been retired, resulting in a colony-wide deflation. Payment of principal could be made in gold, silver, wheat, or old bills of credit. The second act specified that the interest money was to pay the incidental expenses of the provincial government. The fact that New Jersey currency circulated at a premium to New York money suggested that additional money could be issued without great risk of depreciation. A third loan-office bill was confirmed in 1735 for another £40,000, resembling the second law. New Jersey bills continued to circulate at a premium to those of neighboring New York. Interest payments on these loans covered the costs of government at first partly, and then later entirely, for the next 30 years encompassing 1723 through 1752. By 1753, the last loans had fallen due, most of the bills had been retired, and the colonists were once again paying taxes.

The British government opposed the use of interest from bills of credit as a general means of supporting the civil government in the colony. It was concerned that New Jersey’s representatives, supported by the electorate, employed this scheme to avoid taxation. It was further concerned about possible over-issue of currency and subsequent depreciation that would result in losses to British creditors. In 1749, Governor Jonathan Belcher wrote to the Lords of Trade (the body responsible for regulating the colonies) that New Jersey’s Assembly had not found it necessary to raise a tax on real or personal property for 17 consecutive years (no taxation continued until 1751) to support the provincial government.

For nearly three decades, the profits of the loan offices replaced the need for some, and then all, of provincial New Jersey taxes. New Jersey exemplified the emerging colonial spirit of (local) representation without taxation. As was true in Pennsylvania and Delaware, colonial New Jersey was a precursor to the modern-day tax haven. A generation of New Jersey residents escaped provincial taxation. Small wonder that its population found British attempts to introduce a variety of taxes after the French and Indian War intolerable, especially since the British refused to allow the reenactment of public loan offices.

(Issues of New Jersey bills to finance the colony’s part in the War of Austrian Succession in the 1740s and subsequent massive issues of £347,000 during the French and Indian War were in the form of tax-anticipation notes. All subsequent attempts to issue loan-office bills were denied by the British government until 1775, by which time the Revolutionary War had begun and the issue became moot.)

 

Maryland

Tobacco, the principal crop, became a medium of exchange early in Maryland’s history and remained the principal medium even after the issue of paper money. Tobacco payments were made largely as book entries between buyers and sellers but also passed in bulk form as country pay. To facilitate the transfer of bulky money, the colony established public warehouses in 1747 to which all tobacco had to be sent before shipment. Transferable (or nontransferable) receipts were issued for deposits of tobacco. Transferable (bearer) notes specified the amount, condition, and quality of tobacco received and passed, like cash, as a medium of exchange. Their value varied with the market price of tobacco, set by external demand.

To reduce the reliance on tobacco money, which was perishable, bulky, and unstable in value, the Maryland legislature in 1733 authorized the printing of £90,000 currency in accordance with Queen Anne’s proclamation of 1704 (£133.33 Maryland currency equaled £100 English sterling).6 Thirty shillings was to be given outright to every taxable individual, which put £47,924 into immediate circulation. In return, each taxable head of household who raised tobacco was required to burn 150 pounds of his “trash” tobacco annually, a policy designed to maintain the quality and price of Maryland tobacco. The remainder of the money might be lent out by the commissioners of the loan fund at 4 percent interest on the security of silver plate, leaseholds, or real estate. During the first 10 months, £7,374 was loaned out. (By March 22, 1737, only £16,160 had been lent, while £3,054 had already been repaid in principal and interest.) After a year, any remaining notes might be invested in bills of exchange and remitted to London to establish a fund with which to redeem the bills.

Between September 29, 1748, and March 29, 1749, all persons with paper notes in their possession good for 15 years, £30,000 of the original issue, were to redeem them at the office of the commissioners and receive back one-third of their value in sterling bills of exchange at the stipulated Queen Anne rate (£133.33 Maryland currency to £100 English sterling, regardless of the market rate between Maryland notes and English sterling) and two-thirds of their value in new Maryland bills. Between the same days of 1764 and 1765, the two-thirds of the bills remaining in circulation were to be redeemed in the same way.

The credit of this note issue was to be supported by an export duty of 1s. 3d. on each hogshead (63 gallons) of tobacco exported for a period of 31 years ending September 29, 1764, which was to be used to purchase Bank of England (established in 1694) stock and make other well-secured private loans in England. Between 1734 and 1749, Maryland sent sterling bills of exchange to its agents in London for £28,907, which they invested in bank stock. Semi-annual dividends from this stock added another £7,697 sterling to the colony’s reserve funds. The overseas funds that had accumulated were more than sufficient to redeem the required one-third of the notes in 1748-1749, which were paid out in sterling bills of exchange obtained from the sale of bank stock and the issue of new local bills.

Apart from the cash grants and loans, the legislature allocated several thousand pounds of the note issue for a house for the governor and to erect and repair certain public buildings and jails. To put the remaining loan-office funds in circulation, the legislature authorized the commissioners to pay the general expenses of the provincial government. They did so in full for 1735, 1736, and 1737, which put another £9,403 in circulation, and eliminated provincial taxes for those three years. The commissioners further assisted in the general charges of government between 1740 and 1746, helping to finance military expeditions against the West Indies in 1740 and Canada in 1746, again reducing tax burdens of Maryland residents.

The issue and reissue of funds raised the total funds on loan to £19,728 in 1739, which amounted to about a quarter of all the Maryland bills of credit in circulation. By 1748, the interest received from loans amounted to £5,663, which could be re-loaned or used to purchase more Bank of England stock. As of 1751, some £16,248 still remained on loan, generating a continuous stream of interest income for the loan office.

Pennsylvania, Delaware, and New Jersey enforced payment schedules and foreclosed on delinquents. Maryland did not. It was estimated in 1758 that up to half the borrowers were in arrears on their principal and interest payments. This did not trouble the Maryland legislature or the commissioners because the compounding of interest represented a future stream of revenue that would permit lower provincial taxes. Few losses seem to have occurred from this lax policy. Only one foreclosure is on record.

Maryland used some of the interest receipts to purchase additional Bank of England stock. When the old Maryland paper money was fully redeemed in 1764, the commissioners still retained substantial bank stock and other financial assets in their English account. Any remaining funds after all the Maryland paper money had been redeemed were to belong to the province and be at the disposal of the Assembly. Against this collateral, the colony issued about a half-million dollars during 1765-1768, the first government to issue dollar currency in America, although the dollar notes were not declared legal tender to conform with the parliamentary act of 1764, which proscribed the issue of new colonial legal tender notes. Thereafter until 1775, all Maryland currency issues traded at par with specie. Maryland was an even closer precursor to the standard British colonial currency board of a century later.

 

New York

New york first issued bills of credit in 1709 to finance an expedition to drive the French from Canada. Subsequent issues were backed by a sinking fund from a duty on wine, rum, brandy, and other distilled liquors for 17 years. New York bills traded at a premium to those of New England and neighboring provinces.

In 1737, the growing power of the assembly resulted in a change in the appropriations process, with annual appropriations replacing the prior custom of a five-year grant to the governor. By this time, the redemption of previous bills had reduced the quantity of New York notes in circulation, and the bills of neighboring provinces were becoming the chief medium of exchange inside New York. In response, the legislature approved a loan-office issue of £40,000.7 Loans required collateral in the form of land, houses, or other valuable improvements worth double the value of the loan. Loans were to be made on the security of real estate and silver plate for 12 years in sums between £25 and £100. One-fourth of the loan was to be repaid in April 1747, a similar sum in April in the three succeeding years. Repaid bills were to be canceled. Another £8,350 was issued to meet the expenses of government, to be retired with the interest from the loans. Indeed, in 1743, the loan period was extended for another four years in order to prolong the collection of revenue from interest.

Governor George Clarke of New York reported that loan-office interest earnings had greatly eased the tax burdens of the people of New York, much to the satisfaction of all concerned parties, himself included. Governor Charles Hardy in 1756 acknowledged that loan office debtors did not fear foreclosure because they knew that the provincial government preferred to have the interest revenue, which amounted annually to £1,800, a substantial portion of annual expenses. As late as 1774, New York’s annual peacetime provincial expenditures came to about £5,000.

 

Rhode Island

Rhode island’s large issues of paper money and their subsequent depreciation led Parliament in 1751 to enact a ban on the issue of all new paper money in the New England colonies (and subsequently, in 1764, in all the remaining colonies).

Rhode Island’s first paper money, issued in 1710, was fiat currency backed by future taxes.8 Its subsequent issues were mainly loan-office disbursements for 10-year mortgage loans at 5 percent interest. Interest on the first loan was earmarked for the repair of Fort Ann. This loan was known as the First Bank.

A subsequent issue in 1715, re-dated 1721, known as the Second Bank, was extended for five years, with interest payable in flax and hemp. These loans were later extended to 23 years in duration. The Third Bank, approved in 1728, issued £49,000 to replace all prior issues and provide funds for further repair of Fort Ann. The Fourth Bank (1734) issued £60,000 at 5 percent interest as 10-year delayed mortgage loans. The Fifth Bank (1733) issued £104,000, with interest earmarked for cannon at Fort George. The Sixth Bank (1738) issued £100,000 for 20-year mortgages at 5 percent interest. The Seventh Bank (1740) issued £24,000 on 20 years at 4 percent. The Eighth Bank (1743) issued £40,000 on similar terms.

Due to these large issues, in contrast with the middle colonies, Rhode Island notes did not maintain their value. Depreciation of Rhode Island currency resulted in the creation of notes designated New Tenor, each of which was worth four times the previous issues, the Old Tenor notes. The Ninth Bank (1750) issued £50,000 New Tenor notes in five-year mortgages at 6 percent interest; a year later the loans were doubled in duration and the interest reduced to 5 percent.

Rhode Island loan offices did not directly re-lend repaid bills. Rather, each time the currency in circulation declined due to repayment, a new bank was authorized and its issue of bills increased the total supply of money in circulation compared with authorization of the prior bank. The nominal value of Rhode Island paper money for each 1,000 persons peaked at £31,500 Rhode Island currency in 1760, but its real exchange rate value amounted to £59 English sterling. This was a decline from a peak of £166 English sterling in 1740 when £18,300 Rhode Island currency circulated for each 1,000 population. Between 1740 and 1760, the quantity of local currency per 1,000 population had risen 72 percent, while its value in English sterling had declined 64 percent.

Despite the steady depreciation of Rhode Island bills, the colony’s legislature authorized one issue after another because the interest paid by the borrowers was sufficient to pay the cost of Rhode Island government during some peacetime years. This eliminated or reduced the need to impose provincial taxes, a measure popular with the taxpaying electorate.

 

Massachusetts, Connecticut, New Hampshire

In response to a plan by private businessmen to set up a note-issuing bank, which they planned to call a land bank, the Massachusetts colonial government determined to control the issue of notes and the public purse by establishing a public loan office.9 An act of November 4, 1714, authorized the trustees of a public loan office to lend £50,000 for 5 years at 5 percent interest, with loans ranging between £50 and £500. Despite the five-year limitation, loans were rolled over (continuously made). The act specified that interest income was to help liquidate public charges. The act banned the establishment of private land banks. On December 4, 1716, a second issue of £100,000 was approved, for 10-year loans at 5 percent, stipulating that the profits were to help pay the cost of government.

This second issue resulted in the immediate depreciation of Massachusetts bills against English sterling and silver coin to 12 Massachusetts shillings per ounce. Another £50,000 was approved in March 1721, a 10-year loan at 6 percent on ample security, and another £60,000 in 1728. In addition to payment of principal and interest, these loans were to be redeemed by taxes on polls and real and personal property.

Numerous other bills were issued to meet the yearly cost of government and to replace retired bills. Over time, the total amount of bills outstanding increased from £229,500 in 1720 to £575,809 in 1740 to £2,119,800 in 1749. (In 1751, Parliament banned all new currency issue in the New England colonies.) The nominal value of Massachusetts bills per 1,000 population peaked in 1765 at £168,000, which was worth £82 English sterling. This is a ratio of 2,049:1, the culmination of a steady decline from 48:1 in 1720, 113:1 in 1740, and 205:1 in 1750. An ounce of silver reached 60 shillings per pound in 1749. In 1760, one Massachusetts pound had depreciated to £0.08 English sterling.

Along with Massachusetts and Rhode Island, the colonial bills of Connecticut and New Hampshire also experienced rapid depreciation outside New England. Connecticut issued loan-office money in 1733 and 1740 totaling £127,000 Old Tenor Connecticut bills. Given rapid currency depreciation, it is not surprising that interest and principal payments fell into arrears. New Hampshire established its loan office in 1717, putting out £15,000 for 11 years at 10 percent. New Hampshire restrained its note issues until the accession in 1741 of a new governor who was more friendly toward paper money. He and the legislature jointly connived, after he received substantial funds for his support, to approve new loan-office issues in 1742. The outbreak of war in 1744 resulted in huge emissions of bills that markedly depreciated the currency. Representation without taxation in the New England colonies was not as successful an experiment as it was in the middle colonies.

 

Other taxes

The focus of this essay has been on the use of loan offices by colonial governments to reduce and even eliminate the need for other forms of direct and indirect taxes to support provincial governments. The middle colonies were more successful using this fund-raising mechanism than the New England colonies and the Carolinas. Although counties and towns imposed their own taxes, these were generally light, dedicated to specific infrastructure and services, and rarely deemed objectionable (except for required religious support and for maintaining poorhouses). In addition to internal provincial taxes, the British government imposed implicit and explicit taxes on its American colonies. These consisted of duties imposed on goods exported from the colonies to England and other destinations and customs duties paid on imports arriving in England. Although these taxes remained modest during the first half of the eighteenth century, many of the duties were successfully evaded.10 The revolt against external imposts and British government efforts to levy internal taxes in the colonies to support its standing army in North America did not threaten a rupture with the mother country until, and especially in the aftermath of, the French and Indian War.


1 Population figures are found in U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1957 (U.S. Government Printing Office, 1960), Series z1-19. “Estimated Population of American Colonies: 1610-1780,” 756. The word “Negro” is used in the Census Bureau’s statistical tables.

2 One pound equals 20 shillings, and one shilling equals 12 pence, so one pound equals 240 pence.

3 Detailed statistics about the Pennsylvania loan offices can be found in Mary M. Schweitzer, Custom and Contract: Household, Government, and the Economy in Pennsylvania (Columbia University Press, 1987), 115–168.

4 Richard S. Rodney, Colonial Finances in Delaware (Wilmington Trust Company, 1928).

5 Donald L. Kemmerer, “The Colonial Loan-Office System in New Jersey,” Journal of Political Economy (December 1939).

6 Clarence P. Gould, Money and Transportation in Maryland, 1720-1765 (Johns Hopkins Press, 1915), 78-121.

7 John H. Hickcox, History of the Bills of Credit or Paper Money Issued by New York (Burt Franklin, 1866, reprinted 1969), 26-27.

8 Leslie V. Brock, The Currency of the American Colonies, 1700-1764: A Study in Colonial Finance and Imperial Relations (Arno Press, 1975), 37-43.

9 Joseph B. Felt, Historical Account of Massachusetts Currency (Perkins and Marvin, 1839, reprinted by Burt Franklin, 1968); and Roger W. Weiss, “The Colonial Monetary Standard of Massachusetts,” Economic History Review (November 1974).

10 An excellent source is Thomas C. Barrow, Trade and Empire: The British Customs Service in Colonial America, 1660-1775 (Harvard University Press, 1967).