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					                          Reconsidering the Creation Story:
                      Money, Credit, and the Advent of Capitalism

                                     Christine Desan
                                      draft, 5/9/061

       Volume 1 of Capital opens with a long description that grants special status to one
“specific kind of commodity”: money. Money, according to Marx, is “the universal
equivalent,” the commodity form into which the value of any other commodity can be
translated. Any commodity can serve as money – gold prevailed simply because, after
serving as an equivalent for other commodities in isolated exchanges, “[g]radually it
began to serve as universal equivalent in narrower or wider fields.” It became the money
form only after it “had won a monopoly of this position in the expression of value for the
world of commodities.”2 An ocean away, in politics as well as society, another
nineteenth historian articulated the same assumption. “Currency,” he explained, “denotes
whatever has been adopted, as a medium of exchange, by general consent and practice.”3
The basic narrative – that money is a neutral medium produced spontaneously by
individuals who convene upon a fungible commodity for purposes of making exchanges,
sharing a unit of account, and having a store of value – remains the conventional account
of money today, from basic texts in economics to everyday intuitions.4
        A strikingly similar narrative has come to characterize histories of credit.
Modern accounts organize the development of commercial law along a trajectory of ever-
increasing liquidity. The underlying assumption holds that “the law of bills and notes
evolved in response to a universal mercantile need for freely transferable debt

  Professor of Law, Harvard Law School. Special thanks to Farley Grubb, Duncan
Kennedy, Roy Kreitner, Dick Sylla, and Ryan Taliaferro for the valuable discussions that
stimulated this draft.
  Marx 1976, 163. As Marx put it more generally, “The specific kind of commodity with
whose natural form the equivalent form is socially interwoven now becomes the money
commodity, or serves as money.” Id., 162.
  Felt 1839, 10.
  See, e.g., Mankiw 2000, 157-158; Schumpeter 1994 [1954], 62-63 (reviewing roots of
exchange-based theories of money). The dominance in the economic tradition of the
assumption that money as a medium performs an essentially transactional service and
does not substantively affect “real” exchange is traced by Bell 2001, 151-153, 161.

instruments.”5 From that axiom, the conventional account follows. It focuses on the
timeless activity of merchants, understood to generate highly liquid instruments that
could be used as currency substitutes. The “law merchant” represents the body of law
that results, doctrine developed through everyday commercial experience. Confronting
the spontaneous product of trading men, the common law courts initially resist. They
eventually understand, however, the emanating rationality of the law merchant and
assimilate it. The orthodox histories then detail the development of “negotiability” – or
“the property by which certain choses in action, that is, undertakings to pay, pass from
hand to hand like money.”6
       The conventional stories of cash and credit embed in their detail the standard
account of economic modernization as a incremental matter of material development.
Money is a medium engendered by the social activity of individuals. Credit, as a
currency substitute, is assimilated to money and its neutrality. Its inventors, the
merchants, are actually replicating money, outside of the state and in ambivalent relation
to it – they are enacting, as it were, the elemental logic of exchange. In that sense and at
the same time, they represent commercial man as a constant, working sensibly and self-
interestedly, even in times of widespread ignorance or superstition.7 Eventually, their
pragmatism and productivity is recognized and accommodated by the law. The state
appears as it generally does in the drama of a developing liberalism: a negative if
necessary presence, it functions best by freeing and facilitating individual initiative.8
       Writ larger, economic modernization and the coming of capitalism merge.
Economic activity increases as populations grow and come increasingly into contact with
one another. The social order changes as monetary instruments penetrate human
relations. Networks of credit thicken until they extend beyond the merchant circles that
generated them. At a certain point, the market moves to the center -- intimately tied to

  Rogers 1995, 10 (describing standard account).
  Bigelow, quoted in Rogers 1995, 2 n.2. See, e.g., Holden 1953 (organizing history
around development of negotiability via acceptance of law merchant into the common
  Rogers 1995, 22 (disputing image popularized by modern accounts).
  See, e.g., Landes 2003, 14-21; North and Weingast 1989; Goodhart, 1996 & 1997,
cited in Bell 2001, 152.

one another as producers, consumers, wage earners, and employers, individuals enter the
modern age.
       In this account, capitalism is largely a matter of degree. There may be tipping
points – moments when so many have so realigned their relations, by choice or force, that
the texture of the community is itself transformed. In America, for example, the
eighteenth century can be understood as the story of men and women entering “the
market,” assuming new roles as entrepreneurs, leaving subsistence farming for waged
labor, and increasingly costing out the value of time in loans and leisure time.9 There
may also be critical passages -- moments when institutions change to accommodate the
cumulatively new patterns of exchange, in turn promoting further exchange and
investment.10 In early modern England, for example, the Glorious Revolution may be
seen as appropriately restricting the practice of the sovereign prerogative against
individual property owners.11 But the basic story is remarkably close to that classically
attributed to Adam Smith: individuals, inherently oriented towards truck and barter,
eventually specialize their labor, producing for exchange, procuring through exchange,
and generating increasing profits in exchange.12
       There are, however, problems with the creation story of capitalism. Consider, at
the outset, how central money and credit are to the history. Money provides the liquidity
that allows individuals to move beyond barter. As contemporary economists have
elaborated, it facilitates exchanges by providing a fungible medium, one that obviates the
need, if exchange is to occur, for a “double coincidence” of wants – the fortuity that
people have goods that they are willing to exchange at a time, quantity, and value that
both agree on. Further, a common currency allows goods to be valued over time relative
to other goods, establishing prices that convey information about relative worth to buyers
and sellers. Only when a fungible medium exists and prices transmit information about
goods can individuals specialize as producers, allowing “the market” to penetrate time
and space in the way that the conventional narrative identifies as distinctive to
  See, e.g., Henretta 1991; Mann 1987; [Priest on modernization]; Rothenberg 1988.
   See, e.g., Landes 2003, 14-21; North and Weingast 1989; North 1981; Beard 1935.
The role of the state to identify legitimate coinage could be conceived as such an
advance. See, e.g., Goodhart 1996 & 1997, cited in Bell 2001, 152.
   North and Weingast 1989; Ferguson 1991.
   See Smith 1776 [1999], 109-121, 167-190.

modernity.13 Likewise, easily transferable credit provides an essential means for this
development: It allows capital to be stored and transferred so that it can be sought or
invested. Participants can thus borrow and lend funds, or profit by coordinating the
parties needing to do so.14
       Given the centrality of money and credit to the conventional history of capitalism,
it is striking that the history’s account of each medium is, basically, fictional.
        First, where money is concerned, the story simply does not fit the facts. The
invention and orchestration of money have not occurred spontaneously in any known
frame. To the contrary, money has consistently been initiated by an organized group, and
almost universally by an institutionalized public: monarch, parliament, or provincial
assemblies in the Anglo-American world, in coordination with a larger membership of
users. As an early Stuart court declared, “it appertaineth only to the king of England, to
make or coin money within his dominions. . . and if any persons presume to do it of his
own head, it is treason against the person of the king by the common law.”15
       All modern political systems have in fact distinctively created money, struggling
over its control, its definition and the methods of producing it; the sovereign claims to its
definition are only the most conspicuous evidence of that drama.16 In asserting the control
of the Crown, the Stuart court went on to detail a whole range of monetary issues,
including the legitimacy of debasement, the importance of a standard for contracts, and
the legal tender status of coins, all matters that would dramatically affect the fortunes of
those holding money and their society. The actuality that money is a matter of

   See, e.g., Friedman 1969. For reviews of the economic literature on liquidity, see, e.g.,
Priest 2001, 116-119; Levine 1997, 690-703.
   See, e.g., Rothenberg 1988, 126-165 (stressing importance of liquid portfolios in
modernizing America); North and Weingast 1989, 825 (considering importance of
investment and intermediation); Deane 1979, 53-71.
   Case of the Mixt Money 1605, 116. As the court continued, “the king shall have mines
of gold and silver; for if a subject had them, he by law could not coin such metals, nor
stamp a print or value upon them, for it appertaineth to the king only to put a value upon
coin, and make the price of the quantity, and to put a print to it; which being done the
coin is current; and if a subject doth this it is high treason at common law. . . to the king,
because he hath the sole power of making money.” Id. For “the royal prerogatives of
regulating the coinage and value of money, and the history of the exercise of those
prerogatives,” see also Liverpool, Treatise on the Coins of this Realm, cited at id., 113.
   See, e.g., Woodruff 1999.

governance in turn penetrated the colonial enterprise; clashes over money’s creation and
circulation cursed the relationship between the American settlers and imperial authorities
from the outset and contributed at last to the coming of revolution.17 And, at the end of
the century, the Federalists effected a change of literally constitutional dimension in
significant part through the reorganization of money and finance.18
       Even in economics, approaches newly attuned to the necessity of institutional
structures to define money, the path of the money supply, the expectations of holders, and
the predictability of future events have opened up new scholarship on money. That work
questions the more traditional macroeconomic assumption, still pervasive, that the only
issues raised by money have been answered by quantity theoretic approaches. By
contrast, it explores the impact of different rule systems on monetary value, the variation
in methods of creating fiat money, and the vexing tangles of technical, political, and
theoretical change that underlie the construction of modern money.19
       Nor is money, under any of these systems, just an item with a commodity value
that transparently represents the value of other commodities for purposes of exchange.
As a common resource that is produced by a group rather than a convention that springs
from bipolar exchange, money costs money to construct. Creating an easily transferable
medium that can be used for public payment in particular requires legal and political
orchestration. Groups undertake the effort because money offers a clear value to
participants as a collective or as individuals: its currency makes money worthwhile to
create and to hold. Money, quite literally, offers the value attached to the attribute of
liquidity apart from whatever intrinsic value it has as a commodity or as a token
representing a commodity value.20 The value attached to liquidity means that participants
are willing to “pay” for money – and they have in fact done so over the ages.

   See, e.g., Brock 1975; Ernst 1973; Nettels 1934.
   See, e.g., Grubb [Monetary Union]; Sylla 1999; Ferguson 1961; Beard 1935.
   See, e.g., Grubb 2003; Sargent and Velde 2002; Sylla 1999; Eichengreen 1996;
Calomiris 1988; Smith 1987; Smith 1985; Sargent 1982. See also the line of economic
analysis exemplified by George Knapp and his State Theory of Money. Innes 1913;
Knapp 1924; Lerner 1947; Wray 1998; Bell 2001.
   For example, a seller will generally charge more for a good if a buyer pays in
commodities than if the buyer offers money, which the seller will be able to use more

       Where credit is concerned, the standard story fares no better. The conviction that
the law on bills and notes exhibits a teleological movement towards negotiability has
obstructed the study of the practice actually undertaken by early modern merchants.
Those few scholars who have questioned the character of that activity have recovered
developments in commercial relations quite unlike those long assumed.21 The problem
begins with the kinds of exchange engaged by early merchants. According to the
evidence they left behind, those actors wanted commercial instruments that would help
them move funds from one place to another, most often back home again from the
foreign sites of sales. Or, they used credit instruments to engage in exchange lending, a
kind of arbitrage operation that allowed them to make a profit on the difference in
exchange rates. Neither sort of transaction required highly transferable bills and notes.22
       Nor, in fact, does the history of the courts support the hoary tale of a law
merchant as a distinct body of doctrine denied recognition by the common law for
decades. Commercial law cases were in fact adjudicated within common law courts from
the beginning; organized according to the procedural categories of the time, they long
eluded modern eyes looking for law organized around substantive areas.23 And those
commercial disputes that were determined according to the law merchant, whether in
local fair courts or the central courts of the realm, do not exhibit a specialized body of
law so much as a particular procedure, characteristically quick but not substantively
different from generally applicable doctrine.24
       Finally, the traditional account overlooks basic but inconspicuous connections
between money and credit.25 Or perhaps more precisely, the traditional account renders
those connections counterintuitive. Organized around the narrative of private movement
towards increased negotiability, it locates money and credit as parallel developments. As
the current focus on negotiability makes clear, credit can in fact function as a money
substitute: the credit substantiated in a book account recognizing a conveyance of goods,
or the note held to indicate a deposit or the extension of a loan, represents a claim to
   Rogers 1995; Baker 1979.
   Rogers 1995, 32-43.
   Baker 1979.
   Rogers 1995, 20-31.
   I am indebted to Farley Grubb for a number of illuminating exchanges that clarified the
following points to me.

value (money or goods) that records a partially completed transaction, allowing it to
proceed on the understanding of some future action, most often a reciprocation of
resources. In that sense, the existence of credit assists people engaged in an exchange.
That role, however, does not directly entail or require transferability.26 Nor, when such
forms of credit are transferred, do they represent the only way that credit can augment
        Credit also regularly functions more directly to constitute money itself,
specifically defined as the stock of tokens accepted in public payments and denominated
in the unit of account in which prices are set. Credit, that is, may not substitute for
money but actually compose it. In particular, if money is assumed to be the unit of
account, medium of exchange, and store of value in a society, circulating credit as
fiduciary or fiat money has regularly operated to increase the money supply in modern
Anglo-American societies.27 Circulating credit operates to expand or multiply the money
supply when it is made easily transferable and receivable for public obligations.28 At that
point, it adds a resource with predictable demand and supply beyond the pre-existing
money stock (specie, in metallic coin systems). The pre-existing stock can therefore
remain in circulation.29 Several strategies for deploying circulating credit to expand or
multiply the money supply have existed in the modern era, and the differences between
them will turn out to figure significantly in a new account of capitalism. Remaining with
the conventional account itself, the fact that circulating credit, both public and private,
has not only substituted for money but has, at times, constituted money itself indicates
that money and credit are more than parallel developments tending in the common
direction of greater liquidity. Rather, they are intertwined in ways that have defined their
courses and the larger political economy.30

   [Check Innes 1913]; see Bell 2001, 152 n.1
   I use “fiduciary” money here to refer to tokens issued on or convertible to a tangible
reserve. I use “fiat” money to refer to tokens issued without that kind of backing.
   See Calomiris 1988; Smith 1987; cf., Sargent 1982.
   See, e.g., Calomiris 1988; Smith 1987. The pre-existing money stock can also be
exported from the jurisdiction, in turn decreasing the amount of money in circulation.
[See Grubb; Michener.]
   There are, in fact, economic approaches that define money as credit per se: money is a
credit (and a debt) insofar as it represents an asset held by a party insofar as others would
be willing to accept it in payment, or a liability insofar as a party agrees to exchange a

       The history that follows argues for a different approach to both money and credit,
one that connects them and recognizes the importance of that relationship. It begins by
opening up that “universal equivalent” – the conventional means of exchange, money --
assumed by most commentators. Both history and economics, read institutionally,
indicate that money is not a simple commodity but a medium constructed by a practice
connecting a government (or a collective having the authority to collect funds) and its
members.31 A money becomes established as furnishing a unit of account insofar as its
issue under government auspices furnishes a predictable supply and its receivability for
public payments furnishes a predictable demand.32 Money acts as a medium in the
meantime insofar as it is allowed to be transferred and is accepted for payments, a quality
created and institutionalized in modern societies by public authority.
       The institutionalized public and its individual members all participate in the
orchestration that makes money. Individuals want money for all the reasons familiar
from the existing narratives of private exchange, and their actions put money into play
through the myriad interactions of ordinary life. But the institutionalized public needs a
currency even more particularly: while individuals in idiosyncratic exchanges may be
able to use currency substitutes (book accounts and promissory notes, for example),
communities in the collective enterprise of collecting revenue and coordinating
purchases find a more standardized medium necessary to maintain themselves.33 The
mutual demand of individuals and the public they inhabit to have money orients them to
the enterprise of creating it. The public and the private, then, are each intimately
involved, one with the other, in creating value.

resource for money. Bell 2001, 150-151; Innes 1913. Notice that the role of agreement
in this approach replicates or assimilates a legal relation of easy transferability, the
relation that will tie such definitions to the role of the institutionalized public. See infra.
   I suspect that this formulation, to be unpacked in future drafts, will align my approach
with those approaches to money in economics that recognize the role of an
institutionalized public -- the state for all practical purposes -- in determining a “decisive”
money – the currency whose denomination furnishes the unit of account in which prices
are set. See, e.g., Bell 2001; Knapp 1924.
   See. e.g., Calomiris 1988; Sumner 1993; Sargent. Put another way, government issued
tokens hold value effectively insofar as they represent a “claim” on a future asset – the
future revenue of the government. Cf. Bell 2001; Smith 1987; Smith 1985; Sargent 1982.
   For monetary consolidation as statebuilding, see Woodruff 1999, and as governance,
see Desan 2005.

       Orchestrating a currency of value involves not only money but credit -- just as it
is necessary to rethink the conventional approach to money, it is necessary to reevaluate
our assumptions about credit. Credit, as a claim on future resources, distributes the value
of those resources insofar as it can circulate. That quality is particularly important to an
institutionalized group, suggesting that a candidate other than the merchants actually
pioneered circulating credit. While merchants in the early modern period were resolving
the problems of moving funds from place to place, or taking advantage of the associated
opportunities, governments were faced with challenges on a more collective scale. They
too, confronted problems of moving money, and credit if not credit made current appears
as early as that problem. But as in the case of money, the particular problems of
coordinating a collective enterprise – mobilizing resources across many participants and
distributing those resources to maintain the polity – invited a turn to a more concerted
way to use credit as currency.34 The most significant forms of circulating credit in the
early modern period were not private; they were public.
       The way that credit gains currency is particular to the public and its members as,
again, a governance practice. Credit-based currencies allowed governments both to
expand their money supplies and to augment their revenues (or, perhaps more precisely,
to distribute those revenues differently across time.) From at least the medieval period,
political authorities did so by innovating new instruments of credit and by bestowing on
those instruments a quality that they only could bestow. The governments paid creditors
with tokens or notes that promised a credit on future tax obligations. They then allowed
these tax anticipation instruments to circulate, instead of paying interest for their use of
revenue before its time. While officials got the resources contributed by the creditors,
the creditors received an IOU that had value as a claim on future assets or, put differently,
had value given the demand for it relative to the supply of money.35 That token could be
used immediately (only) if it could be transferred. Creditors, in other words, received
valid money – real balances – for their advances, money that had been created when the
   [This may amount to circulating value in a standardized way across time as opposed to
space by coordinating its present use and ultimate availability by representations or
promises of value].
   The asset-oriented model is articulated in Smith 1987; Sargent 1982. The creation of
real balances conceived as a function of demand relative to supply is reviewed in Sumner
1993; Calomiris 1988.

state imposed a future demand for tokens supplied in the payments to creditors and
allowed those tokens to circulate in the meantime. The “negotiability” of circulating
credit sprang, then, from a public arrangement, not from private developments. As in the
case of other monies, the arrangement mediated the requirements of the institutionalized
public and its members.36
       When recognized as a medium orchestrated by a public and its members, money,
whether cash or credit-based, takes its place as a matter of constitutional dimension. Far
from a neutral conveyance, money poses a challenge for governments to produce in
concert with their participants: a medium gains liquidity when a public and its members
succeed in a pact over the treatment of a token as a current mode of payment.37 The dry
formulations of supply and demand recognize that constant; history in turn restores the
rich universe of political arrangements that can and have constituted the pact. Groups
can successfully orchestrate a medium in remarkably different ways, ways that variously
distribute authority, public and private roles, burdens, opportunities, and costs. The
practices that create value in liquidity are conceptual as well as concrete; with the
diversity of acted arrangements come changes in conceptualization – “rights,” “interests,”
and assumptions about agency are reconceived with changing relations of governance.
The way that value is made current, then, penetrates and distinguishes the character of a
political economy. “Capitalism,” I will argue, arrived with a new approach to that pact.
       Over the period commonly associated with the coming of capitalism (a term that I
use nominally), those in the early modern polities of England and America transformed
their approach to creating liquidity, the circulating quality of value that makes a medium.
The transformation affected both money and credit. Before the shift, Anglo-American
governments treated the liquidity or circulating quality of money as a domestic resource
for which each member appropriately contributed. Under that logic, government charged
their members for coining money. In addition, they anticipated the revenue of their
members in return for public acknowledgements of debt (credit instruments) that could

   In fact, the public model would pervade the way even private circulating credit was
eventually established; English and American legislatures would, as it turns out, frame
the transferability and acceptability of early banknotes as cash, a development that in turn
legitimated private credit.
   [cld cite Simmel; Knapp].

circulate. In that way, they expanded the money supply on the basis of credit advanced
by members: public notes or tallies circulated, providing current value to users even as
those credit mediums effectively anticipated revenues for public use.
       At a certain point, the same communities radically changed those practices.
Governments began “gifting” liquidity, or granting currency to instruments of value
without conditioning it on the contribution of members. Centralized authorities assumed
the cost of producing coins. More importantly, they stopped anticipating revenues by
trading that form of finance for the currency demanded by individuals. Rather,
governments bestowed liquidity on banknotes, making them easily transferable and
ordaining them as money when they made them receivable for public payments. Banks
making loans on the basis of fractional reserves met individual demands for a circulating
medium; they now collected the premium for liquidity that individuals were still willing
to pay. In turn, governments moved to borrow money, including that issued by banks,
through interest-bearing loans. In effect, they borrowed currencies already liquid as
opposed to paying suppliers and others with credit that anticipated revenue in a
circulating form.
       Implicit in the details of the shift sketched here is the claim that a change of
constitutional dimension occurred. As an economic matter, the new strategy changed the
way the money supply was created, encouraging growth in that supply and tying that
growth in significant part to a system focused on private incentive.38 The government
assumed the costs of the liquidity by paying for coinage or borrowing liquid assets for
interest. Insofar as demand for liquidity drove the government or individuals to borrow
in banknotes, the new device created a channel for private creditors to make a profit off
that demand by users.39 The new system appeared to reduce costs to individual

   [Calomiris 1988 on growth of the money supply]
   Ricardo 1817, ch. 27, web version at (Thanks to Roy Kreitner for this
reference.) I mean to distinguish here the premium paid by government or individuals for
loans made in money from the price paid by either for an advance of resources per se.
[Here, can demonstrate higher value of loan in currency than in a commodity.] A shift in
the first is what I want to identify – its significance may be substantial economically. It is
certainly substantial politically and conceptually.

participants, although those costs were actually paid in other ways – taxes used to finance
the mint or premiums paid to private creditors and lenders.
          The new design was itself a politics – in this case, to author money by employing
private incentive, undergirded by a system of publicly institutionalized demand, to
produce it. The arrangement reduced direct political control over money and, in
America, took the venerable issue of early paper money off the electoral agenda. Insofar
as government spending outran tax revenues, public borrowing became a far more
appealing way to pay for the overrun than anticipating future taxes had been. Under the
old system, as decision-makers issued notes anticipating taxes into the future, they had
also to emphasize the predictability – indeed the unavoidability and significance of –
taxation in order to underscore the credibility and therefore value of their bills. Under the
new approach, decision-makers could limit present taxes to pay off the interest of
borrowing, and leave the load of the principal for later.40
          Legally, the new system shifted in focus by substituting one anchor of monetary
stability for another. In the earlier system, participants had identified taxes as a critical
civic obligation in part because the levy transparently supported the money supply and
the currency it made possible.41 In the new regime, they would conceive of private
property – the security of the money reserve held by the banks – as the indispensable
safeguard for a functioning system of economic exchange.
          In these and other ways that remain to be explored, the new approach to money
and credit transformed the political economic order. The old system had defined specie as
a sovereign resource and circulating credit as a largely local instrument that brought
opportunities and problems to participants in the community; both currencies were public
media evidently dependent on political authorship and popular contribution, coerced or
voluntary. The new system cast metallic money as a “costless” commodity medium and
credit as an instrument for enterprising individuals, including those from outside the
political community. Both media appeared to supply liquidity on the basis of private
choice without public charge or, indeed, even political authorship.

     See, e.g., Morris 1782.
     See, e.g., Mather 1690.

         The story of money, credit, and capitalism as it is reconceived diverges from the
standard modernization narrative. Making money becomes itself a constitutional effort, a
challenge that requires legal and political orchestration. Credit is intimately involved in
the enterprise, a fact that suggests its role as well in the constitutional drama. In fact, the
political economy of each modern period has turned distinctively on the practices and
conceptualizations inhering in the social orchestration of money and credit. In particular,
recognizing the transformation in that relationship that occurred in the early Anglo-
American world reframes the advent of capitalism. Rather than an incrementalist matter
of material development, it appears as a distinctive political economic strategy or, put
another way, a strategy that distinctively claimed to split the political from the economic.
Political authority had publicly orchestrated the circulating quality of value in the early
order, understanding money and the market it created as a matter of public debate. Now,
it furnished that quality of currency to individuals and identified private productivity as
the heart of the market. Governance, once modeled as a concerted enterprise, became
reconceived as a frame for individual action.

A Counterhistory, Part I: Currency as a Common Resource – Leveraging Sovereign
Authority over Liquidity
         Commentators in the early modern period energetically claimed money as a
precious common resource. “In every commonwealth, it is necessary to have a certain
standard of money,” an early English court declared, “for although in the first societies of
the world, permutation of one thing for another was used, yet that was soon found
cumbersome, and the transportation and division of things was found difficult and
impossible; and therefore money was invented, as well as for the facility of commerce, as
to reduce contracts to an equality.”42 “As the medium of trade,” a New England pastor
propounded in 1682, money “answereth all things”:
                For where it is in plenty, no buyer will be bound to one person, or market;
                nor purchase credit at the grantor’s price; nor be necessitated to become
                servant to the lender, if he have money to answer his occasions; nor will
                run the hazard of trusting. … [Money] likewise, multiplies trading;
                increaseth manufacture, and provisions[,] … forwards the improvement
                both of real, and personal estates; promoteth the settling of new
     Case of the Mixt Money 1605 116.

                plantations, and maritim[e] affairs; encourageth heartless idlers, to work;
                redeemeth time labour, and expence, greatly consumed in higling up and
                down to suit pay to content, abrogateth the mystery of trucking, by sinking
                barter, and reducing all bought, and sold, to the English standard…43

Franklin lauded money as a “general medium” that “is to those who possess it… that very
thing which they want, because, it will immediately procure it for them, it’s cloth to him
that wants cloth, and corn to him that want corn…”44
        Money brought its benefits not only to individuals, the paradigmatic agents of the
conventional modernization story, but also to the society as a coordinated enterprise:
governance across a community of any size could hardly occur without a common
medium in which to pay the costs of the public. As an early provincial agonized about
the exigencies of frontier life:
                We are surrounded with adversaries . . . if we cannot find a store of men
                to expose themselves for us at this time, no man in his wits, can think the
                country can stand: these men must have mony to reward and support them
                in their services, or they can do no more.45

Money, as one colonial American put it simply, is “the vital spirit and blood of the body
        The quality that made money so valuable to both governments and their members
– its liquidity – located it as a common resource to be defined within that relationship.
Money would be a matter negotiated within the terms of power, conceptual categories,
and technical possibilities that connected these participants. it would in turn pervade
those dynamics, changing the character of the interaction. Exploring the different nature
of the “markets” and for that matter, of the politics and societies acted out with the
definitions of their mediums, is far beyond the ambition of this essay. The essay, rather,
by sketching the main lines of the transition towards capitalism, aims instead to invite
exactly that inquiry.

   Severals Relating to the Fund 1682, in I Davis 1910, 112-113; ibid., at 118-119
(suggesting identity of author as Rev. John Woodbridge).
   [Atkinson plagarism 1743, 10-11 [replace w/ Franklin original].
   Some Additional Considerations, I Davis 1910, 203. See also, e.g., the refrain of early
American governors who identified the need for a public medium and the difficulties that
bedeviled the later years of the American Revolution.
   Rawle 1725, 5.

       Until the Restoration, the English public produced its money in a particular way:
it paid for its coins and carried the circulating credit of the government without charging,
or without charging fully, for interest.47 The arrangement allowed the sovereign to
produce coins, and to do so without paying for the process. At times, in fact, the state
may even have made a profit. Moreover, at some point during the medieval period, the
Crown began to expand the money supply of metallic money by using instruments of
circulating public credit that did not bear interest. The same strategy acted as a form of
public finance, extending the Crown’s reach for future revenues. Holders received more
than an IOU, however, given the capacity attributed to the instruments by the sovereign
to circulate as currency. In the American colonies, a similar set of monetary and public
finance options existed. Settlers used coin that had been minted according to existing
practices elsewhere. More distinctively, all the provinces began to issue paper money,
another form of public credit that anticipated future revenues without bearing interest.
       The equilibrium that characterized the early Anglo-American societies – the way
governments effectively leveraged public authority to produce a circulating medium –
helped configure the political economic order, defining the amount of money and public
credit in circulation, the avenues political, legal, and social that produced those forms of
value, and the approach people took to conceiving money, monetary policy, and the
market more generally.

       A. The Practice of Coinage
       The gold florins, nobles, and sovereigns, the silver shillings and groats of English
history are deceptively simple coins. From Charlemagne’s first and only issue – the
silver penny – until far into the nineteenth century, the English struggled to issue and
circulate a coined money that paid for public needs and supplied a medium for
individuals, one that resisted wear and tear, defied counterfeiting, supplied a sufficient
small change, and survived periodic debasements. Out of that history, one of the relative
constants was the sovereigns’ approach to minting. Traveling under the strangely
misleading label of “free minting,” the system operated to make coins available for a

  As the draft suggests, recipients of credit instruments may have found was to get partial
payment for accepting a draft rather than specie. See infra TAN ___.

charge to those bringing in bullion. (The coins could be “freely” minted, albeit for a fee,
in the sense that the sovereign stood ready to convert into coin as much specie as was
brought to it.)48
        The system depended on the fact that coins, because of the liquidity value they
offered, were generally worth more than their weight in silver or gold. Because holders
could buy other objects more easily in coin than in bullion, they preferred to hold coins
than specie and were willing to pay for the convenience. Given the extra value that
attached to coins, early modern governments could charge those bringing in bullion for
providing the service of minting. In fact, sovereigns imposed a fee to cover production
costs, a sum to the “moneyers.”49 In addition, they added a production tax, seigniorage,
that raised public revenues. The men at the mint often levied another amount informally,
a personal fee for service as it were.50 Total official charges could be quite significant:
setting aside the period of the Tudor debasement, when charges for money reached as
high as 61 per cent, total costs for converting bullion to coin ranged from 2.2 to 12 per
cent of value of the money coined.51 Americans assumed the same system. In their brief
attempts to make copper pennies in Massachusetts, they replicated English practice,
charging individuals for the coins.52
        The free minting system structured the way coined money was produced. As long
as it was worthwhile for people holding bullion to pay the cost of converting it into coins,
they brought their metal to the mint. When coining costs were too high, they waited or
even began to melt coin. Their decision, to mint, wait, or melt, depended on the price
level for goods in coins. As long as prices traveled in a certain interval, it was
worthwhile for people to use coins that could be purchased for a price because they still
held a higher purchasing power as coins than did silver or gold.53

   Feavearyear 1963, 3.
   Feavearyear 1963, 3.
   Feavearyear 1963, 3; Sargent and Velde 2002, 8-9.
   Feavearyear 1963, 3, 435-436. Feavearyear’s appendix tracks total seignorage and
production charges, where available, for silver and gold from Alfred’s reign through
   Mossman 1992, 80 (identifying seigniorage at Massachusetts mint as 7.5%); [check
Sumner, Coin Shilling 1899].
   The price interval within which the coined money supply would be stable was bounded
by a lower limit, the “mint equivalent,” and an upper limit, “the mint price.” When prices

       As that condition suggests, the interval within which a stable supply of coins
would circulate depended on the government’s policy – its charges for coining. The
higher those charges, for example, the greater the value of coins had to be (the lower
prices had to fall) before people would coin money.54 Seigniorage policy in turn
depended on a complex array of factors, including the costs of coin production, the
competition from other producers (foreign mints or counterfeiters), the circumstances
affecting domestic prices, and the availability of bullion.55 The complexities were
compounded by the circumstance that money, as its users so blithely assume, should
circulate in different denominations. But coining costs varied for each coin, as did prices,
given the advantages to users of holding certain denominations -- small change in
particular is the only coin that can facilitate small transactions, the most common
exchange of everyday life. The difficulties of setting relative price intervals so that all
coins would circulate bedeviled early governments.56
       The challenges posed by the “big problem of small change” led to chronic
shortages of small coins. That kind of currency shortage – a money scarcity in the sense
that more currency could have eased the problems (lowered the transaction costs) for
individuals trying to makes exchanges – could have contributed to early English attempts
to expand the money supply by using public credit.57 That credit strategy had, however,
clear advantages of its own. In any event, the case of coinage is clear: Until the mid-
seventeenth century, early English governments charged money for money. Their
members assumed as much, and the politics of producing coins, the approaches to
economic exchange, the assumptions about the market, and the images of money that
resulted, all would be affected by that practice.

fell below the lower limit or mint equivalent, coined money had gained in value, and
people would go to the mint. When prices exceeded the upper limit or mint price, coined
money had lost value and would no longer purchase more than its metal content of silver
or gold. People would melt coins in this circumstance and try to use the value of bullion
directly. Sargent and Velde 2002, 8-9.
   [Develop, Sargent and Velde 2002].
   See Sargent and Velde 2002, 8-9; Feavearyear 1963, 3-7.
   See generally Sargent and Velde 2002.
   [Consider w/r S and V are actually showing depreciation to be consistent with money
shortages in the sense that would be changed by the turn to banking, i.e., before the
“standard formula” is figured out.]

       B. The Innovation of Public Credit as Currency
        The silver and gold of the early modern period, meeting so perfectly the
monetary imagination of later centuries, overshadows other, less expected monies. In
both England and America, however, governments created money based on public credit
– fiduciary or fiat currencies with a value set by their anticipation of in-coming tax
revenues.58 Invented in circumstances as varied and exigent as much of community life,
they filled the practical needs of their publics, both financial and monetary. They most
obviously functioned as a mode of public borrowing, effectively extracting advances of
revenue, generally interest-free, from participants. At times, the currencies functioned
coercively, leaving creditors with tokens they berated as less credible and less valuable
than specie. They were tolerated in some periods and places, and indeed demanded in
others because they provided an instrument that could circulate as money. The structure
of public authority, the reliability of redemption or retirement, levels of elite and popular
knowledge, the momentum of debate over money, together with community expectations,
all affected the character of the medium and the tenor of the political and economic
exchanges it produced.
       “Tallies” reflected their early medieval origins in picturesque detail: they were
pieces of notched wood, sticks marked to reflect a certain amount of money by cuts of
different sizes. Initially issued to certify the receipt of money in the English Exchequer,
the stick would be split down the middle, so that one half could be held by payer, while
the other could be kept at the Exchequer. The fit of the halves would later certify that the
holder had indeed deposited money.59 Style gave way to function at that moment.
       Officials originally gave tallies to tax farmers to signify a payment to the
Exchequer; the recipient would later use his half to certify that he had submitted all the
money due on his account. By the fourteenth century however, tallies or the “writs of
assignment” that accompanied their issue, were already being used as a form of public

   The token coins of the same period – copper, tin, and cheap alloys – also fall out of
most models of early money. For a striking exception that documents the importance of
understanding the role of those tokens, see Sargent and Velde 2002. See also, Mossman
   Chandaman 1975, 286; Feavearyear 1963, 110.

credit: the tally (or writ) would be issued directly to a public creditor, who would use the
tally (or writ) to claim funds from a tax farmer. The strategy effectively anticipated
revenues due to the Exchequer, allowing them to be employed before they were
received.60 “English medieval finance,” writes one scholar of the medieval period, “was
built upon the tally and the assignment.”61 During certain years, the great majority of the
Crown’s creditors were paid by way of tally; very little specie would ever need, in that
case, to come into the Exchequer.62
       At some point, apparently before the end of the fourteenth century, tallies and
similar instruments likely began to circulate. Without formal legal sanction, the practice
seems instead to have arisen with the compliance, and perhaps profit, of the officials who
mattered – those in the Exchequer in charge of certifying the course of public payments.
Those clerks needed only to allow tallies to be paid off by local officials without proof
that the person cashing them was indeed the creditor to whom they were originally
issued. Tallies apparently changed hands at a discount, sometimes a deep one during the
reign of sovereigns who were failing to collect revenues or redeem the obligations they
had pledged on them.63 Tallies remained in wide use through the middle ages.64
       By the seventeenth century, the form in which tallies circulated had changed, but
the practice apparently remained pervasive.65 The “sol” tally of receipt had displaced a

   See, e.g., Steel 1954, xxix.
   Steel 1954, xxix; see also Glyn 1994, 146-152; Willard, [Writs of Assignment]; Steel
   One scholar, studying the early years of the century, found that tallies were used more
pervasively during peacetime. Willard, [Writs of Assignment]. By contrast, the demand
of soldiers for tangible money produced a reduction in the use of the tally in some war
years. Steel, reviewing the later practice of the Exchequer describes a change to greater
use of tallies during wartime and periods of exigency when existing revenues failed to
meet present needs, leading sovereigns to anticipate taxes by tally. Steel 1954, xxxiii.
   Steel 1954, xxxvi; Steel 1929 (detailing negotiation of “debentures,” another form of
public credit). The discount, taken off the face value of the note, allowed those taking a
tally from an original creditor to be paid for the risk that the tally would be dishonored
without (obviously) flouting usury laws. Steel 1954, xxxv-xxxvi. Discounting in the
transfer of tallies between holders reflected the flawed credibility of the instruments in
certain reigns or conditions; it did not reflect a payment by the sovereign to the creditors
it paid. For more on that possibility, see infra TAN ___.
   Steel 1954, App. E, Graph II; other.
   Chandaman 1975, 287-295. Chandaman, an historian of the English revenue,
identified the pattern as he reconstructed Exchequer payment practice to understand the

more formal counterpart in Exchequer practice, apparently because it was more easily
transferable.66 According to comprehensive study of the Restoration Exchequer, the sol
tally had such “large-scale employment . . . for purposes of anticipation” of the revenue,
that the records were “completely falsified” if read without caution.67 As it became “the
normal instrument of revenue anticipation,” at least by the Restoration, the sol tally was
often cashed several years after it had been issued, “during which such a tally might well
change hands more than once or be discounted with a goldsmith banker.”68 The
frequency of the practice suggests it was a familiar device, assumedly in place far earlier.
By 1666, Samuel Pepys, navy administrator and loquacious diarist of Restoration
England, would write in passing that he arranged to have “some little tallys made me in
lieu of two great ones, of £2000 each, to enable me to pay small sums therewith.”69
       Until 1660, tallies do not appear to have borne interest, which was authorized by
statute in that year.70 By contrast, sovereigns may have discounted tallies as they issued
them in order to provide a security for money lenders: in return for an advance of money,
tallies could be issued for a greater amount, effectively paying interest for the loan.71

flow of early modern revenue. Specifically, by tracing the entries of receipt and
payment made to balance accounts, Chandaman figured out that both “sol” tallies of
receipt and “pro” tallies of payment were being used pervasively to advance money to
creditors. See also the description of the process by Lowndes, C.M., Add. MS. 15898, ff.
   Sol tallies recorded only the date, amount deposited, and person and standing of the
person making the deposit; unlike the more formal “pro” tally, sol tallies did not identify
the person to whom the payment (“pro”) should be made. Chandaman 1975, 287.
Historians of the earlier practice note that the pro tally could also be assigned, although
apparently with more difficulty. Id., 294. See also Steel 1954, xxxvi (noting that
language of “pro” tally allowed transferability during the medieval period, apparently
relative to the yet more restrictive language of other instruments).
   Chandaman 1975, 300-301.
   Chandaman 1975, 293. According to Feavearyear, tallies by the Restoration were
negotiable by endorsement. Feavearyear 1963, 110.
   Wheatley 1926, 284 (May 30, 1666); see also id., 306, 310, 312, 353.
   Richards 1929, 59; 12 Chas II, c.9 (1660).
   McFarlane 1947. It seems possible that sovereigns also discounted tallies given to
anticipate revenue by paying more for advances of goods and supplies than they would
have with specie. That practice would have reduced the advantage of the tax anticipation
strategy, making it an expensive way to pay for goods. The strategy would, however,
have left fewer reasons for sovereigns to allow the tallies to circulate, especially since it
would assumedly increase the price that would have to be paid to lenders of liquid

       The Americans, chronically short of specie for purposes of domestic payment and
exchange, took the concept of public credit to a whole new level. Colonial paper money,
“bills of credit” in the vocabulary of the day, were in fact non-interest-bearing tax
anticipation notes that circulated.72 They acted as money in all but name – a difference
that allowed the provincial innovation to develop without formally invading imperial
authority to define money. How effectively that authority was invaded is, however, one
of the more fascinating dramas of the early American world. The American legislatures
rose through expanding their power over domestic money and finance eventually to help
divide the Empire.73
       American practice began with the same problem that plagued early Exchequer
officials: public creditors needed to be paid and the tax revenues to satisfy them had not

advances. Independent of that consideration, it would also be less likely either where
more coercion existed or, ironically, where more public support for the creation of a
circulating credit existed. The issue whetehr discounting hid an interest payment would
be easier to investigate in the case of American bills of credit. In the colonies, bills
furnished virtually sole currency for paying public creditors. The prices paid by the
government in newly issued tax anticipation notes were not, as far as I know, higher than
the market price in those notes. [to be explored] (In exploring the possibility of hidden
interest charges, it would be necessary to distinguish the discounting that occurred
because sovereigns were not reliable. On the other possibility that interest would be paid
to compensate for the reduced liquidity of tokens not directly receivable for government
payments, see Bell 2001, 158-161.)
   The term “bill of credit” has probably influenced the general consensus that American
paper money was modeled on private commercial credit. See, eg., I Davis 1910, [pages].
In fact, the colonists were probably copying public instruments, either English tallies, the
Restoration payment orders that postdated tallies, or various token coinages. See infra,
TAN ___. The language of the bills of credit most closely resembles the language used
by James I to authorize the circulation of copper token money, a fiat currency in that
sense relying on the credit that it would circulate. See Proclamation of 19 Jan. 1613, in I
Larkin 1973, 288. [Compare/Consider here – language of writs of assignment]. The
provincial bills could not, of course, claim a public status, given imperial insistence that
identified the power to make money with sovereignty. See, e.g., the Case of the Mixt
Money; [other]. Thus the Americans referred to their paper money as “bills of credit,”
the name of the credit instruments used by individuals.
   The expansion of American legislative power over the purse turned on a long
institutional struggle larger than the invention of paper money. See generally Greene
1963; Labarree 1930; see also Desan 1998. The paper phenomenon did, however,
significantly contribute to the Rise: when Americans began printing paper money, they
literally located a money supply in the hands of their own treasurers, marginalizing the
amounts controlled by gubernatorial agents and advancing the provincial campaign to
author appropriations. See also infra TAN ___.

yet arrived. In the provinces, however, the challenge was relentless and the turn to credit
correspondingly dramatic. Americans began with a shortfall: the mercantilist logic of the
Empire generated laws prohibiting the export of English coin from the mother country.74
The situation only worsened: the balance of payments cut consistently against the
provincials, draining specie to England as Americans imported refined goods and
exported ruder resources.75 The demands of Empire worked against the provinces in
another way: the wars of imperial aggression waged between England and France during
the eighteenth century unsettled the new world. Pressed to defend their territory, patrol
the seas, or advance into foreign-controlled territory, colonial Americans drafted and
outfitted militias, marshaled expeditions, and built defensive bulwarks. The expenses of
peacetime civil life added a lighter but more constant layer of demands.
       American representatives in Massachusetts issued the first paper money as a
temporary measure to pay soldiers returning from an ill-fated expedition to Quebec.
After an early slide in value, the bills stabilized, and Massachusetts institutionalized its
practice. Settlers across the mainland soon copied the system and refined its details. By
1712, paper money was in use in South Carolina, Connecticut, New York, New
Hampshire, New Jersey, Rhode Island, and North Carolina. Both Pennsylvania and
Maryland inaugurated paper money regimes in the following decades. Virginia, which
had long relied on a different kind of paper – tobacco notes – began issuing more
conventional bills of credit during the Seven Years War.76 Although it is not possible to
quantify the amounts of paper money in circulation, it appears to be the most widely used
currency paid to public creditors, certainly in wartime.77 By other estimates, it was
commonly used in everyday life.78
       Paper money operated according to the same principle as tallies. The bills were
virtual IOUs, each for an amount denominated in the colonial unit of account.79 Their

   Priest 2001, 120; Nettels 1934, [page].
   See, e.g., Breen 2004 [page cite]; Ernst 1973; Nettels 1934.
   See Desan 2005, 17.
   See [scholarship on Seven Yrs War].
   See Grubb, [PA paper]. [Adjust / explain contested nature of information about
quantity of money in circulation].
   Brock 1975, 17-19; I Davis 1910, 23. The face value of the note did not refer directly
to English shillings at sterling value. While the colonists used English units of accounts

face asserted that they were “in value equal to money” and would be accepted by the
provincial treasurer for money due to government officials, including taxes, payments, or
fines.80 That is, paper money could be used instead of silver or gold to pay off public
obligations; the value of the bills depended on the fact that they would be good for the
continuing demands of government.81 Accordingly, colonial representatives committed
their governments to retire and cancel public bills of credit through regular levies; a
failure to bring in the bills would cause them to lose their value.82 In the meantime, the

and English silver currency as a common standard, they also developed systems of
accounts that were colony-specific. The most common specie in many colonies was
foreign coin; Americans thus defined the value of their colony-specific units of account
relative to amounts of foreign specie. See, e.g., Act of June 8, 1709, I N.Y. COL. LAWS,
at ___; Act of Nov. 1, I N.Y. COL. LAWS, at ___. (In fact, the value of foreign coin was
generally inflated by each province so as to attract it to them (see supra note __ [noting
this effort to get specie]); a foreign coin with a worth of 4s. 6 d. sterling might be valued
at 6s in American currency, for example.) Foreign coin was, in turn, often named as the
“current lawful money” of the province, and American currency values referred to that
standard of value. Nettels, at 180 & n.4; Brock, at 148-167 (reviewing colony-by-colony
arrangements [check]). [Check all ag/ McCusker]. The legal ratios between colonial
money and foreign coin could be and were of course translated into the legal ratios
between colonial money and sterling. Nettels, at 181. Legal ratios were not, however,
fixed as exchange rates. See B. Smith, at 531a, 536c; Priest, at 155 (regarding
Massachusetts); McCusker [get cite]; cf. Nettels at 181. But see Michener, [get cite]
(arguing that exchange rates were effectively fixed according to merchant custom).
   The face of the first bills read in full: “This indented bill of __ shillings, due from the
Massachusets Colony to the possessor, shall be in value equal to money, and shall be
accordingly accepted by the Treasurer and Receivers, subordinate to him in all publick
payments, and for any stock at any time in the Treasury Boston in New-England.,
December the 10th, 1690. By order of the General Court.” Savage 1691, 13.
   As a typical statute put it, the notes could “be received for payment of the tax which
was to be levied, and all other payments in [sic] the treasury.” Brock 1975, 22. Actual
redeemability in specie gave bills of credit tangible backing. Bills without redeemability
also held value as long as they fulfilled a requirement imposed by public authorities. See
infra TAN __; see generally Calomiris 1988. For some authors, simple
intercontrovertibility was preferable because it avoided the problems raised by
redeemability. See, e.g., John Webbe, "A Discourse Concerning Paper Money" (PA,
   Brock 1975, 28; see infra TAN __. America legislators soon added another device, one
that also rested on a repayment agreement, to their methods of issuing money. Colonial
governments became lenders, offering bills of credit to borrowers who could secure their
loans with a mortgage on land. The paper money that borrowers received could be used
to pay the interest and the principal on the loan, as well as turned in for taxes. See, e.g.,
Brock 1975, 18-20; Priest 2001, 43-44.

notes could circulate as currency. In many colonies, most notably the mid-Atlantic
region, paper money held its value well.83 Several governments experimented at first
with attaching interest to circulating currency in an attempt to secure that value yet more
conspicuously; they generally abandoned the effort given its cost and inconvenience.84
       Tallies and tax anticipation notes, like other early modern methods of public
credit85, put resources in the hands of the state. That body got the use of the creditor’s
resource while postponing payment with a note that could only be cashed when tax
revenues came in or, in the American case, when the tax obligation came due.86 Until the
mid-seventeenth century in England and the late eighteenth century in America, the
advance came at no or lower cost to the state, insofar as tallies and bills of credit bore no
interest. They had obvious advantages, then, for those facing demanding public creditors.
       Tallies and bills of credit carried an advantage for creditors as well, one that set
the public bills apart from private notes. By making the tokens receivable for public
payments and by allowing them to circulate, Anglo-American governments ordained
them as money. First, the issue of tokens paired with their predictable use at tax time
established a demand for them and set out the path of their supply.87 The quantity of the

   Smith 1985, 544-549, 556-562; Bernholz 1988, 25; Michener 1987, 234, 237; Brock
1975, 74; Wicker 1985, 869, 870; Lester 1939. During the nineteenth century, hard
money sentiment informed a historiography that, identifying experience under the
Revolutionary continental with that under earlier paper money, inaccurately projected
that paper monies could not represent real balances and would inevitably depreciate. The
influence of those arguments is still widespread in late twentieth century sources.
   Nettels 1934, 263-264; Newman 1967, 15, 51 ff (for examples of retirement or
redemption pledges); see also 12 Journals of the Continental Congress 1242 (rejecting the
payment of interest on government debt as inconsistent with the past practice of
sovereigns generally).
   One of the most striking innovations was “siege money,” promises to pay printed on
or represented by pieces of leather, metal, or paper, that cities used as money when they
had been cut off from the outside world by enemies. In the late fifteenth and sixteenth
century, towns in Spain, the Flanders, and Holland circulated siege money when they
were surrounded by Arab and Spanish forces. See Sargent and Velde 2002, 218-222.
   American paper money was rarely redeemable for silver or gold nor did it so promise,
since colonial governments had no silver and gold.
   See, e.g., Sumner 1993; Calomiris 1988; see also Smith 1987; Smith 1985 [American
Colonial Monetary Regimes]; Sargent 1982.

tokens using a given unit of account would thus affect the price level, stated in that unit.88
(According to current macroeconomic theory, the issue and acceptability of a token for
public payments, rather than the formality of legal tender, thus identify a token as
money.89) In turn, the fact that tokens could travel hand to hand meant that they could
function as a currency.
       Those qualities meant that tallies and bills of credit could, assuming adequate
taxation, add real balances – money with real purchasing power – to the money supply.
Economists have in fact modeled the dynamic in the case of American paper money.
There, when notes were denominated in terms of specie and the tax obligation, which
could be satisfied in either medium, was large enough to absorb the aggregate amounts of
specie and paper available, bills of credit added to the stock of money for public or
private use.90 Put more intuitively, the issue of paper money allowed a government to
pay off a creditor and then cancel its IOU by imposing an additional tax obligation worth
a certain specie amount without taking specie out of circulation.91
       Tallies in early modern England would have held value in the same way,
providing that sufficient taxes were imposed.92 The practice may not have appeared at all
obvious: Exchequer records were designed to match tallies issued with liabilities owed
   [Adjust to correctly convey effect of token if money on price level]. [Add caveat from
Farley concerning the possibility of getting a split in the price level of the two
   Bell 2001, 155, n.2; Wray 1998, 32; [check Sumner 1993; Calomiris 1988]. A
declaration of legal tender status does not, itself, create the conditions for users to predict
demand for a token and a path for its supply such that it would represent real balances. In
colonial America, for example, bills of credit circulated successfully if they were
properly managed, whether or not they had been declared legal tender. That declaration
would, of course, be necessary for notes to circulate if users assumed a background
prohibition on transferring it to each other.
   Grubb [Two Theories of Money Reconciled]; Sumner 1993; Calomiris 1988; Smith
   Grubb [email, 4/10/06]. [To be added: 1) relationship between addition of real
balances, liquidity, and deliberate depreciation; 2) remaining costs to holders.]
[Depreciation per se wld not be helpful if cancelled out by need for just as many more
notes to pay off debt.] [Remaining cost to holders = in lesser price that holders are
willing to be paid in money than in commodity?; for possible relevance check Bell 2001,
156 n.2.]
   Cf. Steel 1954, xxxvi; Glyn 1994, 149. Steel assumes that the use of tallies “expanded
the currency,” as does Glyn, but does not detail how. The anticipation of revenue alone
would not suffice if all tallies had to be redeemed by specie. [Check]

by tax farmers, so that all public creditors would assumedly go to those collectors and
trade their tallies for coins. But a public creditor who owed taxes may also have turned
the tally in for that obligation, without claiming any cash at all, or circulated the tally to
someone who could use it in that way.93
        The way early modern governments in England and America made money out of
public credit instruments resembled the way they made money out of metal: They
leveraged their sovereign authority to exact a contribution from users in return for the
construction of a common resource. In both cases, holders contributed to the state,
paying production and seigniorage fees when they brought money to the mint, or
forbearing interest on the public IOUs they received as tax anticipation notes. In return,
members received a circulating medium, one that was worth real money to them.

        C. The Early Modern Equilibrium
        The strategies used to produce money in early modern England and America
distinctively influenced the political economic orders of those communities. Most
obviously, the strategies used to make money conditioned the amounts that circulated and
the politics that produced them. In the case of coin, the policies adopted by the
government on seigniorage in interaction with conditions setting the prices of goods and
bullion affected how much metal would flow to the mint. The struggle to produce and
protect specie currency drove English policy at both the domestic and the imperial levels.
In the case of public credit instruments, the success of using credit as money depended on
the practice and perceived legitimacy of their issuing and retirement through the levying
of taxes. That structure put particular power in the hands of those determining how many
tokens to issue relative to tax levies – the Crown in Restoration England, the legislatures
in early America. In addition, it relied quite transparently on the cooperation of taxpayers
to support the value of money, a circumstance that gave them some real power to

   Speculatively: In such a system, the money supply could assumedly be further
expanded (and the government could get the present value of issues immediately) insofar
at the government “anticipated” taxes further into the future. In order to support that
system, however, the government would have successfully to stress the reliability of
future taxes and bills might have to be receivable for taxes any given year. In such a
system, the complaints of taxpayers could be mitigated insofar as higher levels of
circulating real balances would allow [nominal] interest rates to fall. [Check Calomiris]

destabilize the system. The characteristics of each strategy therefore produced particular
amounts of money, an issue that would affect economic activity in various ways. More
broadly, the politics of each strategy intimately informed the political dramas of the early
modern world.94
       Somewhat more elusively, the early modern equilibrium entailed certain
assumptions about the political economic order. Money seems to have been theorized
explicitly as a public resource – recall the emphasis placed on it by the commentators
who opened this section. That assumption figured in the debates on money and the
relations it made possible. In colonial America, for example, paper money became a
prime area of popular debate: when the provincial assemblies took over the issue of
paper money, they made monetary policy a matter of electoral relevance. The intimate
impact that issues about the currency had on daily life energized voters; paper money
became a hot issue in eighteenth century campaigns. As Benjamin Franklin commented
about the paper money in early Pennsylvania, it is “now the chief concern of my
countrymen.”95 “[W]e are drove to that pass,” commented one of his contemporaries,
when “the single question” about a candidate is, Whether he be for or against paper-
currency, that’s the standard and rule.”96 The paper money debate developed in rich
waves over the course of the century. As I have explored elsewhere, that discussion
configured a public agenda that located money as a beneficial force – a medium able to
further economic development, enrich social exchange, rescue debtors, inculcate an
honest and industrious culture, and pay for defending the public.97
       More speculatively, the perception of money as a resource produced by common
action overseen by the sovereign may have supported contemporary attitudes on usury;
the use of money would be less naturally claimed as something owned by individuals on
which they could therefore profit. As for the relationship of individuals to the state, it

   For an idea of the dramas that public policy over coinage entailed, see Sargent and
Velde 2002. For an idea of the dramas that public policy over tax anticipation methods
entailed, see Desan 2005.
   Franklin 1729, 14.
   A Dialogue Shewing 1725, 22.
   This observation radically summarizes the contemporary debate on paper money and
its issue. See Desan 2005, “The Politics of Paper: A Working Currency for a Middling
Man’s Market” (in progress).

seems at least clear that citizens did not assume that they should obviously “charge” the
public for money. Action in one’s own interest would more naturally play, before the
Restoration, as a vice or necessary evil.98 Conversely, there would be less room for the
notion that lending to the state for interest was a civic good, or within a generalized ideal
of citizenship. In his intellectual genealogy of self-interest, Albert Hirschman dates its
transformation from vice to virtue (or at least beneficent distraction from more
destructive impulses) to the 1660s. Potentially, then, the turn depended on the next part
of our story.
       First, to set the stage. As the history above suggests, early governments faced
significant political, if not theoretical, barriers to raising funds for public finance. The
burden of raising money fell heavily on taxation: sovereigns could tax directly, or they
could try to expand the money available for public use by anticipating revenues further
and further in advance, emphasizing the taxes to follow. Those difficulties moved
sovereigns to exploit other means of raising revenue – the traditional repertoire included
militia rates and ship money, sales of lands, monopolies, and licenses, colonization,
forced loans, and impositions.99 The early Anglo-American governments could also
borrow money voluntarily loaned for interest. In those cases, they paid for the use of a
medium already “liquid,” if you will. There was no reason to bestow easy transferability
as part of that arrangement, and liquidity was not an important attribute of the credit
instruments that marked these loans. The debt could be represented in a note or bill that
did not circulate, or in notes to very few lenders.100
       That kind of public borrowing would not compete with tax anticipation methods
or undermine the willingness of public creditors to trade their claims to revenue for notes
that circulated. The difference in whether public credit notes circulated depended, after
all, on whether the state was acquiring liquidity or creating it in exchange for an advance.
As occasional practice during the medieval period may have suggested, however,
repaying genuine loans could sometimes be done by using tax anticipation devices, again
adding to the money supply if sufficient taxes were imposed at the same time. That
approach raised the danger, however, that the provision of interest-bearing debt could
   Hirschman 1997.
   Braddick 2000, [Chap 6].
    [Ashton; other]

undermine the willingness of others to forego interest themselves, or would otherwise
displace that practice. Pulling on that thread would unravel the early modern fabric.

Counterhistory, Part II: The Transition -- The Move towards Centralized Payment for
        Charles II is most renowned in the history of finance for the Stop of the
Exchequer, an infamous default on the servicing of the royal debt.101 Ironically in light
of his reputation, however, it was during Charles’s reign that the English government first
moved concertedly towards paying for the production of money, a shift that would
change approaches both to the basic medium and to the credit that expanded it.
        The difficulties of maintaining the value of domestic coin triggered the change in
the approach to specie. A problem with metal money had haunted the English from the
beginning of the century: prices for goods in silver coin had been higher than their price
in metal. Because the value of coins was less than the value of the silver they contained,
no bullion flowed to the mint for coining.102 While the government had managed to
channel some metal there itself – silver captured from the Spanish and the sale price of
Dunkirk to the French, for example – the situation catalyzed a drive to reduce or abolish
the production and seigniorage charges on money.103 In 1666, the Act “for the
encouraging of Coinage” put the prescription into action. Under its terms, the
government paid all the costs for assaying, melting, and minting coins. Those bringing
bullion to the mint received the full weight of the metal they brought back in coin.104 The
commitment cost the government money it levied elsewhere in taxes: The Cavalier
Parliament imposed import duties on wine, beer, cider, vinegar, and spirits.105 The
arrangement, initially experimental, remained in effect until changed by revised along

    The actual effect of the Stop – a delay in payment that became a default for some
lenders and a postponement for others – has been controverted. See, e.g., Horsefield;
Holden 1955, 211-212; Chandaman 1975, 297-300.
    Feavearyear 1963, 95; see supra for an account of the pricing interval necessary to
attract bullion to the mint.
    Feavearyear 1963, 95-96.
    18 Car. II, c.5; Feavearyear 96.
    Feavearyear 1963, 96.

with the gold standard in 1925.106 By the time the Americans set up a mint in 1792, the
practice of paying for coined may have appeared standard. The United States followed
the same pattern, minting coins at minimal or no charge.107
       The demands of public spending appear to have caused the other, and somewhat
more complicated, transformation. For a variety of reasons, most immediately the Dutch
War, the Restoration administration faced dire shortfalls of cash. Its predecessors, both
Tudor and Stuart, had exhausted or lost control of previous strategies for raising money,
including sale of Crown lands and monopolies, and the forced loans of the earlier
century.108 Moreover, the government had apparently exploited routine methods of
anticipating revenue as fully as seemed possible, given the significant limits on the
Crown’s legitimacy and its efficiency in revenue-raising. It had, in fact, begun to
authorize officials to offer interest when paying by tally. The strategy may have been
used to sweeten tallies earlier. In 1660, however, Charles institutionalized the practice,
responding perhaps to the shaky financial legitimacy of his early reign, or the changing
expectations of holders influenced by the beginning of private banking in London.109 The
plague had, in addition, thrown London and its business community into turmoil.110
Finally, distrust of the royal prerogative, the rising power of Parliament, and Whig
conceptions of individual rights had redefined the political possibilities of the period.
The circumstances pushed royal officials to look for new ways to borrow; their
experiment undid the existing approach to public credit.
       The key innovation was the effort to generalize public borrowing. Credited to
George Downing, who had been taking notes from the Dutch, the idea was relatively
simple, if administratively complicated. The way to bring down the interest rates charged
the king on money loans was to borrow more broadly, beyond the narrow group of
goldsmith-bankers who traditionally took that risk. The way to borrow more broadly was

    Feavearyear 1963, 96.
    Mint Act of 1792, sec. 14, 1 Stat. 246, __; Sargent and Velde 2002, 313. The mint
began operating in 1794. Kemp 1956, 60.
    [to be developed, see, e.g., Ashton 1960].
    12 Chas II, c.9 (1660).
    See Roseveare 1973, 31-32; Chandaman 1975, 295.

to reach the small lender, the average citizen, who might make a modest contribution.111
And the way to do that was, in part, to prove that the king was a trustworthy debtor.
       Downing obtained a statutory guarantee that loans to the king would be
numbered, publicly registered, and paid off “in course” as they came due. Moreover, the
loans would be funded by an identifiable revenue stream: each early borrowing initiative
was linked to a statutory levy; as taxes came in, the promise took effect to pay lenders “in
course” as their claims were registered.112 Each loan would bear interest at 6% -- far
better for the Crown than the 10 to 12% it had been paying its traditional lenders.113 In
order to drive home the virtues of the new regime, Downing advertised the system. He
publicly posted the order of payment, and published notices of government obligation
and redemption dates when they came due in the London Gazette.114 The aim was to
establish the reliability of the system, the profits to be made from it, and the patriotism
involved in becoming a lender to the public. It was the first time a public investment
opportunity was so broadcast.115
       There were two other aspects deemed essential to enticing the public to lend
money to the government. First, small lenders had to be able to advance small amounts.
Second, the “payment orders” that represented claims on the king would be more
appealing if they were able to circulate; they were therefore made, and promoted, as

    [See Clarendon – explore, cited in Chandaman 1975, 295 n.2; check also Pepys, as
cited in Chandaman 297 n.1.]
    See, e.g., the first public borrowing effort in the Additional Aid of 1665, 17 Car. II
c.1, ss.5-7. See generally, Roseveare 1973, 23-24; Chandaman 1975, 295. In 1667, the
“in course” promise of repayment was extended to apply to payment orders issued on the
king’s ordinary revenue. PRO Printed Proclamations, Charles II, SPDom 45/12 no. 244a,
cited in Roseveare 32 n.48. (The orders issued on this promise were the ones on which
the Crown defaulted in the Stop. See id.)
    Roseveare 1973, 24.
    Roseveare 1973, [specimens from London Gazette].
    Roseveare 1973, 24.

indefinitely transferable by written endorsement.116 Each of Downing’s new payment
orders were, in other words, another kind of cash.117
       A particular use of the payment notes made their character as “paper money”
especially clear.118 As part of the effort to guarantee funds to repay the loans, Downing’s
reform dictated that the revenues dedicated to that task should come straight to the
Exchequer without diversion. No tallies – the old instrument of anticipation – could be
issued on the revenue.119 Rather, all revenue from the in-coming revenue had to be
issued by way of payment orders, including orders issued to pay creditors for supplies
and orders sold to the spending departments for as-yet-undesignated needs. The latter
orders replicated the function previously filled by the old tallies. These, administratively
useful payment orders thus joined those representing actual cash loans made to the
government; the negotiability of all the notes was provided by statute.120 Even more
clearly than in the case of orders issued to private holders, the practice of issuing payment
orders to departments dictated issuing those instruments in smaller and manageable
denominations so that the notes could be spent. Chandaman records evidence of payment
orders broken up to orders of about £73 to “facilitate disposal” by the departments.121

    See the Additional Aid Act, 17 Car. II c.1, ss 7, 10; A State of the Case (emphasizing
advantage of transferability of treasury orders). For the extension of transferability by
endorsement in the case of the orders issued on the ordinary revenue, see 19 and 20 Car.
II, c. 4.
    to be investigated: w/r payment orders, because they were repaid only in a centralized
way, actually could not be used as effectively as tallies for public payment.
    For the assumption by historians of the Exchequer that its orders merited this term, see
Chandaman 1975, 297; Shaw 1906, 40; see also Clapham, i, 38 [check] (concerning the
Exchequer bills, 1696 descendents of the payment order).
    Chandaman 1975, 295.
    17 Car. II, c. 1, s. 7 [check]. “Fiduciary orders” – those orders issued to the spending
departments -- were modified by the addition of the language “or his assigns” to the name
of the public payee. [get yr, the fiduciary order is part of the Additional Aid, is extended
to the ordinary revenue in 1667; not clear when “or his assigns” is added -- may be part
of following statutory modifn:] For the provisions regarding those orders issued on the
ordinary revenue, see 19 and 20 Car. II, c. 4; check Pepys Diary, Nov. 6, 1667; see
generally Chandaman 1975, 297; Roseveare 31-32.
    Chandaman 1975, 297 n.3. [note – consider w/r there is evid. of even smaller
denominations – Richards? Feavearyear?, and also w/r this is money only partly liquid, as
Bell would categorize it.]

Further, he tracks the way bills were issued and circulated for a period of months or
years, assigned or discounted in the process.122
        Downing’s payment orders represented, then, a new kind of credit-based
currency. Although later scholars often assumed that the payment order system was
discontinued after the Stop, that default affected only a subgroup of the orders.123 The
rest of the payment order program was in fact retooled and extended by 1677; according
to an historian of the English revenue, it applied to “most of the remaining parliamentary
supplies” during the remainder of the Restoration.124 Payment orders revolutionized
public borrowing; they can be credited with starting the financial revolution of eighteenth
century Britain.
        At the same time and unremarked, however, the turn to payment orders also
displaced the tradition of interest-free currency provided by other instruments of public
credit. The sources suggest that the displacement of the earlier notes occurred literally –
they were crowded out as claims on revenue. And it occurred conceptually – they were
delegitimized because they carried no interest.
        As for the first, the administrative reform that accompanied the loan program
required that all issues from dedicated revenues be made by payment order. As the
description of the administratively useful payment orders makes clear, if all in-coming
revenue had to be paid out “in course,” it could not be diverted into redeeming an odd
and unpredictable array of outstanding tallies. The clash was acted out at the very outset
of the system. Affronted by Downing’s reform and chilled by the possibility that the ‘in
course” guarantee would destructively limit Exchequer discretion to repay tallies, the
Treasurer, the earl of Southampton, began to raise money on the credit of the Additional
Aid Act by anticipation tally, offering 6% interest on the advances. According to the

    Chandaman 1975, 297, 298-99.
    The orders affected were the fiduciary orders issued on the ordinary revenue. Those
orders, unconstrained by being tied to a specific revenue measure, were in fact over-
issued. See Chandaman 1975, 297. That event exposes the underlying logic of the orders
as tax anticipation notes. See Calomiris 1988 (modeling problems with overissue of tax
anticipation notes in the American context).
    Chandaman 1975, 298; see, e.g., 18 & 19 Car. II C. 13, ss 6-9; 22 & 23 Car. Car. II, c.
3, ss. 51-55; 29 Car. II, c. 1, ss. 38-42; 29 Car. II c. 2. ss 5-13, 20; 29 & 30 Car.II c. 1, ss.
34-38, 47; 30 Car. Car. 1 ss. 509; 31 Car. II c. 1, ss 12-16; 1 Jac. II c. 5, ss.709; see also
7 & 8 will 3, c. 21 (Exchequer bills).

terms of the statute, however, the revenues that came in had to be repaid to lenders who
had also advanced money to the government. The predicament took a “country-wide
campaign” to clear; Downing and the Treasury Commission used letters and published a
pamphlet explaining the system publicly.125
       When the system was up and running, then, officials replaced tallies with payment
orders, issuing orders even for those purposes for which tallies had originally been used –
advances to creditors supplying goods and advances to the spending departments
mentioned above.126 In an interesting echo of the old tradition and its logic on liquidity,
the payment orders that duplicated the old tallies did not officially bear interest. That
payment was apparently reserved for those who actually loaned cash to the
       The result might have replicated the old system, had it remained as written: non-
interest-bearing orders would have operated as traditional tax anticipation instruments,
while new interest-bearing orders would have lured lenders to make cash advances. But
actual practice diverged from statutory provision: those cashing payment orders of all
kinds apparently could successfully claim interest on them.128 The practice may have
followed from Charles’s decision at the start of this regime to allow interest on tallies.129
It may also have flowed from the example of the interest-bearing payment orders; once
they began to circulate, those holding the alternative orders would have every reason to

    Roseveare 1973, 25; see A State of the Case Between Furnishing His Majesty with
Money by Way of Loan, or by Way of Advance of the Tax.
    See supra TAN ___. When the system was extended to the ordinary revenue, official
worked to cut the use of tallies there as well, and to clear the ordinary revenue of prior
claims. Chandaman 1975, 301.
    Roseveare 1973, 24. [statutory provisions] The evidence is somewhat conflicting on
this point; Chandaman categorizes all payment orders as interest-bearing. Presumably,
he is incorporating the practice of informal payment, which may have been based on the
1660 statute allowing interest on tallies.
    Roseveare 1973, 33-34; Chandaman 1975, 296-297 (assuming all orders were interest-
    12 Car. II, c. 9 (1660). The tactic, which probably appeared informally and
inconsistently at earlier moments, was apparently familiar to officials in the following
years. Roseveare 1973, 25; see, e.g., A State of the Case Between Furnishing His
Majesty with Money by way of Loan, or by way of Advance of the Tax [ ].

       In any event, the contagious effect of payment order practice would be all the
more powerful once all the orders bore interest, formally or informally. The advertising,
clarification campaign, and publicity that introduced the payment order program also
emphasized the provision of interest, promoting expectations that interest was properly
granted to any advance. Indeed, the payment order program and its publicity lauded
lending money to the public for a profit; that activity began for the first time to be
identified as a worthy civic role. It became possible, under the force of the new practice,
to understand action in one’s own interest as socially beneficial. The way public finance
had been restructured, moreover, would have encouraged theorists to articulate a
respectable role for profit-seeking behavior: “interest” in the literal sense was here
celebrated as a constructive motivator.130
       More immediately in the story about the changing character of money, the interest
that attached to an advance no longer needed to be sacrificed to obtain negotiability – all
the new orders came with that property. In these circumstances, the traditional practice of
issuing non-interest-bearing tallies would be very hard to maintain; indeed, it fades from
the scene at about this time. By 1696, the new Exchequer bills issued under William
would all be interest-bearing affairs.131
       [Developments in the early American nation followed a path that was different in
detail but remarkably similar overall. To be developed here is a description of the turn by
Robert Morris to pay public creditors, soldiers, and others near the end of the
Revolutionary War with interest-bearing cash. As in the English case, the shift occurred
when the public desperately needed revenues and the government had lost credibility to
issue more tax anticipation notes. The turn to interest-bearing cash made non-interest-
bearing cash, already discredited because of the inflationary experience of the War,

Counterhistory, Part III: Gifting Liquidity and Licensing Money by Private Note

    The timing is right to fit into Hirschman’s sense of the chronology; the connections
might lie in the contemporary literature on self-interest, which could in fact focus on
material incentives.
    Holden 1955, 96.
    Ferguson 1961; Holton; Boulton; other.

          In both England and America, the government began paying for the production of
money in coin and in public credit shortly before introducing another element, private
credit, into the mix. In late 17th century England, as in America a hundred years later, the
authors of the new regime licensed banks to increase the amount of currency in
circulation by lending out banknotes on the basis of a fractional reserve. That device
multiplied the money stock insofar as banknotes were effectively or officially receivable
for public obligations. In addition, it opened a new opportunity for profit to private
investors, who could now charge for the liquidity available from banknotes. Users, after
all, continued to value the liquidity service offered by currency; they remained willing to
pay something for notes that could circulate. Insofar as they paid a premium on loans
that came in the new medium of banknotes (or the old medium of specie), over the
amount they would have paid for an advance of resources in a non-circulating
commodity, they now paid banks for the benefit of liquidity. The demand for banknotes
may have increased over time as the government moved away from issuing notes of
public credit that could circulate and depended, instead, on specie and private notes.
          The deployment of banknotes as currency had, lastly, an effect that would finally
produce a circulating private credit between merchants. Inherent in the shift to banknotes
was a public endorsement of private credit as a circulating medium. The government had
licensed a private institution to produce money in the form of private credit instruments.
It therefore assimilated those notes to the attributes of negotiability that had always
attached to money: users had to be able to transfer the bills easily free of defenses based
on the underlying transaction, a condition institutionalized in the ability of holders to sue
on the bill itself. Banknotes, in other words, modeled the easy transferability that could
be attached to private circulating credit. An instrument supported by the state, which
shared the risk of their redemption, banknotes effectively legitimated private circulating

       A. Licensing a Private Device to Multiply Money
       By the close of the English Restoration and the end of the American Revolution,
national authorities in both Britain and America had virtually institutionalized a
commitment to pay for the costs of producing money. The decision to pay for minting
money and to pass over coining as an occasion for taxation, a decision taken by the
English in 1666, became permanent. Neither in England nor in America, when the
federal government established the first U.S. mint, did governments ask those bringing in
bullion to pay for the service of converting it to coin.133
       In addition, authorities in both places moved away from using credit instruments,
either tallies or bills of credit, that anticipated tax revenue without paying interest in
return for allowing the tokens to circulate. In England, the architects of the financial
revolution elaborated an entire industry of public borrowing.134 The initiative
successfully attracted both domestic and foreign investment, funding the huge
administrative growth and the military outlays that enabled Britain’s inauguration as an
empire.135 Government bonds could, depending on their structure, denomination and
transferability, have functioned as money during this period, an area still to be
explored.136 Exchequer bills, for example, the descendants of Restoration payment orders,
circulated to some degree.137
       The new nationalists who came to power in the United States confirmed
constitutionally their rejection of early American strategies of making money. Motivated
at once to leave behind the difficulties of Revolutionary finance, to redistribute authority
from the states to the federal government, and to attach investors firmly to the enterprise
of nation-building, Federalist framers centralized control over creating money. The
Constitution gave Congress the power to coin money and regulate its value, as well as “to

    See supra, TAN ___.
    See generally Dickson 1967; other.
    See, e.g, Brewer 1990; [Niall] Ferguson 1991.
    See Bell 2001, for a discussion of the limited liquidity of government bonds in the
contemporary context. [[Authorities may have been able to structure government
borrowing, including interest payments, to produce notes that would circulate without the
encumbrance of interest.]]
    Holden 1955, [95-96].

borrow money on the credit of the United States.”138 It barred the states from issuing
“bills of credit,” thus prohibiting the method of making money on which they had relied
for a century. States were also disallowed to “coin money,” or to “make any thing but
gold and silver coin a tender in payment of debts.”139
       The new American government also confirmed its commitment to using interest-
bearing forms of public credit currency. In the aftermath of the Revolution,
Confederation agents had worked to standardize the confusing mélange of payment notes
used during the war to compensate creditors, soldiers, and suppliers of the national
government. Those notes had continued to circulate, most notably into the hands of
buyers who banked on their redemption with interest. One of the most wrenching
debates of the First Federal Congress proved their prediction correct: the United States
committed itself to a virtually full payment plan that drove prices for the securities up
steeply. The event sacrificed the claims of those who initially had held the interest-
bearing money, mainly soldiers and suppliers of modest means, to some share in the
profits of the increase. Those groups had argued that Congress should consider the
conditions in which money had been transferred in the years after the Revolution:
holding money which the government failed to service and facing tax burdens from the
very authorities who had abandoned them, poorer holders had sold their bills at huge
discounts.140 In rejecting the demand to look into the circumstances of its circulation, the
new government underscored the modern determination not to condition the grant of
negotiability on money in any way.
       [The next section of the paper will explore the decision, in both England and
America, to license private banks to multiply money by issuing banknotes, effectively or
officially acceptable for public obligations, on the basis of a fractional reserve. The
initiative held many attractions: First, it created a way to multiply the money stock that
authorized private actors to control the mechanics of producing money by making
decisions to issue contingent on calculations of a reserve. According to proponents of the
    U.S. Constitution, Art. I, sec. 9.
    U.S. Constitution, Art. I, sec. 10. [check w/r interpreted to mn legal tender in
private/public transactions, or both, and w/r limited to refer to formal enforcement or
    The authoritative account of Revolutionary finance and its unfolding is Ferguson
1961. For recent work newly illuminated the drama, see Holton.

move, the private role helped to legitimate token money, discredited in England and
America by the Stop and the depreciation of the Continental dollar respectively. More
substantively, the innovation opened up opportunities for private investors to profit from
the role of providing liquidity, independent of the profits from lending resources
understood as their commodity value. When liquidity had been reframed as an attribute
attached to all debt bills by the government, the logic that those who multiplied it should
be paid for that service, followed naturally. Third and somewhat ironically, the practice
that had performed much of that reframing – the turn to interest-bearing public credit
currencies -- now facilitated the shift to private banking as the main source of paper
currency. The fact that government bonds bore interest interfered with their daily use.
Holders in both England and America found it inconvenient to recalculate regularly the
constantly changing value of the bills.141
        After mapping the way the Bank of England was authorized to create banknotes,
the paper will describe how the Bank of the U.S. received the same kind of license]:
        The money supply of the early Republic had a second significant component
beyond coin: banknotes issued by both the Bank of the United States and by state-
chartered banks. As a money, banknotes joined specie as a unique vehicle of liquidity:
they came in small denominations and circulated as demand deposit notes, a claim
immediately redeemable in specie. For the service of supplying them, the Bank could
charge the same rates it asked on lending specie, including the premium that people
would pay for the utility of currency or liquidity itself.142
        The license to issue money traveled in the details of institutionalizing the Bank.
Those logistics enacted the logic of a new approach to money, according to which the
government supplied a circulating quality to the notes without condition. Each sovereign
– the national government and the states – made the banknotes issued by their institutions
receivable for various public payments, institutionalizing a demand for the notes that

    See, e.g., Holden 1955, [95-96] (reviewing Clapham/Shaw assertions that Exchequer
bills would have rendered Bank bills unnecessary, had they been more conveniently
interest-free); Continental Congress’s waiver of interest owed on soldiers’ compensation,
given difficulties of calculating small sums.
    The theory assumes a functioning and credible reserve system.

would support their value.143 The mechanism that had ensured demand for banknotes was
thus parallel to the mechanism that ensured demand for bills of credit: in other words,
Section 10 of the Act to Incorporate the Subscribers to the Bank, providing that the notes
of the Bank “shall be receivable in all payments to the United States,” was a sleeper of
dimension starkly incongruous to its dry wording. In that inconspicuous provision, the
public effectively acted to create a currency, but one that, for the first time, channeled
profits on its liquidity to private not public hands.
        In turn, sovereigns provided the legalities to make the notes circulate – the Act
next stipulated, for example, that notes “payable to bearer shall be negotiable and
assignable by delivery only.”144 In addition, state and federal governments designed a
quantity control mechanism for the notes that tied notes to fractional reserves and, in the
case of capital requirements, interest-bearing debt.145
        The system enacted by the First Congress expressly imitated the model of public
finance and currency creation pioneered by the English and effectuated through its
powerful central bank. The first Bank of the United States began operating on the basis
of capital acquired from subscribers. According to an allowance fixed by statute, they
contributed 25% specie and 75% government bonds -- the mixed public/private model of
initial capitalization prevailed in the early decades at the state level as well.146 The Bank
went into business as both a bank of deposit, offering “safe keeping” of funds, and a
lender. While loans to commercial customers were significant and grew quickly, the
Bank loaned heavily to the federal government, especially in its first decade. Public
borrowing played a significant role in the system: While the Revolutionary War debt
represented borrowing in another “currency” (goods and services for which the public
    I Stat. 191, 196 (making the notes of the First Bank “receivable in all payments to the
United States); Kemp 1956, 67. By contrast, the notes were not legal tender.
    I Stat. 195.
    Federal notes depended, in particular, on public bonds at their inception and provided
a national exemplar for state practice. to be traced: the transition from public debt
reserves to private debt reserves. The transition would reduce government payments to
amount of public debt still used as reserves but increase private profits.
    An Act to Incorporate the Subscribers, sec. 1-2, I Stat. 191-192; Perkins 1994, 237.
Perkins briefly reviews the public sentiment in favor of public ownership of the banks;
that sentiment flowed from traditional American practice, sketched above, according to
which the colonial governments had gained revenue from currency issuing. See id., 236-

still paid) the U.S. borrowed afresh -- and in the new currency -- to cover revenue
deficits.147 In addition, government borrowing allowed greater public spending over time
than possible when expenditures were based on current taxes alone.148 Those outlays,
now payable in the new bills, expanded the money stock, constituted by that currency.149
        The Bank, in turn, issued demand notes, from a $5 denomination up, based on
initial capital and later deposits; the total amount of its liabilities, including notes and all
other kinds of debt, could not exceed the amount of total reserves by more than $10
million.150 According to a contemporaneous estimate of the early 19th century money
stock, banknotes (state and federal), made up $10.5 million of a $28.0 million total, or
37.5%.151 Some 15 to 23% of that note total was, in 1800, federal.152 That proportion of
the money stock made up of banknotes, then, were demand notes issued as part a
commercial banking venture designed to generate dividends to investors (private or
public).153 Dividends distributed to Bank of the United States shareholders, assumedly in
banknotes, averaged just over 8% a year during its twenty-year charter period.154

    The Treasury borrowed first to cover the government’s entire subscription to capital,
the $2 million dollars used to purchase its 20% share of ownership, and then to survive
the series of revenue shortfalls that carried through most of Washington’s presidency, for
a total of up to $6 million dollars in 1796. Perkins 1994, 254-255. Private borrowing
during the period ranged from $5.3 to 9.4 million dollars at the end of the decade. id.,
254; see generally Wettereau __ , ___.
    For this argument, see, e.g., Morris 1782.
    Government debt also, as above, constituted the initial capitalization of the banks.
    Perkins 1994, 236-37 [check]; An Act to Incorporate the Subscribers, sec. 10, I Stat.
194. [check use of term “reserves”, here including deposits, not just specie].
    The remainder was made up mainly of specie. Figures in 1792 were comparable:
banknotes composed $11.5 million of a money stock amounting to $29.5 million, or
about 39%. See Samuel Blodget, Economica, as quoted in Perkins 1994, 247.
    These percentages are based on Perkins’s estimates that the money supply in 1800
amounted to about $6.50 per capita, of which $1.00 to $1.50 consisted of Bank of the
United States notes. For those estimates, as well as estimates about how much the turn to
fractional banking multiplied the aggregate money supply (approximately three-fold), see
Perkins 1994, 246-247 (figure considers proportion of deposits and banknote liabilities
issued relative to specie reserve).
    Dividends from the First Bank of the United States averaged over 8% annually. 60%
of dividends came from U.S. government funds paid to the Bank as bond interest and
interest on an initial loan covering its whole $2 million subscription. See Perkins 1994,
248, 253.
    Perkins 1994, 248.

       The principle of design underlying the new American money would affect the
way participants understood their political economy. First, the long movement away
from public credit instruments that were non-interest-bearing as money suggested to
users that liquidity – including the transferability that allowed money to circulate easily –
came free. It was no longer gained by foreswearing interest on an advance and receiving
in exchange a note that held immediate value as money. Gifted by the state, the quality
of money’s currency no longer appeared as part of a pact with a group of other users,
coordinated by a central authority that had secured the system of issue and demand that
gave the notes value. Rather, liquidity, that quality of money’s currency, could seem
spontaneous; it just happened when everyone agreed to treat an object as money, and
could arise by a conventional process of exchange.
       In that case, the government appropriately paid for advances to itself (government
borrowing), just as individuals did; the reframing had obscured the distinctive authorship
of the institutionalized public and so its claims to unique treatment.155 While the
government could add to the money supply by issuing public debt notes that could
circulate, it could also license a private entity to multiply the money stock. Embedded in
the need for the license – the set of rules creating demand for the banknotes – was the
continuing role of the state to centrally coordinate the monetary system. But once the
license issued, the continuing role of the state was easily obscured. Consistent with the
state’s commitment to waive a charge for its role in establishing demand, here for
banknotes, the new device authorized private investors to charge for the service of
multiplying the money stock.
       The new approach to expanding the money stock relied on private incentives to
lend, institutionalizing that mechanism as an engine in the system. In addition, that
system located private property in the form of the specie reserve that secured the value of
notes as essential to the operation of the system. Taxes and other public payments, still
essential as the means of creating demand for money, were not, by contrast, obviously

   Public borrowing could have provided a expansion of the money stock by adding
notes with a value based on future taxes (and providing for interest). [Work out here how
the government would have picked up the costs of liquidity when it paid interest on the

necessary to secure the value of notes. All of these changes would reconfigure the debate
over the political economic order.

       B. The Impact of Credit Currencies on Private Credit
       [In this section, as a kind of coda to the story, I would like to explore how the
development of credit as a medium was affected by its assimilation to money, first in the
form of public credit and then in the form of private credit. The movement towards
negotiability in private notes seems to occur slightly after the time that credit is used to
create money, first in the form of tax anticipation instruments and then in the form of
banknotes. Money is, itself, the paradigmatically negotiable instrument in the sense that
the bill can be sued upon without recourse to the underlying transaction.156 The issue is,
then, whether and how the negotiability of private credit might be patterned on the law
and expectations that allowed both tallies and demand notes to circulate. Having said
that, there was undoubtedly reciprocal influence between the “public” and “private”
instruments, like the goldsmiths’ notes, all the way along.
       The issue may be joined most fully when banknotes began to circulate as
currency. At that point, the government’s agreement to take banknotes in satisfaction of
public obligations meant that the government was sharing the risk for the notes. That act
gave banknotes greater stability. At a moment of flux, the legitimating effect of stable
circulating private banknotes may have been significant.157 Ironically, given their
imitation of public credit instruments, private banknotes gained repute in contrast to those
public notes which seemed, after the debacles of the Stop and the revolutionary
depreciation, less reliable. The private incentives that powered the Bank’s role could also
be enlisted to legitimate the extension of private credit as a productive institution. In fact,
private banknotes gained further stature insofar as they expanded the money supply. In
the late 1690s, the need for stable money in England was immense, given disruption to
the specie money stock.]

   Rogers 1995.
   Public credit notes were also guaranteed by the government’s commitment to pay
them via future taxes, of course. That guarantee would not tend directly legitimize
private credit instruments, however.

       Reconceiving the way money was constructed, where credit circulated in the early
modern world, and how the two were related changes the creation story about capitalism.
That story depends to a significant extent on understanding both media as generated
conventionally through the exchanges of individuals. In fact, that narrative does not
describe the genesis of either money or circulating credit. Nor does it capture the shift in
the relationship between them that catalyzed new and capitalist modes of political
economic order.
       In place of the conventional narrative, the history traced here suggests that both
money and credit depend on collective political arrangements, improvised over time by
an institutionalized public in negotiation with its members. That approach defines
capitalism as a political transformation, not a natural development. The early modern
regime of creating money, whether in coin or by credit, depended evidently on the
contributions of individuals to the common resource constructed in the medium. The
modern capitalist order employed the centralizing coordination of the state, but used that
authority to frame the production of money as a matter of individual choice and
opportunity to profit.
       The approach to capitalism taken here draws on the insights of existing
approaches – the importance of the financial revolution, for example. It also suggests
possible connections to those histories – the relationship of money and the laws that
regulated it to the rise of waged employment, for instance. But more fundamentally,
understanding capitalism as a political arrangement opens up new questions about its
character, as well as the nature of alternative arrangements. Recall the way that the
modernization narrative paints the coming of capitalism as a long, gradual process. A
stain or a tide depending on whether the writer begrudges or approves it, capitalism
begins with priced exchange and arrives when those relationships penetrate territory that
was formerly outside of the “the market.” Capitalism becomes, by this definition, both
timeless and inescapably contemporary. It has existed in all places as some essentially
economized dimension of human life, and now engulfs the whole, to the dismay of those
committed to values outside rational choice and the relief of instrumentalists.

         By contrast, the approach taken here suggests that exchange may always have
existed, but that there is nothing essential about it. Likewise, Americans participated in a
“market” in the eighteenth century, but the nature of that market was specific to the
political economy in which it occurred. For example, the provincials who engaged in
debates over paper money understood economic activity as a terrain that political actors
had a responsibility to make accessible through monetary policy. They voted in ways
that shaped the “market” in that image.158 The capitalism that eventually arrived, under
this view, likewise has a particular character. It describes a certain political economic
strategy that can be varied, diluted, or determined to be obsolete. “Capitalism” as a
political economic form is not, necessarily, here to stay, even if modernity is. At the very
least, a definition of capitalism that has specificity renders the term meaningful once
         Just as there is nothing essential about the market, so also there is nothing
absolute about the political structures or legal rights that undergird it. Recall here the
other theme of the modernization story, the one that locates the “state” as an actor that
accommodates capitalist development when it removes barriers to individuals interested
in exchange. That setting invites the notion that concepts like property or individual
rights have content in the abstract. They appear as safeguards against a state now
restrained. Increasing “them” increases economic growth and, perhaps, the other way
around, as if capitalism entails an increase in individual rights.
         In fact, democratic polities can cluster the protections, vulnerabilities, and
opportunities that may travel under the name of “property” or a “right” in many different
ways.159 So, for that matter, can less democratic polities. The safeguards that might
attach to one kind of property, the right of a creditor to interest for example, might
displace the claim of another, the right for relief from taxes, for example, in times of
economic depression. The laws that structure activity in a society are not a set of
constraints that individuals per se have against that state; they are the terms of

    See, e.g., Lester 1938; Lester 1939. Conversely, those who held money that was in
some respects similar – those of early modern England for example – may have had no
such experience or aspiration when they had no political access.
    Hohfeld 1913; Kennedy 1991.

interpersonal relations that exist in a community, improvised by a set of people with
different powers over time.
       Capitalism and the state do not have, in other words, the arms’ length relationship
invoked by the conventional account. To the contrary, capitalism is the state. The
conventional image of the private liberated by the political is, in fact, a function of the
story they tell together. A definition of capitalism that recognized its normativity would
also be meaningful.

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