(The following is a draft excerpt from a forthcoming book.)
One important issue that prominent pre-constitution pre-Americans were concerned about was the tyranny of the English government and of how to preclude the possibility of a similar tyranny amongst a conglomeration of the thirteen east coast English colonies which then existed. Ten years prior to their drafting of the constitution in 1786, there had been a loose sort of formal relationship between these colonies (which at the time and for many years hence had the status of different countries with different currencies and laws) inscribed in a document called The Articles Of Confederation. Then, no executive (president) or judicial (supreme court) branch of government existed. The educated, wealthy people at the time (reminiscent of the philosopher-kings of Plato’s Republic) had for decades just made the laws for their individual colonies without any vote or debate. Despite this, perhaps surprisingly, the colonies prospered. According to Benjamin Franklin:
“There was abundance in the Colonies, and peace was reigning on every border. It was difficult, and even impossible, to find a happier and more prosperous nation on all the surface of the globe. Comfort was prevailing in every home. The people, in general, kept the highest moral standards, and education was widely spread.”
Given the lack of democracy in the Colonies of the mid-eighteenth century, one may wonder: how could such a relatively utopian society possibly exist (especially given the views of post-second-world-war American presidents about the moral necessity of democracy in current geo-politics)? According to Benjamin Franklin the reason for this prosperity was two-fold. First, the colonies printed their own money (called ‘colonial scrip’), paying no interest to any bank. Secondly, neither too much nor too little printed money was allowed to circulate – colonies controlled their money-base (and incidentally, people from such colonies could revolt against their government if e.g. the value of their money was too low – that’s not possible nowadays since government doesn’t control the value of money anymore).
The (privately owned and misleadingly named) ‘Bank Of England’ had been cut off from a source of revenue from the colonies during this time. Upon their learning of the existence of colonial scrip, opposition to it arose immediately. This led to the bank’s insistence that the English Government (who were subservient to the bank) require that the colonies cease printing their own money.
Although colonial scrip was ‘fiat currency’ i.e. owner’s of such currency had no right to demand to exchange it for a set amount of e.g. gold or silver, it had worked well in pre-revolutionary times. States (not banks) could control how much currency was in circulation in order to regulate its value and thereby facilitate commerce and prosperity. The key idea about fiat money is that money in general is only what people agree upon as having instrumental value – something that can be exchanged for something else that is intrinsically valuable (valued for its own sake, not as a means to getting something else). Almost anything could (and often has) been used as money historically around the world e.g. Yak dung, wooden ‘tally-sticks’ (in England), gold, silver and pieces of paper with numbers on them (e.g. dollar bills).
Read more: Money, Guns, War and Money