Fiat Currency Revolutionized American Independence 281 Years Ago

The American colonies' journey to independence from Great Britain was marked by a significant innovation: the use of fiat currency. In 1690, the Massachusetts Bay Colony issued 7,000 GBP in “bills of credit” to soldiers returning from a failed raid into Quebec. These soldiers, who had expected to be paid in plunder, received newly printed paper money instead, which held value solely because it was required for paying taxes. This marked a global-scale invention and a great intellectual breakthrough, as it shifted the anchor of money from intrinsically valuable goods to the circulation of money into and out of the state’s treasury.

However, the Massachusetts Bay Colony ended its first experiment in fiat money just two years later when it retired all of the bills it had issued. Other American colonies followed their example, but only in brief spurts. The world only recognized the power of tax-backed paper currency a few decades later, when the colonies collectively used it to win independence from their British overlords. In 1775, the cash-strapped Continental Congress paid the rebel army it had raised by issuing paper currency backed only by the promise that the individual colonial governments would accept it for tax payments. Despite the proof-of-concept in Massachusetts, people struggled with the idea of tax-backed money, so much so that the Continental Congress printed its dollars with an entirely fictional promise right on the front. In large letters, each dollar declared that “THIS BILL entitles the Bearer to receive TWENTY Spanish MILLED Dollars or the value thereof in Gold or Silver.” But the only thing the government ever intended to give in return for a continental dollar was a tax receipt. Also, the Continental Congress printed far too many of them. By 1781, continental dollars had lost nearly all of their purchasing power. But against all odds, it kept an army in the field. And in so doing, it proved that fiat currency, however unsound, could win wars — and even print a nation into existence.

After the war, even the victorious Americans recoiled at the thought that money could be backed by nothing more than the power to collect taxes. “Paper is poverty,” Thomas Jefferson wrote just a decade after paper money had come to his rescue. “It is only the ghost of money, and not money itself.” Nearly everyone agreed. It wasn’t until 1971 — 281 years after the Massachusetts innovation — that the United States fully accepted the idea that money could be backed by nothing more than its power of taxation. This might not end well. The American government is currently exploring the outer boundaries of just how much tax-backed currency the world is willing to accept. But if you celebrated the American Revolution today, you should consider celebrating the great American invention of fiat currency too.