Era 03 · 1690 — 1797

First Paper Bubbles

Loss of purchasing power

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The invention of paper money in Western economies (borrowed conceptually from Song Dynasty China) introduced a new debasement mechanism: issuing more paper claims on gold or silver than the issuer actually held. The first Western paper monies were issued by the Massachusetts Bay Colony in 1690. Within 30 years, John Law's Banque Royale in France had demonstrated the catastrophic potential at industrial scale. Every paper-money experiment of the 18th century — Continentals, assignats, Bank of England wartime notes — followed the same pattern: issue, over-issue, collapse.

Events in this era

Dec 1690

Massachusetts Bay issues the first Western paper money

In December 1690, the Massachusetts Bay Colony issued paper notes — called 'bills of credit' — to pay soldiers returning from a failed expedition to capture Quebec. The colony had no specie to pay the troops and no way to levy taxes fast enough. The notes promised to be accepted for future tax payments. Within a few years, Massachusetts had issued more notes than its tax base could absorb. By 1750, the Massachusetts paper pound traded at roughly one-tenth of its original promised value. The pattern — issue notes to cover a war, over-issue them, watch them depreciate — would repeat in every paper-money experiment for the next century.

First Western paper money — and its first inflation

May 1716 — Dec 1720

John Law's Mississippi Bubble

Scottish economist John Law convinced the French Regent in May 1716 to establish the Banque Générale (later Banque Royale), which issued paper notes backed by shares in the Mississippi Company. Law promoted the notes aggressively and merged the bank with France's colonial trading enterprise. Over four years, the bank issued roughly five times more notes than it held in gold and silver. The shares of the Mississippi Company rose tenfold; then Law tried to convert shares back to specie and the whole scheme collapsed in December 1720. The French state was bankrupted. Paper money was so discredited in France that the word 'banque' remained taboo for the next 80 years.

First industrial-scale fiat collapse

Jun 1775 — 1781

Continental Congress issues Continentals

Starting in June 1775, the Continental Congress — which had no taxation authority — issued paper money called 'Continentals' to fund the Revolutionary War. By 1779, roughly $241 million in Continentals had been issued against a tax base that could not service them. The currency depreciated to roughly 1 percent of face value by 1781, giving rise to the phrase 'not worth a continental,' which entered American English as a synonym for valueless. The Continentals were formally abandoned in 1790, redeemed at 1 cent on the dollar.

American currency destroyed by 99 percent in six years

Apr 1789 — Feb 1796

French Revolutionary assignats

The National Assembly issued the first assignats in April 1789, notionally backed by confiscated Church lands that the state would sell. Within three years, the government was issuing assignats faster than land could be sold to back them. By 1795, roughly 40 billion livres of assignats were in circulation against a nominal backing of perhaps 3 billion livres of land. By February 1796, the assignat had fallen to 0.5 percent of face value, and the National Convention ordered the printing plates publicly burned. The assignats were briefly replaced by a second paper currency, the mandats, which collapsed in under a year.

Assignats destroyed by 99.5 percent in 7 years

Feb 1797

Bank of England suspends gold convertibility

On February 26, 1797, in response to rumors of a French invasion of Britain and a run on the Bank of England's gold reserves, the Privy Council ordered the Bank to suspend gold convertibility of its notes. The suspension was supposed to be temporary — a wartime emergency. It lasted for 24 years, through the entire Napoleonic Wars, and was only ended by Robert Peel's Bank Charter Act of 1821. During the suspension, the Bank of England note traded at a discount of up to 30 percent against gold bullion. It was the first time a major European central bank had effectively admitted that its paper was not fully backed — and the template for every subsequent wartime suspension.

Template for 'temporary' wartime suspension

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