Massachusetts Bay Colony notes
The colony issued 7,000 pounds in paper notes to pay soldiers returning from Sir William Phips's failed expedition against French Quebec. The treasury was empty and the troops were threatening mutiny. The notes promised redemption in silver from future tax revenue, eventually. They were the first government-issued paper currency in the Western world, predating the Bank of England by four years. The notes traded at a discount to silver within months, a pattern every subsequent paper currency has repeated at some point in its history.
The notes traded at a discount to silver almost immediately — the first sign that a paper currency's value is whatever the market thinks the issuer can back, not whatever the issuer says on the note.
03 · Paper Money
Paper money is a piece of paper that says, on its face, that it can be exchanged for something else. That something else — usually metal — stays in a vault. The paper circulates, the metal doesn't. The entire economy becomes a bet on whether the issuer can still deliver the metal. For most of paper's history, they couldn't.
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