colonial money

Fractional Reserve Banking-banks are vulnerable to bank runs because the bank does not have money in reserve. People begin to question the bank so they go get their money out. If there is not a central bank this happens more often. To avoid this bank run, bankers want to have an institution to protect them.
They create a cartel. Each bank wants this type of protection. A central bank protects the cartel and provides bank bailouts. Where does the central bank get the money? It creates it. It acts as a lender of last resort to a commercial bank.

Bank of England was privately owned until 1950? It is the model for all other central banks.
They bought government bonds. A group of men with relatively little money who get a license from the government to set up a monopoly in which it has the power to create money and then buy government bonds at a low rate of interest. Central bank kept the interest paid by bonds. They bought bonds with money they created and the bank got to keep the interest. This was the sweetest deal in western civilization. It has worked for a long time. They are stock rich.

Colonial banks did not participate in this system. All colonial banks failed. They were not part of the cartel and did not get the protection.

Colonial money-not based on banks, and access to the Bank of England. Only based on colonial government in North America and based on people in the private market place.
Specie-gold or silver coins. Not produced by N. Am institutions. Spain provided the most common coins.
Foreign coin was the most important. Spanish dollar was used-pieces of 8-there were 8 pieces to one dollar. The secret was simple-they were stable and predictable coins used all over western civilization.


State currency-each state had their own currency. Value was not consistent. Based on legislature. put out bills of credit that could be used as currency. The states did not print too many of these bills. There were no specie coins issued by states.

Other-sugar, tobacco, rice. Money has to be relatively scarce, dividable, etc. Less true into the 18thcentury.
Private credit. Most transactions in stores. The store would offer credit to people and they had to pay it off. This was how most purchases were made.

Shortage of money in the colonies usually happened when colonies did not establish good exchange rates. This drove out Spanish specie dollars. British established price ceilings that were wrong. The coins were worth more. People did not use their coins. They held onto the coins and used the paper money. The coins were more plentiful that the paper money. Gresham's Law-bad money drives out good. There is no shortage of money in a free market. Why? If money flows out of a country for foreign imports. If people are buying foreign imports. In comes the supply of goods people bought. There is a decrease in the supply of money. So prices will go down. Lower prices lure foreign buyers to buy more. If there are bargains people will come.

Prices allocate supply and demand. The shortage of money in the colonies. The person writing it doesn't understand. The idea is theoretically wrong. It is not what happened. Inflation led to shortage of money. Wrong. The main reason for inflation is to pay off wars. Inflation was the worst during the American Revolution it went down to 0.
Shortage: At what price?

Glut: At what price?

Shortage of money: At what price?

Glut of goods: At what price?

Gresham's law (popular): "Bad money drives out good money."

Gresham's law (accurate): "Money overvalued by the state drives out money undervalued by the state."

bankrupt-bank ruptured