MA Bay Colony Issues First Paper Money in America (1690)
On February 3, 1690, the Massachusetts Bay Colony issued the very first paper money in the American colonies. In particular, the MA Bay Colony issued around $40,000 worth of bills of credit, i.e. IOUs.
The British King authorized the MA Bay Colony to issue the paper money in order to pay the army it had raised to fight against the French in Canada. Because Britain did not have enough official coins at that time, the King said the paper money represented the colony’s obligation to the soldiers for their service.
Each note stated:
This indented Bill of [...] Shillings due from the Massachusetts Colony to the Possessor shall be in value equal to money and shall be accordingly accepted by the Treasurer and Receiver Subordinates to him in all Public payments and for any stock at any time in the Treasury - New England, February the third, 1690. By order of the General Court. (Source:
www.modernhistorian.blogspot.com)
Interestingly, the paper money was not backed by land or other means. In fact, potential recipients of the paper money could actually refuse to accept it! So, the paper money acted simply as an IOU from England to the soldiers. Other colonies followed the MA Bay Colony’s example and created their own paper money. But these currencies generally did not last because of inflation and the lack of suitable backing for the money.
Less than 100 years later, two competing currencies were created to finance the Civil War. But these currencies were unstable, as they rose and fall with the events of the war. It wasn't until after the Civil War when Congress passed the National Bank Act that the U.S. government created a more stable monetary system. At that time, banks could issue paper notes based on how many government bonds they had. Finally, years later, the national bank note as we know it today (i.e. "greenback") was created – which was the first uniform U.S. paper money.