The Currency Act (1764) was a British attempt to limit and regulate the use of paper money in the American colonies. Prior to the 1760s the American colonists had created their own paper money for internal trade (see the picture, right, for a 1740 example from New Hampshire). These banknotes, called colonial scrip, were a form of fiat currency, with no value elsewhere and not backed by gold. The Americans had issued this paper currency as something of a last resort: not only were there no local gold or silver mines in the colonies, but throughout the mid-1700s there was also a decline in the amount of raw precious metals and specie in America. Another problem was that there was no single, uniform standard of currency throughout the thirteen British colonies. The value of a pound note in Boston might be different in other parts of the continent.
The shortage of gold in America was no accident: it was the result of deliberate British policy. The underlying economic ideology in Britain was mercantilism: the belief that colonies existed only to benefit and supply the mother country with raw materials. Mercantilist economists argued that the amount of gold held in a nation’s treasury was the most crucial determinant of its wealth; the ambition was for Britain to own and store more gold than France. Mercantilist acts of parliament were passed that required all colonial debts to England to be paid using gold or silver, rather than other means such as promissory notes or payment in kind. The flow of gold between the colonies and Britain was closely regulated: a trickle one way and a steady stream the other. By the mid-1760s there was a distinct shortage of gold in the colonies, leading more banks and companies to issue paper money.
A historian’s view:
“The Currency Act effectively outlawed most colonial paper money… British merchants had long complained that Americans were paying their debts in inflated local currencies. [But] Americans could accumulate little sterling because they imported more than they exported; colonists complained that the act deprived them of a useful medium of exchange [and was] imposed on an economy already in the midst of depression.”
Mary Beth Norton
The most logical measure at this juncture would have been for parliament to issue its own paper currency in the colonies, providing a regulated and consistent standard. Instead they simply abolished the issue of all new money, infuriating colonists employed in finance or large-scale trade. Currency would remain a biting problem all through the revolutionary period, particularly during and after the War of Independence. With no strong central body to oversee and regulate the issuing of paper money, as demand for goods increased so too did the production of fiat banknotes, usually by the thirteen colonies or states. As all those familiar with basic economics would know, excessive printing of paper currency without the gold or the commodities to support it results in deterioration in the value of those notes and hyperinflation. It was a problem that wasn’t fully overcome until after the enactment of the Constitution.