MMT, Massachusetts Bay Colony, and the Invention of Motives

When paper money was issued in America, it became the first authorized by any government in the Western world. The Massachusetts Bay Colony financed a military expedition to Canada in 1690 by issuing bills of credit. Subsequent military campaigns and other expenses by other Colonies were funded in a similar way... In all cases, they were a financial expedient adopted to cover a lack of funds by promising to “pay later.”

- American Numismatic Society

Excerpts below are from The Colonial Roots of American Taxation, 1607-1700 by Alvin Rabushka. From the Hoover Institution:

Official paper money was first issued by the Massachusetts Bay Colony in 1690. (Seven more colonies followed by 1712.) A military expedition led by its governor, Sir William Phipps, set out in the fall of 1690 to conquer Quebec. It failed. The colonial government expected the soldiers to be paid from seizing the enemy’s treasury. Upon their return, the surviving soldiers demanded immediate pay from the government. The colonial treasury was empty, as revenues were collected only to meet anticipated annual expenditures. The solution was to issue bills in the form of “certificates of indebtedness” to the possessor on the part of the legislature. Bills would be receivable by the colonial treasury in payment of taxes.

Note that the Machusetts Bay authorities did not say You have to use these certificates of indebtedness to pay your taxes. They said: We lost the skirmish. We didn't get the spoils of war. The treasury is empty. We have nothing to pay you.

They said: But we can give you these certificates of indebtedness. They may not be good for much, but at least you can use them to pay the taxes you owe us. It's the best we can do for you. We feel terrible about this, really. Please accept the certificates.

The certificates of indebtedness were made acceptable in payment of taxes so the soldiers would find them of some value. That's not anything like saying you "have to" use these certificates or "you must" use them, which is the story MMT tells.

Let me go back and finish that paragraph.

Bills would be receivable by the colonial treasury in payment of taxes. The law provided that a portion of the notes would be called in and retired (destroyed) each year as revenues materialized.

Sounds exactly like MMT, which says that when the Federal government receives tax payments, they "shred" them. Stupidest thing I ever heard. But it made sense in Massachusetts Bay colony in the 1690s, because the certificates of indebtedness weren't money anyway. They were “bills of credit”. They were IOUs issued by the Massachusetts Bay colony, that could be used in payment of taxes.

So you'd pay your taxes with them, and they'd mark your taxes "paid". And then they'd discarded the IOUs. That's similar to MMT saying the Federal government discards the taxes you pay it. But it makes perfect sense to shred the retired IOUs, and it makes no sense at all to discard money. I think MMT is trying to make us understand that money is just an IOU. But that idea is too over-simplified to be correct.

The Massachusetts Bay authorities did not say "you must use these to pay your taxes". They said "this is the best we can do for you. Please take the certificates. To give them some value, we'll let you use them to pay your taxes." They did not say "you have to use them to pay your taxes". But at least the soldiers could do more than frame their certificates and hang them on the wall.

Things in Massachusetts Bay in the 1690s were not as MMT says things are today. Massachusetts Bay didn't print paper money and say "you have to pay your taxes" with it. They did not say "you must" pay your taxes with it. They did not say "you need it in order to pay your taxes". The soldiers would have preferred real money, of course. They didn't want the certificates of indebtedness. They took em because the certificates were better than nothing.

The bills issued in 1690 were called Colony or Old Charter bills. They became known as “bills of public credit,” or “bills of credit” for short, and were printed in denominations of 5s., 10s.. 20s., and £5. Their issue was justified on the basis of borrowing for a specific public expenditure. The bills were not called money since none of the colonies had received the right to coin money. Bills of credit were inscribed as legal tender and valid payments for all obligations, including taxes and bills of exchange. The original issue in the amount of £7,000 was raised to £40,000 a year later.

Bills of credit were initially met with distrust. Soldiers who received the first bills were able to exchange them for no more than 12-14 shillings to the pound in other forms of money. To establish public confidence in them, by an act in 1692 the General Court of the colony, its governing body, attached a 5 percent premium in their use to pay taxes (which remained in place until 1720). This measure made bills of credit more valuable than other lawful money. By early 1693, most of the bills had been redeemed. Popular demand for bills of credit to facilitate commerce and payment of taxes led to their regular reissue. Bills of credit remained at par with specie for about 20 years.

When I took my three credits of macro, the teacher emphasized the difference between our economy and a "command" economy. The policy of a command economy tells you YOU MUST. The policy of our economy uses inducements like the 5 percent premium, which increased the value of the certificates of indebtedness. Inducements make us want to do what they want us to do. Commands only remind us how much we don't want to do what they want us to do.

It troubles me when MMT describes our economy as a command economy. It's wrong.


Oh, and

Fees, taxes, and personal debts could be settled in any form of lawful money. Colonial legislatures gave locally produced crops (cereals, corn, tobacco, rice) official value for payment of taxes.

Nobody said you HAVE TO pay your taxes with the certificates of indebtedness. You could pay your taxes with "any form of lawful money", maybe even vegetables from your garden.

It may in fact be the case that payment of taxes was the only use open to the soldiers when the certificates were first issued. But saying HAVE TO requires that we invent unpleasant motives and assign them to Mass Bay. That's what I object to most of all in the argument MMT makes, the invention of other people's motives.


The bills of credit were promises to "pay later", as the American Numismatic Society says. As long as US paper money had precious metal backing, paper money was also a promise to pay. It was like a "bill of credit".

When President Nixon took the dollar off gold, the dollar stopped being a promise to pay. It became the payment. It became money. Fiat money, if you like, but money.

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