By Nancy Spannaus

Jan. 19, 2024—One of the lesser-known writings of Founding Father Benjamin Franklin is his 1729 paper entitled A Modest Enquiry into the Nature and Necessity of a Paper-Currency. In celebration of Franklin’s 318th birthday (Jan. 17, 1706), I have decided to once again bring this document to the attention of those seeking to understand the principles behind the American System of Political Economy.[1]

The young Benjamin Franklin in Philadelphia

Franklin and Alexander Hamilton played very different roles in our history, but I believe that this paper reflects some critical similarities in their thinking. Both leaders were committed to ensuring that the state’s financial system served to foster the growth of trade and manufactures for their populations. And both concluded that the government must therefore support the circulation of a paper currency in the quantities and at the interest rate or cost required to create such a prosperous economy.

Would that we today would administer our monetary policy by the same standard!

The Immediate Context

At the time Franklin wrote his treatise, there were no commercial banks in Pennsylvania. Before 1723, business had to be transacted by barter, with whatever coins were available (mostly Spanish), with agreed-upon commodities (such as tobacco in Virginia), or through British trading houses. But in that year, the Pennsylvania government issued 45,000 pounds worth of bills of credit, most of which were to be loaned to individuals at 5 percent interest, on the security of real estate, for a certain number of years. This was done through land banks set up for this purpose. The bills were short-term, in the sense that they were taken out of circulation when the loan was repaid.

A new issuance was made in 1726, but by 1729, agitation arose for an additional large issuance, a lower interest rate, and extended terms for repayment.

The Pennsylvania proprietors (living in England) and the British government objected, leading young Franklin to jump into the fray. He argued that the paper currency had contributed greatly to the prosperity of the province, and that its terms should in fact be liberalized.

His pamphlet was anonymous but helpful in achieving the desired result: a new issuance of 30,000 pounds in credit.[2]

The Broader Context

As you might expect, the conflict over this issue in Pennsylvania was the continuation of a much longer battle between the British Empire and the American colonies. The first colony to establish its own currency was Massachusetts, back in 1652. Its “tree shillings”[3] were issued in order to encourage local commerce, and reduce the need to drain the colony of specie. The British government ordered a ban on that issuance in 1684, so in 1690 the Massachusetts authorities began issuing bills of credit, which were acceptable for taxes as well as local business.

The Pine Tree shilling, issued by Massachusetts, filled the need for a currency, but was banned by the British. It was replaced by bills of credit.

Other colonies eventually followed suit, much to the British government’s consternation. In 1720, parliament issued laws forbidding the issuance of such currency without a clause permitting its suspension.  In 1740, it banned the Massachusetts land bank, and in 1751 banned all issuance of credit in the New England colonies.

The capstone, however, was the British 1764 Currency Act, which ordered the cessation of all issuances of paper currency by all colonies, demanding that they return to a strictly specie-based payment system through the British financial institutions. The purpose was clear: the mother country wanted to maintain near-total control over the colonial economy, and gain maximum financial benefit through insisting on being the sole provider of manufactures, and receiving the maximum of specie payments for their goods.

In later days, Franklin is reported to have charged that the Currency Act’s dampening effect on the colonial economies was a major contributor to the revolutionary sentiment that led to the war with Great Britain. In 1729, he still hoped to convince the British authorities, along with a faction of wealthy Pennsylvanians, that the issuance of a state-backed paper currency was a step toward prosperity for all.

“The Nature and Necessity of a Paper Currency”

Franklin organized his paper around certain propositions, which he proceeded to “prove.” The first was “A great Want of Money  in any Trading Country, occasions Interest to be at a very high Rate.” This argument was repeated almost word for word in Hamilton’s Report on a National Bank, when he is arguing for the establishment of bank credit (which was also paper). Hamilton asserted, without contradicting it, that “there is a leading view, in which the tendency of banks will be seen to be, to abrige rather than to promote usury.”

Franklin’s second proposition was: “Want of Money in a Country reduces the Price of that Part of its Produce which is used in Trade.” In other words, lack of credit will hurt demand, and tend to increase unemployment. He then argues that the recent issuances of the paper currency by the Pennsylvania government were one of the causes of the flourishing of the local economy, especially the ship-building industry.

Pennsylvania’s bills of credit played a key role in allowing Philadelphia’s shipyards, shown here, to thrive.

The third was “Want of Money in a Country discourages Labouring and Handicrafts Men (which are the chief Strength and Support of a People) from coming to settle in it, and induces many that were settled to leave the Country, and seek Entertainment and Employment in other Places, where they can be better paid.”  But the abundance of money will do the opposite, encouraging industry, increasing the value of land, and “enlivening” business to the benefit of “Brickmakers, Bricklayers, Masons, Carpenters, Shoemakers, Shop-keepers….,” etc. Note the desire to encourage immigration, a view Hamilton shared.

Fourth, “Want of Money is such a Country as ours, occasions a greater Consumption of English and European Goods, in Proportion to the Number of the People, than there would otherwise be.” Such consumption makes the country poorer, Franklin argued; it’s better to produce for ourselves. This argument too can be seen in Hamilton’s later writings, specifically the Report on Manufactures.

Franklin then argued that the end-result of issuing the paper currency – “advancing this Province in Trade and Riches, and increasing the Number of its People” – will be to the advantage of everyone, including the inhabitants of Great Britain.  There is no objective reason for them to object to the new issuance, as it will benefit all.

A Pennsylvania bill of credit, printed by Franklin’s printing company

The second part of Franklin’s paper shifted into discussing the nature and value of money in general, and why the issuance of the bills need not be inflationary. Here, he elaborated on what is called the “labour theory of value,” noting that the fundamental basis for valuation of hard currency (silver and gold) and money, is the amount of labor required to produce various items. To make a long argument short, he asserted that the use of a paper currency reduces the labor required for trade and industry, and thus encourages prosperity. And the lower the rate of interest charged for that currency (which is actually a loan), the more trade will be encouraged.

And what about the fears of inflation, or overproduction? Franklin argued that these fears are unfounded: the first, because a strict and skillful administration of the loans will prevent inflation, and the second, because “we can never have too many People.” In fact, our country (he’s talking about Pennsylvania here) is currently lacking people to work in many areas of manufacturing which are desirable, so if one area of the economy is ”overstocked,” there are many places where workers are needed.

Different Context, Similar Goals

A brief note on the comparison of Franklin’s paper and Alexander Hamilton’s is in order.

First, it is crucial to understand that they are talking about very different institutional arrangements. Franklin is discussing state government issuances of loans to the public through bills of credit at a time when American commercial banks were not available, whereas Hamilton is proposing bank loans to the public through a private (although partially government-owned) institution, the Bank of the United States. Both, however, resulted in the creation of a circulating medium tied to goods production and commerce, which contributed to the growth of the physical economy, and thus prosperity.

Alexander Hamilton at the Treasury

But there was a common foundation which has been critical to the progress of the economy under the principles of the American System. That is the essential role of government-backed credit[4] to promote economic growth. Both Franklin and Hamilton were dedicated to creating prosperity by 1) reducing the cost of obtaining money for investment (reducing usury with lower interest rates); and 2) expanding the amount of money (credit) available for those investments. They were also interested in reducing the dependence of the American (or Pennsylvanian, in Franklin’s case) economy on the mother country, by increasing manufactures and population.

Was Alexander Hamilton familiar with Franklin’s 1729 work?  I don’t know. More likely, both had read the same or similar economic treatises from Europe, and adapted them to their common values: building a prosperous and just economy. They insisted that their country’s financial system be constructed so as to benefit the “general welfare.”

The very same principle that we have to apply today.

Nancy Spannaus is the author of Hamilton Versus Wall Street: The Core Principles of the American System of Economics, and Defeating Slavery: Hamilton’s American System Showed the Way.

[1] My first reading of this document was in 1976, when I was working on The Political Economy of the American Revolution. The full text is included in that volume of primary sources, which is still available on Amazon. I also republished Franklin’s full document in a post celebrating his birthday back in 2019. Click here.

[2] See the introduction to Franklin’s document in Volume 1 of The Papers of Benjamin Franklin, edited by Leonard W. Labaree, Yale University Press, 1959.

[3] The most famous was the “Pine Tree Shilling” which circulated beyond Massachusetts for about 30 years, even to the Caribbean.

[4] Hamilton has an elaborated discussion of the role of credit in his 1795 Report on a Plan for the Further Support of Public Credit, available here.

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