Paying for Goods and Services

Sources

Business and Consumer Credit. In the colonies the shortage of specie (gold and silver coin) made credit an important means of paying for goods. About 80 percent of the goods purchased from Britain was bought on credit. Credit also functioned as a kind of seed capital: it allowed farmers to grow and harvest their products before selling them, a process that could take months and

even years to complete. Local storekeepers extended up to nine months’ worth of credit to farmers for seed and supplies. The storekeeper, in his turn, depended on about twelve months’ credit from merchants in the large cities, who were also given credit by their British suppliers. Southern planters also relied on credit. They extended it to one another or obtained it from English and Scottish merchants. In the late colonial period the British merchants extended increasingly liberal credit terms to thirty-five thousand planters in Virginia alone. A Glasgow merchant operating in the Chesapeake in 1766 observed that young men in that area “must have some household furniture and working tools. With these, they are supplied upon Credit, by some Factor or Storekeeper.” He concluded that credit was granted on the basis of the young men’s “labor, industry and honesty” rather than on their “real property.” Most of these accounts were for the relatively small amount of under £100, but collectively they totaled about £2 million worth of credit. The increased indebtedness of planters did not necessarily mean that they were in economic trouble. On the contrary, going into debt often meant that planters were optimistic about the economy and the future, so they borrowed to buy more land and slaves. Credit was a valuable asset in the developing colonial economy because it allowed individuals to do business across vast distances, from the British ports all the way to the most remote trading outpost on the frontier. But credit also made people extremely vulnerable to economic downturns. When prices for crops were good, everyone got paid quickly. But during a downturn, such as the one that hit tobacco prices during the early 1770s, the whole process slowed down. A lot of people were unable to pay their debts and became insolvent.

Paper Currency. People of the eighteenth century believed that specie was the safest and best form of money. Unfortunately the colonists’ supply of specie tended to flow to Britain because of the huge amount of British-made goods that the colonies bought. In order to compensate for this loss and to pay for government expenses, most colonies printed their own paper money, especially during wartime. The paper money took the form of “bills of credit.” Rather than levying additional taxes, which would have been unpopular with voters, the colonial governments simply issued these bills to pay for the supplies they bought. In effect the government borrowed from their suppliers by giving them a kind of IOU that circulated as paper money among the populace. The bills were later retired—that is, taken out of circulation—when the governments accepted them as payment for taxes. At a time when few colonists had much liquid wealth (specie), this method was often the only way that colonial governments could get people to pay for public expenditures. The paper money issued by colonial governments and land banks generally worked well, especially in the Middle colonies. Prior to the War of Independence the currencies usually held their value, and people used them as readily as they did specie. Many currencies even circulated outside of the colonies that issued them. But the paper money caused problems with Parliament. Colonial creditors and British traders complained whenever the bills of credit lost their value, as they sometimes did in New England and the Southern colonies. The Currency Act of 1751 ordered the New England colonies to retire their bills of credit within two years after they had been issued and prohibited the use of paper money in the settlement of private debts. In 1764 Parliament prohibited all of the colonies from using paper money to pay any kind of debt, public or private. Both acts caused great resentment

among the colonists, and they often broke the law. In 1773 Parliament relented and allowed colonial paper money to be used for paying taxes. A year later an estimated $12 million was in circulation throughout the colonies. Some colonists, including Benjamin Franklin, believed that plentiful paper money was good for the economy so long as it was carefully monitored by the colonial governments.

Other Ways to Pay. Merchants living far away from one another used an instrument called a “bill of exchange” to pay for goods. They used it instead of specie, which was in short supply and dangerous to transport. This method of payment had originated in the Middle Ages and was widely used by Venetian merchants. A bill of exchange was similar to a modern-day check except that it was used exclusively by merchants, and it was drawn on other merchants rather than on a bank. Each merchant who received a bill of exchange as payment for goods imposed a service fee for accepting it. In business parlance the bills of exchange made the value of the goods they represented liquid and therefore capable of being traded more easily and quickly. By the seventeenth century the bills functioned as a kind of currency within the merchant community. Ordinary consumers also had other means of paying for goods whenever specie and paper money were in short supply. Storekeepers accepted all sorts of “country produce” as payment, and rural customers brought in eggs, chickens, wheat, corn, deerskins, furs, and butter (made mostly by the women of the house) to exchange for store-bought goods. Storekeepers sold the perishable items such as butter locally. They shipped the rest of the country produce to nearby cities, either for consumption there or for export overseas.

Land Banks. The colonists did not have banks in the modern sense. Theirs did not accept deposits from customers, clear checks, or buy and sell foreign currencies. Instead the colonial governments chartered banks that functioned essentially as loan offices. They were called land banks because land was used as collateral for the loans. This way the colonists used their most plentiful asset—land—as the basis for money and credit. In the eighteenth century every colony except Virginia had land banks that made loans in the form of bills of credit. People used these bills as a kind of paper money, in the same way that they used the bills issued by colonial governments. In the Middle colonies the loans issued by public land banks served as a substitute for taxes because the government received interest on the loans. Pennsylvania operated a land bank almost continuously after 1723. The land banks became popular with the colonists. According to John Adams the Currency Act of 1751, which prohibited private land banks in New England, “raised a greater ferment” in Massachusetts “than the Stamp-Act did.” The first true commercial bank was established only in 1781 with the Bank of North America. Afterward other commercial banks appeared that bought—or “discounted”—commercial bills and notes from merchants and created deposits, similar to modern-day checking accounts, on which they could draw.

WEALTH DISTRIBUTION: AVERAGE FOR ALL WEALTH HOLDERS, 1774

Free white colonists were well-off compared to their European counterparts. Probate records— lists of people’s assets that were made upon their deaths—show that in 1774 the average wealth holder owned about £252 worth of assets. (Wealth holders made up about one-quarter of the total free population.) Land accounted for the largest portion of these people’s assets, followed by slaves. Wealth was not evenly distributed. Then as now, the top 20 percent of wealth holders owned a disproportionately large share.

Sources

Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, N.J.: Princeton University Press, 1957);

Jacob Price, Capital and Credit in Birtish Overseas Trade: The View from the Chesapeake, 1700-1776 (Cambridge, Mass.: Harvard University Press, 1980).