Public Money Creation Where You Least Expected It! (A History of Public Money Creation Part 4)

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Throughout history, Public Money Creation has been the norm, rather than the exception. What can we learn from money creation by the former Colony of Pennsylvania and the Island of Guernsey?

Throughout history, governments have used their ability to create money to fund public spending. While none of these policies were called, “People’s QE”, “Strategic QE”, “Sovereign “Money Creation”, or “Helicopter Money” (what Positive Money collectively refers to as Public Money Creation), they shared the common trait of using newly created state money to finance government spending, rather than relying on commercial banks to create new money through lending.

The times when this Public Money Creation has resulted in high inflation or even hyperinflation (inflation of over 50% a year) have been well documented. However, the times when governments have created money in a careful and responsible manner to grow the economy are usually ignored or overlooked. At Positive Money we want to set the record straight and bring to light the many case studies where state-led money creation has successfully boosted the economy without leading to economic disaster.

In our previous posts on this topic, we showed that theory and analysis have been dispensed with at the expense of this widespread misconception. We also showed that misleading conclusions have been drawn from the case studies of Public Money Creation in Zimbabwe and the Weimar Republic.   In our most recent post, we highlighted some lessons from Public Money Creation under the Roman and Chinese empires. In this post, we shall look at the cases of the Colony of Pennsylvania and the Island of Guernsey.


The Colony of Pennsylvania (1723)

In Modernising MoneyDyson and Jackson (2012) demonstrate how the Pennsylvania Colony was successful in its efforts to create money to stimulate demand, and managed to do so without prompting a high level of inflation. With the British South Sea Bubble having burst in 1720 (causing a financial crisis and a number of bankruptcies), the typical symptoms in the aftermath of a bust plagued global markets: deflation and a lack of spending caused by excessive hoarding. This had a number of effects on Pennsylvania’s economy:


“Firstly, the lower demand for goods negatively affected Pennsylvania’s exports to Britain. Secondly, imports from Great Brit­ain to Pennsylvania (which included a variety of commodities that had not been manufactured in the colonies because of the underdevelopment of its infrastructure and division of labour) began to fall. Thirdly, the hoarding of currency led to further scarcity in an already scarce medium of exchange.”


Accordingly, the governor of Pennsylvania told the legislature in 1723:


“I daily perceive more and more that the People languish for want of some Currency to revive Trade and Business, which is wholly at a Stand; therefore I am of Opinion, that all the Dispatch imaginable ought to be given to the Paper Bill.” (Lester, R., 1938).


Of vital importance, the Governor added that in order to maintain the value of the currency, “the quantity must be moderate”. By March 1723, the Pennsylvanian assembly agreed to pass an act that would allow the creation of £15,000 worth of paper money.


Of this amount, £11,000 was lent into the economy, where the loans had to be secured on land. Moreover, to maintain the currency in circulation, the money had to be re-lent upon repayment. As the newly created money was designed to help both the poor and subsidize the industrious, only £100 could be loaned to a single individual. This version of money creation, amounts to modern day proposals for Strategic QE by the New Economics Foundation – where money is created by the state, to on-lend to the productive sectors of the economy.


The residual £4,000 was to be spent into the economy on public works. This amounts to modern day proposals for Sovereign Money Creation or OMF, as spending could take place without the private sector taking on a corresponding amount of debt.


The initial experiment was successful and had virtually no affect on prices. As the economy thrived and demand for new loans increased, the assembly decided to create another £30,000 in December of the very same year. However, £26,500 of money was created for on-lending, while £3,500 was spent into circulation.


The case study of Pennsylvania is a great example of how new money creation doesn’t always result in an increase in prices. Indeed, Dyson and Jackson (2012) point to a study conducted by Lester (1938), which showed “that prices from 1721 until 1775 were more stable than in any subsequent period of equal length”.


It is, therefore, no surprise that many economists agree that Pennsylvania’s system of money creation was “to the manifest benefit of the province” and that “Favourable testimony can be found in nearly all commentators, modern or contemporary” (Fergusson, 1953). Adam Smith even praised the Pennsylvanian case study, and suggested that much of its success depended “upon the moderation with which it was used”. Indeed, Smith goes on to say:

“The same expedient was, upon different occasions, adopted by several other American colonies; but, from want of this moderation, it produced, in the greater part of them, much more disorder than convenience.”


Guernsey (1817 – Present)

While the island of Guernsey encompasses only 30 square miles (77 square kilometres) of land and a population of 65,000 people, it has been using the money creating powers of the state to finance public projects since 1817. The Napoleonic wars had devastated the infrastructure and economy of the small island. Its sea-walls were breaking down and its road had all but disappeared. There were virtually no trade or employment opportunities. In addition, government debt stood at £19,137 and carried an annual interest rate amounting to £2,390. However, gross national revenue for the entire island was a mere £3,000, meaning the majority of state revenue went to interest payments and little money was left to run the island.


In 1815 a committee was appointed to consider the state of the current market place and how it could be renovated. With further taxation and debt out of the question, the committee suggested that the state pay for it by issuing its own notes interest free. The initial proposal was rejected but later in the year the first issue of state notes was authorized to finance: a new church, new roads, and other state expenses.


To avoid inflation, the new money created had expiration dates and was effectively removed through taxation. Yet, growing economic activity necessitated a matching increase in the stock of money, thus the government created more money to be spent into circulation through public projects. Thus, in 1820 another £4,500 of notes was issued, this time to pay for the market place.


The monetary experiment in Guernsey was so successful that its government issued another £10,000 in 1821, £5,000 in 1824 and £20,000 in 1826. According to Professor Bob Blain of Southern Illinois University:


“By 1837, £50,000 had been issued interest-free for the primary use of projects like sea walls, roads, the marketplace, churches, and colleges. This sum more than doubled the island’s money supply during this thirteen-year period, but there was no inflation.”


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Frank Van Lerven

Frank is our Research and Policy Analyst, and is responsible for our research on current events. Frank also leads our research in Public Money Creation and Quantitative Easing. Prior to working on the availability of credit under a Sovereign Money system, Frank also researched issues related to the 1844 Bank Charter Act and its implications for contemporary monetary policy. With a Research Master’s in Advanced Political Economy (cum laude) and a BA in African Development Studies, Frank is especially interested in how Western financial systems (and models) influence developing economies.
  • jamesmurraylaw

    What to do? What to do?

    Frank has repeated Ben and Andrews’ tales of great outcomes arising from historical examples of PoMo Sovereign Money Creation.

    However, those in charge will ignore SMC etc and its defences as they have done so since its predessor advocates first appeared in the 1930s.

    The private banking system will not easily let go of its private money money tree.
    After all, it has even insinuated itself into economics text books to hide what we all know is the reality of Fractional Reserve Banking – where money comes from etc.

    I would be interested in suggestions as to how effectively to put Pomo arguments right in front of the public.

    Frank having right on his side may not be be enough….

    • RJ

      “What to do”.

      Continue doing what Franks doing. Making factual, easily understood information available to the public. And two. Understand clearly what money is. Very few do yet. And three. Stop promoting misinformation. PM is currently guilty of this. For example the 97% of money from bank lending. This is just wrong. A lot of new money is created from UK treasury spending. Where BoE reserves are given (credited) to the banks as an asset (a bank debit entry) to support the bank credit to the recipients bank account. This is new money no different to the bank credit resulting from bank lending. But the asset held by the bank is BoE reserves rather than a loan.

      Get these three component right and the rest will fall into place. The lie that austerity is necessary or economically desirable can be strongly challenged with clarity rather than muddled thinking. And promoting PM type reforms can still be still pursued but also steps taken as the treasury and banking system operates today can also be promoted. As Frank and others are doing with PQE.

      • jamesmurraylaw


        Yet again you pretend to support PoMo – 1./ and 2./ above.

        Then, 3./ in the next sentence you tell all that they got it wrong.

        You keep doing this claiming you are a supporter and a clarifier, but always you then object and obfuscate.

        Whats your game?

        You are in fact a troll….

      • PJM

        RJ, please clarify this a bit more, taking into account that we currently have a two-tier money system. PM’s claim that 97% of money was created ex nihilo by banks’ granting of loans is referring to 97% of the money in the lower tier (known by most of us as ‘the money supply’, and yet you wrote (Please forgive me for correcting you punctuation error where you wrote two sentences that should have been one, joined by a comma): “A lot of new money is created from UK treasury spending, where reserves are given (credited) to the banks as an asset (a bank debit entry) to support the bank credit to the recipients bank account. This is new money no different to the bank credit resulting from bank lending.”

        • RJ

          Wherever the UK Govt pay an entity the journal entries are as follows (simplified to take out offsetting journal entries)
          Example Govt pays PM £100,000 banking at BoS (all entries £100,000) for contracting work done (Govt expense / your income)

          DEBIT Expenses [a]
          CREDIT BoE Reserve account [b] = Govt debt increase

          DEBIT Treasury Asset [b]
          CREDIT BoS Account Reserves [c]

          Bank of Scotland
          DEBIT BoE Reserves [c]
          CREDIT PJM Bank account [d] = new money

          DEBIT Money at BoS [d] = new money
          CREDIT Revenue [a]

          Now you can see that all entries offset each other [abcd]
          And that treasury payments result in new money. UK Govt spending is over £500 billion every year. This is a lot more than 3% of yearly lending in the UK

          All I’m saying is that PM need to be a lot more precise. And comparing bank credit to notes and coins in circulation to the past is completely meaningless. And misleading if it’s used to imply that the 99% are somehow worse off because the ratio has changed. The key today as it was in the past is the size of the Govt deficit and how the Govt spends and taxes.

          • jamesmurraylaw


            I challenge anybody yo understand your above ‘explanation’.

            I have said for many months, and still believe, that you are in the business of confusing readers to these pages.

            This is for reasons unstated but assumed by me that you are some sort of troll who wishes SMC – sovereign money creation – to just ‘go away’ or otherwise be discredited.

            You post little else than that your precious double entry bookkeeping, with its journal entries as above, somehow ‘prove’ that What PM says is wrong.

            You claim that tithe usage of banking reserves and the accompanying journal entries show that the Govt creates more ‘fiat’ money than in the 3% money supply that is notes and coins.

            Perhaps if Frank et al were to respond to your saying this, you will stop your ridiculous obfuscating.

          • RJ

            its easy to prove

            What happens when the BoE buys back bonds. Say I sell bonds and bank at the BoS. I get extra money. The BoS end up with more reserves. So
            the Bank of Scotland JEs are

            DEBIT BoE reserves
            CREDIT My bank account = NEW MONEY

            So bonds repurchases create new money.
            And Bond sales destroy money. And taxes destroy money.
            And spending creates new money

            The journal entries make this very clear. All I’m saying is PM need to be more precise. Otherwise down the track they will be discredited if this reform movement becomes a more serious one.

          • jamesmurraylaw


            Absolute nonsense!

            AGAIN you’re trying feebly to confuse the issue so that casual readers will be put off.

            Just as you have been all along with your false paeans to double entry bookkeeping and its journal entries.

            Modern day Governments DO NOT create money by transferring between reserves at the the B of E.

            I challenge you to produce just one reputable link to support your nonsense.

            Or even a link where the UK Govt shows accounts on the income side which shows it has received money to spend from such reserve transfers.


            So put up or shut up….

            Silly troll.

          • RJ

            What do you think Frank about paying interest on excess reserves? QE resulted in bonds being bought back from the public. This resulted in
            -The sellers holding more cash (bank credit) but also
            – The banks holding more excess reserves
            Now if QE was £1 trillion and interest on excess reserves was 0.5%. This generates 5 billion profit for the banks. For doing nothing.

            That’s the thing with not selling Govt bonds to drain reserves from Govt spending (and Govt spending does create new money just like bank lending does). We lose an interest bearing asset. And the banks start to earn huge interest. Do you agree or not?

        • RJ

          “(Please forgive me for correcting you punctuation error where you wrote
          two sentences that should have been one, joined by a comma)”

          At least you are not carrying on like James. For that I am thankful.

  • John C. Turmel, B. Eng.

    Jct: So here’s historic evidence of central bank accounts working for governments and http://SmartestManOnEarth.Ca says central bank accounts also work for the citizens.

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