Throughout history, state-led 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?
History has many examples of governments successfully growing their economies through state-led money creation. While none of these policies were called, “QE for People”, “Sovereign Money Creation”, or “Helicopter Money”, 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 state-led 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 state-led money creation in Zimbabwe and the Weimar Republic. In our most recent post, we highlighted some lessons from state-led 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 Money, Dyson 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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