Personal promissory notes (often called I.O.U.'s) have been recognized as legal agreements between two or more parties for many centuries. These notes serve as a written contract of a transaction undertaken by specified parties. In the New World necessity sometimes required these agreements to be constructed rather loosely. In 1685, due to a delay in receiving their pay chest, French military personnel in Canada were paid with playing cards that had been cut into quarters and denominated. These cards were then used by the soldiers to purchase items within the area of the garrison. In effect the cards were treated as "bearer instruments." Rather than record terms between specific individuals the cards were valid for exchange by anyone who had possession of them, thus they could circulate from person to person. The French government did not sanction this necessary but unorthodox situation and considered the cards to be personal promissory notes rather than official currency.
Expediency also forced the colony of Massachusetts Bay to take the concept of "bearer" promissory notes a step further. In 1690 the legislature found itself faced with an immediate need to pay expenses relating to a military action against Canada during King William's War. In April of 1690 Sir William Phips had easily defeated the French settlement in Acadia. On May 28, two days before Phips had returned from his victory, a bill for the "encouragement of volunteers for an expedition against Canada" passed in the House of Deputies. The bill stated in addition to soldier's pay, "one just half part of all plunder, taken from the enemy, should be shared among the officers, soldiers, and seamen, stores of war excepted." Further, on June 6th a loan for the expedition was authorized to which subscribers, "besides the repayment of their money, after all charges of the expedition were defrayed, and the proportion of plunder assigned to officers, seamen, and soldiers, the remainder should be equally divided between the country and the subscribers."
In early August Phips set sail with thirty two ships and over 2,000 men to take Quebec, which was under the command of Count Frontenac. Phips laid siege to the fortress but was unsuccessful, returning to Boston in failure with part of his fleet damaged. The colony had not considered this possibility. They had counted on French booty to increase their depleted coffers so they would be able to pay the troops. Meanwhile, both the soldiers and the creditors expected payment in full. The situation grew serious with the threat of a mutiny by the soldiers. The colony could not expect financial support from Britain nor could they wait the year or two it would take to collect a special tax. Instead, on December 10, 1690 the Massachusetts General Court authorized the issuing of £7,000 in public paper currency. This novel solution seemed the only way to immediately satisfy the soldiers and creditors of the otherwise bankrupt colony. At the time no one realized this was the first public paper money issued in the history of Western civilization.
What follows is an excerpt from the act authorizing the emission, from the records of the General Court of Massachusetts for December 10, 1690:
Whereas (for the maintaining and defending of their Majesties interests against the hostile invasions of their French and Indian enemies who have begun and are combined in the prosecution of a Bloody war upon the English of their Majesties Colonys and plantations of New England) this Colony hath necessarily contracted sundry considerable debts, which the Court taking into consideration and being desirous to approve themselves Just and honest in the discharge of the same and that every person who hath credit with the country for the use of any of his estate, disbursements, or services done for the Public, and in convenient time receive due and equal satisfaction; withal considering the present poverty and calamities of the country And (through scarcity of money) the want of adequate measure of Commerce whereby they are disadvantaged in making present payment as desired; Yet being willing to settle and adjust the accompts (sic) of the said debts, and to make payment thereof, with what speed they can
It is ordered by the Court that Major Elisha Hutchinson, Major John Phillips, Captain Penn Townsend, Mr. Adam Winthrop and Mr. Timothy Thornton or any three of them, be and are hereby appointed and impowered (sic) a Committee for the granting forth of Printed Bills in such form as is agreed upon by this Court (none under five shillings nor exceeding five pounds in one bill) unto all such persons who shall desire the same, to whom the Colony is indebted, for such sum or sums of money as they have debentures from the Committee, or Committees that are or shall be appointed to give out the same, Every of which Bills according to the sums therein expressed shall be of equal Value with money, and the Treasurer and all the receivers subordinate to him shall accept, and receive the same accordingly in all Publick Payments; No more of Said Bills, to be Printed or granted forth than for the Sum of Seven thousand Pounds; And the Colony is hereby engaged to Satisfy the Value of Said Bills as the Treasury shall be enabled, And any person having of said Bills in his Hands, may Accordingly return the same to the Treasurer, and shall receive the full Sum thereof in Money, or other Public Stock at the Money Price as Stated for that time. And if any of the said Bills be worn in any Persons hands, so as they desire to renew them, returning them to the Committee, they shall have new ones of the same numbers and sums given out.The act continues with an explanation of the design and text for the bills.
A supplemental law of February 3, 1691 removed the £7,000 limit and authorized an additional emission of currency to be printed. The law further decreed paper money would be accepted by the government for tax payments at a 5% premium ("Bills of 20s shall be accepted in all Publick Payments...at 21s and so proportionally for all Bills"). It also provided for the dissemination of the bills. Selectmen from each town would come to Boston representing fellow townsmen to whom the colony owed money. The Selectmen would turn in the promissory notes the colony had issued to these people and then would be paid currency for the full amount of the debts. The Selectmen would take the funds back to their towns and disperse the currency as required.
Further legislation on May 21, 1691 limited the size of both emissions (December 1690 and February 1691) to an aggregate total of £40,000. It also clarified some details not addressed in the earlier acts. A committee of Mr. John Foster, Captain Joseph Lynde and Captain Samuel Ruggles was formed to insure the "safe custody of the Plates which the Bills were printed off with." They were also charged to insure the colony treasury books accurately recorded all bills that had been paid back into the treasury. They were to inventory the redeemed bills and to "dispose of, and secure those Bills as there may be no Danger of their Coming forth again into any private hands."
By October of 1691 £10,000 in notes that had been turned into the treasury in payment of taxes were destroyed. According to Nettels people were not willing to accept the paper currency in daily exchanges at the same rate as coins so the General Court approved a tax of £30,000 to be collected in 1693-1694, which would retire most of the bills. To insure the highest tax return the Court abolished the 5% premium on the notes for tax payments in December of 1693. However they soon realized the premium made the notes more acceptable to the public so it was reinstated a few years later.
Excerpts from: The Massachusetts Court Records, vol. 6, pp. 170-171 for Dec. 10, 1690; The Massachusetts Archives, vol. 36, no. 383 for February 3, 1691 and The Massachusetts Court Records, vol 6, p. 185 for May 21, 1691 - all as quoted in Andrew McFarland Davis, Currency and Banking in the Province of the Massachusetts Bay, rpt of 1900 edition, New YorK: A.M. Kelley, 1970, vol. 1, pp. 10-13 also see Curtis P. Nettels, The Money Supply of the American Colonies before 1720, University of Wisconsin Studies in Social Science and History, number 20, Madison: University of Wisconsin, 1934, pp. 250-277 especially p. 257 footnote 31 and p. 263.