Promissory Notes

The Increase in Fiat (Personal Debt) Increases Inflation

⁹⁷ It would be otherwise with a paper money consisting in promissory notes, of which the immediate payment:

• depended on the goodwill of its issuers,
• depended on a condition which the holder of the notes might not always be able to fulfill, and
• could only be made after a certain number of years and bore no interest in the meantime.

Paper money in promissory notes would fall below the value of gold and silver according to:

• the difficulty or uncertainty of obtaining immediate payment, and
• the length of time at which payment could be made.

Length of Time

⁹⁸ Some years ago, the Scottish banks inserted an optional clause into their bank notes. They promised payment to the bearer:

• as soon as the note should be presented, or
• six months after such presentment, with 6-month interest.

Some bank directors took advantage of this optional clause. They sometimes threatened those who demanded gold and silver for their notes, that the demanders should be content with just a part of what they demanded.

At that time, the bank’s promissory made up most of Scottish currency.

• This uncertainty of payment degraded the currency below the value of gold and silver money.
• This abuse occurred chiefly from 1762-1764.
• Back then, the exchange between London and Carlisle, Scotland was at par.

The exchange between London and Dumfries, Scotland would sometimes be 4% against Dumfries, even though Dumfries was less than 30 miles away from Carlisle.

• At Carlisle, bills were paid in gold and silver.
• At Dumfries, bills were paid in Scotch bank notes.

The uncertainty of getting those bank notes exchanged for gold and silver coin degraded them 4% below the value of that coin.

The same Act of Parliament which suppressed 10 and 5 shilling bank notes also suppressed this optional clause.

• It restored the exchange between England and Scotland to its natural rate, or to what the course of trade and remittances might make.

Difficulty of Converting Paper to Coins

⁹⁹ In Yorkshire’s paper currencies, the payment of so small a sum as a sixpence required the bank note’s holder to bring a guinea.

• This was very difficult for the holders of such notes.
• It must have degraded this currency below the value of gold and silver money.

An Act of Parliament declared all such clauses unlawful.

• It suppressed, as in Scotland, all promissory notes payable to the bearer under 20 shillings value.

¹⁰⁰ The North American paper currencies consisted in government paper and not in bank notes payable to the bearer.

• The payment was due several years after it was issued.
• The colony governments declared it a legal tender.
  • They paid no interest to the holders of this paper.

If the colony were perfectly secure, £100 payable in 15 years at 6% interest, is worth around £40 ready money today. [100 * 1/(1.06 ^ 15)]

To oblige a creditor to accept £40 payment for a debt of £100 was such violent injustice perhaps never attempted by any other free government.

• The honest and downright Doctor Douglas assures us that this was originally a scheme of fraudulent debtors to cheat their creditors.

In 1772, the Pennsylvania government pretended on their first paper money to render their paper equal to gold and silver.

• This was done by enacting penalties against those who sold goods with a colony-paper price different from its gold and silver price.
• This regulation was equally tyrannical but much less effective.

A positive law can render a shilling equal to a guinea because it can direct the courts to discharge the debtor who made that tender.*

• But no positive law can oblige a free seller to accept a shilling as a payment for something priced at a guinea.

In the exchange with Great Britain, £100 was occasionally considered equal to £130 in some colonies.

• In other colonies, £100 was equal to £1,100 currency.

This difference in the value was due to the:

• difference in the amount of paper printed in the colonies
• distance and probability of the term of its final discharge and redemption.

¹⁰¹ An Act of Parliament which declared that no paper currency created in the colonies should be a legal tender, is most equitable.

• However, such a law is so unjustly complained of in the colonies.

¹⁰² Pennsylvania was always more moderate in its creations of paper money than any other of our colonies.

Its paper currency never sunk below the value of the gold and silver in the colony before the first creation of its paper money.

Before that creation, the colony raised its coin denomination.

By an act of assembly. it ordered the colony’s 5 shillings sterling [60 pence] to pass for=

• six and threepence [75 pence], and then
• six and eightpence [80 pence].

Therefore, £1 colony currency was more than 30% below the value of £1 sterling , even when the colony currency was in gold and silver.

When the £1 colony currency was turned into paper, it was seldom much more than 30% below that value.

The pretence for devaluing the coin was to prevent gold and silver exportation.

• It aimed to make equal quantities of those metals have greater value in the colony than in Great Britain.

However, they found that:

• the price of all goods from Great Britain rose exactly in proportion as they devalued their coin, and
• their gold and silver were exported as fast as ever.