The Free Market 19, no. 1 (January 2001)
According to the dictionary, the word “wanton” means undisciplined or unruly, with connotations of self-indulgent, arrogant recklessness, and a disregard for justice or the rights of others. The word goes back to Middle English, being a combination of the words “wanting” or “wane,” meaning a lack of, and “towen,” which is related to education or upbringing. The idea is that “wanton” indicates being spoiled and self-centered.
The inflation suffered by the colony of Rhode Island during the early eighteenth century is well-described by the word “wanton.” Especially since the engineers of this inflation were the Wanton brothers, John and William, Governor and Deputy Governor of the colony at the time.
Rhode Island’ s first issue of paper money occurred during Queen Anne’ s War, the second in a series of wars between Great Britain and France for dominance in North America. To help pay for military expenditures in 1710, the colony issued £5,000 in legal tender “bills of credit.” These bills of credit were non-interest bearing notes, which - being of small denominations - were useful as a medium of exchange. Supposedly, they were to be retired over the subsequent five years via the levying of taxes, for which the colony would receive them at their face value.
However, they were not gradually retired during the subsequent five years. Indeed, with military expenses piling up, the colony issued £8,000 more. With the issue of so much paper money by Rhode Island as well as by the other New England colonies, which constituted something of a common currency area, all of the silver of the colony was driven overseas or into hoards. As Gresham’ s Law states, the “bad” money drove out the “good” money. At this point, the value of the Rhode Island pound began to float relative to the British pound. By “floating” relative to the British pound, I mean that it was sinking.
In 1715, the colony embarked on a new form of paper money: bills of credit secured by mortgages on land, what was then referred to as a “land bank.” Supposedly, the borrowers were to annually pay the interest on their mortgages, at the rate of 5 percent, and at the end of five years either refinance the mortgage for another five years or repay the principal of the mortgage. Through this scheme, £40,000 of new bills of credit were issued. Then, in 1720, another £40,000. Then, in 1728, you guessed it, another £40,000. With subsequent issues, the paper money of the colony totaled more than £700,000 by 1748. Needless to say, with the issue of so much paper money, prices were skyrocketing and the value of the Rhode Island pound was falling relative to the British pound.
As the inflation grew worse, opposition to paper money started to gather. In 1728, the governor of the colony, Joseph Jenckes, asked the King’s Privy Council if his refusal to agree to the colonial legislature’s approval of the “third” land bank had, in fact, constituted a veto. This incensed the other politicians of the colony, who were jealous of the independence they enjoyed by reason of their charter and who did not want their affairs reviewed by the Privy Council as were the affairs of royal colonies. Claiming advanced age, Jenckes declined to run for re-election in 1733. This opened the door open to the advocates of paper money, whereupon entered John and William Wanton, along with the approval of additional land banks.
In a strange way 1733 was also the beginning of the end. Following the death of the treasurer of the colony, the colonial legislature conducted an audit, the first, of the land banks, finding the books in disarray and the mortgages not perfected (i.e., not legally sufficient). The collection rate was running at a pathetic 60 percent, and mortgages in default were not being foreclosed (and probably could not have been foreclosed). Furthermore, with almost one out of every four voters also being a mortgagee, it was politically-dangerous to do much about the problem. Then, another war, King George’s War, broke out between Great Britain and France, and the printing presses were at it again.
Following a series of investigations, charges and countercharges of corruption and favoritism, a combination of liberal forgiveness of arrears in return for resumption of payments on mortgages combined with selective foreclosures, and the wiping-out of most of the value of the mortgage debt by the inflation, something akin to order was achieved in 1750. Eventually, the paper money was received for taxes at the rate of £27 in bills of credit for £1 in silver, and destroyed. However, the independence of Rhode Island was compromised in regard to money.
By reason of the Currency Act of 1751, Parliament limited the issue of bills of credit by the New England colonies during peacetime to only the “current service” of government. That is, any new bills of credit would have to be collected by the colonial government for taxes within two years, and would not enjoy legal tender status in the payment of private debts. (During wartime, the colony could issue bills of credit redeemable within five years at face value plus the legal rate of interest.) Thereafter and until the Revolutionary War, the New England colonies were on a silver standard.
Following independence, which freed the state of the restraints of the Currency Act of 1751, and until the ratification of the U.S. Constitution, which prohibited the issue of paper money by the states, Rhode Island had probably the worst inflation of any of the states of the union. And, the name of the governor at the time was Jonathan Hazard. Could it be any clearer that allowing the government to simply print paper money is a hazard because politicians have wanton disregard for the property of others?
Clifford F. Thies, adjunct scholar of the Mises Institute, is a professor of economics and finance at Shenandoah University (cthies@su.edu).
