Accurate words and definitions always matter, however, it is often underappreciated how important this is in the study of history, especially regarding context-dependent words and meanings. A common historical error is anahcronism—a chronological inconsistency in which an object, person, or concept is inappropriately retrojected back into a time when it did not exist. Shakespeare’s Julius Caesar, for example, states, “The clock hath stricken three,” in a time period prior to mechanical clocks that struck.
A subset of anachronism is failure to note how a word was used in a particular historical context, assuming it to have the same meaning now. This can be glaring—nice (used to mean trivial or foolish), bully (sweetheart, darling), secretary (one entrusted with the secrets or confidences of a superior), etc. But it can also be more subtle, especially when the evolution of a word has been more gradual and it means something similar today. This article seeks to correct the definitional anachronism that often occurs in colonial America regarding the word currency (as discussed in a forthcoming paper).
While the word “currency” has come to be synonymous with “money,” some insights as to the usage of this term in colonial America sheds light on how barter led to generally-accepted media of exchange. Economic historian Ron Michener provides some clarity and warning for students of monetary history in colonial America,
Failure to appreciate that the unit of account and medium of exchange were quite distinct in colonial times, and that a familiar term like “currency” had a subtly different meaning, can lead unsuspecting historians astray. They often assume that a phrase such as “£100 New York money” or “£100 New York currency” necessarily refers to £100 of the bills of credit [paper money] issued by New York. In fact, it simply means £100 of whatever was accepted as money in New York, according to the valuations prevailing in New York. Such subtle misunderstandings have led some historians to overestimate the ubiquity of paper money in colonial America. (emphasis added)
In fact, he continues, “In colonial times, ‘money’ and ‘currency’ were practically synonymous and signified whatever was conventionally used as a medium of exchange. The word ‘currency’ today refers narrowly to paper money, but that wasn’t so in colonial times” (emphasis added).
I have written previously on, not the gold standard, but the tobacco standard in colonial America. In fact, in another previous article, I cited Curtis P. Nettels’s The Money Supply of the American Colonies before 1720 (1934), where he explained, “In employing commodity money, a person sold goods in order to secure something he did not intend to consume, but which he expected to exchange again for some other product. In this transaction, the intermediate commodity performed the function of money.” That is essentially just a rewording of Menger’s monetary theory, observed and described in history. Thus, certain items became currencies, that is, commodity goods that currently circulated as media of exchange.
“Currency” and “money” were used to denote whatever goods exchanged as money, thus drawing a close connection between barter goods and generally-accepted media of exchange. Michener also references Hugh Vance in further explanation of this point. In 1740, Vance explained the following,
The Word, Currency, is in common Use in the Plantations (tho’ perhaps least of all in this Province) and signifies Silver passing current either by Weight or Tale. The same Name is also applicable as well to Tobacco in Virginia, Sugars in the West Indies &c. Every Thing at the Market-Rate may be called a Currency; more especially that most general Commodity, for which Contracts are usually made. And according to that Rule, Paper-Currency must signify certain Pieces of Paper, passing current in the Market as Money. (emphasis in original)
What we observe from this record is the notion that certain commodity goods were already trading as currencies, so much so that certain goods came to be monies. This evidence weighs heavily in favor of monies evolving in markets based on their preexisting market values as commodities in demand. It also humbles the chartalist theory that assumes a greater ubiquity of government paper bills of credit. Michener continues,
At certain times and in certain colonies, however, specific commodities came to be so widely used in transactions that they might appropriately be termed money. Specie, of course, was such a commodity, but its worldwide acceptance as money made it special, so it is convenient to set it aside for a moment and focus on the others.
The fact that certain commodities came to be currencies weighs heavily against chartalism and toward Mengerian monetary theory. Currencies were not necessarily government bills of credit, nor did they become currencies because of government taxation, decree, or other legal actions. Currencies became currencies through barter exchange, recognizability, and indirect exchange. Certain goods valued for their non-money characteristics came to also be valued for their ability to serve as monies, hence they became currency.
But where did the units of account come from? In other words, Michener refers to “£100 New York money” or “£100 New York currency,” but how and why is this denominated in pounds (£)? Obviously, a pound referred originally to a specific weight in a commodity (i.e., gold, silver), but was manipulated by governments over time to the extent that monetary names (e.g., pound, dollar, etc.) came to be disconnected with their original meanings. This leads to a question as to how there can be “£100” of a currency other than a weight of silver or gold or a government note with “£100” on it?
In this case, it seems that the connection between the American colonies and England explains this unit of account. According to Nettels, “To a very large extent the condition of the currency in America before the Revolution was shaped by commercial and political contacts with England. The English connection gave the colonies their money of account, while trade with the mother country drained them of their gold and silver coin” (emphasis added). This could mean that—despite the fluctuations in the market value of the pound (£) due to government tampering—the prior unit of account with which the colonists were already familiar was used to denominate non-pound currencies also. For example, “£100 New York money” or “£100 New York currency” (emphasis added) does not necessarily mean the pounds (£) of government paper bills of credit or silver or gold. It would simply mean whatever amount of goods or fractions of goods that was considered to be equivalent to £100 in New York at that moment. For example, $100 of lumber at Home Depot today has a dollar-denominated price, but it could trade against an array of other goods and services for its own sake regardless of the nominal dollar amount.
While we note the importance of understanding the term currency in its historical context, we also should appreciate that there were non-stable, fluctuating definitions of units of account. Of course, sound money requires monies to have fixed definitions according to weight, and governments tamper with this, making them inconsistent. (For example, the definition of a foot or a gallon—even while other countries use the metric system—does not change in other countries through government tampering). We also have to remember that the price of money can change due to supply and demand, just like any other economic good. The real price of a money is always the array of goods and services for which it will exchange. That said, noting the changing nature of units of account, Julie Miller—historian and curator of manuscripts with the Library of Congress—wrote in 2020,
The value of American pounds, shillings, and pence was local. A New York pound, for example, had a different value than a Pennsylvania pound, and neither was a British pound. Even though American colonists expressed monetary values in British terms, actual British currency was scarce in the American colonies. As a result, Americans used whatever coins they had at hand. Spanish and Portuguese coins, such as the dollar and pistole and the Portuguese Joe (short for Johannes) and half-Joe were widely used in the American colonies.
As we see from the above quote, it is important to keep in mind that there was a diversity within these monetary definitions despite using the British unit of account in name. This further adds doubt to the chartalist theory of the origins of money held by Modern Monetary Theory (MMT).
Chartalism, at minimum, requires that a political state establishes a unit of account and accepts taxes denominated in that currency, thus it becomes a generally-accepted medium of exchange. But we see that this can only be done in an economy that already has developed money from barter (which MMTers say does not happen, has not happened, and cannot happen). While Americans utilized the nominal British units of account (i.e., pounds, shillings, pence), there was a diversity in definitions based on locality. Further, to the point of this article, the term currency itself indicates that multiple monies emerged from barter by free market exchanges, leading to a few media of exchange. Government monetary interventions necessary came afterwards.
Since the modern United States is MMT’s favorite example of monetary sovereignty—the best possible case where the policy prescriptions of MMT might apply—the monetary history of America should be troubling for the theory. America’s colonial monetary history indicates barter led to media of exchange spontaneously and voluntarily, followed by government interventions—the exact opposite of the sequence MMT and chartalist theory would expect. Even the historical definition of the word currency demonstrates this. It seems that MMT must either choose between the US as an exemplar of monetary sovereignty or their commitment to chartalist monetary theory, but they cannot hold both consistently.
