The Growing Pains of New Money, Part 1: When Money Was Stuff

Every new form of money in history has gone through growing pains: counterfeits, broken promises, lost value, and hard-won fixes. This series tells those stories from the primary sources, because the pattern is easier to see from a distance, and because knowing the pattern is the best preparation for living through it.

Every form of money you have ever trusted went through an awkward and sometimes painful adolescence. Before the dollar in your pocket earned its calm reliability, its ancestors were counterfeited, over-issued, argued over in court, and occasionally rioted about. This series tells those stories, two weeks of them, because they follow a pattern worth knowing: new money always has growing pains. Something breaks, people get hurt, and a fix gets invented. It has happened every time money has changed form, and it will happen again.

We begin where the American story of money begins, with money made of stuff.

Money nobody planned

The English colonists of the early sixteen hundreds had a problem that sounds strange today: there was almost no money in America. England sent few coins across the Atlantic and expected the colonies to ship value back, not hold it. Yet colonists still needed to pay the blacksmith, settle debts, and collect taxes. So they improvised with what they had.

In the Northeast, that meant wampum: small beads of white and purple shell, drilled and strung, which the Native nations of the region had long made and exchanged as objects of diplomacy and record. Colonists adopted the beads as everyday cash. Massachusetts made wampum legal tender for small debts in 1637, and the colony records preserve the order in the spelling of the day, directing that wampum “shall passe at 6 a penny for any sume under 12d.” In the Chesapeake, the money was tobacco. Virginia planters paid taxes, fines, and even ministers’ salaries in leaf for more than a century. New England colonies rated corn, wheat, and other produce as payment at official prices, a practice everyone called country pay.

None of this was designed. It was improvised, the way new money almost always is. Necessity came first. Trust and rules came later, and the gap between them is where the trouble lived.

The first growing pain: people pay with the worst version

Whenever anything counts as payment, people discover the same loophole: pay with the worst version that still counts. The colonial records are full of it.

Virginia debtors paid in their moldiest, most unsellable tobacco and kept the good leaf for market. Creditors complained for decades. New England court records show the same fight over country pay, with debts settled in shriveled corn valued at the full official rate. Economists would later call this pattern Gresham’s law, the tendency of bad money to drive good money out of circulation. The colonists had no name for it. They just lived it.

Wampum had a version of the problem too, and a worse one behind it. The Dutch authorities at New Amsterdam watched it happen in real time. Their 1641 ordinance, in the standard English translation of E.B. O’Callaghan, complains that “very bad wampum is at present circulating here, and payment is made in nothing but rough unpolished stuff,” while the good polished wampum “is wholly exported or otherwise disappears.” Bad beads circulating while good beads vanish: that is Gresham’s law described by eyewitnesses, two centuries before the law had a name. Then European traders realized that steel drills could produce beads far faster than hand tools ever had. The supply exploded, and the value fell.

The first fixes: inspection and standards

What happened next is the part of the story that repeats across every century. The authorities did not give up on the new money. They built institutions around its weak points.

New Netherland’s 1641 ordinance set separate rates for polished and unpolished beads, and a further ordinance in 1650 tightened the rules for loose and poorly strung wampum. Imagine needing a law to define what counts as real money. They did, and passing one is a stage most new money goes through.

Virginia’s fix came in 1730 and proved more important than anyone at the time could have known. The Tobacco Inspection Act required planters to bring their crop to public warehouses, where inspectors graded it and destroyed the trash. The warehouse then issued a receipt for the good tobacco, and those receipts, called tobacco notes, began to circulate as money themselves. Paper, backed by inspected leaf, trusted because of a stamp. Virginia had reinvented a very old idea and taken an accidental step toward the banknote.

Wampum did not get a fix that worked. Massachusetts ended its legal tender status in 1661, and the beads faded from colonial commerce. Some growing pains are survived, and some are not.

The same story, three centuries later

If commodity money seems like a problem from a distant past, consider what happened inside German prison camps during the Second World War. Allied prisoners had no money at all, and Red Cross parcels arrived carrying food and cigarettes. Within weeks, cigarettes became the camp currency. An economist named R.A. Radford was imprisoned in one of those camps and published his observations in 1945. “The cigarette became the standard of value,” he wrote, and the beads-and-leaf logic of the sixteen hundreds reappeared intact: cigarettes, in his account, “performed all the functions of a metallic currency as a unit of account, as a measure of value and as a store of value.” The old growing pains returned on schedule too. Inferior brands circulated as money while good cigarettes were smoked, a perfect miniature of the colonists’ moldy tobacco.

That is the lesson of the stuff money era, and the theme of everything that follows in this series. The growing pains do not come from shells or leaf or paper. They come from human nature meeting a new promise, which means they arrive for every new money, always, on schedule. A young money having problems is not a sign that it has failed. It is a sign that it is young. In the next post, the invention that answered the quality problem for good: a small stamp, pressed into metal about 2,600 years ago, that your wallet still depends on today.

Works cited

Hening, William Waller, editor. The Statutes at Large: Being a Collection of All the Laws of Virginia. Richmond, 1809 to 1823. Includes the Tobacco Inspection Act of 1730.

O’Callaghan, E.B., translator. Laws and Ordinances of New Netherland, 1638 to 1674. Albany, 1868. Wampum ordinances of 1641 and 1650.

Radford, R.A. “The Economic Organisation of a P.O.W. Camp.” Economica, vol. 12, no. 48, November 1945, pp. 189 to 201.

Shurtleff, Nathaniel B., editor. Records of the Governor and Company of the Massachusetts Bay in New England. Boston, 1853 to 1854. Wampum orders of 1637 and 1661.