The Yale Law Journal

June 2001

Currency Policies and Legal Development in Colonial New England

Claire Priest
110 Yale L.J. 1303 (2001)

This Article presents a new interpretation of the relation of law to economic development in colonial New England. Prior legal historical scholarship has focused almost exclusively on judicial decisionmaking, emphasizing judges' role in adapting the law in some optimal way to satisfy local preferences regarding the development of markets. This Article suggests that the relationship of law to economic development cannot be understood without consideration of the impact of colonial currency policies on the structure of the government, the nature of contractual relations, and the quantity of litigation. The seventeenth-century colonial economy can be characterized as plagued by an extreme scarcity of a circulating medium of exchange, in many periods compelling resort to barter. Currency scarcity reduced the possibility of market exchanges, prevented specialization, and suppressed market conditions. Colonial citizens developed means of surpassing pure barter, but the most central of these, such as book accounts--a system of keeping tabs within an insular community--reinforced localism. Currency scarcity also limited colonial governments' ability to impose monetary taxes with which to finance operations. The circulation of paper money therefore vastly increased the potential for a greater volume of exchanges, greater specialization, and market development, as well as colonial governments' ability to finance more expansive operations. Colonial citizens' reliance on paper money, however, had an additional effect: The value of contractual obligations became dependent upon the stability of colonial governments' currency policies.
Colonial governments began issuing paper money, in the form of bills of credit, in the period from 1690 to 1710. Currency policies in New England in the first half of the eighteenth century were nevertheless highly unstable, leading variously to periods of severe inflation and periods of extreme monetary scarcity. Because fluctuations in the value of currency had a direct impact on the value of all preexisting contracts, periods of currency crises coincided with periods in which litigation vastly increased: On a widespread basis, debtors delayed repayment of their debts to benefit from periods of depreciating currency, forcing creditors to sue to claim the debt. In addition, periods of currency crisis were often times of recession, when debtors widely became unable to pay their debts, propelling creditors to sue to establish priority to debtors' assets.
The correlation between periods of exponentially increased litigation and currency crisis suggests the need to reassess the role of the court system in promoting economic development. First, a focus on currency policy reveals that colonial courthouses were often occupied with problems that were entirely nonlocal in origin. Indeed, currency policies were the outcome of tense negotiations between colonial assemblies and the Board of Trade and Parliament in England. Second, the litigation crises attending currency crises reveal the weakness of characterizing judges as optimally adapting the law to satisfy the needs of local communities. Indeed, judges may have inadvertently worsened the litigation crises of the first half of the eighteenth century by enforcing the legal tender laws, which allowed debtors to repay debts in the nominal value of contracts, even after severe depreciation of the currency. Moreover, the absence of an organized system of priority-lending rules led to an increased volume of litigation during periods of recession.