One by one, colonies began to issue their own paper money to serve as a convenient
medium of exchange. In 1690, the
Province of Massachusetts Bay created "the first authorized paper money issued by any government in the
Western World."
[3] This paper money was issued to pay for a military expedition during
King William's War. Other colonies followed the example of Massachusetts Bay by issuing their own paper currency in subsequent military conflicts.
[3]
The paper bills issued by the colonies were known as "
bills of credit." Bills of credit were usually
fiat money: they could not be exchanged for a fixed amount of gold or silver coins upon demand.
[2][4] Bills of credit were usually issued by colonial governments to pay debts. The governments would then retire the currency by accepting the bills for payment of taxes. When colonial governments issued too many bills of credit or failed to tax them out of circulation,
inflation resulted. This happened especially in
New England and the southern colonies, which, unlike the
Middle Colonies, were frequently at war.
[4] Pennsylvania, however, was responsible in not issuing too much currency and it remains a prime example in history as a successful government-managed monetary system. Pennsylvania's paper currency, secured by land, was said to have generally maintained its value against gold from 1723 until the Revolution broke out in 1775.
