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
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.
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.
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.
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.