HOW THE QUAKERS’ MODEL PUBLIC BANK BROUGHT PROSPERITY TO PENNSYLVANIA

There are three faithful friends – an old wife, an old dog, and ready money.
– Benjamin Franklin

The first and arguably the best of the modern public banking models was established by the
Quakers in the American colony of Pennsylvania. Issuing money as credit that returned to the
government and was recycled back into the economy created a sustainable feedback loop,
avoiding a pyramiding, compounding debt. The Pennsylvania experiment was terminated not
because it was unsuccessful but because of the opposition of British banking interests.

The Quakers, like the Jews, were a minority religious sect that took up banking in England
when they were excluded from other forms of commerce. The sect was founded by George
Fox in 1650, following a revelation that the divine presence was within him and in every
man. It was a revolutionary way of preaching, which did away with hierarchies and did not
recognize worldly claims of office. The doctrine was so revolutionary that the established
order felt threatened by it.217 The Quakers took the Biblical injunction against swearing so
literally that they would not swear allegiance to the Crown, an act of defiance that was
interpreted as disloyalty or even treason. They also refused to pay tithes to the Church of
England.
Excluded from other professions, they went into banking, and they eventually came to
dominate that business in England. Lloyds and the founding families of Barclays were
Quakers. Most of the country banks were also Quaker-owned and Quaker-run.218
Driven by persecution, the Quakers soon began to migrate to America; but they were not
accepted in Massachusetts either. They wished to have a colony of their own.219 This wish
was fulfilled when William Penn, the most prominent Quaker in England, was granted the
land that would become Pennsylvania in payment of a debt owed by the King to his father.
Penn was a leader of a sort rarely seen today. In 1904, H. W. Elson wrote of him in
his History of the United States of America:
It is difficult to find a man, especially one whose life is spent in the midst of political
turmoil and governmental strife, so utterly incorruptible as was William Penn. . . . He
founded a government and based it on the eternal principle of equal human rights, with
its sole object as the freedom and happiness of its people.220
Penn drew up a government that gave the whole power of lawmaking to the people. The
people were represented by a council that originated all the laws and an assembly that
approved them. He also made a treaty with the Indians and vowed to live in harmony with
them.
Pennsylvania grew more rapidly than the other colonies, and Philadelphia soon became
the chief city in colonial America. Later it would be the birthplace of independence, and of
the Constitution of the United States. Half the population of Pennsylvania were Scots-
Presbyterians, who had occupied northern Ireland for two or three generations before coming
to America. Like the Quakers, they were attracted by the liberal, humane government
inaugurated by William Penn. The colony also attracted the most famous figure in colonial
America, Benjamin Franklin. Franklin has been called “the father of paper money.” He did
not actually invent it or the public banking system that worked so well in his adopted colony,
but he wrote about these innovations and extolled their virtues, popularizing them in the
Middle Colonies.

Redefining Money
The idea of a paper currency was suggested as far back as 1650, in an anonymous British
pamphlet titled “The Key to Wealth, or, a New Way for Improving of Trade: Lawfull, Easie,
Safe and Effectual.” But the currency proposed by the pamphleteer was modeled on the
receipts issued by London goldsmiths and silversmiths for the precious metals left in their
vaults for safekeeping. The colonists needed a payment system that was based on something
besides gold, which was scarce in the colonies. They had to use foreign coins to conduct
trade; and since they imported more than they exported, the coins were continually being
drained off to England and other countries, leaving the colonists without enough money for
their own internal needs.
What they came up with in place of foreign currency was a payment system based simply
on credit—the “credit of the whole Country,” said Cotton Mather, the most famous minister
in New England. When confidence in the new paper money waned, Mather argued:
Is a Bond or Bill-of-Exchange for £1000, other than paper? And yet is it not as valuable
as so much Silver or Gold, supposing the security of Payment is sufficient? Now what
is the security of your Paper-money less than the Credit of the whole Country?222
Mather had redefined money. What it represented was not a sum of gold or silver but
simply the credit of the nation. A paper bill of credit was the government’s IOU or promise
to pay, an acknowledgment by the community of a debt owed and due, redeemable by the
members of the community in goods and services.

Funding Local Government with Credit

The first local government to issue its own paper money was the province of Massachusetts.
The year was 1691, three years before the charter of the Bank of England. Massachusetts’
buccaneer governor had led a daring assault on Quebec in an attempt to drive the French out
of Canada, but the assault had failed. Militiamen and widows needed to be paid. The local
merchants were approached but had declined, saying they had other demands on their
money.223
The innovative Massachusetts Assembly then came up with the idea of paying with paper
money. Just as the banker’s banknotes were promissory notes or IOUs of the banks, the
provincial governments’ “bill of credit” represented the “bond” or IOU of the government—
its promise to pay tomorrow on a debt incurred today.
Other colonies followed suit with their own issues of paper money. Some were considered
government IOUs, redeemable later in “hard” currency (silver or gold). Other issues were
“legal tender” in themselves—money that must legally be accepted in the payment of debts.
Legal tender was “as good as gold” in trade, without bearing debt or an obligation to redeem
the notes in some other form of money later.224
 Turning Prosperity Tomorrow into “Ready Money” Today
It was into this experimental cauldron that Benjamin Franklin stepped at the age of 17,
arriving from Boston in 1723. Six years later, in 1729, he wrote a pamphlet called “A Modest
Enquiry into the Nature and Necessity of a Paper-Currency,” which was circulated
throughout the colonies. It became very popular, earning him contracts to print paper money
for New Jersey, Pennsylvania, and Delaware.225
Franklin wrote his pamphlet after observing the remarkable effects paper currency had
had in stimulating the economy in Pennsylvania. He said, “Experience, more prevalent than
all the logic in the World, has fully convinced us all, that [paper money] has been, and is now
of the greatest advantages to the country.”
Paper currency secured against future tax revenues, he said, turned prosperity tomorrow
into “ready money” today. The government did not need gold to issue this currency, and it
did not need to go into debt to the banks. In America, the land of opportunity, ready money
would allow even the poor to get ahead. Franklin wrote, “Many that understand . . . Business
very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money;
to trade with, when they have it at a moderate interest.”
He also said, “The riches of a country are to be valued by the quantity of labor its
inhabitants are able to purchase and not by the quantity of gold and silver they
possess.”226 When gold was the medium of exchange, money determined production rather
than production determining the money supply. When gold was plentiful, things got
produced. When it was scarce, men were out of work and people knew want. The virtue of
government-issued paper scrip was that it could grow along with productivity, allowing
potential wealth to become real wealth. The government could pay for services with paper
receipts that were basically community credits. In this way, the community actually created
supply and demand at the same time. The farmer would not farm, the teacher would not teach,
the miner would not mine, unless the funds were available to compensate them for their
labors. Paper “scrip” underwrote the production of goods and services that would not
otherwise have been on the market. Anything for which there was a buyer and a producer
could be produced and traded. If A had what B wanted, B had what C wanted, and C had
what A wanted, they could all get together and trade. They did not need the moneylenders’
gold, which could be hoarded, manipulated, or lent only at usurious interest rates. The
colonists’ new paper money financed a period of prosperity that was considered remarkable
for isolated colonies lacking their own silver and gold. Edward Burke, speaking in the British
House of Commons in 1774, would say of the American colonies:
Nothing in the history of mankind, is like their progress. For my part, I never cast an
eye on their commerce, and their cultivated and commodious life, but they seem to me
rather nations grown to perfection through a long series of fortunate events, and a train
of successful industry accumulating wealth in many centuries, than the colonies of
yesterday; than a set of miserable outcasts, a few years ago, not so much sent as thrown
on the bleak and barren shore of a desolate wilderness, three thousand miles from all
civilized intercourse.227
The wilderness had been transformed into abundance using a medium of exchange that
economist David Hume called “representative money” and Benjamin Franklin called “bills
of credit” or “ready money.” It was money backed, not by gold, but by the goods and services
for which it was traded by the issuing government.
 Funding Local Government on Credit
It was an era of monetary experimentation, and some of these colonial experiments were
more sustainable than others. In the middle colonies—Pennsylvania, Delaware, New York
and New Jersey—the colonial governments managed to finance their operations in a way that
reduced or avoided the need to tax the people; and they did it by going into the banking
business.
Alvin Rabushka, a senior fellow at the Hoover Institution at Stanford University, traced
this development in a 2002 article called “Representation Without Taxation.” He wrote that
there were two main ways the colonies issued paper money. Most colonies used both, in
varying proportions.228
One was a direct issue of notes, usually called “bills of credit” or “treasury notes.” These
were promissory notes or IOUs of the government backed by specific future taxes. Although
taxation was involved, the payback was deferred well into the future, and sometimes the
funds never got returned to the treasury at all.
The advantage of this system of note issuance over the British bankers’ gold was that the
funds were not owed back to private foreign lenders, and no interest was due on them. They
were just credits issued and spent into the economy on goods and services. The problem with
the system of print-and-spend without drawing the money back to the issuer was that it tended
to inflate the money supply and devalue the currency.
The inflation problem was solved when a second method of issue was devised. Colonial
assemblies discovered that provincial loan offices could generate a steady stream of revenue
in the form of interest, by taking on the lending functions of banks. In the sustainable system
of the middle colonies, a government loan office called a “land bank” would issue paper
money and lend it to residents (usually farmers) at low rates of interest. This money would
come back to the loan office on a regular payment schedule, preventing the money supply
from over-inflating and keeping the value of the loan-office bills stable in terms of English
sterling. The loans were secured by mortgages on real property, silver plate, and other hard
assets. Benjamin Franklin wrote, “Bills issued upon Land are in Effect Coined Land.” The
interest paid on the loans went into the public coffers, funding the government in place of
taxes.

Pennsylvania’s Model Public Bank

The most celebrated of these loan offices was in Pennsylvania, where the Quakers applied
their banking expertise to the problem of designing a sustainable monetary system. The
Pennsylvania model demonstrated that it was quite possible for the government to issue new
money in place of taxes, without inflating prices. The loan office was the province’s chief
source of revenue. Except for import duties on liquor, the provincial government collected
no taxes at all.229
During this period, which lasted from 1723 into the 1750s, Pennsylvania wholesale prices
remained stable. The currency depreciated by 21 percent against English sterling, but
Rabushka states that this was due to external trade relations rather than to changes in the
quantity of currency in circulation.230 In 1938, Dr. Richard A. Lester, an economist at
Princeton University, wrote, “The price level during the 52 years prior to the American
Revolution and while Pennsylvania was on a paper standard was more stable than the
American price level has been during any succeeding fifty-year period.”231
 In 1776, Adam Smith wrote in The Wealth of Nations:
The government of Pennsylvania, without amassing any treasure [gold or silver],
invented a method of lending, not money indeed, but what is equivalent to money to its
subjects. By advancing to private people at interest . . . paper bills of credit . . . made
transferable from hand to hand like bank notes, and declared by act of assembly to be
legal tender in all payments from one inhabitant to another, it raised a moderate revenue
which went a considerable way toward defraying . . . the whole ordinary expense of
that frugal and orderly government. . . . [This] paper currency . . . is said never to have
sunk below the value of gold and silver which was current in the colony before the issue
of paper money.
Franklin said the money system of Pennsylvania was the reason that it “has so greatly
increased in inhabitants,” having replaced “the inconvenient method of barter” and given
“new life to business [and] promoted greatly the settlement of new lands (by lending small
sums to beginners on easy interest).”
The Pennsylvania land bank was not lending gold or the money of its depositors, and it
was not drawing from a pool of “reserves.” It was not bound by capital requirements, reserve
requirements, or the need for “liquidity.” It was just issuing credit—paper bills representing
the credit of the community. British banknotes had to be borrowed at 8 percent interest, and
they were scarce. The Pennsylvania scrip was lent at 5 percent interest, and there was enough
of this credit for every creditworthy borrower who wanted it. Yet it did not over-inflate the
money supply. The loans-plus-interest recycled back to the government, which spent and lent
the money back into the economy in a sustainable way. It was a bold model that produced
remarkable results, a model that would be repeated and proven in other countries later.
The Pennsylvania experiment was brought to an end not because it was unsuccessful but
because it was too successful in making the colonists economically independent.
Government-issued money competed with the monopoly of the Bank of England.

King George Bans the Colonial Scrip

Paper currency was stable in Pennsylvania, but this was not true in some of the other
provinces. In the New England colonies—Massachusetts, Rhode Island, Connecticut and
New Hampshire—paper currencies were issued in excessive quantities, both as bills of credit
and as loans, and they did not maintain their value. They also suffered from a lack of common
regulations and standards. Some paid interest; others did not. Some could be used only for
purchase and not in the repayment of debt. Some could be used for public debts but not for
private transactions. The result for trade was chaos and confusion.
Although these paper currencies helped to finance development in New England that
would not otherwise have occurred, their rapid depreciation threatened the investments of
British merchants and financiers who were doing business with the colonies, and they leaned
on Parliament to prohibit the practice. In 1751, King George II enacted a ban on the issue of
new paper money in New England, although existing issues could be still renewed. This ban
was continued under King George III, who succeeded his father in 1760.
In 1764, Benjamin Franklin went to London to petition Parliament to lift the ban. He
recounted the many benefits of colonial scrip for the citizens of Pennsylvania, and assured
his listeners that “New York and New Jersey have also increased greatly during the same
period, with the use of paper money; so that it does not appear to be of the ruinous nature
ascribed to it.”
Rather than pacifying Parliament, however, the petition only alarmed British banking
interests. Giving the government the benefit of money creation was a complete reversal of
the established British school of economics, in which the government had to borrow from
private bankers at interest. The bankers viciously opposed Franklin’s appeal.
Parliament wound up passing a Currency Act that was actually stricter than the earlier
prohibition, banning not only new issues but the reissue of existing currency.232 The bill
declared that “no act, order, resolution, or vote of assembly, in any of his Majesty’s colonies
or plantations in America, shall be made, for creating or issuing any paper bills, or bills of
credit of any kind or denomination whatsoever, declaring such paper bills, or bills of credit,
to be legal tender . . . .”233
The colonists were forced to pay all future taxes to Britain in silver or gold, or in the Bank
of England banknotes that were supposedly backed by those precious metals. Since the
colonists lacked mines of their own, that meant they had to go into debt to the British bankers.
When they could not issue their own currency, the money supply suddenly shrank, leaving
widespread unemployment, hunger and poverty in its wake.

“The Corner Stone of the Revolution”

The oppressed colonists finally ignored the ban and went back to issuing their own paper
money. Stephen Zarlenga quotes historian Alexander Del Mar, writing in 1895:
[T]he creation and circulation of bills of credit by revolutionary assemblies . . . coming as
they did upon the heels of the strenuous efforts made by the Crown to suppress paper money
in America [were] acts of defiance so contemptuous and insulting to the Crown that
forgiveness was thereafter impossible . . . [T]here was but one course for the Crown to pursue
and that was to suppress and punish these acts of rebellion . . . . Thus the Bills of Credit of
this era, which ignorance and prejudice have attempted to belittle into the mere instruments
of a reckless financial policy were really the standards of the Revolution. They were more
than this: they were the Revolution itself!234
This version of the events leading up to the Revolution was echoed by Peter Cooper,
founder of Cooper Union College and a former colleague of Treasury Secretary Albert
Gallatin. Cooper wrote in his 1883 book Ideas for a Science of Good Government:
After Franklin had explained . . . to the British Government as to the real cause of
prosperity, they immediately passed laws, forbidding the payment of taxes in that
money. This produced such great inconvenience and misery to the people, that it was
the principal cause of the Revolution. A far greater reason for a general uprising, than
the Tea and Stamp Act, was the taking away of the paper money.
Like Massachusetts nearly a century earlier, the colonists suddenly found themselves at
war and without the means to pay for it. The first act of the new Continental Congress was
to issue its own paper scrip. Popularly called the Continental, it allowed the colonists to do
something that had never been done before: they financed a war against a major power, with
virtually no “hard” currency of their own. It was a bold stroke, which evoked the wonder and
admiration of foreign observers. Franklin wrote that “the whole is a mystery even to the
politicians, how we could pay with paper that had no previously fixed fund appropriated
specifically to redeem it. This currency as we manage it is a wonderful machine.”
 Thomas Paine called it a “corner stone” of the Revolution:
Every stone in the Bridge, that has carried us over, seems to have claim upon our
esteem. But this was a corner stone, and its usefulness cannot be forgotten.235

Economic Warfare: The Bankers Counterattack

The British retaliated with their own form of economic warfare: they attacked their
competitor’s currency and drove down its value. In the 1770s, when paper money was easy
to duplicate, its value could be diluted by physically flooding the market with counterfeit
money.
The British shipped in counterfeit Continentals by the boatload. They could be purchased
in any amount, essentially for the cost of the paper on which they were printed. Thomas
Jefferson estimated that counterfeiting added $200 million to the money supply, effectively
doubling it; and later historians thought this figure was low.
Zarlenga cites historian J. W. Schuckers, who wrote, “The English Government which
seems to have a mania for counterfeiting the paper money of its enemies entered into
competition with private criminals.” Schuckers quoted a confidential letter from an English
general to his superiors, stating that “the experiments suggested by your Lordships have been
tried, no assistance that could be drawn from the power of gold or the arts of counterfeiting
have been left untried; but still the currency . . . has not failed.” 236 What could not be achieved
by counterfeiting was finally achieved by speculation. Northeastern bankers, stockbrokers
and businessmen bought up the scrip at a fraction of its value, after convincing the soldiers
and suppliers who had been paid with it that it would be worthless after the war. The
Continental also had to compete with other currencies, making it vulnerable to speculative
attack. The British bankers’ gold and silver coins were regarded as far more valuable than
the paper promises of a revolutionary government that might not prevail. The Continental
also had to compete with the paper notes of the States, which had the taxation power to back
them.
The problem might have been avoided by making the Continental the sole official
currency, but the Continental Congress did not yet have the power to enforce that sort of
order. It had no courts, no police, and no authority to collect taxes to redeem the notes or
contract the money supply. The colonies had just rebelled against taxation by the British and
were not ready to commit to that burden from the new Congress.237 Speculators took
advantage of these weaknesses by buying up Continentals at a deeper and deeper discount
until they became virtually worthless, giving rise to the expression “not worth a Continental.”
The colonists won the war, but the paper currency that had funded it wound up completely
discredited. The new government was faced with the challenge of finding some other means
of paying the debts of the nation and jumpstarting the economy.