In the 17th and 18th centuries, Europe instituted mercantilist economic policies designed to promote the accumulation of money by running trade surpluses with other countries. Since several European states pursued this policy, they couldn’t all run trade surpluses with each other, so it tended to be with their colonies that European countries sought to accumulate surpluses. In British North America, this led to shortages of coins that had to be alleviated by using commodities as money and by paper money. So, to this end, land banks were established by colonial governments not only to make loans and fund government expenditures, but also to solve the monetary shortfall by means of issuing paper money.
British colonies in North America suffered from shortages of currency during the 17th and 18th centuries. While the colonies there might have received gold and silver from trade with the West Indies, this precious metal would be shipped to England as a result of the unfavorable balance of trade with the mother country, from whom more was bought than sold. As a result, colonists used commodities like beaver skins and tobacco as money in the 17th century. Other measures no less creative were devised to alleviate the shortage. To encourage imports of coins for example, colonial governments set local values for coins higher than their foreign values to encourage coined money to flow into the colonies but this had insufficient effect to solve the problem altogether.
Paper money offered an alternative but as elsewhere, paper money was initially treated with skepticism. Still, the colonists resorted to it. The colony of East Jersey even considered making all debt instruments, like bonds, bills of exchange, and mortgages legal tender. Paper could complement metal coins and more money in circulation was thought to promote industry and trade.
In addition to offering credit, banks could also have solved the problem by adding banknotes to the circulating stock of money. Land banks were the earliest banks in America. They could be found in several British colonies, from New England to the South. Indeed, by the end of the colonial era, only Virginia lacked one. There were even efforts to create a land bank for the entire continent but these did not come to fruition. Instead, individual land banks were mostly public institutions run by colonial governments for their own colony’s benefit. They were typically run by a board of directors or trustees chosen by the legislature or the governor.
The land banks, or loan offices as they were also known, issued banknotes to fund loans secured by real estate. Benjamin Franklin would not have been altogether wrong to call their paper money “coined land”. Franklin himself would print the paper banknotes used in Pennsylvania and New Jersey. The land banks were used by borrowers acquiring real estate. In New England, loans were made by local town boards, each of which was given an allotment of credit to dole out. The credit was rationed according to taxes paid by that town.
Other colonies had other methods of making loans but all involved assessing the value of property to be mortgaged and loans were usually limited to one-half of the estimated value of the property. Interest rates were generally capped at 5% per year for most land banks. The interest income was used by colonial governments for meeting public expenditures. These revenues made up significant sources of public funds.
Across the sea though, the land banks were not looked upon well. In 1720, orders were sent from London to royal governors in America to bar the creation of such land banks until their legality was clarified at a later date. This came amidst the rapid expansion of the land banks and these orders were widely ignored.
The government in London attempted to restrict issuance of land bank notes again in 1741 by extending the Bubble Act of 1720, created after the South Sea Bubble in Britain, to the colonies in North America. Existing land banks were given exemptions, subject to limits on note issuance, so the land bank experiment went on. The reason for British opposition was usually a mercantile one. British policy was to run trade surpluses with the colonies to accumulate precious metal and not paper money; so, a growing circulation of paper money in lieu of metal coins made that difficult.
The decision to apply British laws related to banknote issuance to North America slowed the development of land banks and issuances of their notes The monetary results of the Seven Years’ War also gave rise to an alternative to land banks’ notes. British authorities permitted note issuance by colonial governments during times of war and so new colonial banknotes were issued in large amounts. These displaced the land bank notes and made them redundant and dispensable to the colonial economy. In the 1760s though, all paper legal tender was prohibited by London. So, once again, a new solution was needed and the land banks again provided it. Colonial land banks responded by issuing non legal tender bills to fund their lending. While not officially currency, these bills proceeded to be widely accepted just as the old banknotes had.
The American experience with land banks started in New England. A couple of private land banks were founded in Boston in the 1680s. Like their public counterparts later on, they also issued notes secured by mortgages on land but these were small scale experiments. In Massachusetts, a public land bank, after being treated with suspicion, was approved after town meetings across the colony revealed strong demand for one. The first public land bank was therefore authorized in 1714. It was followed by land banks created in Rhode Island in 1715 and New Hampshire in 1717.
The Massachusetts experience was plagued by excessive currency issuance and low land values. Some £250,000 in banknotes were issued between 1714 and 1728. Two pounds face value of paper money was worth just one pound sterling in coin in 1720. By 1739, it was worth five-to-one against sterling. This trend was common in New England and elsewhere; in fact, the depreciation of paper money in the southern colonies was even worse, with ratios of ten-to-one against coined money not unheard of. This depreciation increased the opposition of British merchants to the banknotes since using them in trade meant the depreciation ate into their profits.
Besides over-issuance, low land values also weakened the land banks’ notes. In the South, land was also abundant enough to make land values too low to support the lending of the land banks. In practice, loans were frequently too large relative to the security provided by the mortgaged land and this meant too many large loans were made, and too many notes issued with insufficient security. Loan terms were also frequently extended to help borrowers struggling to repay the loan at maturity.
By means of large issuances of notes, loans in Massachusetts were made liberally enough that officials usually reported that there were too few borrowers interested in land bank loans to absorb all the credit available. Clearly, things had gone too far in Massachusetts and in other colonies’ land bank projects. However, there were some more positive examples; the ‘middle colonies’ managed to establish more stable systems of paper money, also by means of a land bank.
New Jersey first considered a land bank in 1716, when several were being established in New England. The colony began funding mortgage loans with banknotes in 1723 after petitions were put before the assembly demanding paper money. An initial issue of £40,000 in denominations ranging from one shilling to three pounds was promptly authorized. After much of the first issue was retired, a fresh £60,000 in New Jersey land bank money was issued between 1733 and 1735 across two new issuances.
The colony’s land bank made loans ranging from £12 and 10 shillings to £100. Loans’ principal would amortize over a period of twelve years, reducing credit risk. Credit was extended to customers by county boards; each country was given an allocation of credit to disburse. As was common for land banks elsewhere, loans were made at 5% interest, compared to 8% which had been the prevailing rate at the time when the bank was formed. Perhaps crucially to securing the value of the banknotes, taxpayers guaranteed the notes if the losses were experienced on the loans that secured them. Regardless, collections and foreclosure were pursued promptly, enhancing confidence in the land bank’s money.
New Jersey’s colonial government expenditures were eventually able to be met exclusively from interest collected by the land bank. This of course made the bank popular with taxpayers. The notes also had relatively stable value. They were worth about 1.7-to-1 against metal coins in 1739. To be sure, this represented a discount against metal coins but not so massive as that of the other colonies’ paper monies. Still, the project had to often be defended from censure by the British Board of Trade.
There were no new issuances of land bank notes after the British government prohibited increases in banknote issuance in 1741. Existing notes were withdrawn from circulation over the next twelve years or so as loans repaid. As elsewhere, the land bank notes were replaced by paper money issued by the colonial government to finance wars. These included an issuance of £20,000 used to finance the colony’s part in the War of Austrian Succession during the 1740s. Still, New Jersey would regularly petition for new land bank issuances until the War of Independence. It finally got one approved by London in 1775, subject to restrictions that its notes not be given legal tender status, but this was by now irrelevant given the war just beginning.
Pennsylvania, like New Jersey, was judged to have had a successful experience with its land bank. Compared to the more mixed results elsewhere, the middle colonies had moderate note issuance, profitable agriculture, and higher land values. Records related to land sales suggest that loans were usually small relative to land values. Loans in the middle colonies seem to have been in higher demand with waiting lists developing for loans. Perhaps this allowed authorities disbursing the credit to be more selective. These colonies’ land banks tended to enforce loans more faithfully to the contract and so were less forgiving of delinquency. Even Adam Smith, writing from Britain, spoke highly of the system here.
Pennsylvania established a land bank in 1723 during an era of numerous economic reforms. The bank was championed by merchant and assemblyman Francis Rawle who rejected the idea that only precious metals could serve as money; he was an outspoken advocate for paper. His effort was strongly supported by merchants.
Responsibility for extending credit was not devolved to local bodies in Pennsylvania as it was in other colonies. Rather, trustees would travel between Philadelphia and Bucks and Chester counties to make loans to applicants in the entire colony. Interest income was used by the government to build public buildings, make payments of tribute to Native American tribes, and pay for the defense of the colony. As elsewhere, the land bank reduced reliance on taxes and this gave the institution further popular support. Not all went well though; there were a couple of incidents involving likely fraud committed by directors against the land bank. Still, the colony’s economy was strengthening and this was attributed to the formation of the land bank.
Pennsylvania’s bank, founded the same year as New Jersey’s, also saw controlled volumes of note issuance. An initial issue of £15,000 for 1723 was tripled to £45,000 by year-end and another £30,000 was issued in 1729. Still, these were reasonable quantities. In 1739, the colony’s paper land bank notes were worth about the same as those of New Jersey against metal coins. As discussed, this represented a depreciation over the prior two decades but a modest one. As elsewhere, the use of land bank paper money diminished as scrutiny from London grew and the crackdown on paper money was viewed among the violations of constitution, liberty, and private property that set off the upcoming War of Independence.
Banks aren’t always popular institutions. Yet, the colonial land banks were formed by popular demand. Its perfectly understandable why. The banks provided paper money that went some way towards mitigating the coin shortage, supplied credit at an affordable cost, and enabled lower taxes. The public benefits of such banks were obvious.
One could argue that official banks came at the expense of private competition. However, there was no preexisting flurry of bank formation stomped out by the land banks so their overall contribution to prosperity seemed positive by the standards of what was achievable at the time, whatever their flaws. If money represents the rights to current consumption and credit the transportation of money across time, then banking would seem to enhance the usefulness of money and in the absence of banks, money seems defective. By allowing transactions to take place that otherwise would not, the land banks, like most banks, were supportive of their economies’ prosperity.
More from the Tontine Coffee-House
1. Kemmerer, Donald L. “The Colonial Loan-Office System in New Jersey.” Journal of Political Economy, vol. 47, no. 6, Dec. 1939, pp. 867–874.
2. Markham, Jerry W. A Financial History of the United States. Sharpe, 2011.
3. Moore, Katie A. “America’s First Economic Stimulus Package: Paper Money and the Body Politic in Colonial Pennsylvania, 1715–1730.” Pennsylvania History: A Journal of Mid-Atlantic Studies, vol. 83, no. 4, 2016, pp. 529–557.
4. Thayer, Theodore. “The Land-Bank System in the American Colonies.” The Journal of Economic History, vol. 13, no. 2, 1953, pp. 145–159.