In preparation for the 2026 Austrian Economics Research Conference, where I was presenting a forthcoming paper entitled “The United States: Chartalism’s Worst Nightmare,” I had been reading some of the work of prominent US monetary historians. One such work was Curtis P. Nettels’s The Money Supply of the American Colonies before 1720 (1934) which provided some key information and insights, especially when paired with Menger’s monetary theory. This article explores some of those insights through presenting and analyzing a few selected quotes.
A Reminder on Menger’s Monetary Theory
By way of brief review, Menger’s monetary theory posits that, due to the inherent limitations of a barter economy, valued goods with particular characteristics—scarcity, divisibility, portability, durability, recognizability, fungibility, high value per weight, etc.—began to be used for indirect exchange, not just direct exchange. Goods without those characteristics could also be used for indirect exchange, but it would be unlikely that they would become generally-accepted media of exchange.
Direct exchange is the voluntary and mutually-beneficial action where individuals give up what they want less to get what they want more from another willing actor in an act of trade (without coercion or fraud). Free exchange depends on subjective valuation and disagreement over value between the participants—each one values what the other has more than what is given up in exchange. While this is mutually beneficial, it is inherently limited because each side of the trade must want what the other has more than what is given up and possess the goods or services another wants more than what he possesses. Additionally, they must know about each other. Under direct exchange, only certain exchanges can take place, growth is inherently limited, and there can be no economic calculation.
Indirect exchange occurs when people recognize that there is general demand for certain goods that possess the qualities described above (i.e., scarcity, divisibility, etc.), therefore, instead of direct exchange, people exchange their goods and services for those goods—not to consume them—but to trade those goods again to obtain a greater variety of goods. For example, if someone wanted apples, a chair, shoes, etc. and had a horse to exchange, that person could exchange his horse indirectly for gold (or another valued commodity with similar characteristics) in order to then use the gold to obtain the other goods in the present or future. The individual—while he may not intend to consume or use gold directly—knows other people want it and will be willing to trade goods for it. Thus, we have the beginning of money because a barter good transitions to a medium of exchange.
As gold, in this example, becomes demanded—not just as a consumer good, but for indirect exchange—it can become a generally-accepted medium of exchange or money. As more people see the value in using gold for indirect exchange, the recognizability of gold as money increases.
Where did money get its value? The original purchasing power of an ounce of gold (or another commodity) as money depended on the array of goods and services (or fractions thereof) for which that ounce of gold could have been exchanged in barter in the immediate past (e.g., the day before). In other words, a money’s purchasing power comes from its non-money exchange value. This leads to a logically-complete explanation for the origin of money’s purchasing power. It is also worth mentioning that this process happens spontaneously, through subjective valuations and market exchanges, rather than money being “invented.”
A Note on Monetary Theory and Empirical Evidence from History
Before turning to some historical evidence, a few clarifying points are necessary. The use of historical evidence to elucidate Menger’s theory is not meant to suggest that the validity of Menger’s theory depends upon empirical-historical verification. Within the Austrian methodological framework, monetary theory is developed a priori as an account of the logical conditions under which indirect exchange can emerge; it is not advanced as a contingent historical hypothesis awaiting archival confirmation. The point here is instead to distinguish between the types of claims at issue. Menger’s theory concerns the logical preconditions of monetary emergence under conditions of barter and indirect exchange, whereas chartalism—in its stronger formulations—advances historical and institutional claims regarding the state’s role in the origin of money. The evidentiary expectations attached to these claims are therefore categorically different. Demonstrating the historical presence of barter-based commodity selection would not “prove” Menger’s theory in a positivist sense, nor would the absence of complete archival documentation falsify it; by contrast, a theory that locates the origin of money in identifiable acts of state taxation or decree invites a different kind of historical scrutiny.
Colonial America and Multiple Media of Exchange
Unsurprisingly, aspects of money in colonial America were influenced by England. Not only simple trade, but monetary interventions of the British government shaped the situation in the American colonies. Writes Nettels,
To a very large extent the condition of the currency in America before the Revolution was shaped by commercial and political contacts with England. The English connection gave the colonies their money of account, while trade with the mother country drained them of their gold and silver coin.
In the above statement, it seems we can see the workings of Gresham’s Law (specie drains to the mother country) and the fact that the British gave the colonies their units of account. The latter explains why public prices were often denominated in British units of account (i.e., pounds, etc.).
Nettels also discusses barter and trade, but notes the inherent difficulties of barter without money, “The merchants live the best of any in that country [Virginia], but yet are subject to great inconveniences in the way of their trade, which might be avoided if they had towns, markets, and money…” Barter alone—direct exchange—is inherently limited, leading to the market demand and context for a common medium of exchange.
In terms of describing the barter goods that became generally-accepted media of exchange, contra what the theory of chartalism would expect, Nettels describes several barter goods that came to serve as money,
In the earliest days of settlement the shortage of coin had forced the colonists to use certain commodities as money. Among such products of most consequence were wheat, beef, and pork: all these were commonly employed in Carolina and in the colonies north of Maryland. Tobacco and sugar were also of major importance, for they formed the principal currency of two important regions. The Leeward Islands relied on sugar for transacting all sorts of business; so did Barbados to a lesser extent. The middle colonies and North Carolina used tobacco along with many other forms of commodity money; whereas Virginia and Maryland depended upon it almost entirely.
A second group of commodities in the northern area, although not so important as those of the first group, included peas, Indian corn, barley, and rye. In South Carolina rice likewise became popular. The third group consisted of commodities that were less commonly used—such as lumber and fish in New Hampshire, flax and hemp in Pennsylvania and Maryland, wool in Rhode Island, pitch and tar in Carolina, and cattle and dairy products in southern New England. (emphasis added)
He continues in a footnote,
Of North Carolina, the Reverend William Gordon wrote in 1709: “In this as in all other parts of the province, there is no money; every one buys and pays with their commodities, of which corn, pork, pitch are the chief.” Quoted in C. J. Bullock, Essays on the Monetary History of the United States (New York, 1900), 125. A South Carolina act of 1687 defined the following commodities as money: wheat, peas, pork, beef, tobacco, and tar. South Carolina Statutes, II, 37…. The list of money commodities in New York at this time included pork, beef and winter wheat…. The Massachusetts products in 1690 were wheat, Indian corn, barley, peas, oats, pork and beef…. New Hampshire in the years 1701-9 listed eight kinds of boards or staves, four kinds of fish as well as pork, beef, peas, wheat, and Indian corn…. The common products of Connecticut were wheat, peas, Indian corn, rye, pork, and beef. Between 1710 and 1720 commodities were not authorized as tax money in Connecticut, but in October, 1720, as a result of the scarcity of other money, the General Court again agreed to receive wheat, rye, and Indian corn…. Pennsylvania by acts of 1683, 1693 and 1700 made hemp, flax, wheat, rye, oats, barley, Indian corn, tobacco, beef, pork, and hides current money.
Nettels does describe the role of governments in recognizing and affirming certain media of exchange in law, however, instead of chartalism—in which the state originates money through taxation denominated in a certain token and it becomes a general medium of exchange because of those actions—his analysis presupposes barter led to generally-accepted media of exchange before governmental actions. On the next page,
Commodity money differed from simple barter in one important respect. The various colonial assemblies enacted that certain products should be received in payment of taxes and all other public debts. These commodities were then called current money or, in some places, country pay. They were paid out by the colony to its creditors; their use in all public transactions was compulsory; they alone among local products could be received and disbursed. Consequently they differed in legal standing from all other commodities that were bartered in private, individual agreements. There was always a local demand for commodity money commensurate with the fiscal needs of the colonial government; hence a person could receive a designated product with the assurance of disposing of it again in payment of taxes.
While chartalists and MMTers might claim that what is described above is what they are talking about—a good truly became money once the government intervened to accept it in taxes—this surface plausibility evaporates once we realize that, 1) market media of exchange already existed as money, ruling out strong chartalism; and, 2) it is no embarrassment to Mengerian theory to observe that governments intervened in money, accepted it as payment in taxes, propped it up by legal interventions, and often artificially overvalued it. As governments engaged in these actions, a distinction arose between market monies and government monies:
In such private dealings, however, the legal prices did not apply. The two parties determined the quality and price of the tendered commodities; failing in this, they referred the issue to impartial umpires. The invariable practice of the assemblies in valuing commodities for public payments was to set the legal prices higher than the prevailing market rates.
Reminiscent of Menger’s own theory, Nettels writes, “In employing commodity money, a person sold goods in order to secure something he did not intend to consume, but which he expected to exchange again for some other product. In this transaction, the intermediate commodity performed the function of money.” The process Nettels describes is exactly what Menger theorized—certain goods became money due to their tradability and demand as non-money goods. Further, Nettels gives the example of tobacco as money,
Ordinarily, if a Virginian received tobacco in payment of debts, he did so, not with the purpose of using the tobacco himself, but of making other purchases with it. He could do this because its standing as currency was guaranteed by law.
Again, Nettels attributes the acceptance of tobacco in trade as money because it was guaranteed as currency by the law, however, the law could only affirm a commodity already in use as a medium of exchange through voluntary barter-trade. Monetary intervention presupposes a money already exists on which to intervene. (It is also important to note that Nettels is a monetary historian, not a theorist). That aside, we can note that Nettels describes exactly how a commodity becomes a medium of exchange through barter and voluntary exchange. In other words, there is nothing embarrassing to Menger’s monetary theory in history, especially American history.
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