While paper money had been widely used since its invention in China, until Massachusetts in 1690, all paper money was either convertible with real assets, or sellers were legally required to accept it. During the Glorious Revolution, the protestant government in Massachusetts first printed a money which satisfied neither condition, and in doing so, invented modern fiat money. The question is why such a bold move was taken. Goldberg shows that Massachusetts had both a need to pay troops returning for revolutionary activity in Quebec, and a long-run interest in not rocking the monarchy who was to potentially reinstate Massachusetts’ charter in 1691. Because of a dispute with the crown over coin minting, Massachusetts was not allowed to print debased money. They were also not allowed to force sellers or troops to accept IOUs – this was a royal prerogative. However, a hidden passage in the bill authorizing troops to be paid with IOUs also gave taxpayers a one-third discount for paying with IOUs rather than grain or specie. This incentivized troops to accept the new IOUs, while hiding their true monetary nature from the Crown authorities.
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A Fine Theorem 