Paper money and taxation both have limits

On February 3rd, 1690, the Massachusetts colony issued the first paper money in the Americas. What was unusual about the Massachusetts issue was that this was the first paper currency not to be convertible. It was not backed by gold or silver, only by the assurances of the colony’s government. To thwart forgery, the bills were cut by hand with an indentation across the top, with the Treasury retaining the stub in case the bill subsequently needed to be authenticated. The lack of convertibility was attributed to a local shortage of specie down to the ongoing King William’s War in Canada. It set an unfortunate precedent that allowed future governments across the world to issue unbacked currency to pay their way, foreshadowing the hyper-inflation of the Weimar Republic, Zimbabwe and Venezuela.

On the same day in 1913 the US passed the 16th amendment to its constitution, allowing Congress to levy an income tax without apportioning it among the states on the basis of population. There had been earlier attempts at income tax, including one in 1861 that was repealed in 1872. When the Supreme Court struck down an 1894 Act that included one, the only option was an amendment to the constitution. The reasoning was that while most federal revenue was derived from tariffs, these were thought to bear too heavily on the poor, and that a tax on income would be fairer. All taxes change behaviour, however, and governments that have imposed excessive income taxes have found that they inhibit the creation of wealth and jobs, and rarely if ever raise the anticipated revenue.

On a more sombre note, February 3rd was in 1959, 60 years ago, “the day the music died,” with the deaths in a plane crash of Buddy Holly, the Big Bopper and Ritchie Valens.