Land Backed Mortgages as a System of Exchange in the Colony of Pennsylvania in the 18th Century

Huston, Lauren
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University of Delaware
Prior to the formation of federal government under the Constitution, there existed a system of land–backed mortgages in the colonies that to some extent could be utilized as currency. The colonies lacked a system of exchange due to a paucity of gold and silver so many paper money schemes were enacted to remedy this problem – this was one such scheme. Given the importance of, and trouble caused by, mortgage-backed securities in today's economy, the history of similar methods used in the colonial economy to generate tradable money may be informative of the present. This colonial system of currency creation via land-backed mortgages was described and written about by the famous polymath Benjamin Franklin of Philadelphia. In my studies of this particular type of paper currency I hope to quantitatively prove him correct in his assertions on the importance of paper currency in the economy. Of all the studies conducted on colonial monetary policy, there has been little distinguishing research on these monies. This paper outlines the development of the land-backed mortgages as a medium of exchange in the colony of Pennsylvania and attempts to quantitatively measure the liquidity premium of these land-backed mortgages.