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Colonial Scrip was paper money and fiat money issued by the colonies in the revolution/pre-revolution era. This money was not backed by gold or silver and therefore the Colonies could control its purchasing power. This was a revolutionary concept in economics, because the conventional European system of money required governments to loan from banks and pay interest for those loans, as gold and silver were the only regarded forms of money. This is known as the debt-based money system, where banknotes are "bills of debt." Colonial Scrip, however, were "bills of credit" created by the government, based on the credit of that government, and this meant that there was no interest to pay for the introduction of money. This went a considerable way towards defraying the expense of the Colonial governments and in maintaining prosperity. The Governments charged low interest when it loaned out this paper money, and this income lowered the tax burden on the people, contributing to prosperity.

The currency was born when a lack of gold and silver in the Colonies made trade hard to conduct, and a barter system prevailed. One by one, the Colonies began to issue their own paper money to serve as a medium of exchange to make trade vibrant. The Governments could then retire excess notes out of circulation by taxing the people, helping some Colonies generally avoid inflation. Each Colony had its own currency and some were better managed than others. It was banned by English Parliament in the Currency Act after Benjamin Franklin had explained the benefits of this currency to the British Board of Trade. Outlawing the circulating medium caused a depression in the Colonies.

The Pennsylvania version of this currency was said to be the most effective, because they issued only enough notes so as to satisfy the demands of trade, preventing inflation.

Benjamin Franklin helped create the Pennsylvania Scrip, and in his autobiography he wrote of this currency:

The utility of this currency became by time and experience so evident as never afterwards to be much disputed[1]

Franklin beleived the shutting down of this paper money by Parliament in 1764 was the principal cause of the American Revolution. As did many other prominent Americans. Here is what Peter Cooper, founder of Cooper Union College, US Presidential Candidate in 1876, and one-time colleague of Secretary of the Treasury Albert Gallatin said in his 1883 book Ideas for a Science of Good Government:

After Franklin had explained…to the British Government as the real cause of prosperity, they immediately passed laws, forbidding the payment of taxes in that money. This produced such great inconvenience and misery to the people, that it was the principal cause of the Revolution. A far greater reason for a general uprising, than the Tea and Stamp Act, was the taking away of the paper money.[2]

Adam Smith wrote of the Pennsylvania currency in his famed 1776 work The Wealth of Nations:

The government of Pennsylvania, without amassing any [gold or silver], invented a method of lending, not money indeed, but what is equivalent to money to its subjects. [It advanced] to private people at interest, upon [land as collateral], paper bills of credit…made transferable from hand to hand like bank notes, and declared by act of assembly to be legal tender in all payments...[the system] went a considerable way toward defraying the annual expense…of that…government [low taxes]. [Pennsylvania’s] paper currency…is said never to have sunk below the value of gold and silver which was current in the colony before the…issue of paper money.[3]

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