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Massachusetts Bay Colony, one of the original English settlements in present-day Massachusetts, settled in 1630 by a group of about 1,000 Puritan refugees from England under Gov. John Winthrop and Deputy Gov. Thomas Dudley. In 1629 the Massachusetts Bay Company had obtained from King Charles I a charter empowering the company to trade and colonize in New England between the Charles and Merrimack rivers. The grant was similar to that of the Virginia Company in 1609, the patentees being joint proprietors with rights of ownership and government. The intention of the crown was evidently to create merely a commercial company with what, in modern parlance, would be called stockholders, officers, and directors. By a shrewd and legally questionable move, however, the patentees decided to transfer the management and the charter itself to Massachusetts. By this move, they not only paved the way for local management, but they established the assumption that the charter for a commercial company was in reality a political constitution for a new government with only indefinable dependence upon the imperial one in England. Among the communities that the Puritans established were Boston, Charlestown, Dorchester, Medford, Watertown, Roxbury, and Lynn. Source: Britannica
 

From 1690, paper money was issued, denominated in pounds, shillings and pence. The notes were printed from engraved copper plates (probably the work of silversmith Jeremiah Dummer).

The Massachusetts shilling was initially worth 9 pence sterling. However, the value of this first issue of notes declined relative to silver coins and, in 1704, the "Old Tenor" notes were introduced, again at a value of 1 Massachusetts shilling = 9 pence sterling. The value of these notes also declined and they were followed, in 1737, by the "Middle Tenor" issue, worth 3 times the Old Tenor notes, and, in 1741, by the "New Tenor" issue, worth 4 times the Old Tenor notes. In 1759, all previous issues were replaced by the "Colonial" issue, worth 10 times the Old Tenor notes.             Source: Wikipedia

 

In 1690, five years after the issue of playing card money, the Massachusetts Bay colony became the first colony to issue paper shillings, in order to pay the expenses of a failed military expedition to Canada in King William's war. The paper shillings were declared acceptable for taxes, as is evident from their inscription:

"The Indented Bill of Twenty shillings due from the Massachusetts Colony to the Possessor shall be in Value equal to Money and shall be Accordingly Accepted by the Treasurer, and Receivers subordinate to him in all Publick Payments, and for any stock at any time in the Treasury Boston in New England Decemr 10th 1690." (Newman, 1967, p. 124.)

The other colonies began their own issues of paper money between 1703-1713, most often to pay military expenses. Cotton Mather described the usefulness of the paper money, and the importance of tax backing, as follows:

"Had the government been so settled, that there had not been any doubt of any obstruction, or diversion to be given to the prosecution of the tax-act, by a total change of affairs, then depending at White-Hall, 'tis very certain that the bills of credit had been better than so much ready silver; yea, the invention had been of more use to the New Englanders, than if all their copper mines had been opened, or the mountains of Peru had been removed into these parts of America. The Massachusetts bills of credit had been like bank bills of Venice, where, though there were not, perhaps, a ducat of money in the bank, yet the bills were esteemed more than twenty per cent. better than money among the body of the people, in all their dealings. But many people being afraid that the government would in half a year be so overturned as to convert their bills of credit altogether into waste paper, the credit of them was thereby very much impaired; and they who first received them could make them yield little more than fourteen or sixteen shillings in the pound; . . ." (Mather, p. 191.)

Colonial currency was typically issued and backed in two ways: (1) Bills were printed and spent by the colony, with a promise that the colony would collect sufficient future taxes to retire the bills. (2) Bills were lent by colonial land banks. Customers would pledge land or other collateral and loan repayments would retire the bills. All colonies rated their bills in terms of commodities, specie, and most frequently, the Spanish dollar, or piece of eight.

"By 1690 every colony had created a special currency of its own, called "current lawful money of the province." This currency consisted of foreign coins (principally Spanish pieces of eight) which were valued by provincial law in terms of shillings...When bills of credit appeared, the colonial legislatures intended that such paper should be equal to current lawful money. A certain number of shillings in bills of credit were supposed to represent an ounce of silver, Mexico, pillar, or Seville, as valued by law. Although the earliest colonial acts authorizing the issue of paper did not define bills of credit as current lawful money, it was uniformly provided that such bills should be receivable as such in all public payments [e.g., taxes]." (Nettels, 1934, pp. 256-57.)(See also Brock, 1975, p. 386.)

Thus, if New York had a tax claim of 8 shillings against a colonist, and if silver were legally rated at 8s./oz., then the tax collector, who had always demanded 1 ounce of silver before the introduction of paper money, would thereafter accept either 1 ounce of silver or 8 shillings. Real backing would thus be established even if no colonial office existed where a colonist could bring 8 New York shillings and receive an ounce of silver in return.

While the issue of new money often stimulated trade by alleviating the perennial money shortage of the colonies, the retiring of money just as often led to a return of money shortages, and to recession.

"The retirement of a large proportion of the circulating medium through annual taxation, regularly produced a stringency from which the legislature sought relief through postponement of the retirements. If the bills were not called in according to the terms of the acts of issue, public faith in them would lessen, if called in there would be a disturbance of the currency. On these points there was a permanent disagreement between the governor and the representatives, discussions concerning which reveal themselves in 1715 and traces of which are frequently found after that date." (Davis, 1910.)

Source: http://www.csun.edu/~hceco008/papermoney.html