Re-examination of the Empirical Evidence Concerning Colonial New Jersey's Paper Money, 1709–1775: A Comment on Farley Grubb

Farley Grubb’s recent paper in the Journal of Economic History on the monetary history of colonial New Jersey argues that colonial currencies were valued as “zero-coupon bonds” that “traded below face value due to time-discounting, not depreciation.” To support this thesis, Grubb presents econometric results that purport to establish a strong association between the market exchange value, MEV, of New Jersey’s paper money and its average present value, APV. His empirical results, however, are extremely fragile, the results achieved only by omitting variables that he includes elsewhere in analyzing the same data. Moreover, Grubb relies heavily on interpolated values for his dependent variable, which exaggerates the precision of his estimates; introduces bias, serial correlation, and heteroscedasticity; and invalidates his statistical tests. But there is also a fatal historiographical problem in interpreting historical sources concerning exchange rates. Based on a faulty premise, Grubb erroneously alters John McCusker’s 1741 and 1762 exchange rates, creating outliers in the data set, outliers that are crucial to Grubb’s empirical results. Once one corrects Grubb’s historiographical and econometric errors, the association between MEV and APV becomes negligible and statistically insignificant. The coefficient of APV, which should be approximately one under Grubb’s theory, is more than twelve standard deviations below one. Subsidiary results are spurious or irreproducible. Before treating the errors of Grubb’s article on colonial New Jersey, however, I motivate my persistent criticisms of Grubb’s research by establishing the importance of correcting the historical record and appreciating the grievances “submitted to a candid world” on a fateful day in July 1776.