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The relationship between money and prices: some historical evidence reconsidered

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  • Bruce Smith

Abstract

This article describes a debate about the validity of the quantity theory of money and offers further evidence against it. The evidence is primarily from the North American colonies of Virginia, New York, and Pennsylvania and regards the issue of measuring the money supply. Studies have shown that changes in colonial money and inflation are inconsistent with the quantity theory. Some have argued that those studies measure money wrong: specie belongs in the measure because the colonies were on a fixed exchange rate system with Britain; changes in colonial paper money were offset by specie flows. When specie is counted, the quantity theory stands. This study responds with evidence that the critics are wrong: the colonies had no such fixed exchange rate regime, and movements in the stock of colonial paper currency cannot have been offset by specie flows. ; Reprinted in Quarterly Review, Fall 2002 (v. 26, no. 4)

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  • Bruce Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Sum), pages 18-32.
    • Handle: RePEc:fip:fedmqr:y:1988:i:sum:p:18-32:n:v.12no.3
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    Cited by:

    1. Peter L. Rousseau, 2010. "Monetary Policy and the Dollar," NBER Chapters, in: Founding Choices: American Economic Policy in the 1790s, pages 121-149, National Bureau of Economic Research, Inc.
    2. Paul De Grauwe & Magdalena Polan, 2014. "Is Inflation always and Everywhere a Monetary Phenomenon?," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 14, pages 357-382, World Scientific Publishing Co. Pte. Ltd..
    3. Farley Grubb, 2003. "Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence," Working Papers 03-03, University of Delaware, Department of Economics.

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