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Monetary Policy and the Dollar

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  • Peter L. Rousseau

Abstract

In this essay I propose that the adoption of the U.S. dollar as a common currency shortly after the ratification of the Federal Constitution and the accompanying transition from a fiat to specie standard was a pivotal moment in the nation's early history and marked an improvement over the monetary systems of colonial America and under the Articles of Confederation. This is because the dollar and all that came with it monetized the modern sector of the U.S. economy and tied the supply of money more closely to the capital market and the provision of credit -- feats that were not possible in an era when colonial legislatures were unable to credibly commit to controlling paper money emissions. The switch to a specie standard was at the time necessary to promote domestic and international confidence in the nascent financial system, and paved the way for the long transition to the point when the standard was no longer required.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14993.

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Date of creation: May 2009
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Publication status: published as Monetary Policy and the Dollar , Peter L. Rousseau. in Founding Choices: American Economic Policy in the 1790s , Irwin and Sylla. 2011
Handle: RePEc:nbr:nberwo:14993

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  1. Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers 678, Stockholm University, Institute for International Economic Studies.
  2. Sargent, Thomas J & Smith, Bruce D, 1987. "Irrelevance of Open Market Operations in Some Economies with Government Currency Being Dominated in Rate of Return," American Economic Review, American Economic Association, vol. 77(1), pages 78-92, March.
  3. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1993. "In order to form a more perfect monetary union," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  4. Michener, Ronald, 1987. "Fixed exchange rates and the quantity theory in colonial America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 233-307, January.
  5. Smith, Bruce D, 1985. "Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1178-1211, December.
  6. West, Robert Craig, 1978. "Money in the Colonial American Economy," Economic Inquiry, Western Economic Association International, vol. 16(1), pages 1-15, January.
  7. Sylla, Richard, 2002. "Financial Systems And Economic Modernization," The Journal of Economic History, Cambridge University Press, vol. 62(02), pages 277-292, June.
  8. McCallum, Bennett T, 1992. "Money and Prices in Colonial America: A New Test of Competing Theories," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 143-61, February.
  9. Peter L. Rousseau & Richard Sylla, 1999. "Emerging Financial Markets and Early U.S. Growth," NBER Working Papers 7448, National Bureau of Economic Research, Inc.
  10. Calomiris, Charles W., 1988. "Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental," The Journal of Economic History, Cambridge University Press, vol. 48(01), pages 47-68, March.
  11. Peter L. Rousseau, 2004. "A Common Currency: Early U.S. Monetary Policy and the Transition to the Dollar," NBER Working Papers 10702, National Bureau of Economic Research, Inc.
  12. Peter L. Rousseau, 2007. "Backing, the Quantity Theory, and the Transition to the U.S. Dollar, 1723-1850," NBER Working Papers 12835, National Bureau of Economic Research, Inc.
  13. Grubb, Farley, 2004. "The circulating medium of exchange in colonial Pennsylvania, 1729-1775: new estimates of monetary composition, performance, and economic growth," Explorations in Economic History, Elsevier, vol. 41(4), pages 329-360, October.
  14. Ronald W. Michener & Robert E. Wright, 2005. "State "Currencies" and the Transition to the U.S. Dollar: Clarifying Some Confusions," American Economic Review, American Economic Association, vol. 95(3), pages 682-703, June.
  15. Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 346-97, April.
  16. Bruce D. Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 18-32.
  17. Farley Grubb, 2004. "The Constitutional Creation of a Common Currency in the U.S., 1748-1811: Monetary Stabilization versus Merchant Rent Seeking," Working Papers 04-07, University of Delaware, Department of Economics.
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