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Money and inflation in colonial Massachusetts

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  • Bruce D. Smith

Abstract

This article argues that the quantity theory of money is not supported by the evidence. Contrary to the quantity theory, the article says, the value of money depends primarily on how carefully it is backed. That is, the rate of inflation depends more on underlying fiscal policies than on rates of money growth. The evidence for this argument comes from a close look at the way in which the colony of Massachusetts ended a severe long-term inflation in 1750. Other British North American colonies endured similar episodes, all of which parallel some periods of severe inflation in the 20th century United States. The 18th century evidence thus contains lessons for modern monetary policy. ; Reprinted in Quarterly Review, Fall 2002 (v. 26, no. 4)

Suggested Citation

  • Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  • Handle: RePEc:fip:fedmqr:y:1984:i:win:n:v.8no.1
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    References listed on IDEAS

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    1. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    2. Neil Wallace, 1980. "Integrating micro and macroeconomics: an application to credit controls," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. E. Gerald Corrigan, 1980. "A new approach to monetary control," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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    Cited by:

    1. Officer, Lawrence H., 2005. "The quantity theory in New England, 1703-1749: new data to analyze an old question," Explorations in Economic History, Elsevier, vol. 42(1), pages 101-121, January.
    2. James B. Bullard & Steven Russell, 1998. "Monetary steady states in a low real interest rate economy," Working Papers 1994-012, Federal Reserve Bank of St. Louis.
    3. Preston J. Miller & Neil Wallace, 1985. "International coordination of macroeconomic policies: a welfare analysis," Quarterly Review, Federal Reserve Bank of Minneapolis.
    4. Rousseau, Peter L. & Stroup, Caleb, 2011. "Monetization and growth in colonial New England, 1703–1749," Explorations in Economic History, Elsevier, vol. 48(4), pages 600-613.
    5. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, pages 4-25.
    6. Preston J. Miller & William Roberds, 1992. "How little we know about deficit policy effects," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 2-11.
    7. Steven Russell & Marco A. Espinosa-Vega, 1990. "The inflationary effects of the use of reserve ratio reductions, or open market purchases, to reduce market interest rates: a theoretical comparison," Working Papers 1990-006, Federal Reserve Bank of St. Louis.
    8. Andreas Schabert, 2006. "Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 742-762, October.
    9. Gary Pecquet & Clifford Thies, 2010. "Money in occupied New Orleans, 1862–1868: A test of Selgin’s “salvaging” of Gresham’s Law," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(2), pages 111-126, June.
    10. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.
    11. Marco A. Espinosa-Vega & Steven Russell, 2001. "Stability of steady states in a model of pleasant monetarist arithmetic," FRB Atlanta Working Paper 2001-20, Federal Reserve Bank of Atlanta.
    12. Mark G. Guzman, 2008. "The Impact Of Paying Interest On Reserves In The Presence Of Government Deficit Financing," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 624-642, October.
    13. Ken Burdett & Randall Wright, 1998. "Two-Sided Search with Nontransferable Utility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, pages 220-245.
    14. Bruce D. Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 18-32.
    15. Gary M. Pecquet & Clifford F. Thies, 2006. "Texas Treasury Warrants, 1861-1865: A Test Of The Tax-Backing Of Money," Eastern Economic Journal, Eastern Economic Association, vol. 32(2), pages 191-203, Spring.
    16. Pecquet, Gary M. & Thies, Clifford F., 2007. "Texas treasury notes and market manipulation, 1837-1842," Explorations in Economic History, Elsevier, vol. 44(1), pages 81-99, January.
    17. Marco A. Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," FRB Atlanta Working Paper 98-6, Federal Reserve Bank of Atlanta.
    18. Preston J. Miller & William Roberds, 1989. "How little we know about budget policy effects," Staff Report 120, Federal Reserve Bank of Minneapolis.

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    Keywords

    Money theory ; Economic history;

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